As filed with the Securities and Exchange Commission on August 27, 2014
File No. 001-36440
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 3
to
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g)
of the Securities Exchange Act of 1934
Halyard Health, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State of incorporation or organization) |
46-4987888 (I.R.S. Employer Identification No.) |
|
P.O. Box 619100, Dallas, Texas (Address of principal executive offices) |
75261-9100 (Zip Code) |
Registrants telephone number, including area code: (972) 281-1200
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class to be so Registered |
Name of Each Exchange on which Each Class is to be
|
|
Common Stock, $0.01 par value | New York Stock Exchange |
Securities to be registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Cross-Reference Sheet between the Information Statement and Items of Form 10
Information Included in the Information Statement and Incorporated by Reference into
the Registration Statement on Form 10
Certain information required to be included herein is incorporated by reference to specifically identified portions of the body of the information statement filed herewith as Exhibit 99.1. None of the information contained in the information statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically incorporated by reference.
Item 1. Business.
The information required by this item is contained under the sections of the information statement entitled Summary Halyard, Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, Business, and Where You Can Find More Information and is incorporated herein by reference.
Item 1A. Risk Factors.
The information required by this item is contained under the section of the information statement entitled Risk Factors and is incorporated herein by reference.
Item 2. Financial Information.
The information required by this item is contained under the sections of the information statement entitled Capitalization, Unaudited Pro Forma Condensed Combined Financial Statements, Selected Historical Combined Financial Data, and Managements Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.
Item 3. Properties.
The information required by this item is contained under the sections of the information statement entitled Business Manufacturing and Business Properties and is incorporated herein by reference.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is contained under the section of the information statement entitled Ownership of Halyard Capital Stock by Certain Beneficial Owners and Management and is incorporated herein by reference.
Item 5. Directors and Executive Officers.
The information required by this item is contained under the section of the information statement entitled Management and is incorporated herein by reference.
Item 6. Executive Compensation.
The information required by this item is contained under the section of the information statement entitled Executive Compensation and is incorporated herein by reference.
Item 7. Certain Relationships and Related Transactions.
The information required by this item is contained under the sections of the information statement entitled Summary The Separation and Distribution Our Post-Distribution Relationship with Kimberly-Clark, Our Relationship with Kimberly-Clark after the Distribution, and Certain Relationships and Related Party Transactions and is incorporated herein by reference.
2
Item 8. Legal Proceedings.
The information required by this item is contained under the sections of the information statement entitled Risk Factors, Business Legal Proceedings, and Managements Discussion and Analysis of Financial Condition and Results of Operations Legal Matters and is incorporated herein by reference.
Item 9. Market Price of, and Dividends on, the Registrants Common Equity and Related Stockholder Matters.
The information required by this item is contained under the sections of the information statement entitled Summary, The Separation and Distribution Market for Halyard Common Stock, Dividend Policy, Capitalization, and Description of Halyard Capital Stock and is incorporated herein by reference.
Item 10. Recent Sales of Unregistered Securities.
The information required by this item is contained under the section of the information statement entitled Description of Halyard Capital Stock Sale of Unregistered Securities and is incorporated herein by reference.
Item 11. Description of Registrants Securities to be Registered.
The information required by this item is contained under the sections of the information statement entitled Dividend Policy and Description of Halyard Capital Stock and is incorporated herein by reference.
Item 12. Indemnification of Directors and Officers.
The information required by this item is contained under the section of the information statement entitled Description of Halyard Capital Stock Limitation of Liability and Indemnification of Our Directors and Officers and is incorporated herein by reference.
Item 13. Financial Statements and Supplementary Data.
The information required by this item is contained under the section of the information statement entitled Index to Financial Statements and the financial statements referenced therein and is incorporated herein by reference.
Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 15. Financial Statements and Exhibits.
(a) | Financial Statements |
The information required by this item is contained under the section of the information statement entitled Index to Financial Statements and the financial statements referenced therein and is incorporated herein by reference.
(b) | Exhibits |
See below.
The following documents are filed as exhibits hereto:
Exhibit
Number |
Exhibit Description | |
2.1 | Form of Distribution Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.** | |
3.1 | Form of Amended and Restated Certificate of Incorporation of Halyard Health, Inc.*** |
3
Exhibit
Number |
Exhibit Description | |
3.2 | Form of Amended and Restated Bylaws of Halyard Health, Inc.*** | |
10.1 | Form of Transition Services Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.** | |
10.2 | Form of Tax Matters Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.** | |
10.3 | Form of Employee Matters Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.* | |
10.4 | Employment Offer Letter for Rhonda D. Gibby.** | |
10.5 | Employment Offer Letter for Christopher M. Lowery.** | |
10.6 | Employment Offer Letter for Steven Voskuil.** | |
10.7 | Employment Offer Letter for John Wesley.** | |
10.8 | Form of Patent and Know-How License Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.* | |
10.9 | Form of Trademark License Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.* | |
21.1 | List of Subsidiaries.* | |
99.1 | Information Statement of Halyard Health, Inc., preliminary and subject to completion, dated as of August 27, 2014.** |
* | To be filed by amendment. |
** | Filed herewith. |
*** | Previously filed. |
4
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 27, 2014 | Halyard Health, Inc. | |||||||
By: |
/s/ Robert E. Abernathy |
|||||||
Name: | Robert E. Abernathy | |||||||
Title: | Chairman of the Board and Chief Executive Officer |
5
EXHIBIT INDEX
Exhibit
Number |
Exhibit Description | |
2.1 | Form of Distribution Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.** | |
3.1 | Form of Amended and Restated Certificate of Incorporation of Halyard Health, Inc.*** | |
3.2 | Form of Amended and Restated Bylaws of Halyard Health, Inc.*** | |
10.1 | Form of Transition Services Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.** | |
10.2 | Form of Tax Matters Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.** | |
10.3 | Form of Employee Matters Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.* | |
10.4 | Employment Offer Letter for Rhonda D. Gibby.** | |
10.5 | Employment Offer Letter for Christopher M. Lowery.** | |
10.6 | Employment Offer Letter for Steven Voskuil.** | |
10.7 | Employment Offer Letter for John Wesley.** | |
10.8 | Form of Patent and Know-How License Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.* | |
10.9 | Form of Trademark License Agreement between Kimberly-Clark Corporation and Halyard Health, Inc.* | |
21.1 | List of Subsidiaries.* | |
99.1 | Information Statement of Halyard Health, Inc., preliminary and subject to completion, dated as of August 27, 2014.** |
* | To be filed by amendment. |
** | Filed herewith. |
*** | Previously filed. |
6
Exhibit 2.1
Distribution Agreement
Effective as of October , 2014
Between
Kimberly-Clark Corporation
and
Halyard Health, Inc.
Table of Contents
Page | ||||||||
ARTICLE I DEFINITIONS |
2 | |||||||
SECTION 1.1 |
Definitions | 2 | ||||||
SECTION 1.2 |
Interpretation | 9 | ||||||
ARTICLE II BUSINESS SEPARATION |
10 | |||||||
SECTION 2.1 |
Separation Transactions | 10 | ||||||
SECTION 2.2 |
Transfer of Healthcare Business | 10 | ||||||
SECTION 2.3 |
Retained Assets | 13 | ||||||
SECTION 2.4 |
Assumption of Liabilities | 13 | ||||||
SECTION 2.5 |
Retained Liabilities | 14 | ||||||
SECTION 2.6 |
Termination of Existing Intercompany Agreements | 15 | ||||||
SECTION 2.7 |
Shared Contracts | 15 | ||||||
SECTION 2.8 |
Related Transactions | 15 | ||||||
SECTION 2.9 |
Waiver of Bulk-Sale and Bulk-Transfer Laws | 16 | ||||||
ARTICLE III THE DISTRIBUTION |
16 | |||||||
SECTION 3.1 |
Issuance and Delivery of Halyard Shares | 16 | ||||||
SECTION 3.2 |
Distribution of Halyard Shares | 16 | ||||||
SECTION 3.3 |
Treatment of Fractional Shares | 16 | ||||||
SECTION 3.4 |
Kimberly-Clark Board Action | 17 | ||||||
SECTION 3.5 |
Additional Approvals | 17 | ||||||
ARTICLE IV BUSINESS SEPARATION CLOSING MATTERS |
17 | |||||||
SECTION 4.1 |
Delivery of Instruments of Conveyance | 17 | ||||||
SECTION 4.2 |
Delivery of Other Agreements | 17 | ||||||
SECTION 4.3 |
Provision of Corporate Records | 17 | ||||||
ARTICLE V NO REPRESENTATIONS AND WARRANTIES |
17 | |||||||
SECTION 5.1 |
No Kimberly-Clark Representations or Warranties | 17 | ||||||
ARTICLE VI CERTAIN COVENANTS |
18 | |||||||
SECTION 6.1 |
Material Governmental Approvals and Consents | 18 | ||||||
SECTION 6.2 |
Non-Assignable Contracts | 18 | ||||||
SECTION 6.3 |
Novation of Assumed Liabilities; Release of Guarantees | 19 | ||||||
SECTION 6.4 |
Further Assurances | 20 | ||||||
SECTION 6.5 |
Collection of Accounts Receivable | 21 | ||||||
SECTION 6.6 |
Cooperation Regarding Accounts Payable | 22 | ||||||
SECTION 6.7 |
Election of Halyard Board of Directors | 22 | ||||||
SECTION 6.8 |
Late Payments | 22 | ||||||
SECTION 6.9 |
Registration and Listing | 22 | ||||||
SECTION 6.10 |
No Noncompetition | 23 | ||||||
SECTION 6.11 |
Litigation | 24 | ||||||
SECTION 6.12 |
Signs; Use of Company Name | 25 |
i
Table of Contents
Page | ||||||||
SECTION 6.13 |
Conduct of Healthcare Business in Ordinary Course | 25 | ||||||
ARTICLE VII CONDITIONS TO THE DISTRIBUTION |
25 | |||||||
SECTION 7.1 |
Approval by Kimberly-Clark Board of Directors | 25 | ||||||
SECTION 7.2 |
Receipt of Tax Treatment Opinion | 26 | ||||||
SECTION 7.3 |
Receipt of Solvency Opinion | 26 | ||||||
SECTION 7.4 |
Compliance with State and Foreign Securities and Blue Sky Laws | 26 | ||||||
SECTION 7.5 |
SEC Filings and Approvals | 26 | ||||||
SECTION 7.6 |
Effectiveness of Form 10; No Stop Order | 26 | ||||||
SECTION 7.7 |
Dissemination of Information to Kimberly-Clark Stockholders | 26 | ||||||
SECTION 7.8 |
Approval of NYSE Listing Application | 26 | ||||||
SECTION 7.9 |
Operating Agreements | 26 | ||||||
SECTION 7.10 |
Resignations | 27 | ||||||
SECTION 7.11 |
Consents | 27 | ||||||
SECTION 7.12 |
No Actions | 27 | ||||||
SECTION 7.13 |
Consummation of Pre-Distribution Transactions | 27 | ||||||
SECTION 7.14 |
Pre-Distribution Payment | 27 | ||||||
SECTION 7.15 |
No Other Events | 27 | ||||||
SECTION 7.16 |
Satisfaction of Conditions | 27 | ||||||
SECTION 7.17 |
Employee Consultation Process | 27 | ||||||
ARTICLE VIII INSURANCE MATTERS |
28 | |||||||
SECTION 8.1 |
Insurance Prior to the Effective Time | 28 | ||||||
SECTION 8.2 |
Ownership of Existing Policies and Programs | 28 | ||||||
SECTION 8.3 |
Maintenance of Insurance for Halyard | 28 | ||||||
SECTION 8.4 |
Acquisition and Maintenance of Post-Distribution Insurance by Halyard | 28 | ||||||
SECTION 8.5 |
Property Damage and Business Interruption Insurance Claims Administration for Pre-Distribution Losses | 29 | ||||||
SECTION 8.6 |
Liability and Workers Compensation Insurance Claims Administration for Pre-Distribution Occurrences | 29 | ||||||
SECTION 8.7 |
Non-Waiver of Rights to Coverage | 30 | ||||||
SECTION 8.8 |
Scope of Affected Policies of Insurance | 30 | ||||||
ARTICLE IX DEBT ISSUANCE COSTS |
31 | |||||||
SECTION 9.1 |
Debt Issuance Costs | 31 | ||||||
ARTICLE X RELEASES AND INDEMNIFICATION |
31 | |||||||
SECTION 10.1 |
Release of Pre-Distribution Claims | 31 | ||||||
SECTION 10.2 |
Indemnification by Halyard | 32 | ||||||
SECTION 10.3 |
Indemnification by Kimberly-Clark | 33 | ||||||
SECTION 10.4 |
Applicability of and Limitation on Indemnification | 34 | ||||||
SECTION 10.5 |
Adjustment of Indemnifiable Losses | 35 | ||||||
SECTION 10.6 |
Procedures for Indemnification of Third Party Claims | 36 | ||||||
SECTION 10.7 |
Procedures for Indemnification of Direct Claims | 38 | ||||||
SECTION 10.8 |
Contribution | 38 |
ii
Table of Contents
Page | ||||||||
SECTION 10.9 |
Remedies Cumulative | 38 | ||||||
SECTION 10.10 |
Survival | 38 | ||||||
ARTICLE XI DISPUTE RESOLUTION |
38 | |||||||
SECTION 11.1 |
Escalation and Mediation | 38 | ||||||
SECTION 11.2 |
Continuity of Service and Performance | 39 | ||||||
SECTION 11.3 |
Choice of Mediation Forum | 39 | ||||||
SECTION 11.4 |
Ability to Pursue Other Legal Remedies | 39 | ||||||
ARTICLE XII ACCESS TO INFORMATION AND SERVICES |
39 | |||||||
SECTION 12.1 |
Agreement for Exchange of Information | 39 | ||||||
SECTION 12.2 |
Ownership of Information | 40 | ||||||
SECTION 12.3 |
Compensation for Providing Information | 40 | ||||||
SECTION 12.4 |
Retention of Records | 40 | ||||||
SECTION 12.5 |
Limitation of Liability | 41 | ||||||
SECTION 12.6 |
Production of Witnesses | 41 | ||||||
SECTION 12.7 |
Confidentiality | 41 | ||||||
SECTION 12.8 |
Privileged Matters | 42 | ||||||
SECTION 12.9 |
Financial Information Certifications | 43 | ||||||
ARTICLE XIII MISCELLANEOUS |
43 | |||||||
SECTION 13.1 |
Entire Agreement | 43 | ||||||
SECTION 13.2 |
Choice of Law and Forum | 43 | ||||||
SECTION 13.3 |
Amendment | 44 | ||||||
SECTION 13.4 |
Waiver | 44 | ||||||
SECTION 13.5 |
Partial Invalidity | 44 | ||||||
SECTION 13.6 |
Execution in Counterparts | 44 | ||||||
SECTION 13.7 |
Successors and Assigns | 44 | ||||||
SECTION 13.8 |
Third Party Beneficiaries | 44 | ||||||
SECTION 13.9 |
Notices | 45 | ||||||
SECTION 13.10 |
Performance | 45 | ||||||
SECTION 13.11 |
Force Majeure | 45 | ||||||
SECTION 13.12 |
No Public Announcement | 46 | ||||||
SECTION 13.13 |
Termination | 46 | ||||||
SECTION 13.14 |
Conflict | 46 |
iii
List of Schedules to this Agreement
Schedule 1.1(a) | Patent License and Transfer Agreements | |
Schedule 1.1(b) | Retained Receivables and Retained Payables | |
Schedule 1.1(c) | Trademark License and Transfer Agreements | |
Schedule 2.1 | Separation Transactions | |
Schedule 2.2(d)(i) | Owned Real Property | |
Schedule 2.2(d)(ii) | Real Estate Leases | |
Schedule 2.2(e) | Personal Property Leases | |
Schedule 2.2(f) | Information Technology Equipment | |
Schedule 2.2(h)(i) | Acquisition or Divestiture Contracts | |
Schedule 2.2(h)(ii) | Supplier Contracts | |
Schedule 2.2(h)(iii) | Services Contracts | |
Schedule 2.2(h)(iv) | Transferred Shared Contracts | |
Schedule 2.2(h)(v) | Other Contracts | |
Schedule 2.3(l) | Other Retained Assets | |
Schedule 2.4(f) | Other Assumed Liabilities | |
Schedule 2.5(d) | Other Retained Liabilities | |
Schedule 2.6 | Retained Intercompany Agreements | |
Schedule 2.7 | Shared Contracts | |
Schedule 6.7 | Nominees to Board of Halyard | |
Schedule 6.11(a) | Assumed and Excluded Actions | |
Schedule 6.11(b) | Transferred Actions | |
Schedule 8.3 | Insurance | |
Schedule 8.6 | K-C Administered Claims | |
Schedule 10.2(i) | Special Indemnification Matters | |
Schedule 10.3 | Suppliers of Information |
iv
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT is made as of October [ ], 2014 by and between Kimberly-Clark Corporation ( Kimberly-Clark ), a Delaware corporation, and Halyard Health, Inc. ( Halyard ), a Delaware corporation, and, as of the date hereof, a wholly-owned subsidiary of Kimberly-Clark.
WHEREAS, Kimberly-Clark, through its health care division and certain subsidiaries and affiliates, is engaged in the Healthcare Business (as defined below);
WHEREAS, the Board of Directors of Kimberly-Clark has determined that it is advisable and in the best interests of Kimberly-Clark and its stockholders for Kimberly-Clark to transfer and assign, or cause to be transferred and assigned, to the Halyard Parties (as defined below), all or substantially all of the business, operations, assets and liabilities primarily related to the Healthcare Business, as well as the Included Non-Woven Business (as defined below);
WHEREAS, Kimberly-Clark has agreed to transfer and assign, or cause to be transferred or assigned, to the Halyard Parties all or substantially all of the business, operations, assets and liabilities primarily related to the Healthcare Business, as well as the Included Non-Woven Business, and Halyard has agreed to the transfer and assignment of such assets and to assume, or cause to be assumed, substantially all of the liabilities and obligations arising out of or relating to the Healthcare Business and the Included Non-Woven Business(the Contribution );
WHEREAS, the Board of Directors of Kimberly-Clark has determined that it is advisable and in the best interests of Kimberly-Clark and its stockholders for Kimberly-Clark to distribute on a pro rata basis to the holders of record of Kimberly-Clarks common stock, par value $1.25 per share ( Kimberly-Clark Common Stock ) as of the Record Date (as defined below), without any consideration being paid by the holders of such Kimberly-Clark Common Stock, all of the outstanding shares of Halyard common stock, par value $0.01 per share (the Halyard Common Stock ), then owned by Kimberly-Clark (the Distribution ), subject to satisfaction or waiver of certain conditions set forth herein;
WHEREAS, for U.S. federal income tax purposes, the Distribution is intended to qualify as a transaction described under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the Code ); and
WHEREAS, it is appropriate and desirable to set forth the principal transactions required to effect the Contribution and Distribution and certain other agreements that will govern the relationship of Kimberly-Clark and Halyard following the Distribution.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions . As used in this Agreement, the following terms shall have the meanings set forth in this Section 1.1 .
Actions means any action, claim, demand, suit, arbitration, inquiry, subpoena, discovery request, proceeding or investigation by or before any court or grand jury, any governmental or other regulatory or administrative entity, agency or commission or any arbitration tribunal, domestic or foreign.
Affiliate means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with such Person. For the purpose of this definition, the term control means the power to direct the management of an entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the term controlled has the meaning correlative to the foregoing. After the Distribution, Halyard and Kimberly-Clark shall not be deemed to be under common control for purposes hereof due solely to the fact that Halyard and Kimberly-Clark have common stockholders.
Agent means Computershare Investor Services, the distribution agent appointed by Kimberly-Clark to distribute shares of Halyard Common Stock pursuant to the Distribution.
Assumed Actions has the meaning set forth in Section 6.11(a) .
Assumed Liabilities has the meaning set forth in Section 2.4 .
Balance Sheet means the pro forma balance sheet of Halyard as of [ ], 2014, as filed with the Form 10.
Code has the meaning set forth in the Recitals.
Contracts has the meaning set forth in Section 2.2(h) .
Contribution has the meaning set forth in the Recitals.
Conveyancing Instruments has the meaning set forth in Section 4.1 .
Copyrights means United States and foreign copyrights, both registered and unregistered, along with the registrations and applications to register any such copyrights.
Credit Facility means a $[ ] million senior secured credit facility to be entered into by Halyard.
Debt means the indebtedness evidenced by the Credit Facility and the senior notes due [ ] issued by Halyard pursuant to the Notes Offering.
2
Debt Issuance Costs means the fees and expenses incurred in connection with negotiating, documenting and closing the Debt, including the underwriting fees for the notes to be issued by Halyard in the Notes Offering, the legal fees of counsel for the underwriters of the Notes Offering, the fees of Moodys Investor Services and Standard & Poor for establishing an initial debt rating for the notes issued by Halyard in the Notes Offering, the legal fees of counsel for the lenders under the Credit Facility, the legal fees of counsel for Halyard in connection with the issuance of the notes issued by Halyard in the Notes Offering and in connection with the Credit Facility, pre-Distribution expenses incurred by Halyard in connection with meeting with prospective purchasers of the notes to be issued in the Notes Offering, the fees and expenses of the indenture trustee and its counsel in connection with the Notes Offering, printing, reproduction and delivery expenses relating to the Notes Offering (including postage, air freight charges and charges for counting and packaging), authentication, stamp or transfer Taxes and related expenses for the Notes Offering, any federal or state blue sky securities registration fees and expenses (including SEC and state filing fees and the reasonable fees and expenses of counsel relating to such registration) in connection with the Notes Offering, cost of surveys conducted at the lenders request in the United States in connection with the Credit Facility, costs of appraisals and field exams conducted by or at the request of the lenders in connection with the Credit Facility, mortgagee title insurance for the benefit of the lenders under the Credit Facility, and fees relating to the filing and recordation of security interests and mortgages under the Credit Facility, and interest accrued on the Debt prior to the Effective Time.
Distribution has the meaning set forth in the Recitals.
Distribution Date means the date determined by the Board of Directors of Kimberly-Clark as the date on which the Distribution shall be made to holders of Kimberly-Clark Common Stock on the Record Date.
Effective Time means midnight (i.e., end of day) on the Distribution Date.
Employee Consultation Process has the meaning set forth in Section 6.4(a).
Employee Matters Agreement means the Employee Matters Agreement, dated the date hereof, between Kimberly-Clark and Halyard.
Escalation Notice has the meaning set forth in Section 11.1(b) .
Exchange Act means the Securities Exchange Act of 1934, as amended.
Excluded Non-Woven Assets means all assets (including intellectual property assets and receivables) of the Kimberly-Clark non-woven business other than those specifically included within the Included Non-Woven Business.
Expenses means any and all expenses incurred in connection with investigating, defending or asserting any claim, action, suit or proceeding incident to any matter indemnified against hereunder (including court filing fees, court costs, arbitration fees or costs, witness fees, and reasonable fees and disbursements of legal counsel, investigators, expert witnesses, consultants, accountants and other professionals).
3
Foreign Exchange Rate means, with respect to any currency other than United States dollars, as of any date of determination, the rate set forth in the exchange rate section of the Wall Street Journal or, if not published in the Wall Street Journal , then the average of the opening bid and asked rates on such date at which such currency may be exchanged for United States dollars as quoted by JPMorgan Chase Bank, NA (or any successor thereto or other major money center commercial bank agreed to by the Parties).
Form 10 means the registration statement on Form 10 filed by Halyard with the SEC under the Exchange Act in connection with the Distribution, including any amendment or supplement thereto.
Governmental Authority means any foreign, federal, state, local or other government, governmental, statutory or administrative authority, regulatory body or commission or any court, tribunal or judicial or arbitral body.
Halyard has the meaning set forth in the first paragraph of this Agreement.
Halyard Common Stock has the meaning set forth in the recitals.
Halyard Distributable Share means, for each holder of record of Kimberly-Clark Common Stock as of the close of business on the Record Date, one share of Halyard Common Stock for every [ ] shares of Kimberly-Clark Common Stock outstanding and held of record by such holder at such time.
Halyard Indemnified Parties has the meaning set forth in Section 10.3 .
Halyard Parties means Halyard, the Subsidiaries of Halyard as of the date hereof and any Subsidiaries of Halyard formed or acquired after the date hereof.
Halyard Business means (i) at any time prior to the Distribution, the Healthcare Business and the Included Non-Woven Business, and (ii) at any time following the Distribution, all businesses, operations and activities conducted by Halyard or any of its Subsidiaries .
Halyard Share(s) mean(s) each share of Halyard Common Stock.
Healthcare Business means all businesses, operations and activities conducted (whether by Kimberly-Clark or any of its Subsidiaries) within Kimberly-Clarks health care operating segment.
Included Non-Woven Business means those assets and liabilities of the Kimberly-Clark non-woven business that will be contributed by Kimberly-Clark to Halyard North Carolina, Inc., pursuant to the Lexington Contribution Agreement.
Indemnified Party has the meaning set forth in Section 10.5(a) .
Indemnifying Party has the meaning set forth in Section 10.5(a) .
Indemnity Payment has the meaning set forth in Section 10.5(a) .
Information has the meaning set forth in Section 12.1(a) .
4
Information Statement has the meaning set forth in Section 6.9(a) .
Insurance Charges has the meaning set forth in Section 8.6(d) .
Intercompany Agreements means any Contract between Kimberly-Clark or one of its Subsidiaries, on the one hand, and Halyard or one of its Subsidiaries, on the other hand, entered into prior to the Effective Date, but excluding this Agreement and the Operating Agreements.
IRS means the Internal Revenue Service.
K-C Administered Claims has the meaning set forth in Section 8.6(a) .
KCM Distributor Agreement means that certain Distributor Agreement, dated as of the date hereof, between Kimberly-Clark de Mexico S.A.B. de C.V. and Halyard Sales, LLC.
Kimberly-Clark has the meaning set forth in the first paragraph of this Agreement.
Kimberly-Clark Common Stock has the meaning set forth in the Recitals.
Kimberly-Clark Parties means Kimberly-Clark and its Subsidiaries (including those formed or acquired after the date hereof), other than the Halyard Parties.
Kimberly-Clark Policies has the meaning set forth in Section 8.2 .
Kimberly-Clark Indemnified Parties has the meaning set forth in Section 10.2 .
Know-How means engineering drawings, technical data, reports, technical knowledge, methods, formulas, patterns, compilations, programs, devices, techniques, tests, drawings, processes, experience, base and analytical science relating to the manufacture, testing, converting, packaging, handling, distributing and supplying of products and is inclusive of any and all Trade Secrets. For purposes of this Agreement, Know How shall expressly exclude Patents, Copyrights and Trademarks.
Lexington Contribution Agreement means that certain Contribution Agreement, dated as of October 27, 2014, between Kimberly-Clark and Halyard North Carolina, Inc.
Liability means any and all debts, liabilities and obligations, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising (unless otherwise specified in this Agreement), including all costs and expenses relating thereto, and including those debts, liabilities and obligations arising under any law, rule, regulation, Action, threatened Action, order or consent decree of any Governmental Authority or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking.
Losses means any and all losses, costs, obligations, liabilities, settlement payments, awards, judgments, fines, penalties, damages, fees, expenses, deficiencies, claims or other charges, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown (including the costs and expenses of any and all Actions, threatened Actions,
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demands, assessments, judgments, settlements and compromises relating thereto and attorneys fees and any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened Actions).
Manufacturing and Supply Agreements means those Manufacturing and Supply Agreements, dated as of the date hereof, between Kimberly-Clark or its Affiliates on the one hand, and Halyard or its Affiliates on the other hand.
Material Governmental Approvals and Consents means any material notices, reports or other filings to be made with or to, or any material consents, registrations, approvals, permits, clearances or authorizations to be obtained from, any Governmental Authority.
Non-Competition Agreements means those Non-Competition Agreements, dated as of the date hereof, between Kimberly-Clark and Halyard.
Non-Permitted Names has the meaning set forth in Section 6.12 .
Notes Offering means the offering by Halyard pursuant to Rule 144A [and Regulation S] under the Securities Act of 1933, as amended, of senior unsecured notes of Halyard in the aggregate principal amount of up to $[ ] million (the Original Notes ) and any (a) filing of a registration statement with the SEC with respect to a registered offer to exchange the Original Notes for new notes of Halyard having terms substantially identical in all material respects to the Original Notes and the offering of such new notes in exchange for surrender of the Original Notes, or (b) filing of a shelf registration statement covering resales of the Original Notes.
NYSE means the New York Stock Exchange, Inc.
Operating Agreements means the Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement, Patent License Agreements, Patent Transfer Agreements, Trademark License Agreements, Trademark Transfer Agreements, Manufacturing and Supply Agreements, Non-Competition Agreements, KCM Distributor Agreement, YK Distributor Agreement and any other agreement entered into on or before the Distribution Date regarding the ongoing business and service relationships between the Kimberly-Clark Parties and Halyard Parties.
Ordinary Course has the meaning set forth in Section 6.13 .
Owned Real Property has the meaning set forth in Section 2.2(d)(i) .
Party means the Kimberly-Clark Parties or the Halyard Parties.
Patent License Agreements means those patent license agreements between Kimberly-Clark Worldwide, Inc. and Avent, which are identified on Schedule 1.1(a).
Patent Transfer Agreements means those patent transfer agreements between Kimberly-Clark Worldwide, Inc. and Avent, Inc., which are identified on Schedule 1.1(a) .
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Patents means United States and foreign patents and applications for patents, including any continuations, continuations-in-part, divisions, renewals, reissues and extensions thereof.
Person means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or Governmental Authority.
Personal Property Leases has the meaning set forth in Section 2.2(e) .
Prime Rate means the rate that JP Morgan Chase Bank, NA (or any successor thereto or other major money center commercial bank agreed to by the Parties) announces from time to time as its prime lending rate, as in effect from time to time.
Privilege has the meaning set forth in Section 12.8(a) .
Privileged Information has the meaning set forth in Section 12.8(a) .
Real Estate Leases has the meaning set forth in Section 2.2(d)(ii) .
Receivables has the meaning set forth in Section 2.2(b)(i) .
Record Date means the date determined by the Board of Directors of Kimberly-Clark as the record date for the Distribution.
Retained Assets has the meaning set forth in Section 2.3 .
Retained Busines s means the business of Kimberly-Clark and its Subsidiaries other than the Halyard Business.
Retained Liabilities has the meaning set forth in Section 2.5 .
Retained Payables means the accounts payable primarily related to the Halyard Business and owed by those entities set forth in Schedule 1.1(b) .
Retained Receivables means the accounts receivable primarily related to the Halyard Business and owned by those entities set forth in Schedule 1.1(b) .
SEC means the United States Securities and Exchange Commission.
Shared Contract means a Contract with a third Person that directly benefits both the Kimberly-Clark Parties and the Halyard Parties.
Software means computer software programs, in source code or object code form, including, without limitation, all related source diagrams, flow charts, specifications, documentation and all other materials and documentation necessary to allow a reasonably skilled third party programmer or technician to maintain, support or enhance the Software.
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Subsidiary means, when used with reference to any Person, any corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided , however , that no Person that is not directly or indirectly wholly-owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. After the Distribution, Halyard and Kimberly-Clark shall not be deemed to be under common control for purposes hereof due solely to the fact that Halyard and Kimberly-Clark have common stockholders.
Tax Matters Agreement means the Tax Matters Agreement, dated as of the date hereof, between Kimberly-Clark and Halyard.
Taxes shall have the meaning set forth in the Tax Matters Agreement.
Third Party Claim has the meaning set forth in Section 10.6(a) .
Third Party Consents has the meaning set forth in Section 6.4(a) .
Trademark License Agreements means those Trademark License Agreements between Kimberly-Clark and Avent which are identified on Schedule 1.1(c) .
Trademark Transfer Agreements means those trademark transfer agreements between Kimberly-Clark and Avent which are identified on Schedule 1.1(c).
Trade Secrets means information, including formulas, patterns, compilations, programs, devices, methods, techniques, or processes, that: (i) derive independent economic value from not being generally known to, and not being readily ascertainable by proper means by, other Persons who can obtain economic value from their disclosure or use, and (ii) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. For purposes of this Agreement, Trade Secrets shall expressly exclude Patents, Copyrights, Trademarks and Know-How.
Trademarks means all United States, state and foreign trademarks, service marks, logos, trade dress and trade names, whether registered or unregistered, including all goodwill associated with the foregoing, and all registrations and pending applications to register the foregoing.
Transferred Actions has the meaning set forth in Section 6.11(b) .
Transferred Assets has the meaning set forth in Section 2.2 .
Transition Services Agreement means the Transition Services Agreement, dated the date hereof, between Kimberly-Clark and Halyard.
Uninsured Claim has the meaning set forth in Section 8.6(c) .
YK Distributor Agreement means that certain Distributor Agreement, dated as of the date hereof, between Yuhan-Kimberly, Limited and Halyard Sales, LLC.
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SECTION 1.2 Interpretation .
(a) In this Agreement, unless the context clearly indicates otherwise:
(i) words used in the singular include the plural and words used in the plural include the singular;
(ii) reference to any Person includes such Persons successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement;
(iii) reference to any gender includes the other gender;
(iv) the word including means including but not limited to;
(v) reference to any Article, Section, Exhibit or Schedule means such Article or Section of, or such Exhibit or Schedule to, this Agreement, as the case may be, and references in any Section or definition to any clause means such clause of such Section or definition;
(vi) the words herein, hereunder, hereof, hereto and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Section or other provision hereof;
(vii) reference to any agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and by this Agreement;
(viii) reference to any law (including statutes and ordinances) means such law (including all rules and regulations promulgated thereunder) as amended, modified, codified or reenacted, in whole or in part, and in effect at the time of determining compliance or applicability;
(ix) relative to the determination of any period of time, from means from and including, to means to but excluding and through means through and including;
(x) accounting terms used herein shall have the meanings historically ascribed to them by Kimberly-Clark and its Subsidiaries based upon Kimberly-Clarks internal financial policies and procedures in effect prior to the date of this Agreement;
(xi) if there is any conflict between the provisions of the body of this Agreement and the Exhibits or Schedules hereto, the provisions of the body of this Agreement shall control unless explicitly stated otherwise in such Exhibit or Schedule;
(xii) the titles to Articles and headings of Sections contained in this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of or to affect the meaning or interpretation of this Agreement;
(xiii) any portion of this Agreement obligating a Party to take any action or refrain from taking any action, as the case may be, shall mean that such Party shall also be obligated to cause its relevant Subsidiaries to take such action or refrain from taking such action, as the case may be; and
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(xiv) unless otherwise specified in this Agreement, all references to dollar amounts herein shall be in respect of lawful currency of the United States.
(b) This Agreement was negotiated by the Parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against either Party shall not apply to any construction or interpretation hereof.
ARTICLE II
BUSINESS SEPARATION
SECTION 2.1 Separation Transactions . Prior to the Distribution, Kimberly-Clark shall use commercially reasonable efforts to, and shall cause Halyard and each other Subsidiary of Kimberly-Clark to use commercially reasonable efforts to, effect each of the transactions set forth in Schedule 2.1 , which transactions shall be accomplished substantially in the order and utilizing the steps described therein, with such modifications, if any, as Kimberly-Clark shall determine in its sole discretion are necessary or desirable for efficiency or similar purposes. For the avoidance of doubt, some or all of such transactions and the transactions contemplated under this Article II , may have already been implemented prior to the date hereof.
SECTION 2.2 Transfer of Halyard Business . As more fully set forth in this Article II and subject to the terms and conditions of this Agreement (including Section 2.1 ) and the Operating Agreements, prior to the Distribution, Kimberly-Clark shall in the manner described in Schedule 2.1 , and shall cause its Subsidiaries to, convey, assign, transfer, contribute and set over, or cause to be conveyed, assigned, transferred, contributed and set over, to the Halyard Parties, and Halyard shall cause the Halyard Parties to accept and receive, all right, title and interest of Kimberly-Clark and its Subsidiaries in and to the tangible and intangible assets primarily related to the Healthcare Business, as well as the tangible and intangible assets included in the Included Non-Woven Business (all of such assets being hereinafter referred to as the Transferred Assets ), including, but not limited to, the following:
(a) Balance Sheet Assets . all assets reflected or disclosed on the Balance Sheet, including all machinery, equipment, furniture and other tangible personal property, whether owned or leased, primarily related to the Healthcare Business, subject to acquisitions, dispositions and adjustments in the ordinary course of the Healthcare Business, consistent with past practice, from the date of the Balance Sheet through the Effective Time;
(b) Receivables .
(i) all accounts receivable, notes receivable, lease receivables, prepayments (other than prepaid insurance), advances and other receivables arising out of or produced by the Healthcare Business and owing by any Persons (the Receivables ), but in all cases excluding the Retained Receivables;
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(ii) all cash payments received after the Effective Time on account of the Receivables;
(iii) all manufacturers warranties or guarantees related primarily to the Transferred Assets; and
(iv) any and all manufacturers or third party service or replacement programs related primarily to the Transferred Assets;
(c) Inventories . all supplies, packaging, raw materials, works in progress, finished goods and other inventories primarily related to the Healthcare Business;
(d) Owned Real Property and Real Estate Leases .
(i) those certain parcels of land described on Schedule 2.2(d)(i) (the Owned Real Property ) and any and all improvements, fixtures, machinery, equipment and other property located on the premises demised under such Owned Real Property; and
(ii) those certain real estate leases set forth on Schedule 2.2(d)(ii) (the Real Estate Leases ) and any and all improvements, fixtures, machinery, equipment and other property located on the premises demised under such Real Estate Leases;
(e) Personal Property Leases . those certain machinery, equipment or other tangible personal property leases (the Personal Property Leases ) set forth on Schedule 2.2(e) ;
(f) Equipment . all manufacturing fixtures, machinery, installations, equipment, computers, furniture, tools, spare parts, supplies, automobiles, trucks, materials, and other personal property primarily related to the Healthcare Business, including those information technology assets set forth on Schedule 2.2(f) ;
(g) Intellectual Property . (i) all Copyrights and Patents set forth on the Patent Transfer Agreements as to be transferred to a Halyard Party; and (ii) all business and technical information, nonpatented inventions, patent disclosures, Trade Secrets, Know-How and invention disclosures set forth on the Patent Transfer Agreements as to be transferred to a Halyard Party;
(h) Contracts . all contracts, agreements, arrangements, leases, manufacturers warranties, memoranda, understandings and offers open for acceptance of any nature, whether written or oral (the Contracts ) set forth below (other than Real Estate Leases, Personal Property Leases and employment contracts):
(i) all Contracts related to acquisitions or divestitures of assets or stock primarily related to the Healthcare Business, including Contracts primarily related to the transactions set forth on Schedule 2.2(h)(i) , except to the extent any such Contracts primarily relate to the Retained Business and except to the extent indicated on Schedule 2.2(h)(i) ;
(ii) all supplier Contracts primarily related to the Healthcare Business relating either to raw materials or distributed products, including those set forth on Schedule 2.2(h)(ii) ;
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(iii) all Contracts with third-parties primarily related to the Healthcare Business relating to services provided to, or for the benefit of, Halyard, including those set forth on Schedule 2.2(h)(iii) ;
(iv) the Shared Contracts set forth on Schedule 2.2(h)(iv) ; and
(v) all other Contracts primarily related to the Healthcare Business, including those set forth on Schedule 2.2(h)(v) ;
(i) Permits and Licenses . all permits, approvals, licenses, franchises, authorizations or other rights granted by any Governmental Authority held or applied for by Kimberly-Clark and its Subsidiaries and that are primarily related to the Healthcare Business or that are primarily related to the Transferred Assets, and all other consents, grants and other rights that are used primarily for the lawful ownership of the Transferred Assets or the operation of the Healthcare Business and that are legally transferable to Halyard;
(j) Claims and Indemnities . all rights, claims, demands, causes of action, judgments, decrees and rights to indemnity or contribution, whether absolute or contingent, contractual or otherwise, in favor of Kimberly-Clark or any of its Subsidiaries primarily related to the Healthcare Business, including the right to sue, recover and retain such recoveries and the right to continue in the name of Kimberly-Clark and its Subsidiaries any pending actions relating to the foregoing, and to recover and retain any damages therefrom;
(k) Books and Records . all books and records (including all records pertaining to customers, suppliers and personnel, and all data, in whatever form), wherever located, that are primarily related to the Healthcare Business;
(l) Supplies . all office supplies, production supplies, spare parts, purchase orders, forms, labels, shipping material, art work, catalogues, sales brochures, operating manuals and advertising and promotional material and all other printed or written material primarily related to the Healthcare Business;
(m) Trademarks . all Trademarks and domain names set forth on the Trademark Transfer Agreements as to be transferred to a Halyard Party;
(n) Tax Credits . any right, title or interest in any Tax refund, credit or benefit to which any of the Halyard Parties is entitled in accordance with the terms of the Tax Matters Agreement;
(o) Lexington Mill Assets . all assets transferred to Halyard North Carolina, Inc. pursuant to the Lexington Contribution Agreement;
(p) Accruals . any amounts accrued on the books and records of Kimberly-Clark or its Subsidiaries with respect to any Transferred Liabilities; and
(q) Other Assets . all other assets, tangible or intangible, including all goodwill, that are primarily related to the Healthcare Business, including, without limitation, domain names and websites, other than email addresses.
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SECTION 2.3 Retained Assets . Notwithstanding anything to the contrary herein, the following assets (the Retained Assets ) are not, and shall not be deemed to be, Transferred Assets:
(a) cash and cash equivalents, any cash on hand or in bank accounts, certificates of deposit, commercial paper and similar securities, except for (i) deposits securing bonds, letters of credit, leases and all other obligations primarily related to the Healthcare Business, (ii) petty cash and impressed funds primarily related to the Healthcare Business, and (iii) cash, cash equivalents, certificates of deposit, commercial paper and similar securities held in bank accounts of Halyard or any of its Subsidiaries;
(b) the Retained Receivables;
(c) any right, title or interest in and to any Tax refund, credit or benefit to which any of the Kimberly-Clark Parties is entitled in accordance with the terms of the Tax Matters Agreement;
(d) any amounts accrued on the books and records of Kimberly-Clark or its Subsidiaries with respect to any Retained Liabilities;
(e) any right, title or interest in and to any prepaid insurance premiums for the Kimberly-Clark Policies existing immediately prior to the Distribution;
(f) all Trademarks and domain names other than those set forth on the Trademark Transfer Agreements as to be transferred to a Halyard Party;
(g) all Copyrights and Patents and all business and technical information, nonpatented inventions, patent disclosures, Trade Secrets, Know-How and invention disclosures other than those set forth set forth on the Patent Transfer Agreements as to be transferred to a Halyard Party;
(h) all Shared Contracts not set forth on Schedule 2.2(h)(iv) ;
(i) all information technology assets other than those set forth on Schedule 2.2(f) ;
(j) all Excluded Non-Woven Assets;
(k) all other assets of the Kimberly-Clark Parties other than the Transferred Assets; and
(l) all other assets set forth on Schedule 2.3( l ) .
SECTION 2.4 Assumption of Liabilities . In connection with the transactions contemplated by this Article II , and except as set forth in Section 2.5 , Halyard shall, or shall cause the Halyard Parties to assume, and to pay, comply with and discharge all contractual and other Liabilities in accordance with their terms of Kimberly-Clark or its Subsidiaries arising out of the ownership or use of the Transferred Assets or the operation of the Healthcare Business, whether due or to become due, including:
(a) all Liabilities of Kimberly-Clark and its Subsidiaries that are reflected, disclosed or reserved for on the Balance Sheet, as such Liabilities may be increased or decreased in the operation of the Healthcare Business from the date of the Balance Sheet through the Effective Time;
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(b) all Liabilities of Kimberly-Clark and its Subsidiaries under or related to the Real Estate Leases, the Personal Property Leases and the Contracts, such assumption to occur as (i) assignee if such Real Estate Leases, Personal Property Leases and Contracts are assignable and are assigned or otherwise transferred to the Halyard Parties, or (ii) subcontractor, sublessee or sublicensee as provided in Section 6.3 if such assignment of such Real Estate Leases, Personal Property Leases and Contracts and/or proceeds thereof is prohibited by law, by the terms thereof or not permitted by the other contracting party;
(c) all Liabilities of Kimberly-Clark and its Subsidiaries in connection with claims of past or current directors, officers, employees, agents, consultants, advisors and other representatives of the Healthcare Business, except as otherwise expressly provided in this Agreement or the Employee Matters Agreement;
(d) all Liabilities of Kimberly-Clark and its Subsidiaries related to any and all Actions asserting a violation of any law, rule or regulation arising out of the operations of the Healthcare Business or the ownership or use of the Transferred Assets, whether before or after the Effective Time and all Liabilities relating to Assumed Actions;
(e) all Liabilities for which Halyard is liable in accordance with the terms of the Tax Matters Agreement;
(f) the Liabilities set forth on Schedule 2.4(f) ;
(g) all Liabilities assumed by Halyard North Carolina, Inc. pursuant to the Lexington Contribution Agreement; and
(h) all other Liabilities of Kimberly-Clark and its Subsidiaries arising out of the ownership or use of the Transferred Assets or the operation of the Healthcare Business, whether existing on the date hereof or arising at any time or from time to time after the date hereof, and whether based on circumstances, events or actions arising heretofore or hereafter, whether or not such Liabilities shall have been disclosed herein, and whether or not reflected on the books and records of Kimberly-Clark and its Subsidiaries or Halyard and its Subsidiaries or the Balance Sheet.
The Liabilities described in this Section 2.4 are referred to in this Agreement collectively as the Assumed Liabilities .
SECTION 2.5 Retained Liabilities . Notwithstanding anything to the contrary in this Agreement, neither Halyard nor any of the other Halyard Parties shall assume or have any assumed liability for any of the following Liabilities of the Kimberly-Clark Parties (the Retained Liabilities ):
(a) except as provided in the Employee Matters Agreement, the Liabilities under the Kimberly-Clark employee benefit plans;
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(b) all Liabilities for which Kimberly-Clark is liable in accordance with the terms of the Tax Matters Agreement;
(c) all Liabilities arising out of the ownership or use of the Retained Assets or the operation of the Retained Business;
(d) all liabilities relating to the Retained Payables; and
(e) the Liabilities set forth on Schedule 2.5(d) .
SECTION 2.6 Termination of Existing Intercompany Agreements . Except as otherwise expressly provided in this Agreement, the Operating Agreements or as set forth on Schedule 2.6 and except for all receivables and payables accrued in the ordinary course of business of the Kimberly-Clark Parties and the Halyard Parties, all Intercompany Agreements and all other intercompany arrangements and course of dealings, whether or not in writing and whether or not binding, in effect immediately prior to the Effective Time, shall be terminated and be of no further force and effect from and after the Effective Time.
SECTION 2.7 Shared Contracts .
(a) With respect to Liabilities pursuant to, arising under or relating to any Shared Contract, including those set forth in Schedule 2.7 , such Liabilities shall be allocated between the Kimberly-Clark Parties, on the one hand, and the Halyard Parties on the other hand, as follows:
(i) first, if a Liability is incurred exclusively in respect of a benefit received by one Party, the Party receiving such benefit shall be responsible for such Liability; and
(ii) second, if a Liability cannot be so allocated under clause (i) , such Liability shall be allocated between the Parties based on the relative proportions of total benefit received (over the term of the Shared Contract, measured as of the date of the allocation) under the relevant Shared Contract. Notwithstanding the foregoing, each Party shall be responsible for any and all Liabilities arising out of or resulting from its breach of the relevant Shared Contract.
(b) If any of the Kimberly-Clark Parties, on the one hand, or any of the Halyard Parties, on the other hand, receive any benefit or payment under any Shared Contract that was intended for the other Party, the Party receiving such benefit or payment will use commercially reasonable efforts to deliver, transfer or otherwise afford such benefit or payment to the other Party.
SECTION 2.8 Related Transactions .
(a) No later than [ ] days prior to the Distribution, Halyard shall and shall cause the other Halyard Parties to (i) enter into the Credit Facility and related agreements, (ii) consummate the Notes Offering and (iii) borrow under the Credit Facility such amount, if any, as may be necessary in order to enable Halyard to make the payment described in Section 2.8(b) .
(b) Upon Halyards receipt of the proceeds of the borrowings described in Section 2.8(a) , Halyard will make a distribution of $[ ] to Kimberly-Clark by wire transfer of immediately available funds to an account specified by Kimberly-Clark, which amounts shall be used by Kimberly-Clark for purposes of making open market purchases of shares of Kimberly-Clark Common Stock.
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SECTION 2.9 Waiver of Bulk-Sale and Bulk-Transfer Laws . Kimberly-Clark hereby waives compliance by each and every Kimberly-Clark Party with the requirements and provisions of any bulk-sale or bulk-transfer laws of any jurisdiction that may otherwise be applicable with respect to the transfer of any or all of the Transferred Assets to the Halyard Parties. Halyard hereby waives compliance by each and every Halyard Party with the requirements and provisions of any bulk-sale or bulk-transfer laws of any jurisdiction that may otherwise be applicable with respect to the transfer of any or all of the Transferred Assets to the Halyard Parties.
ARTICLE III
THE DISTRIBUTION
SECTION 3.1 Issuance and Delivery of Halyard Shares . Halyard shall issue to Kimberly-Clark the number of Halyard Shares required so that the total number of Halyard Shares held by Kimberly-Clark immediately prior to the Distribution is equal to the total number of Halyard Shares distributable pursuant to Section 3.2 . Kimberly-Clark shall deliver to the Agent one or more stock certificates representing all Halyard Shares then issued and outstanding, together with one or more stock power(s) endorsed in blank and, with respect to any uncertificated shares to be distributed pursuant to Section 3.2 , shall take such steps as are necessary to permit such shares to be distributed in the manner described in Section 3.2 . Kimberly-Clark and Halyard shall cause the Agent to distribute such shares in the manner described in Section 3.2 .
SECTION 3.2 Distribution of Halyard Shares . Kimberly-Clark shall instruct the Agent to (i) distribute the Halyard Distributable Share to each holder of record of Kimberly-Clark Common Stock at the close of business on the Record Date, and (ii) after completing the transactions described in Section 3.3 , deliver to Halyard as a contribution to Halyard, all remaining Halyard Shares, if any, then held by the Agent. Any such returned Halyard Shares shall be immediately cancelled by Halyard and shall not constitute treasury shares. Each distributed Halyard Share shall be validly issued, fully paid and nonassessable and free of preemptive rights. The shares of Halyard Common Stock distributed shall be distributed as uncertificated shares registered in book-entry form through the direct registration system. Except as required by applicable law, no certificates therefor shall be distributed. Halyard shall cause the Agent to deliver an account statement to each holder of Halyard Common Stock reflecting such holders ownership interest in shares of Halyard Common Stock.
SECTION 3.3 Treatment of Fractional Shares . No certificates or scrip representing fractional Halyard Shares shall be issued in the Distribution. In lieu of receiving fractional shares, each holder of Kimberly-Clark Common Stock who would otherwise be entitled to receive a fractional Halyard Share pursuant to the Distribution will receive cash for such fractional share. Kimberly-Clark and Halyard shall instruct the Agent to determine the number of whole Halyard Shares and fractional Halyard Shares allocable to each holder of record of Kimberly-Clark Common Stock as of the close of business on Record Date, to aggregate all such fractional shares into whole shares and sell the whole shares obtained thereby in the open market at the then prevailing prices on behalf of holders who would otherwise be entitled to receive
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fractional share interests, and to distribute to each such holder such holders ratable share of the total proceeds of such sale after making appropriate deductions of any Taxes required to be withheld with respect to the sale of such fractional share interests.
SECTION 3.4 Kimberly-Clark Board Action . The Kimberly-Clark Board of Directors shall, in its sole discretion, establish the Record Date and the Distribution Date and all appropriate procedures in connection with the Distribution. The Board of Directors of Kimberly-Clark also shall have the right, in its sole discretion, to adjust the distribution ratio set forth in the definition of Halyard Distributable Share at any time prior to the Distribution. The consummation of the transactions provided for in this Article III shall only be effected after the Distribution has been declared by the Kimberly-Clark Board of Directors.
SECTION 3.5 Additional Approvals . Kimberly-Clark shall cooperate with Halyard in effecting, and if so requested by Halyard, Kimberly-Clark shall, as the sole stockholder of Halyard prior to the Distribution, ratify any actions which are reasonably necessary or desirable to be taken by Halyard to effectuate the transactions referenced in or contemplated by this Agreement in a manner consistent with the terms hereof, including the preparation and implementation of appropriate plans, agreements and arrangements for employees of the Halyard Business and non-employee members of Halyards Board of Directors.
ARTICLE IV
BUSINESS SEPARATION CLOSING MATTERS
SECTION 4.1 Delivery of Instruments of Conveyance . In order to effectuate the transactions contemplated by Article II , the Parties shall execute and deliver, or cause to be executed and delivered, prior to or as of the Distribution Date such deeds, bills of sale, instruments of assumption, instruments of assignment, stock powers, certificates of title and other instruments of assignment, transfer, assumption and conveyance (collectively, the Conveyancing Instruments ) as the Parties shall reasonably deem necessary or appropriate to effect such transactions.
SECTION 4.2 Delivery of Other Agreements . Prior to or as of the Distribution Date, the Parties shall execute and deliver, or shall cause to be executed and delivered, each of the Operating Agreements.
SECTION 4.3 Provision of Corporate Records . Prior to or as promptly as practicable after the Distribution, Kimberly-Clark shall deliver to Halyard all corporate books and records of Halyard Parties and copies of all corporate books and records of the Kimberly-Clark Parties primarily relating to the Halyard Business, including in each case all active agreements, litigation files and government filings.
ARTICLE V
NO REPRESENTATIONS AND WARRANTIES
SECTION 5.1 No Kimberly-Clark Representations or Warranties . Except as expressly set forth herein or in any Operating Agreement, Kimberly-Clark does not represent or warrant in any way (i) as to the value or freedom from encumbrance of, or any other matter concerning, any of the Transferred Assets or Assumed Liabilities, (ii) as to the legal
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sufficiency to convey title to any of the Transferred Assets on the execution, delivery and filing of any Conveyancing Instrument, or (iii) the absence of any defenses or right of setoff or freedom from counterclaim with respect to any Actions, Transferred Assets or Assumed Liabilities, including accounts receivable. ALL SUCH ASSETS ARE BEING TRANSFERRED ON AN AS IS, WHERE IS BASIS WITHOUT ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, MARKETABILITY, TITLE, VALUE, NON-INFRINGEMENT, PERFORMANCE, FREEDOM FROM ENCUMBRANCE OR ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, and the Halyard Parties shall bear the economic and legal risks that any conveyances of such assets shall prove to be insufficient or that the Halyard Parties title to any such assets shall be other than good and marketable and free of encumbrances. Except as expressly set forth in this Agreement or in any Operating Agreement, Kimberly-Clark does not represent or warrant that the obtaining of the consents or approvals, the execution and delivery of any amendatory agreements and the making of the filings and applications contemplated by this Agreement shall satisfy the provisions of all applicable agreements or the requirements of all applicable laws or judgments, and, subject to Section 6.4 , the Halyard Parties shall bear the economic and legal risk that any necessary consents or approvals are not obtained or that any requirements of law or judgments are not complied with. Notwithstanding the foregoing, the Parties shall fully cooperate and use commercially reasonable efforts to obtain all consents and approvals, to enter into all amendatory agreements and to make all filings and applications that may be required for the consummation of the transactions contemplated by this Agreement.
ARTICLE VI
CERTAIN COVENANTS
SECTION 6.1 Material Governmental Approvals and Consents . The Parties will use commercially reasonable efforts to obtain any Material Governmental Approvals and Consents required by the transactions contemplated by this Agreement.
SECTION 6.2 Non-Assignable Contracts . If and to the extent that any Kimberly-Clark Party is unable to obtain any consent, approval or amendment necessary for the transfer or assignment to any Halyard Party of any Contract or other rights relating to the Halyard Business that would otherwise be transferred or assigned to such Halyard Party as contemplated by this Agreement or any other agreement or document contemplated hereby, (i) such Kimberly-Clark Party shall continue to be bound thereby and the purported transfer or assignment to such Halyard Party shall automatically be deemed deferred until such time as all legal impediments are removed and all necessary consents have been obtained, and (ii) unless not permitted by the terms thereof or by law, the Halyard Parties shall pay, perform and discharge fully all of the obligations of the Kimberly-Clark Parties thereunder from and after the Effective Time, or such earlier time as such transfer or assignment would otherwise have taken place, and indemnify the Kimberly-Clark Parties for all indemnifiable Losses arising out of such performance by such Halyard Party. The Kimberly-Clark Parties shall, without further consideration therefor, pay and remit to the applicable Halyard Party promptly all monies, rights and other considerations received in respect of such performance. The Kimberly-Clark Parties shall exercise or exploit their rights and options under all such Contracts and other rights, agreements and documents referred to in this Section 6.2 only as reasonably directed by Halyard and at Halyards expense. If and when any such consent, approval or amendment shall be obtained
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or such Contract or other right or agreement shall otherwise become transferable or assignable or be able to be novated, the Kimberly-Clark Parties shall promptly assign or transfer and novate (to the extent permissible) all of their rights and obligations thereunder to the applicable Halyard Party without payment of further consideration, and the Halyard Party shall, without the payment of any further consideration therefor, assume such rights and obligations. To the extent that the transfer or assignment of any Contract or other right (or the proceeds thereof) pursuant to this Section 6.2 is prohibited by law or the terms thereof, this Section 6.2 shall operate to create a subcontract with the applicable Halyard Party to perform each relevant Contract or other right, agreement or document at a subcontract price equal to the monies, rights and other considerations received by the Kimberly-Clark Parties with respect to the performance by such Halyard Party.
SECTION 6.3 Novation of Assumed Liabilities; Release of Guarantees .
(a) Except as otherwise specifically provided in Section 2.7 with respect to Shared Contracts and elsewhere in this Agreement, it is expressly understood and agreed to by the Parties that upon the assumption by the Halyard Parties of the Assumed Liabilities, the Kimberly-Clark Parties and their respective officers, directors and employees shall be released unconditionally by the Halyard Parties from any and all Liability, whether joint, several or joint and several, for the discharge, performance or observance of any of the Assumed Liabilities, so that the Halyard Parties will be solely responsible for such Assumed Liabilities.
(b) The Halyard Parties, at the reasonable request of any Kimberly-Clark Party, shall use commercially reasonable efforts to obtain, or cause to be obtained, any consent, approval, substitution or amendment required to novate (including with respect to any federal government contract) or assign all obligations under the Assumed Liabilities, or to obtain in writing the unconditional release of all parties to such arrangements other than the Halyard Parties.
(c) If a Halyard Party is unable to obtain any such required consent, approval, substitution or amendment, the applicable Kimberly-Clark Party shall continue to be bound by such Assumed Liability and, unless not permitted by law or the terms thereof, the Halyard Parties shall, as agent or subcontractor for the Kimberly-Clark Parties, pay, perform and discharge fully all of the obligations or other Liabilities of the Kimberly-Clark Parties thereunder from and after the date hereof. The Halyard Parties shall indemnify and hold harmless the Kimberly-Clark Parties against any Liabilities arising in connection with such Assumed Liability. Except as otherwise set forth in this Agreement, the Kimberly-Clark Parties shall, without further consideration, pay and remit, or cause to be paid or remitted, to the applicable Halyard Party promptly the after-Tax amount of all money, rights and other consideration received by it in respect of such performance (unless any such consideration is a Retained Asset). If and when any such consent, approval, substitution or amendment shall be obtained or such Assumed Liability shall otherwise become assignable or be able to be novated, the applicable Kimberly-Clark Party shall thereafter assign, or cause to be assigned, all of their rights, obligations and other Liabilities thereunder to the applicable Halyard Party shall, without payment of further consideration, and the Halyard Parties shall, without the payment of any further consideration, assume such rights and obligations.
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SECTION 6.4 Further Assurances .
(a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the Parties shall use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the Contribution, the Distribution, the Operating Agreements and the other transaction, agreements and documents contemplated hereby, including (i) the obtaining of all necessary actions or non-actions, waivers, consents and approvals from Governmental Authorities and the making of all necessary registrations and filings (including filings with Governmental Authorities) and the taking of all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Authority, (ii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Authority vacated or reversed, (iii) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by this Agreement, and (iv) to the Parties mutual reasonable satisfaction, the conclusion of any information or consultation obligation owed to employees (or their relevant representatives) in respect of the matters contemplated herein (the Employee Consultation Process ). Without limiting the generality of the foregoing, each Party shall cooperate with the other Party to execute and deliver, or use commercially reasonable efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any Governmental Authority or any other Person under any permit, license, Contract or other instrument ( Third Party Consents ), and to take all such other actions as such Party may reasonably be requested to take by the other Party from time to time, consistent with the terms of this Agreement, in order to confirm the title of the Halyard Parties to all of the Transferred Assets, to put the applicable Halyard Party in actual possession and operating control thereof and to permit the applicable Halyard Party to exercise all rights with respect thereto and to effectuate the provisions and purposes of this Agreement and the other agreements and documents contemplated hereby or thereby.
(b) If, as a result of mistake or oversight, any asset reasonably necessary to the conduct of the Halyard Business is not transferred to the applicable Halyard Party, or any asset reasonably necessary to the conduct of the Retained Business is transferred to any Halyard Party, Kimberly-Clark and Halyard shall negotiate in good faith after the Distribution to determine whether such asset should be transferred to a Halyard Party or to a Kimberly-Clark Party, as the case may be, and the terms and conditions upon which such asset shall be made available to a Halyard Party or to a Kimberly-Clark Party, as the case may be. Unless expressly provided to the contrary in this Agreement or any Operating Agreement, if, as a result of mistake or oversight, any Liability arising out of or relating to the Halyard Business is retained by any Kimberly-Clark Party, or any Liability arising out of or relating to the Retained Business is assumed by any Halyard Party, Kimberly-Clark and Halyard shall negotiate in good faith after the Distribution to determine whether such Liability should be transferred to a Halyard Party or a Kimberly-Clark Party, as the case may be, and/or the terms and conditions upon which any such Liability shall be transferred.
(c) In the event that at any time and from time to time after the Effective Time, any Kimberly-Clark Party shall receive from a third party an asset of the Halyard Business (including any remittances from account debtors in respect of the Halyard Business), such Party shall
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promptly transfer such asset to the appropriate Halyard Party. In the event that at any time and from time to time after the Effective Time, any Halyard Party shall receive from a third party an asset of the Retained Business (including any remittances from account debtors in respect of the Retained Business), such Party shall promptly transfer such asset to the appropriate Kimberly-Clark Party. Each Party shall cooperate with the other Party and use its commercially reasonable efforts to set up procedures and notifications as are reasonably necessary or advisable to effectuate the transfers contemplated by this Section 6.4 .
SECTION 6.5 Collection of Accounts Receivable .
(a) Following the Distribution, the Kimberly-Clark Parties shall be entitled to control all collection actions related to the Retained Business and the Halyard Parties shall be entitled to control all collection actions related to the Halyard Business, in each case including the determination of what actions are necessary or appropriate and when and how to take any such action.
(b) If, after the Distribution, any Halyard Party shall receive any remittance from any account debtors with respect to the accounts receivable arising out of the Retained Business or other amounts due any Kimberly-Clark Party in respect of services rendered by any Kimberly-Clark Party after the Distribution, or any Kimberly-Clark Party shall receive any remittance from any account debtors with respect to the accounts receivable arising out of the Halyard Business or other amounts due any Halyard Party in respect of services rendered by any Halyard Party after the Distribution, such Party shall receive and deposit such remittance and hold the same for the benefit of the other Party. The Parties shall reconcile any amounts held under this Section 6.5 on a weekly basis, with the difference between the amounts held by each Party for the benefit of the other being settled by a cash payment to be made as soon as practicable following such reconciliation and, in any event, no later than five business days following the completion of such reconciliation.
(c) Each Party shall deliver to the other such schedules and other information with respect to accounts receivable as each shall reasonably request from time to time in order to permit such Parties to reconcile their respective records and to monitor the collection of all accounts receivable. Each Party shall afford the other reasonable access to its books and records relating to any accounts receivable.
(d) Notwithstanding anything to the contrary in this Section 6.5 , with respect to the Retained Receivables, the Kimberly-Clark Parties shall process and seek to collect payment on such Retained Receivables in the ordinary course of business, consistent with past practice. If any such Retained Receivables becomes more than 60 days past due, Kimberly-Clark shall provide written notice thereof to Halyard and Halyard shall promptly elect to either (i) purchase such past due Retained Receivable from Kimberly-Clark for a purchase price equal to the full amount of such past due Retained Receivable, or (ii) authorize Kimberly-Clark to undertake formal collection efforts at Kimberly-Clarks expense. Halyard shall provide to Kimberly-Clark written notice of Halyards election under this Section 6.5 within five (5) days following Halyards receipt of the written notice from Kimberly-Clark referenced above. If Halyard fails to timely provide such written notice, it shall be deemed to have elected the option set forth in (d)(ii) above.
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SECTION 6.6 Cooperation Regarding Accounts Payable .
(a) Following the Distribution, the Kimberly-Clark Parties shall be entitled to control the handling and payment of all accounts payable requirements of the Retained Business and the Halyard Parties shall be entitled to control the handling and payment of all accounts payable requirements of the Halyard Business.
(b) If, after the Distribution, any Halyard Party shall receive any invoices from any account creditors with respect to the accounts payable arising out of the Retained Business or other amounts owed by any Kimberly-Clark Party in respect of services rendered thereto after the Distribution, or any Kimberly-Clark Party shall receive any invoices from any account creditors with respect to the accounts payable arising out of the Halyard Business or other amounts owed by any Halyard Party in respect of services rendered thereto after the Distribution, such Party shall promptly forward such invoice to the other Party.
(c) Each Party shall deliver to the other such schedules and other information with respect to accounts payable as each shall reasonably request from time to time in order to permit such Parties to reconcile their respective records and to monitor the payment of all accounts payable. Each Party shall afford the other reasonable access to its books and records relating to any accounts payable.
(d) Notwithstanding anything to the contrary in this Section 6.6 , with respect to the Retained Payables, the Kimberly-Clark Parties shall pay such Retained Payables in the ordinary course of business, consistent with past practice. If any such Retained Payables become more than 60 days past due, at Halyards option and upon written notice thereof to Kimberly-Clark, Halyard may pay the applicable creditor the full amount of such past due Retained Payables, and Kimberly-Clark shall reimburse Halyard for the full amount of such payment, together with any late fees or penalties owed to the applicable creditor.
SECTION 6.7 Election of Halyard Board of Directors . Prior to the Distribution, Kimberly-Clark agrees to vote all shares of Halyard Common Stock held by it in favor of the nominees to the Board of Directors of Halyard, as set forth on Schedule 6.7 .
SECTION 6.8 Late Payments . Except as expressly provided to the contrary in this Agreement or in any Operating Agreement, any amount not paid when due pursuant to this Agreement or any Operating Agreement (and any amounts billed or otherwise invoiced or demanded and properly payable that are not paid within 60 days of the date of such bill, invoice or other demand) shall accrue interest at a rate per annum equal to the Prime Rate plus 2%.
SECTION 6.9 Registration and Listing . Prior to the Distribution:
(a) Kimberly-Clark and Halyard shall cooperate with respect to the preparation of the Form 10, to effect the registration of the Halyard Common Stock under the Exchange Act. The Form 10 shall include an information statement to be sent by Kimberly-Clark to its stockholders in connection with the Distribution (the Information Statement ). Halyard and Kimberly-Clark shall use commercially reasonable efforts to cause the Form 10 to become and remain effective under the Exchange Act as soon as reasonably practicable. As soon as practicable after the Record Date is designated, Kimberly-Clark shall mail the Information Statement to the holders of Kimberly-Clark Common Stock as of that Record Date.
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(b) The Parties shall use commercially reasonable efforts to take all such action as may be necessary or appropriate under state and foreign securities and Blue Sky laws in connection with the transactions contemplated by this Agreement.
(c) Kimberly-Clark and Halyard shall prepare, and Halyard shall file and seek to make effective, an application for the listing of the Halyard Common Stock on the NYSE, subject to official notice of issuance. Kimberly-Clark shall, to the extent commercially reasonable, give the National Association of Securities Dealers, Inc., notice of the Record Date in compliance with Rule 10b-17 of the Securities Exchange Act of 1934, as amended.
(d) The Parties shall cooperate in preparing, filing with the SEC and causing to become effective any registration statements or amendments thereto that are necessary or appropriate in order to effect the transactions contemplated hereby or to reflect the establishment of, or amendments to, any employee benefit plans contemplated hereby.
SECTION 6.10 No Noncompetition .
(a) After the Distribution, except as otherwise provided in the Operating Agreements, (i) either Party may engage in the same or similar activities or lines of business as the other Party, (ii) either Party may, do business, or refrain from doing business, with any potential or actual supplier or customer of the other Party, (iii) for a period of 24 months following the Effective Time, Kimberly-Clark shall not, and shall cause its Affiliates to not, take any steps to enforce any non-competition covenant that any such Person may have with any employee or former employee thereof (to the extent that such covenant was in place as of the Effective Time), in connection with such individuals provision of services to a Halyard Party, and (iv) for a period of 24 months following the Effective Time, Halyard shall not, and shall cause its Affiliates to not, take any steps to enforce any non-competition covenant that any such Person may have with any employee or former employee thereof (to the extent that such covenant was in place as of the Effective Time), in connection with such individuals provision of services to a Kimberly-Clark Party.
(b) the Parties shall not, and shall cause their respective Affiliates to not, take any steps to enforce any non-compete covenant any such entity may have with any Business Employee (as that term is used in the Employee Matters Agreement) insofar as such Business Employee may provide services to either a Kimberly-Clark Party or to a Halyard Party.
(c) In the event that Kimberly-Clark or any other Kimberly-Clark Party, or any director or officer of Kimberly-Clark or any other Kimberly-Clark Party, acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both Kimberly-Clark or any other Kimberly-Clark Party and Halyard or any other Halyard Party, neither Kimberly-Clark nor any other Kimberly-Clark Party, nor any director or officer of Kimberly-Clark or any other Kimberly-Clark Party, shall have any duty to communicate or present such corporate opportunity to Halyard or any other Halyard Party and shall not be liable to Halyard or any other Halyard Party or to Halyards stockholders for breach of any fiduciary duty as a stockholder of Halyard or an officer or director thereof by reason of the fact that Kimberly-Clark or any other Kimberly-Clark
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Party pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person or entity, or does not present such corporate opportunity to Halyard or any other Halyard Party.
(d) In the event that Halyard or any other Halyard Party, or any director or officer of Halyard or any other Halyard Party, acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both Kimberly-Clark or any other Kimberly-Clark Party and Halyard or any other Halyard Party, neither Halyard nor any other Halyard Party, nor any director or officer of Halyard or any other Halyard Party, shall have any duty to communicate or present such corporate opportunity to Kimberly-Clark or any other Kimberly-Clark Party and shall not be liable to Kimberly-Clark or any other Kimberly-Clark Party or to Kimberly-Clarks stockholders for breach of any fiduciary duty as a stockholder of Kimberly-Clark or an officer or director thereof by reason of the fact that Halyard or any other Halyard Party pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person or entity, or does not present such corporate opportunity to Kimberly-Clark or any other Kimberly-Clark Party.
(e) For the avoidance of doubt, to the extent that any person who is a director or officer of Kimberly-Clark or any other Kimberly-Clark Party is also a director or officer of Halyard or any other Halyard Party, such person shall have no duty to communicate or present any corporate opportunity of which he or she acquires knowledge to Halyard or any other Halyard Party and shall not be liable to Halyard or any other Halyard Party or to Halyards stockholders for breach of any fiduciary duty as an officer or director of Halyard by reason of the fact that Kimberly-Clary or any other Kimberly-Clark Party pursues or acquires such corporate opportunity, directs such corporate opportunity to another Person, or does not present such corporate opportunity to Halyard or any other Halyard Party.
SECTION 6.11 Litigation .
(a) Except as provided in Article VIII , as of the Effective Time, the Halyard Parties shall assume and pay all Liabilities that may result from the Assumed Actions and all fees and costs relating to the defense of the Assumed Actions, including attorneys fees and costs incurred after the Effective Time. Assumed Actions means those cases, claims and investigations, whether arising before or after the Effective Time (in which any Kimberly-Clark Party or any Affiliate of a Kimberly-Clark Party, other than Halyard and its Subsidiaries, is a defendant or the party against whom the claim or investigation is directed), primarily related to the Halyard Business, including those listed on Schedule 6.11(a) as assumed actions, but expressly excluding those listed on Schedule 6.11(a) as excluded actions (the Excluded Actions ). Except as provided in Article VIII , the Kimberly-Clark Parties shall retain and pay all Liabilities that may result from the Excluded Actions and all fees and costs relating to the defense of the Excluded Actions, including attorneys fees and costs incurred after the Effective Time.
(b) The Kimberly-Clark Parties shall transfer the Transferred Actions to Halyard, and Halyard shall receive and have the benefit of all of the proceeds of such Transferred Actions. Transferred Actions means those cases and claims pending as of the Effective Time (in which any Kimberly-Clark Party or any of its Affiliates is a plaintiff or claimant), primarily relating to the Halyard Business, including those listed on Schedule 6.11(b) .
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(c) Each Party agrees that at all times from and after the Distribution, if an Action is commenced by a third party naming both Parties as defendants thereto and with respect to which one Party is a nominal defendant, then the other Party shall use commercially reasonable efforts to cause such nominal defendant to be removed from such Action.
SECTION 6.12 Signs; Use of Company Name . Prior to March 1, 2015, (i) Halyard shall, at its expense, remove (or, if necessary, on an interim basis cover up) any and all exterior and interior signs and identifiers on the Transferred Assets that refer or pertain to any Kimberly-Clark Party or the Retained Business, and (ii) Kimberly-Clark shall, at its expense remove (or, if necessary, on an interim basis cover up) any and all exterior and interior signs and identifiers on the Retained Assets that refer or pertain to any Halyard Party or the Transferred Business. After such period, except as otherwise permitted by the terms of the Operating Agreements (i) the Halyard Parties shall not use or display the name Kimberly-Clark or any variations thereof, or other trademarks, any tradenames, logos or identifiers using any of such names or otherwise owned by or licensed to any Kimberly-Clark Party that have not been assigned or licensed to a Halyard Party, and (ii) the Kimberly-Clark Parties shall not use or display the name Halyard Health or any variations thereof, or other trademarks, tradenames, logos or identifiers using any of such names or otherwise owned by or licensed to any Halyard Party that have not been assigned or licensed to a Kimberly-Clark Party (collectively, the Non-Permitted Names ), without the prior written consent of the other Party; provided , however , that notwithstanding the foregoing, nothing contained in this Agreement shall prevent either Party from using the others name in public filings with Governmental Authorities, materials intended for distribution to either Partys stockholders or any other communication in any medium that describes the relationship between the Parties, including materials distributed to employees relating to the transition of employee benefit plans; and provided further that Halyard shall be permitted to use its inventories of packaging and promotional materials and other supplies existing on the date hereof that bear the Kimberly-Clark name or logo until March 1, 2015.
SECTION 6.13 Conduct of Healthcare Business in Ordinary Course . The Parties hereby agree and acknowledge that it is their intent that between May 1, 2014 and the Effective Time the Healthcare Business be operated in the ordinary course of business consistent with past practice, other than such actions (including failures to act) and decisions relating solely to the Distribution and Contribution which were taken (or not taken) or made with the consent of the other Party (such operation of the Healthcare Business is referred to as the Ordinary Course ).
ARTICLE VII
CONDITIONS TO THE DISTRIBUTION
The obligation of Kimberly-Clark to effect the Distribution is subject to the satisfaction or the waiver by Kimberly-Clark of each of the following conditions:
SECTION 7.1 Approval by Kimberly-Clark Board of Directors . This Agreement and the transactions contemplated hereby, including the declaration of the Distribution, shall have been duly approved by the Board of Directors of Kimberly-Clark in accordance with applicable law and the Restated Certificate of Incorporation, as amended, and By-Laws of Kimberly-Clark.
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SECTION 7.2 Receipt of Tax Treatment Opinion . Kimberly-Clark shall have received an opinion of Baker Botts L.L.P., which shall not have been rescinded, to the effect that the Distribution will constitute a reorganization within the meaning of Sections 368(a)(l)(D) and 355 of the Code, and Kimberly-Clark, Halyard Health and Kimberly-Clarks shareholders will not be subject to U.S. tax in respect of the Distribution, other than with respect to (i) cash received by Kimberly-Clarks shareholders in lieu of fractional shares, (ii) any income or gain from or attributable to inter-company transactions or excess loss accounts which are required to be taken into account by Kimberly-Clark in connection with the Distribution under Treasury regulation section 1.I502-I3 or 1.1502-19, respectively, and (iii) any income or gain resulting from any actual or deemed transfer of property from Halyard Health to Kimberly-Clark as a result of any rights granted by Halyard Health to Kimberly-Clark pursuant to the Patent License Agreements and Trademark License Agreements.
SECTION 7.3 Receipt of Solvency Opinion . The Parties shall have received an opinion from its financial advisory firm, which shall not have been rescinded, substantially to the effect that Halyard, following the Contribution and Distribution, will be solvent and sufficiently capitalized to continue operations as a going concern.
SECTION 7.4 Compliance with State and Foreign Securities and Blue Sky Laws . The Parties shall have taken all such action as may be necessary or appropriate under state and foreign securities and blue sky laws in connection with the Distribution.
SECTION 7.5 SEC Filings and Approvals . The Parties shall have prepared and Halyard shall, to the extent required under applicable law, have filed with the SEC any such documentation and no action letter requests that Kimberly-Clark determines are necessary or desirable to effectuate the Distribution, and each Party shall have obtained all necessary approvals or no action letters from the SEC.
SECTION 7.6 Effectiveness of Form 10; No Stop Order . The Form 10 shall have been declared effective by the SEC, and no stop order suspending the effectiveness of the Form 10 shall have been initiated or, to the knowledge of either of the Parties, threatened by the SEC.
SECTION 7.7 Dissemination of Information to Kimberly-Clark Stockholders . Prior to the Distribution, the Parties shall have prepared and mailed to the holders of Kimberly-Clark Common Stock such information concerning Halyard, its business, operations and management, the Distribution and such other matters as Kimberly-Clark shall reasonably determine and as may be required by law.
SECTION 7.8 Approval of NYSE Listing Application . The Halyard Common Stock to be distributed in the Distribution shall have been approved for listing on the New York Stock Exchange, subject to official notice of issuance.
SECTION 7.9 Operating Agreements . Each of the Operating Agreements shall have been executed and delivered, and each of such agreements shall be in full force and effect.
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SECTION 7.10 Resignations . Prior to the Distribution, the individuals that were designated by Kimberly-Clark and identified by Halyard shall have resigned or been removed as officers and from all Boards of Directors or similar governing bodies of Halyard and its Subsidiaries.
SECTION 7.11 Consents .
(a) All Material Governmental Approvals and Consents required to permit the valid consummation of the Contribution and the Distribution shall have been obtained without any conditions being imposed that would have a material adverse effect on Kimberly-Clark or Halyard.
(b) Kimberly-Clark shall have obtained the Third Party Consents that shall be required in connection with the Distribution or Contribution, except those for which the failure to obtain such consents, approvals or waivers would not, in the reasonable opinion of Kimberly-Clark, individually or in the aggregate have a material adverse effect on Kimberly-Clark, Halyard or the consummation of the Contribution or Distribution.
SECTION 7.12 No Actions . No action, suit or proceeding shall have been instituted or threatened by or before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator to restrain, enjoin or otherwise prevent the Distribution or the other transactions contemplated by this Agreement (including a stop order with respect to the effectiveness of the Form 10), and no order, injunction, judgment, ruling or decree issued by any court of competent jurisdiction shall be in effect restraining the Distribution or such other transactions.
SECTION 7.13 Consummation of Pre-Distribution Transactions . The pre-Distribution transactions contemplated by Sections 2.1 through 2.7 of this Agreement shall have been consummated in all material respects.
SECTION 7.14 Pre-Distribution Payment . The pre-Distribution distribution payment contemplated by Section 2.8(b) of this Agreement shall have been received by Kimberly-Clark.
SECTION 7.15 No Other Events . No other events or developments shall have occurred that, in the judgment of the Kimberly-Clark Board of Directors made in their sole discretion, would result in the Distribution having a material adverse effect on Kimberly-Clark or its stockholders.
SECTION 7.16 Satisfaction of Conditions . The satisfaction of the foregoing conditions are for the sole benefit of Kimberly-Clark and shall not give rise to or create any duty on the part of Kimberly-Clark or the Kimberly-Clark Board of Directors to waive or not waive any such condition, to effect the Distribution or in any way limit Kimberly-Clarks power of termination set forth in Section 13.13 .
SECTION 7.17 Employee Consultation . The completion, to the reasonable mutual satisfaction of the Parties, of any Employee Consultation Process in any relevant jurisdiction.
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ARTICLE VIII
INSURANCE MATTERS
SECTION 8.1 Insurance Prior to the Effective Time . Except as may otherwise be expressly provided in this Article VIII , the Kimberly-Clark Parties shall not have any Liability whatsoever as a result of the insurance policies and practices of Kimberly-Clark in effect at any time prior to the Effective Time, including as a result of the level or scope of any such insurance, the creditworthiness of any insurance carrier, the terms and conditions of any policy and the adequacy or timeliness of any notice to any insurance carrier with respect to any claim or potential claim or otherwise. Notwithstanding the prior sentence, Ridgeway Insurance Company, a wholly-owned Subsidiary of Kimberly-Clark, will continue to be responsible for any property damage to the Transferred Assets which occurs prior to the Effective Time to the extent that such damage is included in the scope of any property damage reinsurance in effect prior to the Effective Time maintained by Ridgeway Insurance Company.
SECTION 8.2 Ownership of Existing Policies and Programs . Kimberly-Clark or one or more of the other Kimberly-Clark Parties shall continue to own all property damage and business interruption, and liability insurance policies and programs (including primary and excess general liability, director and officer liability, automobile, workers compensation, property damage and business interruption, crime, surety and other similar insurance policies) in effect on or before the Effective Time (collectively, the Kimberly-Clark Policies and individually, a Kimberly-Clark Policy ). Subject to the provisions of this Agreement, the Kimberly-Clark Parties shall retain all of their respective rights, benefits and privileges, if any, under the Kimberly-Clark Policies. Nothing contained herein shall be construed to be an attempted assignment of or a change to any part of the ownership of the Kimberly-Clark Policies. With respect to any claim under the Kimberly-Clark Policies relating to the Halyard Business or the Transferred Assets, Kimberly-Clark shall have sole responsibility for claims administration and financial administration of such policies, and such administration shall be governed solely by the terms of Sections 8.5 and 8.6 . Except as expressly set forth in Sections 8.5 and 8.6 , no Kimberly-Clark Party nor any of its Affiliates shall have any responsibility for, or obligation to, any Halyard Party or any of its Affiliates under the Kimberly-Clark Policies relating to any of the matters, losses or claims covered by or assumed to be covered by the Kimberly-Clark Parties for any period, whether prior to, on or after the Effective Time.
SECTION 8.3 Maintenance of Insurance for Halyard . Until the Effective Time, Kimberly-Clark will maintain in full force and effect its existing insurance to the extent that it applies to the Transferred Assets or the Halyard Business, which insurance policies are set forth on Schedule 8.3 .
SECTION 8.4 Acquisition and Maintenance of Post-Distribution Insurance by Halyard. Commencing on and as of the Effective Time, Halyard shall be responsible for establishing and maintaining separate property damage and business interruption and liability insurance policies and programs (including primary and excess general liability, director and officer liability, automobile, workers compensation, property damage and business interruption, crime, surety and other similar insurance policies) for activities and claims involving any Halyard Party or any of their Affiliates, in each case with commercially reasonable and customary limits and deductibles. Each of the Halyard Parties and each of their Affiliates, as
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appropriate, shall be responsible for all administrative and financial matters relating to insurance policies established and maintained by the Halyard Parties and each of their Affiliates for claims involving any Halyard Party or any of its Affiliates.
SECTION 8.5 Property Damage and Business Interruption Insurance Claims Administration for Pre-Distribution Losses . For property damage and business interruption losses related to the Transferred Assets or the Halyard Business which occur prior to the Effective Time, Kimberly-Clark shall have the sole right, responsibility and authority to submit and process claims, including claims that are to be paid by the Kimberly-Clark Parties in whole or in part because of insurance or reinsurance in support of property damage and business interruption insurance maintained by any Kimberly-Clark Party prior to the Effective Time. Any amounts received by Kimberly-Clark with respect to (i) any such claims that are resolved prior to the Effective Time shall be retained by Kimberly-Clark, and (ii) any such claims that remain unresolved as of the Effective Time that are settled subsequent to the Effective Time shall be paid to Halyard within five business days of receipt thereof by Kimberly-Clark.
SECTION 8.6 Liability and Workers Compensation Insurance Claims Administration for Pre-Distribution Occurrences .
(a) The Kimberly-Clark Parties shall have the sole right, responsibility and authority for the administration of United States workers compensation claims for pre-Distribution occurrences involving employees of the Halyard Business (collectively, the K-C Administered Claims ). Schedule 8.6 identifies the K-C Administered Claims known as of the date of this Agreement, including those claims which are uninsured, where the claim is reasonably expected to result in a charge to Halyard of more than $50,000 (including those for which a reserve has been established). Halyard shall cooperate with Kimberly-Clark in asserting and pursuing coverage and payment for such claim by the appropriate insurance carrier(s).
(b) Upon notification by a Halyard Party or any of its Affiliates of a claim relating to a Halyard Party or any of its Affiliates under one or more of the Kimberly-Clark Policies, Kimberly-Clark shall cooperate with Halyard in asserting and pursuing coverage and payment for such claim by the appropriate insurance carrier(s). In asserting and pursuing such coverage and payment, and subject to Sections 8.6(c) and 10.6 , Kimberly-Clark shall have sole power and authority to make binding decisions, determinations, commitments and stipulations on its own behalf and on behalf of the Halyard Parties and their Affiliates, which decisions, determinations, commitments and stipulations shall be final and conclusive if reasonably made to maximize the overall economic benefit of the Kimberly-Clark Policies.
(c) Kimberly-Clark shall give written notice to Halyard of any pre-Distribution liability or workers compensation claim which is uninsured due to the terms of the Kimberly-Clark Policies to the extent that any such claim is reasonably expected to result in a charge to Halyard (including those for which a reserve has been established) of more than $50,000 (an Uninsured Claim ). With respect to any such Uninsured Claim, Kimberly-Clark shall use commercially reasonable efforts to (i) afford Halyard a reasonable opportunity to inspect and copy any written materials relating to the defense of such claim, (ii) consult with Halyard respecting the strategies for defending such Uninsured Claim, including a reasonable opportunity to review and comment upon any written materials before they are submitted to the claimant or others in defense of such
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Uninsured Claim, (iii) consult with and afford Halyard a reasonable opportunity to express its views before making or refusing to make any settlement offer to the claimant or before proceeding to trial, and (iv) obtain the consent of Halyard to settle, try or otherwise dispose of any such Uninsured Claim, which consent shall not be unreasonably withheld, conditioned or delayed. Halyard will indemnify and hold Kimberly-Clark harmless from any and all damages and liabilities resulting from or arising out of Halyard unreasonably withholding, conditioning or delaying its consent to settle, try or otherwise dispose of any such Uninsured Claim. Halyard hereby authorizes Kimberly-Clark to communicate solely with its Senior Vice President and General Counsel for all matters relating to this Section 8.6 .
(d) Consistent with past practices and subject to Section 8.6(a) , the Halyard Parties and their Affiliates shall assume responsibility for, and shall pay to the appropriate insurance carriers or otherwise, any premiums, retrospectively-rated premiums, defense costs, indemnity payments, deductibles, retentions or uninsured costs arising from liability or workers compensation losses which are uninsured because of coverage terms or conditions of the policies covering such losses, or other charges (collectively, Insurance Charges ) whenever occurring, which shall become due and payable under the terms and conditions of any applicable Kimberly-Clark Policy in respect of any liabilities, losses, claims or actions attributable to pre-Distribution occurrences, whenever becoming known, arising out of the ownership, use or operation of any of the assets, businesses, operations or liabilities of any Halyard Party or any of its Affiliates, which Insurance Charges are known or become known prior to, on or after the Distribution Date. To the extent that the terms of any applicable Kimberly-Clark Policy provide that any Kimberly-Clark Party shall have an obligation to pay or guarantee the payment of any Insurance Charges relating to any Halyard Party, Kimberly-Clark shall be entitled to demand that Halyard make such payment directly to the Person or entity entitled thereto. In connection with any such demand, Kimberly-Clark shall submit to Halyard a copy of any invoice or listing of claims received by Kimberly-Clark pertaining to such Insurance Charges together with appropriate supporting documentation. In the event that Halyard fails to pay any such Insurance Charges when due and payable, whether at the request of the Person entitled to payment or upon demand by Kimberly-Clark, the Kimberly-Clark Parties may (but shall not be required to) pay such insurance charges for and on behalf of the Halyard Parties and, thereafter, the Halyard Parties shall forthwith reimburse Kimberly-Clark for such payment within 30 days.
SECTION 8.7 Non-Waiver of Rights to Coverage . An insurance carrier that would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the provisions of this Article VIII , have any subrogation rights with respect thereto. It is expressly understood and agreed that no insurance carrier or any third party shall be entitled to a benefit (i.e., a benefit they would not be entitled to receive had no Distribution occurred or in the absence of the provisions of this Article VIII ) by virtue of the provisions hereof.
SECTION 8.8 Scope of Affected Policies of Insurance . The provisions of this Article VIII relate solely to matters involving property, damage and business interruption, and liability insurance policies and programs, including, primary and excess general liability, director and officer liability, automobile, workers compensation, property damage and business interruption, crime, surety and other similar insurance policies, and shall not be construed to affect any obligation of or impose any obligation on the Parties with respect to any life, health and accident, dental or medical or any other insurance policies applicable to any of the officers, directors, employees or other representatives of the Parties or their Affiliates.
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ARTICLE IX
DEBT ISSUANCE COSTS
SECTION 9.1 Debt Issuance Costs .
(a) Halyard will be responsible for, and will pay out of the proceeds of the borrowings described in Section 2.8 of this Agreement or otherwise, the Debt Issuance Costs.
(b) To the extent that Kimberly-Clark has paid any Debt Issuance Costs on behalf of Halyard prior to the Effective Time, Halyard will reimburse Kimberly-Clark for such amounts after the Effective Time.
(c) Amounts to be paid by Halyard to Kimberly-Clark pursuant to this Section 9.1 will be promptly paid by it following receipt of an invoice from Kimberly-Clark which invoice sets forth a reasonably detailed accounting of such amounts.
ARTICLE X
RELEASES AND INDEMNIFICATION
SECTION 10.1 Release of Pre-Distribution Claims .
(a) Except as provided in Section 10.1(b) , effective as of the Effective Time, each Party does hereby, on behalf of itself and its respective Subsidiaries and Affiliates, successors and assigns and all Persons who at any time prior to the Effective Time have been shareholders, directors, officers, agents or employees of either Party (in each case, in their respective capacities as such), remise, release and forever discharge the other Party, its respective Subsidiaries and Affiliates, successors and assigns and all Persons who at any time prior to the Effective Time have been shareholders, directors, officers, agents or employees of such Party or such Subsidiaries or Affiliates (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Effective Time, including in connection with the transactions and all other activities to implement the Distribution. In connection with the foregoing, on or before the Distribution Date, Kimberly-Clark, at Kimberly-Clarks expense, shall cause its directors and officers insurance policies existing as of the Distribution Date to extend coverage for the Persons transferring to Halyard that were covered by such policies immediately prior to the Distribution, and for the amounts provided thereby, for a period of at least six years after the Distribution as to all claims based upon occurrences prior to the Distribution that would have been covered by such insurance absent the Distribution.
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(b) Nothing contained in Section 10.1(a) shall impair any right of any Person identified in Section 10.1(a) to enforce this Agreement, any Operating Agreement or any agreements, arrangements, commitments or understandings that are specified in Section 2.6 or Schedule 2.6 not to terminate as of the Effective Time, in each case in accordance with its terms. Nothing contained in Section 10.1(a) shall release any Person from:
(i) any Liability provided in or resulting from any agreement of the Parties that is specified in Section 2.6 or Schedule 2.6 as not to terminate as of the Effective Time, or any other intercompany arrangement or course of dealing specified in Section 2.6 or Schedule 2.6 as not to terminate as of the Effective Time;
(ii) any Liability, contingent or otherwise, assumed, transferred, assigned, retained or allocated to a Party, its Subsidiaries or Affiliates in accordance with, or any other Liability of any Party, its Subsidiaries or Affiliates under, this Agreement or the Operating Agreements; or
(iii) any Liability that any Indemnified Party may have with respect to indemnification or contribution pursuant to this Agreement for claims brought against the Parties or their respective Subsidiaries or Affiliates by third Persons, which Liability shall be governed by the provisions of this Article X and, if applicable, the appropriate provisions of the Operating Agreements.
(c) Neither Party shall make, nor permit any of its Subsidiaries or Affiliates to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or indemnification, against the other Party, or any other Person released pursuant to Section 10.1(a) , with respect to any Liability released pursuant to Section 10.1(a) .
(d) It is the intent of each of the Parties by virtue of the provisions of this Section 10.1 to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the Effective Time, between the Parties (including any contractual agreements or arrangements existing or alleged to exist between the Parties on or before the Effective Time), except as expressly set forth in Section 10.1(b) . At any time, at the reasonable request of either Party, the other Party shall execute and deliver releases reflecting the provisions hereof.
SECTION 10.2 Indemnification by Halyard . Except as provided in Section 10.5 and except as expressly provided in the Operating Agreements, Halyard shall, and shall cause each of the other Halyard Parties to, indemnify, defend and hold harmless each Kimberly-Clark Party, each of their respective Affiliates, each of the respective directors, officers, employees and agents of any of the foregoing, and each of the respective heirs, executors, successors and assigns of any of the foregoing (collectively, the Kimberly-Clark Indemnified Parties ), from and against any and all Expenses or Losses incurred or suffered by one or more of the Kimberly-Clark Indemnified Parties, in connection with, relating to, arising out of or due to, directly or indirectly, any of the following items:
(a) any claim that the information included in the Form 10 or the Information Statement that was supplied by Halyard, is or was false or misleading with respect to any material fact or omits or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, regardless of whether the occurrence, action or other event giving rise to the applicable matter took place prior to or subsequent to the Effective Time;
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(b) the Halyard Business as conducted by the Kimberly-Clark Parties or their Affiliates or predecessors on or at any time prior to the Effective Time;
(c) the Transferred Assets;
(d) the Assumed Liabilities;
(e) any claim that the information included in the offering memorandum relating to the Notes Offering or the confidential information memorandum relating to the Credit Facility that was supplied by Halyard is or was false or misleading with respect to any material fact or omits or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, regardless of whether the occurrence, action or other event giving rise to the applicable matter took place prior to or subsequent to the Effective Time;
(f) the Healthcare Business not being operated in the Ordinary Course prior to the Effective Time as a result of any action or failure to act by (i) any Halyard Party, (ii) any person who served or is serving as a director, officer or employee of any Halyard Party after the Effective Time, or (iii) any person whose employment and job responsibilities would have resulted in such person serving as a director, officer or employee of any Halyard Party after the Effective Time had such person not retired or his employment been terminated voluntarily or involuntarily prior to the Effective Time;
(g) the use by any Halyard Party after the Effective Time of the name Kimberly-Clark or any variation thereof, or other Trademarks, tradenames, logos or identifiers using any of such names or otherwise owned by or licensed to any Kimberly-Clark Party;
(h) the breach by any Halyard Party of any covenant or agreement set forth in this Agreement, any Operating Agreement or any Conveyancing Instrument; and
(i) the matters set forth in Schedule 10.2(i) ;
in each case, regardless of when or where the loss, claim, accident, occurrence, event or happening giving rise to the Expense or Loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported.
SECTION 10.3 Indemnification by Kimberly-Clark . Except as provided in Section 10.5 and except as expressly provided in the Operating Agreements, Kimberly-Clark shall indemnify, defend and hold harmless each Halyard Party, each of their respective Affiliates, each of the respective directors, officers, employees and agents of any of the foregoing, and each of the respective heirs, executors, successors and assigns of any of the foregoing (collectively, the Halyard Indemnified Parties ), from and against any and all Expenses or Losses incurred or suffered by one or more of the Halyard Indemnified Parties in connection with, relating to, arising out of or due to, directly or indirectly, any of the following items:
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(a) any claim that the information in the Form 10 or the Information Statement that was supplied by Kimberly-Clark, is or was false or misleading with respect to any material fact or omits or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, regardless of whether the occurrence, action or other event giving rise to the applicable matter took place prior to or subsequent to the Effective Time;
(b) the business (other than the Halyard Business) conducted by the Kimberly-Clark Parties or their Affiliates or predecessors on or at any time prior to the Effective Time;
(c) the assets owned by the Kimberly-Clark Parties, other than the Transferred Assets;
(d) the Liabilities (including the Retained Liabilities) of the Kimberly-Clark Parties, other than the Assumed Liabilities (but excluding the matters set forth in Schedule 10.2(i) );
(e) any claim that the information included in the offering memorandum relating to the Notes Offering or the confidential information memorandum relating to the Credit Facility that was supplied by Kimberly-Clark is or was false or misleading with respect to any material fact or omits or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, regardless of whether the occurrence, action or other event giving rise to the applicable matter took place prior to or subsequent to the Effective Time;
(f) the Healthcare Business not being operated in the Ordinary Course prior to the Effective Time as a result of any action or failure to act by any Kimberly-Clark Party or any person who served or is serving as a director, officer or employee of any Kimberly-Clark Party prior to, on or after the Effective Time, other than a person described in Section 10.2(f)(ii) or (iii) ; and
(g) the breach by any Kimberly-Clark Party of any covenant or agreement set forth in this Agreement, any Operating Agreement or any Conveyancing Instrument;
in each case, regardless of when or where the loss, claim, accident, occurrence, event or happening giving rise to the Expense or Loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported.
For purposes of the foregoing, the scope of information in the Form 10, the content of the Information Statement, the offering memorandum relating to the Notes Offering and the confidential information memorandum relating to the Credit Facility that is deemed to have been supplied by Halyard and that is deemed to have been supplied by Kimberly-Clark, in each case is as is set forth on Schedule 10.3 .
SECTION 10.4 Applicability of and Limitation on Indemnification . EXCEPT AS EXPRESSLY PROVIDED HEREIN, THE INDEMNITY OBLIGATIONS OF EACH PARTY UNDER THIS ARTICLE X SHALL APPLY NOTWITHSTANDING ANY INVESTIGATION MADE BY OR ON BEHALF OF ANY INDEMNIFIED PARTY AND SHALL APPLY WITHOUT REGARD TO WHETHER THE LOSS, LIABILITY, CLAIM, DAMAGE, COST OR EXPENSE FOR WHICH INDEMNITY IS CLAIMED HEREUNDER IS BASED ON STRICT LIABILITY, ABSOLUTE LIABILITY, ANY OTHER THEORY OF LIABILITY OR ARISES AS AN OBLIGATION FOR CONTRIBUTION.
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SECTION 10.5 Adjustment of Indemnifiable Losses .
(a) The amount that any Party or any of its Affiliates (an Indemnifying Party ) is required to pay to any Person entitled to indemnification hereunder (an Indemnified Party ) shall be reduced by any insurance proceeds and other amounts actually recovered by or on behalf of such Indemnified Party in reduction of the related Expense or Loss. If an Indemnified Party receives a payment (an Indemnity Payment ) required by this Agreement from an Indemnifying Party in respect of any Expense or Loss and subsequently actually receives Insurance Proceeds or other amounts in respect of such Expense or Loss, then such Indemnified Party shall pay to the Indemnifying Party a sum equal to the lesser of (1) the after-tax amount of such Insurance Proceeds or other amounts actually received and (2) the net amount of Indemnity Payments actually received previously. The Indemnified Party agrees that the Indemnifying Party shall be subrogated to such Indemnified Party under any insurance policy.
(b) An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a windfall (i.e., a benefit he or she would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof.
(c) Indemnity Payments (i) shall not be increased to take into account any Tax costs incurred by the Indemnified Party arising from any Indemnity Payments from the Indemnifying Party and (ii) shall not be reduced to take into account any Tax benefit received by the Indemnified Party arising from the incurrence or payment of any Indemnity Payment. For all Tax purposes, to the extent permitted by applicable Tax laws, the Parties will treat any indemnification or reimbursement payment in respect of a Liability pursuant to this Article X as a capital contribution made by Kimberly-Clark to Halyard or as a distribution made by Halyard to Kimberly-Clark, as the case may be, on the date recited above on which the parties entered into the Agreement.
(d) Amounts paid by Kimberly-Clark to or for the benefit of Halyard, or by Halyard to or for the benefit of Kimberly-Clark, under this Article X (and under other specified provisions of this Agreement) shall be treated by the Parties, for all applicable Tax purposes, as adjustments to the amount of Transferred Assets.
(e) In the event that an Indemnity Payment shall be denominated in a currency other than United States dollars, the amount of such payment shall be translated into United States dollars using the Foreign Exchange Rate for such currency determined in accordance with the following rules:
(i) with respect to an Expense or a Loss arising from payment by a financial institution under a guarantee, comfort letter, letter of credit, foreign exchange contract or similar instrument, the Foreign Exchange Rate for such currency shall be determined as of the date on which such financial institution shall have been reimbursed;
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(ii) with respect to an Expense or a Loss covered by insurance, the Foreign Exchange Rate for such currency shall be the Foreign Exchange Rate employed by the insurance company providing such insurance in settling such Expense or Loss with the Indemnifying Party; and
(iii) with respect to an Expense or a Loss not covered by clause (i) or (ii) above, the Foreign Exchange Rate for such currency shall be determined as of the date that notice of the claim with respect to such Expense or Loss shall be given to the Indemnified Party.
SECTION 10.6 Procedures for Indemnification of Third Party Claims .
(a) If any third party shall make any claim or commence any arbitration proceeding or suit (collectively, a Third Party Claim ) against any one or more of the Indemnified Parties with respect to which an Indemnified Party intends to make any claim for indemnification against any Halyard Party under Section 10.2 or against Kimberly-Clark under Section 10.3 , such Indemnified Party shall promptly give written notice to the Indemnifying Party describing such Third Party Claim in reasonable detail. Notwithstanding the foregoing, the failure of any Indemnified Party to provide notice in accordance with this Section 10.6(a) shall not relieve the related Indemnifying Party of its obligations under this Article X , except to the extent that such Indemnifying Party is actually prejudiced by such failure to provide notice.
(b) The Indemnifying Party shall have 30 days after receipt of the notice referred to in Section 10.6(a) to notify the Indemnified Party that it elects to conduct and control the defense of such Third Party Claim. If the Indemnifying Party does not give the foregoing notice, the Indemnified Party shall have the right to defend, contest, settle or compromise such Third Party Claim in the exercise of its exclusive discretion subject to the provisions of Section 10.6(c) , and the Indemnifying Party shall, upon request from any of the Indemnified Parties, promptly pay to such Indemnified Parties in accordance with the other terms of this Section 10.6(b) the amount of any Expense or Loss resulting from their liability to the third party claimant. If the Indemnifying Party gives the foregoing notice, the Indemnifying Party shall have the right to undertake, conduct and control, through counsel reasonably acceptable to the Indemnified Party, and at its sole expense, the conduct and settlement of such Third Party Claim, and the Indemnified Party shall cooperate with the Indemnifying Party in connection therewith, provided that (i) the Indemnifying Party shall not thereby permit any lien, encumbrance or other adverse charge to thereafter attach to any asset of any Indemnified Party; (ii) the Indemnifying Party shall not thereby permit any injunction against any Indemnified Party; (iii) the Indemnifying Party shall permit the Indemnified Party and counsel chosen by the Indemnified Party and reasonably acceptable to the Indemnifying Party to monitor such conduct or settlement and shall provide the Indemnified Party and such counsel with such information regarding such Third Party Claim as either of them may reasonably request (which request may be general or specific), but the fees and expenses of such counsel chosen by the Indemnified Party (including allocated costs of in-house counsel and other personnel) shall be borne by the Indemnified Party unless (A) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (B) the named parties to any such Third Party Claim include the Indemnified Party and the Indemnifying Party and in the reasonable opinion of counsel to the Indemnified Party representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and disbursements of counsel for such Indemnified Party (including allocated costs of in-house counsel and other personnel) shall be paid by the
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Indemnified Party; and (iv) the Indemnifying Party shall agree promptly to reimburse to the extent required under this Article X the Indemnified Party for the full amount of any Expense or Loss resulting from such Third Party Claim and all related expenses incurred by the Indemnified Party. In no event shall the Indemnifying Party, without the prior written consent of the Indemnified Party, settle or compromise any claim or consent to the entry of any judgment that does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a release from all liability in respect of such claim.
If the Indemnifying Party shall not have undertaken the conduct and control of the defense of any Third Party Claim as provided above, the Indemnifying Party shall nevertheless be entitled through counsel chosen by the Indemnifying Party and reasonably acceptable to the Indemnified Party to monitor the conduct or settlement of such claim by the Indemnified Party, and the Indemnified Party shall provide the Indemnifying Party and such counsel with such information regarding such Third Party Claim as either of them may reasonably request (which request may be general or specific), but all costs and expenses incurred in connection with such monitoring shall be borne by the Indemnifying Party.
(c) So long as the Indemnifying Party is contesting any such Third Party Claim in its reasonable good faith judgment, the Indemnified Party shall not pay or settle any such Third Party Claim. Notwithstanding the foregoing, the Indemnified Party shall have the right to pay or settle any such Third Party Claim, provided that in such event the Indemnified Party shall waive any right to indemnity therefor by the Indemnifying Party, and no amount in respect thereof shall be claimed as an Expense or a Loss under this Article X .
If the Indemnified Party determines in its reasonable good faith judgment that the Indemnifying Party is not contesting such Third Party Claim in good faith, the Indemnified Party shall have the right to undertake control of the defense of such Third Party Claim upon five days written notice to the Indemnifying Party and thereafter to defend, contest, settle or compromise such Third Party Claim in the exercise of its exclusive discretion.
If the Indemnified Party shall have undertaken the conduct and control of the defense of any Third Party Claim as provided above, the Indemnified Party, on not less than 45 days prior written notice to the Indemnifying Party, may make settlement (including payment in full) of such Third Party Claim, and such settlement shall be binding upon the Parties for the purposes hereof, unless within said 45-day period the Indemnifying Party shall have requested the Indemnified Party to contest such Third Party Claim at the expense of the Indemnifying Party. In such event, the Indemnified Party shall promptly comply with such request and the Indemnifying Party shall have the right to direct the defense of such claim or any litigation based thereon subject to all of the conditions of Section 10.6(b) . Notwithstanding anything in this Section 10.6(c) to the contrary, if the Indemnified Party, in the good-faith belief that a claim may materially and adversely affect it other than as a result of money damages or other money payments, advises the Indemnifying Party that it has determined to settle a claim, the Indemnified Party shall have the right to do so at its own cost and expense, without any requirement to contest such claim at the request of the Indemnifying Party, but without any right under the provisions of this Article X for indemnification by the Indemnifying Party.
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SECTION 10.7 Procedures for Indemnification of Direct Claims . Any claim for indemnification on account of an Expense or a Loss made directly by the Indemnified Party against the Indemnifying Party and that does not result from a Third Party Claim shall be asserted by written notice from the Indemnified Party to the Indemnifying Party specifically claiming indemnification hereunder. Such Indemnifying Party shall have a period of 45 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 45-day period, such Indemnifying Party shall be deemed to have accepted responsibility to make payment and shall have no further right to contest the validity of such claim. If such Indemnifying Party does respond within such 45-day period and rejects such claim in whole or in part, such Indemnified Party shall be free to pursue resolution as provided in Article XI .
SECTION 10.8 Contribution . If the indemnification provided for in this Article X is unavailable to an Indemnified Party in respect of any Expense or Loss arising out of or related to information contained in the Form 10, the Information Statement or the offering memorandum relating to the Notes Offering, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Expense or Loss in such proportion as is appropriate to reflect the relative fault of the Halyard Indemnified Parties, on the one hand, or the Kimberly-Clark Indemnified Parties, on the other hand, in connection with the statements or omissions that resulted in such Expense or Loss. The relative fault of any Halyard Indemnified Party, on the one hand, and of any Kimberly-Clark Indemnified Party, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission of a material fact relates to information supplied by the Halyard Business or a Halyard Indemnified Party, on the one hand, or by the Retained Business or a Kimberly-Clark Indemnified Party, on the other hand.
SECTION 10.9 Remedies Cumulative . The remedies provided in this Article X shall be cumulative and, subject to the provisions of Article XI , shall not preclude assertion by an Indemnified Party of any other rights or the seeking of any and all other remedies against any Indemnifying Party.
SECTION 10.10 Survival . All covenants and agreements of the Parties contained in this Agreement relating to indemnification shall survive the Effective Time indefinitely, unless a specific survival or other applicable period is expressly set forth herein.
ARTICLE XI
DISPUTE RESOLUTION
SECTION 11.1 Escalation and Mediation .
(a) Except as otherwise provided in each Operating Agreement for purposes of resolving any disputes that arise thereunder, the Parties agree that this Article XI shall serve as the mechanism to resolve all disputes that arise between the Parties under the Agreement or under any Operating Agreement.
(b) The Parties agree to use commercially reasonable efforts to resolve expeditiously any dispute, controversy or claim between them with respect to the matters covered hereby that
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may arise from time to time on a mutually acceptable negotiated basis. In furtherance of the foregoing, any Party involved in a dispute, controversy or claim may deliver a notice (an Escalation Notice ) demanding an in-person meeting involving representatives of the Parties at a senior level of management of the Parties (or if the Parties agree, of the appropriate strategic business unit or division within such entity). A copy of any such Escalation Notice shall be given to the General Counsel, or like officer or official, of each Party involved in the dispute, controversy or claim (which copy shall state that it is an Escalation Notice pursuant to this Agreement). Any agenda, location or procedures for such discussions or negotiations between the Parties may be established by the Parties from time to time; provided , however , that the Parties shall use commercially reasonable efforts to meet within 30 days of the Escalation Notice.
(c) The Parties may agree to retain a mediator, acceptable to both Parties, to aid the Parties in their discussions and negotiations by informally providing advice to the Parties. Any opinion expressed by the mediator shall be strictly advisory and shall not be binding on the Parties, nor shall any opinion expressed by the mediator be admissible in any action or proceeding. The mediator shall be selected by the Party that did not deliver the applicable Escalation Notice from the list of individuals to be supplied to the Parties by JAMS/Endispute, the American Arbitration Association or such entity mutually agreeable to the Parties. Costs of the mediator shall be borne equally by the Parties involved in the matter, except that each Party shall be responsible for its own expenses.
SECTION 11.2 Continuity of Service and Performance . Unless otherwise agreed in writing, the Parties will continue to provide service and honor all other commitments under this Agreement and each Operating Agreement during the course of dispute resolution pursuant to the provisions of this Article XI with respect to all matters not subject to such dispute, controversy or claim.
SECTION 11.3 Choice of Mediation Forum . Any mediation hereunder shall take place in Dallas, Texas, unless otherwise agreed in writing by the Parties.
SECTION 11.4 Ability to Pursue Other Legal Remedies . For the avoidance of doubt and notwithstanding the foregoing, nothing in this Article XI shall prevent any Party from pursuing any and all remedies available to it in connection with a dispute relating to this Agreement or any of the Operating Agreements.
ARTICLE XII
ACCESS TO INFORMATION AND SERVICES
SECTION 12.1 Agreement for Exchange of Information .
(a) At all times from and after the Effective Time for a period of seven years, as soon as reasonably practicable after written request: (i) Kimberly-Clark shall afford to Halyard, its Subsidiaries and their authorized accountants, counsel and other designated representatives reasonable access during normal business hours to, or at Halyards expense, provide copies of, all records, books, contracts, instruments, data, documents and other information (collectively, Information ) in the possession or under the control of Kimberly-Clark immediately following the Effective Time that relates to Halyard, the Halyard Business or the employees of the Halyard
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Business; and (ii) Halyard shall afford to Kimberly-Clark, its Subsidiaries and their authorized accountants, counsel and other designated representatives reasonable access during normal business hours to, or, at Kimberly-Clarks expense, provide copies of, all Information in the possession or under the control of Halyard immediately following the Effective Time that relates to Kimberly-Clark, the Retained Business or the employees of Kimberly-Clark; provided , however , that in the event that either Party determines that any such provision of or access to Information could be commercially detrimental, violate any law or agreement or waive any attorney-client privilege, the Parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence.
(b) Either Party may request Information under Section 12.1(a) (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities laws) by a Governmental Authority having jurisdiction over the requesting party, (ii) for use in any other judicial, regulatory, administrative or other proceeding or in order to satisfy audit, accounting, claims defense, regulatory filings, litigation or other similar requirements, (iii) for use in compensation, benefit or welfare plan administration or other bona fide business purposes or (iv) to comply with its obligations under this Agreement or any Operating Agreement.
SECTION 12.2 Ownership of Information . Any Information owned by one Party that is provided to a requesting Party pursuant to Section 12.1 shall be deemed to remain the property of the providing Party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed to grant or confer rights of license or otherwise in any such Information.
SECTION 12.3 Compensation for Providing Information .
SECTION 12.4 The Party requesting Information agrees to reimburse the providing Party for the reasonable costs, if any, of creating, gathering and copying such Information, to the extent that such costs are incurred for the benefit of the requesting Party. Except as otherwise specifically provided in this Agreement, such costs shall be computed in accordance with the providing Partys standard methodology and procedures. To the extent that this Section 12.3 conflicts with any services then-being provided under the Transition Services Agreement, the Transition Services Agreement shall control. For the avoidance of doubt, this Section 12.3 shall not apply to the transfer of the books and records primarily related to the Halyard Business that are to be conveyed to Halyard pursuant to Section 2.2(k). Retention of Records . To facilitate the possible exchange of Information pursuant to this Article XII after the Effective Time, the Parties agree to use commercially reasonable efforts to retain all Information in their respective possession or control as of the Effective Time in accordance with the record retention policies and procedures of Kimberly-Clark as in effect as of the Effective Time or such other procedures as may reasonably be adopted by the applicable Party after the Effective Time; provided , however , that notwithstanding any requirements of any such policies or procedures, no party will be required to retain any Information for longer than seven years. Notwithstanding the foregoing, a Partys obligation to retain any particular Information shall terminate upon such Partys delivery of such Information to the other Party.
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SECTION 12.5 Limitation of Liability . No Party shall have any liability to the other Party (i) if any Information exchanged or provided pursuant to this Agreement that is an estimate or forecast, or that is based on an estimate or forecast, is found to be inaccurate, in the absence of gross negligence or willful misconduct by the Party providing such Information, or (ii) if any Information is destroyed after commercially reasonable efforts to comply with the provisions of Section 12.4 .
SECTION 12.6 Production of Witnesses . At all times from and after the Effective Time, each Party shall use commercially reasonable efforts to make available to the other Party (without cost (other than reimbursement of actual out-of-pocket expenses) to, and upon prior written request of, the other Party) its directors, officers, employees and agents as witnesses to the extent that the same may reasonably be required by the other Party in connection with any legal, administrative or other proceeding in which the requesting Party may from time to time be involved with respect to the Halyard Business, the Retained Business or any transactions contemplated hereby.
SECTION 12.7 Confidentiality .
(a) From and after the Effective Time, each of Kimberly-Clark and Halyard shall hold, and shall cause their respective directors, officers, employees, agents, consultants, advisors and other representatives to hold, in strict confidence, with at least the same degree of care that applies to Kimberly-Clarks confidential and proprietary information pursuant to policies in effect as of the Effective Time or such other procedures as may reasonably be adopted by the applicable Party after the Effective Time, all non-public information concerning or belonging to the other Party or any of its Subsidiaries or Affiliates obtained by it prior to the Effective Time, accessed by it pursuant to Section 12.1 , or furnished to it by the other Party or any of its Subsidiaries or Affiliates pursuant to this Agreement or any agreement or document contemplated hereby, including, without limitation, any Trade Secrets, technology, Know-How and other non-public, proprietary intellectual property rights licensed pursuant to the Patent License Agreements and shall not release or disclose such information to any other Person, except their representatives, who shall be bound by the provisions of this Section 12.7 ; provided , however , that Kimberly-Clark and Halyard and their respective directors, officers, employees, agents, consultants, advisors and other representatives may disclose such information if, and only to the extent that, (i) a disclosure of such information is compelled by judicial or administrative process or, in the opinion of such Partys counsel, by other requirements of law (in which case the disclosing Party will provide, to the extent practicable under the circumstances, advance written notice to the other Party of its intent to make such disclosure), or (ii) such Party can show that such information (A) is published or is or otherwise becomes available to the general public as part of the public domain without breach of this Agreement; (B) has been furnished or made known to the recipient without any obligation to keep it confidential by a third party under circumstances which are not known to the recipient to involve a breach of the third partys obligations to a Party hereto; (C) was developed independently of information furnished to the recipient under this Agreement; or (D) in the case of information furnished after the Effective Time, was not known to the recipient at the time of the Distribution but became known to the recipient prior to the time of receipt thereof from the other Party.
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(b) Each Party acknowledges that the other Party would not have an adequate remedy at law for the breach by the acknowledging Party of any one or more of the covenants contained in this Section 12.7 and agrees that, in the event of such breach, the other Party may, in addition to the other remedies that may be available to it, apply to a court for an injunction to prevent breaches of this Section 12.7 and to enforce specifically the terms and provisions of this Section. Notwithstanding any other Section hereof, the provisions of this Section 12.7 shall survive the Effective Time indefinitely.
SECTION 12.8 Privileged Matters .
(a) Each of Kimberly-Clark and Halyard agrees to maintain, preserve and assert all privileges, including, without limitation, privileges arising under or relating to the attorney-client relationship (which shall include without limitation the attorney-client and work product privileges), not heretofore waived, that relate to the Halyard Business and the Transferred Assets for any period prior to the Effective Time ( Privilege or Privileges ). Each Party acknowledges and agrees that any costs associated with asserting any Privilege shall be borne by the Party requesting that such privilege be asserted. Each Party agrees that it shall not waive any Privilege that could be asserted under applicable law without the prior written consent of the other Party. The rights and obligations created by this Section 12.8 shall apply to all information relating to the Halyard Business as to which, but for the Distribution, either Party would have been entitled to assert or did assert the protection of a Privilege ( Privileged Information ), including without limitation, (i) any and all information generated prior to the Effective Time but which, after the Distribution, is in the possession of either Party; and (ii) all information generated, received or arising after the Effective Time that refers to or relates to Privileged Information generated, received or arising prior to the Effective Time.
(b) Upon receipt by either Party of any subpoena, discovery or other request that may call for the production or disclosure of Privileged Information or if either Party obtains knowledge that any current or former employee of Kimberly-Clark or Halyard has received any subpoena, discovery or other request that may call for the production or disclosure of Privileged Information, such Party shall notify promptly the other Party of the existence of the request and shall provide the other Party a reasonable opportunity to review the information and to assert any rights it may have under this Section 12.8 or otherwise to prevent the production or disclosure of Privileged Information. Each Party agrees that it will not produce or disclose any information that may be covered by a Privilege under this Section 12.8 unless (i) the other Party has provided its written consent to such production or disclosure (which consent shall not be unreasonably withheld), or (ii) a court of competent jurisdiction has entered a final, nonappealable order finding that the information is not entitled to protection under any applicable Privilege.
(c) Kimberly-Clarks transfer of books and records and other information to Halyard, and Kimberly-Clarks agreement to permit Halyard to possess Privileged Information existing or generated prior to the Effective Time, are made in reliance on Halyards agreement, as set forth in Sections 12.7 and 12.8 , to maintain the confidentiality of Privileged Information and to assert and maintain all applicable Privileges. The access to information being granted pursuant to Section 12.1 , the agreement to provide witnesses and individuals pursuant to Section 12.6 and the transfer of Privileged Information to Halyard pursuant to this Agreement shall not be deemed a waiver of any Privilege that has been or may be asserted under this Section 12.8 or otherwise. Nothing in this Agreement shall operate to reduce, minimize or condition the rights granted to the Parties in, or the obligations imposed upon the Parties by, this Section 12.8 .
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SECTION 12.9 Financial Information Certifications .
(a) In order to enable the principal executive officer or officers, principal financial officer or officers and controller or controllers of Kimberly-Clark to make the certifications required of them under Section 302 of the Sarbanes-Oxley Act of 2002, within 30 days following the end of any fiscal quarter during which Halyard is a Subsidiary of Kimberly-Clark, Halyard shall provide a certification statement with respect to such quarter or portion thereof to those certifying officers and employees of Kimberly-Clark, which certification shall be in substantially the same form as had been provided by officers or employees of Halyard in certifications delivered prior to the Effective Time (provided that such certification shall be made by Halyard rather than individual officers or employees), or as otherwise agreed upon between the Parties. Such certification statements shall also reflect any changes in certification statements necessitated by the transactions contemplated by this Agreement.
(b) In order to enable the principal executive officer or officers, principal financial officer or officers and controller or controllers of Halyard to make the certifications required of them under Section 302 of the Sarbanes-Oxley Act of 2002, within 30 days following the end of any fiscal quarter during which Halyard is a Subsidiary of Kimberly-Clark, Kimberly-Clark shall provide a certification statement with respect to testing of internal controls for corporate and shared services processes for such quarter or portion thereof to those certifying officers and employees of Halyard, which certification shall be in substantially the same form as had been provided by officers or employees of Kimberly-Clark in certifications delivered to its principal executive officer, principal financial officer and controller prior to the Effective Time (provided that such certification shall be made by Kimberly-Clark rather than individual officers or employees,) or as otherwise agreed upon between the Parties. Such certification statements shall also reflect any changes in certification statements necessitated by the transactions contemplated by this Agreement.
ARTICLE XIII
MISCELLANEOUS
SECTION 13.1 Entire Agreement . This Agreement and the Operating Agreements, including the Schedules and Exhibits referred to herein and therein and the documents delivered pursuant hereto and thereto, constitute the entire agreement between the Parties with respect to the subject matter contained herein or therein, and supersede all prior agreements, negotiations, discussions, understandings, writings and commitments between the Parties with respect to such subject matter.
SECTION 13.2 Choice of Law and Forum . This Agreement shall be governed by and construed and enforced in accordance with the substantive laws of the State of Delaware and the federal laws of the United States of America applicable therein, as though all acts and omissions related hereto occurred in Delaware. The Parties hereby irrevocably submit to the non-exclusive jurisdiction of the state and federal courts located in the State of Delaware, and each party hereby irrevocably agrees that all disputes, controversies or claims may be heard and
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determined in the state and federal courts located in the State of Delaware. The Parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection which they may now or hereafter have to the laying of venue of any such dispute brought in such court or any defense of inconvenient forum for the maintenance of such dispute. Each of the Parties hereto agrees that a judgment in any such dispute may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.
SECTION 13.3 Amendment . This Agreement shall not be amended, modified or supplemented except by a written instrument signed by an authorized representative of each of the Parties.
SECTION 13.4 Waiver . Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the Party or Parties entitled to the benefit thereof. Any such waiver shall be validly and sufficiently given for the purposes of this Agreement if, as to any Party, it is in writing signed by an authorized representative of such Party. The failure of any Party to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, or in any way to affect the validity of this Agreement or any part hereof or the right of any Party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach.
SECTION 13.5 Partial Invalidity . Wherever possible, each provision hereof shall be interpreted in such a manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision or provisions shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such provision or provisions or any other provisions hereof, unless such a construction would be unreasonable.
SECTION 13.6 Execution in Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by and delivered to each of the Parties.
SECTION 13.7 Successors and Assigns . This Agreement and each Operating Agreement shall be binding upon and inure to the benefit of the Parties hereto and thereto, respectively, and their successors and permitted assigns; provided , however , that the rights and obligations of either Party under this Agreement and each Operating Agreement shall not be assignable by such Party without the prior written consent of the other Party. The successors and permitted assigns hereunder shall include, without limitation, any permitted assignee as well as the successors in interest to such permitted assignee (whether by merger, liquidation (including successive mergers or liquidations) or otherwise).
SECTION 13.8 Third Party Beneficiaries . Except to the extent otherwise provided in Article X or in any Operating Agreement, the provisions of this Agreement and each Operating Agreement are solely for the benefit of the Parties and their respective Affiliates, successors and permitted assigns and shall not confer upon any third Person any remedy,
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claim, liability, reimbursement or other right in excess of those existing without reference to this Agreement or any Operating Agreement. Nothing in this Agreement or any Operating Agreement shall obligate Kimberly-Clark or Halyard to assist any Halyard Employee to enforce any rights such employee may have with respect to any of the employee benefits described in this Agreement.
SECTION 13.9 Notices . All notices, requests, claims, demands and other communications required or permitted hereunder shall be in writing and shall be deemed given or delivered (i) when delivered personally, (ii) if transmitted by facsimile when confirmation of transmission is received, (iii) if sent by registered or certified mail, postage prepaid, return receipt requested, on the third business day after mailing or (iv) if sent by private courier when received; and shall be addressed as follows:
If to Kimberly-Clark, to:
Kimberly-Clark Corporation
351 Phelps Drive
Irving, Texas 75309
Attention: General Counsel
Facsimile: 972-281-1492
If to Halyard, to:
Halyard Health, Inc.
5405 Windward Parkway
Suite 100, South
Alpharetta, GA 30004
Attention: General Counsel
Facsimile: 770-587-7749
or to such other address as such Party may indicate by a notice delivered to the other Party.
SECTION 13.10 Performance . Each Party shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary or Affiliate of such Party.
SECTION 13.11 Force Majeure . No Party shall be deemed in default of this Agreement to the extent that any delay or failure in the performance of its obligations under this Agreement results from any cause beyond its reasonable control and without its fault or negligence, including, without limitation, acts of God, acts of civil or military authority, embargoes, epidemics, war, riots, insurrections, fires, explosions, earthquakes, floods, unusually severe weather conditions, labor problems or unavailability of parts, or, in the case of computer systems, any failure in electrical or air conditioning equipment. In the event of any such excused delay, the time for performance shall be extended for a period equal to the time lost by reason of the delay.
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SECTION 13.12 No Public Announcement . Neither Kimberly-Clark nor Halyard shall, without the approval of the other, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such Party shall be so obligated by law or the rules of any stock exchange or quotation system, in which case the other Party shall be advised and the Parties shall use commercially reasonable efforts to cause a mutually agreeable release or announcement to be issued; provided , however , that the foregoing shall not preclude communications or disclosures necessary to implement the provisions of this Agreement or to comply with the accounting and SEC disclosure obligations or the rules of any stock exchange.
SECTION 13.13 Termination . Notwithstanding any provisions hereof, this Agreement may be terminated and the Distribution abandoned at any time prior to the Effective Time by and in the sole discretion of the Board of Directors of Kimberly-Clark without the prior the approval of any Person. In the event of such termination, this Agreement shall forthwith become void and no Party shall have any liability to any Person by reason of this Agreement, except that Kimberly-Clark shall be liable for any costs and expenses, including reasonable attorneys fees, prior to or arising out of such termination.
SECTION 13.14 Conflict . In the case of any conflict between this Agreement and the Tax Matters Agreement in relation to any matters addressed by the Tax Matters Agreement, the Tax Matters Agreement shall prevail.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their authorized representatives as of the date first above written.
KIMBERLY-CLARK CORPORATION | ||
By: |
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Name: | ||
Title: | ||
HALYARD HEALTH, INC. | ||
By: |
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Name: | ||
Title: |
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Exhibit 10.1
TRANSITION SERVICES AGREEMENT
This TRANSITION SERVICES AGREEMENT (this Agreement ) is entered into as of October , 2014 between Kimberly-Clark Corporation, a Delaware corporation ( Kimberly-Clark ), and Halyard Health, Inc., a Delaware corporation ( Halyard ). Kimberly-Clark and Halyard are sometimes hereinafter collectively referred to as the Parties and each individually as a Party .
WHEREAS, Kimberly-Clark, acting through its direct and indirect Subsidiaries, owns and conducts the Retained Business and the Healthcare Business;
WHEREAS, the Board of Directors of Kimberly-Clark has determined that it would be advisable and in the best interests of Kimberly-Clark and its stockholders for Kimberly-Clark to distribute on a pro rata basis to the holders of Kimberly-Clarks common stock all of the outstanding shares of Halyard common stock owned by Kimberly-Clark (the Distribution );
WHEREAS, Kimberly-Clark and Halyard have entered into a Distribution Agreement, dated as of the date hereof (the Distribution Agreement ), in order to carry out, effect and consummate the Distribution and related matters;
WHEREAS, in order to effect an orderly separation and transition under the Distribution Agreement, the Parties have agreed that (a) Kimberly-Clark will provide or cause to be provided to Halyard (and/or its Affiliates) certain services and other assistance on a transitional basis during the transition period and (b) Halyard will provide or cause to be provided to Kimberly-Clark (and/or its Affiliates) certain services and other assistance on a transitional basis during the transition period, in each case in accordance with the terms and subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and the agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound hereby, agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions . Capitalized terms used but not otherwise defined elsewhere in this Agreement shall have the respective meanings given to such terms in the Distribution Agreement. The following terms shall have the meaning ascribed thereto for purposes of this Agreement, including all Schedules hereto:
Business Day means any day, other than a Saturday, Sunday or a day on which banking institutions located in New York, New York shall be authorized or required by any Government Requirement to close.
Damages means any and all liability, demands, claims, actions or causes of action, assessments, losses, damages, fines, penalties, costs and expenses (including reasonable attorneys fees and expenses).
Governmental Requirement means at any time (i) any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, writ, edict, award, authorization or other requirement of any Governmental Authority in effect at that time or (ii) any obligation included in any certificate, certification, franchise, permit or license issued by any Governmental Authority or resulting from binding arbitration, including any requirement under common law.
Gross Negligence means a negligent act or negligent failure to act (whether sole, joint or concurrent) by any person, which act or failure to act is more fundamental than a failure to exercise proper skill and/or care and would reasonably be perceived as entailing an extreme degree of risk of injury to a Person or physical loss of or damage to property (considering the probability and magnitude of the potential injury, loss or damage), coupled with the persons actual awareness of and indifference to such extreme risk.
Halyard Group means Halyard and each direct or indirect Subsidiary of Halyard (other than Kimberly-Clark and any Subsidiary of Kimberly-Clark).
Kimberly-Clark Group means Kimberly-Clark and each direct or indirect Subsidiary of Kimberly-Clark (other than Halyard and any Subsidiary of Halyard).
Regardless of Cause means, whether or not any Damages are asserted to have been caused or arisen by virtue of tort (including negligence and gross negligence), breach of statutory duty, breach of common law duty (including fiduciary duties), breach of contract (including breach of condition) or quasi-contract, strict liability, misrepresentation, breach of any laws, regulations, rules or orders of any Governmental Requirements or otherwise, on the part of the Party or other Person seeking indemnity (or exclusion or limitation of liability).
Service Provider means the Party (or its Subsidiary or Affiliate) providing a Service under this Agreement.
Service Receiver means the Party (or its Subsidiary or Affiliate) to whom a Service is being provided under this Agreement.
Service Receiver Group means the applicable Halyard Group or Kimberly-Clark Group receiving the Services from the Service Provider.
Willful Misconduct any intentional wrongful act or intentional wrongful failure to act (whether sole, joint or concurrent) with actual knowledge that such act (or failure to act) is wrongful and with the intention to cause injury to a person, physical loss of or damage to property, breach of a contract or quasi-contract, or breach of any Government Requirement.
ARTICLE II
SERVICES
Section 2.1 Services . Subject to the terms and conditions of this Agreement, (a) Kimberly-Clark, acting through its own or procured through other members of the Kimberly-Clark Group and their respective employees, agents, contractors or independent third parties,
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agrees to provide or cause to be provided to Halyard and the other members of the Halyard Group (solely with respect to that portion of the Halyard Business arising out of the Healthcare Business and the Included Non-Woven Business) the services set forth in Schedules A -[ ] to A -[ ] hereto and any additional services provided to Halyard or the other members of the Halyard Group pursuant to Section 2.3 of this Agreement (the Kimberly-Clark Services ), and (b) Halyard, acting through its own or procured through other members of the Halyard Group and their respective employees, agents, contractors or independent third parties, agrees to provide or cause to be provided to Kimberly-Clark and the other members of the Kimberly-Clark Group (solely with respect to the Retained Business) the services set forth in Schedules B -[ ] to B -[ ] hereto and any additional services provided to Kimberly-Clark or the other members of the Kimberly-Clark Group pursuant to Section 2.3 of this Agreement (the Halyard Services and, collectively with the Kimberly-Clark Services, the Services ). At all times during the performance of the Services, all Persons performing such Services (including agents, temporary employees, independent third parties and consultants of the Service Provider, collectively, the Service Provider Group ) shall be construed as being independent from the Service Receiver Group, and no such Person shall be considered or deemed to be an employee of any member of the Service Receiver Group nor entitled to any employee benefits of the Service Receiver as a result of this Agreement.
The Service Receiver acknowledges and agrees that, except as may be expressly set forth herein as a Service (including additional Services to be provided pursuant to Section 2.3 below), no member of the Service Provider Group shall be obligated to provide, or cause to be provided, any service to any member of the Service Receiver Group.
Section 2.2 Service Coordinators . Each of Kimberly-Clark and Halyard will nominate a representative to act as the primary contact with respect to the provision of the Services as contemplated by this Agreement (the Service Coordinators ). The initial Service Coordinators shall be Gene Bernier for Kimberly-Clark and Warren Machan for Halyard. Unless Kimberly-Clark and Halyard otherwise agree, Kimberly-Clark and Halyard agree that all notices and communications relating to this Agreement, other than those day-to-day communications and billings relating to the actual provision of the Services, shall be directed to the Service Coordinators in accordance with Section 11.10 hereof. The Service Coordinators shall meet as expeditiously as possible to resolve any dispute hereunder, and any dispute that is not resolved by the Service Coordinators within thirty (30) calendar days after their first meeting with respect to such dispute shall be resolved in accordance with the dispute resolution procedures set forth in Section 11.3 . Each of Kimberly-Clark and Halyard may treat an act of a Service Coordinator of the other Party which is consistent with the provisions of this Agreement as being authorized by such other Party without inquiring behind such act or ascertaining whether such Service Coordinator had authority to so act; provided , however , that no such Service Coordinator shall have authority to amend this Agreement. Unless otherwise provided herein, Kimberly-Clark and Halyard shall advise each other promptly (in any case no more than three Business Days) in writing of any change in their respective Service Coordinators, setting forth the name of the replacement, and stating that the replacement Service Coordinator is authorized to act for such Party in accordance with this Section 2.2 .
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Section 2.3 Additional Services . During the period (the Transition Period ) from the Distribution Date until the second anniversary of the Distribution Date, Kimberly-Clark and Halyard may, each acting in its sole discretion, mutually agree that each Party, in its capacity as a Service Provider, will provide additional Services to the other Party, in its capacity as a Service Receiver. Upon the mutual written agreement as to the nature, cost, duration and scope of such additional Services, the Parties shall supplement in writing the Schedules hereto to include such additional Services.
Notwithstanding anything to the contrary herein or in any current or supplemental Schedule hereto, no additional Services shall extend or be provided past the end of the Transition Period.
Section 2.4 Third-Party Services . Each Party, in its capacity as a Service Provider, shall have the right, whenever it deems necessary or advisable, to hire third-party subcontractors or acquire rights from third parties to provide all or part of any applicable Service hereunder; provided, however, that prior to any such hire or acquisition of rights, the Service Provider shall provide the Service Receiver with written notice thereof, which notice shall include the identity of such third party, and to permit the Service Receiver with an opportunity to indicate any concerns therewith (it being understood that the Service Receiver shall not have the right of approval). The Service Provider will provide to the Service Receiver all reasonably requested information regarding such third-party subcontractors.
Section 2.5 Standard of Performance . The Services to be provided hereunder shall be performed with the same general degree of care as the Service Provider and its Affiliates performs such services within the Service Provider organization. It is understood and agreed that the employees of the Service Provider and the other members of the Service Provider Group performing the Services are not professional providers to third parties of the types of services included in the Services and that some or all of the Service Provider Group employees performing Services may have other responsibilities and may not be dedicated full-time to performing Services hereunder. EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 2.5, NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED (INCLUDING THE WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO ANY REPRESENTATION, SPECIFICATION OR DESCRIPTION), ARE MADE BY THE APPLICABLE SERVICE PROVIDER OR ANY MEMBER OF THE APPLICABLE SERVICE PROVIDER GROUP WITH RESPECT TO THE SERVICES UNDER THIS AGREEMENT AND, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ALL SUCH REPRESENTATIONS OR WARRANTIES ARE HEREBY WAIVED AND DISCLAIMED, REGARDLESS OF CAUSE, BY THE APPLICABLE SERVICE PROVIDER.
Section 2.6 Service Boundaries and Scope . Except as otherwise provided in this Agreement or a Schedule for a specific Service: (a) the Service Provider shall be required to provide, or cause to be provided, the Services only to the extent and only at the locations such Services are being provided by any member of the Service Provider Group for the applicable Business immediately prior to the Distribution Date; and (b) the Services shall be available only for purposes of conducting the applicable Business substantially in the manner it was conducted immediately prior to the Distribution Date; provided, however, that the Service Receiver shall be entitled to request changes to the Services locations and/or purposes, and the Service Provider shall consider all such requests in good faith, it being understood that the Service Provider shall
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be permitted to reject any such request for any reason if such change would be reasonably likely to increase the volume of Services provided hereunder by more than 2%. Except as otherwise provided in this Agreement or a Schedule for a specific Service, in providing, or causing to be provided, the Services, the Service Provider shall not be obligated to: (i) maintain the employment of any specific employee or hire additional employees or third-party service providers; (ii) purchase, lease or license any additional equipment (including computer equipment, furniture, furnishings, fixtures, machinery, vehicles, tools and other tangible personal property), software or other assets, rights or properties; (iii) make modifications to its existing systems or software; (iv) provide any member of the Service Receiver Group with access to any systems or software; (v) provide or cause to be provided any training, licensing or similar services to any person; (vi) provide any marketing, promotional, bid inquiry or similar services; (vii) provide any transportation services; or (viii) pay any costs related to the transfer or conversion of data of any member of the Service Receiver Group. Each Party in its capacity as a Service Receiver acknowledges (on its own behalf and on behalf of the other members of its respective Group) that the employees of the Service Provider or any other members of the Service Provider Group who may be assisting in the provision of Services hereunder are or may be at-will employees and, in any event, may terminate or be terminated from employment with the Service Provider or any of the other members of the Service Provider Group providing Services hereunder at any time for any reason. For the avoidance of doubt, the Services do not include any services required for or as the result of any business acquisitions, divestitures, start-ups or terminations by the Service Receiver or any other member of the Service Receiver Group, or any similar transactions, in each case to the extent consummated after the Distribution Date.
Section 2.7 Kimberly-Clark Documents and Other Information.
(a) Except for software licensed from third parties that are not Affiliates of Kimberly-Clark, all software used in or in connection with any part of the Retained Business (the Kimberly-Clark Software ), is proprietary to Kimberly-Clark or its Affiliates and, to the extent it is necessary to license or sublicense such software to Halyard in order for Kimberly-Clark to provide the Kimberly-Clark Services, such software is hereby licensed or sublicensed non-exclusively, royalty-free to Halyard solely for use in connection with the Halyard Business and the Included Non-Woven Business and only until the earlier of the termination of this Agreement or the time at which the Service to which such Kimberly-Clark Software relates terminates or ceases to be provided under this Agreement. Halyard agrees not to use the licensed or sublicensed Kimberly-Clark Software or related documentation (other than in connection with that portion of the Halyard Business that arose out of the Healthcare Business and the Included Non-Woven Business during the term of this Agreement) or to copy, modify, reverse engineer, reverse compile, or reverse assemble it. Irrespective of any terms to the contrary in this Agreement, any and all such licenses and sublicenses shall terminate as of the termination of this Agreement.
(b) As a result of the provision of Kimberly-Clark Services, certain employees of Halyard may receive access to computer, communications or information networks or systems of Kimberly-Clark or its Affiliates, and any related documentation (collectively, Kimberly-Clark Systems ). Halyard shall access and use only those Kimberly-Clark Systems for which it has been granted the right to access and use. Halyards right to access and use is provided for the limited purpose of supporting the Services provided hereunder. Individual access to such
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Kimberly-Clark Systems is strictly limited to those employees of Halyard approved in advance by Kimberly-Clark. With respect to all Kimberly-Clark Systems to which any employee of Halyard has access as a result of the Services being provided, Halyard (i) shall use such Kimberly-Clark Systems internally and for their intended purpose only, shall not distribute, publish, transfer, sublicense or in any manner make such Kimberly-Clark Systems available to other organizations or persons, and shall not act as a service bureau or consultant in connection with such Kimberly-Clark Systems; (ii) shall comply with all of Kimberly-Clarks system security policies, procedures and requirements that are provided to Halyard from time to time ( Kimberly-Clark Security Regulations ); and (iii) shall not tamper with, compromise or circumvent any security or audit measures employed by Kimberly-Clark. Halyard shall ensure that only those employees acting on its behalf who are specifically authorized to have access to Kimberly-Clark Systems gain such access and prevent unauthorized access, use, destruction, alteration or loss of information contained therein, including notifying its employees who might have access to such Kimberly-Clark Systems of the restrictions set forth in this Agreement and of the Kimberly-Clark Security Regulations.
(c) If, at any time, (i) any employee of the Halyard Group or other Person acting on its behalf seeks to circumvent, or circumvents, the Kimberly-Clark Security Regulations, (ii) any unauthorized employee of the Halyard Group or Person acting on its behalf accesses Kimberly-Clark Systems, or (iii) any employee or representative of the Halyard Group engages in activities that may lead to the unauthorized access, use, destruction, alteration or loss of data, information or software of Kimberly-Clark, Halyard shall promptly terminate any such employees or Persons access to Kimberly-Clark Systems and immediately notify Kimberly-Clark. In addition, Kimberly-Clark shall have the right to deny any employee of the Halyard Group or other Person acting on the Halyard Groups behalf access to Kimberly-Clark Systems in the event that Kimberly-Clark reasonably believes that such employee has engaged in any of the activities set forth above in this Section 2.7 or otherwise poses a security concern. Halyard shall cooperate with Kimberly-Clark in investigating any apparent unauthorized access to Kimberly-Clark Systems.
(d) Without limiting the generality of any other provision hereof, the Halyard Group shall have responsibility under this Agreement for the actions and omissions of both its employees and any other Person acting on its behalf.
(e) To the extent Halyard no longer requires access to Kimberly-Clark Systems with respect to specific software, functions, systems or services, Halyards access will be terminated.
Section 2.8 Halyard Documents and Other Information.
(a) Except for software licensed from third parties that are not Affiliates of Halyard, all software used in or in connection with any portion of the Halyard Business or the Included Non-Woven Business (the Halyard Software ), is proprietary to Halyard or its Affiliates and, to the extent it is necessary to license or sublicense such software to Kimberly-Clark in order for Halyard to provide the Halyard Services, such software is hereby licensed or sublicensed non-exclusively, royalty-free to Kimberly-Clark solely for use in connection with the Kimberly-Clark Business and only until the earlier of the termination of this Agreement or the
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time at which the Service to which such Halyard Software relates terminates or ceases to be provided under this Agreement. Kimberly-Clark agrees not to use the licensed or sublicensed Halyard Software or related documentation (other than in connection with the Kimberly-Clark Business during the term of this Agreement) or to copy, modify, reverse engineer, reverse compile, or reverse assemble it. Irrespective of any terms to the contrary in this Agreement, any and all such licenses and sublicenses shall terminate as of the termination of this Agreement.
(b) As a result of the provision of Halyard Services, certain employees of Kimberly-Clark may receive access to computer, communications or information networks or systems of Halyard or its Affiliates, and any related documentation (collectively, Halyard Systems ). Kimberly-Clark shall access and use only those Halyard Systems for which it has been granted the right to access and use. Kimberly-Clarks right to access and use is provided for the limited purpose of supporting the Services provided hereunder. Individual access to such Halyard Systems is strictly limited to those employees of Kimberly-Clark approved in advance by Halyard. With respect to all Halyard Systems to which any employee of Kimberly-Clark has access as a result of the Services being provided, Kimberly-Clark (i) shall use such Halyard Systems internally and for their intended purpose only, shall not distribute, publish, transfer, sublicense or in any manner make such Halyard Systems available to other organizations or persons, and shall not act as a service bureau or consultant in connection with such Halyard Systems; (ii) shall comply with all of Halyards system security policies, procedures and requirements that are provided to Kimberly-Clark from time to time ( Halyard Security Regulations ); and (iii) shall not tamper with, compromise or circumvent any security or audit measures employed by Halyard. Kimberly-Clark shall ensure that only those employees acting on its behalf who are specifically authorized to have access to Halyard Systems gain such access and prevent unauthorized access, use, destruction, alteration or loss of information contained therein, including notifying its employees who might have access to such Halyard Systems of the restrictions set forth in this Agreement and of the Halyard Security Regulations.
(c) If, at any time, (i) any employee of the Kimberly-Clark Group or other Person acting on its behalf seeks to circumvent, or circumvents, the Halyard Security Regulations, (ii) any unauthorized employee of the Kimberly-Clark Group or Person acting on its behalf accesses Halyard Systems, or (iii) any employee or representative of the Kimberly-Clark Group engages in activities that may lead to the unauthorized access, use, destruction, alteration or loss of data, information or software of Halyard, Kimberly-Clark shall promptly terminate any such employees or Persons access to Halyard Systems and immediately notify Halyard. In addition, Halyard shall have the right to deny any employee of the Kimberly-Clark Group or other Person acting on the Kimberly-Clark Groups behalf access to Halyard Systems in the event that Halyard reasonably believes that such employee has engaged in any of the activities set forth above in this Section 2.8 or otherwise poses a security concern. Kimberly-Clark shall cooperate with Halyard in investigating any apparent unauthorized access to Halyard Systems.
(d) Without limiting the generality of any other provision hereof, the Kimberly-Clark Group shall have responsibility under this Agreement for the actions and omissions of both its employees and any other Person acting on its behalf.
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(e) To the extent Kimberly-Clark no longer requires access to Halyard Systems with respect to specific software, functions, systems or services, Kimberly-Clarks access will be terminated.
Section 2.9 Conflict with Laws; Business Ethics . Notwithstanding anything in this Agreement to the contrary, (a) no Service Provider nor any of its Affiliates shall be required to undertake any actions that would or may place such Service Provider in violation of any Governmental Requirements and (b) each of the Parties agrees that the other Party shall not be required to take any actions that would place such Party or any other member of such Partys Group in violation of its Business Code of Conduct, as they may be amended from time to time. Each Party shall promptly notify the other Party of any Service or action relating to a Service that cannot be performed without violating the Partys Business Code of Conduct. The Party who gives such notice shall use commercially reasonable efforts to provide such Services or take such actions in such a way and to such an extent as will not cause it to violate its Business Code of Conduct.
Section 2.10 Local Implementing Agreements; Access . The Parties recognize and agree that there may be a need to document the Services provided hereunder in various countries from time to time. Consequently, the Parties shall enter into, or cause their respective Subsidiaries to enter into, local implementing agreements ( Local Agreements ) for Services to be provided hereunder in such countries or geographical regions as either Kimberly-Clark or Halyard may reasonably request from time to time; provided , however , that the execution or performance of any such Local Agreement shall in no way alter or modify any term or condition hereof nor the effect thereof. Without limiting the generality of the foregoing, should there be any conflict between any term or condition of a Local Agreement and this Agreement, the terms and conditions of this Agreement shall prevail.
During the term of this Agreement and for so long as any Services are being provided, the Kimberly-Clark Group will provide the Halyard Group and its authorized representatives such access to Kimberly-Clark and any other member of the Kimberly-Clark Group and their respective employees, representatives, facilities, premises and other equipment and books and records (including electronic data) as Halyard and its representatives may reasonably require in order to perform the Services or fulfill their respective obligations hereunder. During the term of this Agreement and for so long as any Services are being provided, the Halyard Group will provide the Kimberly-Clark Group and its authorized representatives such access to Halyard and any other member of the Halyard Group and their respective employees, representatives, facilities, premises and other equipment and books and records (including electronic data) as Kimberly-Clark and its representatives may reasonably require in order to perform the Services or fulfill their respective obligations hereunder.
ARTICLE III
CHARGES
Section 3.1 Charges . Each Service will be provided at the price indicated in the corresponding Schedule hereto.
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ARTICLE IV
PAYMENT
Section 4.1 Payment . Charges for Services shall be invoiced monthly or at such other times as provided in the applicable Schedules hereunder in one or more statements (the Monthly Statements ) prepared by the applicable Service Provider or one or more of its Affiliates and in the form set forth in Exhibit A hereto (with Kimberly-Clark as Service Provider) or Exhibit B hereto (with Halyard as Service Provider). The recipient of such invoice shall make the corresponding payment no later than sixty (60) calendar days after receipt of the Monthly Statement. Each Monthly Statement shall be directed to the applicable Service Coordinator or such other person designated in writing from time to time by such Service Coordinator. The Monthly Statement shall set forth in reasonable detail, for the period covered by such Monthly Statement: (i) the Services rendered and (ii) the basis for the calculation of the charges as set forth in Section 3.1 . In the event there is any dispute with respect to a Monthly Statement, the Service Receiver shall make the payment for all non-disputed portions in accordance herewith. In the event it is determined that the Service Receiver is entitled to a refund of amounts actually paid by the Service Receiver hereunder, the Service Provider or its Affiliate (as applicable) shall pay the Service Receiver such overpaid amount.
The Service Receiver shall be responsible for all transfer taxes, excises, fees or other charges (including any sales, use, goods and services, value added or similar taxes) imposed or assessed on the Service Provider or its Affiliates as a result of the provision of Services under this Agreement. The Service Receiver shall be entitled to deduct and withhold taxes required by any Governmental Requirements to be withheld on payments made pursuant to this Agreement. To the extent any amounts are so withheld, the Service Receiver shall (i) pay such deducted and withheld amount to the proper Governmental Authority, and (ii) promptly provide to the Service Provider evidence of such payment to such Governmental Authority.
ARTICLE V
TERM
Section 5.1 Term . The term of this Agreement shall commence on the Distribution Date and shall continue in force until the termination of all Services in accordance with the duration of such Services set forth in the Schedules hereto or as otherwise set forth herein, but in no event beyond the October 31, 2016. Except as otherwise provided in a Schedule with respect to a specific Service, all Services shall terminate at the end of the Transition period.
ARTICLE VI
DISCONTINUATION OF SERVICES
Section 6.1 Discontinuation of Services . The Service Receiver may elect to discontinue its receipt of any individual Service from time to time or all of the Services that it receives under this Agreement in its entirety, by providing to the Service Provider the advance written notice set forth in the applicable Schedule in respect of the Service that is to be discontinued; provided , however , that any discontinuation of any Service will not affect the amounts payable to the Service Provider hereunder in respect of the Services not so discontinued. The Service Receiver shall be liable to the Service Provider for all charges payable under this Agreement in respect of such discontinued Services that are delivered prior to the effective date of such discontinuation.
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ARTICLE VII
DEFAULT
Section 7.1 Termination for Default . Either Party may, by giving written notice to the other Party identifying the basis for such notice, terminate this Agreement as of the date specified in the notice of termination, if such other Party commits a material breach of this Agreement, which breach is not cured within thirty (30) days after receipt from the non-breaching Party of written notice of the breach specifying in reasonable detail the nature of the breach.
Section 7.2 Termination for Bankruptcy . In the event that a Party shall (i) file a petition in bankruptcy, (ii) become or be declared insolvent, or become the subject of any proceedings (not dismissed within sixty (60) calendar days) related to its liquidation, insolvency or the appointment of a receiver, (iii) make an assignment on behalf of all or substantially all of its creditors, or (iv) take any corporate action for its winding up or dissolution, then the other Party shall have the right to terminate this Agreement by providing written notice in accordance with Section 11.4 .
ARTICLE VIII
INDEMNIFICATION
Section 8.1 Liabilities and Indemnities.
(a) Failure to Perform .
(i) In the event Kimberly-Clark fails to provide the Kimberly-Clark Services (or a portion thereof) in accordance herewith, the sole and exclusive remedy of Halyard shall be, at Halyards election, (A) to make a claim for indemnification pursuant to Section 8.1(b) (if available); (B) to require Kimberly-Clark to reperform the applicable Service (or relevant portion), without additional charge; (C) to withhold payment for such Service; provided, that if payment for such Service has already been made, Halyard shall be entitled, at its election, to a refund of the amount of such payment or to offset the amount of such payment against payments for other Services hereunder; (D) to the extent applicable, to have the right to terminate the Agreement under Section 7.1 ; or (E) to pursue its rights under Section 11.14 .
(ii) In the event Halyard fails to provide the Halyard Services (or a portion thereof) in accordance herewith, the sole and exclusive remedy of Kimberly-Clark shall be, at Kimberly-Clarks election, (A) to make a claim for indemnification pursuant to Section 8.1(b) (if available), (B) to require Halyard to reperform the applicable Service (or relevant portion) without additional charge, (C) to withhold payment for such Service; provided, that if payment for such Service has already been made, Kimberly-Clark shall be entitled, at its election, to a refund of the amount of such payment or to offset the amount of such payment against payments for other Services hereunder, (D) to the extent applicable, to have the right to terminate the Agreement under Section 7.1 ; or (E) to pursue its rights under Section 11.14 .
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(iii) Each Party may pursue more than one remedy at the same time but ultimately may not recover more than once. Such rights are the Parties sole remedy for any non-performance, inadequate performance, faulty performance or other failure or breach by a Party in its capacity as a Service Provider under or relating to this Agreement.
(b) Indemnity by the Service Provider . Each party in its capacity as a Service Provider shall fully indemnify, defend and hold harmless the other Party in its capacity as a Service Receiver, and its Affiliates and their respective directors, officers, employees and agents, from and against any and all Damages, but only to the extent that such Damages relate to, arise out of, or result from (i) the Service Providers intentional cessation or suspension of, or refusal to provide, a material portion of the applicable Services as required hereunder (an Abandonment ) or (ii) the Gross Negligence or Willful Misconduct of the Service Provider or its Affiliates in the performance of Service Providers obligations hereunder.
(c) Indemnity by the Service Receiver . Each party in its capacity as a Service Recipient shall fully indemnify, defend and hold harmless the other Party in its capacity as a Service Provider, and its Affiliates and their respective directors, officers, employees and agents, from and against any and all Damages incurred thereby relating to, arising out of, or resulting from the Service Providers provision of the applicable Services (including, for the avoidance of doubt, such Damages that arise out of the Service Providers or its Affiliates negligence or their breach of this Agreement), but in all cases excluding such Damages that relate to, arise out of, or result from (i) an Abandonment or (ii) the Gross Negligence or Willful Misconduct of the Service Provider or its Affiliates in the performance of Service Providers obligations hereunder. The foregoing indemnity shall not apply to Damages incurred directly by the Service Provider, including without limitation Damages to Service Providers real or tangible or intangible personal property and injury to the employees or agents of the Service Provider, but only to the extent that such Damages arise out of the acts or omissions of Service Provider or its Affiliates or agents (it being understood that this sentence shall not apply to Damages arising out of Claims (as defined below)).
(d) Survival . The provisions in this Section 8.1 shall survive and continue in full force and effect notwithstanding the expiration or termination of this Agreement for any reason whatsoever.
(e) Indemnification Procedures.
(i) Third-Party Claim . The indemnification obligation pursuant to Section 8.1(b) for each Party in its capacity as a Service Provider and the indemnification obligation pursuant to Section 8.1(c) for each party in its capacity as a Service Receiver, in each case, with respect to Damages claimed or asserted against a person claiming indemnification under this Agreement (an Indemnified Party ) by a third party (that third-party claim or assertion, a Claim ), are subject to the following terms and conditions:
(1) The Indemnified Party shall, with reasonable promptness after the Indemnified Party has notice of a Claim, (A) notify the Party from whom indemnification is sought (the Indemnifying Party ) of the existence of that Claim and (B) transmit to the Indemnifying Party a notice (a Claim Notice ) describing, in reasonable detail, the nature of the Claim, and copies of any papers served with respect to such Claim. Within
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fifteen (15) calendar days following receipt of notice from the Indemnified Party relating to any Claim, but no later than five (5) calendar days before the date on which any response to a complaint or summons is due if the Indemnifying Party has received notice from the Indemnified Party relating to any Claim at least five (5) days before that date, the Indemnifying Party shall notify the Indemnified Party that the Indemnifying Party will assume control of the defense and settlement of such claim (a Notice of Assumption ).
(2) If the Indemnifying Party delivers a Notice of Assumption within the required notice period, the Indemnifying Party shall assume control (subject to Indemnified Partys right to participate at its own expense) over the defense and settlement of the claim and diligently defend the claim; provided , however , that (i) the Indemnifying Party shall keep the Indemnified Party fully apprised as to the status of the defense, and (ii) the Indemnifying Party shall obtain the prior written approval of the Indemnified Party before entering into any settlement of such claim asserting any liability against the Indemnified Party, imposing any obligations or restrictions on the Indemnified Party, ceasing to defend against such claim or otherwise adversely impacting the Indemnified Party. The Indemnifying Party shall not be liable for any legal fees or expenses incurred by the Indemnified Party following the delivery of a Notice of Assumption; provided , however , that the Indemnified Party shall be entitled to employ counsel at its own expense to participate in the handling of the claim. The Indemnifying Party shall not be obligated to indemnify the Indemnified Party for any amount paid or payable by such Indemnified Party in the settlement of any claim if (x) the Indemnifying Party has delivered a timely Notice of Assumption and such amount was agreed to without the written consent of the Indemnifying Party, (y) the Indemnified Party has not provided the Indemnifying Party with notice of such claim and a reasonable opportunity to respond thereto, or (z) the time period within which to deliver a Notice of Assumption has not yet expired.
(3) If the Indemnifying Party does not deliver a Notice of Assumption relating to any claim within the required notice period, the Indemnified Party shall have the right to defend the claim in such manner as it may deem appropriate. The Indemnifying Party shall promptly reimburse the Indemnified Party for all reasonable costs and expenses incurred by Indemnified Party, including attorneys fees, in connection therewith to the extent it is a claim for which the Indemnifying Party is obligated to indemnify under this Agreement.
(ii) No Third-Party Claim . In the event any Indemnified Party claims indemnification against any Indemnifying Party under this Agreement but that claim for indemnification does not involve a Claim, the Indemnified Party shall (A) notify the Indemnifying Party and (B) transmit to the Indemnifying Party a notice (an Indemnity Notice ) describing, in reasonable detail, the nature of the claim. Within thirty (30) calendar days after receipt of any Indemnity Notice, the Indemnifying Party shall notify the Indemnified Party whether the Indemnifying Party disputes its potential liability to the Indemnified Party under this Article VIII . If the Indemnifying Party does not notify the Indemnified Party within such thirty (30)-day period that the Indemnifying Party disputes its potential liability with respect to the claim described in such Indemnity Notice, any Damages resulting from such claim shall be payable by the Indemnifying Party under this Agreement.
(iii) The provisions of this Section 8.1(e) are in all cases subject to the limitations set forth in Sections 8.1 and 8.2 and elsewhere in this Agreement.
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Section 8.2 Limitations on Damages.
(a) SUBJECT TO THE REPERFORMANCE OBLIGATIONS IN SECTION 8.1(a)(i)(B) AND 8.1(a)(ii)(B), NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT (REGARDLESS OF CAUSE) SHALL A PARTY IN ITS CAPACITY AS A SERVICE PROVIDER BE LIABLE TO A PARTY IN ITS CAPACITY AS SERVICE RECEIVER AND ITS AFFILIATES WITH RESPECT TO CLAIMS ARISING OUT OF THIS AGREEMENT, WHETHER UNDER THIS ARTICLE VIII OR OTHERWISE, FOR AMOUNTS IN THE AGGREGATE EXCEEDING THE AGGREGATE SERVICE CHARGES PAID TO THE APPLICABLE PARTY IN ITS CAPACITY AS A SERVICE PROVIDER UNDER THIS AGREEMENT IN THE TWELVE-MONTH PERIOD PRIOR TO THE OCCURRENCE GIVING RISE TO THE DAMAGES (SUCH AMOUNT, THE CAP ); PROVIDED , HOWEVER , THAT DURING THE SIX MONTH PERIOD IMMEDIATELY FOLLOWING THE EFFECTIVE TIME, THE CAP SHALL BE EQUAL TO THE TOTAL SERVICE CHARGES PAYABLE TO THE APPLICABLE PARTY IN ITS CAPACITY AS A SERVICE PROVIDER UNDER THIS AGREEMENT OVER SUCH SIX MONTH PERIOD, CALCULATED AS THOUGH THE FULL SCOPE OF SUCH SERVICES WILL BE DELIVERED WITHOUT EARLY TERMINATION OR SUSPENSION.
(b) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY, THEIR RESPECTIVE AFFILIATES OR THEIR RESPECTIVE DIRECTORS, OFFICERS AND EMPLOYEES BE LIABLE UNDER THIS AGREEMENT FOR ANY CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF ANY PROVISION OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED , HOWEVER , THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT AN INDEMNIFYING PARTYS INDEMNIFICATION OBLIGATIONS HEREUNDER FOR LIABILITIES ANY INDEMNIFIED PARTY MAY HAVE TO THIRD PARTIES FOR ANY CONSEQUENTIAL DAMAGES ARISING OUT OF THE CLAIM THAT IS THE SUBJECT OF SUCH INDEMNIFICATION. FOR PURPOSES OF THIS ARTICLE VIII , CONSEQUENTIAL DAMAGES MEAN ANY EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES (INCLUDING IN RESPECT OF LOST PROFITS OR REVENUES).
(c) To the extent that an Indemnified Party has incurred Damages that are subject to indemnification under this Article VIII for which (i) insurance coverages may be available or (ii) claims may be available against a third party in respect thereof, such Indemnified Party shall, to the extent possible, undertake good faith efforts to recover against such coverages and/or pursue such available third party claim. To the extent that an Indemnified Party obtains insurance proceeds or third party recoveries in respect of such Damages, such Indemnified Party shall use the funds actually received in connection with such insurance recovery or third party claim (in lieu of funds provided by the Indemnifying Party pursuant to the indemnification provisions of this Article VIII ) to pay or otherwise satisfy such Damages, and the amount of any Damages for which indemnification is available under this Article VIII shall be reduced by the amount of such insurance or third party claim proceeds paid in cash to the Indemnified Party net of all out-of-pocket costs and expenses. If, after the making of any payment to an Indemnified
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Party of Damages under this Article VIII , the amount of Damages to which such payment relates is reduced by actual recovery, settlement or otherwise by the Indemnified Party under any insurance coverage or against any third parties, the amount of such reduction will promptly be repaid by the Indemnified Party to the Indemnifying Party, net of all out-of-pocket costs and expenses.
(d) In the event that a Service Recipient incurs any Damages relating to, arising out of, or resulting from the Service Providers provision of the applicable Services (including, for the avoidance of doubt, such Damages that arise out of the Service Providers or its Affiliates negligence or breach of this Agreement) for which (i) insurance coverages may be available to Service Provider or (ii) claims may be available to Service Provider against a third party in respect thereof (including any agents used by Service Provider in providing the Services), Service Provider shall, to the extent possible, at the Service Recipients expense, either (x) undertake good faith efforts to recover against such coverages and/or pursue such available third party claim or (y) take such action as shall be necessary for the Service Recipient to be subrogated, to the extent possible, to the rights of the Service Provider with respect thereto. To the extent that the Service Provider obtains insurance proceeds or third party recoveries in respect of such Damages, the Service Provider shall pay the funds actually received in connection with such insurance recovery or third party claim to the Service Recipient, net of all out-of-pocket costs and expenses incurred by Service Provider in connection therewith, notwithstanding any of the limitations in this Section 8.2.
Section 8.3 Limited Recourse . EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, (A) NO AFFILIATE OF ANY PARTY WILL HAVE ANY LIABILITY OR RESPONSIBILITY FOR, RELATING TO OR IN CONNECTION WITH A PARTYS FAILURE TO PERFORM ANY TERM, COVENANT, CONDITION OR PROVISION OF THIS AGREEMENT AND (B) IN PURSUING ANY REMEDY FOR ANY PARTYS BREACH OF ANY TERM, COVENANT, CONDITION OR PROVISION OF THIS AGREEMENT OR OF ANY DUTY OR STANDARD OF CONDUCT BASED ON NEGLIGENCE, GROSS NEGLIGENCE, STRICT LIABILITY OR PERSONAL INJURY OR OTHER TORT OR VIOLATION OF APPLICABLE GOVERNMENTAL REQUIREMENTS, OR OTHERWISE, THE OTHER PARTY WILL NOT HAVE RECOURSE AGAINST ANY PERSON OTHER THAN THE DEFAULTING OR BREACHING PARTY ITSELF NOR AGAINST ANY ASSETS OTHER THAN THE ASSETS OF THE DEFAULTING OR BREACHING PARTY ITSELF.
Section 8.4 Limitation on Remedies.
(a) EXCEPT AS SET FORTH IN SECTION 8.1 and 8.2(d) , EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY OTHERWISE HAVE TO CLAIM, COLLECT OR RECEIVE DAMAGES, TO ENFORCE SPECIFIC PERFORMANCE OR TO PURSUE ANY OTHER REMEDY AVAILABLE IN CONTRACT, AT LAW OR IN EQUITY IN THE EVENT OF ANY NON-PERFORMANCE, INADEQUATE PERFORMANCE, FAULTY PERFORMANCE OR OTHER FAILURE OR BREACH BY THE OTHER PARTY IN ITS CAPACITY AS A SERVICE PROVIDER UNDER THIS AGREEMENT, REGARDLESS OF CAUSE EXCEPT ONLY TO THE EXTENT CAUSED BY THE WILLFUL MISCONDUCT OF SUCH SERVICE PROVIDER OR ITS AFFILIATES.
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(b) Without limiting the generality of any other provision hereof, it is not the intent of either Party (or their Affiliates) in its capacity as a Service Provider to render professional advice or opinions, whether with regard to tax, legal, treasury, finance, intellectual property, employment or other matters; no Party in its capacity as a Service Receiver shall rely on any Service rendered by or on behalf of the Service Provider or its Affiliates for such professional advice or opinions; and notwithstanding the Service Receivers receipt of any proposal, recommendation or suggestion in any way relating to tax, legal, treasury, finance, intellectual property, employment or any other subject matter, the Service Receiver shall seek all third-party professional advice and opinions as it may desire or need; and, with respect to any software or documentation provided in connection with the Services, the Service Receiver shall use such software and documentation internally and for their intended purpose only, shall not distribute, publish, transfer, sublicense or in any manner make such software or documentation available to other organizations or persons, and shall not act as a service bureau or consultant in connection with such software.
(c) A material inducement to the provision of the Kimberly-Clark Services is the limitation of liability, damages and recourse set forth herein and the release and indemnity provided by Halyard. A material inducement to the provision of the Halyard Services is the limitation of liability, damages and recourse set forth herein and the release and indemnity provided by Kimberly-Clark.
(d) Without limiting the generality of any other provision hereof, (i) none of Kimberly-Clark nor its Affiliates shall have any liability or responsibility for any loss of or Damage to any equipment related to the Halyard Business or the Included Non-Woven Business, which such liability, responsibility and risk shall be for the account of Halyard and its Affiliates, Regardless of Cause, and (ii) none of Halyard nor its Affiliates shall have any liability or responsibility for any loss of or Damage to any equipment related to the Retained Business, which such liability, responsibility and risk shall be for the account of Kimberly-Clark and its Affiliates, Regardless of Cause.
Section 8.5 Express Negligence . EXCEPT AS OTHERWISE EXPRESSED THEREIN, THE INDEMNITY, RELEASES AND LIMITATIONS ON DAMAGES, RECOURSE AND LIABILITIES IN THIS AGREEMENT (INCLUDING ARTICLES II AND VIII ) ARE INTENDED TO BE ENFORCEABLE AGAINST THE PARTIES IN ACCORDANCE WITH THE EXPRESS TERMS AND SCOPE THEREOF, REGARDLESS OF CAUSE.
ARTICLE IX
CONFIDENTIALITY
Section 9.1 Confidentiality . The Parties each acknowledge and agree that the terms of the Distribution Agreement shall apply to information, documents, plans and other data made available or disclosed by one Party to the other in connection with this Agreement, including any such information Halyard may gain from access to the Kimberly-Clark Systems or that Kimberly-Clark may gain from access to the Halyard Systems.
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ARTICLE X
FORCE MAJEURE
Section 10.1 Effect and Definition . No failure or omission by either Party to perform or carry out its obligations in accordance with this Agreement (other than the obligation to make payment) shall give rise to any claim by the other Party or be deemed a breach of this Agreement if such failure or omission arises from a Force Majeure Event. Force Majeure Event shall mean any event or circumstance that is beyond the reasonable control of the Party affected thereby, including lightning, earthquakes, tornadoes, hurricanes, floods, wash outs, storms, fires, explosions, epidemics, acts of God, other natural disasters, acts of the public enemy, computer crimes, cyber terrorism, actions by any Governmental Authority or other governmental interference, insurrections, riots, civil disturbance, sabotage, terrorism, threats of sabotage or terrorism, vandalism, wars and war like actions (whether declared or undeclared and whether actual, pending or expected), confiscation, seizure, arrests or other restraints by a Governmental Authority, blockades, embargoes, boycotts, strikes, lockouts, labor unrest and other labor disputes, and any shortage of adequate power or transportation facilities.
Section 10.2 Notification Requirements . The Party claiming to be affected by a Force Majeure Event shall, as soon as reasonably practicable, notify the other Party of the beginning and end of any event claimed to be a Force Majeure Event and use commercially reasonable efforts to resume performance in accordance with this Agreement as soon as is reasonably practicable after the end of the Force Majeure Event.
Section 10.3 Cooperation . The Parties shall cooperate in reasonable respects with each other to find alternative means and methods for the provision of any suspended Service with respect to a Force Majeure Event.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Construction Rules.
(a) A reference to an Article, Section or Schedule shall mean an Article or Section of, or a Schedule to, this Agreement unless otherwise explicitly set forth. The titles and headings herein are for reference purposes only and shall not in any manner limit the construction of this Agreement which shall be considered as a whole.
(b) The words include, includes and including when used in this Agreement shall be deemed in each case to be followed by the words without limitation.
(c) The words hereof, herein and herewith and words of similar import will, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement.
(d) The word or when used in this Agreement will not be exclusive.
(e) Words in the singular when used in this Agreement will be held to include the plural.
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(f) Unless specifically stated otherwise, all dollar amounts referred to in this Agreement or required to be paid pursuant to this Agreement are expressed in and shall be paid in United States Dollar funds.
Section 11.2 Entire Agreement . This Agreement and the Schedules and Exhibits referred to herein, and the documents delivered pursuant hereto, together with the other Operating Agreements, constitute the entire agreement between the Parties with respect to the subject matter contained herein, and supersede all prior agreements, negotiations, discussions, understandings, writings and commitments between the Parties with respect to such subject matter; provided that, in the event of any conflict between this Agreement and any other Operating Agreement, this Agreement shall control with respect to the subject matter herein.
Section 11.3 Choice of Law; Dispute Resolution.
(a) This Agreement shall be governed by and construed and enforced in accordance with the substantive laws of the State of Delaware and the federal laws of the United States of America applicable therein, without regard to any principles of conflicts of laws therein that would cause the laws of any other jurisdiction to apply.
(b) In respect of any dispute hereunder, the Service Coordinators shall first attempt to resolve such dispute in accordance with Section 2.2 . If the Service Coordinators are unable to resolve any such dispute within the timeframes set forth therein, either Party may refer the dispute for resolution pursuant to Article XI of the Distribution Agreement.
Section 11.4 Amendment . This Agreement shall not be amended, modified or supplemented except by a written instrument signed by an authorized representative of each of the Parties.
Section 11.5 Waiver . Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the Party or Parties entitled to the benefit thereof. Any such waiver shall be validly and sufficiently given for the purposes of this Agreement if, as to any Party, it is in writing signed by an authorized representative of such Party. The failure of any Party to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, or in any way to affect the validity of this Agreement or any part hereof or the right of any Party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach.
Section 11.6 Partial Invalidity . Wherever possible, each provision hereof shall be interpreted in such a manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision or provisions shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such provision or provisions or any other provisions hereof, unless such a construction would be unreasonable.
Section 11.7 Execution in Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by and delivered to each of the Parties.
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Section 11.8 Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the Parties and their successors and permitted assigns; provided , however , that the rights and obligations of either Party under this Agreement shall not be assignable by such Party without the prior written consent of the other Party. The successors and permitted assigns hereunder shall include, without limitation, any permitted assignee as well as the successors in interest to such permitted assignee (whether by merger, liquidation (including successive mergers or liquidations) or otherwise).
Section 11.9 Third Party Beneficiaries . Except to the extent otherwise provided herein, the provisions of this Agreement are solely for the benefit of the Parties and their respective Affiliates, successors and permitted assigns and shall not confer upon any third Person any remedy, claim, liability, reimbursement or other right in excess of those existing without reference to this Agreement.
Section 11.10 Notices . All notices, requests, claims, demands and other communications required or permitted hereunder shall be in writing and shall be deemed given or delivered (i) when delivered personally, (ii) if transmitted by facsimile when confirmation of transmission is received, (iii) if sent by registered or certified mail, postage prepaid, return receipt requested, on the third Business Day after mailing or (iv) if sent by private courier when received; and shall be addressed as follows:
If to Kimberly-Clark, to:
Kimberly-Clark Corporation
351 Phelps Drive
Irving, Texas 75309
Attention: General Counsel
Facsimile: 972-281-1492
If to Halyard, to:
Halyard Health, Inc.
5405 Windward Parkway
Suite 100, South
Alpharetta, GA 30004
Attention: General Counsel
Facsimile: 770-587-7749
or to such other address as such Party may indicate by a notice delivered to the other Party.
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Section 11.11 Performance . Each Party shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary or Affiliate of such Party.
Section 11.12 No Public Announcement . Neither Kimberly-Clark nor Halyard shall, without the approval of the other, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such Party shall be so obligated by law or the rules of any stock exchange or quotation system, in which case the other Party shall be advised and the Parties shall use commercially reasonable efforts to cause a mutually agreeable release or announcement to be issued; provided , however , that the foregoing shall not preclude communications or disclosures necessary to implement the provisions of this Agreement or to comply with the accounting and SEC disclosure obligations or the rules of any stock exchange.
Section 11.13 Authority . Each of the Parties represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with their respective terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors rights generally and general equity principles.
Section 11.14 Specific Performance . In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the Party or the Parties who are or are to be thereby aggrieved shall have the right to specific performance and injunctive or other equitable relief of their rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The Parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived.
Section 11.15 Construction . This Agreement shall be construed as if jointly drafted by Kimberly-Clark and Halyard and no rule of construction or strict interpretation shall be applied against any Party.
Section 11.16 Exclusivity of Tax Matters . Subject to the second paragraph of Section 4.1, but notwithstanding any other provision of this Agreement, the provisions of the Tax Matters Agreement shall exclusively govern all matters related to Taxes.
Section 11.17 Relationship of Parties . Each Party in its capacity as a Service Receiver understands and agrees that the Service Providers relationship to such Party as a Service Receiver under this Agreement is strictly a contractual arrangement on the terms and conditions set forth in this Agreement, that no fiduciary, trust, partnership, joint venture, agency or advisory relationship exists between either Party as a Service Provider and the other Party as a Service Receiver, that all Services are provided by the Service Provider as an independent contractor and
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that each Party in its capacity as a Service Receiver hereby waives any and all rights that it may otherwise have under applicable Governmental Requirements to make any claims or take any action against the other Party (or any of its Affiliates) as a Service Provider based on any theory of agency, fiduciary duty, relationship of trust or other special standard of care. Without limiting the generality of the foregoing, each Party acknowledges and agrees that the other Party owes no duties, fiduciary or otherwise, to such Party other than those expressly set forth in this Agreement.
Section 11.18 Further Assurances . From time to time, each Party agrees to execute and deliver such additional documents, and will provide such additional information and assistance as either Party may reasonably require to carry out the terms of this Agreement.
Section 11.19 Survival . The Parties agree that Articles IV , VIII , IX , and XI and any limitations on liability or responsibility and any exculpatory, disclaimer, waiver or similar provisions will survive the termination of this Agreement and that any such termination shall not affect any obligation for the payment of Services rendered or any other amounts due to a Party under this Agreement prior to termination.
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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above.
KIMBERLY-CLARK CORPORATION | ||
By: |
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Name: | ||
Title: | ||
HALYARD HEALTH, INC. | ||
By: |
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Name: | ||
Title: |
Signature Page to Transition Services Agreement
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Exhibit 10.2
TAX MATTERS AGREEMENT
DATED AS OF [ ]
BETWEEN
KIMBERLY-CLARK CORPORATION
AND
HALYARD HEALTH, INC.
SECTION 1. | Definition of Terms | 2 | ||||
SECTION 2. | Allocation of Tax Liabilities and Tax Benefits | 8 | ||||
2.1 | Liability for and the Payment of Taxes | 8 | ||||
2.2 | Allocation Rules | 11 | ||||
SECTION 3. | Preparation and Filing of Tax Returns | 13 | ||||
3.1 | Joint Returns | 13 | ||||
3.2 | Separate Returns | 14 | ||||
3.3 | Special Rules Relating to the Preparation of Tax Returns | 15 | ||||
3.4 | Reliance on Exchanged Information | 16 | ||||
3.5 | Allocation of Tax Items | 16 | ||||
SECTION 4. | Tax Payments | 17 | ||||
4.1 | Payment of Taxes to Tax Authority | 17 | ||||
4.2 | Indemnification Payments | 17 | ||||
4.3 | Initial Determinations and Subsequent Adjustments | 18 | ||||
4.4 | Interest on Late Payments | 18 | ||||
4.5 | Payments by or to Other Group Members | 19 | ||||
4.6 | Procedural Matters | 19 | ||||
4.7 | Tax Consequences of Payments | 19 | ||||
SECTION 5. | Assistance and Cooperation | 19 | ||||
5.1 | Cooperation | 19 | ||||
5.2 | Supplemental Tax Opinions | 20 | ||||
SECTION 6. | Tax Records | 20 | ||||
6.1 | Retention of Tax Records | 20 | ||||
6.2 | Access to Tax Records | 20 | ||||
6.3 | Confidentiality | 20 | ||||
SECTION 7. | Tax Contests | 21 | ||||
7.1 | Notices | 21 | ||||
7.2 | Control of Tax Contests | 21 | ||||
7.3 | Cooperation | 22 | ||||
SECTION 8. | Restriction on Certain Actions of External Distributing and External SpinCo. | 22 | ||||
8.1 | General Restrictions | 22 | ||||
8.2 | Restricted Actions Relating to Tax Materials | 23 | ||||
8.3 | Certain External SpinCo Actions Following the Effective Time | 23 |
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SECTION 9. | General Provisions | 24 | ||||
9.1 | Limitation of Liability | 24 | ||||
9.2 | Entire Agreement | 24 | ||||
9.3 | Governing Law | 24 | ||||
9.4 | Termination | 24 | ||||
9.5 | Notices | 24 | ||||
9.6 | Counterparts | 25 | ||||
9.7 | Binding Effect; Assignment | 25 | ||||
9.8 | No Third Party Beneficiaries | 25 | ||||
9.9 | Severability | 25 | ||||
9.10 | Failure or Indulgence Not Waiver; Remedies Cumulative | 25 | ||||
9.11 | Amendments; Waivers | 25 | ||||
9.12 | Authority | 25 | ||||
9.13 | Construction | 26 | ||||
9.14 | Interpretation | 26 | ||||
9.15 | Predecessors or Successors | 26 | ||||
9.16 | Effective Time | 26 | ||||
9.17 | Change in Law | 26 | ||||
9.18 | Disputes | 26 |
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TAX MATTERS AGREEMENT
THIS TAX MATTERS AGREEMENT (this Agreement ) is entered into as of October 31, 2014, between Kimberly-Clark Corporation, a Delaware corporation ( External Distributing ), and Halyard Health, Inc., a Delaware corporation ( External SpinCo ). Unless otherwise indicated, all Section references in this Agreement are to sections of this Agreement.
RECITALS
WHEREAS, External SpinCo is a wholly owned Subsidiary of External Distributing; and
WHEREAS, the Board of Directors of External Distributing has determined that it would be appropriate and desirable for External Distributing to separate the External SpinCo Group from the External Distributing Group, as contemplated by the Distribution Agreement (the Separation ); and
WHEREAS, in furtherance thereof, the Board of Directors of External Distributing has determined that, in connection with the Separation, it would be appropriate and desirable for (i) Kimberly-Clark Worldwide, Inc., a Delaware corporation and wholly-owned subsidiary of External Distributing, to contribute (such contribution, the Internal Contribution ) certain assets and liabilities to Avent, Inc., a Delaware corporation ( Internal SpinCo ), and to distribute its entire interest in the stock of Internal SpinCo to External Distributing (the Internal Distribution ) in what is intended to qualify, together with the Internal Contribution, as a reorganization described under Sections 368(a)(1)(D) and 355 of the Code, and (ii) following the transactions described in clause (i), for External Distributing (A) to transfer (or cause its Subsidiaries to transfer) certain assets and liabilities associated with the External SpinCo Business to External SpinCo (or to certain other Persons that will become members of the External SpinCo Group pursuant to the Separation), (B) to contribute to External SpinCo (1) all of the outstanding shares of stock of Halyard International, Inc., (such contribution, External Contribution 1 ), (2) all of the membership interests of Halyard US Sales LLC (such contribution, External Contribution 2 ), and (3) all of the stock of Internal SpinCo (such contribution, External Contribution 3 and together with External Contribution 1 and External Contribution 2, the External Contributions ), and (C) to distribute its entire interest in the stock of External SpinCo on a pro rata basis to holders of External Distributing common stock (the External Distribution ) in what is intended to qualify, together with the External Contributions, as a reorganization described under Sections 368(a)(1)(D) and 355 of the Code; and
WHEREAS, the Board of Directors of External SpinCo has also approved such transactions; and
WHEREAS, the parties set forth in the Distribution Agreement the principal arrangements between them regarding the separation of the External SpinCo Group from the External Distributing Group; and
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WHEREAS, the parties desire to provide for and agree upon the allocation between the parties of Taxes and Tax Items arising prior to, as a result of, and subsequent to the External Distribution, and provide for and agree upon other matters relating to Taxes.
NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows:
SECTION 1. Definition of Terms. For purposes of this Agreement (including the recitals hereof), the following terms have the following meanings:
Affiliate means with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person. It is expressly agreed that, from and after the Effective Time, (i) no member of the External Distributing Group shall be deemed an Affiliate of any member of the External SpinCo Group and (ii) no member of the External SpinCo Group shall be deemed an Affiliate of any member of the External Distributing Group.
Agreement has the meaning set forth in the preamble hereof.
Cash Distribution has the meaning set forth in the definition of Repatriation Taxes in this Section 1.
Code means the U.S. Internal Revenue Code of 1986, as amended from time to time, or any successor law.
Control means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through ownership of securities or partnership, membership, limited liability company, or other ownership interests, by contract or otherwise and the terms Controlling and Controlled have meanings correlative to the foregoing.
Credit Transfer Agreement means that certain agreement between External Distributing and External SpinCo, dated as of [ ], pursuant to which External Distributing transferred a portion of its [South Carolina investment tax credits] to External SpinCo.
Disclosing Party has the meaning set forth in Section 6.3.
Distribution Agreement means the Distribution Agreement entered into as of the date hereof, between External Distributing and External SpinCo.
Distribution Date means the date on which the External Distribution occurs.
Due Date has the meaning set forth in Section 4.4.
Effective Time means the time at which the External Distribution is effected on the Distribution Date.
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External Contribution 1 has the meaning set forth in the recitals hereto.
External Contribution 2 has the meaning set forth in the recitals hereto.
External Contribution 3 has the meaning set forth in the recitals hereto.
External Contributions has the meaning set forth in the recitals hereto.
External Distributing has the meaning set forth in the preamble hereof.
External Distributing Business has the meaning set forth for the term Retained Business in the Distribution Agreement.
External Distributing Group means External Distributing and each Subsidiary of External Distributing (but only while such Subsidiary is a Subsidiary of External Distributing) other than any Person that is a member of the External SpinCo Group.
External SpinCo has the meaning set forth in the preamble hereof.
External SpinCo Business has the meaning set forth for the term Halyard Business in the Distribution Agreement.
External SpinCo Group means (i) with respect to any Tax Year (or portion thereof) ending on or before the Distribution Date, External SpinCo and each other Subsidiary of External Distributing that is (or will be) a Subsidiary of External SpinCo at the Effective Time; and (ii) with respect to any Tax Year (or portion thereof) that begins after the Distribution Date, External SpinCo and each Subsidiary of External SpinCo (but only while such Subsidiary is a Subsidiary of External SpinCo).
External Distribution has the meaning set forth in the recitals hereof.
Group means the External Distributing Group or the External SpinCo Group, as the context requires.
Income Tax or Income Taxes means any federal, state, local or foreign Tax measured by or imposed on net income, together with any interest, penalties, additions to tax, or additional amounts in respect of the foregoing.
Information has the meaning set forth for such term in the Distribution Agreement.
Internal Distributing has the meaning set forth in the recitals hereof.
Internal Distributing Business means the portion of the External Distributing Business consisting of contract manufacturing family, infant and childcare products through two plants, located in Ogden Utah, and Fullerton, California.
Internal Distribution has the meaning set forth in the recitals hereof.
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Internal SpinCo has the meaning set forth in the recitals hereof.
Internal SpinCo Business means the portion of the External SpinCo Business consisting of manufacturing health care related products on behalf of Kimberly-Clark Global Sales LLC in its surgical and infection prevention and medical devices business segments.
IRS means the United States Internal Revenue Service.
Joint Return means any Tax Return, for any Tax Year, that includes Tax Items of both the External Distributing Business and the External SpinCo Business, determined without regard to Tax Items carried forward to such Tax Year; provided, however, that Joint Returns shall not include any Tax Returns (other than Tax Returns that are filed on a consolidated, combined, or unitary basis with any member of the External Distributing Group) that are required to be filed with respect to (i) Internal SpinCo (or any of its Subsidiaries prior to the External Distribution), (ii) Safeskin Corporation Thailand Ltd., or (iii) Safeskin Medical and Scientific Thailand Ltd.
Losses means any and all damages, losses, deficiencies, liabilities, obligations, Taxes, penalties, judgments, settlements, claims, payments, fines, interest, costs and expenses (including, without limitation, the fees and expenses of any and all actions and demands, assessments, judgments, settlements and compromises relating thereto and the costs and expenses of attorneys, accountants, consultants and other professionals fees and expenses incurred in the investigation or defense thereof or the enforcement of rights hereunder), including direct and consequential damages.
Non-Income Tax or Non-Income Taxes means all Taxes other than Income Taxes.
Non-Preparer means, in the case of any Joint Return or Separate Return, the party that is not responsible for the preparation and filing of such Joint Return or Separate Return, as applicable, pursuant to Sections 3.1(a) or 3.2.
Non-Preparer Party Item has the meaning set forth in Section 7.2(b).
Payment Date means (i) with respect to any U.S. federal income tax return, the due date for any required installment of estimated taxes determined under Code Section 6655, the due date (determined without regard to extensions) for filing the return determined under Code Section 6072, and the date the return is filed, and (ii) with respect to any other Tax Return, the corresponding dates determined under the applicable Tax Law.
Person means any individual, corporation, limited liability company, joint stock company, partnership, trust, incorporated or unincorporated association, union, unincorporated organization, joint venture, governmental entity (or any department, agency or political subdivision thereof) or other entity of any kind.
Pre-Acquisition Taxes means any Taxes that (i) (A) are the liability of any Person listed in Appendix B and (B) relate to any Tax Year (or portion thereof) prior to the acquisition of such Person by the External Distributing Group or (ii) are described in Schedule 1 hereto.
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Preparer means, in the case of any Joint Return or Separate Return, the party that is responsible for the preparation and filing of the Joint Return or Separate Return, as applicable, pursuant to Sections 3.1(a) or 3.2.
Receiving Party has the meaning set forth in Section 6.3.
Redetermination Event has the meaning set forth in Section 4.3.
Requesting Party has the meaning set forth in Section 5.2.
Repatriation Taxes means any Income Taxes (other than Separation Taxes) and withholding Taxes imposed by the United States, Thailand, or Singapore on the direct or indirect distribution of cash by Safeskin Corporation Thailand Ltd., Safeskin Medical and Scientific Thailand Ltd., or Kimberly-Clark Far East Pte. Limited to a member of the External Distributing Group (all such distributions collectively, the Cash Distribution ).
Restructuring Taxes means any Income Taxes (other than Separation Taxes) including, without limitation, Income Taxes imposed by the United States or Mexico, which are related to or arise in connection with the transfer, at or prior to the Effective Time, of assets and liabilities (i) related to the External SpinCo Business from members of External Distributing Group on one hand to members of External SpinCo Group on the other hand; and (ii) related to the External Distributing Business from members of the External SpinCo Group on one hand to members of External Distributing Group on the other hand. For the avoidance of doubt, Restructuring Taxes shall include without limitation any Mexican Income Taxes arising from the transfers of FemCare assets by Internal SpinCo and Internal SpinCos Subsidiaries, and any United States Income Taxes arising out of deferred intercompany gains recognized pursuant to Treasury Regulation Section 1.1502-13, any recapture of excess loss account recognized pursuant to Treasury Regulation Section 1.1502-19, any triggering of dual consolidated losses pursuant to Treasury Regulation Section 1.1503(d)-6, recapture of overall foreign loss pursuant to Section 904(f) of the Code and gain recognition pursuant to a gain recognition agreement pursuant to Treasury Regulation Section 1.367(a)-8.
Separate Return means any Tax Return that (i) is required to be filed by or with respect to any member of either Group and (ii) is not a Joint Return (including, for the avoidance of doubt, Tax Returns of foreign Subsidiaries of External Distributing or External SpinCo which are not Joint Returns).
Separation has the meaning set forth in the recitals hereof.
Separation Taxes has the meaning set forth in Section 2.2(b).
Separation Transactions means the transactions described in Schedule 2.1 of the Distribution Agreement.
Subsidiary when used with respect to any Person, means (i)(A) a corporation a majority in voting power of whose share capital or capital stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by such Person, by
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one or more Subsidiaries of such Person, or by such Person and one or more Subsidiaries of such Person, whether or not such power is subject to a voting agreement or similar encumbrance, (B) a partnership or limited liability company in which such Person or a Subsidiary of such Person is, at the date of determination, (1) in the case of a partnership, a general partner of such partnership with the power affirmatively to direct the policies and management of such partnership or (2) in the case of a limited liability company, the managing member or, in the absence of a managing member, a member with the power affirmatively to direct the policies and management of such limited liability company, or (C) any other Person (other than a corporation) in which such Person, one or more Subsidiaries of such Person or such Person and one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof, has or have (1) the power to elect or direct the election of a majority of the members of the governing body of such Person, whether or not such power is subject to a voting agreement or similar encumbrance, or (2) in the absence of such a governing body, at least a majority ownership interest or (ii) any other Person of which an aggregate of 50% or more of the equity interests are, at the time, directly or indirectly, owned by such Person and/or one or more Subsidiaries of such Person. References herein to Subsidiaries includes (without limitation) any Subsidiary formed after the date hereof in anticipation of the External Distribution.
Supplemental Tax Opinion means, with respect to a specified action, an opinion (other than the Tax Opinion) from Tax Counsel to the effect that (i) such action should not preclude the Internal Contribution and the Internal Distribution together from qualifying as a reorganization described under Sections 368(a)(1)(D) and 355 of the Code, (ii) such action will not preclude the External Contributions and the External Distribution together from qualifying as a reorganization described under Sections 368(a)(1)(D) and 355 of the Code and (iii) such action will not otherwise increase the amount of Tax imposed on the Separation Transactions. No opinion relied upon by External SpinCo to satisfy the requirements of Section 8.3 shall be considered a Supplemental Tax Opinion unless such opinion is, in addition to the requirements above, an unqualified will opinion (in the case of the External Distribution) or an unqualified should opinion (in the case of the Internal Distribution) reasonably satisfactory to External Distributing, which opinion may rely upon, and may assume the accuracy of, any customary representations, reasonably satisfactory to External Distributing, contained in an officers certificate delivered by an officer of External Distributing or External SpinCo to Tax Counsel.
Tax or Taxes means all forms of taxation imposed by any governmental entity or political subdivision, agency, commission or authority thereof, whenever created or imposed, and whether of the United States or foreign jurisdiction, and whether imposed by a local, municipal, state, national, federal, or other body, and without limiting the foregoing, shall include any income, gross income, gross receipts, profits, capital stock, franchise, withholding, payroll, social security, workers compensation, unemployment, disability, property, ad valorem, stamp, medical device excise, other excise, severance, occupation, service, sales, use, license, lease, transfer, recording, import, export, value added, alternative minimum, estimated or other similar tax (including any fee, assessment, or other charge in the nature of or in lieu of any tax), together with any interest, penalties, additions to tax, or additional amounts in respect of the foregoing.
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Tax Authority means, with respect to any Tax, the governmental entity or political subdivision, agency, commission or authority thereof that imposes such Tax, or that is charged with the assessment, determination or collection of such Tax for such entity or subdivision.
Tax Benefit means, for any Tax Year with respect to a Group, (i) losses of such Group carried forward or back to such Tax Year from another Tax Year; (ii) Tax credits generated by such Group; and (iii) after separately taking into account solely the items of income, gain, loss, and deduction of such Group for such Tax Year (but excluding any deductions attributable to losses carried forward or back to such Tax Year from another Tax year), any net operating loss of such Group for such Tax Year.
Tax Contest means an audit, review, examination, or any other administrative or judicial proceeding with the purpose or effect of examining, determining or redetermining Taxes of any member of either Group (including any administrative or judicial review of any claim for refund).
Tax Counsel means (i) with respect to the Tax Opinion delivered to External Distributing with respect to the External Distribution, Baker Botts L.L.P., (ii) with respect to the Tax Opinion delivered to External Distributing with respect to the Internal Distribution, Price Waterhouse Coopers, or (iii) with respect to a Supplemental Tax Opinion delivered to External Distributing or to External SpinCo, a nationally recognized law firm or accounting firm reasonably acceptable to External Distributing to provide such Supplemental Tax Opinion.
Tax Item means, with respect to any Tax, any item of income, gain, loss, deduction, credit or other attribute that may have the effect of increasing or decreasing any Tax.
Tax Law means the law of any governmental entity or political subdivision thereof, and any controlling judicial or administrative interpretations of such law, relating to any Tax.
Tax Materials means (i) the representation letters delivered to Tax Counsel in connection with the delivery of the Tax Opinion or the Supplemental Tax Opinion and (ii) any other materials delivered or deliverable by External Distributing, External SpinCo and others in connection with the rendering by Tax Counsel of the Tax Opinions or the Supplemental Tax Opinion.
Tax Opinion means the opinion to be delivered by Tax Counsel to External Distributing in connection with the Internal Distribution and the External Distribution to the effect that (i) the Internal Contribution and the Internal Distribution together should qualify as a reorganization described under Sections 368(a)(1)(D) and 355 of the Code and (ii) the External Contributions and the External Distribution together will qualify as a reorganization described under Sections 368(a)(1)(D) and 355 of the Code.
Tax Records means Tax Return, Tax Return work papers, documentation relating to any Tax Contests, and any other books of account or records required to be maintained under applicable Tax Laws (including but not limited to Section 6001 of the Code) or under any record retention agreement with any Tax Authority.
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Tax Return means any report of Taxes due (including estimated Taxes), any claims for refund of Taxes paid, any information return with respect to Taxes, or any other similar report, statement, declaration, election, notice or other document required to be filed (by paper, electronically or otherwise) under any applicable Tax Law (whether or not a payment is required to be made in connection with such filing), including any attachments, exhibits, schedules, appendices or other materials submitted with any of the foregoing, and including any amendments or supplements to any of the foregoing.
Tax Year means with respect to any Tax, the year, or shorter period, if applicable, for which the Tax is reported as provided under applicable Tax Law.
Treasury Regulations means the regulations promulgated from time to time under the Code as in effect for the relevant Tax Year.
SECTION 2. Allocation of Tax Liabilities and Tax Benefits.
2.1 Liability for and the Payment of Taxes . Except as provided in Section 3.1(b) (Provision of Information and Assistance), Section 3.2(c) (Provision of Information), and Section 7 (Tax Contests), and in accordance with Section 4, the parties liabilities for Taxes and payment obligations with respect to utilized Tax Benefits shall be as set forth in Sections 2.1(a) and 2.1(b) below.
(a) External SpinCo Liabilities and Payments. For any Tax Year (or portion thereof):
(i) External SpinCo shall be liable for the Taxes (determined without regard to Tax Benefits) allocated to External SpinCo pursuant to Section 2.2(a)(i) or Section 2.2(b), reduced by any Tax Benefits that External SpinCo is permitted to utilize under the rules set forth in Section 2.1(c) that are allowable under applicable Tax Law.
(ii) External SpinCo shall pay External Distributing for:
(A) any Tax Benefits arising in a Tax Year that begins on or before the Distribution Date which are allocated to External Distributing pursuant to Section 2.2(a)(ii), but which are utilized by External SpinCo to reduce Taxes for which it is liable pursuant to Section 2.1(a)(i) in any Tax Year that begins after the Distribution Date,
(B) any Tax Benefits arising in a Tax Year that begins after the Distribution Date which are allocated to External Distributing pursuant to Section 2.2(a)(ii), but which are utilized by External SpinCo to reduce Taxes for which it is liable pursuant to Section 2.1(a)(i) in any Tax Year that begins on or before the Distribution Date,
(C) any Tax Benefits arising in any Tax Year which are allocated to External Distributing pursuant to Section 2.2(a)(ii), but which are utilized by External SpinCo to reduce Taxes for which it is liable in such Tax Year or in another Tax Year beginning on or before the Distribution Date pursuant to Section 2.1(a)(i), and
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(D) any Tax Benefits arising in a Tax Year that begins on or before the Distribution Date which are allocated to External Distributing pursuant to Section 2.2(a)(ii), but which both arise as a result of a Tax Contest or other dispute which is resolved after the Distribution Date and are utilized by External SpinCo to reduce Taxes for which it is liable pursuant to Section 2.1(a)(i) in any Tax Year that begins on or before the Distribution Date.
(b) External Distributing Liabilities and Payments. For any Tax Year (or portion thereof):
(i) External Distributing shall be liable for the Taxes (determined without regard to Tax Benefits) allocated to External Distributing pursuant to Section 2.2(a)(i) or Section 2.2(b), reduced by any Tax Benefits that External Distributing is permitted to utilize under the rules set forth in Section 2.1(c) that are allowable under applicable Tax Law.
(ii) External Distributing shall pay External SpinCo for:
(A) any Tax Benefits arising in a Tax Year that begins on or before the Distribution Date which are allocated to External SpinCo pursuant to Section 2.2(a)(ii), but which are utilized by External Distributing to reduce Taxes for which it is liable pursuant to Section 2.1(b)(i) in any Tax Year that begins after the Distribution Date,
(B) any Tax Benefits arising in a Tax Year that begins after the Distribution Date which are allocated to External SpinCo pursuant to Section 2.2(a)(ii), but which are utilized by External Distributing to reduce Taxes for which it is liable pursuant to Section 2.1(b)(i) in any Tax Year that begins on or before the Distribution Date,
(C) any Tax Benefits arising in any Tax Year which are allocated to External SpinCo pursuant to Section 2.2(a)(ii), but which are utilized by External Distributing to reduce Taxes for which it is liable in such Tax Year or in another Tax Year beginning on or before the Distribution Date pursuant to Section 2.1(b)(i), and
(D) any Tax Benefits arising in a Tax Year that begins on or before the Distribution Date which are allocated to External SpinCo pursuant to Section 2.2(a)(ii), but which both arise as a result of a Tax Contest or other dispute which is resolved after the Distribution Date and are utilized by External Distributing to reduce Taxes for which it is liable pursuant to Section 2.1(b)(i) in any Tax Year that begins on or before the Distribution Date.
(c) Rules for Utilization of Tax Benefits . For purpose of this Section 2, the parties rights to utilize Tax Benefits under Sections 2.1(a) and 2.1(b) shall be determined in accordance with the following rules:
(i) In general, the party to whom Tax Benefits are allocated pursuant to Section 2.2(a)(ii) shall be entitled to utilize such Tax Benefits to reduce Taxes for which such party is liable pursuant to Section 2.1(a)(i) or Section 2.1(b)(i).
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(ii) Notwithstanding the preceding paragraph, for any Tax Year that begins on or before the Distribution Date, (A) External SpinCo may take into account a Tax Benefit under Section 2.1(a)(i) only if (and to the extent that) the utilization by External SpinCo of such Tax Benefit would be allowable under applicable Tax Law after taking into account only those Tax Items allocated to External SpinCo during such Tax Year (or portion thereof), and (B) External Distributing may take into account a Tax Benefit under Section 2.1(b)(i) only if (and to the extent that) the utilization by External Distributing of such Tax Benefit would be allowable under applicable Tax Law after taking into account only those Tax Items allocated to External Distributing during such Tax Year (or portion thereof).
(iii) For any Tax Year that begins on or before the Distribution Date, if, because of the application of the rules described in the preceding paragraph or otherwise, External Distributing is not able to fully utilize the Tax Benefits allocated to it pursuant to Section 2.2(a)(ii), then External SpinCo may utilize such Tax Benefits allocated to External Distributing, but only to the extent such Tax Benefits are not taken into account by External Distributing pursuant to Section 2.1(b)(i) in the same Tax Year on an original or amended return or otherwise. Similarly, if, because of the application of the rules described in the preceding paragraph or otherwise, External SpinCo is not able to fully utilize the Tax Benefits allocated to it pursuant to Section 2.2(a)(ii), then External Distributing may utilize such Tax Benefits allocated to External SpinCo, but only to the extent such Tax Benefits are not taken into account by External SpinCo pursuant to Section 2.1(a)(i) in the same Tax Year on an original or amended return or otherwise.
(iv) For any Tax Year that begins after the Distribution Date in which a party has available for utilization both Tax Benefits allocated to such party pursuant to Section 2.2(a)(ii) and Tax Benefits allocated to the other party pursuant to Section 2.2(a)(ii) (because, for example, such other party was unable to utilize the Tax Benefits allocated to it), if the applicable Tax Law does not provide for the priority and order in which such Tax Benefits are deemed to be utilized then the first party shall be deemed to first utilize the Tax Benefits allocated to it pursuant to Section 2.2(a)(ii) to the extent that such Tax Benefits may be utilized by the first party in such Tax Year under the rules set forth in this Section 2.1(c).
(v) Payment for Tax Benefits described in Section 2.1(a)(ii) shall be made only when and to the extent that the utilization of such Tax Benefit does not increase the Taxes of External SpinCo or reduce the Tax Benefits otherwise utilizable by External SpinCo during the applicable Tax Year, and payment for Tax Benefits described in either Section 2.1(b)(ii) shall be made only when and to the extent that the utilization of such Tax Benefit does not increase the Taxes of External Distributing or reduce the Tax Benefits otherwise utilizable by External Distributing during the applicable Tax Year.
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2.2 Allocation Rules . For purposes of Section 2.1:
(a) General Rule . Except as otherwise provided in this Section 2.2,
(i) Taxes for any Tax Year (or portion thereof) shall be allocated between External SpinCo and External Distributing as follows:
(A) Pre-Acquisition Taxes and medical device excise taxes shall be allocated solely to External SpinCo.
(B) Restructuring Taxes and Repatriation Taxes shall be allocated solely to External Distributing.
(C) Income Taxes (other than Separation Taxes, which are allocated pursuant to Section 2.2(b), and other than Income Taxes described in subclauses (i)(A) and (i)(B) of this Section 2.2(a)) shall be allocated among External SpinCo and External Distributing in proportion to the separate net taxable income (calculated in accordance with Treasury Regulation Section 1.1552-1(a)(1) and in accordance with past practices) attributable to or arising from the members of the External Distributing Group (including, for the avoidance of doubt, the members of the External Distributing Group that are treated as disregarded entities for U.S. federal income tax purposes), on the one hand, and the members of the External SpinCo Group (including, for the avoidance of doubt, the members of the External SpinCo Group that are treated as disregarded entities for U.S. federal income tax purposes), on the other hand.
(D) Non-Income Taxes (other than those described in subclauses (i)(A) and (i)(B) of this Section 2.2(a)) shall be allocated among External SpinCo and External Distributing based on the applicable items attributable to or arising from the respective External SpinCo Business and External Distributing Business (as so defined for such Tax Year or portion thereof) that contribute to such Taxes (e.g., sales taxes shall be allocated to External SpinCo to the extent arising from taxable sales made by the External SpinCo Business). In the event that any Non-Income Tax is not attributable to (and does not arise from) any items of the External SpinCo Business or the External Distributing Business (e.g., capital taxes imposed based on the authorized stock), such Non-Income Taxes shall be allocated among External Distributing and External SpinCo in proportion to the net taxable income of the External Distributing Business, on the one hand, and the External SpinCo Business, on the other hand.
(ii) Tax Benefits for any Tax Year (or portion thereof) shall be allocated between External SpinCo and External Distributing as follows:
(A) All foreign tax credits arising in 2014 shall be allocated solely to External Distributing, other than foreign tax credits attributable to (i) foreign Taxes accrued or paid prior to the External Distribution by (1) Internal SpinCo (or any of its Subsidiaries prior to the External Distribution) or (2) Kimberly-Clark Health Care Inc. or (ii) Taxes described in Schedule 2 hereto. Notwithstanding the preceding sentence, any foreign tax credits related to or arising in connection with the Cash Distribution (whether or not such foreign tax credits arise prior to the Effective Time) shall be allocated to External Distributing.
(B) Tax Benefits arising from (1) the Georgia research and development tax credits and the North Carolina investment tax credits shall be allocated solely to External Distributing and (2) the portion of the South Carolina investment tax credits transferred from External Distributing to External SpinCo pursuant to the Credit Transfer Agreement shall be allocated solely to External SpinCo.
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(C) Except as provided in subclause (ii)(B) of this Section 2.2(a), all research and development tax credits shall be allocated solely to External Distributing.
(D) Except as provided in subclauses (ii)(A) through (ii)(C) of this Section 2.2(a), Tax Benefits with respect to Income Taxes (including, for the avoidance of doubt, Tax Benefits derived from the payment or accrual of Taxes, whether Income Taxes or Non-Income Taxes) shall be allocated in proportion to the losses, credits, or other applicable items attributable to or arising from the members of the External Distributing Group (including, for the avoidance of doubt, the members of the External Distributing Group that are treated as disregarded entities for U.S. federal income tax purposes), on the one hand, and from the members of the External SpinCo Group (including, for the avoidance of doubt, the members of the External SpinCo Group that are treated as disregarded entities for U.S. federal income tax purposes), on the other hand, that gave rise to such Tax Benefits.
(E) Tax Benefits other than Tax Benefits allocated pursuant to subclauses (ii)(A) through (ii)(D) of this Section 2.2(a) shall be allocated among External SpinCo and External Distributing in proportion to the losses, credits, or other applicable items attributable to or arising from the respective External SpinCo Business and External Distributing Business (as so defined for such Tax Year or portion thereof) that contribute to such Tax Benefits.
For purposes of applying this Section 2.2, any Taxes imposed on payments from a member of one Group to a member of the other Group shall be treated as attributable entirely to the payee, except that Taxes in the nature of sales, value added or other transaction-based Taxes shall be treated as attributable entirely to the payer.
(b) Taxes Resulting from the Internal Contribution, the Internal Distribution, the External Contributions, or the External Distribution . Taxes and Tax Items resulting from the Internal Contribution, the Internal Distribution, the External Contributions, or the External Distribution (collectively, Separation Taxes ) will be allocated as follows:
(i) Separation Taxes Allocable to External Distributing. Separation Taxes shall be allocated to External Distributing to the extent that such Separation Taxes result primarily from one or more of the following:
(A) from the External Distributing Group ceasing to be engaged in the Internal Distributing Business or the External Distributing Business; or
(B) from an action or failure to act by the External Distributing Group that causes Section 355(e) of the Code to apply to either the Internal Distribution or the External Distribution, or that causes Section 355(f) of the Code to apply to the Internal Distribution; or
(C) taking any of the actions prohibited in (or failing to take any of the actions required by) Sections 8.1 or 8.2.
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(ii) Separation Taxes Allocable to External SpinCo . Separation Taxes shall be allocated to External SpinCo to the extent that such Separation Taxes result primarily from External SpinCos taking any of the actions prohibited in (or failing to take any of the actions required by) Sections 8.1, 8.2 or 8.3.
(iii) Joint Responsibility for Separation Taxes . Any Separation Taxes not allocated under Section 2.2(b)(i) or Section 2.2(b)(ii) shall be allocated fifty percent (50%) to External Distributing and fifty percent (50%) to External SpinCo.
SECTION 3. Preparation and Filing of Tax Returns.
3.1 Joint Returns .
(a) Preparation of Joint Returns . In general, External Distributing shall be responsible for preparing and timely filing all Joint Returns. Notwithstanding the previous sentence, with respect to tax years ending on or before December 31, 2014, (i) External Distributing shall be responsible for (A) preparing all IRS Forms 5471 required to be filed with respect to any foreign Subsidiaries of External Distributing and (B) timely filing all IRS Forms 5471 required to be filed with respect to any foreign Subsidiaries of External Distributing (other than foreign Subsidiaries of External SpinCo) and (ii) External SpinCo shall be responsible for timely filing all IRS Forms 5471 required to be filed with respect to any foreign Subsidiaries of External SpinCo.
(b) Provision of Information and Assistance.
(i) Information with Respect to Joint Returns . The Non-Preparer shall provide the Preparer with all information in its possession necessary for the Preparer to properly and timely file all Joint Returns for which such Preparer is responsible pursuant to Section 3.1(a). The Non-Preparer shall provide such information no later than thirty days prior to the extended due date of such Joint Return. If the Non-Preparer fails to provide such information within the time period provided in this Section 3.1(b)(i) and in the form reasonably requested by the Preparer to permit the timely filing of any Joint Return for which the Preparer is responsible pursuant to Section 3.1(a), then notwithstanding any other provision of this Agreement, the Non-Preparer shall be liable for, and shall indemnify and hold harmless each member of the Preparers Group from and against, any penalties, interest, or other payment obligation assessed against any member of either Group by reason of a failure to file such return by its due date (including applicable extensions). If the Non-Preparer provides information within the time period provided in this Section 3.1(b)(i) in the form reasonably requested by the Preparer to permit the timely filing of a Joint Return for which such Preparer is responsible pursuant to Section 3.1(a), or if the Preparer does not request any such information, then notwithstanding any other provision of this Agreement, the Preparer shall be liable for, and shall indemnify and hold harmless each member of the Non-Preparers Group from and against, any penalties, interest, or other payments assessed against any member of either Group by reason of a failure to file such return by its due date (including applicable extensions).
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(ii) Information with Respect to Estimated Payments and Extension Payments . The Non-Preparer shall provide the Preparer with all information relating to members of the Non-Preparers Group that the Preparer needs to determine the amount of Taxes due on any Payment Date with respect to a Joint Return for which such Preparer is responsible pursuant to Section 3.1(a). The Non-Preparer shall provide such information no later than thirty days before such Payment Date. In the event that the Non-Preparer fails to provide information within the time period provided in this Section 3.1(b)(ii) in the form reasonably requested by the Preparer to permit the timely payment of such Taxes, the indemnification principles of Section 3.1(b)(i) shall apply with respect to any penalties, interest, or other payments assessed against any member of either Group by reason of a failure to pay such Taxes by the Payment Date.
(iii) Assistance . At the request of the Preparer, the Non-Preparer shall take (at its own cost and expense), and shall cause the members of the Non-Preparers Group to take (at their own cost and expense), any reasonable action ( e.g. , filing a ruling request with the relevant Tax Authority or executing a power of attorney) that is reasonably necessary in order for the Preparer or any other member of the Preparers Group to prepare, file, amend or take any other action with respect to a Joint Return for which the Preparer is responsible pursuant to Section 3.1(a). In the event that the Non-Preparer fails to take, or cause to be taken, any such requested action, the indemnification principles of Section 3.1(b)(i) shall apply with respect to any penalties, interest, or other payments assessed against any member of either Group by reason of a failure to take any such requested action.
(iv) Information with Respect to Liability for Taxes . At the reasonable request of either Party, the Parties shall provide whatever documentation, schedules, workpapers, Tax Returns, etc. as may be reasonably required to substantiate a claim made by one Party against the other Party for Taxes pursuant to Section 2.1
3.2 Separate Returns .
(a) Tax Returns to be Prepared by External Distributing . External Distributing shall be responsible for preparing and timely filing all Separate Returns that include Tax Items of the External Distributing Business (other than Separate Returns described in Section 3.2(b)), determined without regard to Tax Items carried forward to such Tax Year.
(b) Tax Returns to be Prepared by External SpinCo . External SpinCo shall be responsible for preparing and timely filing (i) any Separate Returns that are required to be filed with respect to (A) Internal SpinCo (or any of its Subsidiaries prior to the External Distribution), (B) Safeskin Corporation Thailand Ltd., and (C) Safeskin Medical and Scientific Thailand Ltd. and (ii) all Separate Returns that include Tax Items of the External SpinCo Business, determined without regard to Tax Items carried forward to such Tax Year.
(c) Provision of Information . External Distributing shall provide to External SpinCo, and External SpinCo shall provide to External Distributing, any information about members of the External Distributing Group or the External SpinCo Group, respectively, which the party receiving such information reasonably needs to properly and timely file all Separate Returns pursuant to Sections 3.2(a) or (b). Such information shall be provided within the time
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prescribed by Section 3.1(b) for the provision of information for Joint Returns. In the event that External Distributing or External SpinCo fails to provide information within the time period provided in Section 3.1(b) and in the form reasonably requested by the other party to permit the timely filing of a Separate Return, the indemnification principles of Section 3.1(b)(i) shall apply with respect to any penalties, interest, or other payments assessed against any member of the External Distributing Group or the External SpinCo Group by reason of a failure to file any such return by its due date (including applicable extensions).
3.3 Special Rules Relating to the Preparation of Tax Returns .
(a) General Rule . Except as otherwise provided in this Agreement, the Preparer shall have the exclusive right, in its reasonable discretion, with respect to such Tax Return to determine (i) the manner in which such Tax Return shall be prepared and filed, including the elections, methods of accounting, positions, conventions and principles of taxation to be used and the manner in which any Tax Item shall be reported, (ii) whether any extensions may be requested, (iii) whether an amended Tax Return shall be filed, (iv) whether any claims for refund shall be made, (v) whether any refunds shall be paid by way of refund or credited against any liability for the related Tax and (vi) whether to retain outside firms to prepare or review such Tax Return. Notwithstanding the preceding sentence, if the External SpinCo Group pays any Tax to a Tax Authority other than the IRS that may be claimed as a foreign Tax credit for U.S. federal income tax purposes in a Tax Return for which External Distributing is the party responsible for filing (or causing to be filed), External Distributing shall amend such Tax Returns and file such claims for credit or refund that External SpinCo may reasonably request. In addition, the Preparer shall provide to the Non-Preparer for Non-Preparers review and comment pro forma Tax Returns reflecting the Non-Preparers share of Tax Items to be reflected on a Joint Return twenty (20) days prior to the due date of such Joint Return.
(b) External SpinCo Tax Returns . With respect to any Separate Return for which External SpinCo is responsible pursuant to Section 3.2(b):
(i) External SpinCo may not take, and shall cause the members of the External SpinCo Group not to take (including, without limitation, any such members formed after the date hereof in anticipation of the External Distribution), any positions that it knows, or reasonably should know, would be inconsistent with past practices or positions taken by any member of the External Distributing Group; and
(ii) External SpinCo and other members of the External SpinCo Group must (A) allocate Tax Items between such Separate Return for which External SpinCo is responsible pursuant to Section 3.2(b) and any related Joint Return for which External Distributing is responsible pursuant to Section 3.1(a) that is filed with respect to the same Tax Year (or with respect to a Tax Year that includes the Tax Year for such Separate Return) in a manner that is consistent with the reporting of such Tax Items on the related Joint Return for which External Distributing is responsible pursuant to Section 3.1(a) and (B) make any applicable elections required under applicable Tax Law (including, without limitation, under Treasury Regulations Section 1.1502-76(b)(2)) necessary to effect such allocation.
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(c) Election to File Consolidated, Combined or Unitary Tax Returns . External Distributing shall have the reasonable discretion of filing any Tax Return on a consolidated, combined or unitary basis, if such Tax Return would include at least one member of each Group and the filing of such Tax Return is elective under the relevant Tax Law.
(d) Carrybacks of Tax Benefits . External SpinCo shall not carry back and utilize as a Tax Benefit in a Tax Year that begins on or before the Distribution Date any Tax Item arising in a Tax Year that begins after the Distribution Date, provided, that, if the carryback of such Tax Item is material and is required by applicable Tax Law (for example, pursuant to Section 904(c) of the Code), and if External Distributing would be the Preparer of any Tax Return (or Tax Returns) amended to include the carried-back Tax Item, External Distributing shall amend such Tax Return (or Tax Returns) and file such claims for credit or refund that External SpinCo may reasonably request. External SpinCo shall reimburse External Distributing for reasonable outside advisor fees incurred in connection with amending such Tax Return (or Tax Returns). With respect to any foreign Taxes claimed on any such amended Tax Return, External Distributing shall only elect the benefits of the foreign Tax credit under Section 901 of the Code and shall not elect to deduct such foreign Taxes.
(e) Withholding and Reporting . With respect to stock of External Distributing delivered to any Person, External Distributing and External SpinCo shall cooperate (and shall cause their Affiliates to cooperate) so as to permit External Distributing to discharge any applicable Tax withholding and Tax reporting obligations, including the appointment of External SpinCo or one or more of its Affiliates as the withholding and reporting agent if External Distributing or one or more of its Affiliates is not otherwise required or permitted to withhold and report under applicable Tax Law.
(f) Standard of Performance . Each party shall act reasonably and in good faith in preparing the Tax Returns for which it is responsible pursuant to this Section 3.
(g) IRS Forms 8858 . In each case, the party responsible under applicable law for filing (or causing to be filed) IRS Form 8858 shall prepare and timely file such forms.
3.4 Reliance on Exchanged Information . If a member of the External SpinCo Group supplies information to a member of the External Distributing Group, or a member of the External Distributing Group supplies information to a member of the External SpinCo Group, and an officer of the requesting member intends to sign a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then a duly authorized officer of the member supplying such information shall certify, to the best of such officers knowledge, the accuracy and completeness of the information so supplied.
3.5 Allocation of Tax Items . External Distributing shall determine in accordance with applicable Tax Laws the allocation of any applicable Tax Items ( e.g. , net operating loss, net capital loss, investment Tax credit, foreign Tax credit, research and experimentation credit, charitable deduction, or credit related to alternative minimum Tax) as of the Effective Time among External Distributing, each other External Distributing Group member, External SpinCo, and each other External SpinCo Group member. External Distributing and External SpinCo
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hereby agree that in the absence of controlling legal authority each such Tax Item shall be allocated as provided in Section 2.2. External Distributing shall provide reasonably timely updates of the allocation of Tax Items, as it finalizes its Tax Returns and as adjustments, if any, are subsequently made to such Tax Returns.
SECTION 4. Tax Payments.
4.1 Payment of Taxes to Tax Authority . External Distributing shall be responsible for remitting to the proper Tax Authority all Tax shown (including Taxes for which External SpinCo is wholly or partially liable pursuant to Section 2) on any Tax Return for which it is responsible for the preparation and filing pursuant to Section 3.1(a) or Section 3.2(a), and External SpinCo shall be responsible for remitting to the proper Tax Authority all Tax shown (including Taxes for which External Distributing is wholly or partially liable pursuant to Section 2) on any Tax Return for which it is responsible for the preparation and filing pursuant to Section 3.2(b).
4.2 Indemnification Payments .
(a) Tax Payments Made by the External Distributing Group . If any member of the External Distributing Group remits a payment to a Tax Authority for Taxes for which External SpinCo is wholly or partially liable under this Agreement, External SpinCo shall remit the amount for which it is liable pursuant to Section 2 to External Distributing within thirty days after receiving notification requesting such amount.
(b) Tax Payments Made by the External SpinCo Group . If any member of the External SpinCo Group remits a payment to a Tax Authority for Taxes for which External Distributing is wholly or partially liable under this Agreement, External Distributing shall remit the amount for which it is liable pursuant to Section 2 to External SpinCo within thirty days after receiving notification requesting such amount.
(c) Credit for Prior Deemed Tax Payments . For purposes of Section 4.2(a), the portion of Taxes paid by External Distributing to a Tax Authority for which External SpinCo is liable will be determined by assuming that External SpinCo has previously paid in the aggregate (i) the amounts specified on Exhibit I hereto with respect to Tax Years for which Tax Returns have not been filed before the Distribution Date and (ii) the full amount of its allocable share of all Taxes shown on any other Tax Return filed before the Distribution Date with respect to any other Tax Year ending before the Distribution Date.
(d) Payments for Tax Benefits .
(i) If a member of the External Distributing Group utilizes a Tax Benefit for which External SpinCo is entitled to payment pursuant to clause (ii) of Section 2.1(b), External Distributing shall pay to External SpinCo, within fifteen business days following the utilization of such Tax Benefit, an amount equal to such Tax Benefit.
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(ii) If a member of the External SpinCo Group utilizes a Tax Benefit for which External Distributing is entitled to payment pursuant to clause (ii) of Section 2.1(a), External SpinCo shall pay to External Distributing, within fifteen business days following the utilization of such Tax Benefit, an amount equal to such Tax Benefit.
(iii) For purposes of this Agreement, a Tax Benefit will be considered utilized (i) in the case of a Tax Benefit that generates a Tax refund, at the time such Tax refund is received and (ii) in all other cases, at the time the Tax Return is filed with respect to such Tax Benefit or, if no Tax Return is filed, at the time the Tax would have been due in the absence of such Tax Benefit. The amount of such Tax Benefit will be the amount by which Taxes are actually reduced by such Tax Benefit (determined in accordance with the provisions of Section 2.1(c)).
4.3 Initial Determinations and Subsequent Adjustments . The initial determination of the amount of any payment that one party is required to make to another under this Agreement shall be made on the basis of the Tax Return as filed, or, if the Tax to which the payment relates is not reported in a Tax Return, on the basis of the amount of Tax initially paid to the Tax Authority. The amounts paid under this Agreement will be redetermined, and additional payments relating to such redetermination will be made (subject to the last sentence of this Section 4.3), as appropriate, if as a result of an audit by a Tax Authority, an amended Tax Return, or for any other reason (i) additional Taxes to which such redetermination relates are subsequently paid, (ii) a refund of such Taxes is received, (iii) the party utilizing a Tax Benefit changes, or (iv) the amount or character of any Tax Item is adjusted or redetermined. Each payment required by the immediately preceding sentence (i) as a result of a payment of additional Taxes will be due thirty days after the date on which the additional Taxes were paid or, if later, fifteen days after the date of a request from the other party for the payment, (ii) as a result of the receipt of a refund will be due thirty days after the refund was received, (iii) as a result of a change in utilization of a Tax Benefit will be due thirty days after the date on which the final action resulting in such change is taken by a Tax Authority or either party or any of their Subsidiaries, or (iv) as a result of an adjustment or redetermination of the amount or character of a Tax Item will be due thirty days after the date on which the final action resulting in such adjustment or redetermination is taken by a Tax Authority or either party or any of their Subsidiaries. If a payment is made as a result of an audit by a Tax Authority which does not conclude the matter, further adjusting payments will be made, as appropriate, to reflect the outcome of subsequent administrative or judicial proceedings. Notwithstanding anything else to the contrary in this Agreement, in any case in which amounts are redetermined pursuant to a particular event described in the second sentence of this Section 4.3 (a Redetermination Event ), the parties will be obligated to make additional payments otherwise owed under this Section 4.3 only if the amount of additional payment resulting from such Redetermination Event exceeds $50,000.
4.4 Interest on Late Payments . Payments pursuant to this Agreement that are not made by the date prescribed in this Agreement or, if no such date is prescribed, within fifteen days after demand for payment is made (the Due Date ) shall bear interest for the period from and including the date immediately following the Due Date through and including the date of payment at a per annum rate equal to the rate specified in Section 6.8 of the Distribution Agreement. Such interest will be payable at the same time as the payment to which it relates and shall be calculated on the basis of a year of 365 days and the actual number of days for which due.
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4.5 Payments by or to Other Group Members . When appropriate under the circumstances to reflect the underlying liability for a Tax or entitlement to a Tax refund or Tax Benefit, a payment which is required to be made by or to External Distributing or External SpinCo may be made by or to another member of the External Distributing Group or the External SpinCo Group, as appropriate, but nothing in this Section 4.5 shall relieve External Distributing or External SpinCo of its obligations under this Agreement.
4.6 Procedural Matters . Any written notice delivered to the indemnifying party in accordance with Section 9.5 shall show the amount due and owing together with a schedule calculating in reasonable detail such amount (and shall include any relevant Tax Return, statement, bill or invoice related to such Taxes, costs, expenses or other amounts due and owing). All payments required to be made by one party to the other party pursuant to this Section 4 shall be made by electronic, same day wire transfer. Payments shall be deemed made when received. If the indemnifying party fails to make a payment to the indemnified party within the time period set forth in this Section 4, the indemnifying party shall pay to the indemnified party, in addition to interest that accrues pursuant to Section 4.4, any costs or expenses, including any breakage costs, incurred by the indemnified party to secure such payment or to satisfy the indemnifying partys portion of the obligation giving rise to the indemnification payment.
4.7 Tax Consequences of Payments . For all Tax purposes and to the extent permitted by applicable Tax Law, the parties hereto shall treat any payment made pursuant to this Agreement as a capital contribution or a distribution, as the case may be, immediately prior to the External Distribution. Under no circumstances shall any payment (or portion thereof) made pursuant to this Agreement be grossed up to take into account any additional Taxes that may be owed by the recipient (or any of the members of its Group) as a result of such payment. In the event that a Tax Authority asserts that External Distributings or External SpinCos treatment of a payment pursuant to this Agreement should be other than as required pursuant to this Section 4.7, External Distributing or External SpinCo, as appropriate, shall use its reasonable best efforts to contest such assertion if the parties reasonably believe that the treatment described in this Section 4.7 is permitted by applicable Tax Law.
SECTION 5. Assistance and Cooperation.
5.1 Cooperation . In addition to the obligations enumerated in Sections 3.1(b) and 3.2(c), External Distributing and External SpinCo will cooperate (and cause their respective Subsidiaries to cooperate) with each other and with each others agents, including accounting firms and legal counsel, in connection with Tax matters, including provision of relevant documents and information in their possession and making available to each other, as reasonably requested and available, personnel (including officers, directors, employees and agents of the parties or their Affiliates) responsible for preparing, maintaining, and interpreting information and documents relevant to Taxes, and personnel reasonably required as witnesses or for purposes of providing information or documents in connection with any administrative or judicial proceedings relating to Taxes.
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5.2 Supplemental Tax Opinions . Each of the parties agrees that at the reasonable request of the other party (the Requesting Party ), such party shall cooperate and use reasonable efforts to (and shall cause its Subsidiaries to cooperate and use reasonable efforts to) assist the Requesting Party in obtaining, as expeditiously as reasonably practicable, a Supplemental Tax Opinion from Tax Counsel. Within thirty days after receiving an invoice from the other party therefor, the Requesting Party shall reimburse such party for all reasonable costs and expenses incurred by such party and the members of its Group in connection with assisting the Requesting Party in obtaining any Supplemental Tax Opinion.
SECTION 6. Tax Records.
6.1 Retention of Tax Records . Each of External Distributing and External SpinCo shall preserve, and shall cause their respective Subsidiaries to preserve, all Tax Records that are in their possession, and that could affect the liability of any member of the other Group for Taxes, for as long as the contents thereof may become material in the administration of any matter under applicable Tax Law, but in any event until the later of (i) the expiration of any applicable statutes of limitation, as extended, and (ii) seven years after the Distribution Date.
6.2 Access to Tax Records . External SpinCo shall make available, and cause its Subsidiaries to make available, to members of the External Distributing Group for inspection and copying (i) all Tax Records in their possession that relate to Tax Years that begin on or before the Distribution Date, and (ii) the portion of any Tax Record in their possession that relates to Tax Years that begin after the Distribution Date and which is reasonably necessary for the preparation of a Joint Return or Separate Return by a member of the External Distributing Group or with respect to an audit or litigation by a Tax Authority of such return. External Distributing shall make available, and cause its Subsidiaries to make available, to members of the External SpinCo Group for inspection and copying (i) that portion of any Tax Record in their possession (redacted to reflect only the information relating to the members of the External SpinCo Group) that relates to Tax Years that begin on or before the Distribution Date and which is reasonably necessary for the preparation of a Separate Return by a member of the External SpinCo Group or with respect to an audit or litigation by a Tax Authority of such return and (ii) workpapers or other documentation relating to the calculation of the Taxes and Tax Benefits that have been allocated to External SpinCo pursuant to this Agreement.
6.3 Confidentiality . Each party hereby agrees that it will hold, and shall use its reasonable best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence all records and information prepared and shared by and among the parties in carrying out the intent of this Agreement, except as may otherwise be necessary in connection with the filing of Tax Returns or any administrative or judicial proceedings relating to Taxes or unless disclosure is compelled by a governmental authority. Information and documents of one party (the Disclosing Party ) shall not be deemed to be confidential for purposes of this Section 6.3 to the extent such information or document (i) becomes publicly available by means other than unauthorized disclosure under this Agreement by the other party (the Receiving Party ) or (ii) is received from a third party without, to the knowledge of the Receiving Party after reasonable diligence, a duty of confidentiality owed to the Disclosing Party.
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SECTION 7. Tax Contests.
7.1 Notices . Each party shall provide prompt notice to the other party of any pending or threatened Tax audit, assessment or proceeding or other Tax Contest of which it becomes aware relating to (i) Taxes for which it is or may be indemnified by the other party hereunder, (ii) the qualification of the Internal Contribution and the Internal Distribution together as a reorganization described under Sections 368(a)(1)(D) and/or 355 of the Code or (iii) the qualification of the External Contributions and the External Distribution together as a reorganization described under Sections 368(a)(1)(D) and/or 355 of the Code. Such notice shall contain factual information (to the extent known) describing any asserted Tax liability in reasonable detail and shall be accompanied by copies of any notice and other documents received from any Tax Authority in respect of any such matters. If (i) an indemnified party has knowledge of an asserted Tax liability with respect to a matter for which it is to be indemnified hereunder, (ii) such party fails to give the indemnifying party prompt notice of such asserted Tax liability and (iii) the indemnifying party has the right, pursuant to Section 7.2(a), to control the Tax Contest relating to such Tax liability, then (x) if the indemnifying party is precluded from contesting the asserted Tax liability as a result of the failure to give prompt notice, the indemnifying party shall have no obligation to indemnify the indemnified party for any Taxes arising out of such asserted Tax liability and (y) if the indemnifying party is not precluded from contesting the asserted Tax liability, but such failure to give prompt notice results in a monetary detriment to the indemnifying party, then any amount which the indemnifying party is otherwise required to pay the indemnified party pursuant to this Agreement shall be reduced by the amount of such detriment.
7.2 Control of Tax Contests .
(a) General Rule . Except as provided in the following sentence or in Section 7.2(b), each party (or the appropriate member of their Group) shall have full responsibility, control and discretion in handling, settling or contesting any Tax Contest involving a Tax reported on a Tax Return for which it is responsible for preparing (or causing to be prepared) pursuant to Section 3 of this Agreement. Notwithstanding the previous sentence, External SpinCo may not take, and shall cause the members of the External SpinCo Group not to take (including, without limitation, any such members formed after the date hereof in anticipation of the External Distribution), any position in a Tax Contest that it knows, or reasonably should know, would have a material adverse effect on any member of the External Distributing Group.
(b) Non-Preparer Participation Rights . With respect to a Tax Contest of any Tax Return which involves a Tax Item for which the Non-Preparer may be liable (in the case of Tax Items that increase Tax liability), or which is allocated to the Non-Preparer (in the case of Tax Benefits), under this Agreement (a Non-Preparer Party Item ), (i) the Non-Preparer shall, at its own cost and expense, be entitled to participate in such Tax Contest, to the extent it relates to a Non-Preparer Party Item; (ii) the Preparer shall keep the Non-Preparer reasonably informed and consult in good faith with the Non-Preparer and its Tax advisors with respect to any issue relating to a Non-Preparer Party Item; (iii) the Preparer shall provide the Non-Preparer with copies of all correspondence, notices, and other written materials received from any Tax
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Authority and shall otherwise keep the Non-Preparer and its Tax advisors advised of significant developments in the Tax Contest and of significant communications involving representatives of the Tax Authority, to the extent related to a Non-Preparer Party Item; (iv) the Non-Preparer may request that the Preparer take a position in respect of a Non-Preparer Party Item, and the Preparer shall do so provided that (A) there exists substantial authority for such position (within the meaning of the accuracy-related penalty provisions of Section 6662 of the Code), (B) the adoption of such position could not reasonably be expected to increase the Taxes or reduce the Tax Benefits allocated to the Preparer pursuant to Section 2 of this Agreement (unless the Non-Preparer agrees to indemnify and hold harmless the Preparer from such increase in Taxes or reduction in Tax Benefits) and (C) the Non-Preparer agrees to reimburse the Preparer for any reasonable third-party costs that are attributable to the Non-Preparers request; (v) the Preparer shall provide the Non-Preparer with a copy of any written submission to be sent to a Taxing Authority to the extent related to a Non-Preparer Party Item prior to the submission thereof and shall give good faith consideration to any comments or suggested revisions that the Non-Preparer or its Tax advisors may have with respect thereto; and (vi) there will be no settlement, resolution, or closing or other agreement with respect to the Non-Preparer Party Item without the consent of the Non-Preparer, which consent shall not be unreasonably withheld.
7.3 Cooperation . The Non-Preparer shall provide a party controlling any Tax Contest pursuant to Section 7.2(a) with all information relating to the Non-Preparers Group which the party controlling the Tax Contest needs to handle, settle or contest the Tax Contest. At the request of a party controlling any Tax Contest pursuant to Section 7.2(a), the other party shall take any action ( e.g. , executing a power of attorney) that is reasonably necessary in order for the party controlling the Tax Contest to handle, settle or contest the Tax Contest. External SpinCo shall assist External Distributing, and External Distributing shall assist External SpinCo, in taking any remedial actions that are necessary or desirable to minimize the effects of any adjustment made by a Tax Authority. The indemnifying party shall reimburse the indemnified party for any reasonable out-of-pocket costs and expenses incurred in complying with this Section 7.3. The party controlling the Tax Contest shall have no obligation to indemnify the indemnified party for any additional Taxes resulting from the Tax Contest, if the indemnified party fails to cooperate in accordance with this Section 7.3.
SECTION 8. Restriction on Certain Actions of External Distributing and External SpinCo.
8.1 General Restrictions . Following the Effective Time, External Distributing and External SpinCo shall not, and shall cause the members of their respective Groups not to, take any action that, or fail to take any action the failure of which, (i) would be inconsistent with the Internal Contribution and the Internal Distribution together qualifying, or preclude the Internal Contribution and the Internal Distribution together from qualifying, as a reorganization described under Sections 368(a)(1)(D) and/or 355 of the Code, (ii) would be inconsistent with the External Contributions and the External Distribution together qualifying, or preclude the External Contributions and the External Distribution together from qualifying, as a reorganization described under Sections 368(a)(1)(D) and/or 355 of the Code, (iii) would result in the recognition of gain under either Section 355(d), Section 355(e) or Section 355(f) of the Code, or (iv) reasonably could be expected to increase the amount of Tax imposed on any other part of the Separation Transactions.
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8.2 Restricted Actions Relating to Tax Materials . Without limiting the other provisions of this Section 8, following the Effective Time, External Distributing and External SpinCo shall not, and shall cause the members of their Groups not to, take any action that, or fail to take any action the failure of which, would be reasonably likely to be inconsistent with, or cause any Person to be in breach of, any representation or covenant, or any material statement, made in the Tax Materials.
8.3 Certain External SpinCo Actions Following the Effective Time . Without limiting the other provisions of this Section 8, during the two-year period following the Distribution Date, External SpinCo shall not take (and shall cause the members of the External SpinCo Group to not take), nor negotiate or enter into a binding agreement to take (and shall cause the members of the External SpinCo Group to not negotiate or enter into a binding agreement to take), any of the following actions: (i) liquidate, or sell or transfer (1) 50% or more of the assets that constitute the External SpinCo Business as of the Effective Time to any Person other than External SpinCo or an entity which is and will be wholly-owned, directly or indirectly, by External SpinCo or (2) 50% or more of the assets that constitute the Internal SpinCo Business as of the Effective Time to any Person other than Internal SpinCo or an entity which is and will be wholly-owned, directly or indirectly, by Internal SpinCo; (ii) transfer, in a transaction described in subparagraphs (A), (C), (D), or (G) of Section 368(a)(1), (1) any assets of External SpinCo or any External SpinCo Affiliate to another entity (other than to External SpinCo or an entity which is and will be wholly-owned, directly or indirectly, by External SpinCo) or (2) any assets of Internal SpinCo or any Internal SpinCo Affiliate to another entity (other than to Internal SpinCo or an entity which is and will be wholly-owned, directly or indirectly, by Internal SpinCo); (iii) issue stock of External SpinCo or any External SpinCo Affiliate (or any instrument that is convertible or exchangeable into any such stock), other than an issuance to which Treasury Regulations Section 1.355-7(d)(8) or (9) applies, equal to or exceeding twenty percent (20%) (by vote or value) of the stock of External SpinCo or of such External SpinCo Affiliate that was issued and outstanding immediately following the Effective Time; (iv) facilitate or otherwise participate in any acquisition (or deemed acquisition) of stock of External SpinCo or Internal SpinCo that would result in (1) any shareholder owning (or being deemed to own after applying the rules of Sections 355(e)(4)(C) and 355(e)(3)(B) of the Code) forty percent (40%) or more (by vote or value) of the outstanding stock of External SpinCo or (2) any shareholder other than External SpinCo owning (or being deemed to own after applying the rules of Sections 355(e)(4)(C) and 355(e)(3)(B) of the Code) forty percent (40%) or more (by vote or value) of the outstanding stock of Internal SpinCo; (v) redeem or otherwise repurchase any stock of External SpinCo other than pursuant to open market stock repurchase programs meeting the requirements of Section 4.05(1)(b) of Rev. Proc. 96-30, 1996-1 C.B. 696; or (vi) terminate the active conduct by the External SpinCo Group of the External SpinCo Business or the Internal SpinCo Business; in each case, without first obtaining and delivering to External Distributing at External SpinCos own expense a Supplemental Tax Opinion with respect to such action, in such form and on such terms as External Distributing may reasonably direct.
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SECTION 9. General Provisions.
9.1 Limitation of Liability . IN NO EVENT SHALL ANY MEMBER OF THE EXTERNAL DISTRIBUTING GROUP OR THE EXTERNAL SPINCO GROUP OR THEIR RESPECTIVE DIRECTORS, OFFICERS AND EMPLOYEES BE LIABLE TO ANY OTHER MEMBER OF THE EXTERNAL DISTRIBUTING GROUP OR THE EXTERNAL SPINCO GROUP FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
9.2 Entire Agreement . This Agreement and the Distribution Agreement constitute the entire agreement between External Distributing and External SpinCo with respect to the subject matter hereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof.
9.3 Governing Law . This Agreement shall be governed and construed and enforced in accordance with the laws of the State of Texas as to all matters regardless of the laws that might otherwise govern under the principles of conflicts of laws applicable thereto.
9.4 Termination .
(a) This Agreement may be terminated at any time prior to the Distribution Date by and in the sole discretion of External Distributing without the approval of External SpinCo. In the event of termination pursuant to this Section 9.4, neither party shall have any liability of any kind to the other party.
(b) This Agreement shall otherwise terminate at such time as all obligations and liabilities of the parties hereto have been satisfied. The obligations and liabilities of the parties arising under this Agreement shall continue in full force and effect until all such obligations have been satisfied and such liabilities have been paid in full, whether by expiration of time, operation of law, or otherwise.
9.5 Notices . Unless expressly provided herein, all notices, claims, certificates, requests, demands and other communications hereunder shall be in writing and shall be deemed to be duly given (i) when personally delivered or (ii) if mailed registered or certified mail, postage prepaid, return receipt requested, on the date the return receipt is executed or the letter is refused by the addressee or its agent or (iii) if sent by overnight courier which delivers only upon the signed receipt of the addressee, on the date the receipt acknowledgment is executed or refused by the addressee or its agent or (iv) if sent by facsimile or other generally accepted means of electronic transmission, on the date confirmation of transmission is received (provided that a copy of any notice delivered pursuant to this clause (iv) shall also be sent pursuant to clause (ii) or (iii)), addressed to the attention of the addressees General Counsel at the address of its principal executive office or to such other address or facsimile number for a party as it shall have specified by like notice.
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9.6 Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.
9.7 Binding Effect; Assignment . This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement may not be assigned by any party hereto.
9.8 No Third Party Beneficiaries . This Agreement is solely for the benefit of External Distributing, External SpinCo and their Subsidiaries and is not intended to confer upon any other Person any rights or remedies hereunder.
9.9 Severability . If any term or other provision of this Agreement is determined by a nonappealable decision by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the court, administrative agency or arbitrator shall interpret this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. If any sentence in this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.
9.10 Failure or Indulgence Not Waiver; Remedies Cumulative . No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.
9.11 Amendments; Waivers . Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. Except as otherwise provided herein, the rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by applicable law. Any consent provided under this Agreement must be in writing, signed by the party against whom enforcement of such consent is sought.
9.12 Authority . Each of the parties hereto represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it has been duly authorized by
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all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement to be executed and delivered on or prior to the Distribution Date, and (d) this Agreement creates legal, valid and binding obligations, enforceable against it in accordance with its respective terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors rights generally and general equity principles.
9.13 Construction . This Agreement shall be construed as if jointly drafted by External SpinCo and External Distributing and no rule of construction or strict interpretation shall be applied against either party. The parties represent that this Agreement is entered into with full consideration of any and all rights which the parties may have. The parties have relied upon their own knowledge and judgment and upon the advice of the attorneys of their choosing. The parties have received independent legal advice, have conducted such investigations they and their counsel thought appropriate, and have consulted with such other independent advisors as they and their counsel deemed appropriate regarding this Agreement and their rights and asserted rights in connection therewith. The parties are not relying upon any representations or statements made by any other party, or such other partys employees, agents, representatives or attorneys, regarding this Agreement, except to the extent such representations are expressly incorporated in this Agreement. The parties are not relying upon a legal duty, if one exists, on the part of any other party (or such other partys employees, agents, representatives or attorneys) to disclose any information in connection with the execution of this Agreement or its preparation, it being expressly understood that no party shall ever assert any failure to disclose information on the part of the other party as a ground for challenging this Agreement.
9.14 Interpretation . The headings contained in this Agreement and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. The word including and words of similar import when used in this Agreement will mean including, without limitation, unless otherwise specified. The operation of various provisions of this Agreement is illustrated by examples in Appendix A hereto, and this Agreement shall be interpreted in accordance with such examples.
9.15 Predecessors or Successors . Any reference to External Distributing, External SpinCo, a Person, or a Subsidiary in this Agreement shall include any predecessors or successors (e.g., by merger or other reorganization, liquidation, conversion, or election under Treasury Regulations Section 301.7701-3) of External Distributing, External SpinCo, such Person, or such Subsidiary, respectively.
9.16 Effective Time . This Agreement shall become effective on the date recited above on which the parties entered into this Agreement.
9.17 Change in Law . Any reference to a provision of the Code or any other Tax Law shall include a reference to any applicable successor provision or law.
9.18 Disputes . The procedures for discussion, negotiation and arbitration set forth in Article XI of the Distribution Agreement shall apply to all disputes, controversies or claims (whether sounding in contract, tort or otherwise) that may rise out of or relate to, or arise under or in connection with this Agreement.
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9.19 Conflict . Notwithstanding anything else to the contrary in the Distribution Agreement, except to the extent expressly provided in this Agreement the parties shall have no obligation to each other (or to any of each others Affiliates) with respect to the transfer, delivery, sharing, disclosure, provision, preparation, or maintenance of (i) any books and records primarily relating to Taxes, (ii) any Information primarily relating to Taxes, or (iii) any Tax Records.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the respective officers as of the date set forth above.
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Exhibit 10.4
July 30, 2014
Rhonda Gibby
225 Winnipeg Lane
Alpharetta, GA 30022
Dear Rhonda:
This letter confirms the offer made to you to work for the Kimberly-Clark Health Care business (Health Care Company) following the date of the spin-off or sale (Distribution Date). Your initial assignment will be Senior Vice President and Chief Human Resources Officer. Your start date will be the Distribution Date. Since it is anticipated you will be an Elected Officer of the Health Care Company this letter will be subject to approval by the Management and Development and Compensation Committee of the Health Care Company Board of Directors.
Base Salary
Your annual base salary, while with Kimberly-Clark will remain unchanged and you will be eligible for salary adjustments as part of Kimberly-Clarks 2014 compensation planning process.
Effective on the Distribution Date, as a Health Care Company employee, your salary will increase to $310,000.
Annual Incentive
As a Kimberly-Clark employee, your MAAP target will remain at 45% but for 2014 your business unit financial measures will be based on the Health Care business unit results. Assuming Health Care completes its spin-off in 2014; you will receive a pro-rated 2014 MAAP payment.
Effective on the Distribution Date, as a Health Care Company employee, your short-term incentive target will increase to 50%. The terms and conditions of the short-term incentive will be governed by the Health Care Companys plan document.
Long-Term Incentives
Effective with the initial grant following on the Distribution Date, as a Health Care Company employee, your 2014 target long-term incentive grant will be $350,000, which is your initial target level for long-term incentive grants in your new role subject to the Health Care Companys discretion to adjust the actual grant by the grant date value of your grant under Kimberly-Clarks 2014 long-term incentive grant process which is not forfeited or otherwise replaced. The terms and conditions of the long-term incentive grant will be governed by Health Care Companys plan document.
Total Compensation
Given the above, effective on the Distribution Date, your total compensation target amount with the Health Care Company is $815,000. This amount is comprised of your base salary ($310,000), annual incentive target amount ($155,000) and long-term incentive target amount ($350,000). Again, your total compensation may be higher or lower than the target amount based on company, business unit, and your individual performance.
Retention Award
The letter amends your Retention Incentive Agreement to provide that your $100,000 Retention Incentive Bonus pursuant to the terms of your Retention Incentive Agreement will be payable from the Health Care Company.
Severance
Should you be involuntarily terminated from Kimberly-Clark due to the Health Care Company spin-off or sale not occurring, you will be eligible for severance per the terms of the Kimberly-Clark Severance Pay Plan.
Your employment is at-will, and can be ended by you or Kimberly-Clark, or the Health Care Company after the Distribution Date, for any reason at any time.
This letter supersedes all prior offers, whether oral or written, or any prior discussion of the terms and conditions of your employment as a Health Care employee. This letter is not, however, intended to supersede, replace, or alter the terms of any confidentiality, nonsolicitation, noncompetition or other, similar agreement that you may have executed during your employment with Kimberly-Clark.
Rhonda, we are excited about the opportunity to work with you to complete this transaction, and look forward to your acceptance of this offer. We would appreciate your response by August 5, 2014. If you have any questions or need additional information, please let Wes or me know.
Sincerely,
Lizanne C. Gottung
Senior Vice President and
Chief Human Resources Officer
cc: | R. Abernathy |
W. Wada |
There are two copies of the offer letter enclosed. Please indicate your acceptance of our offer by signing your name on the line below and returning the signed letter to Liz Gottung in the envelope provided. The other copy is for your records.
/s/ Rhonda D. Gibby
Signature / Date
Exhibit 10.5
July 30, 2014
Christopher M. Lowery
1325 Jade Lane
Longmont, CO 80504
Dear Chris:
This letter confirms the offer made to you to work for the Kimberly-Clark Health Care Company (the Health Care Company) following the date of the planned spin-off from Kimberly-Clark (Distribution Date). Your initial assignment will be Chief Operating Officer. Your start date will be the Distribution Date, which is expected to occur in the second half of 2014.
Since it is anticipated you will be an Elected Officer of the Health Care Company, your compensation after the Distribution Date will be subject to approval by the Compensation Committee (HC Compensation Committee) of the Health Care Company Board of Directors.
Base Salary
Initially your annual base salary while with Kimberly-Clark will remain unchanged and you will be eligible for salary adjustments as part of Kimberly-Clarks 2014 compensation planning process.
Effective on the Distribution Date, as a Health Care Company employee, your salary will increase to $475,000.
Annual Incentive
As a Kimberly-Clark employee, your MAAP target will remain at 50% but for 2014 your business unit financial measures will be based on the Health Care business unit results. Assuming the Health Care spin-off is completed in 2014, you will receive a pro-rated 2014 MAAP payment.
Effective on the Distribution Date, as a Health Care Company employee, your short-term incentive target will increase to 85%. The terms and conditions of the short-term incentive will be governed by the Health Care Companys plan document. Assuming the Health Care spin-off is completed in 2014; the Health Care Companys intention is to provide a pro-rated 2014 short-term incentive plan payment for the portion of the year after the Distribution Date.
Long-Term Incentives
Effective with the initial grant following on the Distribution Date, as a Health Care employee, your 2014 long-term incentive grant will be $1,000,000, which is your initial target level for long-term incentive grants in your new role subject to the Health Care Companys discretion to adjust the actual grant by the grant date value of your grant under Kimberly-Clarks 2014 long-term incentive grant process which is not forfeited or otherwise replaced. You will receive another target long-term incentive grant in 2015 as part of the Health Care Companys annual incentive compensation grant cycle, subject to the Health Care Companys discretion to adjust the actual grant for performance and market conditions. The terms and conditions of the long-term incentive grant will be governed by the Health Care Companys plan document.
Total Compensation
Given the above, effective on the Distribution Date your total annual compensation target amount with the Health Care Company is approximately $1,878,750. This amount is comprised of your base salary ($475,000), annual incentive target amount ($403,750) and long-term incentive target amount ($1,000,000). Your total compensation may be higher or lower than the target amount based on company, business unit, and your individual performance.
Retention Award
You will receive a retention payment from the Health Care Company in the gross amount of $150,000, less applicable withholdings and deductions, if you are an active Health Care employee on the Distribution Date. This retention payment will be paid as a lump sum within 60 days following your involuntary separation from service with Kimberly-Clark or following the date of the spin-off or sale of the Health Care Company.
You will receive an additional $100,000 less applicable withholdings and deductions, if you have purchased a home in the Atlanta area and have made Atlanta (or one of its suburbs} your permanent residence by December 31, 2014. This retention payment will be paid as a lump sum within 60 days following your providing documentation as to your home purchase and residency status but no later than December 31, 2014.
Your employment is at-will, and can be ended by you or Kimberly-Clark, or the Health Care Company after the Distribution Date, for any reason at any time.
This letter supersedes all prior offers, whether oral or written, or any prior discussion of the terms and conditions of your employment as a Health Care employee. This letter is not, however, intended to supersede, replace, or alter the terms of any confidentiality, nonsolicitation, noncompetition or other, similar agreement that you may have executed during your employment with Kimberly-Clark.
This letter is intended to be compliant with Section 409A of the Code and any noncompliant provisions of this letter will either be void or deemed amended to comply with Section 409A of the Code and the guidance promulgated thereunder.
Chris, we are excited about the opportunity to work with you to complete this transaction, and look forward to your acceptance of this offer. We would appreciate your response by August 5, 2014. If you have any questions or need additional information, please let Rhonda Gibby or me know.
Sincerely,
Lizanne C. Gottung
Senior Vice President and
Chief Human Resources Officer
cc: | R. Gibby |
W. Wada |
There are two copies of the offer letter enclosed. Please indicate your acceptance of our offer by signing your name on the line below and returning the signed letter to Rhonda Gibby in the envelope provided. The other copy is for your records.
/s/ Christopher M. Lowery
Signature / Date
Exhibit 10.6
July 30, 2014
Steven Voskuil
2908 Corkwood Circle
Flower Mound, TX 75022
Dear Steve:
This letter confirms the offer made to you to work for the Kimberly-Clark Health Care Company (Health Care Company) following the date of the planned spin-off from Kimberly-Clark (Distribution Date). Your initial assignment will be Senior Vice President and Chief Financial Officer. Your start date will be the Distribution Date, which is expected to occur in the second half of 2014.
Since it is anticipated you will be an Elected Officer of the Health Care Company, your compensation after the Distribution Date will be subject to approval by the Compensation Committee (HC Compensation Committee) of the Health Care Company Board of Directors.
Base Salary
Initially your annual base salary while with Kimberly-Clark will remain unchanged and you will be eligible for salary adjustments as part of Kimberly-Clarks 2014 compensation planning process.
Effective on the Distribution Date, as a Health Care Company employee, your salary will increase to $430,000.
Annual Incentive
As a Kimberly-Clark employee, your MAAP target will remain at 55% but for 2014 your business unit financial measures will be based on the Health Care business unit results. Assuming the Health Care spin-off is completed in 2014, you will receive a pro-rated 2014 MAAP payment.
Effective on the Distribution Date, as a Health Care Company employee, your short-term incentive target will increase to 70%. The terms and conditions of the short-term incentive will be governed by the Health Care Companys plan document. Assuming the Health Care spin-off is completed in 2014; the Health Care Companys intention is to provide a pro-rated 2014 short-term incentive plan payment for the portion of the year after the Distribution Date.
Long-Term Incentives
Effective with the initial grant following the Distribution Date, as a Health Care Company employee, your 2014 target long-term incentive grant will be $775,000, which is your initial target level for long-term incentive grants in your new role subject to the Health Care Companys discretion to adjust the actual grant by the grant date value of your grant under Kimberly-Clarks 2014 long-term incentive grant process which is not forfeited or otherwise replaced. Subject to approval by the HC Compensation Committee, you will receive another target long-term incentive grant in 2015 as part of the Health Care Companys annual incentive compensation grant cycle. The terms and conditions of the long-term incentive grant will be governed by the Health Care Companys plan document.
Total Compensation
Given the above, effective on the Distribution Date, your total annual compensation target amount with the Health Care Company is approximately $1,500,000. This amount is comprised of your base salary ($430,000), annual incentive target amount ($300,000) and long-term incentive target amount ($775,000). Your total compensation may be higher or lower than the target amount based on company, business unit, and your individual performance.
Forfeited PRSU Value Upon Spin Completion
You will have forfeited value due to the pro-rated payout of your K-C PRSU grants which was caused by your new role as Chief Financial Officer of the Health Care Company. Effective on the Distribution Date subject to approval by the HC Compensation Committee, the Health Care Company will provide you with a long-term incentive grant that is intended to replace the forfeited value of your pro-rated K-C PRSU grants. The terms and conditions of this long-term incentive grant will be governed by the Health Care Companys plan document.
Retention Award
K-C will pay, or will cause the Health Care Company to pay, you a retention payment in the gross amount of $150,000, less applicable withholdings and deductions. This retention payment will be paid as a lump sum within 60 days following (a) your involuntary separation from service with Kimberly-Clark, (b) the Distribution Date, or (c) the date K-C determines not to pursue the spin-off.
Severance
Should you be involuntarily terminated from Kimberly-Clark before the Health Care Company spin-off, you will be eligible for severance per the terms of the Kimberly-Clark Severance Pay Plan. Under that plan, you are eligible to receive (among other benefits) a severance of one times your annual salary plus the average of your last three MAAP awards.
Relocation
Initially, your assignment location will be Dallas, TX. At this time the extent of your duties and responsibilities as the Senior Vice President and Chief Financial Officer are still somewhat uncertain. The Health Care Company will expect you to provide office space or other work facilities for you to perform your responsibilities from your residence in Dallas, Texas. Therefore, as a condition of employment, it is expected that you will perform your responsibilities, including directing personnel and conducting administrative and managerial activities, as part of the [e.g., Finance] Organization from your residence in Dallas, Texas. You will also be expected to travel to Roswell, Georgia, California, Belgium, Japan, and other domestic and international locations in the execution of your responsibilities.
Your employment is at-will, and can be ended by you or Kimberly-Clark, or the Health Care Company after the Distribution Date, for any reason at any time.
This letter supersedes all prior offers, whether oral or written, or any prior discussion of the terms and conditions of your employment as a Health Care employee. This letter is not, however, intended to supersede, replace, or alter the terms of any confidentiality, nonsolicitation, noncompetition or other, similar agreement that you may have executed during your employment with Kimberly-Clark.
This letter is intended to be compliant with Section 409A of the Code and any noncompliant provisions of this letter will either be void or deemed amended to comply with Section 409A of the Code and the guidance promulgated thereunder.
Steve, we are excited about the opportunity to work with you to complete this transaction, and look forward to your acceptance of this offer. We would appreciate your response by August 5, 2014. If you have any questions or need additional information, please let Rhonda or me know.
Sincerely,
Lizanne C. Gottung
Senior Vice President and
Chief Human Resources Officer
cc: | R. Gibby |
W. Wada |
There are two copies of the offer letter enclosed. Please indicate your acceptance of our offer by signing your name on the line below and returning the signed letter to Rhonda Gibby in the envelope provided. The other copy is for your records.
/s/ Steven Voskuil
Signature / Date
Exhibit 10.7
July 30, 2014
John Wesley
4933 Gulfstream Drive
Dallas, TX 75244
Dear John:
This letter confirms the offer made to you to work for the Kimberly-Clark Health Care Company (the Health Care Company) following the date of the planned spin-off from Kimberly-Clark (Distribution Date). Your initial assignment will be Senior Vice PresidentGeneral Counsel and Chief Ethics and Compliance Officer. Your start date will be the Distribution Date, which is expected to occur in the second half of 2014. Prior to the Distribution Date, you will remain Corporate Secretary until a replacement is named by the Management Development and Compensation Committee of Kimberly Clark, and then your title will be Vice President and Deputy General Counsel.
As an Elected Officer of Kimberly-Clark this letter is subject to approval by the Management Development and Compensation Committee of the Kimberly-Clark Corporation Board of Directors. Also, since it is anticipated you will be an Elected Officer of the Health Care Company, your compensation after the Distribution Date will be subject to approval by the Compensation Committee of the Health Care Company Board of Directors.
Base Salary
Initially your annual base salary while with Kimberly-Clark will remain unchanged and you will be eligible for salary adjustments as part of Kimberly-Clarks 2014 compensation planning process.
Effective on the Distribution Date, as a Health Care Company employee, your salary will increase to $375,000.
Annual Incentive
As a Kimberly-Clark employee, your MAAP target will remain at 50% but for 2014 your business unit financial measures will be based on the Health Care business unit results. Assuming the Health Care spin-off is completed in 2014, you will receive a pro-rated 2014 MAAP payment.
Effective on the Distribution Date, as a Health Care Company employee, your short-term incentive target will increase to 60%. The terms and conditions of the short-term incentive will be governed by the Health Care Companys plan document. Assuming the Health Care spin-off is completed in 2014; the Health Care Companys intention is to provide a pro-rated 2014 short- term incentive plan payment for the portion of the year after the Distribution Date.
Long-Term Incentives
Effective with the initial grant following the Distribution Date, as a Health Care employee, your 2014 long-term incentive grant will be $400,000, which is your initial target level for long-term incentive grants in your new role subject to the Health Care Companys discretion to adjust the actual grant by the grant date value of your grant under Kimberly-Clarks 2014 long-term incentive grant process which is not forfeited or otherwise replaced. You will receive another target long-term incentive grant in 2015 as part of the Health Care Companys annual incentive compensation grant cycle, subject to the Health Care Companys discretion to adjust the actual grant for performance and market conditions. The terms and conditions of the long-term incentive grant will be governed by the Health Care Companys plan document.
Total Compensation
Given the above, effective on the Distribution Date your total annual compensation target amount with the Health Care Company is approximately $1,000,000. This amount is comprised of your base salary ($375,000), annual incentive target amount ($225,000) and long-term incentive target amount ($400,000). Your total compensation may be higher or lower than the target amount based on company, business unit, and your individual performance.
Relocation Benefits
Your office will continue to be located in Dallas, Texas prior to the Distribution Date. After the Distribution Date, the Health Care Company will relocate you to Roswell, Georgia and provide you with a relocation benefit equivalent to that provided under the terms of Kimberly-Clarks Relocation Program for U.S. Salaried Exempt and Executive-Level New Hire Employees.
Retention Award
K-C will pay, or will cause the Health Care Company to pay, you a retention payment in the gross amount of $150,000, less applicable withholdings and deductions. This retention payment will be paid as a lump sum within 60 days following (a) your involuntary separation from service with Kimberly-Clark, (b) the Distribution Date, or (c) the date K-C determines not to pursue the spin-off.
Severance
Should you be involuntarily terminated from Kimberly-Clark before the Health Care Company spin-off, you will be eligible for severance per the terms of the Kimberly-Clark Severance Pay Plan. Under that plan, you are eligible to receive (among other benefits) a severance of one times your annual salary plus the average of your last three MMP awards.
Your employment is at-will, and can be ended by you or Kimberly-Clark, or the Health Care Company after the Distribution Date, for any reason at any time.
This letter supersedes all prior offers, whether oral or written, or any prior discussion of the terms and conditions of your employment as a Health Care employee. This letter is not, however, intended to supersede, replace, or alter the terms of any confidentiality, nonsolicitation, noncompetition or other, similar agreement that you may have executed during your employment with Kimberly-Clark.
This letter is intended to be compliant with Section 409A of the Code and any noncompliant provisions of this letter will either be void or deemed amended to comply with Section 409A of the Code and the guidance promulgated thereunder.
John, we are excited about the opportunity to work with you to complete this transaction, and look forward to your acceptance of this offer. We would appreciate your response by August 5, 2014. If you have any questions or need additional information, please let Rhonda or me know.
Sincerely,
Lizanne C. Gottung
Senior Vice President and
Chief Human Resources Officer
cc: | R. Gibby |
W. Wada |
There are two copies of the offer letter enclosed. Please indicate your acceptance of our offer by signing your name on the line below and returning the signed letter to Rhonda Gibby in the envelope provided. The other copy is for your records.
/s/ John Wesley
Signature / Date
Exhibit 99.1
, 2014
Dear Fellow Kimberly-Clark Stockholder:
I am pleased to inform you that on , 2014 our Board of Directors approved the spin-off of Halyard Health, Inc., a wholly-owned subsidiary that owns Kimberly-Clarks health care business.
The spin-off of Halyard will allow us to further sharpen our focus on our consumer and professional brands, while allowing Halyard to optimize its performance and flexibility in a rapidly changing industry.
The spin-off of Halyard is scheduled to occur on , 2014. If you hold Kimberly-Clark common stock at the close of business on the record date for the spin-off, which is , 2014, you will receive a distribution of one share of Halyard common stock for every shares of Kimberly-Clark common stock that you hold on that date.
You dont need to take any action to receive shares of Halyard common stock to which you are entitled as a Kimberly-Clark stockholder. In addition, you dont need to pay any consideration or surrender or exchange your Kimberly-Clark common stock.
Following the spin-off, Kimberly-Clark common stock will continue to trade on the New York Stock Exchange under the symbol KMB, and Halyards common stock is expected to trade on the New York Stock Exchange under the symbol HYH.
I encourage you to read the attached information statement carefully, which provides a description of the spin-off and includes important information about Halyard, including its historical combined financial data.
We look forward to your continued support as a stockholder in both Kimberly-Clark and Halyard.
Sincerely,
Thomas J. Falk
Chairman of the Board and Chief Executive Officer
, 2014
Dear Future Halyard Health, Inc. Stockholder:
It is my pleasure to welcome you as a stockholder of our new company, Halyard Health, Inc.
Halyard will be a global healthcare company that seeks to advance health and healthcare by preventing infection, eliminating pain and speeding recovery. We will focus on delivering clinically-superior solutions with remarkable service to improve the well-being of the people we touch every day.
Our employee teams are excited about the opportunity and are committed to realizing the potential that exists for us operating as a more focused company, independent of Kimberly-Clark.
I encourage you to learn more about Halyard by reading the attached information statement. Halyard intends to file an application to list its common stock on the New York Stock Exchange under the symbol HYH.
Thank you for your support of our new company. We look forward to having you as a fellow stockholder.
Sincerely,
Robert E. Abernathy
Chairman of the Board and Chief Executive Officer
Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.
PRELIMINARY AND SUBJECT TO COMPLETION, DATED AUGUST 27, 2014
INFORMATION STATEMENT
Halyard Health, Inc.
Common Stock
(par value $0.01 per share)
We are providing this information statement to you as a stockholder of Kimberly-Clark Corporation in connection with Kimberly-Clarks distribution to its stockholders of all of the outstanding shares of common stock of Halyard Health, Inc. (Halyard), a wholly-owned subsidiary of Kimberly-Clark. Halyard was formed to hold directly or indirectly the assets and liabilities associated with Kimberly-Clarks health care business. All of the issued and outstanding shares of Halyard will be distributed to stockholders in a manner that is intended to generally be tax-free for U.S. federal income tax purposes (other than with respect to cash received in lieu of fractional shares).
We expect that the distribution will be made on , 2014, which we refer to as the distribution date, to the holders of record of Kimberly-Clark common stock on , 2014, which we refer to as the record date. If you are a holder of record of Kimberly-Clark common stock at the close of business on the record date, you will receive one share of Halyard common stock for every shares of Kimberly-Clark common stock you hold on that date. Kimberly-Clark will distribute the shares of Halyard in book-entry form, which means that Halyard will not issue physical stock certificates. In lieu of fractional shares, stockholders of Kimberly-Clark will receive cash, which generally will be taxable.
You are not required to vote on or take any other action in connection with the spin-off. We are not asking you for a proxy, and you are requested not to send us a proxy. You will not be required to pay any consideration for the shares of Halyard common stock you receive in the spin-off, surrender or exchange your shares of Kimberly-Clark common stock or take any action in connection with the spin-off.
Kimberly-Clark currently owns all of the outstanding shares of Halyard common stock. Accordingly, no trading market for Halyard common stock currently exists. We expect, however, that a limited trading market for Halyard common stock, commonly known as a when-issued trading market, will develop on or shortly before the record date for the distribution, and we expect regular-way trading of Halyard common stock will begin on the first trading day after the distribution date. We intend to file an application to list Halyard common stock on the New York Stock Exchange under the symbol HYH.
In reviewing this information statement, you should carefully consider the matters described in the section entitled Risk Factors beginning on page 12.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.
This information statement is not an offer to sell, or a solicitation of an offer to buy, any securities.
The date of this information statement is , 2014.
This information statement was first mailed to Kimberly-Clark stockholders on or about , 2014.
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Presentation of Information
Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement about Halyard assumes the completion of all of the transactions referred to in this information statement in connection with the transfer of Kimberly-Clarks health care business to Halyard and the distribution of Halyard common stock to Kimberly-Clark common stockholders. Our historical financial results as part of Kimberly-Clark contained herein may not reflect our financial results in the future as a separate publicly-traded company or what our financial results would have been had we been operated as a stand-alone company during the periods presented.
Trademarks, Trade Names and Service Marks
Halyard owns or has the rights to use the trademarks, trade names and service marks that it uses in connection with the operation of its business. Some of the more important marks that Halyard owns or has the rights to use in the United States or in other jurisdictions that appear in this information statement include: KIMGUARD ONE-STEP sterilization wrap, MICROCOOL surgical gowns, FLUIDSHIELD face masks and ON-Q PAINBUSTER pain pumps. Halyards rights to some of these trademarks may be limited to select markets. Each trademark, trade name or service mark of any other company appearing in this information statement is, to Halyards knowledge, owned by such other company.
This summary highlights selected information from this information statement and may not contain all of the information concerning our company, our separation from Kimberly-Clark, Kimberly-Clarks distribution of Halyard common stock to Kimberly-Clarks stockholders or other information that may be important to you. To better understand the distribution and our business and financial position, you should carefully review this entire information statement, particularly the discussion of Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, and our historical combined financial statements and unaudited pro forma condensed combined financial statements and the notes to those statements appearing elsewhere in this information statement.
References in this information statement to Halyard, we, our and us mean Halyard Health, Inc., a Delaware corporation, and its subsidiaries. References in this information statement to our historical assets, liabilities, products, operations or activities of our business are to the historical assets, liabilities, products, operations or activities of the transferred health care business as they were historically owned, incurred or conducted as part of Kimberly-Clark prior to the distribution.
References in this information statement to Kimberly-Clark mean Kimberly-Clark Corporation, a Delaware corporation, and its subsidiaries, other than Halyard, unless the context otherwise requires. References in this information statement to the distribution mean Kimberly-Clarks distribution of Halyard common stock to Kimberly-Clark stockholders following the completion of our separation from Kimberly-Clark. Unless otherwise indicated or the context otherwise requires, the information included in this information statement assumes the completion of the distribution.
Halyard
Overview
We are a global company which seeks to advance health and healthcare by preventing infection, eliminating pain and speeding recovery. Our products and solutions are designed to address some of todays most important healthcare needs, namely, preventing infection and reducing the use of narcotics while helping patients move from surgery to recovery. We have two business segments: Surgical and Infection Prevention (S&IP) and Medical Devices.
We have operated our S&IP business for over 30 years, providing products that address the prevention of healthcare-acquired infections (HAIs) and provide protection for both healthcare workers and patients. We have recognized brands and leading market positions in the United States across our entire S&IP product portfolio, which includes sterilization wrap, surgical drapes and gowns, facial protection, protective apparel and medical exam gloves. Our S&IP product portfolio is supported by a global sales force, a customer support team with significant industry experience and robust product training, and customer education programs.
Our Medical Devices business is comprised of a diverse set of medical device solutions focused on improving patient outcomes, patient safety and reducing the cost of care. Our innovative portfolio includes post-operative pain management solutions, minimally invasive interventional (or chronic) pain therapies, closed airway suction systems and enteral feeding tubes. Our recognized brands and highly specialized sales team in each of these medical device product areas strategically position us for growth.
Strengths
Our competitive advantages include:
| Our established portfolio of S&IP products with leading market positions and significant brand recognition. |
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| Our growing and innovative Medical Devices business with solutions that reduce the cost and improve the quality of care. |
| Our global commercial infrastructure. |
| Our strong cash flow. |
| Our strong management team with significant healthcare experience. |
See the discussion under Business Strengths below for further information.
Strategies
To achieve our mission, we have three strategies:
| Maintain market leadership and improve margins in our S&IP business through operational excellence and innovation. |
| Grow our Medical Devices business by accelerating utilization of our unique solutions through clinical education and awareness, and innovation. |
| Identify, develop and pursue new growth opportunities. |
See the discussion under Business Strategies below for further information.
Risks Related to Our Business and the Distribution and Our Separation from Kimberly-Clark
An investment in Halyard common stock is subject to a number of risks, including risks relating to the separation and distribution. The following list of risk factors is not exhaustive. Please read the information in the section captioned Risk Factors for a more thorough description of these and other risks.
Risks Related to Our Business and Industry
| We face strong competition. Our failure to compete effectively could have a material adverse effect on our business. |
| We may not be successful in developing, acquiring or marketing competitive products and technologies. |
| We are exposed to price fluctuations of key commodities, which may negatively impact our results of operations. |
| An inability to obtain key components, raw materials or manufactured products from third parties may have a material adverse effect on our business. |
| An interruption in our ability to manufacture products may have a material adverse effect on our business. |
| We are subject to extensive government regulation, which may require us to incur significant expenses to ensure compliance. If we fail to comply with those regulations, this noncompliance could have a material adverse effect on our business, results of operations, financial condition and cash flows. |
| We are subject to healthcare fraud and abuse laws and regulations that could result in significant liability, require us to change our business practices or restrict our operations in the future. |
| We must obtain clearance or approval from the appropriate regulatory authorities prior to introducing a new product or a modification to an existing product. The regulatory clearance process may result in substantial costs, delays and limitations on the types and uses of products we can bring to market, any of which could have a material adverse effect on our business. |
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| We may incur product liability losses, litigation liability, product recalls, safety alerts or regulatory action associated with our products which can be costly and disruptive to our business. |
| Current economic conditions have affected and may continue to adversely affect our business, results of operations, financial condition and cash flows. |
| Cost-containment efforts of our customers, purchasing groups, third-party payors and governmental organizations could adversely affect our sales and profitability. |
| We face significant uncertainty in the healthcare industry due to government healthcare reform in the United States and elsewhere. |
| Our customers depend on third-party coverage and reimbursements. The failure of healthcare programs to provide coverage and reimbursement, or reductions in levels of reimbursement, could have a material adverse effect on our business. |
| We are subject to political, economic and regulatory risks associated with doing business outside of the United States. |
| Currency exchange rate fluctuations could have a material adverse effect on our business and results of operations. |
| We cannot guarantee that any of our strategic acquisitions, investments or alliances will be successful. |
| We may need additional financing in the future to meet our capital needs or to make acquisitions, and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders. |
| We may be unable to protect our intellectual property rights or may infringe the intellectual property rights of others. |
| We may be unable to attract and retain key employees necessary to be competitive. |
| Breaches of our information technology systems could have a material adverse effect on our business. |
Risks Related to the Distribution and Our Separation from Kimberly-Clark
| We have no operating history as a separate company, and our historical and pro forma financial data are not necessarily representative of the results we would have achieved as a stand-alone publicly-traded company and therefore may not be reliable as an indicator of our performance. |
| Following our separation from Kimberly-Clark, we will have a significant amount of debt that could adversely affect our business. |
| We have not previously operated as an independent company, and our management team has been assembled for only a short time. |
| We could incur significant tax liabilities if the distribution becomes a taxable event. |
| We may not be able to engage in certain corporate transactions for up to two years after the distribution. |
| As we build our information technology infrastructure and transition our data to our own systems, we could incur substantial additional costs and experience temporary business interruptions. |
| We may not realize potential benefits from the separation of our business from Kimberly-Clarks other businesses. |
| The transition services to be provided to us by Kimberly-Clark for a limited time may be difficult for us to perform or replace without operational problems or additional cost. |
| Following our separation from Kimberly-Clark, we may experience increased costs resulting from decreased purchasing power, which could decrease our overall profitability and cash flow. |
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The Separation and Distribution
On November 14, 2013, Kimberly-Clark announced that its Board of Directors authorized management to evaluate a potential tax-free spin-off of our business. On , 2014, Kimberly-Clarks Board of Directors approved the distribution of all of the issued and outstanding shares of Halyard common stock on the basis of one share of Halyard common stock for every shares of Kimberly-Clark common stock held as of the close of business on , 2014, the record date for the distribution.
Formation of Halyard
Halyard Health, Inc. was incorporated in Delaware on February 25, 2014 for the purpose of holding Kimberly-Clarks health care business following the distribution. Prior to the distribution, we and Kimberly-Clark expect to engage in a series of transactions that are designed to transfer ownership of Kimberly-Clarks health care business to us.
Prior to the distribution, we expect to borrow approximately $ million through the issuance of senior unsecured notes and/or a secured credit facility. We also anticipate entering into a revolving credit facility allowing borrowings of up to $ million. We expect that the proceeds from the senior unsecured notes and/or the secured credit facility will be used to fund a cash distribution of approximately $ million to Kimberly-Clark immediately prior to the distribution. The amount of the cash distribution will be determined by Kimberly-Clarks board of directors. Kimberly-Clark expects to use the proceeds of this cash distribution to make open-market repurchases of its shares. Funds under the revolving credit facility are expected to be available for our working capital and other requirements after the distribution.
Prior to the transfer by Kimberly-Clark to us of its health care business, we will have no operations other than those related to our formation and in preparation for the separation and distribution. Following the distribution, we will be a separate public company, and Kimberly-Clark will have no continuing stock ownership in us.
Our Post-Distribution Relationship with Kimberly-Clark
Prior to the distribution, we will enter into a distribution agreement with Kimberly-Clark. In connection with the distribution, we will also enter into various other agreements to effect the separation of our business from Kimberly-Clarks other businesses and set forth our contractual relationships with Kimberly-Clark after the distribution. These agreements will provide for the allocation, between us and Kimberly-Clark, of Kimberly-Clarks assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the distribution. The agreements will include a transition services agreement, a tax matters agreement, an employee matters agreement, intellectual property agreements, and manufacturing and supply agreements.
For additional information regarding the distribution agreement and other transaction agreements, see Risk Factors Risks Related to the Distribution and Our Separation from Kimberly-Clark and Our Relationship with Kimberly-Clark after the Distribution.
Reasons for the Separation and Distribution
Kimberly-Clarks Board of Directors believes that separating its health care business from the remainder of Kimberly-Clark is in the best interests of Kimberly-Clark and its stockholders for a number of reasons, including:
| Strategic Focus. The distribution will allow each business to focus its attention and financial resources to more effectively pursue its own distinct operating priorities and strategies, which have diverged over time. |
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| Capital Flexibility. The distribution will permit each company to concentrate its financial resources solely on its own operations without having to compete with each other for investment capital and will allow us to utilize our expected excess cash flow to invest in the growth of our business. In addition, we and Kimberly-Clark will have direct access to the debt and equity capital markets to fund our and its respective growth opportunities in a time and manner appropriate for our and Kimberly-Clarks respective business needs. |
| Employee Incentives. We will be able to develop incentive programs to better attract and retain key employees through the use of stock-based and performance-based incentive plans that more directly link compensation with the financial performance of our business. |
| Distinct Investment Identity . The distribution will allow investors to separately value Kimberly-Clark and Halyard based on their unique investment identities, including the merits, performance and future prospects of Kimberly-Clarks and our respective businesses. The distribution will also provide investors with two distinct and targeted investment opportunities. |
| Management Realignment. Each company will be able to realign its management structure to better focus on its different product markets and the pursuit of unique business opportunities for long-term growth and profitability. |
Kimberly-Clarks Board of Directors considered a number of potentially negative factors in evaluating the separation and distribution, including loss of synergies and increased costs, disruptions to the business as a result of the distribution, increased significance of certain costs and liabilities, one-time costs of the distribution, inability to realize anticipated benefits of the distribution, and limitations placed upon Halyard as a result of the tax matters agreement. The Board of Directors, however, concluded that the potential benefits of the separation and distribution outweighed these factors. For more information, see the sections entitled Risk Factors and The Separation and Distribution Reasons for the Separation and Distribution included elsewhere in this information statement.
Corporate Information
After the separation, our principal executive offices will be located at 5405 Windward Parkway, Suite 100 South, Alpharetta, GA 30004, and our telephone number will be . Our website address is www.halyardhealth.com. Information contained on, or connected to, our website or Kimberly-Clarks website is not part of this information statement, and you should not rely on that information in making an investment decision.
Reason for Furnishing this Information Statement
This information statement is being furnished solely to provide information to stockholders of Kimberly-Clark who will receive shares of Halyard common stock in the distribution. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any of Halyards or Kimberly-Clarks securities. The information contained in this information statement is believed by Halyard to be accurate as of the date on the cover. Changes may occur after that date, and neither we nor Kimberly-Clark will update the information except in the normal course of our and Kimberly-Clarks respective disclosure obligations and practices.
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QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION
What is Halyard and why is Kimberly-Clark separating its health care business and distributing Halyard common stock? | Halyard currently is a wholly-owned subsidiary of Kimberly-Clark that was formed to hold Kimberly-Clarks health care business. Following the distribution, Halyard will no longer be a wholly-owned subsidiary of Kimberly-Clark. The separation of our business from Kimberly-Clark and the distribution of Halyard common stock is intended to provide you with equity investments in two distinct companiesKimberly-Clark and Halyardthat will each be able to focus on its own distinct operating needs, priorities and strategies. The separation and distribution is expected to result in improved long-term performance of our and Kimberly-Clarks respective businesses for the reasons discussed in The Separation and Distribution Reasons for the Separation and Distribution. | |
How will the separation and distribution work? | The separation and distribution will be accomplished through a series of transactions in which Kimberly-Clark will transfer its health care business to us and then distribute all of the outstanding shares of Halyard common stock to the stockholders of Kimberly-Clark on a pro rata basis. | |
What will our relationship be with Kimberly-Clark after the distribution? |
We will be a separate, publicly-traded company and Kimberly-Clark will not own Halyard common stock after the distribution. We will, however, enter into a distribution agreement and various other agreements with Kimberly-Clark to effect the separation and set forth our contractual relationships with Kimberly-Clark after the distribution. These agreements will provide for the allocation, between us and Kimberly-Clark, of Kimberly-Clarks assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the distribution. These agreements also will govern certain relationships between us and Kimberly-Clark after the distribution.
For additional information, see Our Relationship with Kimberly-Clark after the Distribution. |
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How will we be managed after the distribution? | Robert Abernathy is our Chief Executive Officer. Mr. Abernathy joined Kimberly-Clark in 1982 and has held senior management positions throughout Kimberly-Clark, including having overall responsibility for Kimberly-Clarks health care business from 1997 to early 2004. He will be supported by an experienced management team that includes Christopher Lowery, Senior Vice President and Chief Operating Officer and Steven Voskuil, Senior Vice President and Chief Financial Officer. For more information on our management team, see Management. | |
When will the distribution occur? | We expect that Kimberly-Clark will distribute the shares of Halyard common stock on , 2014 to holders of record of Kimberly-Clark common stock on the record date. | |
What is the record date for the distribution? | , 2014. |
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What do I have to do to participate in the distribution? |
You are not required to take any action to receive Halyard common stock in the distribution, but you are encouraged to read this entire information statement carefully. No vote will be taken for the distribution. You are not being asked for a proxy.
You do not need to pay any consideration, exchange or surrender your existing Kimberly-Clark common stock or take any other action to receive your shares of Halyard common stock. If you own Kimberly-Clark common stock as of the close of business on the record date, a book-entry account statement reflecting your ownership of shares of Halyard common stock will be mailed to you, or your brokerage account will be credited for the shares.
You should not and do not need to mail in Kimberly-Clark common stock certificates to receive Halyard common stock. |
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How many shares of Halyard common stock will I receive? | Kimberly-Clark will distribute one share of Halyard common stock for every shares of Kimberly-Clark common stock you own as of the close of business on the record date. For example, if you own shares of Kimberly-Clark common stock on the record date, you will receive shares of Halyard common stock in the distribution. Based on approximately shares of Kimberly-Clark common stock that we | |
expect to be outstanding on the record date, Kimberly-Clark will distribute a total of approximately shares of Halyard common stock, representing 100% of the outstanding Halyard common stock. For more information, see The Separation and Distribution. | ||
Will I receive physical stock certificates representing shares of Halyard common stock? |
No, you will not receive a stock certificate in connection with the distribution.
Instead, if you own Kimberly-Clark common stock as of the close of business on the record date, including shares owned in certificate form or through the Kimberly-Clark dividend reinvestment plan, Kimberly-Clark, with the assistance of Computershare Inc. (Computershare), the settlement and distribution agent, will electronically distribute shares of Halyard common stock to you or to your brokerage firm on your behalf by way of direct registration in book-entry form. Computershare will mail you a book-entry account statement that reflects your shares of Halyard common stock, or your bank or brokerage firm will credit your account for the shares. |
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Will Kimberly-Clark distribute fractional shares? | No. In lieu of fractional shares of Halyard common stock, stockholders of Kimberly-Clark will receive cash. Fractional shares you would otherwise be entitled to receive will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of these sales will be distributed ratably to those stockholders who would otherwise have received fractional shares of Halyard common stock. If you own less than shares of Kimberly-Clark common stock on the record date, you will not receive any shares of Halyard common stock in the distribution, but you will receive cash in lieu of fractional shares. Cash you receive in lieu of fractional shares will generally be taxable. |
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What are the conditions to the distribution? |
The distribution is subject to a number of conditions, including, among others:
the debt financing contemplated to be obtained by Halyard in connection with the distribution, as described in the distribution agreement, shall have been obtained,
the making of a cash distribution of $ million from Halyard to Kimberly-Clark prior to the distribution,
the receipt of an opinion of Baker Botts, L.L.P. to the effect that the separation and the distribution will qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code of 1986, as amended (Code),
the receipt of an opinion from Houlihan Lokey, Inc. with respect to the solvency of Halyard in connection with the distribution,
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Kimberly-Clark shall have completed the transfer to us of assets and liabilities as well as the permits, licenses and registrations relating to our business as described in this information statement,
the U.S. Securities and Exchange Commission (SEC) shall have declared effective our registration statement on Form 10, of which this information statement is a part, under the Securities Exchange Act of 1934, as amended (Exchange Act), and no stop order relating to our registration statement shall be in effect,
we and Kimberly-Clark shall have received all permits, registrations and consents required under the securities or blue sky laws of states or other political subdivisions of the United States or of foreign jurisdictions in connection with the distribution,
the shares of Halyard common stock to be distributed shall have been accepted for listing on the New York Stock Exchange, subject to official notice of distribution,
execution and delivery of the transaction agreements relating to the separation as described in Our Relationship with Kimberly-Clark after the Distribution,
no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition shall be in effect that prevents consummation of the separation, distribution or any of the related transactions, including the transfers of assets and liabilities contemplated by the distribution agreement, and
no other event or development shall be in existence or have occurred that, in the judgment of Kimberly-Clarks Board of Directors, in its sole discretion, makes it inadvisable to effect the distribution and other related transactions. |
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Neither we nor Kimberly-Clark can assure you that any or all of these conditions will be met. In addition, Kimberly-Clark can decline at any time to go forward with the separation and distribution. For a complete discussion of all of the conditions to the distribution, see The Separation and Distribution Distribution Conditions and Termination. |
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Are there risks associated with owning Halyard common stock? | Yes. Ownership of Halyard common stock is subject to both general and specific risks relating to our business, the industry in which we operate, our ongoing contractual relationships with Kimberly-Clark and our status as a separate, publicly-traded company. Ownership of Halyard common stock is also subject to risks relating to the distribution. These risks are described in the Risk Factors section of this information statement. You are encouraged to read that section carefully. | |
Will I be paid any dividends on Halyard common stock? | We currently do not anticipate paying cash dividends on Halyard common stock. See Dividend Policy for additional information on our dividend policy after the distribution. | |
Where will I be able to trade shares of Halyard common stock? | We plan to apply to list the Halyard common stock on the New York Stock Exchange under the symbol HYH. We anticipate that trading in shares of Halyard common stock will begin on a when-issued basis on or around the record date and will continue up to and through the distribution date, and that regular-way trading will begin on the first trading day after the distribution date. If trading does begin on a when-issued basis, you may purchase or sell Halyard common stock after that time, but your transaction will not settle until after the distribution date. We cannot predict the trading prices of Halyard common stock before, on or after the distribution date. | |
Will the number of Kimberly-Clark shares I own change as a result of the distribution? | No. The number of shares of Kimberly-Clark common stock you own will not change as a result of the distribution. | |
What will happen to the listing of Kimberly-Clark common stock? | Kimberly-Clark common stock will continue to be traded on the New York Stock Exchange under the symbol KMB following the distribution. | |
Will Halyard incur any debt prior to or at the time of the distribution? | Yes. We anticipate having approximately $ million of indebtedness upon completion of the distribution. Prior to the distribution, we expect to borrow approximately $ million through the issuance of senior unsecured notes and/or a secured credit facility. We also anticipate entering into a revolving credit facility allowing borrowings of up to $ million. See Description of Material Indebtedness. | |
Who will be the distribution agent, transfer agent, registrar and information agent for the Halyard common stock? |
The distribution agent, transfer agent, registrar and information agent for Halyard common stock will be Computershare. For questions relating to the transfer or mechanics of the stock distribution, you should contact:
Computershare Trust Company, N.A. www.computershare.com/investor
If your shares are held by a bank, broker or other nominee please call them directly. |
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Where can I find more information about Kimberly-Clark and Halyard? |
Before the distribution, if you have any questions relating to Kimberly-Clarks business performance, you should contact:
Kimberly-Clark Corporation P.O. Box 619100 Dallas, Texas 75261-9100 Attention: Stockholder Services (972) 281-1522 www.kimberly-clark.com
After the distribution, Halyard stockholders who have any questions relating to Halyards business performance should contact us at:
Halyard Health, Inc. 5405 Windward Parkway Suite 100, South Alpharetta, GA 30004 Attention: Stockholder Services ( ) www.halyardhealth.com |
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You should carefully consider each of the following risks and all of the other information contained in this information statement. Some of the risks described below relate principally to our business and the industry in which we operate, while others relate principally to the distribution and our separation from Kimberly-Clark. The remaining risks relate principally to the securities markets generally and ownership of Halyard common stock.
Our business, results of operations, financial condition or cash flows could be materially adversely affected by any of these risks, and, as a result, the trading price of Halyard common stock could decline.
These risks are not the only ones we face. Other risks that we do not presently know about or that we presently believe are not material could also adversely affect us.
Risks Related to Our Business and Industry
We face strong competition. Our failure to compete effectively could have a material adverse effect on our business.
Our industry is highly competitive. We compete with many domestic and foreign companies ranging from small start-up enterprises that might sell only a single or limited number of competitive products or compete only in a specific market segment, to companies that are larger and more established than us, have a broad range of competitive products, participate in numerous markets and have access to significantly greater financial and marketing resources than we do. We also face competition from distributors who are expanding their private label portfolios and aggressively marketing their product lines. For example, our products are distributed by Cardinal Health, Inc. and Medline Industries, Inc., each of which sells its own private label products and solutions that compete with our offerings. Competitive factors include price, alternative clinical practices, innovation, quality and reputation. Our failure to compete effectively could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may not be successful in developing, acquiring or marketing competitive products and technologies.
Our industry is characterized by extensive research and development and rapid technological advances. The future success of our business will depend, in part, on our ability to design, acquire and manufacture new competitive products and enhance existing products. Accordingly, we commit substantial time, funds and other resources to new product development, including research and development, acquisitions, licenses, clinical trials and physician education. We make these substantial expenditures without any assurance that our products will obtain regulatory clearance or reimbursement approval, acquire adequate intellectual property protection or receive market acceptance. Development by our competitors of improved products, technologies or enhancements may make our products, or those we develop, license or acquire in the future, obsolete or less competitive which could negatively impact our net sales. Our failure to successfully develop, acquire or market competitive new products or enhance existing products could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We are exposed to price fluctuations of key commodities, which may negatively impact our results of operations.
We rely on product inputs, such as nitrile and polypropylene, as well as other commodities, in the manufacture of our products. Prices of oil and gas affect our distribution and transportation costs. Prices of these commodities are volatile and have fluctuated significantly in recent years, which has contributed to, and in the future may continue to contribute to, fluctuations in our results of operations. Our ability to hedge commodity price volatility is limited. Furthermore, due to competitive dynamics, the cost containment efforts of our customers and third-party payors, and contractual limitations, particularly with respect to products we sell under group purchasing agreements, which generally set pricing for a three-year term, we may be unable to pass along commodity-driven
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cost increases through higher prices. If we cannot fully offset cost increases through other cost reductions, or recover these costs through price increases or surcharges, we could experience lower margins and profitability which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
An inability to obtain key components, raw materials or manufactured products from third parties may have a material adverse effect on our business.
We depend on the availability of various components, raw materials and manufactured products supplied by others for our operations. If the capabilities of our suppliers and third-party manufacturers are limited or stopped, due to quality, regulatory or other reasons or if we are unable to outsource the manufacturing capabilities currently conducted in our manufacturing facility in Thailand where we have initiated a plan to exit, it could negatively impact our ability to manufacture or deliver our products and could expose us to regulatory actions. Further, for quality assurance or cost effectiveness, we purchase from sole suppliers certain components and raw materials such as polymers used in our S&IP products, latex bladders for our pain pumps, and synthetic rubber nitrile for our medical exam gloves. Although there are other sources in the market place for these items, we may not be able to quickly establish additional or replacement sources for certain components or materials due to regulations and requirements of the U.S. Food and Drug Administration (FDA) and other regulatory authorities regarding the manufacture of our products. The loss of any sole supplier or any sustained supply interruption that affects our ability to manufacture or deliver our products in a timely or cost effective manner could have a material adverse effect on our business, results of operations, financial condition and cash flows.
An interruption in our ability to manufacture products may have a material adverse effect on our business.
Many of our key products are manufactured at single locations, with limited alternate facilities, including in certain cases by third-party manufacturers. If one or more of these facilities experience damage, or if these manufacturing capabilities are otherwise limited or stopped due to quality, regulatory or other reasons, including natural disasters or prolonged power or equipment failures, it may not be possible to timely manufacture the relevant products at previous levels or at all. For example, floods have negatively impacted our medical exam gloves manufacturing facility in Thailand in recent years, which has resulted in temporary shut downs of the facility and an associated decrease in production of our medical exam gloves. A reduction or interruption in any of these manufacturing processes could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We are subject to extensive government regulation, which may require us to incur significant expenses to ensure compliance. If we fail to comply with those regulations, this noncompliance could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Many of our products are subject to extensive regulation in the United States by the FDA and other regulatory authorities and by comparable government agencies in other countries concerning the development, design, approval, manufacture, labeling, importing and exporting and sale and marketing of many of our products. Furthermore, our facilities are subject to periodic inspection by the FDA and other federal, state and foreign government authorities, which require manufacturers of medical devices to adhere to certain regulations, including the FDAs Quality System Regulation, which requires periodic audits, design controls, quality control testing and documentation procedures, as well as complaint evaluations and investigation. Regulations regarding the development, manufacture and sale of medical products are evolving and subject to future change. We cannot predict what impact those regulatory changes may have on our business. Failure to comply with applicable regulations could lead to manufacturing shutdowns, product shortages, delays in product manufacturing, product seizures, recalls, operating restrictions, withdrawal or suspension of required licenses, and prohibitions against exporting of products to, or importing products from, countries outside the United States and may require significant resources to resolve. Any one or more of these events could have a material adverse effect on our business, results of operations, financial condition and cash flows.
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We are subject to healthcare fraud and abuse laws and regulations that could result in significant liability, require us to change our business practices or restrict our operations in the future.
We are subject to various U.S. federal, state and local laws targeting fraud and abuse in the healthcare industry, including anti-kickback and false claims laws. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application, which could restrict our sales or marketing practices. Furthermore, since many of our customers rely on reimbursement from Medicare, Medicaid and other governmental programs to cover a substantial portion of their expenditures, our exclusion from such programs as a result of a violation of these laws could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We must obtain clearance or approval from the appropriate regulatory authorities prior to introducing a new product or a modification to an existing product. The regulatory clearance process may result in substantial costs, delays and limitations on the types and uses of products we can bring to market, any of which could have a material adverse effect on our business.
In the United States, before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we generally must first receive clearance or approval from the FDA and certain other regulatory authorities. Most major markets for medical devices outside the United States also require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining regulatory clearances and approvals to market a medical device can be costly and time consuming, involve rigorous pre-clinical and clinical testing, require changes in products or result in limitations on the indicated uses of products. There can be no assurance that these clearances and approvals will be granted on a timely basis, or at all. In addition, once a device has been cleared or approved, a new clearance or approval may be required before the device may be modified, its labeling changed or marketed for a different use. Medical devices are cleared or approved for one or more specific intended uses and promoting a device for an off-label use could result in government enforcement action. Furthermore, a product approval or clearance can be withdrawn or limited due to unforeseen problems with the device or issues relating to its application. The regulatory clearance and approval process may result in, among other things, delayed, if at all, realization of product net sales, substantial additional costs and limitations on the types of products we may bring to market or their indicated uses, any one of which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may incur product liability losses, litigation liability, product recalls, safety alerts or regulatory action associated with our products which can be costly and disruptive to our business.
The risk of product liability claims is inherent in the design, manufacture and marketing of the medical products of the type we produce and sell. A number of factors could result in an unsafe condition or injury to, or death of, a patient with respect to the products that we manufacture or sell, including physician technique and experience in performing the relevant surgical procedure, component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or information.
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 brought by multiple plaintiffs alleging that use of the continuous infusion device to deliver anesthetics directly into a synovial joint after surgery resulted in postarthroscopic glenohumeral chondrolysis, or a disintegration of the cartilage covering the bones in the joint (typically, in the shoulder). Plaintiffs generally seek monetary damages and attorneys fees. While Kimberly-Clark is retaining the liabilities related to these matters, the distribution agreement between us and Kimberly-Clark will provide that we will indemnify Kimberly-Clark for any Post-Spin I-Flow Liabilities (as defined herein). There can be no assurance that additional related or unrelated claims or other product liability claims, including potential class actions, will not be made following the distribution date that allege that our products have resulted in or could result in an unsafe condition or injury. Any of these proceedings, regardless of the merits, may result in substantial costs, the diversion of managements attention from other business concerns,
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additional restrictions on our sales or the use of our products, or settlement payments and adjustments not covered by or in excess of insurance. Insurance for these types of claims varies in cost and can be difficult to obtain on terms acceptable to us or at all.
In addition to product liability claims and litigation, an unsafe condition or injury to, or death of, a patient associated with our products could lead to a recall of, or issuance of a safety alert relating to, our products, or suspension or delay of regulatory product approvals or clearances, product seizures or detentions, governmental investigations, civil or criminal sanctions or injunctions to halt manufacturing and distribution of our products. Any one of these could result in significant costs and negative publicity resulting in reduced market acceptance and demand for our products and harm our reputation. In addition, a recall or injunction affecting our products could temporarily shut down production lines or place products on a shipping hold.
All of the foregoing types of legal proceedings and regulatory actions are inherently unpredictable and, regardless of the outcome, could disrupt our business, result in substantial costs or the diversion of management attention and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Current economic conditions have affected and may continue to adversely affect our business, results of operations, financial condition and cash flows.
Disruptions in the financial markets and other macro-economic challenges currently affecting the economy and the economic outlook of the United States, Europe and other parts of the world may continue to have an adverse impact on our results of operations, financial condition and cash flows. Recessionary conditions and depressed levels of consumer and commercial spending have caused and may continue to cause our customers to reduce, modify, delay or cancel plans to purchase our products, and we have observed certain hospitals delaying as well as prioritizing purchasing decisions, which has had and may continue to have a material adverse effect on our business, results of operations, financial condition and cash flows.
In addition, as a result of these recessionary conditions, our customers inside and outside the United States, including foreign governmental entities or other entities that rely on government healthcare systems or government funding, may be unable to pay their obligations on a timely basis or to make payment in full. If our customers cash flow or operating and financial performance deteriorate or fail to improve, or if our customers are unable to make scheduled payments or obtain credit, they may not be able to pay, or may delay payment of, accounts receivable owed to us. These conditions also may have an adverse effect on certain of our suppliers who may reduce output or change terms of sales, which could cause a disruption in our ability to produce our products. Any inability of current and/or potential customers to pay us for our products or any demands by our suppliers for different payment terms may have a material adverse effect on our business, results of operations, financial condition and cash flows.
Cost-containment efforts of our customers, purchasing groups, third-party payors and governmental organizations could adversely affect our sales and profitability.
Many of our customers are members of group purchasing organizations, or GPOs, or integrated delivery networks, or IDNs. GPOs and IDNs negotiate pricing arrangements with healthcare product manufacturers and distributors and offer the negotiated prices to affiliated hospitals and other members. Although we are the sole contracted supplier to certain GPOs for certain product categories, members of the GPO are generally free to purchase from other suppliers, and such contract positions can offer no assurance that sales volumes of those products will be maintained. In addition, initiatives sponsored by government agencies and other third-party payors to limit healthcare costs, including price regulation and competitive bidding for the sale of our products, are ongoing in markets where we sell our products. Pricing pressure has also increased in our markets due to consolidation among healthcare providers, trends toward managed care, governments becoming payors of healthcare expenses and regulation relating to reimbursements. The increasing leverage of organized buying groups and consolidated customers and pricing pressure from third-party payors may reduce market prices for our products, thereby reducing our profitability.
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We face significant uncertainty in the healthcare industry due to government healthcare reform in the United States and elsewhere.
In March 2010, comprehensive healthcare reform legislation was signed into law in the United States through the passage of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act. Among other initiatives, the legislation implemented a 2.3% excise tax on the sales of certain medical devices in the United States, effective January 2013. In 2013, the excise tax had an impact on us of approximately $6.5 million. In addition, the new legislation implements payment system reforms and significantly alters Medicare and Medicaid reimbursements for medical services and medical devices, which could result in downward pricing pressure and decreased demand for our products.
As additional provisions of healthcare reform are implemented, we anticipate that the U.S. Congress, regulatory agencies and certain state legislatures, as well as international legislators and regulators, will continue to review and assess alternative healthcare delivery systems and payment methods with an objective of ultimately reducing healthcare costs and expanding access. We cannot predict with certainty what healthcare initiatives, if any, will be implemented by states or foreign governments or what ultimate effect federal healthcare reform or any future legislation or regulation may have on our customers purchasing decisions regarding our products. However, the implementation of new legislation and regulation may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business, results of operations, financial condition and cash flows.
Our customers depend on third-party coverage and reimbursements. The failure of healthcare programs to provide coverage and reimbursement, or reductions in levels of reimbursement, could have a material adverse effect on our business.
The ability of our customers to obtain coverage and reimbursements is important to our business. Demand for many of our existing and new medical products is, and will continue to be, affected by the extent to which government healthcare programs and private health insurers reimburse our customers for patients medical expenses in the countries where we do business. Any reduction in the amount of reimbursements received by our customers could harm our business by reducing their selection of our products and the prices they are willing to pay.
In addition, as a result of their purchasing power, third-party payors are implementing cost-cutting measures such as seeking discounts, price reductions or other incentives from medical products suppliers and imposing limitations on coverage and reimbursements for medical technologies and procedures. These trends could compel us to reduce prices for our existing products and potential new products and could cause a decrease in the size of the market or a potential increase in competition that could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We are subject to political, economic and regulatory risks associated with doing business outside of the United States.
We operate manufacturing facilities outside the United States in Honduras, Mexico and Thailand and source many of our raw materials and components from foreign suppliers. We distribute and sell our products in over 100 countries. In 2013, approximately 28% of our net sales (excluding related party sales) were generated outside of North America, and we expect this percentage will grow over time. Our operations outside of the United States are subject to risks that are inherent in conducting business internationally, including compliance with both United States and foreign laws and regulations that apply to our international operations. These laws and regulations include robust data privacy requirements, labor relations laws that may impede employer flexibility, tax laws, anti-competition regulations, import, customs and trade restrictions, export requirements, economic sanction laws, environmental, health and safety laws, anti-bribery laws such as the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions. Given the high level of complexity of these
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laws, there is a risk that some provisions may be violated inadvertently or through fraudulent or negligent behavior of individual employees, our failure to comply with certain formal documentation requirements or otherwise. In addition, these laws are subject to changes, which may require additional resources or make it more difficult for us to comply with these laws. Violations of the laws and regulations governing our international operations could result in fines or criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to manufacture or distribute our products in one or more countries and could have a material adverse effect on our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our results of operations and financial condition. Our success depends, in part, on our ability to anticipate and prevent or mitigate these risks and manage difficulties as they arise.
In addition to the foregoing, engaging in international business inherently involves a number of other difficulties and risks, including:
| different local medical practices, product preferences and product requirements, |
| price and currency controls and exchange rate fluctuations, |
| cost and availability of international shipping channels, |
| longer payment cycles in certain countries other than the United States, |
| minimal or diminished protection of intellectual property in certain countries, |
| uncertainties regarding judicial systems, including difficulties in enforcing agreements through certain non-U.S. legal systems, |
| political instability and actual or anticipated military or political conflicts, expropriation of assets, economic instability and the impact on interest rates, inflation and the credit worthiness of our customers, |
| potentially negative consequences from changes in or interpretations of tax laws, including changes regarding taxation of income earned outside the United States, and |
| difficulties and costs of staffing and managing non-U.S. operations. |
These risks and difficulties, individually or in the aggregate, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Currency exchange rate fluctuations could have a material adverse effect on our business and results of operations .
Due to our international operations, we transact business in many foreign currencies and are subject to the effects of changes in foreign currency exchange rates, including the Thai baht, Mexican peso, Japanese yen and the Euro. Our financial statements are reported in U.S. dollars with international transactions being translated into U.S. dollars. If the U.S. dollar strengthens in relation to the currencies of other countries where we sell our products, our U.S. dollar reported net sales and income will decrease. Additionally, we incur significant costs in foreign currencies and a fluctuation in those currencies value can negatively impact manufacturing and selling costs. While we have in the past engaged, and may in the future engage, in various hedging transactions to minimize the effects of foreign currency exchange rate fluctuations, there can be no assurance that these hedging transactions will be effective. Changes in the relative values of currencies occur regularly and could have an adverse effect on our business, results of operations, financial condition and cash flows.
We cannot guarantee that any of our strategic acquisitions, investments or alliances will be successful.
We intend to supplement our growth through strategic acquisitions of, investments in and alliances with new medical technologies. The success of any acquisition, investment or alliance may be affected by a number of factors, including our ability to properly assess and value the potential business opportunity or to successfully
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integrate any business we may acquire into our existing business. These types of transactions may require more resources and investments than originally anticipated, may divert managements attention from our existing business, may result in exposure to unexpected liabilities of the acquired business, and may not result in the expected benefits, savings or synergies. There can be no assurance that any past or future acquisition, investment or alliance will be cost-effective, profitable or successful.
We may need additional financing in the future to meet our capital needs or to make acquisitions and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders.
We intend to increase our investment in research and development activities and expand our sales and marketing activities. We also intend to make acquisitions. In the past, our working capital and capital expenditure requirements have been met from cash flow generated by our businesses and from Kimberly-Clark. Following the distribution, however, we may need to seek additional debt or equity financing. We may be unable to obtain any desired additional financing on terms favorable to us, if at all. If we lose a previously assigned credit rating or adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully develop or enhance products or respond to competitive pressures, any of which could negatively affect our business. If we raise additional funds through the issuance of equity securities, Halyard stockholders will experience dilution of their ownership interest. If we raise additional funds by issuing debt, we may be subject to limitations on our operations due to restrictive covenants. Furthermore, we do not expect that any debt financing we might obtain would reflect interest rates or other terms as favorable as those historically enjoyed by Kimberly-Clark because any credit rating assigned to our debt is likely to be less favorable than similar ratings assigned to the debt of Kimberly-Clark.
We may be unable to protect our intellectual property rights or may infringe the intellectual property rights of others.
We rely on patents, trademarks, trade secrets and other intellectual property assets in the operation of our business. Our efforts to protect our intellectual property and proprietary rights may not be sufficient. We cannot be sure that pending patent applications will result in the issuance of patents or that patents issued or licensed to us will remain valid or prevent competitors from introducing similar competing technologies. Our ability to enforce and protect our intellectual property rights may be limited in certain countries outside of the United States in which we operate, which could make it easier for our competitors to develop or distribute similar competing technologies in those jurisdictions. In addition, our competitive position may be adversely affected by expirations of our significant patents, which would allow competitors to freely use our technology to compete with us.
We operate in an industry characterized by extensive patent litigation and competitors may claim that our products infringe their intellectual property rights. Resolution of patent litigation or other intellectual property claims is inherently unpredictable, 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. Any one of these could have a material adverse effect on our business, results of operations, financial condition and cash flows. At any given time we are involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time. We can expect to face additional claims of patent infringement in the future.
We may be unable to attract and retain key employees necessary to be competitive.
Our ability to compete effectively depends upon our ability to attract and retain executives and other key employees, including people in technical, marketing, sales and research and development positions. Competition for experienced employees, particularly for persons with specialized skills, can be intense. Our ability to recruit such talent will depend on a number of factors, including compensation and benefits, work location and work environment. If we cannot effectively recruit and retain qualified executives and employees, our business could be materially adversely affected.
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Breaches of our information technology systems could have a material adverse effect on our business.
We rely on information technology systems to process, transmit, and store electronic information in our day-to-day operations. Our information technology systems may be subjected to computer viruses or other malicious codes, unauthorized access attempts and cyber- or phishing-attacks. We also store certain information with third parties that could be subject to these types of attacks. These attacks could result in our intellectual property and other confidential information being lost or stolen, disruption of our operations, loss of reputation, and other negative consequences, such as increased costs for security measures or remediation costs and diversion of management attention. While we will continue to implement additional protective measures to reduce the risk of and detect future cyber incidents, cyber-attacks are becoming more sophisticated and frequent, and the techniques used in such attacks change rapidly. There can be no assurances that our protective measures will prevent future attacks that could have a material adverse effect on our business.
Risks Related to the Distribution and Our Separation from Kimberly-Clark
We have no operating history as a separate company, and our historical and pro forma financial data are not necessarily representative of the results we would have achieved as a stand-alone publicly-traded company and therefore may not be reliable as an indicator of our performance.
The historical combined financial data we have included in this information statement present the results of operations and financial position of Kimberly-Clarks health care business to be transferred to us as that business has historically been operated by Kimberly-Clark. Our historical combined financial data and unaudited pro forma condensed combined financial data included in this information statement are derived from the historical consolidated financial statements and accounting records of Kimberly-Clark. Accordingly, these data may not be indicative of our future performance, nor necessarily reflect what our financial position and results of operations or cash flows would have been, had we operated as a separate, stand-alone publicly-traded entity during the periods presented. This is because, among other things:
| Kimberly-Clark performed various corporate functions for us, such as employee payroll and benefits administration, information technology services, financial and tax services, transportation and logistics, procurement services, order management and processing, regulatory compliance and other support services. Following the distribution, Kimberly-Clark will provide some of these functions for a limited period of time as described in Our Relationship with Kimberly-Clark after the Distribution. Our historical combined financial data and unaudited pro forma condensed combined financial data reflect adjustments and allocations with respect to corporate and administrative costs relating to these functions which may be less than the expenses we would have incurred had we operated as a stand-alone company. |
| Currently, our business is integrated with the other businesses of Kimberly-Clark. Historically, we have shared economies of scale in costs, employees, vendor relationships and customer relationships. While we will enter into transition services agreements that will govern certain commercial and other relationships between us and Kimberly-Clark after the distribution, those transitional arrangements may not fully capture the benefits our business has enjoyed as a result of being integrated with the other businesses of Kimberly-Clark. The loss of these benefits could have a material adverse effect on our business, results of operations, financial condition and cash flows following the distribution. |
| Generally, our working capital requirements and capital for our general corporate purposes, including acquisitions, research and development and capital expenditures, have historically been satisfied as part of the corporate-wide cash management policies of Kimberly-Clark. Following the distribution, we may need to obtain additional financing from banks, public offerings or private placements of debt or equity securities, strategic relationships or other arrangements. |
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| Subsequent to the distribution, the cost of capital for our business is likely to be higher than Kimberly-Clarks cost of capital prior to the distribution due to, among other reasons, our anticipated credit rating being lower than Kimberly-Clarks. |
| Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a stand-alone company separate from Kimberly-Clark. |
For additional information about the historical financial performance of our business and the basis of presentation of our historical combined financial statements and our unaudited pro forma condensed combined financial statements, see Unaudited Pro Forma Condensed Combined Financial Statements, Selected Historical Combined Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and the historical combined financial statements and accompanying notes of Kimberly-Clarks health care business included elsewhere in this information statement.
Following our separation from Kimberly-Clark, we will have a significant amount of debt that could adversely affect our business.
As of June 30, 2014, on a pro forma basis after giving effect to the financing arrangements we expect to enter into in connection with the distribution and the application of the net proceeds thereof as contemplated under Unaudited Pro Forma Condensed Combined Financial Statements and Description of Material Indebtedness, our total combined indebtedness would have been $ million. The amount of debt that we intend to incur could have important consequences to us and our investors, including:
| requiring a substantial portion of our cash flow from operations to make interest payments on this debt, |
| reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business, |
| increasing our vulnerability to general adverse economic and industry conditions, |
| increasing the risk of a future downgrade of our credit rating, which could increase future debt costs and limit the future availability of debt financing, |
| limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, and |
| limiting our flexibility in planning for, or reacting to, changes in our business and the industry and placing us at a competitive disadvantage to our competitors that may not be as highly leveraged. |
To the extent that we incur additional indebtedness, the risks described above could increase. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt.
We have not previously operated as an independent company, and our management team has been assembled for only a short time.
We have not previously operated as an independent public company, and our management has limited experience, as a group, in operating our business as a stand-alone entity. Following the distribution, we will be fully responsible for arranging our own funding, managing all of our own administrative and employee arrangements and supervising all of our legal and financial affairs, including publicly reported financial statements. We will adopt separate stock-based and performance-based incentive plans for our employees and will develop our own compliance and administrative procedures necessary for a publicly-held company. We will also enter into an agreement with Kimberly-Clark in which Kimberly-Clark will provide certain transition services to us. See Our Relationship with Kimberly-Clark after the Distribution. In addition, our ability to grow our business may be affected by our indebtedness following the transaction. We anticipate that our success in
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these endeavors will depend substantially upon the ability of our Board of Directors, senior management and other key employees to work together. Although the individual members of our Board of Directors and senior management team have significant experience, they previously have not worked together as a group. Accordingly, we cannot assure you that as an independent company, our aggregate results of operations will continue at the same level as in the past. Moreover, the inability of our Board of Directors or senior management to function cohesively could delay or prevent us from implementing fully our business strategy, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We could incur significant tax liabilities if the distribution becomes a taxable event.
In Rev. Proc. 2013-12, the U.S. Internal Revenue Service announced that, effective for ruling requests postmarked or received after August 23, 2013, it generally will no longer provide private letter rulings to the effect that, for U.S. federal income tax purposes, a separation and distribution transaction (similar to the contribution of our business to us by Kimberly-Clark and the distribution of Halyard common stock) will qualify as a tax-free spin-off under Sections 368(a)(1)(D) and 355 of the Code. Consequently, Kimberly-Clark is not seeking such a ruling from the U.S. Internal Revenue Service. However, it is a condition to the distribution that Kimberly-Clark receive an opinion from Baker Botts L.L.P. to the effect that the distribution of Halyard common stock will qualify as a tax-free spin-off under Sections 368(a)(1)(D) and 355 of the Code. The opinion will rely on certain facts, assumptions, representations and undertakings from Kimberly-Clark and us regarding the past and future conduct of the companies respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not satisfied, Kimberly-Clark and its stockholders may not be able to rely on the opinion of Baker Botts L.L.P. and could be subject to significant tax liabilities.
Notwithstanding Kimberly-Clarks receipt of the legal opinion from Baker Botts L.L.P., there can be no assurance that the U.S. Internal Revenue Service will determine that the distribution is not a taxable event, including as a result of certain significant changes in the share ownership of Kimberly-Clark or Halyard after the distribution. If the distribution is determined to be taxable for U.S. federal income tax purposes, Kimberly-Clark and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities and we could incur significant liabilities as well. For a description of the sharing of such liabilities between Kimberly-Clark and us, see Our Relationship with Kimberly-Clark after the Distribution Tax Matters Agreement.
We may not be able to engage in certain corporate transactions for up to two years after the distribution.
To preserve the treatment to Kimberly-Clark of the separation and the distribution as a reorganization under Sections 368(a)(1)(D) and 355 of the Code, under the tax matters agreement that we will enter into with Kimberly-Clark, we will be restricted from taking any action that prevents the separation and distribution from satisfying the requirements for tax-free treatment under Sections 368(a)(1)(D) and 355 of the Code. Under the tax matters agreement, for the two-year period following the distribution date (the Restricted Period), Halyard will be prohibited, except in certain circumstances, from, among other things:
| issuing shares of its stock equal to or exceeding 20 percent (by vote or value) of the shares of Halyard stock issued and outstanding immediately following the distribution, including to raise capital or as acquisition currency in furtherance of strategic transactions, |
| selling 50 percent or more of the assets of the health care business or engaging in mergers or other strategic transactions that may result in any stockholder owning (as determined under U.S. federal income tax law) 40 percent or more (by vote or value) of the outstanding shares of Halyard stock, |
| repurchasing outstanding shares of its stock, other than in open market repurchases constituting less than 20 percent of such stock outstanding immediately following the distribution, and |
| ceasing to actively conduct its business or liquidating. |
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The foregoing prohibitions are in some cases more restrictive than that required under the Code due to the potential significant liability to Kimberly-Clark and its stockholders were the separation and the distribution determined to be a taxable transaction. Under the tax matters agreement, we will have the ability to engage in certain otherwise prohibited transactions, such as additional stock issuances or stock repurchases during the Restricted Period, provided we first deliver to Kimberly-Clark a tax opinion that doing so will not adversely affect the tax-free treatment of the separation and the distribution.
The foregoing restrictions may limit our ability to pursue certain strategic transactions or other transactions that we believe to be in the best interests of our stockholders or that might increase the value of our business. In addition, under the tax matters agreement, we will be required to indemnify Kimberly-Clark against any tax liabilities incurred primarily as a result of the violation of any of the foregoing restrictions, as well as any transaction (or series of transactions) that results in the distribution being considered part of a plan by us that includes a later change in control of us during the Restricted Period (as determined under U.S. federal income tax law).
As we build our information technology infrastructure and transition our data to our own systems, we could incur substantial additional costs and experience temporary business interruptions.
After the distribution, we will continue to install and implement information technology infrastructure to support our critical business functions, including systems relating to accounting and reporting, manufacturing process control, customer service, inventory control and distribution. We may incur temporary interruptions in business operations if we cannot transition effectively from Kimberly-Clarks existing transactional and operational systems and data centers and the transition services that support these functions as we replace these systems. We may not be successful in effectively and efficiently implementing our new systems and transitioning our data, and we may incur substantially higher costs for implementation than currently anticipated. Our failure to avoid operational interruptions as we implement the new systems and replace Kimberly-Clarks information technology services, or our failure to implement the new systems and replace Kimberly-Clarks services effectively and efficiently, could disrupt our business and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may not realize potential benefits from the separation of our business from Kimberly-Clarks other businesses.
We cannot assure you that we will realize the potential benefits that we expect from our separation from Kimberly-Clark. The separation and distribution is expected to provide the following benefits, among others (1) the ability of Halyard to focus on its own strategic and operational plans; (2) more efficient allocation of capital for Halyard; (3) a distinct investment identity allowing investors to evaluate the merits, performance and future prospects of Halyard separately from those of Kimberly-Clark; and (4) more effective equity-based compensation and greater alignment of management interests with our business.
We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:
| following the distribution, we will not have the same access to the financial, managerial and professional resources from which we have benefited in the past and will incur significant costs, which may be greater than those for which we have planned, to replace these resources, |
| the separation and distribution will require significant amounts of managements time and effort, which may divert managements attention away from Halyards business, |
| following the distribution, certain costs and liabilities that were otherwise less significant to Kimberly-Clark as a whole will be more significant to us as a stand-alone company, |
| following the distribution, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of Kimberly-Clark, and |
| following the distribution, our business will be significantly less diversified than Kimberly-Clarks business prior to the distribution. |
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If we fail to achieve some or all of the benefits expected to result from the separation and distribution, or if such benefits are delayed, our business, financial condition, results of operations and cash flows could be adversely affected and the value of Halyard common stock could be adversely impacted.
The transition services to be provided to us by Kimberly-Clark for a limited time may be difficult for us to perform or replace without operational problems or additional cost.
We will enter into transition services agreements with Kimberly-Clark pursuant to which we and Kimberly-Clark and our and Kimberly-Clarks respective affiliates will provide to each other certain transition services for a period of time following the distribution. These services will include, among others, employee payroll and benefits administration, information technology services, financial and tax services, transportation and logistics, procurement services, order management and processing, regulatory compliance and other support services. If, after the expiration of the transition services agreements, we are unable to perform these services or replace them in a timely manner or on reasonable terms, we may experience operational problems and increased costs to us. See Our Relationship with Kimberly-Clark after the Distribution Transition Services Agreements for more information on the transition services agreements.
Following our separation from Kimberly-Clark, we may experience increased costs resulting from decreased purchasing power, which could decrease our overall profitability and cash flow.
As part of Kimberly-Clark, we are able to take advantage of Kimberly-Clarks size and purchasing power in procuring goods, services and technology, such as management information services, health insurance, pension and other employee benefits, payroll administration, risk management, tax and other services. As a separate, stand-alone entity following the distribution, we may be unable to obtain similar goods, services and technology at prices or on terms as favorable as those obtained prior to the distribution.
Risks Related to Ownership of Halyard Common Stock
There has been no prior market for Halyard common stock, and we cannot guarantee that a trading market for Halyard common stock will develop or that our stock price will not decline or fluctuate significantly after the distribution.
There has been no prior trading market for Halyard common stock, and we cannot predict the price at which Halyard common stock will trade after the distribution date. There can be no assurance that an active trading market for Halyard stock will develop, or if developed, will be sustained following the distribution. If an active market does not develop or is not maintained, you may not be able to sell your shares. Even if a market does develop, the price at which Halyard common stock trades may fluctuate significantly. The market price, or fluctuations in price, for Halyard common stock may be negatively influenced by many factors, including:
| actual or anticipated fluctuations in our quarterly operating results, |
| our failure to achieve the quarterly financial results forecast provided from time to time by the securities analysts who cover our stock, |
| developments generally affecting the healthcare industry, |
| changes in market valuations of comparable companies, |
| the amount of our indebtedness, |
| general economic, industry and market conditions, |
| the depth and liquidity of the market for Halyard common stock, |
| fluctuations in interest and currency exchange rates, |
| our dividend policy, and |
| perceptions of or speculations by the press or investment community. |
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These and other factors may lower the market price of Halyard common stock, regardless of our actual financial condition or operating performance.
We have no present intention to pay dividends on Halyard common stock.
We have no present intention to pay dividends on Halyard common stock. Any determination to pay dividends to holders of Halyard common stock will be at the discretion of our Board of Directors and will depend on many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our debt agreements and other factors that our Board of Directors deems relevant. See Dividend Policy.
Your percentage of ownership in Halyard may be diluted in the future.
In the future, your percentage ownership in Halyard may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we may grant to our directors, officers and employees. We also anticipate that our compensation committee will grant stock options or other equity based awards to our employees. These awards will have a dilutive effect on existing stockholders and on our earnings per share, which could adversely affect the market price of shares of Halyard common stock.
In addition, our certificate of incorporation will authorize us to issue, without the approval of Halyard stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over Halyard common stock with respect to dividends and distributions, as our Board of Directors generally may determine. If our Board of Directors were to approve the issuance of preferred stock in the future, the terms of one or more classes or series of such preferred stock could dilute the voting power or reduce the value of Halyard common stock. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to Halyard preferred stock could affect the residual value of Halyard common stock. See Description of Halyard Capital Stock.
Certain provisions of our certificate of incorporation and by-laws and of Delaware law will make it difficult for stockholders to change the composition of our Board of Directors and may discourage hostile takeover attempts which some of our stockholders may consider to be beneficial.
Certain provisions to be contained in our certificate of incorporation and by-laws and those contained in Delaware law may have the effect of delaying or preventing changes in control if our Board of Directors determines that such changes in control are not in the best interests of us and our stockholders. These provisions include, among other things, the following:
| the division of our Board of Directors into three classes, each with three-year staggered terms, |
| the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval, |
| the inability of our stockholders to call a special meeting of stockholders, |
| stockholder action may be taken only at a special or regular meeting of stockholders, |
| advance notice procedures for nominating candidates to our Board of Directors or presenting matters at stockholder meetings, |
| stockholder removal of directors only for cause and only by a supermajority vote, |
| the ability of our Board of Directors, and not our stockholders, to fill vacancies on our Board of Directors, and |
| supermajority voting requirements to amend our by-laws and certain provisions of our certificate of incorporation and to engage in certain types of business combinations. |
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While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our Board of Directors, they could enable the Board of Directors to hinder or frustrate a transaction that some, or a majority, of the stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. We are also subject to Delaware laws that could have similar effects. One of these laws prohibits us from engaging in a business combination with a significant stockholder unless specific conditions are met. For more information, see Description of Halyard Capital Stock Anti-Takeover Effects of Certain Provisions of Our Certificate of Incorporation and By-Laws and of Delaware Law.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This information statement and other materials we have filed or will file with the SEC (as well as information included in our oral or other written statements) contain, or will contain, certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as may, believe, will, expect, project, estimate, anticipate, plan or continue and similar expressions, among others. These forward-looking statements address, among other things, the anticipated effects of the separation and distribution. The matters discussed in these forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. These factors include, but are not limited to:
| general economic conditions particularly in the United States, |
| fluctuations in global equity and fixed-income markets, |
| the competitive environment, |
| the loss of current customers or the inability to obtain new customers, |
| price fluctuations in key commodities, |
| fluctuations in currency exchange rates, |
| changes in governmental regulations that are applicable to our business, |
| changes in asset valuations including write-downs of assets such as inventory, accounts receivable or other assets for impairment or other reasons, and |
| the other matters described under Risk Factors, Unaudited Pro Forma Condensed Combined Financial Statements, and Managements Discussion and Analysis of Financial Condition and Results of Operations. |
You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this information statement. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished.
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THE SEPARATION AND DISTRIBUTION
Background
Kimberly-Clarks Board of Directors and management regularly review its various businesses to ensure that resources are deployed and activities are pursued in the best interests of Kimberly-Clarks stockholders. In 2013, management of Kimberly-Clark reported to Kimberly-Clarks Board of Directors the results of managements most recent strategic assessment and review of the long-term strategy of the health care business. Following such review, on November 14, 2013, Kimberly-Clark announced that its Board of Directors authorized management to evaluate a potential tax-free spin-off of our business. On , 2014, Kimberly-Clarks Board of Directors approved the distribution of all of the issued and outstanding shares of Halyard common stock on the basis of one share of Halyard common stock for every shares of Kimberly-Clark common stock held as of the close of business on , 2014, the record date for the distribution.
Reasons for the Separation and Distribution
Kimberly-Clarks Board of Directors has determined that separating its health care business from Kimberly-Clarks other businesses would be in the best interests of Kimberly-Clark and its stockholders. Our business and the businesses of Kimberly-Clark have distinct operating, business and financial characteristics. In making the determination to spin off its health care business, Kimberly-Clarks Board of Directors noted that the spin-off would permit Kimberly-Clark to focus on its consumer and K-C Professional brands and would permit us to focus our attention and financial resources on our business. A wide variety of factors were considered by the Kimberly-Clark Board of Directors in evaluating the separation and distribution. The Kimberly-Clark Board of Directors considered the following to be the material potential benefits to the separation and distribution:
| Strategic focus. The distribution will allow each business to focus its attention and financial resources to more effectively pursue its own distinct operating priorities and strategies, which have diverged over time. |
| Capital flexibility. The distribution will permit each company to concentrate its financial resources solely on its own operations without having to compete with each other for investment capital and will allow us to utilize our expected excess cash flow to invest in the growth of our business. In addition, we and Kimberly-Clark will have direct access to the debt and equity capital markets to fund our and its respective growth opportunities in a time and in a manner appropriate for our and Kimberly-Clarks respective business needs. |
| Employee incentives. We will be able to develop incentive programs to better attract and retain key employees through the use of stock-based and performance-based incentive plans that more directly link compensation with the financial performance of our business. |
| Distinct investment identity . The distribution will allow investors to separately value Kimberly-Clark and Halyard based on their unique investment identities, including the merits, performance and future prospects of Kimberly-Clarks and our respective businesses. The distribution will also provide investors with two distinct and targeted investment opportunities. |
| Management realignment. Each company will be able to realign its management structure to better focus on its different product markets and the pursuit of unique business opportunities for long-term growth and profitability. |
There can be no assurance that, following the distribution, these or any other benefits will be realized to the extent anticipated or at all.
Kimberly-Clarks Board of Directors also considered a number of potentially negative factors in evaluating the distribution, including the following which it considered to be the material potentially negative factors:
|
Loss of synergies and increased costs . As a current part of Kimberly-Clark, we take advantage of various functions performed by Kimberly-Clark, such as accounting, tax, legal, human resources and other general and administrative functions. After the distribution, Kimberly-Clark will not perform |
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many of these functions for us. Because of our smaller scale as a stand-alone company, our cost of performing these functions may be higher than the amounts reflected in our historical combined financial statements. As a result, this could cause our profitability to decrease. |
| Disruptions to the business as a result of the distribution . The actions required to separate Kimberly-Clarks health care business from Kimberly-Clarks other businesses and transfer it to us will take significant management time and attention and could disrupt our and Kimberly-Clarks respective operations. |
| Increased significance of certain costs and liabilities. Certain costs and liabilities that were otherwise less significant to Kimberly-Clark as a whole will be more significant for us as a stand-alone company. |
| One-time costs of the distribution . We and Kimberly-Clark will incur costs in connection with the transition to two stand-alone publicly-traded companies, including costs to separate information systems, accounting, tax, legal and other professional services costs, and recruiting and relocation costs associated with hiring key senior management personnel. |
| Inability to realize anticipated benefits of the distribution . We may not achieve the anticipated benefits of the distribution for a variety of reasons, including: |
| the separation will require significant amounts of managements time and effort, which may divert its attention from operating and growing our business, |
| following the distribution, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of Kimberly-Clark, and |
| following the distribution, our business will be less diversified than Kimberly-Clarks business prior to the separation. |
| Limitations placed upon Halyard as a result of the tax matters agreement . To preserve the treatment to Kimberly-Clark of the separation and distribution as a reorganization under Sections 368(a)(1)(D) and 355 of the Code, under the tax matters agreement that we will enter into with Kimberly-Clark, we will be restricted from taking any action that prevents the separation and distribution from satisfying the requirements for tax-free treatment under Sections 368(a)(1)(D) and 355 of the Code. These restrictions will limit our near-term ability to repurchase Halyard shares or to issue additional shares, pursue strategic transactions or engage in other transactions that might increase the value of our business. See Risk Factors Risks Related to the Distribution and Our Separation from Kimberly-Clark. |
Kimberly-Clarks Board of Directors concluded that the potential benefits of the distribution outweighed these negative factors.
Formation of Halyard
Halyard Health, Inc. was incorporated in Delaware on February 25, 2014 for the purpose of holding Kimberly-Clarks health care business following the distribution. Prior to the distribution, we and Kimberly-Clark expect to engage in a series of transactions that are designed to transfer ownership of Kimberly-Clarks health care business to us. Prior to the transfer by Kimberly-Clark to us of its health care business, we will have no operations other than those incident to our formation and in preparation for the separation and distribution.
Manner of Effecting the Distribution
On the distribution date, with the assistance of Computershare, the settlement and distribution agent, Kimberly-Clark will electronically distribute all of the outstanding shares of Halyard common stock to the holders of record of Kimberly-Clark common stock at the close of business on the record date. The distribution will be made by
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way of direct registration in book-entry form on the basis of one share of Halyard common stock for every shares of Kimberly-Clark common stock (the distribution ratio) held on the record date of , 2014. A book-entry account statement reflecting your ownership of whole shares of Halyard common stock will be mailed to you, or your brokerage account will be credited for the shares. Direct registration in book-entry refers to a method of recording share ownership when no physical share certificates are issued to stockholders, as will be the case in the distribution. Each share of Halyard common stock that is distributed will be validly issued, fully paid and non-assessable and free of preemptive rights.
Kimberly-Clark will not distribute fractional shares of Halyard common stock in connection with the distribution. You will receive a check, or a credit to your brokerage account, for the cash equivalent of any fractional shares you otherwise would have received in the distribution. The distribution agent will, on or after the distribution date, aggregate and sell all of those fractional interests on the open market at then applicable market prices and distribute the aggregate cash proceeds ratably (based on the fractional share such holder would otherwise be entitled to receive) to each Kimberly-Clark stockholder who otherwise would have been entitled to receive a fractional share in the distribution. Kimberly-Clark will pay all brokers fees and commissions in connection with the sale of fractional interests. Neither Kimberly-Clark nor Halyard will be able to guarantee any minimum sale price in connection with the sale of these shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares. If you own less than shares of Kimberly-Clark common stock on the record date, you will not receive any shares of Halyard common stock in the distribution, but you will receive cash in lieu of fractional shares. The receipt of cash in lieu of fractional shares will generally result in a taxable gain or loss to the recipient stockholder. See Material U.S Federal Income Tax Consequences for a discussion of the U.S. federal income tax treatment of proceeds from fractional shares.
Transferability of Shares You Receive
Shares of Halyard common stock distributed to Kimberly-Clark stockholders in connection with the distribution will be transferable without registration under the Securities Act of 1933, as amended, or the Securities Act, except for shares received by persons who may be deemed to be affiliates of Halyard. Persons who may be deemed to be affiliates of Halyard after the distribution generally include individuals or entities that control, are controlled by or are under common control with us, which may include our executive officers, directors or principal stockholders. Securities held by our affiliates will be subject to resale restrictions under the Securities Act. Our affiliates will be permitted to sell shares of Halyard common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.
Treatment of Equity-Based Compensation
K-C Participants
Under the terms of Kimberly-Clarks 2011 Equity Participation Plan (the Kimberly-Clark 2011 Plan) and the applicable award agreement, with respect to plan participants that are not employees of Halyard or its subsidiaries (K-C Participants), appropriate adjustments will be made to stock options held by K-C Participants by Kimberly-Clarks Management Development and Compensation Committee to the extent necessary to preserve the benefit of such stock options, such that
| the exercise price of such stock options will be decreased by dividing the exercise price by a fraction (the K-C Ratio), the numerator of which is the closing price of Kimberly-Clark common stock on the distribution date and the denominator of which is the opening price of Kimberly-Clark common stock on the first trading day immediately following the distribution date, and |
| the number of outstanding stock options will be increased by multiplying the number of outstanding stock options by the K-C Ratio. All other stock option terms will remain the same. |
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With respect to unvested performance-based and/or time-based restricted stock units held by K-C Participants, the number of such restricted stock units will be increased by a dividend equivalent equal to the value of the Halyard common stock which would have been distributed had such restricted stock units been vested. The additional restricted stock units will be accumulated and paid if and when the underlying restricted stock units vest and are paid, based on the actual number of restricted stock units outstanding immediately prior to the distribution that vest. The performance goals previously established for the performance-based restricted stock units will not be adjusted but the return on invested capital and net sales performance criteria, as reported, will be adjusted to reflect the impact of the distribution thereon.
Halyard Participants
Upon the distribution, under the terms of the Kimberly-Clark 2011 Plan and the applicable award agreements, with respect to plan participants that are employees of Halyard or its subsidiaries (Halyard Participants) that are under the age of 55:
| any unvested stock options held by them as of the distribution date will be forfeited, |
| any vested stock options held by them as of the distribution date will be exercisable for the lesser of three months or the remaining term of the option, |
| any unvested performance-based restricted stock units outstanding for six months or less from the date of grant will be forfeited, |
| any unvested performance-based restricted stock units outstanding more than six months from the date of grant will vest pro rata, based on the number of full years of employment, and |
| all unvested time-based restricted stock units will vest pro rata, based on the number of full years of employment. |
Upon the distribution, under the terms of the Kimberly-Clark 2011 Plan and the applicable award agreements, with respect to Halyard Participants that are at or over the age of 55:
| any unvested stock options will vest, |
| any stock options will be exercisable until the earlier of five years or the remaining term of the options, |
| any unvested performance-based restricted stock units outstanding for six months or less from the date of grant will be forfeited, |
| any unvested performance-based restricted stock units outstanding more than six months after the date of grant will vest in full and will be payable at the end of the performance period based on attainment of the performance goal, and |
| all unvested time-based restricted stock units will vest pro rata, based on the number of full years of employment. |
Unvested stock options, performance based restricted stock units, and time-based restricted stock units that are forfeited by Halyard Participants will be replaced with equivalent grants of Halyard stock options or time-based restricted stock units with substantially the same intrinsic value as the forfeited Kimberly-Clark awards. After adjusting the option exercise price, number of options and number of restricted stock units to maintain such intrinsic value, all other terms and conditions of the Halyard replacement grants will be materially the same as the forfeited Kimberly-Clark grants, taking into account service with Kimberly-Clark, except that all Halyard replacement restricted stock units will be time-based restricted stock units and not performance-based restricted stock units.
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Results of the Separation and Distribution
After the separation and distribution, we will be a separate publicly-traded company owning and operating what had previously been Kimberly-Clarks health care business. Immediately after the distribution, we expect to have approximately million shares of Halyard common stock issued and outstanding based on the distribution ratio described above and the anticipated number of beneficial stockholders and outstanding Kimberly-Clark shares on , 2014, the record date. The actual number of shares to be distributed will be determined based on the number of Kimberly-Clark shares outstanding on the record date.
The distribution will not affect the number of outstanding Kimberly-Clark shares or any rights of Kimberly-Clark stockholders, although it may affect the market value of the outstanding Kimberly-Clark common stock.
We and Kimberly-Clark will enter into a distribution agreement and various other agreements before the distribution to effect the separation and set forth our contractual relationships with Kimberly-Clark after the distribution. These agreements will provide for the allocation, between us and Kimberly-Clark, of Kimberly-Clarks assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the distribution and will govern certain relationships between us and Kimberly-Clark after the distribution. For a more detailed description of these agreements, see Our Relationship with Kimberly-Clark after the Distribution.
Market for Halyard Common Stock
There is currently no public trading market for shares of Halyard common stock. We expect to apply to list Halyard common stock on the New York Stock Exchange under the symbol HYH. We also expect that a when-issued trading market for Halyard common stock will begin on or shortly before the record date and continue up to and including the distribution date, as more fully described below under Trading Between the Record Date and Distribution Date. We cannot predict the trading prices for Halyard common stock before or after the distribution date. The trading price of Halyard common stock is likely to fluctuate significantly, particularly until an orderly market develops. Prices for Halyard common stock will be determined in the trading markets and may be influenced by many factors, including those described under the caption Risk Factors Risks Related to Ownership of Halyard Common Stock.
Trading Between the Record Date and Distribution Date
Beginning on or shortly before the record date and continuing up to and including through the distribution date, Kimberly-Clark expects that there will be two markets in Kimberly-Clark common stock: a regular-way market and an ex-distribution market. Kimberly-Clark common stock that trades on the regular-way market will trade with an entitlement to Halyard common stock distributed pursuant to the separation. Kimberly-Clark common stock that trades on the ex-distribution market will trade without an entitlement to Halyard common stock distributed pursuant to the distribution. Therefore, if you sell Kimberly-Clark common stock in the regular-way market up to and including through the distribution date, you will be selling your right to receive Halyard common stock in the distribution. If you own shares of Kimberly-Clark common stock at the close of business on the record date and sell those shares on the ex-distribution market up to and including through the distribution date, you will receive the shares of Halyard common stock that you are entitled to receive pursuant to your ownership as of the record date of Kimberly-Clark common stock.
Furthermore, beginning on or shortly before the record date and continuing up to and including the distribution date, we expect that there will be a when-issued market in Halyard common stock. The term when-issued means that shares can be traded conditionally prior to the time shares are actually available or issued. The when-issued trading market will be a market for shares of Halyard common stock that will be distributed to Kimberly-Clark stockholders on the distribution date. If you own Kimberly-Clark common stock at the close of business on the record date, you will be entitled to Halyard common stock distributed pursuant to the
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distribution. You may trade this entitlement to shares of Halyard common stock, without the shares of Kimberly-Clark common stock you own, on the when-issued market. On the first trading day following the distribution date, when-issued trading in Halyard common stock will end and regular-way will begin.
Ex-distribution and when-issued trades generally are settled four business days after the distribution date. If, for whatever reason, the distribution does not occur, when-issued and ex-distribution trades will be cancelled and, therefore, will not be settled.
Incurrence of Indebtedness
Prior to the distribution, we expect to borrow approximately $ million through the issuance of senior unsecured notes and/or a secured credit facility. We also anticipate entering into a revolving credit facility allowing borrowings of up to $ million. We expect that the proceeds from the senior unsecured notes and/or the secured credit facility will be used to fund a cash distribution of approximately $ million to Kimberly-Clark immediately prior to the distribution. Funds under the revolving credit facility are expected to be available for our working capital and other requirements after the distribution. See Description of Material Indebtedness.
Distribution Conditions and Termination
We expect that the distribution will be effective on the distribution date, , 2014, provided that, among other things, the following conditions will have been satisfied:
| the debt financing contemplated to be obtained by Halyard in connection with the distribution, as described in the distribution agreement, shall have been obtained, |
| the making of a cash distribution of $ million from Halyard to Kimberly-Clark prior to the distribution, |
| the receipt of an opinion of Baker Botts, L.L.P. to the effect that the separation and the distribution will qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code, |
| the receipt of an opinion from Houlihan Lokey, Inc. with respect to the solvency of Halyard in connection with the distribution, |
| Kimberly-Clark shall have completed the transfer to us of assets and liabilities as well as the permits, licenses and registrations relating to our business as described in this information statement, |
| the SEC shall have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, and no stop order relating to our registration statement shall be in effect, |
| we and Kimberly-Clark shall have received all permits, registrations and consents required under the securities or blue sky laws of states or other political subdivisions of the United States or of foreign jurisdictions in connection with the distribution, |
| the shares of Halyard common stock to be distributed shall have been accepted for listing on the New York Stock Exchange, subject to official notice of distribution, |
| execution and delivery of the transaction agreements relating to the separation as described in Our Relationship with Kimberly-Clark after the Distribution, |
| no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition shall be in effect that prevents consummation of the separation, distribution or any of the related transactions, including the transfers of assets and liabilities contemplated by the distribution agreement, and |
| no other event or development shall be in existence or have occurred that, in the judgment of Kimberly-Clarks Board of Directors, in its sole discretion, makes it inadvisable to effect the distribution and other related transactions. |
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The fulfillment of the foregoing conditions will not create any obligation on Kimberly-Clarks part to effect the distribution, and Kimberly-Clarks Board of Directors has reserved the right to amend, modify or abandon the distribution and the related transactions at any time prior to the distribution date. Kimberly-Clarks Board of Directors may, in its sole discretion, also waive any of these conditions.
Kimberly-Clark will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the record date and the distribution date and the distribution ratio. Kimberly-Clark does not intend to notify its stockholders of any modifications to the terms of the separation or distribution that, in the judgment of its Board of Directors, are not material. To the extent that the Kimberly-Clark Board of Directors determines that any modifications by Kimberly-Clark materially change the terms of the distribution, Kimberly-Clark will notify Kimberly-Clark stockholders in a manner reasonably calculated to inform them about the modification as may be required by law, including by providing a supplement to this information statement.
Accounting Treatment
The distribution will be accounted for by Kimberly-Clark on a historical cost basis, and no gain or loss will be recorded.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material U.S. federal income tax consequences of the contribution of our business to us by Kimberly-Clark and the distribution of all of the outstanding shares of our common stock to Kimberly-Clarks stockholders. This summary is based on the Code, U.S. Treasury regulations promulgated thereunder and on judicial and administrative interpretations of the Code and the U.S. Treasury regulations, all as in effect on the date of this information statement, and is subject to changes in these or other governing authorities, any of which may have a retroactive effect. This summary assumes that the separation and the distribution will be consummated in accordance with the distribution agreement and as described in this information statement. This summary does not purport to be a complete description of all U.S. federal income tax consequences of the separation and the distribution nor does it address the effects of any state, local or foreign tax laws or U.S. federal tax laws other than those relating to income taxes on the separation and the distribution. The tax treatment of a Kimberly-Clark stockholder may vary depending upon the stockholders particular situation, and some Kimberly-Clark stockholders may be subject to special rules not discussed below, including, but not limited to, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, traders in securities who elect to apply a mark-to-market method of accounting, persons who do not hold Kimberly-Clark common stock as a capital asset, employees of Kimberly-Clark, non-U.S. holders of Kimberly-Clark common stock, individuals who hold Kimberly-Clark common stock as part of a hedge, straddle, conversion, synthetic security, integrated investment or constructive sale transaction, foreign entities, foreign trusts and estates and beneficiaries thereof, or persons who acquire shares of Kimberly-Clark common stock pursuant to the exercise of employee stock options or otherwise as compensation.
YOU ARE URGED TO CONSULT YOUR TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE DISTRIBUTION, INCLUDING THE EFFECTS OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX RULES.
In Rev. Proc. 2013-12, the U.S. Internal Revenue Service announced that, effective for ruling requests postmarked or received after August 23, 2013, it generally will no longer provide a private letter ruling that the separation and the distribution will qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code, nor is Kimberly-Clark seeking such a ruling from the U.S. Internal Revenue Service.
It is a condition to the completion of the distribution that Kimberly-Clark obtain an opinion from the law firm of Baker Botts L.L.P. to the effect that the separation and the distribution will qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code. An opinion of counsel is not binding on the Internal Revenue Service or the courts. Further, opinions of counsel are based on, among other things, current law and certain assumptions and representations as to factual matters made by Kimberly-Clark and Halyard, which if incorrect in certain material respects would jeopardize the conclusions reached by counsel in its opinion. Kimberly-Clark and we are not currently aware of any facts or circumstances that would cause such assumptions and representations to be untrue or incorrect in any material respect or that would jeopardize the conclusions expected to be reached by counsel in its opinion.
Assuming that the separation and the distribution qualify as a reorganization for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code, the following will describe the material U.S. federal income tax consequences to Kimberly-Clark, Halyard and Kimberly-Clark stockholders of the separation and the distribution:
| subject to the discussion below regarding Section 355(e) of the Code, neither Halyard nor Kimberly-Clark will recognize any gain or loss upon the separation and distribution of shares of Halyard common stock and no amount will be includable in the income of Kimberly-Clark or Halyard as a result of the separation and the distribution other than taxable income or gain possibly arising out of internal reorganizations undertaken in connection with the separation and distribution and with respect to any items required to be taken into account under U.S. Treasury regulations relating to consolidated federal income tax returns, |
| a Kimberly-Clark stockholder will not recognize any gain or loss as a result of the distribution except that gain attributable to cash received in lieu of fractional shares will generally be taxable, |
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| after the separation and distribution, a Kimberly-Clark stockholders aggregate tax basis in such stockholders shares of Kimberly-Clark common stock and in shares of Halyard common stock will equal such stockholders tax basis in its Kimberly-Clark common stock immediately before the distribution, allocated between the Kimberly-Clark common stock and Halyard common stock in proportion to their fair market values on the distribution date, and |
| a Kimberly-Clark stockholders holding period for Halyard common stock received in the distribution will include the holding period for that stockholders Kimberly-Clark common stock. |
If the separation and the distribution do not qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code, Kimberly-Clark would recognize a taxable gain equal to the excess of the fair market value of Halyard common stock distributed to Kimberly-Clark stockholders over Kimberly-Clarks tax basis in Halyard common stock. In addition, each stockholder who receives Halyard common stock in the distribution would generally be treated as receiving a taxable distribution in an amount equal to the fair market value of Halyard common stock received, including any fractional share sold on behalf of the stockholder. Such stockholder would be taxed on the full value of our shares that he or she received (without reduction for any portion of his or her basis in Kimberly-Clark shares) as a dividend for U.S. federal income tax purposes and possibly for purposes of state and local tax law to the extent of his or her pro rata share of Kimberly-Clarks current and accumulated earnings and profits (which would include Kimberly-Clarks taxable gain on the distribution).
Even if the distribution otherwise qualifies as a reorganization under Sections 368(a)(1)(D) and 355 of the Code, it may be disqualified as tax-free to Kimberly-Clark under Section 355(e) of the Code, if 50% or more of Kimberly-Clarks stock or our stock is acquired or issued (excluding the issuance of Halyard common stock to Kimberly-Clark stockholders in connection with the distribution) as part of a plan or series of related transactions that includes the distribution. For this purpose, any acquisitions or issuances of Kimberly-Clarks stock within two years before the distribution, and any acquisitions or issuances of Kimberly-Clarks stock or of Halyard common stock within two years after the distribution, are presumed to be part of such a plan, although we or Kimberly-Clark may be able to rebut that presumption. We are not aware of any acquisitions or issuances of Kimberly-Clarks stock within the two years before the distribution that must be taken into account for purposes of Section 355(e) of the Code. If the separation and the distribution qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code but an acquisition or issuance of our stock or Kimberly-Clarks stock would cause Section 355(e) of the Code to apply, Kimberly-Clark would recognize a taxable gain as described above, but the distribution would generally be tax-free to each Kimberly-Clark stockholder. Under the tax matters agreement between Kimberly-Clark and us, we may be required to indemnify Kimberly-Clark against that taxable gain if it were triggered by an acquisition or issuance of our stock. See Our Relationship with Kimberly-Clark after the Distribution - Tax Matters Agreement for a more detailed discussion of the tax matters agreement between Kimberly-Clark and us. If we were to be required to indemnify Kimberly-Clark for taxes incurred as a result of the distribution being taxable, it would have a material adverse effect on our financial condition and results of operations.
Current U.S. Treasury regulations require each Kimberly-Clark stockholder who receives shares of Halyard common stock in the distribution to attach to his or her U.S. federal income tax return for the year in which the distribution occurs a detailed statement setting forth such data as may be appropriate to show the applicability of Section 355 of the Code to the distribution. Within a reasonable period of time after the distribution, Kimberly-Clark will provide its stockholders who receive Halyard common stock pursuant to the distribution with the information necessary to comply with such requirement.
Payments of cash to holders of Kimberly-Clark common stock in lieu of fractional shares may be subject to information reporting and backup withholding at a rate of 28%, unless a stockholder provides proof of an applicable exemption or a correct taxpayer identification number and otherwise complies with the requirements of the backup withholding rules. Backup withholding does not constitute an additional tax. Amounts withheld as backup withholding may be credited against a stockholders U.S. federal income tax liability (and any amounts in excess of such income tax liability may be refunded), provided that the required information is timely supplied to the IRS.
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OUR RELATIONSHIP WITH KIMBERLY-CLARK
AFTER THE DISTRIBUTION
Following the distribution, Halyard and Kimberly-Clark will operate separately, each as a stand-alone public company. Prior to the distribution, we will enter into certain agreements with Kimberly-Clark that will effect the separation of our business from Kimberly-Clarks other businesses, set forth our contractual relationships with Kimberly-Clark after the distribution and provide for the allocation, between us and Kimberly-Clark, of Kimberly-Clarks assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the distribution.
The following is a summary of the terms of the material agreements that we intend to enter into with Kimberly-Clark prior to the distribution. The material agreements described below will be filed as exhibits to the registration statement on Form 10 of which this information statement is a part, and the summaries of each of these agreements set forth the terms of the agreements that we believe are material. These summaries are qualified in their entireties by reference to the full text of the applicable agreements, which are incorporated by reference into this information statement. The terms of the agreements described below that will be in effect following the distribution have not yet been finalized; changes to these agreements, some of which may be material, may be made prior to the distribution date, in which case this information statement will be amended or supplemented to disclose such changes.
Distribution Agreement
The following discussion summarizes the material provisions of the distribution agreement that will be entered into between us and Kimberly-Clark. The distribution agreement will set forth, among other things, our agreements with Kimberly-Clark regarding the principal transactions necessary to separate our business from Kimberly-Clarks other businesses. It will also set forth other agreements that govern the distribution and certain aspects of our relationship with Kimberly-Clark after the distribution date.
Transfer of Assets and Assumption of Liabilities
The distribution agreement will identify the assets to be transferred, the liabilities to be assumed and the contracts to be assigned to us and Kimberly-Clark as part of the separation, and will provide for when and how these transfers, assumptions and assignments will occur.
Halyards Cash Distribution to Kimberly-Clark
The distribution agreement will provide that, prior to the distribution, Halyard will make a cash distribution of approximately $ million to Kimberly-Clark. Kimberly-Clark is expected to use these funds for repurchases of its shares of common stock.
The Distribution
The distribution agreement will also govern the rights and obligations of the parties regarding the distribution following the completion of the separation. On the distribution date, Kimberly-Clark will distribute to its stockholders that hold Kimberly-Clark common stock as of the record date for the distribution all of the issued and outstanding shares of Halyard common stock on a pro rata basis. Kimberly-Clark stockholders of record on the record date will receive a distribution of one share of Halyard common stock for every shares of Kimberly-Clark common stock held by such stockholders. Kimberly-Clark stockholders will receive cash in lieu of any fractional shares of Halyard.
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Conditions to the Distribution
The distribution agreement will provide that the distribution is subject to the satisfaction (or waiver by Kimberly-Clark) of certain conditions. These conditions are described under The Separation and Distribution Distribution Conditions and Termination. Kimberly-Clark will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the record date, the distribution date and the distribution ratio.
Releases
The distribution agreement will provide for a full and complete release and discharge of all liabilities existing or arising from or based on facts existing before the distribution date, between or among us or any of our affiliates, on the one hand, and Kimberly-Clark or any of its affiliates (other than us), on the other hand, except as set forth in the distribution agreement.
These releases will not extend to obligations or liabilities under any agreements between the parties that remain in effect following the distribution, which agreements will include, but are not limited to, the distribution agreement, the transition services agreements, the tax matters agreement, the employee matters agreement, the intellectual property license agreements, the manufacture and supply agreements and the transfer and conveyance documents executed in connection with the separation of our business from Kimberly-Clarks other businesses.
Indemnification
The distribution agreement will contain cross-indemnification provisions principally designed to place financial responsibility for the liabilities of our business with us and financial responsibility for obligations and liabilities of Kimberly-Clark-related businesses with Kimberly-Clark. The distribution agreement will also establish procedures with respect to claims subject to indemnification and related matters.
Legal Matters
Subject to certain specified exceptions, the distribution agreement will provide that each party will assume the liability for, and control of, all pending or threatened legal matters related to its own business, including liabilities for any claims or legal proceedings related to products that had been part of its business but were discontinued prior to the distribution, or its assumed or retained liabilities and will indemnify the other party for any liability arising out of or resulting from such assumed legal matters. While Kimberly-Clark is retaining the liabilities related to claims and causes of actions alleging that the use of our continuous infusion devices resulted in postarthroscopic glenohumeral chondrolysis, we will indemnify Kimberly-Clark and assume the liability for any such claims and causes of actions arising after the distribution (the Post-Spin I-Flow Liabilities).
Insurance
The distribution agreement will provide for the allocation among the parties of rights and obligations under existing insurance policies with respect to occurrences prior to the distribution and sets forth procedures for the administration of insured claims. In addition, the distribution agreement will allocate between the parties the right to proceeds and the obligation to incur certain deductibles under certain insurance policies.
Further Assurances
In addition to the actions specifically provided for in the distribution agreement, the distribution agreement will provide that both we and Kimberly-Clark agree to use commercially reasonable efforts, prior to, on and after the distribution date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary,
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proper or advisable under applicable laws, regulations and agreements to consummate and make effective the transactions contemplated by the distribution agreement and the ancillary agreements.
Dispute Resolution
The distribution agreement will contain provisions that govern, except as otherwise provided in any related agreement, the resolution of disputes, controversies or claims that may arise between us and Kimberly-Clark after the distribution date.
Expenses
Except as expressly set forth in the distribution agreement or in any ancillary agreement, Kimberly-Clark will be responsible for all costs and expenses incurred in connection with the separation of our business and the distribution incurred prior to the distribution date, including costs and expenses relating to legal counsel, financial advisors and accounting advisory work related to the separation of our business and the distribution. Except as expressly set forth in the distribution agreement or in any ancillary agreement, the distribution agreement will provide that all such costs and expenses incurred in connection with the separation of our business and the distribution after the distribution date will be paid by the party incurring such costs and expenses.
Other Matters
Other matters governed by the distribution agreement include access to financial and other information, confidentiality, access to and provision of records and treatment of outstanding guarantees and similar credit support.
Termination
The distribution agreement will provide that it may be terminated and the distribution may be modified or abandoned at any time prior to the distribution date in the sole discretion of Kimberly-Clark without our approval or the approval of Kimberly-Clarks stockholders. In the event of a termination of the distribution agreement, that no party will have any liability of any kind to any other party or any other person. After the distribution date, the distribution agreement may not be terminated except by an agreement in writing signed by both Kimberly-Clark and us.
Transition Services Agreement
We will enter into a transition services agreement with Kimberly-Clark prior to the distribution pursuant to which we and Kimberly-Clark and our and Kimberly-Clarks respective affiliates will provide to each other for an agreed-upon charge, on an interim, transitional basis, various services, including, but not limited to, employee payroll and benefits administration, information technology services, financial and tax services, transportation and logistics, procurement services, order management and processing, regulatory compliance and other support services. The services generally will commence on the distribution date and terminate no later than two years following the distribution date.
We have been preparing for the transition to us of the services to be provided by Kimberly-Clark, or by third-party providers on behalf of Kimberly-Clark, under the transition services agreement. We anticipate that we will be in a position to complete the transition of those services on or before two years following the distribution date.
Subject to certain exceptions, the liabilities of each party providing services under the transition services agreements will generally be limited to the aggregate charges actually paid to such party by the other party pursuant to the transition services agreement during the twelve months prior to the event giving rise to the liability. The transition services agreement will also provide that the provider of a service shall not be liable to the recipient of such service for any special, indirect, incidental or consequential damages, except in connection with certain indemnification matters. The transition services agreement will also provide that the party receiving
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the services will indemnify the service provider for damages except to the extent caused by the gross negligence or willful misconduct of the service provider or damage to the service providers property caused by the service providers conduct in the provision of the services.
Tax Matters Agreement
We will enter into a tax matters agreement with Kimberly-Clark which will generally govern Kimberly-Clarks and our respective rights, responsibilities and obligations after the distribution with respect to taxes and tax benefits attributable to our business, as well as any taxes incurred by Kimberly-Clark in the case of the failure of the separation and distribution to qualify for tax-free treatment under Sections 368(a)(1)(D) or 355 of the Code. The tax matters agreement will also set forth Kimberly-Clarks and our respective obligations with respect to the filing of tax returns, the administration of tax contests, assistance and cooperation and other tax-related matters.
General Taxes. Under the tax matters agreement, we generally will be liable for and indemnify Kimberly-Clark against all income taxes imposed on us or our subsidiaries, as well as all other types of taxes attributable to our business. Kimberly-Clark generally will be liable for and indemnify us against all income taxes imposed on Kimberly-Clark or its subsidiaries, as well as all other types of taxes attributable to Kimberly-Clarks other businesses. The tax matters agreement also sets forth rules for determining how to allocate tax benefits between us and Kimberly-Clark and rules on the effect of subsequent adjustments to taxes and tax benefits due to tax audits or examinations.
Distribution-Related Taxes. Under the tax matters agreement we will be liable for taxes incurred by Kimberly-Clark that arise primarily as a result of our taking or failing to take, as the case may be, certain actions that may result in the separation and distribution failing to meet the requirements of a tax-free distribution under Sections 368(a)(1)(D) and 355 of the Code. In this regard, among other things, the tax matters agreement will restrict us, except in certain circumstances, from engaging in certain transactions during the Restricted Period, including: (i) issuing shares of our stock equal to or exceeding 20 percent (by vote or value) of the shares of our stock issued and outstanding immediately following the distribution, including to raise capital or as acquisition currency in furtherance of strategic transactions, (ii) selling 50 percent or more of the assets of the health care business or engaging in mergers or other strategic transactions that may result in any stockholder owning (as determined under U.S. federal income tax law) 40 percent or more (by vote or value) of the outstanding shares of our stock, (iii) repurchasing outstanding shares of our stock, other than in open market repurchases constituting less than 20 percent of such stock outstanding immediately following the distribution, and (iv) ceasing to actively conduct our business or liquidating. The foregoing prohibitions are in some cases more restrictive than that required under the Code due to the potential significant liability to Kimberly-Clark and its stockholders were the separation and the distribution determined to be a taxable transaction. Under the tax matters agreement, we will have the ability to engage in certain otherwise prohibited transactions, such as additional stock issuances or stock repurchases during the Restricted Period, provided we first deliver to Kimberly-Clark a tax opinion that doing so will not adversely affect the tax-free treatment of the separation and the distribution.
Administrative Matters. The tax matters agreement will also set forth Kimberly-Clarks and our respective obligations with respect to the preparation and filing of tax returns, the administration of tax contests, assistance and cooperation and other matters.
The foregoing summary is qualified in its entirety by reference to the full text of the tax matters agreement, the form of which has been filed as an exhibit to the registration statement on Form 10 of which this information statement is a part.
Employee Matters Agreement
We will enter into an employee matters agreement with Kimberly-Clark prior to the distribution to allocate liabilities and responsibilities relating to employment matters, employee compensation and benefit plans and programs and other related matters.
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The employee matters agreement will govern Kimberly-Clarks and our compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of each company, and will generally allocate liabilities and responsibilities relating to employee compensation and benefit plans and programs. The employee matters agreement will provide for the treatment of outstanding Kimberly-Clark equity awards and certain other outstanding annual and long-term incentive awards. The employee matters agreement will provide that our active employees will continue to participate in the health and welfare benefit plans sponsored by Kimberly-Clark through December 31, 2014 and will then commence participation in our health and welfare benefit plans, which will be generally similar to the existing Kimberly-Clark benefit plans, and that our active employees will commence participation in our 401(k) retirement benefit plan following the distribution. The employee matters agreement will also provide that, we will not establish a defined benefit pension plan for our employees in the United States or Canada and will no longer participate in the Kimberly-Clark frozen defined benefit pension plans in the United States and Canada, and further that the portion of certain foreign Kimberly-Clark pension plan covering our employees will be transferred to Halyard as of the distribution. The employee matters agreement will provide that we will not establish any plan providing medical or life insurance coverage for our retirees and that any of our employees or former employees who, as of the distribution date, participate in or are eligible to participate in such plans sponsored by Kimberly-Clark will continue to participate in or to be eligible to participate in such plans sponsored by Kimberly-Clark. In addition, the employee matters agreement will provide that the parties will be responsible for their respective current employees and compensation plans for such current employees and will allocate liabilities relating to former employees between the two companies, with Halyard being responsible for all post-distribution liabilities for our current and former employees, whether or not they continue to work for us after the distribution, with the exception of liabilities under Kimberly-Clarks defined benefit pension plan in the United States, health and life benefits provided to retirees, and Halyard employees absent from work on insured long term disability as of the distribution date. The employee matters agreement will also set forth the general principles relating to employee matters, including with respect to the assignment of employees, the assumption and retention of liabilities and related assets, expense reimbursements, workers compensation, leaves of absence, the provision of comparable benefits, employee service credit, the sharing of employee information, and the duplication or acceleration of benefits. The employee matters agreement may also address certain special circumstances, including employees who will transfer to their eventual permanent employer on a delayed basis because they will continue to provide services to either Kimberly-Clark or us during a transition period following the distribution.
Intellectual Property Agreements
We expect to enter into an intellectual property license agreement with Kimberly-Clark pursuant to which each party will grant a license to the other to use the intellectual property and technology owned by it as a result of the separation of our business from Kimberly-Clarks other businesses (other than the intellectual property licensed under the trademark license agreement described below) for use in the conduct of the others business as of the separation.
We also expect to enter into a trademark license agreement pursuant to which Kimberly-Clark will grant us a license to use certain of Kimberly-Clarks trademarks, trade names and service marks used in our business as of the distribution date to allow us sufficient time to (1) rebrand or phase out use of the licensed marks and (2) transfer or change any product registrations or regulatory approvals (or applications for either of the foregoing) that are under the name of Kimberly-Clark or any of its affiliates. We will not be able to grant sublicenses to these licensed marks, except limited sublicenses to our distributors in connection with their distribution of certain of our products and services. We will be required to cease all use of the licensed marks within specified periods set forth in the trademark license agreement, the duration of such periods will depend on the nature of the use and the corresponding time needed to cease use of the licensed marks.
Manufacturing and Supply Agreements
We expect to enter into one or more manufacturing and supply agreements with Kimberly-Clark prior to the distribution pursuant to which we or Kimberly-Clark, as the case may be, will manufacture, label and package products for the other party.
40
It is currently contemplated that following the distribution, we will not pay any cash dividends on Halyard common stock. The declaration and amount of any future dividends, however, will be determined by our Board of Directors and will depend on our financial condition, earnings and capital requirements after the distribution, covenants associated with our debt obligations and any other factors that our Board of Directors believes are relevant. There can be no assurance, however, that we will pay any cash dividends on Halyard common stock in the future.
DESCRIPTION OF MATERIAL INDEBTEDNESS
Prior to the distribution, we expect to borrow approximately $ million through the issuance of senior unsecured notes and/or a secured credit facility. We also anticipate entering into a revolving credit facility allowing borrowings of up to $ million. We expect that the proceeds from the senior unsecured notes and/or the secured credit facility will be used to fund a cash distribution of approximately $ million to Kimberly-Clark immediately prior to the distribution. Funds under the revolving credit facility are expected to be available for our working capital and other requirements after the distribution.
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The following table sets forth our capitalization as of June 30, 2014 on a historical basis and a pro forma basis to give effect to the distribution and transactions related to the distribution. The information below is not necessarily indicative of what Halyards capitalization would have been had the distribution and related financing transactions been completed as of June 30, 2014. You should read this table together with Selected Historical Combined Financial Data, Unaudited Pro Forma Condensed Combined Financial Statements, Managements Discussion and Analysis of Financial Condition and Results of Operations and our audited and unaudited historical combined financial statements and related notes thereto included elsewhere in this information statement.
As of June 30, 2014 | ||||||||
(millions of dollars) |
Historical | Pro Forma | ||||||
(unaudited) |
||||||||
Cash and cash equivalents |
$ | 48.5 | $ | 48.5 | ||||
|
|
|
|
|||||
Indebtedness: |
||||||||
Debt payable within one year |
$ | 10.4 | $ | | ||||
Long-term debt |
||||||||
% Unsecured Senior Notes due / Secured Credit Facility |
| | ||||||
Revolving Credit Facility |
| | ||||||
|
|
|
|
|||||
Total Indebtedness |
10.4 | | ||||||
|
|
|
|
|||||
Stockholders equity: |
||||||||
Common stock, par value $0.01 per share, shares authorized, issued and outstanding on a pro forma basis |
| | ||||||
Additional paid-in capital |
| 2,012.8 | ||||||
Kimberly-Clarks net investment |
2,088.9 | | ||||||
Accumulated other comprehensive income (loss) |
(11.6 | ) | (11.6 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
2,077.3 | 2,001.2 | ||||||
|
|
|
|
|||||
Total Capitalization |
$ | 2,087.7 | $ | |||||
|
|
|
|
The pro forma amounts of common stock and additional paid-in capital reflect the elimination of Kimberly-Clarks net investment and the issuance of an estimated million shares of Halyard common stock, par value $0.01 per share, based on the distribution ratio.
The pro forma total long-term debt of $ million represents expected borrowings at the time of the distribution, the net proceeds of which will be used by us to make a payment to Kimberly-Clark of approximately $ million prior to the distribution. For a description of the borrowing arrangements that we will enter into prior to the distribution, see Description of Material Indebtedness.
The pro forma debt payable within one year reflects an adjustment to eliminate related party debt of $10.4 million owed to wholly-owned Kimberly-Clark subsidiaries, which will be repaid prior to the distribution.
Our ability to issue additional stock in the first two years following the distribution will be constrained because such an issuance of additional stock may cause the distribution to be taxable to Kimberly-Clark under Section 355(e) of the Code, and under the tax matters agreement we may be required to indemnify Kimberly-Clark against that tax. See Material U.S. Federal Income Tax Consequences for a more detailed discussion of Section 355(e).
Pro forma financial information reflecting our post-distribution capitalization will be included in an amendment to this information statement.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements consist of unaudited pro forma condensed combined income statements for the year ended December 31, 2013 and the six months ended June 30, 2014, and an unaudited pro forma condensed combined balance sheet as of June 30, 2014. The unaudited pro forma condensed combined financial statements reported below should be read in conjunction with the information under Selected Historical Combined Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and the audited historical combined financial statements for the year ended December 31, 2013 and the related notes thereto and the unaudited historical combined financial statements for the six months ended June 30, 2014 and the related notes thereto included elsewhere in this information statement. The unaudited pro forma condensed combined income statements have been adjusted to give effect to the Pro Forma Transactions (as defined below) as if the Pro Forma Transactions had occurred or had become effective as of January 1, 2013. The unaudited pro forma condensed combined balance sheet has been adjusted to give effect to the Pro Forma Transactions as though the pro forma transactions had occurred as of June 30, 2014.
The unaudited pro forma condensed combined financial statements included in this information statement have been derived from the audited historical combined financial statements included elsewhere in this information statement and do not purport to represent what our financial position and results of operations would have been had the distribution and related transactions summarized under Our Relationship with Kimberly-Clark after the Distribution occurred on the dates indicated or to project our financial performance for any future period. In addition, the unaudited pro forma condensed combined financial statements are provided for illustrative and informational purposes only and are not necessarily indicative of our future results of operations or financial condition as a separate, stand-alone public company. The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable, but actual results may differ from the pro forma adjustments. These adjustments are subject to change based on the finalization of the employee matters, intellectual property, and manufacturing and supply agreements described under Our Relationship with Kimberly-Clark after the Distribution.
Kimberly-Clark did not account for us as, and we were not operated as, a separate, stand-alone public company for the periods presented. Our unaudited pro forma condensed combined financial statements have been prepared to reflect adjustments to our audited historical combined financial statements for the year ended December 31, 2013 and the unaudited historical combined financial statements for the six months ended June 30, 2014 that are (1) directly attributable to the Pro Forma Transactions; (2) factually supportable; and (3) with respect to the unaudited pro forma condensed combined income statement, expected to have a continuing impact on our results of operations. The unaudited pro forma condensed combined financial statements have been adjusted to give effect to the following (the Pro Forma Transactions):
| the transfer of certain of our assets and liabilities that will be retained by Kimberly-Clark, |
| the distribution by means of a tax-free distribution, at a -to- ratio, for stockholders and other adjustments resulting from the distribution, |
| our anticipated capital structure, including debt anticipated to be incurred, |
| the resulting elimination of Kimberly-Clarks net investment in us, and |
| the impact of, and transactions contemplated by, the distribution agreement, transition services agreements and tax matters agreement, between us and Kimberly-Clark summarized under Our Relationship with Kimberly-Clark after the Distribution. |
Transition Services Agreement
We expect to enter into a transition services agreement with Kimberly-Clark prior to the distribution pursuant to which we and Kimberly-Clark and our and their respective affiliates will provide to each other for an agreed-upon charge, on an interim, transitional basis, various services, including, but not limited to, employee payroll and benefits administration, information technology services, financial and tax services, transportation and logistics, procurement services, order management and processing, regulatory compliance and other support
43
services. Charges under the transition services agreement are expected to be approximately $9 million in 2014 and $32 million in 2015. No pro forma adjustments have been made for these expenses. The services generally are expected to commence on the distribution date for a term of up to two years following the distribution date. See Our Relationship with Kimberly-Clark after the Distribution Transition Services Agreements.
Corporate Allocations and Stand-Alone Public Company Costs
Kimberly-Clark currently provides certain corporate services to us, and costs associated with these functions have been allocated to us. These corporate services provided to us by Kimberly-Clark include executive management, supply chain, information technology, legal, finance and accounting, investor relations, human resources, risk management, tax, treasury and other services. In addition, stock-based compensation expense attributable to our employees and an allocation of stock-based compensation attributable to employees of Kimberly-Clark, have been included. The costs of such services have been allocated to us based on the most relevant allocation method to the service provided, primarily based on relative percentage of total net sales, relative percentage of headcount or specific identification. The total amount of these allocations from Kimberly-Clark was approximately $95 million in the year ended December 31, 2013 and $48 million for the six months ended June 30, 2014. These cost allocations are reflected within cost of products sold, selling and general expenses, and research and development in our audited historical combined income statement for the year ended December 31, 2013 as described in Note 15 to our historical combined financial statements and Note 12 to our unaudited historical combined financial statements for the six months ended June 30, 2014 appearing elsewhere in this information statement. Management believes the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us during the periods presented. Following the distribution, we expect Kimberly-Clark to continue to provide many of these services related to these functions on a transitional basis for a fee pursuant to the transition services agreements described above. See Our Relationship with Kimberly-Clark after the Distribution Transition Services Agreement.
Upon the distribution, we will assume responsibility for all of our stand-alone public company costs, including the costs of services currently provided by Kimberly-Clark. We estimate that our annual expense for these costs will be an aggregate of approximately $ million (representing approximately $ million of annual costs incremental to the 2013 allocated costs referred to above). In addition, as we transition away from the services currently provided by Kimberly-Clark, we believe that we may incur $ million to $ million of non-recurring transitional costs in both 2015 and 2016 to establish our own stand-alone functions. No pro forma adjustments have been made for these incremental stand-alone public company costs.
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HEALTH CARE BUSINESS
Unaudited Pro Forma Condensed Combined Income Statement
For the Six Months Ended June 30, 2014
(dollars in millions, except per share amounts)
(millions of dollars) |
Historical |
Pro Forma
Adjustments |
Pro Forma | |||||||||
Net sales |
$ | 824.2 | $ | (12.2 | )(c) | $ | 812.0 | |||||
Cost of products sold |
564.3 | (11.1 | )(c) | 553.2 | ||||||||
|
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|
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|
|||||||
Gross profit |
259.9 | (1.1 | ) | 258.8 | ||||||||
Research and development |
17.6 | | 17.6 | |||||||||
Selling and general expenses |
186.8 | (20.5 | )(a)(b) | 166.3 | ||||||||
Other (income) and expense, net |
(1.7 | ) | | (1.7 | ) | |||||||
|
|
|
|
|
|
|||||||
Operating profit |
57.2 | 19.4 | 76.6 | |||||||||
Interest income |
1.9 | | 1.9 | |||||||||
Interest expense |
| | | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
59.1 | 19.4 | 78.5 | |||||||||
Provision for income taxes |
(22.2 | ) | (6.8 | )(e) | (29.0 | ) | ||||||
|
|
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|
|||||||
Net income |
$ | 36.9 | $ | 12.6 | $ | 49.5 | ||||||
|
|
|
|
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|
|||||||
Pro forma earnings per share: |
||||||||||||
Basic |
||||||||||||
Diluted |
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
45
HEALTH CARE BUSINESS
Unaudited Pro Forma Condensed Combined Income Statement
For the Year Ended December 31, 2013
(dollars in millions, except per share amounts)
(millions of dollars) |
Historical |
Pro Forma
Adjustments |
Pro Forma | |||||||||
Net sales |
$ | 1,677.5 | $ | (25.5 | )(c) | $ | 1,652.0 | |||||
Cost of products sold |
1,065.3 | (23.0 | )(c) | 1,042.3 | ||||||||
|
|
|
|
|
|
|||||||
Gross profit |
612.2 | (2.5 | ) | 609.7 | ||||||||
Research and development |
37.9 | | 37.9 | |||||||||
Selling and general expenses |
351.4 | 10.6 | (a) | 362.0 | ||||||||
Other (income) and expense, net |
(2.4 | ) | | (2.4 | ) | |||||||
|
|
|
|
|
|
|||||||
Operating profit |
225.3 | (13.1 | ) | 212.2 | ||||||||
Interest income |
2.6 | | 2.6 | |||||||||
Interest expense |
(0.1 | ) | | (0.1 | ) | |||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
227.8 | (13.1 | ) | 214.7 | ||||||||
Provision for income taxes |
(73.2 | ) | 4.6 | (e) | (68.6 | ) | ||||||
|
|
|
|
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|
|||||||
Net income |
$ | 154.6 | $ | (8.5 | ) | $ | 146.1 | |||||
|
|
|
|
|
|
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Pro forma earnings per share: |
||||||||||||
Basic |
||||||||||||
Diluted |
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
46
HEALTH CARE BUSINESS
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 2014
(dollars in millions, except share and per share amounts)
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
47
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(a) | Intellectual Property Agreements |
We expect to enter into certain intellectual property agreements with Kimberly-Clark pursuant to which Halyard will pay Kimberly-Clark royalties for the use of certain Kimberly-Clark intellectual property for a transition period ending on the second anniversary of the distribution. The net effect of the agreements as reflected in the unaudited pro forma condensed combined income statement was an increase in selling and general expenses of $10.6 million for the year ended December 31, 2013, and $5.3 million for the six months ended June 30, 2014.
(b) | Transaction Costs |
Transaction costs expected to be incurred in 2014 in connection with the distribution are estimated to be between $100 million and $125 million, which include costs related to legal, accounting, information technology services and consulting services. We expect all these costs to be expensed.
The unaudited pro forma condensed combined income statement reflects an adjustment to remove $25.8 million of transaction costs directly related to the distribution that were incurred during the six months ended June 30, 2014.
(c) | Related Party Sales |
The unaudited pro forma condensed combined income statement reflects an adjustment to eliminate related party sales associated with certain feminine care products manufactured by Halyard for Kimberly-Clark that will not continue after the distribution. The net effect of the agreement as reflected in the unaudited pro forma condensed combined income statement was a decrease in net sales of $25.5 million and cost of products sold of $23.0 million for the year ended December 31, 2013, and a decrease in net sales of $12.2 million and cost of products sold of $11.1 million for the six months ended June 30, 2014.
(d) | New Debt Financing |
The unaudited pro forma condensed combined balance sheet reflects issuance of senior unsecured notes and/or a secured credit facility. We also anticipate entering into a revolving credit facility allowing borrowings of up to $ million. The adjustment also reflects the capitalization of approximately $ million of deferred financing costs that we will incur under the revolving credit facility and senior notes. These costs will be deferred and recognized over the terms of the respective debt agreements using the effective interest method.
The unaudited pro forma condensed combined income statement reflects an adjustment for the expected interest expense and the amortization of deferred financing costs on our new borrowings under the revolving credit facility and senior notes. Pro forma interest expense reflects (1) an estimated weighted average annual interest rate of % on indebtedness to be incurred in conjunction with this offering, and (2) amortization expense on the approximately $ million of deferred financing costs associated with our new borrowings, utilizing a weighted average maturity of years.
The unaudited pro forma condensed combined balance sheet reflects an adjustment to eliminate related party debt of $10.4 million owed to wholly-owned Kimberly-Clark subsidiaries. The related party debt is expected to be repaid prior to the distribution.
(e) | Resulting Tax Effects |
Reflects an income tax expense adjustment for the items noted in (a) through (d), calculated at the U.S. federal statutory rate of 35%.
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(f) | Elimination of Assets Retained and Liabilities Assumed by Kimberly-Clark |
Represents the elimination of certain accounts receivable, inventory, accounts payable, accrued liabilities and property, plant and equipment that will be retained by Kimberly-Clark pursuant to the distribution agreement.
(g) | Distribution Adjustments |
Represents the payment of approximately $ million by Halyard to Kimberly-Clark in connection with the distribution. In addition, includes the reclassification of Kimberly-Clarks net investment in us recorded in Kimberly-Clarks net investment, and reclassified into additional paid-in capital with the required balancing entry to reflect the par value of our outstanding common stock. The distribution of common stock was at a par value of $0.01 per share.
Pro Forma Earnings Per Share
The number of shares used to compute pro forma basic earnings per share for the year ended December 31, 2013 and six months ended June 30, 2014 is , the number of shares expected to be outstanding immediately following the distribution.
The number of shares used to compute pro forma diluted earnings per share for the year ended December 31, 2013 and six months ended June 30, 2014 is , which includes the dilutive impact of all outstanding restricted share units.
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SELECTED HISTORICAL COMBINED FINANCIAL DATA
The following selected historical combined financial data should be read in conjunction with our audited historical combined financial statements for the year ended December 31, 2013 and the related notes thereto and the unaudited historical combined financial statements for the six months ended June 30, 2014 and the related notes thereto included elsewhere in this information statement, Unaudited Pro Forma Condensed Combined Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations.
The historical combined financial statements and other data have been prepared on a stand-alone combined basis in accordance with accounting principles generally accepted in the United States (GAAP) and are derived from Kimberly-Clarks consolidated financial statements and accounting records using the historical results of operations and bases of the assets and liabilities of Kimberly-Clarks businesses and give effect to allocations of expenses from Kimberly-Clark. Our historical combined financial statements and other data will not be indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone public company during the periods shown.
The combined income statement data for each of the years ended December 31, 2013, 2012 and 2011, and the combined balance sheet data as of December 31, 2013 and 2012, are derived from our audited historical combined financial statements included elsewhere in this information statement. The combined income statement data for the six months ended June 30, 2014 and 2013, and the combined balance sheet as of June 30, 2014, are derived from our unaudited historical combined financial statements included elsewhere in this information statement. The combined income statement data for the years ended December 31, 2010 and 2009, and the combined balance sheet data as of December 31, 2011, 2010 and 2009, are derived from unaudited combined financial statements not included in this information statement. The unaudited combined financial statements were prepared on the same basis as our audited historical combined financial statements. In our opinion, such financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements.
Certain elements of the operations of our business are included in the consolidated income tax returns of Kimberly-Clark. Under the tax matters agreement, we will indemnify Kimberly-Clark for the income tax liabilities (and retain rights to related tax refunds) relating to operations, within Kimberly-Clarks consolidated group, of our subsidiaries following the distribution for periods through the distribution date. Accordingly, the combined balance sheet does not include current or prior period income tax receivables or payables related to our operations which file on a consolidated basis with Kimberly-Clark. For more information, see Our Relationship with Kimberly-Clark after the Distribution Tax Matters Agreement. The income tax provisions have been determined as if our business were a separate taxpayer.
(millions of dollars) |
Six Months Ended
June 30 |
Year Ended December 31 | ||||||||||||||||||||||||||
2014 | 2013 | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||
Income Statement Data: |
||||||||||||||||||||||||||||
Net Sales |
$ | 824.2 | $ | 826.7 | $ | 1,677.5 | $ | 1,684.0 | $ | 1,659.9 | $ | 1,495.8 | $ | 1,419.2 | ||||||||||||||
Gross Profit |
259.9 | 295.4 | 612.2 | 602.5 | 590.8 | 543.6 | 540.9 | |||||||||||||||||||||
Income Before Income Taxes |
59.1 | 98.3 | 227.8 | 229.8 | 214.6 | 159.9 | 274.3 | |||||||||||||||||||||
Net Income |
36.9 | 66.9 | 154.6 | 152.6 | 142.4 | 88.0 | 161.5 |
50
As of June 30 | As of December 31 | |||||||||||||||||||||||
(millions of dollars) |
2014 | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||||||
Working Capital |
$ | 314.5 | $ | 274.7 | $ | 234.6 | $ | 172.7 | $ | 156.4 | $ | 168.3 | ||||||||||||
Primary Working Capital (a) |
375.6 | 370.4 | 383.2 | 391.7 | 358.8 | 355.4 | ||||||||||||||||||
Property, Plant and Equipment, Net |
284.9 | 324.9 | 325.7 | 320.0 | 326.4 | 313.8 | ||||||||||||||||||
Total Assets |
2,456.3 | 2,484.0 | 2,534.2 | 2,509.5 | 2,518.3 | 2,507.2 | ||||||||||||||||||
Debt |
10.4 | 11.9 | 75.9 | 100.0 | 88.2 | 84.5 | ||||||||||||||||||
Kimberly-Clarks Net Investment |
2,088.9 | 2,098.7 | 2,045.6 | 2,000.9 | 1,981.6 | 2,021.3 |
(a) | Primary working capital consists of accounts receivable, net plus inventories, less trade accounts payable. |
(millions of dollars) |
Six Months Ended
June 30 |
Year Ended December 31 | ||||||||||||||||||||||||||
2014 | 2013 | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||
Other Data: |
||||||||||||||||||||||||||||
Capital Spending |
$ | 28.0 | $ | 25.0 | $ | 49.0 | $ | 40.8 | $ | 39.7 | $ | 41.6 | $ | 34.0 | ||||||||||||||
Depreciation and Amortization |
34.8 | 35.8 | 69.2 | 57.6 | 51.1 | 49.8 | 45.3 |
51
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis summarizes the factors that had a material effect on our results of operations during the six months ended June 30, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011. Also discussed is our financial position as of the end of those periods. You should read this discussion in conjunction with our historical combined financial statements and the notes to those historical combined financial statements and the unaudited pro forma condensed combined financial statements and the notes to those unaudited pro forma condensed combined financial statements included elsewhere in this information statement. This Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements. See Cautionary Statement Concerning Forward-Looking Statements for a discussion of the uncertainties, risks and assumptions associated with such statements.
Introduction
The results of operations of our business after the distribution will be significantly different than the results of operations of our business prior to the distribution. This difference results from, among other things, the impact of debt anticipated to be incurred, the impact of our operating as a separate, stand-alone public company, and the impact of, and transactions contemplated by, the various agreements between us and Kimberly-Clark summarized under Our Relationship with Kimberly-Clark after the Distribution.
This MD&A is intended to provide investors with an understanding of the recent pre-distribution performance of our business, financial condition and prospects. The following will be discussed and analyzed:
| Overview of Business, |
| Recent Developments, |
| Separation from Kimberly-Clark, |
| Overview of Operating Segments, |
| Results of Operations and Related Information, |
| Liquidity and Capital Resources, |
| Critical Accounting Policies and Use of Estimates, |
| Legal Matters, and |
| Financial Instruments and Risk Management. |
Overview of Business
Halyard is a global company which seeks to advance health and healthcare by preventing infection, eliminating pain and speeding recovery. Our products and solutions are designed to address some of todays most important healthcare needs, namely, preventing infection and reducing the use of narcotics while helping patients move from surgery to recovery. We market and support the efficacy, safety and economic benefit of our products with a significant body of clinical evidence.
We have two business segments: Surgical and Infection Prevention (S&IP) and Medical Devices.
Recent Developments
In June 2014, we initiated a plan to exit one of our disposable glove facilities in Thailand and outsource the related production to improve the competitive position of our surgical and infection prevention business. The restructuring is expected to result in a reduction of our workforce by approximately 3,000 positions.
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The plan is expected to be completed by December 31, 2015 and result in estimated cumulative charges of approximately $70 million ($50 million after tax) over that period. We anticipate that the charges will consist of a noncash asset impairment and incremental depreciation charges of $55 million and workforce reduction and other exit cash costs of $15 million.
Separation from Kimberly-Clark
Halyard Health, Inc. was incorporated in Delaware on February 25, 2014, as a wholly-owned subsidiary of Kimberly-Clark for the purpose of holding Kimberly-Clarks health care business following the distribution. Prior to the distribution, Kimberly-Clark has conducted its health care business through various divisions and subsidiaries. Following the distribution, we will be a separate, stand-alone public company, and Kimberly-Clark will have no continuing ownership interest in us.
Prior to the distribution, we will enter into a distribution agreement with Kimberly-Clark. In connection with the distribution, we will also enter into various other agreements to effect the separation of our business from Kimberly-Clarks other businesses and set forth our contractual relationships with Kimberly-Clark after the distribution. These agreements will provide for the allocation, between us and Kimberly-Clark, of Kimberly-Clarks assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the distribution. The agreements are expected to include transition services agreements, a tax matters agreement, an employee matters agreement, intellectual property agreements, and manufacturing and supply agreements.
For additional information regarding the distribution agreement and other transaction agreements, see Our Relationship with Kimberly-Clark after the Distribution and Risk Factors Risks Related to the Distribution and Our Separation from Kimberly-Clark.
Overview of Operating Segments
We have operated our S&IP business for over 30 years, providing products that address the prevention of healthcare-associated infections (HAIs) and provide protection for both healthcare workers and patients. We have recognized brands and leading market positions in the United States across our entire S&IP product portfolio, which includes sterilization wrap, surgical drapes and gowns, facial protection, protective apparel and medical exam gloves. Our S&IP product portfolio is supported by a global sales force, a customer support team with significant industry experience and robust product training, and customer education programs.
Our Medical Devices business is comprised of a diverse set of medical device solutions focused on improving patient outcomes, patient safety and reducing the cost of care. Our innovative portfolio includes post-operative pain management solutions, minimally invasive interventional (or chronic) pain therapies, closed airway suction systems and enteral feeding tubes. Our recognized brands and highly specialized sales team in each of these medical device product areas strategically position us for growth.
As used below, the term Corporate and other includes sales of feminine care products that we manufacture and sell to Kimberly-Clark. We expect these sales to continue following the distribution pursuant to one or more manufacturing and supply agreements to be entered into with Kimberly-Clark. See Our Relationship with Kimberly-Clark after the Distribution Manufacturing and Supply Agreements. Corporate and other also includes amounts that are not allocated to our two operating segments, such as certain costs allocated to us from Kimberly-Clark, including corporate business development costs and other Kimberly-Clark corporate costs.
Results of Operations and Related Information
This section presents a discussion and analysis of our net sales, operating profit and other information relevant to an understanding of our results of operations. This discussion and analysis compares the results for the six
53
months ended June 30, 2014 to the same period in 2013, the results for the year ended December 31, 2013 to the results for the year ended December 31, 2012, and results for the year ended December 31, 2012 to the results for the year ended December 31, 2011.
Components of Net Sales and Costs and Expenses
Net Sales
Our net sales are derived primarily from the sale of S&IP products and medical devices across North America, Europe, Asia Pacific and Latin America. Sales are reported net of returns, rebates and freight allowed (i.e., net sales).
Net Sales to Related Parties
Sales to other Kimberly-Clark subsidiaries and affiliates have historically been transacted under cost-plus pricing arrangements, which is consistent with Kimberly-Clarks global transfer pricing policies, and consists primarily of sales of gloves and non-healthcare products. We expect to enter into one or more manufacturing and supply agreements with Kimberly-Clark prior to the distribution pursuant to which we or Kimberly-Clark, as the case may be, will manufacture, label and package certain products for the other party. The manufacturing and supply agreements are expected to modify our historical intercompany arrangements and reflect new pricing.
Cost of Products Sold and Operating Costs and Expenses
Cost of products sold consists of many costs, including the costs of raw materials used in the manufacture of products, distribution costs, packaging costs, labor costs, tolling fees, and plant and equipment overhead.
Operating costs and expenses consist primarily of selling expenses, research and development costs and general and administrative expenses. Our selling expenses include marketing expense and sales commissions. Our general and administrative costs consist primarily of wages, related payroll and employee benefit expenses, litigation costs and professional fees and facility related costs, such as rent and depreciation.
Cost of products sold, selling and general expenses, and research and development also include certain expenses of Kimberly-Clark which were allocated to us for certain functions, including general corporate expenses related to supply chain, finance and shared services, legal, information technology, human resources, compliance, insurance, employee benefits and incentives and stock-based compensation. The costs of such services have been allocated to us based on the most relevant allocation method to the service provided, primarily based on relative percentage of total net sales, relative percentage of headcount or specific identification. Management believes the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us during the periods presented. However, these allocations may not be indicative of the actual expenses we would have incurred as a separate, stand-alone public company or of the costs we will incur in the future. Following the distribution, we expect Kimberly-Clark to continue to provide many of these services related to these functions on a transitional basis for a fee pursuant to the transition services agreements described above. See Our Relationship with Kimberly-Clark after the Distribution Transition Services Agreements.
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Results By Business Segment
Year-to-Date Results
Six Months Ended June 30 | ||||||||||||
(millions of dollars) |
2014 | 2013 | Change | |||||||||
NET SALES |
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Surgical and Infection Prevention |
$ | 561.0 | $ | 573.1 | (2.1 | )% | ||||||
Medical Devices |
251.0 | 240.6 | 4.3 | |||||||||
Corporate & Other |
12.2 | 13.0 | N.M. | |||||||||
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TOTAL NET SALES |
$ | 824.2 | $ | 826.7 | (0.3 | )% | ||||||
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OPERATING PROFIT |
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Surgical and Infection Prevention |
$ | 81.3 | $ | 67.8 | 19.9 | % | ||||||
Medical Devices |
56.2 | 35.4 | 58.8 | |||||||||
Corporate & Other (a) |
(82.0 | ) | (7.5 | ) | N.M. | |||||||
Other (income) and expense, net |
(1.7 | ) | (1.7 | ) | | |||||||
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TOTAL OPERATING PROFIT |
$ | 57.2 | $ | 97.4 | (41.3 | )% | ||||||
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N.M. - Not meaningful
(a) | Corporate & Other for the six months ended June 30, 2014 includes $49.0 million associated with the exit of our gloves manufacturing facility in Thailand and $25.8 million of transaction costs associated with the distribution. |
Net Sales By Geography
Six Months Ended June 30 | ||||||||||||
(millions of dollars) |
2014 | 2013 | Change | |||||||||
North America |
$ | 567.9 | $ | 566.3 | 0.3 | % | ||||||
Europe, Middle East and Africa |
115.5 | 113.7 | 1.6 | |||||||||
Asia Pacific and Latin America |
95.2 | 102.2 | (6.8 | ) | ||||||||
Related Party |
45.6 | 44.5 | 2.5 | |||||||||
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TOTAL NET SALES |
$ | 824.2 | $ | 826.7 | (0.3 | )% | ||||||
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Percentage Change
Changes Due To | ||||||||||||||||||||
NET SALES | Total |
Sales
Volume |
Net
Price (a) |
Currency | Mix/Other (b) | |||||||||||||||
Year-to-date June 30, 2014 versus Year-to-date June 30, 2013 |
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Total |
(0.3 | ) | 2 | (1 | ) | (1 | ) | | ||||||||||||
Surgical and Infection Prevention |
(2.1 | ) | | (1 | ) | (1 | ) | | ||||||||||||
Medical Devices |
4.3 | 6 | (1 | ) | (1 | ) | |
(a) | Net price includes the impact of price changes, discounts and rebates. |
(b) | Mix/Other includes rounding. |
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Changes Due To | ||||||||||||||||||||||||||||
OPERATING PROFIT | Total |
Sales
Volume |
Net
Price |
Input
Costs (a) |
Depreciation
and Amortization |
Currency (b) | Other (c) | |||||||||||||||||||||
Year-to-date June 30, 2014 versus Year-to-date June 30, 2013 |
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Total |
(41.3 | ) | 4 | (9 | ) | 3 | 1 | 1 | (41 | ) | ||||||||||||||||||
Surgical and Infection Prevention |
19.9 | (1 | ) | (11 | ) | 5 | 2 | 2 | 23 | |||||||||||||||||||
Medical Devices |
58.8 | 13 | (4 | ) | (1 | ) | (2 | ) | (2 | ) | 55 |
(a) | Input costs consists of inflation/deflation in raw materials, energy and distribution costs. |
(b) | Currency consists of both translational and transactional impacts of changes in exchange rates. |
(c) | Other includes changes in research and development, selling and general expenses, related party activity and manufacturing costs not separately listed in the table. Related party activity includes primarily related party sales of gloves and other non-healthcare products, cost of sales associated with such related party sales and certain corporate administrative costs allocated from Kimberly-Clark but not considered segment operating costs. In addition, Other includes the impact of the charges in 2014 related to the exit of our gloves manufacturing facility in Thailand and transaction costs associated with the distribution. |
Commentary Six Months ended June 30, 2014 Compared to Six Months ended June 30, 2013
Total
Net sales of $824.2 million during the six months ended June 30, 2014 were essentially even with the prior year as a 2% increase in sales volumes was offset by a 1% decrease in net selling prices and a 1% unfavorable change in foreign currency exchange rates.
Operating profit of $57.2 million during the six months ended June 30, 2014 decreased 41.3% compared to the prior year. In June 2014, we initiated a plan to exit one of our medical exam glove facilities in Thailand and outsource the related production to improve the competitive position of our surgical and infection prevention business. As a result, charges of $49.0 million, consisting of an asset impairment charge of $41.9 million and a charge of $7.1 million related to workforce reductions were recorded in the six months ended June 30, 2014. In addition, $25.8 million of incremental transaction and related costs associated with the distribution were incurred in the six months ended June 30, 2014.
Net selling prices were also unfavorable during the six months ended June 30, 2014 compared to the prior year. These decreases were partially offset by the impact of reduced selling and general expenses (excluding the distribution transaction costs discussed previously), supply chain cost savings, lower synthetic nitrile prices and higher sales volumes.
The effective tax rate was 37.6% for the first six months of 2014 compared to 31.9% for the first six months of 2013. The 2013 effective tax rate was favorably impacted by changes in tax law that resulted in a non-recurring benefit.
Surgical and Infection Prevention
Net sales of $561.0 million decreased 2.1% due to a reduction in net selling prices of 1% and unfavorable changes in currency exchange rates of 1%. Operating profit of $81.3 million increased 19.9% compared to the prior year. The profit improvement was driven by improved supply chain costs, a reduction in selling and general expenses mainly due to a strategic reorganization which led to headcount reductions in the fourth quarter of 2013, and lower synthetic nitrile prices. These favorable impacts to operating profit were partially offset by reduced net selling prices from higher rebates and discounts.
Net sales in North America decreased 1% due primarily to selling price decreases related to price reductions on group purchasing organizations and other contracts to secure renewals in our sterilization wrap and medical exam glove businesses.
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In Europe, Middle East and Africa, net sales decreased 2% due to a decline in sales volumes of 5%, partially offset by the favorable impact of changes in currency rates of 3% driven mainly by the strengthening of the euro relative to the U.S. dollar. The decrease in sales volumes was primarily driven by losses of lower profitability contracts in surgical drapes and gowns and medical exam gloves, partially offset by increases in sales of facial protection products due to new contracts in emerging markets.
Net sales in Asia Pacific and Latin America decreased 7% driven mainly by an 8% unfavorable change in currency exchange rates primarily due to the weakening of the Australian dollar and the Japanese yen relative to the U.S. dollar. In addition, net selling prices decreased 3% due primarily to price reductions in Australia from increased competition. These decreases were partially offset by sales volume increases of 4% due primarily to higher sales of semi-finished products to South Korea and growth of surgical drapes and gowns and sterilization wrap in emerging markets.
Medical Devices
Net sales of $251.0 million increased 4.3%, as higher sales volumes of 6% were partially offset by a 1% decrease in net selling prices and a 1% unfavorable change in currency exchange rates. The increase in sales volumes was primarily driven by digestive health and surgical pain management products. Operating profit of $56.2 million increased significantly compared to the prior year from an increase in sales volumes consistent with the growth in net sales and a reduction in selling and general expenses largely from decreased legal expenses and higher supply chain cost savings.
Net sales in North America increased 3% due to an increase in sales volumes in the digestive health business as a result of market growth and in the surgical pain management line which benefitted from a competitors exit from the business.
In Europe, Middle East and Africa, net sales increased 12% due to higher sales volumes of 13% driven primarily by digestive healths strong distributor demand and business gains across the region. In addition, sales volumes of surgical pain management products increased driven by high distributor demand.
Net sales in Asia Pacific and Latin America were essentially even with the prior year, as sales volume and selling price increases of 5% and 2%, respectively, were offset by unfavorable changes in currency exchange rates of 7%, mainly attributable to the Japanese yen. The increase in sales volumes was mainly driven by surgical pain management products.
Annual Results
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N.M. - Not meaningful
Net Sales By Geography
Year Ended December 31 | ||||||||||||||||||||
(millions of dollars) |
2013 | 2012 |
Change
2013 vs. 2012 |
2011 |
Change
2012 vs. 2011 |
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North America |
$ | 1,147.7 | $ | 1,136.8 | 1.0 | % | $ | 1,149.7 | (1.1 | )% | ||||||||||
Europe, Middle East and Africa |
231.9 | 226.8 | 2.2 | 228.0 | (0.5 | ) | ||||||||||||||
Asia Pacific and Latin America |
206.6 | 227.8 | (9.3 | ) | 197.1 | 15.6 | ||||||||||||||
Related Party |
91.3 | 92.6 | (1.4 | ) | 85.1 | 8.8 | ||||||||||||||
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TOTAL NET SALES |
$ | 1,677.5 | $ | 1,684.0 | (0.4 | )% | $ | 1,659.9 | 1.5 | % | ||||||||||
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Percentage Change
Total |
Changes Due To | |||||||||||||||||||
NET SALES |
Sales
Volume |
Net
Price (a) |
Currency |
Mix/
Other (b) |
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2013 versus 2012 |
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Total |
(0.4 | ) | 1 | | (1 | ) | | |||||||||||||
Surgical and Infection Prevention |
(2.7 | ) | (1 | ) | | (1 | ) | (1 | ) | |||||||||||
Medical Devices |
4.5 | 5 | | (1 | ) | | ||||||||||||||
2012 versus 2011 |
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Total |
1.5 | 2 | | (1 | ) | | ||||||||||||||
Surgical and Infection Prevention |
(0.2 | ) | 2 | (1 | ) | (1 | ) | | ||||||||||||
Medical Devices |
5.6 | 3 | 2 | | 1 |
(a) | Net price includes the impact of price changes, discounts and rebates. |
(b) | Mix/Other includes rounding. |
Changes Due To | ||||||||||||||||||||||||||||
OPERATING PROFIT | Total |
Sales
Volume |
Net
Price |
Input
Costs (a) |
Depreciation
and Amortization |
Currency (b) | Other (c) | |||||||||||||||||||||
2013 versus 2012 |
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Total |
(1.2 | ) | 6 | (1 | ) | 8 | (5 | ) | (6 | ) | (3 | ) | ||||||||||||||||
Surgical and Infection Prevention |
(2.6 | ) | | (2 | ) | 12 | (1 | ) | (5 | ) | (7 | ) | ||||||||||||||||
Medical Devices |
(3.6 | ) | 14 | 2 | (1 | ) | (10 | ) | (5 | ) | (4 | ) | ||||||||||||||||
2012 versus 2011 |
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Total |
8.2 | 6 | (1 | ) | 14 | (3 | ) | 3 | (11 | ) | ||||||||||||||||||
Surgical and Infection Prevention |
3.5 | 4 | (6 | ) | 20 | | 3 | (18 | ) | |||||||||||||||||||
Medical Devices |
15.6 | 8 | 9 | | (9 | ) | 4 | 4 |
(a) | Input costs consists of inflation/deflation in raw materials, energy and distribution costs. |
(b) | Currency consists of both translational and transactional impacts of changes in exchange rates. |
(c) | Other includes changes in research and development, selling and general expenses, related party activity and manufacturing costs not separately listed in the table. Related party activity consists primarily of related party sales of gloves and other non-healthcare products, cost of sales associated with such related party sales and certain corporate administrative costs allocated from Kimberly-Clark but not considered segment operating costs. |
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Commentary 2013 Compared to 2012
Total
Net sales of $1,677.5 million in 2013 were essentially even with the prior year as a 1% unfavorable change in foreign currency exchange rates were mostly offset by increased sales volumes of 1%.
Operating profit of $225.3 million in 2013 decreased 1.2% compared to the prior year. A combined 14% improvement from higher sales volumes and a decrease in input costs was offset by increased amortization expenses, unfavorable changes in foreign currency exchange rates, and higher operating expenses primarily from the impact of the medical device excise tax.
The effective tax rate was 32.1% in 2013 compared to 33.6% in 2012.
Surgical and Infection Prevention
Net sales of $1,153.1 million decreased 2.7%, as sales volumes and unfavorable currency rates each negatively impacted net sales by 1%. The decrease in sales volumes resulted from contract losses in certain low profitability accounts largely in the medical exam glove category associated with operating profit improvement initiatives in 2013, partially offset by increased sales volume of facial protection products due to a severe flu season in all regions and sales of surgical drapes and gowns in North America. Operating profit of $151.2 million decreased 2.6% compared to the prior year due to declines in input costs primarily from a decrease in the price of nitrile, offset by unfavorable currency rates, reduced net selling prices from higher rebates and discounts and higher supply chain costs.
Net sales in North America decreased 1% due primarily to a decrease in sales volumes of medical exam gloves for the reasons noted above, partially offset by an increase in sales volumes of surgical drapes and gowns resulting from improved GPO contract positions as well as new product introductions and by an increase in facial protection due to a severe flu season.
In Europe, Middle East and Africa, net sales decreased 4% primarily due to a decrease in sales volumes of 5% and reduced net selling prices of 1%, partially offset by favorable currency rates of 2%. The decrease in sales volumes was primarily driven by declines in sales volumes of medical exam gloves and surgical drapes and gowns as volume was reduced in certain less profitable accounts, partially offset by modest increases in sales volumes of sterilization wrap and facial protection associated with ordinary business variances.
Net sales in Asia Pacific and Latin America decreased 9% driven mainly by a 10% unfavorable change in currency exchange rates primarily due to the weakening of the Japanese yen and the Australian dollar relative to the U.S. dollar.
Medical Devices
Net sales of $499.0 million increased 4.5%, as higher sales volumes of 5% and improved product mix (i.e., the impact of a shift in the composition of products sold) were partially offset by a 1% unfavorable change in currency exchange rates. For the volume improvement, a supply chain disruption experienced by a competitor in Europe, Middle East and Africa surgical pain business contributed 2% of the gain while the respiratory and digestive health businesses each added 1% respectively. Operating profit of $85.6 million decreased 3.6% from higher amortization of acquired technologies, which are amortized based on the estimated economic benefit of the asset, increased operating expenses from the impact of the medical device excise tax and unfavorable currency exchange rates, primarily from the weakening of the Japanese yen relative to the U.S. dollar. These increases to expense were partially offset by improved sales volumes and higher net selling prices.
Net sales in North America increased 4% primarily due to sales volume increases of 3%. The increase in sales volumes were primarily driven by respiratory health and digestive health products. Respiratory health sales
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benefitted from a severe flu season accompanied by government pandemic orders, new contract gains and on-going expansion into the non-acute care markets. Digestive health sales were driven by market growth and a competitors exit from the enteral feeding tube market where we were able to gain a large portion of the stranded sales.
In Europe, Middle East and Africa, net sales increased 20% due to higher sales volumes. Increased demand associated with a supply chain disruption experienced by a competitor contributed to 14% of the increase. We believe the competitors supply chain was restored during the second quarter of 2014.
Net sales in Asia Pacific and Latin America decreased 11% due to a 10% unfavorable change in currency exchange rates and sales volume decreases of 2%, partially offset by net selling prices increases of 1%. The change to sales volume amounts to less than a million dollars.
Commentary 2012 Compared to 2011
Total
Net sales of $1,684.0 million in 2012 increased 1.5% compared to 2011, as higher sales volumes of 2% were partially offset by a 1% unfavorable change in currency rates.
Operating profit of $228.0 million in 2012 increased 8.2% compared to 2011, as higher net sales and a decrease in input costs were partially offset by increased supply chain costs.
The effective tax rate was 33.6% in both 2012 and 2011.
Surgical and Infection Prevention
Net sales of $1,185.1 million were essentially even with 2011. Sales volumes increased 2% driven by an increase in sales of medical exam gloves and surgical drapes and gowns. This increase was offset by the impact of reduced net selling prices of 1% from higher rebates and discounts and a 1% unfavorable change in currency exchange rates. Operating profit of $155.2 million increased 3.5% as higher sales volumes and decreases in input costs primarily from declines in the price of nitrile and nonwoven fabrics were partially offset by higher supply chain costs and lower net selling prices.
Net sales in North America decreased 1% due primarily to a decline in sales volumes of surgical drapes and gowns and protective apparel, partially offset by higher sales volumes of exam gloves. Each of these volume fluctuations contributed to less than 0.5% of net sales.
In Europe, Middle East and Africa, net sales decreased 4% due to a 6% unfavorable change in currency exchange rates driven by the weakening of the Euro relative to the U.S. dollar, partially offset by an increase in sales volumes of 2%. The increase in volumes was driven by surgical drapes and gowns, sterilization wrap and facial protection, partially offset by a decline in sales volumes of medical exam gloves.
Net sales in Asia Pacific and Latin America increased 7% due to increased sales volumes of 12%, partially offset by a decline in net selling prices of 3% and a 2% unfavorable change in currency exchange rates. The growth in sales volumes was driven by surgical drapes and gowns and medical exam gloves due to new contract executions in Australia in both categories and market share gains in medical exam gloves in Japan.
Medical Devices
Net sales of $477.6 million increased 5.6%, driven by higher sales volumes of 3% and increased net selling prices of 2%. The increase in sales volumes was primarily driven by increases in volumes of respiratory and digestive health products. Operating profit of $88.8 million increased 15.6% due to improved sales volumes,
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higher net selling prices and lower selling expenses, partially offset by higher amortization expense related to acquired technologies.
Net sales in North America were essentially even with 2011.
In Europe, Middle East and Africa, net sales increased 12% due to an increase in sales volumes of respiratory health products.
Net sales in Asia Pacific and Latin America increased 58% due to sales volume and net selling price increases primarily related to the acquisition of distribution rights for our Japan respiratory and digestive health businesses.
Liquidity and Capital Resources
General
Historically, Kimberly-Clark has provided financing, cash management and other treasury services to us. In North America, our cash balances are swept daily by Kimberly-Clark and historically, we have received funding from Kimberly-Clark for most of our operating and investing cash needs. Cash transferred to and from Kimberly-Clark has historically been recorded as intercompany receivables and payables. Upon completion of the distribution, we will maintain separate cash management and financing functions from Kimberly-Clark for our operations.
Following the distribution, our primary sources of liquidity will be cash on hand provided from operating activities, and amounts anticipated to be available under our revolving credit facility, as described below. Prior to the distribution, we expect to borrow approximately $ million through the issuance of senior unsecured notes and/or a secured credit facility. We also anticipate entering into a revolving credit facility allowing borrowings of up to $ million. We expect that the proceeds from the senior unsecured notes and/or the secured credit facility will be used to fund a cash distribution of approximately $ million to Kimberly-Clark immediately prior to the distribution. Funds under the revolving credit facility are expected to be available for our working capital and other liquidity requirements after the distribution.
We will incur significant interest expense and financial obligations related to these senior notes, secured credit facility and revolving credit facility, along with new additional stand-alone corporate and other costs. We will continue to make capital expenditures to introduce new products, enhance the effectiveness, reliability and safety of our existing products and to maximize cost savings.
Cash Provided by Operations
Cash provided by operations was $83.7 million and $86.0 million for the six months ended June 30, 2014 and 2013, respectively, with the decrease primarily due to slightly lower cash earnings, partially offset by decreased operating working capital requirements.
Cash provided by operations was $223.8 million in 2013 compared to $202.6 million in 2012 with the increase primarily due to lower income tax payments and higher cash earnings.
Investing
For the six months ended June 30, 2014, our cash used for capital spending was $28.0 million compared to $25.0 million in the same period of 2013. The increase is due to timing of payments for capital spending.
During 2013, our cash used for capital spending was $49.0 million compared to $40.8 million in the prior year. The increase is mainly due to capital spending in 2013 for equipment and building improvements to support the production of feminine care products for Kimberly-Clark.
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Financing
At June 30, 2014, debt was $10.4 million and consisted of related party debt owed to wholly-owned Kimberly-Clark subsidiaries. At December 31, 2013 and 2012, debt was $11.9 million and $75.9 million, respectively, and consisted of a short-term bank loan executed by a non-U.S. subsidiary and related party debt owed to wholly-owned Kimberly-Clark subsidiaries. The bank loan was repaid in March 2014 and the related party debt is expected to be repaid in connection with the distribution. As noted above, our outstanding debt is expected to increase significantly in connection with the distribution.
We believe that our ability to generate cash from operations and our capacity to issue short-term and long-term debt are adequate to fund working capital, capital spending and other needs for the foreseeable future. Further, we do not expect restrictions or taxes on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.
Obligations
The following table presents our total contractual obligations for which cash flows are fixed or determinable as of December 31, 2013.
(millions of dollars) |
Total | 2014 | 2015 | 2016 | 2017 | 2018 | 2019+ | |||||||||||||||||||||
Debt payable within one year |
$ | 11.9 | $ | 11.9 | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Operating leases |
35.2 | 8.8 | 7.8 | 6.5 | 4.9 | 4.4 | 2.8 | |||||||||||||||||||||
Open purchase orders |
94.6 | 94.6 | | | | | | |||||||||||||||||||||
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Total contractual obligations |
$ | 141.7 | $ | 115.3 | $ | 7.8 | $ | 6.5 | $ | 4.9 | $ | 4.4 | $ | 2.8 | ||||||||||||||
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The open purchase orders displayed in the table represent amounts that we anticipate will become payable within the next year for goods and services that we have negotiated for delivery. The table does not include amounts where Kimberly-Clark is the obligor, payments are discretionary or the timing is uncertain, including accrued income tax liabilities for uncertain tax positions and deferred taxes. The table also does not include amounts related to a commercial property lease entered into in 2014 for the Halyard corporate headquarters location in Alpharetta, Georgia.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with GAAP requires management 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 period. The critical accounting policies we used in the preparation of the combined financial statements are those that are important both to the presentation of our financial condition and results of operations and require significant judgments by management with regard to estimates used. The critical judgments by management relate to distributor rebate accruals, future cash flows associated with impairment testing for goodwill and long-lived assets, loss contingencies, and deferred income taxes and potential income tax assessments.
Recent Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers , which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. We are currently analyzing the effect of this standard on our financial position, results of operations and cash flows.
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Distributor Rebate Accruals
Distributor rebates are estimated based on the historical cost differences between list prices and average end user contract prices and the quantity of products expected to be sold to specific end users. Changes in the rebate accrual estimate occur due to changes in volume, list prices and/or contract prices. Rebate accruals were $81.9 million and $70.6 million at December 31, 2013 and 2012, respectively, and $67.2 million at June 30, 2014.
Goodwill and Other Intangible Assets
The carrying amount of goodwill is tested annually for impairment and whenever events or circumstances indicate that impairment may have occurred. Impairment testing is conducted at the reporting unit level of our businesses and is based on a discounted cash flow approach to determine the fair value. The determination of fair value requires significant management judgment including estimating future sales volumes, selling prices and costs, changes in working capital, investments in property and equipment and the selection of an appropriate discount rate. Sensitivities of these fair value estimates to changes in assumptions for sales volumes, selling prices and costs are also tested. If the carrying amount of a reporting unit that contains goodwill exceeds fair value, a possible impairment would be indicated.
If a possible impairment is indicated, the implied fair value of goodwill would be estimated by comparing the fair value of the net assets of the unit excluding goodwill to the total fair value of the unit. If the carrying amount of goodwill exceeds its implied fair value, an impairment charge would be recorded. Judgment is used in assessing whether goodwill should be tested more frequently for impairment than annually. Factors such as unexpected adverse economic conditions, competition, product changes and other external events may require more frequent assessments. For 2013, we completed the required annual testing of goodwill for impairment for all reporting units using the beginning of the third quarter 2013 as the measurement date, and have determined that our $1.4 billion of goodwill is not impaired as the fair value of each unit is substantially in excess of the carrying value of the respective net assets.
At December 31, 2013 and 2012, we had intangible assets with indefinite useful lives of $6.7 million and $11.1 million, respectively, related to acquired in-process research and development. At June 30, 2014, we had intangible assets with indefinite useful lives of $6.7 million related to acquired in-process research and development.
At December 31, 2013, we had intangible assets with finite useful lives with a gross carrying amount of $325.7 million and a net carrying amount of $134.5 million. At June 30, 2014, we had intangible assets with finite useful lives with a gross carrying amount of $325.9 million and a net carrying amount of $118.4 million. These intangibles are being amortized over their estimated useful lives and are tested for impairment whenever events or circumstances indicate that impairment may have occurred. If the carrying amount of an intangible asset is not recoverable based on estimated future undiscounted cash flows, an impairment loss would be indicated. The amount of the impairment loss to be recorded would be based on the excess of the carrying amount of the intangible asset over its fair value (based on discounted future cash flows). Judgment is used in assessing whether the carrying amount of intangible assets is not expected to be recoverable over their estimated remaining useful lives. The factors considered are similar to those outlined in the goodwill impairment discussion above.
Loss Contingencies
The outcome of loss contingencies and legal proceedings and claims brought against us is subject to uncertainty. An estimated loss contingency is accrued by a charge to earnings if it is probable that an asset has been impaired or a liability has been incurred and the amount can be reasonably estimated. Determination of whether to accrue a loss requires evaluation of the probability of an unfavorable outcome and the ability to make a reasonable estimate. Changes in these estimates could affect the timing and amount of accrual of loss contingencies.
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Deferred Income Taxes and Potential Assessments
As of December 31, 2013 and June 30, 2014, we have recorded deferred tax assets related to income tax loss carryforwards and income tax credit carryforwards totaling $4.3 million and have established valuation allowances against these deferred tax assets of the same amount, thereby resulting in no net deferred tax asset. As of December 31, 2012, the net deferred tax asset associated with these items was not significant. These carryforwards are primarily in non-U.S. taxing jurisdictions, and in certain states in the United States. Foreign tax credits earned in the United States in current and prior years, which cannot be used currently, also give rise to net deferred tax assets. In determining the valuation allowances to establish against these deferred tax assets, many factors are considered, including the specific taxing jurisdiction, the carryforward period, income tax strategies and forecasted earnings for the relevant entities in each jurisdiction. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized.
As of December 31, 2013, U.S. income taxes and foreign withholding taxes have not been provided on approximately $177.9 million of unremitted earnings of subsidiaries operating outside the United States. These earnings are considered by management to be invested indefinitely. However, they would be 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. It is not practicable to determine the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings. We periodically determine whether our non-U.S. subsidiaries will invest their undistributed earnings indefinitely and reassess this determination, as appropriate.
Legal Matters
From time to time, 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. Although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate disposition of currently pending matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on our business, financial condition, results of operations or liquidity.
We are one of several manufacturers of continuous infusion medical devices, such as our ON-Q PAINBUSTER pain pumps, that are involved in several different pending or threatened litigation matters from multiple plaintiffs alleging that use of the continuous infusion device to deliver anesthetics directly into a synovial joint after surgery resulted in postarthroscopic glenohumeral chondrolysis, or a disintegration of the cartilage covering the bones in the joint (typically, in the shoulder). Plaintiffs generally seek monetary damages and attorneys fees. While Kimberly-Clark is retaining the liabilities related to these matters, the distribution agreement between us and Kimberly-Clark will provide that we will indemnify Kimberly-Clark for any Post-Spin I-Flow Liabilities. See Our Relationship with Kimberly-Clark after the Distribution Distribution Agreement.
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 are involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.
We 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.
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Financial Instruments and Risk Management
We are exposed to risks such as changes in foreign currency exchange rates and commodity prices. A variety of practices are employed to manage these risks, including derivative instruments where deemed appropriate. Derivative instruments are used only for risk management purposes and not for speculation. All foreign currency derivative instruments are entered into with major financial institutions. Our credit exposure under these arrangements is limited to agreements with a positive fair value at the reporting date. Credit risk with respect to the counterparties is actively monitored but is not considered significant since these transactions are executed with a diversified group of financial institutions.
Presented below is a description of our risk together with a sensitivity analysis, performed annually, based on selected changes in market rates and prices. These analyses reflect managements view of changes which are reasonably possible to occur over a one-year period. Also included is a description of our commodity price risk. There were no material changes to the sources and effects of our market risks from December 31, 2013 through June 30, 2014.
Foreign Currency Risk
Foreign currency risk is managed by the systematic use of foreign currency forward and swap contracts for a portion of our exposure. The use of these instruments allows the management of transactional exposures to exchange rate fluctuations because the gains or losses incurred on the derivative instruments will offset, in whole or in part, losses or gains on the underlying foreign currency exposure.
Foreign currency contracts and transactional exposures are sensitive to changes in foreign currency exchange rates. An annual test is performed to quantify the effects that possible changes in foreign currency exchange rates would have on annual operating profit based on our foreign currency contracts and transactional exposures at the current year-end. The balance sheet effect is calculated by multiplying each affiliates net monetary asset or liability position by a 10% change in the foreign currency exchange rate versus the U.S. dollar. The results of these sensitivity tests are presented in the following paragraph.
As of December 31, 2013, a 10% unfavorable change in the exchange rate of the U.S. dollar against the prevailing market rates of foreign currencies involving balance sheet transactional exposures would not be material to our combined financial position, results of operations or cash flows. These hypothetical losses on transactional exposures are based on the difference between the December 31, 2013 rates and the assumed rates.
The translation of the balance sheets of non-U.S. operations from local currencies into U.S. dollars is also sensitive to changes in foreign currency exchange rates. Consequently, an annual test is performed to determine if changes in currency exchange rates would have a significant effect on the translation of the balance sheets of non-U.S. operations into U.S. dollars. These translation gains or losses are recorded as unrealized translation adjustments (UTA) within parents equity. The hypothetical change in UTA is calculated by multiplying the net assets of these non-U.S. operations by a 10% change in the currency exchange rates.
As of December 31, 2013, a 10% unfavorable change in the exchange rate of the U.S. dollar against the prevailing market rates of our foreign currency translation exposures would have reduced invested equity by approximately $34 million. These hypothetical adjustments in UTA are based on the difference between the December 31, 2013 exchange rates and the assumed rates. In the view of management, the above UTA adjustments resulting from these assumed changes in foreign currency exchange rates are not material to our combined financial position because they would not affect our cash flow.
Commodity Price Risk
We are subject to commodity price risk, the most significant of which relates to the price of nitrile and polypropylene. As previously discussed under Risk Factors, increases in commodities prices could adversely affect our earnings if selling prices are not adjusted or if such adjustments significantly trail the increases in commodities prices. Derivative instruments have been used in accordance with our risk management policy to
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hedge a limited portion of our commodity price risk; however, there can be no assurance that we will continue to utilize derivative instruments to hedge this price risk following the distribution.
Our energy, manufacturing and transportation costs are affected by various market factors including the availability of supplies of particular forms of energy, energy prices and local and national regulatory decisions. As previously discussed in Risk Factors, there can be no assurance we will be fully protected against substantial changes in the price or availability of energy sources. In addition, we are subject to price risk for utilities and manufacturing inputs, which are used in our manufacturing operations. Derivative instruments have been used in accordance with our risk management policy to hedge a limited portion of the price risk; however, there can be no assurance that we will continue to utilize derivative instruments to hedge this price risk following the distribution.
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Overview
Halyard is a global company which seeks to advance health and healthcare by preventing infection, eliminating pain and speeding recovery. We have two business segments: S&IP and Medical Devices.
Our products and solutions are designed to address some of todays most important healthcare needs, namely, preventing infection and reducing the use of narcotics while helping patients move from surgery to recovery. We sell our products in more than 100 countries, and we estimate that the addressable markets into which we sell our products aggregate to more than $7 billion for our S&IP products and to $5 billion for our Medical Devices. We market and support the efficacy, safety and economic benefit of our products with a significant body of clinical evidence.
We have operated our S&IP business for over 30 years, providing products that address the prevention of HAIs and provide protection for both healthcare workers and patients. We have recognized brands and leading market positions in the United States across our entire S&IP product portfolio, which includes sterilization wrap, surgical drapes and gowns, facial protection, protective apparel and medical exam gloves. Our S&IP product portfolio is supported by a global sales force, a customer support team with significant industry experience and robust product training, and customer education programs.
Our Medical Devices business is comprised of a diverse set of medical device solutions focused on improving patient outcomes, patient safety and reducing the cost of care. Our innovative portfolio includes post-operative pain management solutions, minimally invasive interventional (or chronic) pain therapies, closed airway suction systems, and enteral feeding tubes. Our recognized brands and highly specialized sales team in each of these medical device product areas strategically position us for growth.
In 2013, we generated net sales of approximately $1.7 billion and cash flow from operations of more than $220 million. Our S&IP business accounted for approximately 70% and our Medical Devices business accounted for approximately 30% of our 2013 net sales. In 2013, approximately 68% of our net sales was generated in North America, approximately 14% was generated in Europe, Middle East and Africa, approximately 12% was generated in Asia Pacific and Latin America, and approximately 6% was generated from related parties.
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We were incorporated in Delaware on February 25, 2014, in connection with the separation of Kimberly-Clarks health care business from its other businesses. The address of our principal executive offices is 5405 Windward Parkway, Suite 100, South Alpharetta, GA 30004, and our telephone number is .
Strengths
Our competitive advantages include:
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Established portfolio of S&IP products with leading market positions and significant brand recognition. Our S&IP portfolio provides patients and healthcare providers with products that address |
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the prevention of HAIs. We believe we hold leading market positions in the United States in sterilization wrap, surgical drapes and gowns, facial protection, protective apparel and medical exam gloves. Our S&IP products are marketed under well-known brands such as KIMGUARD ONE-STEP sterilization wrap, MICROCOOL surgical gowns, and FLUIDSHIELD face masks and are recognized by our customers as innovative, cost-effective and high quality products. |
| Growing and innovative Medical Devices business with solutions that reduce the cost and improve the quality of care. We offer a portfolio of innovative medical devices that primarily address surgical and interventional (or chronic) pain management and respiratory and digestive health. We focus on the development and introduction of innovative new products internally through research and development programs and externally through acquisitions. As a result, our Medical Devices business has experienced double-digit growth in net sales since 2005. Over 200 clinical studies have been conducted that demonstrate that our medical device solutions provide improved patient outcomes and reduce the cost of care when compared to competing products, therapies and medical practices. |
| Global commercial infrastructure. Our products are sold in over 100 countries. We have regional sales and marketing headquarters in the United States, Belgium, Japan and Australia and approximately 600 sales representatives in 11 countries selling directly to our customers. We also have strategic arrangements with distributors around the world. Our diversified manufacturing base, which includes facilities in the United States, Honduras, Mexico and Thailand, and vertical integration in nonwovens manufacturing enable us to cost-effectively supply our global customer base and differentiate us from our key competitors. We believe that our global commercial infrastructure drives cost efficiencies, enables innovation and strategically positions us for growth in new markets. |
| Our business generates strong cash flow . In 2013, we generated more than $220 million in cash flow from operations. Of this, in excess of 67% was generated in North America. We believe our strong cash flow following the distribution will provide us with the financial flexibility to pursue increased investments for new growth opportunities and the ability to support our research and development programs. |
| Strong management team with significant healthcare experience. Our senior management team has over 100 years of combined experience in the healthcare industry. We have built a deep pool of talented healthcare professionals over our 30-year history. For example, Robert Abernathy, who will serve as our Chairman of the Board and Chief Executive Officer, has served more than 30 years in various senior management positions throughout Kimberly-Clark, including having overall responsibility for Kimberly-Clarks health care business from 1997 to early 2004. In addition, Christopher Lowery, who will serve as our Senior Vice President and Chief Operating Officer and will lead our global sales and marketing teams, has over 18 years of experience in the healthcare industry, with a particular focus on medical devices. |
Strategies
To achieve our mission, we have three strategies:
| Maintain market leadership and improve margins in our S&IP business through operational excellence and innovation. We expect to maintain our leading market positions by utilizing our highly specialized sales team and consultative selling techniques that educate customers on the costs of HAIs and the ability of our S&IP products to reduce the incidence of these infections and the related costs. Internationally, we expect to grow sales by leveraging our innovative product portfolio to capitalize on emerging markets growth and the increasing global awareness of infection prevention. We will focus on driving margin improvement by creating global supply chain efficiencies, such as securing low cost sourcing through internal manufacturing and third party providers. In addition, by leveraging proprietary nonwovens technology and increased spending on design-to-value product innovations, we believe we can provide cost-effective products that meet our customers needs. |
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Grow our Medical Devices business by accelerating utilization of our unique solutions through clinical education and awareness, and innovation . We believe that we can accelerate the adoption of our unique medical devices, including our pain management, respiratory health and digestive health solutions, through a combination of increased clinical education, patient and clinician awareness, and innovation. We plan to enhance our sales and marketing effectiveness by expanding our pain |
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management sales team in key markets, investing in clinical trials to demonstrate the comparative effectiveness of our pain management solutions, and delivering targeted customer education programs to patients and caregivers on the use of our non-narcotic solutions. We will also continue to invest in opportunities to expand the indications for use of our pain management devices and in new product development. We will seek to drive global growth in our respiratory and digestive health businesses through innovative product enhancements, clinical education and increased sales effectiveness led by our specialized sales teams. |
| Identify, develop and pursue new growth opportunities . We intend to develop new growth opportunities by increasing our research and development spending across our businesses and pursuing partnership opportunities and strategic acquisitions in medical devices. We will seek to drive new growth opportunities, particularly in developing markets, as both patients and healthcare providers become more aware of the health benefits and cost savings of improved infection prevention, reduced use of narcotics and accelerated recovery times that our products are designed to achieve. We will continue to focus on the development of innovative technologies that leverage our existing intellectual property and technical expertise. We will consider strategic acquisitions of products or businesses that complement our product portfolio and we believe will help us achieve our mission. |
History and Development
Our history of growth, innovation and acquisitions is characterized by three phases: (1) nonwovens technology expansion, (2) international and portfolio expansion, and (3) medical device growth acceleration. The following graph depicts our growth in the United States and internationally of our S&IP business and the addition of our Medical Devices business.
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Net sales data are derived from historical unaudited results of operations for Kimberly-Clarks health care business, excluding related party sales, for the years shown.
Kimberly-Clark launched its health care business in the late 1970s by offering products that capitalized on its patented, innovative nonwovens technology providing protection from liquids while remaining breathable. These nonwoven fabrics were ideal for use in hospitals for sterilization wrap, protective apparel for healthcare workers and draping for patients because they provided a level of healthcare worker and patient protection and enhanced sterility over cotton- and paper-based products. Key highlights during this period include developing and launching surgical drapes and gowns, laboratory coats and jackets for healthcare workers and KIMGUARD ONE-STEP sterilization wrap.
Beginning in the mid-1990s, the business focused on international expansion leveraging its regional sales and marketing headquarters in Belgium, Japan and Australia and increasing its direct sales and marketing resources in these regions. During this period, the business continued the expansion of its portfolio of S&IP products through the acquisition of Tecnol Medical Products, a leading provider of facial protection and a provider of other disposable medical products, in 1997 and the acquisition of Safeskin Corporation, a market-leading exam glove provider, in 2000. The business portfolio also expanded into medical devices in 1999, with the acquisition of Ballard Medical Products, which offered disposable medical devices for respiratory care and digestive health.
Building on the medical devices platform created by the acquisition of Ballard Medical Products, the business sharpened its focus on medical devices beginning in 2005 and continued to augment the Medical Devices business. Kimberly-Clark acquired Baylis Medicals pain management device business and I-Flow Corporation, which offered elastomeric infusion pumps used in surgical pain management and other infusion therapies, in 2009.
Business Segments
We have two business segments, S&IP and Medical Devices. Information about each of our operating segments is included below and in Note 14 to our audited historical combined financial statements for the year ended December 31, 2013 and Note 11 to our unaudited historical combined financial statements for the six months ended June 30, 2014 included elsewhere in this information statement.
Surgical and Infection Prevention
Our S&IP business is focused on developing, manufacturing and marketing medical supplies designed to reduce the incidence of HAIs among healthcare workers and patients. Each year, there are over 700,000 occurrences, or one in 25 patients hospitalized, in the United States in which a patient contracts an infection related to hospital care. These infections increase the length of hospital stays and the cost of care. In addition, approximately 75,000 patients die each year from HAIs contracted in hospitals. The increased healthcare costs associated with treating patients with these infections is approximately $30 billion per year in the United States alone. As a result, there is an enhanced focus on infection prevention in the United States.
We estimate the worldwide addressable market size for our S&IP portfolio is more than $7 billion. Market growth is driven by healthcare utilization (such as the number of surgical procedures and the number of patient days) and the level of infection prevention awareness. In mature markets, such as the United States, Western Europe, Japan and Australia, we estimate market growth is in the low single-digits due to relatively high penetration rates, while in developing and emerging markets, we believe growth opportunities are higher due to lower levels of product utilization driven by lower levels of infection prevention awareness.
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* | Global addressable market size based on industry data and internal marketing estimates. |
We are recognized as a leading innovator of quality products that help reduce the negative effects of infections on patients, clinicians and hospital costs. With sterilization packaging, surgical drapes and gowns, face masks and exam gloves, we offer a broad portfolio of S&IP solutions that meet the needs of hospitals around the world.
Our S&IP business consists of the following key categories of products which accounted for over 90% of our 2013 net sales in this business segment. Surgical drapes and gowns, medical exam gloves and sterilization wrap have each accounted for more than 10% of our total net sales in each of the last three fiscal years. See Note 14 to our audited historical combined financial statements for the year ended December 31, 2013 for additional information.
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Sterilization wrap . We are a leading provider of sterilization wrap in the United States. We revolutionized the use of sterilization wrap over 30 years ago with the introduction of KIMGUARD ONE-STEP Sterilization Wrap, the worlds first single-use packaging designed to keep sterilized surgical instruments and supplies protected and ready to use at a moments notice. Our sterilization |
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wrap formed the foundation for our S&IP business to expand into other categories, including surgical drapes and gowns and protective apparel. We have also continued to drive innovation and change within the category. Our time-saving ONE-STEP Wrap helps keep sterilized surgical instruments and supply sets ready for use at a moments notice. Our latest innovations include QUICK CHECK Wrap, which provides users with rapid visual reassurance that the wrap is free from tears, cuts and holes and confirms that sterility is intact, and SMART-FOLD Sterilization Wrap, which is an innovative sterilization packaging designed to provide the durability necessary for the most demanding applications. All of our wrap products feature our patented POWERGUARD treatment to deliver the maximum microbial barrier protection for sterilized instrument sets. |
| Surgical drapes and gowns . We are a leading provider of surgical drapes and gowns in the United States. Our complete line of surgical drapes and gowns are designed to protect patients and clinicians in an extensive range of surgical procedures, from simple outpatient procedures to the most complex open heart surgery. As a recognized leader in the development of high-performance medical fabrics, we have the right to use over 650 patents for advanced nonwoven fabrics. Our surgical drapes and gowns provide surgical teams with the critical balance of properties they require, including barrier protection, flame resistance, lint and abrasion resistance, and comfort. We continue to develop and market innovative surgical drapes and gowns to meet the competitive demands and needs of advanced surgical technologies. |
| Facial protection . As a leader in facial and respiratory protection, we provide a full range of facial protection products for routine patient care, isolation and surgical procedures. Our facial protection products include standard and fluid-resistant masks, particulate filter respirators, protective eye wear and face shields. We believe our FLUIDSHIELD face mask is the market leader in fluid-resistant facial protection in the United States, and we offer a complete line-up of facial protection that has been specifically designed, tested and shown to meet or exceed the current FDA recognized standard for medical face masks. We are the first manufacturer to design and market a pediatric patient mask that was tested with children and granted 510(k) clearance by the FDA, specifically for a child face mask. We continuously develop new, innovative face masks to better meet the needs of customers and end users. |
| Protective apparel . We provide head-to-toe personal protective apparel for both healthcare workers and patients with both barrier and fluid protection. Our non-sterile protective apparel products include isolation gowns, coveralls, head wear, foot wear, lab coats and jackets. Our full line of Association of Medical Instrumentation (AAMI)-compliant isolation gowns provides a combination of protection from liquid strikethrough and also from penetration by live bacteria and spores. The ability of a gown to protect against the transfer of pathogens from the environment to the wearers work clothes or scrubs is important to reduce the spread of infectious agents. Our complete line of isolation gowns has been independently tested to measure Bacterial Filtration Efficiency (BFE) and has been shown to provide bacterial and spore holdout that equals or exceeds that of other gowns on the market today. We are one of three leading providers of protective apparel in the United States. |
| Medical exam gloves. Our nitrile and vinyl exam gloves provide a complete latex-free portfolio with multiple levels of protection to help safeguard healthcare employees from exposure to blood-borne pathogens and other infectious materials. Our PURPLE NITRILE exam glove provides maximum protection for high-risk procedures and is one of the most tested chemotherapy gloves available. Patented proprietary nitrile technology affords our LAVENDER and STERLING exam gloves increased tensile strength and a reduction in glove thickness, resulting in added comfort with no compromise in protection. We are one of three leading providers of medical exam gloves in the United States. |
Medical Devices
Our Medical Devices business focuses mainly on pain management and digestive and respiratory health. Our product offerings are focused on improving patient outcomes while reducing the cost of care.
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We estimate the worldwide addressable market size for our Medical Devices is more than $5 billion. Market growth is driven by healthcare utilization rates, physician education and awareness, reimbursement policies and practices and the body of clinical evidence supporting patient outcomes and cost comparativeness versus other therapies. For example, in the United States, over 70 million surgical and diagnostic procedures are performed annually in which our post-operative surgical pain solution can provide improved patient safety and clinical outcomes with cost effectiveness. We estimate that our existing penetration for these procedures is less than 10%.
We believe aggregate market growth rates for medical devices in the United States, Western Europe, Japan and Australia are in the mid-single digits. In developing and emerging markets, growth rates vary depending on the current standards of care in a particular region.
* | Global addressable market size based on industry data and internal marketing estimates. |
Our diverse portfolio of Medical Devices is uniquely positioned for growth and profitability with solutions focused on improving patient outcomes and safety, while reducing the cost of care. The following key categories of products accounted for more than 98% of our 2013 net sales in Medical Devices. No category of products in Medical Devices accounted for 10% or more of total combined net sales in any of the last three fiscal years.
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| Pain management . Our pain management business delivers products and solutions for relieving both post-operative surgical pain and chronic pain: |
| Surgical Pain Management . Post-operative surgical pain can result in significant costs such as longer recovery periods and the use of narcotics such as morphine or other forms of systemic opioid pain medications. These types of pain-relieving drugs affect a patients entire body instead of targeting the specific site of surgery. Our leading alternative surgical pain management products include elastomeric infusion pumps, specialized needles, catheters and associated devices for peripheral nerve block procedures that focus on postoperative, non-narcotic pain relief by delivering local anesthetic to or near the surgical site through specially designed catheters. By targeting the pain directly, our products create a better pain management experience for patients, who by using our ambulatory pain pumps experience materially lower pain scores, lower narcotic usage and consequently are able to return home, on average, 1.1 days sooner than when using narcotics alone. |
| Interventional (Chronic) Pain Management . Interventional (or chronic) pain is defined as pain that lasts beyond the ordinary duration of time that an injury to the body needs to heal. One hundred million Americans suffer from chronic pain, with 56% of all chronic pain related to back pain. Chronic pain is the number one cause of adult disability in the United States and costs the economy $560 billion in incremental healthcare costs and lost productivity each year. In addition, prescription drugs treating chronic pain are the second most abused category of drugs in the United States. Our minimally invasive chronic pain technologies help patients to confront chronic, often debilitating, pain that severely limits their everyday activity and quality of life, with a product offering that is based on conventional and cooled radio frequency (RF) ablation. Our RF pain management systems are indicated for use to create RF lesions in nervous tissue. RF lesioning is a proven means of effectively providing lasting relief from chronic pain. Anatomic variability can make it a challenge to effectively ablate the target nerve using conventional RF technology, so we have developed our COOLIEF Cooled RF treatment, which is our unique, patented, minimally-invasive treatment that increases the lesion size. Cooled RF has been clinically documented to provide back pain relief for up to 24 months, with improved physical function and reduced drug utilization. In addition to RF ablation, we offer a diverse set of disposable kits and trays used in the procedures, creating an effective, efficient chronic pain solutions system. |
| Respiratory health . Our respiratory health solutions are designed for patients supported by mechanical ventilation. Ventilated patients are at increased risk for HAIs, which contribute to increased costs for hospitals. In particular, ventilator-associated pneumonia is the most common and deadly HAI, affecting up to 28% of ventilated patients. Our line of respiratory products contain advanced infection control features that have been proven to reduce cross-contamination, reducing intensive care unit (ICU) days and their associated costs. We believe our closed suction catheters are the preferred closed suction catheter product used by hospital physicians in the United States. In addition, we recently launched our newest innovative product, the MICROCUFF Subglottic Suction Endotracheal Tube, which reduces the likelihood of harmful secretions entering the lungs and causing infection. |
| Digestive health . We deliver easy and reliable digestive health solutions that help improve patient outcomes and quality of life, particularly for patients needing supplemental nutrition delivery with enteral feeding. Our pioneering MIC-KEY low-profile balloon-retained gastrostomy feeding tubes and placement kits are used by more clinicians and patients and backed by the largest body of clinical evidence than any other feeding tube. |
Sales and Marketing
We direct our primary sales and marketing efforts toward hospitals and other healthcare providers to highlight the unique benefits and competitive differentiation of our branded products.
We work directly with physicians, nurses, professional societies, hospital administrators and GPOs to collaborate and educate on emerging practices and clinical techniques that prevent infection, eliminate pain and speed
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recovery. For example, our Medical Devices business facilitated the training of physicians in the latest clinical techniques in RF nerve ablation and peripheral nerve blocks. Also in our S&IP business, our team provides healthcare systems with operating room and central service department product utilization reviews in which we document existing practices and recommend cost effective alternatives. We jointly work with recognized standard setters, such as the CDC, to complete infection prevention awareness programs. We are also a recognized leader in clinical education, spearheaded by our NOT ON MY WATCH campaign. We have issued over 200,000 continuing education credits since 2005 as part of our Knowledge Network program. In our digestive health category, we support the healthcare provider and the patient through our website, Mic-Key.com, which provides the latest information on product usage, reimbursement and feeding tube care.
These marketing programs are delivered directly to healthcare providers by over 600 trained sales representatives in 11 countries. Additionally, we provide marketing programs to our strategic distribution partners throughout the rest of the world.
Our sales and marketing service and excellence is well-recognized by our customers. In May 2013, Novation, a leading healthcare supply chain expertise and contracting company, recognized us with its overall Supplier of the Year award and its Mark McKenna award for outstanding service, compliance and integrity. In July 2013, Premier, a provider-owned performance improvement alliance of 2,800 hospitals and nearly 100,000 other care sites, awarded us a Healthcare Alliance Award for Operational Excellence, marking the fifth time we received this recognition since the awards inception eight years ago.
Distribution
While our products are generally marketed directly to hospitals and other healthcare providers, they are often sold through third-party distribution channels.
In North America, our products are sold principally through independent wholesale distributors, with some sales directly to healthcare facilities and other end customers. In 2013, approximately 74% of our net sales in North America were made through distributors. Sales to Owens & Minor, Inc. and Cardinal Health, Inc. accounted for approximately 28% and 13%, respectively, of our 2013 net sales in North America. No other customer or distributor in North America accounted for more than 10% of our net sales in North America in 2013. These distributors purchase both S&IP and medical device products from us under standard terms and conditions of sale. In certain cases, these distributors also compete with us. See Competition. Over 55% of our 2013 net sales in North America were contracted through five major national GPOs, principally relating to our S&IP business. Of these 2013 GPO-contracted sales, 64% were represented by contracts that will expire by the end of 2015 and 36% were represented by contracts that will expire by the end of 2017. No single GPO-contracted product category represented more than 7% of 2013 net sales in North America.
Outside North America, sales are made either directly to end customers or through distributors, depending on the market served. In 2013, approximately 66% of our net sales outside North America were made through wholesalers or distributors. No single wholesaler or distributor outside North America accounted for more than 10% of our net sales in 2013. We have no single customer or distributor outside of North America that, if the customer or distributor were lost, would have a material adverse effect on our business.
We operate five major distribution centers located in North America, Europe, Australia and Japan that ship multiple finished products to multiple customers, as well as 15 other distribution sites that also have customer shipping capabilities, in order to optimize cost effectiveness with customer service requirements.
No material portion of our business is subject to renegotiation of profits or termination of contracts at the election of the government.
Manufacturing
We are an experienced, vertically-integrated manufacturer of most of our products, including sterilization wraps, gloves, face masks, a portion of our apparel line and all of our medical device products. We utilize a proprietary
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manufacturing process for nonwovens that we believe positions us as a low-cost and flexible manufacturer of associated surgical and infection control products. In addition, we believe our in-house manufacturing capabilities differentiate us from our key competitors who do not have comparable manufacturing capabilities.
Our principal manufacturing plants are located around the world and are owned or leased by us or our subsidiaries:
Products |
Location |
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Owned/Leased |
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S&IP | Tambol Patong | Thailand | Owned | |||
S&IP | Tambol Prik | Thailand | Owned | |||
S&IP | Lexington, North Carolina | USA | Owned | |||
S&IP | Acuña | Mexico | Owned | |||
S&IP | Nogales | Mexico | Leased | |||
Medical Devices | Nogales | Mexico | Owned | |||
S&IP | San Pedro Sula | Honduras | Leased | |||
Medical Devices | Tucson, Arizona | USA | Leased | |||
Medical Devices | Magdalena | Mexico | Leased | |||
Medical Devices | Nogales | Mexico | Leased | |||
Medical Devices | Tijuana | Mexico | Leased | |||
Medical Devices | Weinheim | Germany | Leased |
While we believe that our manufacturing processes and capabilities provide us with a strategic advantage over our competitors, we are constantly evaluating our internal manufacturing costs, as compared to the cost of outsourcing such manufacturing to third parties, in order to maintain the most efficient cost structure for the production of our products. In addition to our internal capabilities, we have agreements with third parties for materials, process development and analytical services. Where it is cost-effective, we utilize third-party manufacturers to produce certain products, including a portion of our apparel line.
In June 2014, we initiated a plan to exit our disposable glove facility in Tambol Patong, Thailand and outsource the related production to improve the competitive position of our surgical and infection prevention business.
We procure certain materials for our products from a limited number of suppliers and, in some cases, a single supply source. See Risk Factors Risks Related to Our Business and Industry An inability to obtain key components, raw materials or manufactured products from third parties may have a material adverse effect on our business.
Following the distribution, we will be party to a transition services agreement with Kimberly-Clark regarding the provision and supply of certain manufacturing capabilities, as described in Our Relationship with Kimberly-Clark after the Distribution.
Raw Materials
We use a wide variety of raw materials and other inputs for the production of our products, with polypropylene polymers and nitrile constituting our most significant raw material purchases. We base our purchasing decisions on quality assurance, cost effectiveness and constraints resulting from regulatory requirements, and we work closely with our suppliers to assure continuity of supply while maintaining high quality and reliability. We primarily purchase these materials from external suppliers, some of which are single-source suppliers.
Global commodity prices can affect pricing of certain of these raw materials on which we rely. In our S&IP business, oil-based raw materials, particularly polypropylene polymers and nitrile, represent a significant component of our manufacturing costs. In addition, the prices of other raw materials we use, such as resins and
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finishing supplies, often fluctuate in response to changes in oil prices. Prices of these commodities can be volatile and have varied significantly in recent years, contributing to fluctuations in our results of operations.
Competition
The markets for our products are highly competitive. No one company competes with us across the breadth of our offerings, but we face significant competition in U.S. and international markets.
Surgical and Infection Prevention
There are a significant number of manufacturers and distributors of medical supplies, and the market for S&IP products is extremely competitive. In the developed markets, the major competitors of our S&IP business include Cardinal Health, Inc., Medline Industries, Inc., Hogy Medical, Multigate Medical Products, Mölnlycke Health Care and HARTMANN Group. In the United States several of our distribution partners and GPOs are also competitors or are increasingly seeking to direct source products. In developing and emerging markets, we compete against multiple use products, or non-use of infection prevention products, due in large part to lack of infection prevention awareness and education.
The highly competitive environment of the S&IP business requires us to continually seek out technological innovations and to market our products effectively. Our products face competition from other brands that may be less expensive than our products and from other companies that may have more resources than we do. Competitive factors include price, alternative clinical practices, innovation, quality and reputation. To successfully compete, we must often demonstrate that our products offer higher quality, innovative features or cost advantages as compared with other products.
Medical Devices
There are a variety of treatment means and alternative clinical practices to address the management of surgical and chronic pain and respiratory and digestive health, especially within our pain management business. We face competition from these alternative treatments, as well as improvements and innovations in products and technologies by our competitors.
Competitors for our medical device products are fragmented by particular product category and the individual markets for these products are highly competitive. Major competitors of our Medical Devices business include, among others:
| Pain Management: B. Braun Medical Inc., NeuroTherm, Pacira Pharmaceuticals, Inc., Stryker Corporation and Teleflex Incorporated |
| Respiratory: CareFusion Corporation, Sage Products LLC and Smiths Medical |
| Digestive Health: Boston Scientific Corporation, Covidien plc and Cook Medical |
In developing and emerging markets, alternative clinical practices and different standards of care are our primary competition.
While we believe that the number of procedures using our medical devices will grow due, in part, to increasing global access to healthcare, we expect that our ability to compete with other providers of similar devices will be impacted by rapid technological advances, pricing pressures and third-party reimbursement practices. We believe that our key product characteristics, such as proven efficacy, reliability and safety, coupled with our core competencies such as our efficient manufacturing processes, established distribution network, field sales organization and customer service, are important factors that distinguish us from our competitors.
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Research and Development
We continuously engage in research and development to commercialize new products and enhance the effectiveness, reliability and safety of our existing products. We incurred $37.9 million in 2013, $33.0 million in 2012, and $31.2 million in 2011 on research and development to develop new products, indications and processes and to improve existing products and processes. These expenses consisted primarily of salaries and related expenses for personnel, product trial costs, outside laboratory and license fees, and the costs of laboratory equipment and facilities. We intend to increase our research and development efforts as a key strategy for growth.
In our S&IP business, we are focused on maintaining our market position by providing innovative customer-preferred product enhancements, with a particular focus on the operating room. Leveraging customer insights and our vertically integrated manufacturing capabilities, we seek to continuously improve our product designs, specifications and features to deliver cost efficiencies while improving healthcare worker and patient protection. In 2013, we launched SMART-FOLD sterilization wrap, which provides increased wrapping durability to improve sterility assurance and to decrease the labor required to both wrap and unwrap procedural trays. We are also launching new face mask innovations and products that complement our current broad product portfolio. We continuously refresh our surgical drape and gown portfolio to ensure that our products are aligned with the latest procedural and market trends. Our research team works with healthcare providers to develop and design exam glove and apparel portfolios that optimize comfort and fit and provide cost-effective infection prevention solutions for use throughout the hospital.
In our Medical Devices business, we collaborate with physicians to develop solutions that seek to accelerate the global adoption of our therapies and procedures. We are investing to expand the indications for use of our pain products with clinical research and studies and associated new product developments. We are expanding our portfolio with customer-preferred product enhancements, such as next generation cooled RF generators and a full line of needles, kits and accessories for continuous peripheral nerve block procedures. We also expect to launch new feeding tubes and closed suction catheters designed with patient and clinician preferred features in 2014.
We are also investing in new categories and solutions that complement our technical expertise and existing intellectual property. We are particularly focused on those new categories that we believe will leverage our existing scalable technology platforms as well as our sales and marketing expertise.
Intellectual Property
Patents, trademarks and other proprietary rights are very important to our business. We also rely upon trade secrets, manufacturing know-how, continuing technological innovations and licensing opportunities to maintain and improve our competitive position. We review third-party proprietary rights, including patents and patent applications, as available, in an effort to develop an effective intellectual property strategy, avoid infringement of third-party proprietary rights, identify licensing opportunities and monitor the intellectual property owned by others.
We hold numerous patents and have numerous patent applications pending in the United States and in other countries that relate to the technology used in many of our products. For example, we utilize patents in our sterilization wrap, surgical drapes and gowns, facial protection, protective apparel and medical exam gloves in our S&IP segment. These patents generally expire between 2015 and 2032. None of the patents we license from third parties are material to our S&IP segment. In our Medical Devices segment, we utilize patents in our surgical pain management, chronic pain management, respiratory health and digestive health products. These patents generally expire between 2019 and 2032. None of the patents we license from third parties are material to our Medical Devices segment.
In connection with the distribution, we expect to enter into a trademark license agreement pursuant to which Kimberly-Clark will grant us a license to use certain of Kimberly-Clarks trademarks, trade names and service marks used in our business as of the distribution date. See Our Relationship with Kimberly-Clark after the Distribution.
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We consider the patents and trademarks which we own and the trademarks under which we sell certain of our products, as a whole, to be material to our business. However, we do not consider our business to be materially dependent upon any individual patent or trademark.
Regulatory Matters
The development, manufacture, marketing, sale, promotion and distribution of our products are subject to comprehensive government regulation. Government regulation by various national, regional, federal, state and local agencies, both in the United States and other countries, addresses (among other matters) inspection of, and controls over, research and laboratory procedures, clinical investigations, product approvals and manufacturing, labeling, packaging, marketing and promotion, pricing and reimbursement, sampling, distribution, quality control, post-market surveillance, record keeping, storage and disposal practices. Our operations are also affected by trade regulations in many countries that limit the import of raw materials and finished products and by laws and regulations that seek to prevent corruption and bribery in the marketplace (including the U.S. Foreign Corrupt Practices Act and the United Kingdom Bribery Act, which provide guidance on corporate interactions with government officials) and require safeguards for the protection of personal data. In addition, we are subject to laws and regulations pertaining to healthcare fraud and abuse, including state and federal anti-kickback and false claims laws in the United States.
Compliance with these laws and regulations is costly and materially affects our business. Among other effects, healthcare regulations substantially increase the time, difficulty and costs incurred in obtaining and maintaining approval to market newly developed and existing products. For example, In the United States, before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we generally must first receive 510(k) clearance from the FDA. In order for us to obtain 510(k) clearance, the FDA must determine that our proposed product is substantially equivalent to a device legally on the market, known as a predicate device, with respect to intended use, technology, safety and effectiveness. Similarly, most major markets for medical devices outside the United States also require clearance, approval or compliance with certain standards before a product can be commercially marketed. For instance, the European Commission, or EC, has harmonized national regulations for the control of medical devices through European Medical Device Directives with which manufacturers must comply. Under these regulations, manufacturing plants must have received CE certification from a notified body in order to be able to sell products within the member states of the European Union. Certification allows manufacturers to stamp the products of certified plants with a CE mark. Products covered by the EC regulations that do not bear the CE mark may not be sold or distributed in the European Union.
We expect compliance with these regulations to continue to require significant technical expertise and capital investment to ensure compliance. Failure to comply can delay the release of a new product or result in regulatory and enforcement actions, the seizure or recall of a product, the suspension or revocation of the authority necessary for a products production and sale, and other civil or criminal sanctions, including fines and penalties.
In addition to regulatory initiatives, our business can be affected by ongoing studies of the utilization, safety, efficacy, and outcomes of healthcare products and their components that are regularly conducted by industry participants, government agencies, and others. These studies can call into question the utilization, safety, and efficacy of previously marketed products. In some cases, these studies have resulted, and may in the future result, in the discontinuance of, or limitations on, marketing of such products domestically or worldwide, and may give rise to claims for damages from persons who believe they have been injured as a result of their use.
Access to healthcare products continues to be a subject of investigation and action by governmental agencies, legislative bodies, and private organizations in the United States and other countries. A major focus is cost containment. Efforts to reduce healthcare costs are also being made in the private sector, notably by healthcare payors and providers, which have instituted various cost reduction and containment measures. We expect insurers and providers to continue attempts to reduce the cost of healthcare products. Outside the United States, many countries control the price of healthcare products directly or indirectly, through reimbursement, payment, pricing, coverage limitations, or compulsory licensing. Budgetary pressures in the United States and in other countries may also heighten the scope and severity of pricing pressures on our products for the foreseeable future.
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We expect debate to continue during the next several years at all government levels worldwide over the marketing, availability, method of delivery, and payment for healthcare products and services. We believe that future legislation and regulation in the markets we serve could affect access to healthcare products and services, increase rebates, reduce prices or the rate of price increases for healthcare products and services, change healthcare delivery systems, create new fees and obligations, or require additional reporting and disclosure. It is not possible to predict the extent to which we or the healthcare industry in general might be affected by the matters discussed above.
Since we market our products worldwide, certain products of a local nature and variations of product lines must also meet other local regulatory requirements. Certain additional risks are inherent in conducting business outside the United States, including price and currency exchange controls, changes in currency exchange rates, limitations on participation in local enterprises, expropriation, nationalization, and other governmental action.
Demand for many of our existing and new medical products is, and will continue to be, affected by the extent to which government healthcare programs and private health insurers reimburse our customers for patients medical expenses in the countries where we do business. Statutory and regulatory requirements for Medicaid, Medicare, and other government healthcare programs govern provider reimbursement levels. From time to time, legislative changes are made to government healthcare programs that impact our business, and the federal and/or state governments may continue to enact measures in the future aimed at containing or reducing reimbursement levels for medical expenses paid for in whole or in part with government funds. We cannot predict the nature of such measures or their impact on our business, results of operations, financial condition and cash flows. Any reduction in the amount of reimbursements received by our customers could harm our business by reducing their selection of our products and the prices they are willing to pay.
Backlog and Seasonality
Orders are generally filled on a current basis, and order backlog is not material to our business. Our business is subject to fluctuations in procedure volumes and to periodic increased utilization of healthcare in response to events such as occurs during flu season; however, there are no significant seasonal aspects to our business.
Long-Lived Assets
Our long-lived assets, which are composed of property, plant and equipment, by geographic area are set forth below:
(millions of dollars) |
Year Ended December 31 | |||||||||||
2013 | 2012 | 2011 | ||||||||||
North America |
$ | 223.4 | $ | 207.0 | $ | 197.3 | ||||||
Europe, Middle East and Africa |
1.3 | 0.2 | 0.3 | |||||||||
Asia Pacific |
100.2 | 118.5 | 122.4 | |||||||||
|
|
|
|
|
|
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Total |
$ | 324.9 | $ | 325.7 | $ | 320.0 | ||||||
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|
|
Our total assets by segment are as follows:
(millions of dollars) |
Year Ended December 31 | |||||||||||
2013 | 2012 | 2011 | ||||||||||
S&IP |
$ | 1,357.2 | $ | 1,405.8 | $ | 1,391.7 | ||||||
Medical Devices |
1,055.5 | 1,065.9 | 1,082.0 | |||||||||
Corporate and other |
71.3 | 62.5 | 35.8 | |||||||||
|
|
|
|
|
|
|||||||
$ | 2,484.0 | $ | 2,534.2 | $ | 2,509.5 | |||||||
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Properties
We own or lease a total of 19 operating facilities located throughout the world that handle manufacturing production, assembly, research, quality assurance testing, distribution and packaging of our products. We have entered into a commercial lease related to our principal executive offices, located in Alpharetta, Georgia. The locations of our principal production facilities by major geographic areas of the world are as follows:
Geographic Area: |
Number of Facilities | |||
United States (in 2 states) |
2 | |||
Europe |
1 | |||
Asia, Latin America and other |
9 | |||
|
|
|||
Worldwide Total (in 5 countries) |
12 | |||
|
|
In June 2014, we initiated a plan to exit one of our disposable glove facilities in Thailand and outsource the
related production to improve the competitive position of our surgical and infection prevention business. The plan is expected to be completed by December 31, 2015 and is not reflected in the chart above.
Our owned operating facilities consist of approximately 2.3 million square feet, and our leased operating facilities consist of approximately 1.7 million square feet. We believe that our facilities are suitable for their purpose, adequate to support their businesses and well maintained.
Employee and Labor Relations
In our worldwide operations, we had approximately 16,500 employees as of December 31, 2013. Approximately 6,240 of our employees working at manufacturing facilities in Mexico are represented by unions or works councils. We believe that we have good relations with our employees.
The restructuring plan initiated in June 2014 to exit one of our disposable glove facilities in Thailand is expected to result in a reduction of our workforce by approximately 3,000 positions.
Legal Proceedings
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. Although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on our business, financial condition, results of operations or liquidity.
We are one of several manufacturers of continuous infusion medical devices, such as our ON-Q PAINBUSTER pain pumps, that are involved in several different pending or threatened litigation matters from multiple plaintiffs alleging that use of the continuous infusion device to deliver anesthetics directly into a synovial joint after surgery resulted in postarthroscopic glenohumeral chondrolysis, or a disintegration of the cartilage covering the bones in the joint (typically, in the shoulder). Plaintiffs generally seek monetary damages and attorneys fees. While Kimberly-Clark is retaining the liabilities related to these matters, the distribution agreement between us and Kimberly-Clark will provide that we will indemnify Kimberly-Clark for any Post-Spin I-Flow Liabilities. See Our Relationship with Kimberly-Clark after the Distribution Distribution Agreement.
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
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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 are 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.
Environmental, Health and Safety Matters
Our operations are subject to federal, state, provincial and local laws, regulations and ordinances relating to various environmental, health and safety matters. Our operations are in compliance with, or we are taking actions designed to ensure compliance with, these laws, regulations and ordinances. However, the nature of our operations exposes us to the risk of claims concerning non-compliance with environmental, health and safety laws or standards, and there can be no assurance that material costs or liabilities will not be incurred in connection with those claims. We are not currently named as a party in any judicial or administrative proceeding relating to environmental, health and safety matters.
While we have incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with environmental, health and safety laws, regulations and ordinances, we believe that our future cost of compliance with environmental, health and safety laws, regulations and ordinances, and our exposure to liability for environmental, health and safety claims will not have a material adverse effect on our financial condition, results of operations or liquidity. However, future events, such as changes in existing laws and regulations, or contamination of sites owned, operated or used for waste disposal by us (including currently unknown contamination and contamination caused by prior owners and operators of such sites or other waste generators) may give rise to additional costs which could have a material adverse effect on our financial condition, results of operations or liquidity.
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Our Executive Officers
The following table and biographies set forth information, as of , 2014, concerning those persons that we expect to serve as our executive officers following the distribution. At or prior to the distribution, all of these individuals will resign from their positions with or retire from Kimberly-Clark and assume their post-distribution roles with Halyard.
Name |
Position |
|
Robert E. Abernathy | Chairman of the Board and Chief Executive Officer | |
Rhonda D. Gibby | Senior Vice President and Chief Human Resources Officer | |
Christopher G. Isenberg | Senior Vice President Global Supply Chain and Procurement | |
Christopher M. Lowery | Senior Vice President and Chief Operating Officer | |
Warren J. Machan | Senior Vice President Business Strategy | |
Steven E. Voskuil | Senior Vice President and Chief Financial Officer | |
John W. Wesley | Senior Vice President, General Counsel and Chief Ethics and Compliance Officer |
Robert E. Abernathy , age 59, will be the Chairman of our Board of Directors and our Chief Executive Officer. He has been serving as President Global Health Care since June 2014. Prior to that he served as an Executive Vice President of Kimberly-Clark from November 2013 to June 2014 and prior to that served as Group President Europe, Global Nonwovens, and Continuous Improvement & Sustainability from 2012 to November 2013. He had overall responsibility for Kimberly-Clarks health care business from 1997 to early 2004. His past responsibilities at Kimberly-Clark have also included overseeing its businesses in Asia, Latin America, Eastern Europe, the Middle East and Africa, as well as operations and major project management in North America. He was appointed Vice President North American Diaper Operations in 1992; Managing Director of Kimberly-Clark Australia Pty. Limited in 1994; Group President Developing and Emerging Markets in 2004; and Group President North Atlantic Consumer Products in 2008. Mr. Abernathy currently serves as a director of RadioShack Corporation. Mr. Abernathy has been selected to serve as the Chairman of our Board of Directors due to his leadership experience as an executive vice president of Kimberly-Clark, knowledge of and experience in the healthcare industry, international experience and governance and public company board experience.
Rhonda D. Gibby , age 46, will be our Senior Vice President and Chief Human Resources Officer. She has been serving as Kimberly-Clarks Vice President Human Resources for its global business-to-business units (K-C Professional and Kimberly-Clarks health care business) as well as the leader of Kimberly-Clarks global labor relations since 2010. Prior to that, Ms. Gibby served as Kimberly-Clarks Global Vice President of Talent Management from 2008 to 2010. Prior to joining Kimberly-Clark in 2005, Ms. Gibby held leadership roles in operations, sales and human resources in a variety of industries and employers, including most recently at Covidien, a global healthcare products company.
Christopher G. Isenberg , age 47, will be our Senior Vice President Global Supply Chain and Procurement. He has been with Kimberly-Clark for over 25 years, serving most recently as Kimberly-Clarks Vice President of Global Health Care Manufacturing and Supply Chain since July 2012. Before assuming this role, Mr. Isenberg served as Senior Manufacturing Director for K-C Professional, beginning in January 2011. From October 2007 until January 2011, Mr. Isenberg served as Plant Manager at Kimberly-Clarks Everett, Washington Pulp and Tissue Mill. Prior to that, he served in various manufacturing operations, marketing and other roles for Kimberly-Clarks Family Care business.
Christopher M. Lowery , age 50, will be our Senior Vice President and Chief Operating Officer, and in that role will have responsibility for leading worldwide sales, marketing, research and development, quality, regulatory and clinical affairs. He has been serving as Kimberly-Clarks Vice President Global Health Care Sales and Marketing since July 2013. Prior to this role he served as Vice President, Global Medical Devices. Mr. Lowery
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joined Kimberly-Clark in 2010 bringing 15 years of healthcare industry experience. Before joining Kimberly-Clark, he held several senior marketing and sales roles at Covidien, a global healthcare products company.
Warren J. Machan , age 48, will be our Senior Vice President Business Strategy. He has been serving as Kimberly-Clarks Senior Director of Strategy Global Health Care since January 2012 and before that served as Senior Director of Finance for Kimberly-Clarks health care business from 2008 to 2012. Mr. Machan served as Director of Finance and Strategic Planning for the Kimberly-Clark International business from 2004 to 2008. He joined Kimberly-Clark in 1987 and, while spending the majority of time in Kimberly-Clarks health care business, he has also held roles in sales, marketing and finance for the K-C Professional, Personal Care and Family Care businesses.
Steven E. Voskuil , age 45, will be our Senior Vice President and Chief Financial Officer. He has been serving as Vice President Finance for Kimberly-Clark International since September 2011 and previously served as Kimberly-Clarks Vice President and Treasurer from January 2008 to September 2011. He joined Kimberly-Clark in 1991 in Finance and has held a variety of roles in business analysis, strategic analysis and treasury for Kimberly-Clarks businesses worldwide. Mr. Voskuil also led a customer development team for Kimberly-Clark and served as the executive sponsor for talent development for the companys Global Finance organization.
John W. Wesley , age 55, will be our Senior Vice President, General Counsel and Chief Ethics and Compliance Officer. He has been serving as Kimberly-Clarks Vice President, Deputy General Counsel and Corporate Secretary since 2009. He joined Kimberly-Clark in May 2000 as Senior Counsel, Corporate Affairs and has held a variety of positions, overseeing corporate transactions and corporate governance matters. Prior to joining Kimberly-Clark, he was a partner at the Dallas law firm of Carrington, Coleman, Sloman & Blumenthal, L.L.P., where he specialized in corporate, securities, corporate finance, mergers and acquisitions and general, commercial and business law.
Our Directors
The following table and biographies set forth information, as of , 2014, concerning those persons that we expect will become our directors as of the distribution date. See Our Executive Officers above for biographical information regarding Mr. Abernathy, who is expected to become our Chairman of the Board and Chief Executive Officer. The following director nominees will be presented to Halyards sole stockholder, Kimberly-Clark, for election to our Board of Directors prior to the distribution.
Following the distribution, our Board of Directors will be divided into three classes. Each director will serve for a term expiring at the annual meeting of stockholders in the year indicated below. Commencing with the first annual meeting of stockholders following the distribution, directors for each class will be elected at the annual meeting of stockholders held in the year in which the term for that class expires and thereafter will serve for a term of three years. For more information, see Description of Halyard Stock Certain Anti-Takeover Effects of Provisions of Our Certificate of Incorporation and By-Laws and of Delaware Law.
Name |
Position |
Term as Director |
||
Robert E. Abernathy | Chairman of the Board and Chief Executive Officer | Expires 201 | ||
Ronald W. Dollens | Lead Director | Expires 201 | ||
Heidi K. Fields | Director | Expires 201 | ||
Director | Expires 201 | |||
Director | Expires 201 | |||
Director | Expires 201 | |||
Director | Expires 201 |
Ronald W. Dollens , age 67, will be the Lead Director of our Board of Directors, and, as such, will serve as the Chairman of the Executive Committee. Mr. Dollens retired as the President and Chief Executive Officer of
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Guidant Corporation, a global producer of cardiovascular therapeutic devices and related products, in 2005 where he had served since its spin-off from Eli Lilly & Company in 1994. Prior to this time, he held various management positions at Eli Lilly & Company from 1972 until 1994. From 2000 until 2011, he served on the Board of Directors of Kinetic Concepts, Inc., a publicly-traded global medical technology company devoted to the discovery, development, manufacturing and marketing of innovative, high-technology therapies and products, and served as Chairman from 2005 until 2011. Mr. Dollens has also served on the Board of Directors of Abiomed, Inc., from 2006 until October 2010, and Beckman Coulter, Inc., from 1999 until April 2005. Mr. Dollens has been selected to serve as the Lead Director of our Board of Directors due to his leadership experience as a chief executive, knowledge of, and experience in, the healthcare industry, international experience and governance and public company board experience.
Heidi K. Fields , age 59, will serve as a member of our Board of Directors and the Chairman of the Audit Committee. Ms. Fields retired as the Executive Vice President and Chief Financial Officer of Blue Shield of California, a not-for-profit health plan provider, where she had served since 2003. Prior to that time, she served as the Executive Vice President and Chief Financial Officer of Gap, Inc., a multinational clothing and accessories retailer, from 1999 until 2003. Ms. Fields currently serves on the Board of Directors of Agilent Technologies, Inc. (NYSE: A) and on the Board of Directors of Financial Engines, Inc. (NASDAQ: FNGN). Ms. Fields has been selected to serve as a member of our Board of Directors due to her executive leadership experience as a chief financial officer, financial literacy and experience in finance and accounting, knowledge of and experience in the healthcare industry, international experience and governance and public company board experience.
Committees of our Board of Directors
Pursuant to our amended and restated by-laws, our Board of Directors will be permitted to establish committees from time to time as it deems appropriate. Effective upon the completion of the distribution, our Board of Directors will have the following standing committees: Audit Committee, Corporate Governance Committee, Compensation Committee and Executive Committee.
Our Board of Directors will adopt written charters for the Audit, Compensation and Corporate Governance Committees. These charters will be available on our website following the distribution.
Audit Committee
are expected to be the members of the Audit Committee, with Heidi K. Fields expected to serve as its chair. The Audit Committee will be comprised solely of directors who meet the independence requirements of the New York Stock Exchange and the Exchange Act, and related SEC regulations, and are financially literate, as required by the New York Stock Exchange. At least one member of the Audit Committee will be an audit committee financial expert, as defined by the SECs regulations.
The principal functions of the Audit Committee are expected to include the following:
| Overseeing: |
| the quality and integrity of our financial statements, |
| our compliance programs, |
| our hedging strategies and policies, |
| the independence, qualification and performance of our independent auditors, and |
| the performance of our internal auditors, |
| Selecting and engaging our independent auditors, subject to stockholder ratification, |
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| Pre-approving all audit and non-audit services that our independent auditors provide, |
| Reviewing the scope of audits and audit findings, including any comments or recommendations of our independent auditors, |
| Establishing policies for our internal audit programs, and |
| Overseeing our risk management program and receiving periodic reports from management on risk assessments, the risk management process and issues related to the risks of managing our business. |
Compensation Committee
are expected to be the members of the Compensation Committee, with expected to serve as its chair. The Compensation Committee will be comprised solely of directors who meet the independence requirements of the New York Stock Exchange and the Exchange Act and related SEC regulations.
The principal functions of the Compensation Committee are expected to include the following:
| Establishing and administering our policies governing annual compensation and long-term compensation, including stock option awards, restricted stock awards and restricted share unit awards, such that the policies are designed to align compensation with our overall business strategy and performance, |
| Setting, after an evaluation of his overall performance, the compensation level of our Chief Executive Officer, |
| Determining, in consultation with our Chief Executive Officer, compensation levels and performance targets for the senior executive team, |
| Overseeing: |
| leadership development for senior management and future senior management candidates, |
| a periodic review of our long-term and emergency succession planning for our Chief Executive Officer and other key officer positions, in conjunction with our Board of Directors, |
| key organizational effectiveness and engagement policies, and |
| Annually reviewing our compensation policies and practices for the purpose of mitigating risks arising from these policies and practices that could reasonably have a material adverse effect. |
Corporate Governance Committee
are expected to be the members of the Corporate Governance Committee, with expected to serve as its chair. The Corporate Governance Committee will be comprised solely of directors who meet the independence requirements of the New York Stock Exchange and the Exchange Act and related SEC regulations.
The principal functions of the Corporate Governance Committee are expected to include the following:
| Overseeing the screening and recruitment of prospective Board members and making recommendations to the Board of Directors regarding specific director nominees, as well as overseeing the process for nominations to the Board of Directors, |
| Overseeing corporate governance matters, including developing and recommending to the Board of Directors changes to our Corporate Governance Policies, |
| Advising the Board of Directors on: |
| Board organization, membership, function, performance and compensation, |
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| committee structure and membership, and |
| policies and positions regarding significant stockholder relations issues, |
| Reviewing director independence standards and making recommendations to the Board of Directors with respect to the determination of director independence, |
| Monitoring and recommending improvements to the Board of Directors practices and procedures, and |
| Reviewing stockholder proposals and considering how to respond to them. |
Executive Committee
are expected to be the members of the Executive Committee, with expected to serve as its chair. The principal function of the Executive Committee will be to exercise the powers of the Board of Directors to direct our business and affairs between meetings of the Board of Directors.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2013, we did not have a compensation committee or any other Board committee serving in a similar function. Individuals who are expected serve as our executive officers will not participate in compensation decisions relating to their compensation.
Corporate Governance
Stockholder Recommendations for Director Nominees
Our amended and restated by-laws are expected to contain provisions that address the process by which a stockholder may nominate an individual to stand for election to our Board of Directors or may put forward proposals for possible consideration by our stockholders at annual meetings. We expect that the Corporate Governance Committee, in accordance with its charter, will establish criteria and processes for director nominees, including nominations proposed by stockholders.
Corporate Governance Policies
Our Board of Directors is expected to adopt Corporate Governance Policies in connection with the distribution. These policies will guide Halyard and our Board of Directors on matters of corporate governance, including director responsibilities, Board committees and their charters, director independence, director compensation and performance assessments, director orientation and education, director access to management, Board and committee access to outside financial, business and legal advisors, and management development and succession planning. These policies, which include our director independence standards, are expected to be available on our website following the distribution.
Director Independence
A majority of our Board of Directors will be comprised of directors who are independent as defined by the rules of the New York Stock Exchange and the Corporate Governance Policies to be adopted by our Board of Directors. We will seek to have all of our non-management directors qualify as independent under these standards. We expect that our Board of Directors following the distribution will be comprised of seven directors, of which six will be considered independent. Robert E. Abernathy, who will be our Chief Executive Officer, will also serve as the Chairman of the Board of Directors.
Our Corporate Governance Policies to be adopted by our Board of Directors are expected to provide categorical independence standards consistent with the rules and regulations of the SEC and the listing standards of the New York Stock Exchange. Our Corporate Governance Policies are expected to be available on our website
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following the distribution. Our Board of Directors will assess on a regular basis, and at least annually, the independence of our directors and, based on the recommendation of the Corporate Governance Committee, will make a determination as to which members are independent.
Communications to Directors
In connection with the distribution, our Board of Directors is expected to establish a process by which stockholders and other interested parties may communicate with the Board of Directors, including our Lead Director. That process is expected to be available on our website following the distribution.
Director Qualification Standards
Our Board of Directors will be responsible for approving candidates for Board membership, whether as nominees to stand for election at our annual meeting of stockholders or as candidates to be elected by our Board of Directors to fill any vacancies. The Board of Directors is expected to delegate the screening and recruitment process to the Corporate Governance Committee, in consultation with the Chairman of the Board and Chief Executive Officer and the Lead Director. The Committee therefore will be expected to recommend to our Board of Directors candidates to be nominated for election as directors at our annual meeting of stockholders. It is also expected to recommend candidates to fill any vacancies.
The Committee may receive recommendations for Board candidates from various sources, including our directors, management and stockholders. In addition, the Corporate Governance Committee may periodically retain a search firm to assist it in identifying and recruiting director candidates meeting the criteria specified by that Committee. The Committee is also expected to establish a process for considering nominations submitted by stockholders, as discussed above.
The Committee is expected to establish criteria for director nominees that foster effective corporate governance, support our strategies and businesses, take diversity into account and ensure that our directors, as a group, have an overall mix of the attributes needed for an effective board of directors. The criteria are also expected to support the successful recruitment of qualified candidates.
Qualified candidates for director are expected to be those who, in the judgment of the Corporate Governance Committee, possess all of the personal attributes and a sufficient mix of the experience attributes established by the Committee to ensure effective service on our Board of Directors.
Lead Director
Ronald W. Dollens is expected to serve as our Lead Director effective immediately following the distribution. The Lead Director will serve as Chairman of the Executive Committee.
Our Corporate Governance Policies will outline the significant roles and responsibilities of the Lead Director, which are expected to include the following:
| Chairing the Executive Committee, |
| Coordinating the activities of the Independent Directors, |
| Providing input on agendas and schedules for meetings of the Board of Directors, |
| Leading (with the Chairman of the Corporate Governance Committee) the annual Board of Directors evaluation process, |
| Leading (with the Chairman of the Compensation Committee) the Board of Directors review and discussion of the Chief Executive Officers performance, |
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| Providing feedback to individual directors following their periodic evaluations, |
| Speaking on behalf of the Board of Directors and chairing Board meetings when the Chairman of the Board is unable to do so, and |
| Acting as a direct conduit to the Board of Directors for stockholders, employees and others according to the Boards policies. |
The Lead Director is also expected to chair executive session meetings of non-management directors and provide feedback, as appropriate to our Chairman of the Board. We expect that our Independent Directors will meet in executive session without the presence of management at least quarterly.
Code of Conduct
In connection with the distribution, we will adopt a Code of Conduct that applies to all of our directors, executive officers and employees, including our Chief Executive Officer, Chief Financial Officer and Controller. Our Code of Conduct, as amended from time to time, will be available on our website following the distribution. Any waivers of our Code of Conduct applicable to our Chief Executive Officer, Chief Financial Officer or Controller will be posted on our website within four business days following the date of the waiver.
Committee Authority to Retain Independent Advisors
Each of the Audit, Compensation and Corporate Governance Committees is expected to have the authority to retain independent advisors and consultants as it deems appropriate, with all fees and expenses to be paid by Halyard.
Whistleblower Procedures
The Audit Committee will establish procedures for the receipt, retention and treatment of complaints we receive regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by our employees and others of concerns regarding questionable accounting or auditing matters. We will also maintain a toll-free Code of Conduct telephone line and an Internet website that will allow our employees and others to voice their concerns anonymously. The whistleblower procedures and information on how to access our Code of Conduct telephone line and website will be available on our website following the distribution.
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Compensation Discussion and Analysis
As noted above, Halyard is currently part of Kimberly-Clark and not a separate, stand-alone company, and the Halyard Compensation Committee has not yet been constituted. Decisions as to the past compensation of those who currently serve as our officers have been made by Kimberly-Clark based on its compensation practices. This Compensation Discussion and Analysis discusses those historical compensation practices and attempts to outline certain aspects of our anticipated compensation structure for our executive officers following the distribution. While we have discussed these anticipated programs and policies with the Management Development and Compensation Committee of Kimberly-Clarks Board of Directors (the Kimberly-Clark Committee), they remain subject to the review and approval of the Halyard Compensation Committee.
For purposes of this Compensation Discussion and Analysis and executive compensation disclosures, the individuals listed below are collectively referred to as the Halyard named executive officers. They are our chief executive officer and chief financial officer, and our three most highly compensated executive officers (other than the chief executive officer and chief financial officer), based on 2013 compensation from Kimberly-Clark:
| Robert E. Abernathy, our Chairman of the Board and Chief Executive Officer, |
| Steven E. Voskuil, our Senior Vice President and Chief Financial Officer, |
| Rhonda D. Gibby, our Senior Vice President and Chief Human Resources Officer, |
| Christopher M. Lowery, our Senior Vice President and Chief Operating Officer, and |
| John W. Wesley, our Senior Vice President, General Counsel and Chief Ethics and Compliance Officer. |
Additional information about our expected senior executive team following the distribution is set forth above under Management Our Executive Officers. Initially, our compensation policies will be largely the same as those employed at Kimberly-Clark. The Halyard Compensation Committee will review these policies and practices and may make adjustments to support our strategies and to remain market competitive.
Executive Compensation Objectives and Policies
Historically
Executive Compensation Policies . The Kimberly-Clark Committee is responsible for establishing and administering Kimberly-Clarks policies governing the compensation of Kimberly-Clarks executive officers. The Kimberly-Clark Committee reviews its compensation philosophy annually, including determining whether this philosophy supports its business objectives and is consistent with the Kimberly-Clark Committees charter.
The Kimberly-Clark Committee has adopted executive compensation policies that are designed to achieve the following objectives:
Objective |
Description |
Related Policies |
||
Pay for Performance | Support a performance-oriented environment that rewards achievement of Kimberly-Clarks financial and non-financial goals. | A significant portion of the Halyard named executive officers pay varies with the levels at which annual and long-term performance goals are achieved. The Kimberly-Clark Committee chooses performance goals that align with Kimberly-Clarks strategies for sustained growth and profitability. | ||
Focus on Long-Term Success | Reward executives for long-term strategic management and stockholder value enhancement. | A significant component of the Halyard named executive officers annual target compensation is in the form of performance-based restricted share units. The number of |
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Objective |
Description |
Related Policies |
||
shares actually received on payout of these units depends on Kimberly-Clarks performance over a three-year period. | ||||
Stockholder Alignment | Align the financial interest of Kimberly-Clarks executives with those of its stockholders. | Equity-based awards make up a significant part of the Halyard named executive officers compensation. The Halyard named executive officers also receive stock options, which vest over time and have value only if Kimberly-Clarks stock value rises after the option grants are made. Kimberly-Clark also has other policies that link its executives interests with those of its stockholders, including target stock ownership guidelines. | ||
Quality of Talent | Attract and retain highly skilled executives whose abilities are considered essential to Kimberly-Clarks long-term success as a global company. | The Kimberly-Clark Committee reviews peer group data to ensure its executive compensation program remains competitive so it can continue to attract and retain this talent. |
Executive Compensation Peer Group . To ensure that Kimberly-Clarks executive compensation programs are reasonable and competitive in the marketplace, the Kimberly-Clark Committee compares Kimberly-Clarks programs to those at other companies. In setting compensation in February 2013 for Kimberly-Clarks executive officers, the Committee used a peer group consisting of the following Consumer Goods companies:
2013 Kimberly-Clark Executive Compensation Consumer Goods Peer Group
Avon Products, Inc. Campbell Soup Company The Clorox Company The Coca-Cola Company Colgate-Palmolive Company ConAgra Foods, Inc. General Mills, Inc. |
The Hershey Company H.J. Heinz Company Johnson & Johnson Kellogg Company Kraft Foods, Inc. Merck & Co., Inc. |
Newell Rubbermaid Inc. Novartis AG PepsiCo, Inc. Pfizer Inc. The Procter & Gamble Company Sara Lee Corporation |
The Kimberly-Clark Committee generally seeks to select companies with whom Kimberly-Clark competes for talent. Kimberly-Clark believes that it generally competes for talent with consumer goods companies with annual net sales ranging from approximately one-half to two times its annual net sales. However, the Kimberly-Clark Committee concluded that it was appropriate also to include certain companies outside of this annual net sales range because Kimberly-Clark directly competes with them for talent.
In developing the peer group, the Kimberly-Clark Committee does not consider individual company compensation practices, and no company has been included or excluded because it is known to pay above-average or below-average compensation. The Kimberly-Clark Committee (working with compensation consultants retained separately by the Kimberly-Clark Committee) reviews the peer group annually to ensure that it continues to serve as an appropriate comparison for Kimberly-Clarks compensation program.
Going Forward
We expect that the executive compensation objectives and policies that we will adopt will be similar to those in place at Kimberly-Clark immediately prior to the distribution. Following the distribution, the Halyard Compensation Committee will continue to consider and develop our executive compensation objectives and policies.
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In establishing compensation for the Halyard named executive officers, the following healthcare peer group was established, which is subject to approval of the Halyard Compensation Committee, consisting of companies that are expected to compete with us for talent:
2014 Halyard Executive Compensation Healthcare Peer Group
CONMED Corporation The Cooper Companies, Inc. C. R. Bard, Inc. DENTSPLY International Inc. |
Edwards Lifesciences Corporation Haemonetics Corporation Hill-Rom Holdings, Inc. Invacare Corporation |
ResMed Inc. STERIS Corporation Teleflex Incorporated West Pharmaceutical Services, Inc. |
We expect that this peer group will continue to be used following the distribution, subject to the annual review and approval of, and potential adjustment by, the Halyard Compensation Committee.
Components of Executive Compensation Program
Historically
To help achieve the objectives of Kimberly-Clarks executive compensation program discussed above, Kimberly-Clarks compensation program for the Halyard named executive officers for 2013 consisted of fixed and performance-based elements, as well as short-term and long-term elements.
Base Salary . To attract and retain high caliber executives, Kimberly-Clark pays the Halyard named executive officers an annual fixed salary considered to be competitive in the marketplace. The following base salaries were approved for the Halyard named executive officers, effective April 1, 2013:
Name |
2013 Base Salary($) | |||
Robert E. Abernathy |
780,000 | |||
Steven E. Voskuil |
351,858 | |||
Rhonda D. Gibby |
240,860 | |||
Christopher M. Lowery (1) |
287,167 | |||
John W. Wesley |
310,000 |
(1) | Mr. Lowerys base salary was increased to $300,000, effective as of September 1, 2013. |
As part of the annual compensation planning process in 2014, the following base salaries were approved for the Halyard named executive officers, effective April 1, 2014:
Name |
2014 Base Salary($) | |||
Robert E. Abernathy |
780,000 | |||
Steven E. Voskuil |
357,769 | |||
Rhonda D. Gibby |
250,494 | |||
Christopher M. Lowery |
306,000 | |||
John W. Wesley |
315,000 |
Annual Cash Incentive Program . Consistent with Kimberly-Clarks pay-for-performance compensation objective, Kimberly-Clarks executive compensation program includes an annual cash incentive program to motivate and reward executives in achieving annual performance objectives.
2013 Targets . The target payment amount for annual cash incentives is a percentage of base salary. The range of possible payouts is expressed as a percentage of the target payment amount, which is set based on competitive factors.
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Target Payment Amounts and Range of Possible Payouts
for 2013 Annual Cash Incentive Program
Target Payment Amount |
Potential Payout |
|||
Robert E. Abernathy |
85% of base salary |
0% - 200% of target payment amount |
||
Steven E. Voskuil |
55% of base salary |
0% - 200% of target payment amount |
||
Rhonda D. Gibby |
45% of base salary |
0% - 200% of target payment amount |
||
Christopher M. Lowery (1) |
47% of base salary |
0% - 200% of target payment amount |
||
John W. Wesley |
50% of base salary |
0% - 200% of target payment amount |
(1) | Mr. Lowerys annual incentive target percentage increased from 45% to 50% of base salary, effective as of September 1, 2013, and his annual incentive target amount was prorated accordingly. |
2013 Performance Goals, Performance Assessments and Payouts . Payment amounts under Kimberly-Clarks annual cash incentive program are dependent on performance measured against corporate goals and business unit or staff function goals established by the Kimberly-Clark Committee at the beginning of each year. These performance goals, which are communicated at the beginning of each year, are derived from Kimberly-Clarks financial and strategic goals.
As shown in the table below, the Kimberly-Clark Committee established goals for three different performance elements for 2013, and these elements were weighted for the Halyard named executive officers as follows:
Annual Cash Incentive Program
2013 Performance Goals and Weights
Robert E.
Abernathy |
Steven E.
Voskuil |
Rhonda D.
Gibby |
Christopher
M. Lowery |
John W.
Wesley |
||||||||||||||||||
Element 1: |
Corporate key financial goals |
35 | % | 21 | % | 21 | % | 21 | % | 70 | % | |||||||||||
Element 2: |
Additional corporate financial and strategic performance goals |
15 | 9 | 9 | 9 | 10 | ||||||||||||||||
Element 3: |
Business unit or staff function performance goals |
50 | 70 | 70 | 70 | 20 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
Below is a description of the three elements of performance, an explanation of how performance was assessed for each element, and the payouts that were determined in each case.
| Element 1: Corporate key financial goals . For 2013, the Kimberly-Clark Committee chose net sales, adjusted EPS and adjusted operating profit return on sales (OPROS) as corporate key financial goals for the annual cash incentive program. |
| Element 2: Additional corporate financial and strategic performance goals . At the beginning of 2013, the Kimberly-Clark Committee also established additional corporate financial and non-financial strategic performance goals that were intended to challenge Kimberly-Clarks executives to exceed its long-term objectives. At the end of the year, the Kimberly-Clark Committee determined a payout percentage based on its assessment of the degree to which these goals are achieved. The Kimberly-Clark Committee does not use a formula to assess the performance of these goals but instead takes a holistic approach and considers performance of all the goals collectively. Although it does review each goal separately, the key consideration for the Kimberly-Clark Committee is how it views Kimberly-Clarks performance for the year in all of these categories, taken as a whole. |
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| Element 3: Business unit or staff function performance goals . In addition to the performance goals established by the Kimberly-Clark Committee, Kimberly-Clarks CEO establishes individual business unit or staff function performance goals . These objectives include strategic performance goals for the business units and staff functions, as well as financial goals for the business units. Following the end of the year, Kimberly-Clarks CEO then provides the Kimberly-Clark Committee with an assessment of each individual business units or staff functions performance against the objectives for that unit or function. In addition, a mutliplier ranging from 0% to 150% is applied to a portion of the business unit or staff function result, as applicable, based on the extent to which the Halyard named executive officer has achieved his or her individual performance objectives. Mr. Abernathy is not eligible for this performance multiplier. |
Annual Cash Incentive Payouts for 2013 . The following table shows the payout opportunities and the actual payouts of annual cash incentives for 2013 for each of the Halyard named executive officers. Payouts were based on the payout percentages for each element, weighted for each named executive officer as discussed above.
Name |
Annual
Incentive Target |
Annual
Incentive Maximum |
2013 Annual
Incentive Payout |
|||||||||||||||||||||
% of Base
Salary |
Amount($) |
% of
Target |
Amount($) |
% of
Target |
Amount($) | |||||||||||||||||||
Robert E. Abernathy |
85 | % | 663,000 | 200 | % | 1,326,000 | 128 | % | 850,533 | |||||||||||||||
Steven E. Voskuil |
55 | % | 193,522 | 200 | % | 387,044 | 119 | % | 230,681 | |||||||||||||||
Rhonda D. Gibby |
45 | % | 108,387 | 200 | % | 216,774 | 107 | % | 116,301 | |||||||||||||||
Christopher M. Lowery (1) |
47 | % | 140,000 | 200 | % | 280,000 | 77 | % | 107,865 | |||||||||||||||
John W. Wesley |
50 | % | 155,000 | 200 | % | 310,000 | 135 | % | 208,630 |
(1) | Mr. Lowerys annual incentive target percentage increased from 45% to 50% of base salary, effective as of September 1, 2013, and his annual incentive target amount was prorated accordingly. |
For 2014, the Halyard named executive officers will continue to participate in Kimberly-Clarks annual incentive program, prorated through the distribution date. The Halyard named executive officers annual incentive target as a percentage of base salary for 2014 did not change from 2013, but each of the Halyard named executive officers business unit or staff function performance goals will be based on Kimberly-Clarks health care business unit results.
Long-Term Equity Incentive Compensation . The Halyard named executive officers received long-term equity incentive grants as part of their overall compensation package. These awards are consistent with the Kimberly-Clark Committees objectives of aligning Kimberly-Clarks senior leaders interests with the financial interests of its stockholders, focusing on its long-term success, supporting its performance-oriented environment and offering competitive compensation packages.
In determining the 2013 long-term equity incentive award amounts for the Halyard named executive officers, the following factors, among others, were considered: the specific responsibilities and performance of the Halyard named executive officer, Kimberly-Clarks business performance, retention needs, Kimberly-Clarks stock price performance and other market factors.
Each named executive officer received a target grant value for long-term equity incentive compensation for 2013, which was then divided into two types:
| Performance-based restricted share units (75% of the target grant value). For valuation purposes, each unit is assigned the same value as one share of Kimberly-Clark common stock on the date of grant. |
| Stock options (25% of the target grant value). For valuation purposes, one option is assigned the same value as 10% of the price of one share of Kimberly-Clark common stock on the date of grant of the stock option. |
For the performance-based restricted share unit awards granted in 2013, the actual number of shares to be received by the Halyard named executive officers will range from zero to 200% of the target levels established
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by the Kimberly-Clark Committee, depending on the degree to which the performance objectives for these awards are met over a three-year period. The performance objectives for the 2013 awards are based on average annual net sales growth and the average adjusted return on invested capital for Kimberly-Clark for the period January 1, 2013 through December 31, 2015.
Stock option awards granted to the Halyard named executive officers in 2013 vest in three annual installments of 30%, 30% and 40%, beginning on the first anniversary of the grant date.
Under the terms of the Kimberly-Clark 2011 Plan, on the distribution date, Messrs. Voskuil and Lowery and Ms. Gibby will forfeit all unvested stock options held by them as of the distribution date, any vested stock options held by them as of the distribution date will be exercisable for the lesser of three months or the remaining term of the option, and unvested performance-based restricted share units will vest pro rata, based on the number of full years of employment. Because Messrs. Abernathy and Wesley are at least age 55, under the terms of the Kimberly-Clark 2011 Plan, on the distribution date their unvested stock options will vest and their options will be exercisable until the earlier of five years or the remaining term of the options, and unvested performance-based restricted share units will be payable in full based on attainment of the performance goal at the end of the restricted period.
Information regarding long-term equity incentive awards granted to the Halyard named executive officers can be found under Summary Compensation Table, Grants of Plan-Based Awards and Discussion of Summary Compensation and Plan-Based Awards Tables below.
Going Forward
In anticipation of the distribution, Kimberly-Clark established the total compensation for the Halyard named executive officers immediately following the distribution, taking into account the median compensation levels of the healthcare peer group discussed above, and determined that the Halyard named executive officers should be paid at levels that range from 36 to 44 percent of the median pay levels for the healthcare peer group. Kimberly-Clark set compensation below the median compensation levels of the healthcare peer group because each officer will be new to his or her role at Halyard and each will be paid more than their compensation at Kimberly-Clark prior to the distribution. Kimberly-Clark has entered into a letter agreement with each of Messrs. Voskuil, Lowery and Wesley and Ms. Gibby that establishes their total compensation as of the distribution date. Compensation for the Halyard named executive officers following the distribution will be subject to the approval of the Halyard Compensation Committee.
Base Salary . Effective as of the distribution date, the annual base salaries of the Halyard named executive officers are expected to be as follows:
Name |
Base Salary
as of Distribution Date($) |
|||
Robert E. Abernathy |
825,000 | |||
Steven E. Voskuil |
430,000 | |||
Rhonda D. Gibby |
310,000 | |||
Christopher M. Lowery |
475,000 | |||
John W. Wesley |
375,000 |
We expect that post-distribution adjustments to base pay, if any, will be made by the Halyard Compensation Committee and will reflect factors such as each named executive officers post-distribution level of responsibility as well as market data for similar positions at comparable peer companies.
Annual Cash Incentive Program . We expect to adopt an annual incentive plan with terms to be determined by the Halyard Compensation Committee that will utilize the target payment amounts set forth below. We expect that the Halyard Compensation Committee will establish performance goals based on an incentive structure that initially is similar to that which is in place at Kimberly-Clark. In connection with this annual incentive program,
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the following target payment amounts for 2014 for the Halyard named executive officers have been established, all to be effective upon the distribution date:
Target Payment Amounts for Halyard 2014 Annual Cash Incentive Program
Following the Distribution
Name |
Target Payment Amount |
|
Robert E. Abernathy |
100% of base salary | |
Steven E. Voskuil |
70% of base salary | |
Rhonda D. Gibby |
50% of base salary | |
Christopher M. Lowery |
85% of base salary | |
John W. Wesley |
60% of base salary |
The range of potential payouts has not been established. Halyards intention is to provide the Halyard named executive officers a prorated 2014 annual incentive payment for the portion of the year after the distribution date.
Long-Term Equity Incentive Compensation . We intend to adopt, subject to the approval of Kimberly-Clark prior to the distribution, in its capacity as our sole stockholder, the Halyard 2014 Equity Participation Plan (the Halyard 2014 Plan), which we expect will be substantially similar to the Kimberly-Clark 2011 Plan. In connection with the anticipated adoption of the Halyard 2014 Plan, we expect a grant will occur with the target levels for long-term incentive compensation for the Halyard named executive officers for 2014 (following the distribution) to be as follows:
Target Long-Term Incentive Grant for 2014
Following the Distribution
Name |
Target Grant($) | |||
Robert E. Abernathy |
3,000,000 | |||
Steven E. Voskuil |
775,000 | |||
Rhonda D. Gibby |
350,000 | |||
Christopher M. Lowery |
1,000,000 | |||
John W. Wesley |
400,000 |
The types of long-term incentive compensation, and their relative percentage, have not been determined and will be offset by the value of long-term equity awards granted as part of Kimberly-Clarks 2014 annual incentive compensation grant cycle which are not forfeited at the distribution date. We will include additional information in an amendment to this information statement.
Messrs. Lowerys, Voskuils and Wesleys letter agreements provide that they will receive a target long-term incentive grant in 2015 as part of Halyards annual incentive compensation grant cycle. Mr. Abernathy and Ms. Gibby are also expected to receive target long-term incentive grants in 2015. The terms and conditions of these grants will be governed by the Halyard 2014 Plan.
At the time of the distribution, Mr. Voskuils unvested performance-based restricted stock units will be forfeited. Mr. Voskuils letter agreement provides that, effective upon the distribution date and his transfer to Halyard (subject to the approval of the Halyard Compensation Committee), Halyard will grant him (in addition to long-term incentive grants listed above) long-term incentive awards intended to replace the value of the forfeited unvested performance-based restricted stock units which will be determined in a manner that is consistent with other replacement awards granted to Halyard Participants. See The Separation and Distribution Treatment of Equity-Based Compensation. The terms and conditions of this long-term incentive grant will be governed by the Halyard 2014 Plan.
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Except as discussed above, Halyards treatment of forfeited Kimberly-Clark equity awards held by the Halyard named executive officers following the distribution has not been determined. We will include information regarding their treatment in an amendment to this information statement.
Retention Award . Kimberly-Clark will pay, or will cause Halyard to pay, a retention payment to Messrs. Voskuil, Lowery and Wesley and Ms. Gibby in the amount of $150,000, $150,000, $150,000, and $100,000, respectively, in a lump sum within sixty days following (1) the Halyard named executive officers involuntary separation from service from Kimberly-Clark, (2) the distribution date, or (3) the date Kimberly-Clark determines not to pursue the distribution.
Benefits and Other Compensation
Historically
Retirement Benefits . The Halyard named executive officers receive contributions from Kimberly-Clark under the Kimberly-Clark Corporation 401(k) and Profit Sharing Plan (the Kimberly-Clark 401(k) Profit Sharing Plan) and the Kimberly-Clark Supplemental Retirement 401(k) and Profit Sharing Plan (the Kimberly-Clark Supplemental 401(k) Plan). Messrs. Abernathy and Voskuil participate in its frozen defined benefit pension plans and supplemental pension plans. These plans are consistent with those maintained by Kimberly-Clarks peer group companies and are therefore necessary to remain competitive with them for recruiting and retaining executive talent. The Kimberly-Clark Committee believes that these retirement benefits are important parts of its compensation program. For more information, see Nonqualified Deferred Compensation Overview of Qualified and Non-Qualified Plans and Pension Benefits.
Other Compensation . Kimberly-Clarks perquisites for its executive officers include personal financial planning services under its Executive Financial Counseling Program, an executive health screening program where executives may receive comprehensive physical examinations from an independent healthcare provider, and permitted personal use of corporate aircraft consistent with Kimberly-Clarks policy. The personal financial planning program is designed to provide Kimberly-Clark executives with access to knowledgeable financial advisors that understand its compensation and benefit plans and can assist its executives in efficiently and effectively managing their financial and tax planning issues. The executive health screening program provides Kimberly-Clark executives with additional services that help maintain their overall health. Messrs. Abernathy and Voskuil are the only Halyard named executive officers who are eligible to receive personal financial planning services, and each of the Halyard named executive officers is eligible to participate in the executive health screening program.
The Kimberly-Clark Committee has adopted a policy that limits the personal use of corporate aircraft by the Chief Executive Officer to an aggregate annual incremental cost to Kimberly-Clark of $100,000, and generally prohibits the personal use of corporate aircraft by other Kimberly-Clark executive officers unless there is no incremental cost to Kimberly-Clark for the use. If a corporate aircraft is already scheduled for business purposes and can accommodate additional passengers, executive officers and their guests may, under certain circumstances, join flights for personal travel.
Kimberly-Clarks executive officers no longer receive tax reimbursement and a related gross-up for perquisites (including personal use of corporate aircraft), except for certain relocation benefits. Kimberly-Clarks relocation program is a broad-based program in which all salaried employees are eligible to participate.
Post-Termination Benefits . Kimberly-Clark maintains two severance plans that cover its executive officers: the Severance Pay Plan and the Executive Severance Plan. Kimberly-Clarks executive officers may not receive severance payments under more than one severance plan. Benefits under these plans are payable only if the executives employment terminates under the conditions specified in the applicable plan. Kimberly-Clark believes that its severance plans are consistent with those maintained by its peer group companies and that they are therefore important for attracting and retaining executives who are critical to its long-term success and competitiveness.
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Severance Pay Plan . Kimberly-Clarks Severance Pay Plan provides severance benefits to most of its U.S. hourly and salaried employees, including the Halyard named executive officers, who are involuntarily terminated under the circumstances described in the plan. The objective of this plan is to facilitate the employees transition to his or her next position, and it is not intended to serve as a reward for the employees past service. See Potential Payments on Termination or Change of Control Severance Benefits.
Executive Severance Plan . Kimberly-Clarks Executive Severance Plan provides severance benefits to eligible employees in the event of a qualified termination of employment (as defined in the plan) in connection with a change of control. For an eligible employee to receive a payment under this plan, two things must occur: there must be a change of control of Kimberly-Clark, and the employee must have been involuntarily terminated without cause or have resigned for good reason (as defined in the plan and referred to as a qualified termination of employment) within two years of the change of control (often referred to as a double trigger). Mr. Abernathy is the only Halyard named executive officer who is a participant under this plan, and his agreement under the plan expires on December 31, 2014. See Potential Payments on Termination or Change of Control Severance Benefits.
Going Forward
The Halyard Compensation Committee will review the benefits and other compensation that the Halyard named executive officers received in connection with their employment with Kimberly-Clark. We expect that it will initially provide benefits and other compensation similar to those provided by Kimberly-Clark immediately prior to the distribution; we do not expect Halyard to provide a pension, supplemental pension or deferred compensation plans, and Kimberly-Clark will continue to be responsible for any benefits accrued prior to the distribution. The Halyard named executive officers will be treated as having terminated employment and be entitled to an acceleration of benefits under certain Kimberly-Clark benefit plans that are not subject to Section 409A of the Code. The only amounts payable to any of the Halyard named executive officers in connection with the distribution that are listed in the Potential Payments on Termination or Change of Control Table below are the retirement benefits payable to Messrs. Abernathy and Wesley, namely accelerated equity vesting under the Kimberly-Clark 2011 Plan, full payment under Kimberly-Clarks Executive Officer Achievement Award Program or Kimberly-Clarks Management Achievement Award Program, and retiree medical and life insurance benefits.
The Halyard named executive officers will not incur a separation from service under the terms of any Kimberly-Clark benefit plans subject to Section 409A of the Code, and thus will not be entitled to an acceleration of benefits under such plans by virtue of the distribution. Similarly, no covered termination will occur and no benefits will be payable under the Kimberly-Clark Severance Plan or Kimberly-Clark Executive Severance Plan. Benefits under the Kimberly-Clark 401(k) Profit Sharing Plan and Supplemental 401(k) Plan will be transferred to Halyard.
Mr. Wesleys letter agreement provides that, after the distribution date, Halyard will relocate him to Roswell, Georgia and provide him with a relocation benefit equivalent to the applicable Kimberly-Clark program.
Mr. Lowery was eligible for a $100,000 cash bonus granted in 2013 to be paid to him if he relocated to Roswell, Georgia by June 30, 2014. As a result of the distribution, Mr. Lowerys letter agreement granted a time extension for this bonus to December 31, 2014. Mr. Lowery has subsequently relocated to the Atlanta, Georgia area and Kimberly-Clark has paid the $100,000 cash bonus.
The Halyard named executive officers will be eligible for severance benefits under the terms of the Kimberly-Clark Severance Pay Plan if they are involuntarily terminated from Kimberly-Clark prior to the distribution date. Mr. Abernathy would also be eligible for severance benefits under the terms of the Kimberly-Clark Severance Pay Plan in such an event.
Because the distribution is not considered a change of control under the Executive Severance Plan, Mr. Abernathy would not be eligible for benefits under the plan solely as a result of the distribution.
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Analysis of Compensation-Related Risks
Historically
The Kimberly-Clark Committee, with the assistance of its independent consultant and Kimberly-Clarks compensation consultant, has reviewed an assessment of Kimberly-Clarks compensation programs for its employees, including Kimberly-Clarks executive officers, to analyze the risks arising from its compensation systems.
Based on this assessment, the Kimberly-Clark Committee believes that the design of Kimberly-Clarks compensation programs, including its executive compensation program, does not encourage its executives or employees to take excessive risks and that the risks arising from these programs are not reasonably likely to have a material adverse effect on Kimberly-Clark.
Several factors contributed to the Kimberly-Clark Committees conclusion, including:
| The Kimberly-Clark Committee believes Kimberly-Clark maintains a values-driven, ethics-based culture supported by a strong tone at the top. |
| The performance targets for annual cash incentive programs are selected to ensure that they are reasonably attainable in a manner consistent with Kimberly-Clarks Global Business Plan without encouraging executives or employees to take inappropriate risks. |
| An analysis by Kimberly-Clarks consultant indicated that its compensation programs are consistent with those of Kimberly-Clarks peer group. In addition, the analysis noted that target levels for direct annual compensation are compared with the median of its peer group. |
| The Kimberly-Clark Committee believes the allocation among the components of direct annual compensation provides an appropriate balance between annual and long-term incentives and between fixed and performance-based compensation. |
| Annual cash incentives and long-term performance-based restricted share unit awards under Kimberly-Clarks executive compensation program are capped at 200% of the target award, and all other material non-executive cash incentive programs are capped at reasonable levels, which the Kimberly-Clark Committee believes protects against disproportionately large incentives. |
| The Kimberly-Clark Committee believes the performance measures and the multi-year vesting features of the long-term equity incentive compensation component encourage participants to seek sustainable growth and value creation. |
| The Kimberly-Clark Committee believes inclusion of share-based compensation through the long-term equity incentive compensation component encourages appropriate decision-making that is aligned with the long-term interests of stockholders. |
| Kimberly-Clarks stock ownership guidelines further align the interests of management and stockholders. |
Going Forward
The Halyard Compensation Committee is expected to take into account risk-management practices and risk-taking incentives as it considers and develops Halyards employee and executive compensation programs. The Halyard Compensation Committee is expected to adopt a risk assessment process relating to compensation policies and practices initially similar to that in place at Kimberly-Clark.
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Historical Compensation of Named Executive Officers Prior to the Distribution
Each of the Halyard named executive officers was employed by Kimberly-Clark prior to the distribution; therefore, the information provided for the years 2013, 2012 and 2011 reflects compensation earned at Kimberly-Clark and the design and objectives of the Kimberly-Clark executive compensation programs in place prior to the distribution. Messrs. Abernathy and Wesley are currently, and were as of December 31, 2013, elected officers of Kimberly-Clark. Accordingly, decisions regarding their compensation were made by the Kimberly-Clark Committee. Decisions regarding Messrs. Voskuils and Lowerys and Ms. Gibbys compensation were made according to Kimberly-Clarks compensation program. Executive compensation decisions following the distribution will be made by the Halyard Compensation Committee. All references in the following tables to stock options and restricted stock units relate to awards granted by Kimberly-Clark in respect of Kimberly-Clarks common stock.
The amounts and forms of compensation reported below are not necessarily indicative of the compensation that the Halyard executive officers will receive following the separation, which could be higher or lower, because historical compensation was determined by Kimberly-Clark and because Halyards future compensation levels will be determined based on the compensation policies, programs and procedures to be established by the Halyard Compensation Committee for those individuals who will be employed by us following the distribution. The services rendered by these individuals to Kimberly-Clark were, in most instances, in capacities not equivalent to those positions in which they will serve for Halyard. Therefore, these tables do not reflect the compensation which will be paid to the Halyard named executive officers following the distribution.
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Summary Compensation Table
The following table contains information concerning compensation awarded to, earned by, or paid to the Halyard named executive officers by Kimberly-Clark for the years indicated. Position titles refer to each Halyard named executive officers title at Kimberly-Clark in 2013. Additional information regarding the items reflected in each column follows the table.
Summary Compensation Table
Name and Principal
|
Year |
Salary
($) |
Stock
Awards ($) |
Option
Awards ($) |
Non-Equity
Incentive Plan Compensation ($) |
Change
in
Pension Value and Nonqualified Deferred Compensation Earnings ($) (1) |
All Other
Compensation ($) |
Total
($) |
||||||||||||||||||||||||
Robert E. Abernathy
|
2013 | 780,000 | 1,424,997 | 328,807 | 850,533 | | 120,106 | 3,504,443 | ||||||||||||||||||||||||
2012 | 777,501 | 1,425,001 | 157,245 | 777,029 | 1,177,038 | 94,016 | 4,407,830 | |||||||||||||||||||||||||
2011 | 765,001 | 1,350,021 | 165,530 | 382,550 | 926,738 | 90,696 | 3,680,536 | |||||||||||||||||||||||||
Steven E. Voskuil
|
2013 | 349,775 | 299,954 | 69,219 | 230,681 | | 53,516 | 1,003,145 | ||||||||||||||||||||||||
2012 | 338,896 | 345,026 | 38,071 | 240,687 | 50,308 | 35,790 | 1,048,778 | |||||||||||||||||||||||||
2011 | 316,251 | 412,485 | 50,580 | 162,047 | 29,084 | 32,048 | 1,002,495 | |||||||||||||||||||||||||
Rhonda D. Gibby
|
2013 | 237,993 | 149,977 | 34,613 | 116,301 | | 33,803 | 572,687 | ||||||||||||||||||||||||
2012 | 228,265 | 131,240 | 14,482 | 95,304 | | 30,410 | 499,701 | |||||||||||||||||||||||||
2011 | 223,122 | 120,028 | 14,715 | 96,877 | | 27,100 | 481,842 | |||||||||||||||||||||||||
Christopher M. Lowery
|
2013 | 290,037 | 142,540 | 32,883 | 107,865 | | 51,361 | 624,686 | ||||||||||||||||||||||||
2012 | 278,992 | 142,472 | 15,724 | 126,608 | | 42,934 | 606,730 | |||||||||||||||||||||||||
2011 | 269,770 | 220,062 | 14,715 | 137,357 | | 95,767 | 737,671 | |||||||||||||||||||||||||
John W. Wesley
|
2013 | 308,750 | 206,232 | 47,590 | 208,630 | | 47,356 | 818,558 | ||||||||||||||||||||||||
2012 | 303,751 | 206,281 | 22,760 | 190,162 | | 31,116 | 754,070 | |||||||||||||||||||||||||
2011 | 298,001 | 206,242 | 25,288 | 128,418 | | 27,901 | 685,850 | |||||||||||||||||||||||||
(1) | For 2013, the aggregate value of pension benefits for Messrs. Abernathy and Voskuil decreased by $519,759 and $32,442, respectively. Because these amounts decreased, they have been excluded from the table above under the SECs regulations. Messrs. Lowery and Wesley and Ms. Gibby are not participants in Kimberly-Clarks pension plans. |
Salary . The amounts in this column represent base salary earned during the year.
Stock Awards and Option Awards . The amounts in these columns reflect the dollar value of restricted share unit awards and stock options, respectively, granted under Kimberly-Clarks stockholder-approved 2001 Equity Participation Plan (the Kimberly-Clark 2001 Plan), as amended by the Kimberly-Clark 2011 Plan (collectively, the Kimberly-Clark Equity Plans).
The amounts for each year represent the grant date fair value of the awards, computed in accordance with ASC Topic 718. See Note 10 to our audited historical combined financial statements included elsewhere in this information statement for the assumptions used in valuing and expensing these restricted share units and stock option awards in accordance with ASC Topic 718.
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For awards that are subject to performance conditions, the value is based on the probable outcome of the conditions at grant date. This value, as well as the value of the awards at the grant date assuming the highest level of performance conditions will be achieved and using the grant date stock price, is set forth below:
Name |
Year |
Stock Awards at
Grant Date Value ($) |
Stock Awards at
Highest Level of Performance Conditions($) |
|||||||||
Robert E. Abernathy |
2013 | 1,424,997 | 2,849,994 | |||||||||
2012 | 1,425,001 | 2,850,002 | ||||||||||
2011 | 1,350,021 | 2,700,042 | ||||||||||
Steven E. Voskuil |
2013 | 299,954 | 599,908 | |||||||||
2012 | 345,026 | 690,052 | ||||||||||
2011 | 412,485 | 824,970 | ||||||||||
Rhonda D. Gibby |
2013 | 149,977 | 299,954 | |||||||||
2012 | 131,240 | 262,480 | ||||||||||
2011 | 120,028 | 240,056 | ||||||||||
Christopher M. Lowery |
2013 | 142,540 | 285,080 | |||||||||
2012 | 142,472 | 284,944 | ||||||||||
2011 | 120,028 | 240,056 | ||||||||||
John W. Wesley |
2013 | 206,232 | 412,464 | |||||||||
2012 | 206,281 | 412,562 | ||||||||||
2011 | 206,242 | 412,484 |
Non-Equity Incentive Plan Compensation . The amounts in this column are the annual cash incentive payments described above in Compensation Discussion and Analysis. These amounts were earned during the years indicated and were paid to the Halyard named executive officers in February of the following year.
Change In Pension Value and Nonqualified Deferred Compensation Earnings . The amounts in this column reflect the aggregate change during the year in actuarial present value of accumulated benefits under all defined benefit and actuarial plans (including supplemental pension plans). With respect to the supplemental pension plans, amounts have been calculated to reflect an approximate 30-year Treasury bond rate to determine the amount of the earlier retirement age lump sum benefit in a manner consistent with Kimberly-Clarks financial statements. A description of the assumptions used in determining the amounts and additional information about these plans are provided in Pension Benefits below.
Mr. Abernathy has compensation from before 2005 that he elected to defer pursuant to the Kimberly-Clark Deferred Compensation Plan then in effect. Each of the Halyard named executive officers participates in the Kimberly-Clark Supplemental 401(k) Plan, a non-qualified defined contribution plan. Earnings on each of these plans are not included in the Summary Compensation Table because the earnings were not above-market or preferential. See Nonqualified Deferred Compensation below for a discussion of these plans and each named executive officers earnings under these plans in 2013.
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All Other Compensation. All other compensation consists of the following:
Name |
Year |
Perquisites
($) (1) |
Defined
Contribution Plan Amounts ($) (2) |
Tax
Gross-Up ($) (3) |
Total
($) (4) |
|||||||||||||||
Robert E. Abernathy |
2013 | 8,000 | 112,106 | | 120,106 | |||||||||||||||
2012 | 10,492 | 83,524 | | 94,016 | ||||||||||||||||
2011 | 2,100 | 88,596 | | 90,696 | ||||||||||||||||
Steven E. Voskuil |
2013 | | 53,516 | | 53,516 | |||||||||||||||
2012 | | 35,790 | | 35,790 | ||||||||||||||||
2011 | 2,230 | 29,818 | | 32,048 | ||||||||||||||||
Rhonda D. Gibby |
2013 | | 33,803 | | 33,803 | |||||||||||||||
2012 | | 30,410 | | 30,410 | ||||||||||||||||
2011 | | 27,100 | | 27,100 | ||||||||||||||||
Christopher M. Lowery |
2013 | | 35,171 | 16,190 | 51,361 | |||||||||||||||
2012 | 1,866 | 29,977 | 11,091 | 42,934 | ||||||||||||||||
2011 | 61,446 | 20,972 | 13,349 | 95,767 | ||||||||||||||||
John W. Wesley |
2013 | 3,629 | 43,727 | | 47,356 | |||||||||||||||
2012 | | 31,116 | | 31,116 | ||||||||||||||||
2011 | | 27,901 | | 27,901 |
(1) | Perquisites. Perquisites for the Halyard named executive officers in 2013 included the following: |
Name |
Executive
Financial Counseling Program($) |
Executive
Health Screening Program($) |
Total($) | |||||||||
Robert E. Abernathy |
8,000 | | 8,000 | |||||||||
Steven E. Voskuil |
| | | |||||||||
Rhonda D. Gibby |
| | | |||||||||
Christopher M. Lowery |
| | | |||||||||
John W. Wesley |
| 3,629 | 3,629 |
The perquisite amount for Mr. Lowery in 2011 represents relocation expenses incurred and paid in 2011 pursuant to Kimberly-Clarks relocation program.
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(2) | Defined Contribution Plan Amounts . Matching contributions were made under the Kimberly-Clark 401(k) Profit Sharing Plan and accrued under the Kimberly-Clark Supplemental 401(k) Plan in 2013, 2012 and 2011 for each of the Halyard named executive officers. A profit-sharing contribution was also made under the Kimberly-Clark 401(k) Profit Sharing Plan and the Kimberly-Clark Supplemental 401(k) Plan in February 2014, 2013 and 2012 with respect to Kimberly-Clarks performance in 2013, 2012 and 2011, respectively, for the Halyard named executive officers as follows: |
Name |
Performance
Year |
Profit Sharing
Contribution($) |
||||||
Robert E. Abernathy |
2013 | 49,825 | ||||||
2012 | 37,122 | |||||||
2011 | 36,481 | |||||||
Steven E. Voskuil |
2013 | 18,895 | ||||||
2012 | 16,030 | |||||||
2011 | 12,278 | |||||||
Rhonda D. Gibby |
2013 | 10,665 | ||||||
2012 | 10,405 | |||||||
2011 | 8,400 | |||||||
Christopher M. Lowery |
2013 | 13,333 | ||||||
2012 | 13,323 | |||||||
2011 | 8,635 | |||||||
John W. Wesley |
2013 | 15,965 | ||||||
2012 | 13,829 | |||||||
2011 | 11,489 |
See Nonqualified Deferred Compensation below for a discussion of these plans. The profit sharing contribution varies depending on Kimberly-Clarks performance for the applicable year, contributing to fluctuations from year to year in the amounts in the All Other Compensation column of the Summary Compensation Table.
(3) | Tax Gross-Ups . The amounts shown for Mr. Lowery reflect tax reimbursement for the value of sales incentive trips that were attributed to Mr. Lowerys income. |
(4) | Certain Dividends . The Halyard named executive officers also received cash dividend equivalents in 2011 and 2012 on certain of the restricted share units held by them at the same rate and on the same dates as dividends were paid to Kimberly-Clarks stockholders. Because the value of the right to receive dividend equivalents was factored into the grant date fair value of the restricted share unit awards, the cash dividend equivalents received by the Halyard named executive officers were not included in the Summary Compensation Table. Dividend equivalents are no longer paid on unvested performance-based and time-vested restricted share units granted to the Halyard named executive officers beginning February 2009; instead, dividend equivalents on these units are accumulated and will be paid in additional shares after the restricted share units vest, based on the actual number of shares that vest. See Outstanding Equity Awards below for information on these reinvested dividend equivalents. |
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Grants of Plan-Based Awards
The following table sets forth Kimberly-Clark plan-based awards granted to the Halyard named executive officers during 2013 on a grant-by-grant basis.
Grants of Plan-Based Awards in 2013
Estimated Future Payouts
Under Non-Equity Incentive Plan Awards (1) |
Estimated Future Payouts
Under Equity Incentive Plan Awards (2) |
All Other
Option Awards: Number of Securities Underlying Options (#) (4) |
Exercise
or Base Price of Option Awards ($/Sh) |
Grant
Date Fair Value of Stock and Option Awards ($) (5) |
||||||||||||||||||||||||||||||||||||||
Name |
Grant Type |
Grant
Date (3) |
Thres-
hold ($) |
Target
($) |
Maximum
($) |
Thres-
hold (#) |
Target
(#) |
Maximum
(#) |
||||||||||||||||||||||||||||||||||
Robert E. Abernathy | Annual cash incentive award | | 663,000 | 1,326,000 | ||||||||||||||||||||||||||||||||||||||
Performance-based RSU | 2/20/2013 | | 15,533 | 31,066 | 1,424,997 | |||||||||||||||||||||||||||||||||||||
Time-vested stock option | 5/1/2013 | 45,987 | 103.29 | 328,807 | ||||||||||||||||||||||||||||||||||||||
Steven E. Voskuil | Annual cash incentive award | | 193,522 | 387,044 | ||||||||||||||||||||||||||||||||||||||
Performance-based RSU | 5/1/2013 | | 2,904 | 5,808 | 299,954 | |||||||||||||||||||||||||||||||||||||
Time-vested stock option | 5/1/2013 | 9,681 | 103.29 | 69,219 | ||||||||||||||||||||||||||||||||||||||
Rhonda D. Gibby | Annual cash incentive award | | 108,387 | 216,774 | ||||||||||||||||||||||||||||||||||||||
Performance-based RSU | 5/1/2013 | | 1,452 | 2,904 | 149,977 | |||||||||||||||||||||||||||||||||||||
Time-vested stock option | 5/1/2013 | 4,841 | 103.29 | 34,613 | ||||||||||||||||||||||||||||||||||||||
Christopher M. Lowery | Annual cash incentive award | | 140,000 | 280,000 | ||||||||||||||||||||||||||||||||||||||
Performance-based RSU | 5/1/2013 | | 1,380 | 2,760 | 142,540 | |||||||||||||||||||||||||||||||||||||
Time-vested stock option | 5/1/2013 | 4,599 | 103.29 | 32,883 | ||||||||||||||||||||||||||||||||||||||
John W. Wesley | Annual cash incentive award | | 155,000 | 310,000 | ||||||||||||||||||||||||||||||||||||||
Performance-based RSU | 2/20/2013 | | 2,248 | 4,496 | 206,232 | |||||||||||||||||||||||||||||||||||||
Time-vested stock option | 5/1/2013 | 6,656 | 103.29 | 47,590 |
(1) | Represents the potential annual performance-based incentive cash payments each Halyard named executive officer could earn in 2013. These awards were granted under Kimberly-Clarks Executive Officer Achievement Award Program, which is its annual cash incentive program for its executive officers approved by stockholders in 2002, or its Management Achievement Award Program, which is its annual cash incentive program for its non-executive officers. Actual amounts earned in 2013 were based on the 2013 objectives established by the Kimberly-Clark Committee at its February 20, 2013 meeting. See Compensation Discussion and Analysis. At the time of the grant, the incentive payment could range from the threshold amount to the maximum amount depending on the extent to which the 2013 objectives were met. The actual amounts paid in 2014 based on the 2013 objectives are set forth in the Summary Compensation Table under the column entitled Non-Equity Incentive Plan Compensation. |
105
(2) | Performance-based restricted share units granted under the Kimberly-Clark 2011 Plan to the Halyard named executive officers on the date indicated. The number of performance-based restricted share units granted in 2013 that will ultimately vest on February 20, 2016 for Messrs. Abernathy and Wesley and on May 1, 2016 for the other Halyard named executive officers could range from the threshold number to the maximum number depending on the extent to which the average annual net sales growth and average adjusted return on invested capital performance objectives for those awards are met. |
(3) | The grant date for each award is the same date that the Kimberly-Clark Committee or the Chief Executive Officer pursuant to delegated authority took action to grant the awards. |
(4) | Time-vested stock options granted under the Kimberly-Clark 2011 Plan to the Halyard named executive officers on May 1, 2013. |
(5) | Grant date fair value is determined in accordance with ASC Topic 718 and, for performance-based restricted share units, is the value at grant date based on the probable outcome of the performance condition and is consistent with the estimate of aggregate compensation cost to be recognized over the service period determined as of the grant date, excluding the effect of estimated forfeitures. See Note 10 to our audited historical combined financial statements included elsewhere in this information statement for the assumptions used in valuing and expensing these restricted share units and stock option awards in accordance with ASC Topic 718. |
Discussion of Summary Compensation and Plan-Based Awards Tables
Kimberly-Clarks executive compensation policies and practices, pursuant to which the compensation set forth in the Summary Compensation Table and the Grants of Plan-Based Awards in 2013 table was paid or awarded, are described under Compensation Discussion and Analysis above.
Each of Messrs. Voskuil, Lowery and Wesley and Ms. Gibby has entered into a letter agreement with Kimberly-Clark that establishes his or her total compensation as of the distribution date and addresses other compensation items following the distribution date. See Compensation Discussion and Analysis.
Mr. Abernathy previously entered into an agreement with Kimberly-Clark under Kimberly-Clarks Executive Severance Plan. See Potential Payments on Termination or Change of Control.
The Halyard named executive officers are eligible to receive long-term equity incentive awards of stock options, restricted stock or restricted share units, or a combination of stock options, restricted stock and restricted share units under the Kimberly-Clark 2011 Plan, which was approved by Kimberly-Clarks stockholders in 2011. The Kimberly-Clark 2011 Plan provides the Kimberly-Clark Committee with discretion to require performance-based standards to be met before awards vest. In 2013, each named executive officer received grants of stock options and performance-based restricted share units under the Kimberly-Clark 2011 Plan. None of the Halyard named executive officers were awarded time-vested restricted share units in 2013.
For grants of stock options, the Kimberly-Clark 2011 Plan provides that the option price per share shall be no less than the closing price per share of Kimberly-Clarks common stock at the grant date. The term of any option is no more than ten years from the grant date. Options granted in 2013 become exercisable in three annual installments of 30%, 30% and 40%, beginning May 1, 2014; however, all of the options become exercisable for three years upon death or total and permanent disability and for the earlier of five years or the remaining term of the options, upon retirement of the officer. In addition, options generally become exercisable upon a termination of employment following a change of control. See Potential Payments on Termination or Change of Control below. The options may be transferred by the Halyard named executive officers to family members or certain entities in which family members have interests.
Performance-based restricted share unit awards granted in 2013 vest three years following the grant date in a range from zero to 200% of the target levels based on Kimberly-Clarks average annual net sales growth and average adjusted return on invested capital performance during the three years. As of February 24, 2014, the performance-based restricted share units granted in 2013 and 2012 were on pace to vest at the following levels: 126% for the 2013 award and 114% for the 2012 award. The Kimberly-Clark Committee has determined that the 2011 award vested at 97%.
Dividend equivalents on unvested performance-based restricted share units are accumulated and will be paid in additional shares after the performance-based restricted share units vest, based on the actual number of shares that vest.
106
Outstanding Equity Awards
The following table sets forth information concerning outstanding Kimberly-Clark equity awards for the Halyard named executive officers as of December 31, 2013. Option awards were granted for ten-year terms, ending on the option expiration date set forth in the table. Stock awards were granted as indicated in the footnotes to the table.
Outstanding Equity Awards as of December 31, 2013 (1)
Option Awards (2) | Stock Awards | |||||||||||||||||||||||||||
Name |
Grant
Date |
Number of
Securities Underlying Unexercised Options (#) Exercisable |
Number of
Securities Underlying Unexercised Options (#) Unexercisable |
Option
Exercise Price ($) (3) |
Option
Expiration Date |
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (4) |
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (5) |
|||||||||||||||||||||
Robert E. Abernathy |
||||||||||||||||||||||||||||
5/1/2013 | | 45,987 | 103.29 | 5/1/2023 | ||||||||||||||||||||||||
2/20/2013 | 31,851 | 3,327,155 | ||||||||||||||||||||||||||
5/2/2012 | 14,514 | 33,869 | 78.54 | 5/2/2022 | ||||||||||||||||||||||||
2/27/2012 | 42,149 | 4,402,885 | ||||||||||||||||||||||||||
4/26/2011 | 16,664 | 22,219 | 64.81 | 4/26/2021 | ||||||||||||||||||||||||
2/17/2011 | 22,851 | 2,387,015 | ||||||||||||||||||||||||||
4/28/2010 | 26,221 | | 61.02 | 4/28/2020 | ||||||||||||||||||||||||
Steven E. Voskuil |
||||||||||||||||||||||||||||
5/1/2013 | | 9,681 | 103.29 | 5/1/2023 | ||||||||||||||||||||||||
5/1/2013 | 5,907 | 617,045 | ||||||||||||||||||||||||||
5/2/2012 | | 8,200 | 78.54 | 5/2/2022 | ||||||||||||||||||||||||
5/2/2012 | 9,344 | 965,628 | ||||||||||||||||||||||||||
4/26/2011 | | 6,790 | 64.81 | 4/26/2021 | ||||||||||||||||||||||||
2/27/2011 | 6,982 | 729,340 | ||||||||||||||||||||||||||
Rhonda D. Gibby |
||||||||||||||||||||||||||||
5/1/2013 | | 4,841 | 103.29 | 5/1/2023 | 2,953 | 308,470 | ||||||||||||||||||||||
5/1/2013 | ||||||||||||||||||||||||||||
5/2/2012 | 1,336 | 3,120 | 78.54 | 5/2/2022 | 3,516 | 367,281 | ||||||||||||||||||||||
5/2/2012 | ||||||||||||||||||||||||||||
4/26/2011 | 2,962 | 1,976 | 64.81 | 4/26/2021 | ||||||||||||||||||||||||
4/26/2011 | 2,028 | 211,845 | ||||||||||||||||||||||||||
4/28/2010 | 5,827 | | 61.02 | 4/28/2020 | ||||||||||||||||||||||||
4/29/2009 | 3,024 | | 49.61 | 4/29/2019 | ||||||||||||||||||||||||
Christopher M. Lowery |
||||||||||||||||||||||||||||
5/1/2013 | | 4,599 | 103.29 | 5/1/2023 | ||||||||||||||||||||||||
5/1/2013 | 2,807 | 293,219 | ||||||||||||||||||||||||||
5/2/2012 | 1,451 | 3,387 | 78.54 | 5/2/2022 | ||||||||||||||||||||||||
5/2/2012 | 3,817 | 398,724 | ||||||||||||||||||||||||||
4/26/2011 | | 1,976 | 64.81 | 4/26/2021 | ||||||||||||||||||||||||
4/26/2011 | 2,028 | 211,845 | ||||||||||||||||||||||||||
John W. Wesley |
||||||||||||||||||||||||||||
5/1/2013 | | 6,656 | 103.29 | 5/1/2023 | ||||||||||||||||||||||||
2/20/2013 | 4,610 | 481,561 | ||||||||||||||||||||||||||
5/2/2012 | | 4,903 | 78.54 | 5/2/2022 | ||||||||||||||||||||||||
2/27/2012 | 6,101 | 637,310 | ||||||||||||||||||||||||||
4/26/2011 | | 3,395 | 64.81 | 4/26/2021 | ||||||||||||||||||||||||
2/17/2011 | 3,491 | 364,670 |
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(1) | The amounts shown reflect outstanding equity awards granted under the Kimberly-Clark Equity Plans. Under the Kimberly-Clark Equity Plans, each Halyard named executive officer may receive awards of stock options, restricted stock or restricted share units, or a combination of stock options, restricted stock and restricted share units. Awards listed above granted on or after April 26, 2011 were granted under the Kimberly-Clark 2011 Plan; all other awards were granted under the Kimberly-Clark 2001 Plan. |
(2) | Stock options granted under the Kimberly-Clark Equity Plans become exercisable in three annual installments of 30%, 30% and 40%, beginning on the first anniversary of the grant date; however, all of the options become exercisable for three years upon death or total and permanent disability and for the earlier of five years or the remaining term of the options, upon retirement of the officer. In addition, options generally become exercisable upon a termination of employment following a change of control, and certain options granted to the Halyard named executive officers are subject to Kimberly-Clarks Executive Severance Plan. See Potential Payments on Termination or Change of Control below. The options may be transferred by the officers to family members or certain entities in which family members have interests. |
(3) | The Kimberly-Clark Equity Plans provide that the option price per share shall be no less than the closing price per share of Kimberly-Clarks common stock at grant date. |
(4) | The amounts shown in this column represent awards of performance-based restricted share units granted to the Halyard named executive officers in February 2011, 2012 and 2013. Subject to accelerated vesting as described in Potential Payments on Termination or Change of Control, performance-based restricted share unit awards granted in 2011, 2012 and 2013 vest on February 17, 2014, February 27, 2015, and February 20, 2016, respectively, for Messrs. Abernathy and Wesley and on April 26, 2014, May 2, 2015, and May 1, 2016, respectively, for the other Halyard named executive officers, in a range from zero to 200% of the target levels indicated based on the achievement of specific performance goals. Based on the current vesting pace of these awards, the amounts shown represent the target level for the 2011 grant and the maximum level for the 2012 and 2013 grants. See Discussion of Summary Compensation and Plan-Based Awards Tables above. The units listed include the following amount of dividend equivalents on performance-based restricted share units granted to the Halyard named executive officers, based on the target level for the 2011 grant and the maximum level for the 2012 and 2013 grants: |
Name |
Year |
Dividend
Equivalents |
||||||
Robert E. Abernathy |
2013 | 785 | ||||||
2012 | 2,483 | |||||||
2011 | 2,199 | |||||||
Steven E. Voskuil |
2013 | 99 | ||||||
2012 | 458 | |||||||
2011 | 672 | |||||||
Rhonda D. Gibby |
2013 | 49 | ||||||
2012 | 174 | |||||||
2011 | 176 | |||||||
Christopher M. Lowery |
2013 | 47 | ||||||
2012 | 189 | |||||||
2011 | 176 | |||||||
John W. Wesley |
2013 | 114 | ||||||
2012 | 359 | |||||||
2011 | 336 |
(5) | The values shown in this column are based on the closing price of Kimberly-Clarks common stock on December 31, 2013 of $104.46 per share. |
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Option Exercises and Stock Vested
The following table sets forth information concerning Kimberly-Clark stock options exercised and stock awards vested during 2013 for the Halyard named executive officers.
Option Exercises and Stock Vested in 2013
Name |
Option Awards | Stock Awards | ||||||||||||||
Number of
Shares Acquired on Exercise(#) |
Value
Realized on Exercise($) (1) |
Number of
Shares Acquired on Vesting(#) |
Value
Realized on Vesting($) (2) |
|||||||||||||
Robert E. Abernathy |
| | 20,441 | 1,931,660 | ||||||||||||
Steven E. Voskuil |
20,727 | 635,218 | 2,762 | 261,009 | ||||||||||||
Rhonda D. Gibby |
9,666 | 427,511 | 962 | 99,201 | ||||||||||||
Christopher M. Lowery |
8,789 | 368,399 | 2,501 | 265,462 | ||||||||||||
John W. Wesley |
10,833 | 405,872 | 1,534 | 144,963 |
(1) | The dollar amount reflects the total pre-tax value realized by the Halyard named executive officers (number of shares exercised times the difference between the fair market value on the exercise date and the exercise price). It is not the grant date fair value disclosed in other locations in this information statement. Value from these option exercises was only realized to the extent Kimberly-Clarks stock price increased relative to the stock price at grant (the exercise price). |
(2) | The dollar amount reflects the total pre-tax value received by the Halyard named executive officers upon the vesting of time-vested restricted share units or performance-based restricted share units (number of shares vested times the closing price of Kimberly-Clarks common stock on the vesting date), including cash paid in lieu of fractional shares. It is not the grant date fair value disclosed in other locations in this information statement. |
Pension Benefits
The following table sets forth information as of December 31, 2013 concerning potential payments to the Halyard named executive officers under Kimberly-Clarks pension plan and supplemental pension plans. Information about these plans follows the table.
2013 Pension Benefits
Name (1) |
Plan Name |
Number
of Years Credited Service(#) (3) |
Present
Value of Accumulated Benefit($) |
|||||
Robert E. Abernathy (2) |
Kimberly-Clark Pension Plan | 28 | 1,156,924 | |||||
Kimberly-Clark Supplemental Pension Plans | 28 | 6,207,017 | ||||||
Steven E. Voskuil |
Kimberly-Clark Pension Plan | 6 | 115,652 | |||||
Kimberly-Clark Supplemental Pension Plans | 6 | 40,244 |
(1) | Because Ms. Gibby and Messrs. Lowery and Wesley joined Kimberly-Clark after January 1, 1997, they are not eligible to participate in its defined benefit pension plans. |
(2) | Mr. Abernathy is currently eligible for early retirement under the plans and would be eligible to receive the early retirement benefit described in the table below. |
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(3) | Mr. Abernathy has 32.0 years of actual service. Beginning in 2010, the number of years of credited service was frozen at the amounts set forth in the table, as a result of Kimberly-Clarks ceasing to accrue compensation and benefit service under the plans. Mr. Voskuil has 22 years of actual service. In 1997, he elected to participate in Kimberly-Clarks defined contribution plans instead of accruing additional years of service under our defined benefit pension plans. This election reduces his benefits under Kimberly-Clarks defined benefit pension plans, in accordance with the terms of those plans. |
Employees who joined Kimberly-Clark prior to January 1, 1997 are eligible to participate in its pension plans, which provide benefits based on years of service as of December 31, 2009 and pay (annual cash compensation), integrated with social security benefits. Kimberly-Clarks pension plans are comprised of the Kimberly-Clark Pension Plan and the Supplemental Benefit Plans. Kimberly-Clark stopped accruing compensation and benefit service for participants under Kimberly-Clarks pension plans for most of its U.S. employees, including the Halyard named executive officers, for plan years after 2009. These changes will not affect benefits earned by participants prior to January 1, 2010.
The following is an overview of these plans.
Kimberly-Clark Pension Plan |
Kimberly-Clark Supplemental Pension Plans |
|||
Reason for Plan | Provide eligible participants with a competitive level of retirement benefits based on pay and years of service | Provide eligible participants with benefits as are necessary to fulfill the intent of the pension plan without regard to limitations imposed by the Code | ||
Eligible Participants | Salaried employees who joined Kimberly-Clark prior to January 1, 1997 | Salaried employees impacted by limitations imposed by the Code on payments under the pension plan | ||
Payment Form |
Normal benefit:
Single-life annuity payable monthly
Other optional forms of benefit are available, including a joint and survivor benefit |
Accrued benefits prior to 2005:
Monthly payments or a lump sum after age 55
Accrued benefits for 2005 and after:
Lump sum six months after termination of employment |
||
Retirement Eligibility |
Full unreduced benefit:
Normal retirement age of 65
Age 62 with 10 years of service
Age 60 with 30 years of service
Disability retirement
Early retirement benefit:
Age 55 with five years of service. The amount of the benefit is reduced according to the number of years the participant retires before the age the participant is eligible for a full, unreduced benefit. The amount of the reduction is based on age and years of vesting service |
Same | ||
Benefits Payable | Service and earnings frozen as of December 31, 2009. Benefit depends on | Same |
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Kimberly-Clark Pension Plan |
Kimberly-Clark Supplemental Pension Plans |
|||
the participants years of service under Kimberly-Clarks plan and monthly average earnings over the last 60 months of service or, if higher, the monthly average earnings for the five calendar years in his or her last fifteen years of service for which earnings were the highest | ||||
Benefit Formula for Salaried Employees (As of December 31, 2009) (Payable in the form of a single life annuity) | Unreduced monthly benefit = 1/12 of ((1.125% x final average annual earnings (up to 2/3 of the Social Security Taxable Wage Base)) + (1.425% x final average annual earnings (in excess of 2/3 of the Social Security Taxable Wage Base up to Taxable Wage Base)) + (1.5% x final average annual earnings (over the Social Security Taxable Wage Base)) | Same | ||
Pensionable Earnings | Annual cash compensation. Long-term equity compensation is not included | Same | ||
Change of control or reduction in Kimberly-Clarks long-term credit rating (below investment grade) | Not applicable | Participants have the option of receiving the present value of their accrued benefits prior to 2005 in the supplemental pension plans in a lump sum, reduced by 10% and 5% for active and former employees, respectively |
The estimated actuarial present value of the retirement benefits accrued through December 31, 2013 appears in the 2013 Pension Benefits table. For purposes of determining the present value of accumulated benefits, the potential earlier retirement ages as described above have been used rather than the normal retirement age under the plans, which is 65. Present values for the qualified plan are based on RP2000 mortality projected with generational improvements and for the supplemental plans were calculated using the 2014 417(e) mortality table. With respect to the supplemental pension plans, the amount of the earlier retirement age lump sum benefit was determined using an approximate 30-year Treasury Bond rate of 3.43%, consistent with the methodology used for purposes of Kimberly-Clarks consolidated financial statements; any actual lump sum benefit would be calculated using the 30-year Treasury Bond rate in effect as of the beginning of the month prior to termination. Present value amounts were determined based on the financial accounting discount rate for U.S. pension plans of 4.93% as of December 31, 2013.
The actuarial increase in 2013 of the projected retirement benefits can be found in the Summary Compensation Table under the heading Change in Pension Value and Nonqualified Deferred Compensation Earnings (all amounts reported under that heading represent actuarial increases in Kimberly-Clarks pension plans). No payments were made to the Halyard named executive officers listed above under Kimberly-Clarks pension plans during 2013.
While the supplemental pension plans remain unfunded, in 1994 Kimberly-Clarks Board of Directors approved the establishment of a trust and authorized Kimberly-Clark to make contributions to this trust in order to provide a source of funds to assist it in meeting its liabilities under its supplemental defined benefit plans. For additional information regarding these plans, see Compensation Discussion and Analysis.
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Nonqualified Deferred Compensation
The following table sets forth information concerning Kimberly-Clark nonqualified defined contribution and deferred compensation plans for the Halyard named executive officers during 2013.
2013 Nonqualified Deferred Compensation
Name |
Plan |
Company
Contributions in 2013($) (1) |
Aggregate
Earnings in 2013($) (2) |
Aggregate
Balance at December 31, 2013($) (3) |
||||||||||
Robert E. Abernathy |
Kimberly-Clark Supplemental 401(k) Plan |
93,746 | 55,680 | 395,797 | ||||||||||
Kimberly-Clark Deferred Compensation Plan |
| 4,043 | 19,643 | |||||||||||
Steven E. Voskuil |
Kimberly-Clark Supplemental 401(k) Plan |
34,888 | 17,995 | 109,565 | ||||||||||
Kimberly-Clark Deferred Compensation Plan |
| | | |||||||||||
Rhonda D. Gibby |
Kimberly-Clark Supplemental 401(k) Plan |
8,142 | 7,805 | 40,065 | ||||||||||
Kimberly-Clark Deferred Compensation Plan |
| | | |||||||||||
Christopher M. Lowery |
Kimberly-Clark Supplemental 401(k) Plan |
16,812 | 2,098 | 30,559 | ||||||||||
Kimberly-Clark Deferred Compensation Plan |
| | | |||||||||||
John W. Wesley |
Kimberly-Clark Supplemental 401(k) Plan |
25,367 | 30,793 | 227,622 | ||||||||||
Kimberly-Clark Deferred Compensation Plan |
| | |
(1) | Contributions consist solely of amounts accrued by Kimberly-Clark under the Kimberly-Clark Supplemental 401(k) Plan, including the profit-sharing contribution in February 2014 with respect to Kimberly-Clarks performance in 2013. These amounts are included in the Summary Compensation Table and represent a portion of the Defined Contribution Plan Payments included in All Other Compensation. |
(2) | The amounts in this column show the changes in the aggregate account balance for the Halyard named executive officers during 2013 that are not attributable to company contributions. Aggregate earnings are not included in the Summary Compensation Table because the earnings are not above-market or preferential. |
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(3) | Balance for the Kimberly-Clark Supplemental 401(k) Plan includes the profit-sharing contribution accrued in February 2014 with respect to Kimberly-Clarks performance in 2013. Balance for the Kimberly-Clark Supplemental 401(k) Plan also includes the following accruals by Kimberly-Clark under the Kimberly-Clark Supplemental 401(k) Plan in 2012 and 2011 that are reported in the Summary Compensation Table as a portion of All Other Compensation for those years: |
Name |
Year |
Accrued
Amount ($) |
||||||
Robert E. Abernathy |
2012 | 65,524 | ||||||
2011 | 71,936 | |||||||
Steven E. Voskuil |
2012 | 18,068 | ||||||
2011 | 13,158 | |||||||
Rhonda D. Gibby |
2012 | 5,410 | ||||||
2011 | 3,740 | |||||||
Christopher M. Lowery |
2012 | 11,977 | ||||||
2011 | 4,312 | |||||||
John W. Wesley |
2012 | 13,116 | ||||||
2011 | 11,241 |
In addition to amounts shown in the table that reflect participation in the Kimberly-Clark Supplemental 401(k) Plan, amounts shown for Mr. Abernathy represent compensation deferred in prior years under the Kimberly-Clark Deferred Compensation Plan and accumulated earnings. Effective in 2005, no further amounts may be deferred under this plan. Participants in the Kimberly-Clark Deferred Compensation Plan may elect to have deferrals credited with yields equal to those earned on any of a subset of funds available in the Kimberly-Clark 401(k) Profit Sharing Plan. Generally, benefits are payable under the Kimberly-Clark Deferred Compensation Plan in accordance with the participants election in a lump sum or in quarterly installments over a period between two and 20 years. If a participant ceases employment (other than as a result of a total and permanent disability or death or on or after age 55 with five or more years of service), the account balance is paid in a lump sum. In the event of a change of control or a reduction in Kimberly-Clarks long-term credit rating (below investment grade), currently-employed participants have the option to elect an immediate lump-sum payment of their account balance, less a 10% penalty.
Overview of Qualified and Non-Qualified Plans . The following is an overview of Kimberly-Clarks qualified and non-qualified plans that it offered to the Halyard named executive officers as of December 31, 2013.
Kimberly-Clark 401(k) Profit Sharing Plan |
Kimberly-Clark Supplemental 401(k) Plan |
|||
Purpose | To assist employees in saving for retirement, as well as to provide a discretionary profit sharing contribution in which contributions will be based on Kimberly-Clarks profit performance | To provide benefits to the extent necessary to fulfill the intent of the Kimberly-Clark 401(k) Profit Sharing Plan without regard to the limitations imposed by the Code on qualified defined contribution plans | ||
Eligible participants | Most employees | Salaried employees impacted by limitations imposed by the Code on the Kimberly-Clark 401(k) Profit Sharing Plan | ||
Is the plan qualified under the Code? | Yes | No | ||
Can employees make contributions? | Yes | No |
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Kimberly-Clark 401(k) Profit Sharing Plan |
Kimberly-Clark Supplemental 401(k) Plan |
|||
Does Kimberly-Clark make contributions or match employee contributions? | Kimberly-Clark matches 100% of employee contributions, to a yearly maximum of 4% of eligible compensation. In addition, Kimberly-Clark may make a discretionary profit sharing contribution of 0% to 6% of eligible compensation based on Kimberly-Clarks profit performance | Kimberly-Clark provides credit to the extent Kimberly-Clarks contributions to the Kimberly-Clark 401(k) Profit Sharing Plan are limited by the Code | ||
When do account balances vest? | Account balances under these plans generally vest once the participant completes at least two years of service | Same | ||
How are account balances invested? | Account balances are invested in certain designated investment options selected by the participant | Account balances are credited with earnings and losses as if such account balances were invested in certain designated investment options selected by the participant | ||
When are account balances distributed? |
Distributions of the participants vested account balance are only available after termination of employment. Loans, hardship and certain other withdrawals are allowed prior to termination of employment for certain vested amounts under the Kimberly-Clark 401(k) Profit Sharing Plan | Distributions of the participants vested account balance are payable after termination of employment. |
While the Kimberly-Clark Supplemental 401(k) Plan remains unfunded, in 1996 the Kimberly-Clark Board of Directors amended a previously established trust and authorized Kimberly-Clark to make contributions to this trust in order to provide a source of funds to assist it in meeting its liabilities under its supplemental defined contribution plans.
Potential Payments on Termination or Change of Control
The Halyard named executive officers are eligible to receive certain benefits in the event of termination of employment, including following a change of control of Kimberly-Clark. This section describes various termination scenarios as well as the payments and benefits payable under those scenarios.
Severance Benefits
Kimberly-Clark maintains two severance plans that cover its executive officers, depending on the circumstances that result in their termination. Those plans include the Executive Severance Plan, which is applicable when an executive officer is terminated following a change of control, and the Severance Pay Plan, which is applicable in the event of certain other involuntary terminations. An executive officer may not receive severance payments under more than one of the plans described below.
Executive Severance Plan . Kimberly-Clarks Board of Directors determines the eligibility criteria for participation in the Executive Severance Plan. Kimberly-Clark has entered into an agreement under this plan with each of Kimberly-Clarks named executive officers, including Mr. Abernathy. This agreement provides that, in the event of a Qualified Termination of Employment (as described below), Mr. Abernathy will receive a cash payment in an amount equal to the sum of:
| Two times the sum of annual base salary and the average annual incentive award for the three prior fiscal years, |
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| The value of any forfeited awards, based on the closing price of Kimberly-Clarks common stock at the date of his separation from service, of restricted stock, time-vested restricted share units, and certain unvested incentive stock options, |
| The number of performance-based restricted share units that are forfeited multiplied by the average performance-based restricted share unit payment for the prior three years, |
| The value of any forfeited benefits under the Kimberly-Clark 401(k) Profit Sharing Plan and Kimberly-Clark Supplemental 401(k) Plan, |
| The value of the employer match and assumed 3% profit sharing contribution Mr. Abernathy would have received if he had remained employed an additional two years under the Kimberly-Clark 401(k) Profit Sharing Plan and Kimberly-Clark Supplemental 401(k) Plan, and |
| Two years of COBRA premiums for medical and dental coverage. |
In addition, nonqualified stock options and certain incentive stock options will vest and be exercisable within the earlier of five years from Mr. Abernathys termination or the remaining term of the option.
A Qualified Termination of Employment is a separation of service within two years following a change of control of Kimberly-Clark (as defined in the plan) either involuntarily without cause or by the participant with good reason. In addition, any involuntary separation of service without cause within one year before a change of control will also be determined to be a Qualified Termination of Employment if it is in connection with, or in anticipation of, a change of control.
The current agreement with Mr. Abernathy expires on December 31, 2014, unless extended by the Kimberly-Clark Committee.
This agreement with Mr. Abernathy reflects that he is not entitled to a tax gross-up if he incurs an excise tax due to the application of Section 280G of the Code. Instead, payments and benefits payable to him will be reduced to the extent doing so would result in his retaining a larger after-tax amount, taking into account the income, excise and other taxes imposed on the payments and benefits.
Mr. Abernathys agreement under the Executive Severance Plan provides that he will retain in confidence any confidential information known to him concerning Kimberly-Clark and Kimberly-Clarks business so long as such information is not publicly disclosed.
Severance Pay Plan . Kimberly-Clarks Severance Pay Plan generally provides eligible employees (including the Halyard named executive officers) severance payments and benefits in the event of certain involuntary terminations. Benefits under the Severance Pay Plan depend on the participants employee classification.
Under the Severance Pay Plan, if Mr. Abernathys employment were involuntarily terminated, he would receive:
| Two times the sum of annual base salary and the average annual incentive award for the three prior fiscal years, |
| If the termination occurs after March 31, the pro-rated current year annual incentive award based on actual performance, |
| Six months of COBRA premiums for medical coverage, and |
| Six months of outplacement services and three months of participation in Kimberly-Clarks employee assistance program. |
Under the Severance Pay Plan, if the remaining Halyard named executive officers were involuntarily terminated, they would receive:
| The sum of annual base salary and the average annual incentive award for the three prior fiscal years, |
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| If the termination occurs after March 31, the pro-rated current year annual incentive award based on actual performance, |
| Six months of COBRA premiums for medical coverage, and |
| Six months of outplacement services and three months of participation in Kimberly-Clarks employee assistance program. |
Severance pay under the Severance Pay Plan will not be paid to any participant who is terminated for cause (as defined under the plan), is terminated during a period in which the participant is not actively at work for more than 25 weeks (except to the extent otherwise required by law), voluntarily quits or retires, dies or is offered a comparable position (as defined under the plan). If any named executive officers termination, other than Mr. Abernathy, were classified as a performance-based termination (as defined under the plan), the Halyard named executive officer would be entitled to receive six months base salary.
A Halyard named executive officer must execute a full and final release of claims against Kimberly-Clark within a specified period of time following termination to receive severance benefits under Kimberly-Clarks severance pay plans. Under the Severance Pay Plan, if the release has been timely executed, severance benefits are payable as a lump sum cash payment no later than 60 days following the participants termination date. Any current year annual incentive award that is payable under the Severance Pay Plan will be paid at the same time as it was payable under the Executive Officer Achievement Award Program or the Management Achievement Award Program, as applicable, but no later than 60 days following the calendar year of the separation from service.
Kimberly-Clark 2011 Plan . In the event of a Qualified Termination of Employment (as described below) of a participant in the Kimberly-Clark 2011 Plan in connection with a change of control, all of the participants awards not subject to performance goals would become fully vested. Any awards subject to performance goals will vest at the average performance-based restricted share unit payout for awards for the three prior fiscal years. Unless otherwise governed by another applicable plan or agreement, such as the terms of the Executive Severance Plan, options in this event would be exercisable for the lesser of three months or the remaining term of the option. If any amounts payable under the Kimberly-Clark 2011 Plan result in excise tax due to the application of Section 280G of the Code, the Kimberly-Clark 2011 Plan provides that payments and benefits payable to the Halyard named executive officer will be reduced to the extent necessary so that no excise tax will be imposed if doing so would result in the executive retaining a larger after-tax amount, taking into account the income, excise and other taxes imposed on the payments and benefits. A Qualified Termination of Employment is a termination of the participants employment within two years following a change of control of Kimberly-Clark (as defined in the Kimberly-Clark 2011 Plan), unless the termination is by reason of death or disability or unless the termination is by Kimberly-Clark for cause or by the participant without good reason.
The Kimberly-Clark 2011 Plan provides that, if pending a change of control, the Committee determines that Kimberly-Clark common stock will cease to exist without an adequate replacement security that preserves the economic rights and positions of the participants in the Kimberly-Clark 2011 Plan (for example, as a result of the failure of the acquiring company to assume outstanding grants), then all options (other than incentive stock options) and stock appreciation rights will become exercisable, in a manner deemed fair and equitable by the Kimberly-Clark Committee, immediately prior to the consummation of the change of control. In addition, the restrictions on all restricted stock will lapse and all restricted share units, performance awards and other stock-based awards will vest immediately prior to the consummation of the change of control and will be settled upon the change of control in cash equal to the fair market value of the restricted share units, performance awards and other stock-based awards at the time of the change of control.
In the event of a termination of employment of a participant in the Kimberly-Clark 2011 Plan, other than a Qualified Termination of Employment, death, total and permanent disability or retirement of the participant, the participant will forfeit all unvested restricted stock and restricted share units, and any vested stock options held by the participant will be exercisable for the lesser of three months or the remaining term of the option.
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Retirement, Death and Disability
Retirement . In the event of retirement (separation from service on or after age 55), the Halyard named executive officers are entitled to receive:
| Benefits payable under Kimberly-Clarks pension plans for eligible participants (if the participant has at least five years of vesting service) (see Pension Benefits for additional information), |
| Their account balance, if any, under the Kimberly-Clark Deferred Compensation Plan, |
| Their account balance under the Kimberly-Clark Supplemental 401(k) Plan (if the participant has at least two years of vesting service), |
| Their account balance under the Kimberly-Clark 401(k) Profit Sharing Plan, including any unvested employer contributions, |
| Accelerated vesting of unvested stock options, and the options will be exercisable until the earlier of five years or the remaining term of the options, |
| For units outstanding more than six months after the date of grant, performance-based restricted share units will be payable based on attainment of the performance goal at the end of the restricted period, |
| Annual incentive award payment under the Executive Officer Achievement Award Program or the Management Achievement Award Program, as applicable, as determined by the Kimberly-Clark Committee in its discretion, |
| For participants with at least fifteen years of vesting service and who joined Kimberly-Clark before January 1, 2004, retiree medical credits based on number of years of vesting service (up to a maximum of $104,500 in credits), and |
| For participants with at least fifteen years of vesting service, $15,000 of continuing coverage under Kimberly-Clarks group life insurance plan, at no cost to the participant. |
Death . In the event of death while an active employee, the following benefits are payable:
| 50% of the benefits under Kimberly-Clarks pension plans for eligible participants, not reduced for early payment (if the participant has at least five years of vesting service) (see Pension Benefits), payable under the terms of the plans to the participants spouse or minor children, |
| Their account balance, if any, under the Kimberly-Clark Deferred Compensation Plan, |
| Their account balance under the Kimberly-Clark Supplemental 401(k) Plan, |
| Their account balance under the Kimberly-Clark 401(k) Profit Sharing Plan, including any unvested employer contributions, |
| Accelerated vesting of unvested stock options, and the options will be exercisable until the earlier of three years or the remaining term of the options, |
| Time-vested restricted share units will be vested pro rata, based on the number of full months of employment during the restricted period prior to the participants termination of employment, payable within 90 days following the end of the restricted period, |
| For units outstanding more than six months after the date of grant, performance-based restricted share units will be vested pro rata, based on attainment of the performance goal at the end of the restricted period, payable within 70 days following the end of the restricted period, |
| Annual incentive award payment under the Executive Officer Achievement Award Program or the Management Achievement Award Program, as applicable, as determined by the Kimberly-Clark Committee in its discretion, |
| For participants who were at least age 55, had at least fifteen years of vesting service and joined Kimberly-Clark before January 1, 2004, medical credits payable to their spouse or dependent based on number of years of vesting service (up to a maximum of $104,500 in credits), and |
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| Payment of benefits under Kimberly-Clarks group life insurance plan (which is available to all salaried employees in the United States) equal to two times the participants annual pay, up to $1 million (plus any additional coverage of three, four, five or six times the participants annual pay, in increments of up to $1 million each, purchased by the participant at group rates). Kimberly-Clark provided and employee-purchased benefits cannot exceed $6 million. |
Disability . In the event of a separation of service due to a total and permanent disability, as defined in the applicable plan, the Halyard named executive officers are entitled to receive:
| Benefits payable under Kimberly-Clarks pension plans for eligible participants, not reduced for early payment, if the participant has at least five years of vesting service (see Pension Benefits for additional information), |
| Up to an additional 12 months of vesting service (but not contributions) from the date of separation of service under the Kimberly-Clark 401(k) Profit Sharing Plan and Kimberly-Clark Supplemental 401(k) Plan, |
| Their account balance, if any, under the Kimberly-Clark Deferred Compensation Plan, |
| Accelerated vesting of unvested stock options, and the options will be exercisable until the earlier of three years or the remaining term of the options, |
| Time-vested restricted share units will be vested pro rata, based on the number of full months of employment during the restricted period prior to the participants termination of employment, payable within 90 days following the end of the restricted period, |
| For units outstanding more than six months after the date of grant, performance-based restricted share units will be vested pro rata, based on attainment of the performance goal at the end of the restricted period, payable within 70 days following the end of the restricted period, |
| Annual incentive award payment under the Executive Officer Achievement Award Program or the Management Achievement Award Program, as applicable, as determined by the Kimberly-Clark Committee in its discretion, |
| For participants of at least age 55 with at least fifteen years of vesting service and who joined Kimberly-Clark before January 1, 2004, medical credits based on number of years of vesting service (up to a maximum of $104,500 in credits), |
| Continuing coverage under Kimberly-Clarks group life insurance plan (available to all U.S. salaried employees), with no requirement to make monthly contributions toward coverage during disability, and |
| Payment of benefits under Kimberly-Clarks Long-Term Disability Plan (available to all U.S. salaried employees). Long-term disability under the plan would provide income protection of monthly base pay, ranging from a minimum monthly benefit of $50 to a maximum monthly benefit of $20,000. Benefits are reduced by the amount of any other Kimberly-Clark- or government-provided income benefits received (but will not be lower than the minimum monthly benefit). |
Potential Payments on Termination or Change of Control Table
The following table presents the approximate value of (1) the severance benefits for Mr. Abernathy under the Executive Severance Plan and for the other named executive officers under the Kimberly-Clark 2011 Plan and the Severance Pay Plan had a Qualified Termination of Employment under that plan occurred on December 31, 2013; (2) the severance benefits for the Halyard named executive officers under the Severance Pay Plan if an involuntary termination had occurred on December 31, 2013; (3) the benefits that would have been payable on the death of the Halyard named executive officers on December 31, 2013; (4) the benefits that would have been payable on the total and permanent disability of the Halyard named executive officers on December 31, 2013; and (5) the potential payments to Messrs. Abernathy and Wesley if they had retired on December 31, 2013. If applicable, amounts in the table were calculated using the closing price of Kimberly-Clarks common stock on December 31, 2013 of $104.46 per share.
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Because none of the Halyard named executive officers, other than Messrs. Abernathy and Wesley, was eligible to retire as of December 31, 2013, potential payments assuming retirement on that date are not included for the other named executive officers.
The amounts presented in the following table are in addition to amounts each Halyard named executive officer earned or accrued prior to termination, such as the officers balances under the Kimberly-Clark Deferred Compensation Plan, accrued retirement benefits (including accrued pension plan benefits), previously vested benefits under Kimberly-Clarks qualified and non-qualified plans, previously vested options, restricted stock and restricted share units and accrued salary and vacation. For information about these previously earned and accrued amounts, see the Summary Compensation Table, Outstanding Equity Awards, Option Exercises and Stock Vested, Pension Benefits and Nonqualified Deferred Compensation.
Name |
Cash
Payment($) |
Equity with
Accelerated Vesting($) |
Additional
Retirement Benefits($) |
Continued
Benefits and Other Amounts($) |
Total($) | |||||||||||||||
Robert E. Abernathy |
||||||||||||||||||||
Qualified Termination of Employment (1) |
3,542,174 | (2) | 9,128,632 | (3) | 188,415 | (4) | 31,680 | (5) | 12,890,901 | |||||||||||
Involuntary termination (6) |
3,542,174 | | | 13,368 | (7) | 3,555,542 | ||||||||||||||
Death |
2,410,533 | (8) | 7,681,938 | (9) | | (10) | 104,500 | 10,196,971 | ||||||||||||
Disability |
850,533 | (8) | 7,681,938 | (9) | | (11) | 104,500 | (12) | 8,636,971 | |||||||||||
Retirement |
850,533 | (2) | 11,929,728 | 123,839 | 104,500 | (13) | 13,008,600 | |||||||||||||
Steven E. Voskuil |
||||||||||||||||||||
Qualified Termination of Employment (1) |
757,534 | (2) | 2,230,203 | | 15,732 | (7) | 3,003,469 | |||||||||||||
Involuntary termination (6) |
757,534 | | | 15,732 | (7) | 773,266 | ||||||||||||||
Death |
1,604,781 | (8) | 1,855,496 | (9) | 39,481 | (10) | | 3,499,758 | ||||||||||||
Disability |
230,681 | (8) | 1,855,496 | (9) | 123,695 | (11) | | (12) | 2,209,872 | |||||||||||
Rhonda D. Gibby |
||||||||||||||||||||
Qualified Termination of Employment (1) |
446,845 | (2) | 889,473 | | 15,732 | (7) | 1,352,050 | |||||||||||||
Involuntary termination (6) |
446,845 | | | 15,732 | (7) | 462,577 | ||||||||||||||
Death |
804,501 | (8) | 625,784 | (9) | | | 1,430,285 | |||||||||||||
Disability |
116,301 | (8) | 625,784 | (9) | | | (12) | 742,085 | ||||||||||||
Christopher M. Lowery |
||||||||||||||||||||
Qualified Termination of Employment (1) |
508,733 | (2) | 1,063,715 | | 15,732 | (7) | 1,588,180 | |||||||||||||
Involuntary termination (6) |
508,733 | | | 15,732 | (7) | 524,465 | ||||||||||||||
Death |
670,965 | (8) | 646,500 | (9) | | | 1,317,465 | |||||||||||||
Disability |
107,865 | (8) | 646,500 | (9) | | | (12) | 754,365 | ||||||||||||
John W. Wesley |
||||||||||||||||||||
Qualified Termination of Employment (1) |
662,262 | (2) | 1,460,762 | | 15,732 | (7) | 2,138,756 | |||||||||||||
Involuntary termination (6) |
662,262 | | | 15,732 | (7) | 677,994 | ||||||||||||||
Death |
1,428,630 | (8) | 1,137,130 | (9) | | | 2,565,760 | |||||||||||||
Disability |
208,630 | (8) | 1,137,130 | (9) | | | (12) | 1,345,760 | ||||||||||||
Retirement |
208,630 | (2) | 1,753,026 | | | (13) | 1,961,656 |
(1) | For Mr. Abernathy, represents amounts payable under the Executive Severance Plan. For the remaining Halyard named executive officers, represents amounts payable under the Kimberly-Clark 2011 Plan plus amounts payable under the Severance Pay Plan. |
(2) | Assumes the Kimberly-Clark Committee would approve full payment under the Executive Officer Achievement Award Program or the Management Achievement Award Program, as applicable, for 2013; actual amount that would be paid is determined by the Kimberly-Clark Committee in its discretion. |
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(3) | Assumes vesting of unvested performance-based restricted share units at the target level of the performance-based restricted share units for the 2011 grant and at the maximum level for the 2012 and 2013 grants. See Outstanding Equity Awards. In addition, under the terms of the Kimberly-Clark 2011 Plan, if the Kimberly-Clark Committee were to determine that, pending a change of control, Kimberly-Clarks common stock would cease to exist without an adequate replacement security, the payment of this amount would not be contingent upon the Qualified Termination of Employment of the Halyard named executive officer. This provision also applies to grants under the Kimberly-Clark 2011 Plan to employees other than the Halyard named executive officers. |
(4) | Includes the value of two additional years of employer contributions under the Kimberly-Clark 401(k) Profit Sharing Plan and the Kimberly-Clark Supplemental 401(k) Plan, pursuant to the terms of the Executive Severance Plan. |
(5) | Includes an amount equal to 24 months of COBRA medical and dental coverage. |
(6) | Benefits payable under the Severance Pay Plan. For Messrs. Abernathy and Wesley, does not include accelerated equity vesting that occurred when they became retirement eligible at age 55. See the amounts payable for Messrs. Abernathy and Wesley for their retirement for the amount of this accelerated equity vesting. |
(7) | Equals six months of COBRA medical coverage and outplacement services. |
(8) | For death, includes the payment of benefits under Kimberly-Clarks group life insurance plan (which is available to all U.S. salaried employees). For death and disability, assumes the Kimberly-Clark Committee would approve full payment under the Executive Officer Achievement Award Program or the Management Achievement Award Program, as applicable, for 2013; actual amount that would be paid is determined by the Kimberly-Clark Committee in its discretion. For disability, does not include benefits payable under Kimberly-Clarks Long-Term Disability Plan (which is available to all U.S. salaried employees), the value of which would be dependent on the life span of the Halyard named executive officer and the value of any Kimberly-Clark or government-provided income benefits received. |
(9) | Assumes pro rata vesting of unvested performance-based restricted share units at the target level of the performance-based restricted share units for the 2011 grant and at the maximum level for the 2012 and 2013 grants. See Outstanding Equity Awards. |
(10) | Includes the excess, if any, of the estimated actuarial present value of the pension benefits payable on death for the Halyard named executive officer through December 31, 2013 over the present value of the aggregate accumulated benefit set forth in the Pension Benefits table. |
(11) | Includes the excess, if any, of the estimated actuarial present value of the retirement benefits payable on disability for the Halyard named executive officer through December 31, 2013 (assuming the Halyard named executive officer elects to receive a continuing benefit for his surviving spouse) over the present value of the aggregate accumulated benefit set forth in the Pension Benefits table. |
(12) | Includes the value of retiree medical credits assuming total and permanent disability on December 31, 2013 of Mr. Abernathy. The Halyard named executive officers would also be eligible for continuing coverage under Kimberly-Clarks group life insurance plan assuming total and permanent disability on December 31, 2013, which benefit does not discriminate in scope, terms or operation in favor of the Halyard named executive officers compared to the benefits offered to all of Kimberly-Clarks U.S. salaried employees and is therefore not included in the table. |
(13) | Includes the value of retiree medical credits assuming Mr. Abernathys retirement on December 31, 2013. Messrs. Abernathy and Wesley would be eligible for continuing coverage under Kimberly-Clarks group life insurance plan assuming retirement on December 31, 2013, which benefit does not discriminate in scope, terms or operation in favor of the Halyard named executive officers compared to the benefits offered to all of Kimberly-Clarks U.S. salaried employees and is therefore not included in the table. |
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Director Compensation Following the Distribution
It is expected that, prior to the completion of the distribution, we will adopt the Halyard 2014 Outside Directors Compensation Plan (the Halyard 2014 Directors Plan), with terms substantially similar to the Kimberly-Clark 2011 Outside Directors Compensation Plan.
Directors who are not officers or employees of Halyard or any of our subsidiaries, affiliates or equity companies will be Outside Directors for compensation purposes and will be compensated for their services under the Halyard 2014 Directors Plan.
The table below shows how we expect Halyards Outside Director compensation to be structured:
Board Members |
Cash retainer: $70,000 annually, paid in four quarterly payments at the beginning of each quarter.
Restricted share units: Annual grant with a value of $140,000, awarded and valued on the first business day of the year. |
|
Committee Chairs |
For Audit Committee and Compensation Committee Chairs: Cash Retainer: $15,000 annually, paid in four quarterly payments at the beginning of each quarter.
For Corporate Governance Committee Chair: No additional compensation. |
|
Lead Director | Cash retainer: $20,000 annually, paid in four quarterly payments at the beginning of each quarter. |
New Outside Directors will receive the full quarterly amount of the annual retainer for the quarter in which they join the Board of Directors. Their annual grant of restricted share units will be pro-rated based on the date when they joined.
We will also reimburse Outside Directors for expenses incurred in attending Board or committee meetings.
Restricted share units are not shares of Halyard common stock. Rather, restricted share units represent the right to receive a pre-determined number of shares of Halyard common stock within 90 days following a restricted period that begins on the date of grant and expires on the date the Outside Director retires from or otherwise terminates service on the Halyard Board of Directors. In this way, they align the directors interests with the interests of Halyard stockholders. Outside Directors may not dispose of the units or use them in a pledge or similar transaction.
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OWNERSHIP OF HALYARD STOCK BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Immediately prior to the distribution all of the outstanding shares of Halyard common stock will be owned beneficially and of record by Kimberly-Clark. The following table sets forth the pro-forma anticipated beneficial ownership of Halyard common stock immediately following the distribution date by each of Halyards directors and named executive officers, and all directors and named executive officers as a group, based upon information available to us concerning ownership of Kimberly-Clark common stock on , 2014 (and assuming a distribution ratio of one share of Halyard common stock for every shares of Kimberly-Clark common stock). The mailing address of each of these individuals is c/o Halyard Health, Inc., 5405 Windward Parkway Suite 100, South Alpharetta, GA 30004. As used in this information statement, beneficial ownership means that a person has, or may have within 60 days, the sole or shared power to vote or direct the voting of a security and/or the sole or shared investment power with respect to a security (i.e., the power to dispose or direct the disposition of a security).
Name |
Shares Projected to be
Beneficially Owned |
Percent of
Class (1) |
||||
Robert E. Abernathy |
* | |||||
Ronald W. Dollens |
* | |||||
Heidi K. Fields |
* | |||||
Steven E. Voskuil |
* | |||||
Rhonda D. Gibby |
* | |||||
Christopher M. Lowery |
* | |||||
John W. Wesley |
* | |||||
All directors, nominees and executive officers as a group (XX persons) |
(1) | An asterisk indicates that the percentage of common stock projected to be beneficially owned by the Halyard named individual does not exceed one percent of Halyard common stock. |
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DESCRIPTION OF HALYARD CAPITAL STOCK
Our certificate of incorporation and by-laws will be amended and restated prior to the distribution. The following is a summary of the material terms of our capital stock that will be contained in the amended and restated certificate of incorporation and the amended and restated by-laws. The summaries and descriptions below do not purport to be complete statements of the relevant provisions of the amended and restated certificate of incorporation or of the amended and restated by-laws to be in effect at the time of the distribution and this summary is qualified in its entirety by reference to these documents. You should read the amended and restated certificate of incorporation and the amended and restated by-laws, together with the applicable provisions of Delaware law, for additional information on our capital stock as of the time of the distribution. The amended and restated certificate of incorporation and the amended and restated by-laws to be in effect at the time of the distribution are included as exhibits to our registration statement on Form 10, of which this information statement forms a part.
General
Our authorized capital stock will consist of 300,000,000 shares of common stock, par value $.01 per share, and 20,000,000 shares of preferred stock, par value $.01 per share. There are no outstanding options or warrants to purchase, or securities convertible into, any shares of Halyard common stock or preferred stock. Based on approximately shares of Kimberly-Clark common stock that we expect to be outstanding on the record date, approximately shares of Halyard common stock will be outstanding immediately following the distribution. and there will be approximately holders of Halyard common stock. Immediately following the distribution, no shares of preferred stock will be outstanding and our Board of Directors has no present plans to issue any shares of our preferred stock.
Common Stock
The holders of Halyard common stock will be entitled to one vote per share of common stock held on all matters voted on by our stockholders, and, subject to preferences that may be applicable to any outstanding preferred stock as provided in any resolution adopted by our Board of Directors, the holders of Halyard common stock will possess all voting power. There will be no cumulative voting rights.
Subject to preferences that may be applicable to any outstanding preferred stock, the holders of Halyard common stock will be entitled to receive ratably such dividends, if any, as may be declared by our Board of Directors out of funds legally available for that purpose. See Dividend Policy. In the event of our liquidation, dissolution or winding up, subject to preferences that may be applicable to any outstanding preferred stock, the holders of Halyard common stock would be entitled to share ratably in all assets available for distribution to stockholders.
The holders of Halyard common stock will have no preemptive or other subscription rights, and there will be no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of holders of Halyard common stock will be subject to, and may be adversely affected by, the rights of holders of shares of any outstanding preferred stock that may be issued from time to time in the future.
Immediately following the distribution, all of the shares of Halyard common stock will be validly issued, fully paid and non-assessable.
Preferred Stock
Our certificate of incorporation will authorize our Board of Directors, without the approval of our stockholders, to fix the designation, powers, preferences and rights of one or more series of preferred stock, which may be greater than those of Halyard common stock.
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Anti-Takeover Effects of Certain Provisions of Our Certificate of Incorporation and By-Laws and of Delaware Law
Our certificate of incorporation and by-laws will contain certain provisions that could make the acquisition of our company by means of a tender offer, proxy contest or otherwise more difficult. The description of these provisions set forth below is intended as a summary only. For more complete information, you should read our certificate of incorporation and by-laws that are included as exhibits to the registration statement of which this information statement is a part.
Classified Board of Directors
Our certificate of incorporation and by-laws will provide that our Board of Directors, subject to the rights of holders of our preferred stock, will be divided into three classes as nearly equal in number as possible. Class I will initially be elected for a term expiring at the annual meeting of stockholders to be held in 2015, Class II will initially be elected for a term expiring at the annual meeting of stockholders to be held in 2016, and Class III will initially be elected for a term expiring at the annual meeting of stockholders to be held in 2017. Thereafter the directors in each class will serve for a three-year term, with each director to hold office until his successor is duly elected and qualified. This structure of electing directors may discourage a third party from making a tender offer or otherwise attempting to obtain control of us because the staggered terms, together with the removal and vacancy provisions that will be contained in our certificate of incorporation discussed below, would make it more difficult for a potential acquiror to gain control of our Board of Directors.
Number of Directors; Filling Vacancies; Removal of Directors
Our certificate of incorporation will provide that, subject to the rights of holders of any series of outstanding preferred stock, if any, the number of directors on our Board of Directors will be fixed exclusively by the Board of Directors. Additionally, subject to the rights of holders of any series of outstanding preferred stock, if any, only our Board of Directors will be able to fill any vacancies resulting in our Board of Directors.
Subject to the rights of holders of our preferred stock, our by-laws will provide that a director may only be removed from office for cause and by the affirmative vote of holders of record of outstanding shares representing at least two-thirds of the voting power of all shares of capital stock then entitled to vote generally in the election of directors, voting together as a single class.
No Stockholder Action by Written Consent; Special Meetings
Our certificate of incorporation and by-laws will provide that, subject to the rights of holders of any series of outstanding preferred stock, if any, any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of such stockholders and may not be effected by any consent in writing of such stockholders. Special meetings may be called only by our Board of Directors pursuant to a resolution adopted by the Board of Directors, by the Chairman of our Board of Directors or by our Chief Executive Officer. These provisions may have the effect of delaying consideration of stockholder proposal until the next annual meeting unless a special meeting is called by our Board of Directors, the Chairman of our Board of Directors or our Chief Executive Officer.
Advance Notice of Stockholder Nominations and Stockholder Proposals
Our by-laws will establish advance notice procedures for stockholders to make nominations of candidates for election as directors or to bring other business before an annual meeting of the stockholders. The business to be conducted at an annual meeting will be limited to business brought before the meeting by, or at the direction of, our Board of Directors or by a stockholder who has given timely written notice to our Corporate Secretary of that stockholders intention to bring such business before such meeting.
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Our by-laws will establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election to our Board of Directors. In order for any matter to be properly brought before a meeting, a stockholder will have to comply with advance notice requirements and provide us with certain information. Our by-laws will allow the presiding officer at a meeting of the stockholders to adopt rules and regulations for the conduct of meetings which may have the effect of precluding the conduct of certain business at a meeting if the rules and regulations are not followed. These provisions may also defer, delay or discourage a potential acquiror from conducting a solicitation of proxies to elect the acquirors own slate of directors or otherwise attempting to obtain control of our company.
Undesignated Preferred Stock
Our certificate of incorporation will authorize our Board of Directors, without the approval of our stockholders, to fix the designation, powers, preferences and rights of one or more series of preferred stock, which may be greater than those of Halyard common stock.
The issuance of shares of our preferred stock, or the issuance of rights to purchase shares of preferred stock, could be used to discourage an unsolicited acquisition proposal. In addition, under some circumstances, the issuance of preferred stock could adversely affect the voting power of Halyard common stockholders.
No Cumulative Voting
Delaware law provides that stockholders are denied the right to cumulate votes in the election of directors unless the companys certificate of incorporation provides otherwise. Our certificate of incorporation will not provide for cumulative voting.
Amendment of the Certificate of Incorporation and By-laws
Our certificate of incorporation will provide that the affirmative vote of holders of record representing at least two-thirds of the voting power of all shares of capital stock then entitled to vote generally in the election of directors, voting together as a single class, is required to amend, alter, change, repeal or adopt any provision relating to:
| our Board of Directors ability to establish a series and issue shares of preferred stock, |
| the inability of our stockholders to take action by written consent, |
| the calling of stockholder meetings, |
| the adoption, amendment or repeal of the by-laws by the affirmative vote of 80% of the voting power of all shares of capital stock then entitled to vote generally in the election of directors, |
| the number, powers, term, election and vacancy procedures of our Board of Directors, |
| the limitations on liability of our directors, |
| the percentage of voting power required to amend, alter, change, repeal or adopt any provision inconsistent with certain provisions of our certificate of incorporation, and |
| our relationship with Kimberly-Clark, |
unless such amendment, alteration, change, repeal or adoption of such provision was declared advisable by resolution of the Board of Directors. In addition, the affirmative vote of at least 80% of the voting power of all shares of capital stock then entitled to vote generally in the election of directors, voting together as a single class, is required to amend, alter, change, repeal or adopt any provision relating to the adoption, amendment or repeal of the by-laws by the affirmative vote of 80% of the voting power of all shares of capital stock then entitled to vote generally in the election of directors, unless such amendment, alteration, change, repeal or adoption of such provision was declared advisable by resolution of the Board of Directors.
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The affirmative vote of the holders of a majority of the voting power will be required to amend all other provisions of our certificate of incorporation. Our certificate of incorporation will also provide that our Board of Directors may amend our by-laws.
Supermajority Voting Requirements
In addition to the supermajority voting requirements to amend our certificate of incorporation and by-laws as discussed above, our certificate of incorporation requires that the affirmative vote of holders of two-thirds of the voting power of all shares of capital stock then entitled to vote is required to approve the following matters (unless such matters were declared advisable by resolution of the Board of Directors):
| our liquidation, |
| the sale, lease, exchange or conveyance of all or substantially all of our property and assets, and |
| the adoption of an agreement of merger or consolidation, unless no stockholder approval would be required under the laws of the State of Delaware. |
Delaware Anti-Takeover Statute
We will be subject to Section 203 of the Delaware General Corporation Law, an anti-takeover statute. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the time the person became an interested stockholder, unless the business combination or the acquisition of shares that resulted in a stockholder becoming an interested stockholder is approved in a prescribed manner. Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an interested stockholder is a person who, together with affiliates and associates, owns (or within three years prior to the determination of interested stockholder status did own) 15% or more of a corporations voting stock. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by our Board of Directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by our stockholders.
Limitation of Liability and Indemnification of Our Directors and Officers
Limitation of Liability of Directors
Our certificate of incorporation will limit the liability of directors to the maximum extent permitted by Delaware law. Delaware law permits the certificate of incorporation to provide that directors of a corporation will not be personally liable to the corporation or its stockholders for monetary damages for breach of their fiduciary duties as directors, except for liability:
| for any breach of their duty of loyalty to the corporation or its stockholders, |
| for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, |
| under Section 174 of the Delaware General Corporation Law relating to unlawful payments of dividends or unlawful stock repurchases or redemptions, or |
| for any transaction from which the director derived an improper personal benefit. |
The limitation of liability will not apply to liabilities arising under the federal or state securities laws and will not affect the availability of equitable remedies, such as injunctive relief or rescission.
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Indemnification of Officers and Directors
Our certificate of incorporation and by-laws will provide that each person who is, or was, or has agreed to become a director or officer of Halyard, and each person who is, or was, or has agreed to serve at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, will be indemnified by us to the fullest extent permitted by Delaware law, as the same exists or may hereafter be amended. However, no indemnification will be provided to any director, officer, employee or agent if the indemnification sought is in connection with a proceeding initiated by such person without the authorization of our Board of Directors. The by-laws will provide that this right to indemnification will be a contract right and will not be exclusive of any other right which any person may have or may in the future acquire under any statute, provision of the certificate of incorporation or by-laws, agreements, vote of stockholders or disinterested directors or otherwise. The by-laws will also permit us to secure and maintain insurance on behalf of any director, officer, employee or agent for any liability arising out of his or her actions in such capacity, regardless of whether the by-laws would permit us to indemnify such person against such liability.
We intend to obtain directors and officers liability insurance providing coverage to our directors and officers.
Exclusive Forum
Our certificate of incorporation will provide that unless we consent in writing to an alternative forum, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of Halyard, any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Halyard to Halyard or Halyards stockholders, any action arising pursuant to any provision of the Delaware General Corporation Law, or any action asserting a claim governed by the internal affairs doctrine.
Authorized but Unissued Shares
Halyards authorized but unissued shares of common stock and preferred stock will be available for future issuance without stockholder approval. Halyard may use additional shares for a variety of purposes, including future public offerings to raise additional capital, to fund acquisitions and as employee compensation. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of Halyard by means of a proxy contest, tender offer, merger or otherwise.
Listing
We intend to file an application to list Halyard common stock on the New York Stock Exchange under the symbol HYH.
Sale of Unregistered Securities
On February 25, 2014, Halyard issued 1,000 shares of its common stock to Kimberly-Clark pursuant to Section 4(2) of the Securities Act. Halyard did not register the issuance of the issued shares under the Securities Act because such issuances did not constitute a public offering.
Transfer Agent
After the distribution, Computershare will serve as the transfer agent and registrar for Halyard common stock.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Policies and Procedures for Review, Approval or Ratification of Related Person Transactions
Our Board of Directors is expected to adopt written procedures regarding the review, approval or ratification of transactions involving related persons that SEC regulations require to be disclosed in proxy statements, which are commonly referred to as related person transactions. A related person transaction is any transaction between Halyard and any related person that requires disclosure under the SECs rules regarding these transactions. A related person is defined under the SECs rules and includes our directors, executive officers and five percent stockholders.
These written procedures are expected to provide that:
| The Corporate Governance Committee is best suited to review, approve and ratify related person transactions involving any director, nominee for director, any five percent stockholder or any of their immediate family members or related firms, and |
| The Audit Committee is best suited to review, approve and ratify related person transactions involving executive officers (or their immediate family members or related firms), other than any executive officer who is also a member of the Board of Directors. |
The procedures are expected to provide that the Corporate Governance Committee or the Audit Committee may, in its sole discretion, refer consideration of these transactions to the full Board of Directors.
The procedures are expected to provide that each director, director nominee and executive officer is required to promptly provide written notification of any material interest that he or she (or his or her immediate family member) has or will have in a transaction with Halyard. Based on a review of the transaction, a determination will be made whether the transaction constitutes a related person transaction under the SECs rules. As appropriate, the Corporate Governance Committee or the Audit Committee will then review the terms and substance of the transaction to determine whether to ratify or approve the related person transaction.
The procedures are expected to provide that, in determining whether the transaction is in, or not opposed to, Halyards best interest, the Corporate Governance Committee or the Audit Committee may consider any factors deemed relevant or appropriate, including:
| Whether the transaction is on terms comparable to those that could be obtained in arms-length dealings with an unrelated third party, |
| Whether the transaction constitutes a conflict of interest under our Code of Conduct, the nature, size or degree of any conflict and whether mitigation of any conflict is feasible, |
| The impact on a directors independence, if applicable, and |
| Whether steps have been taken to ensure fairness to Halyard. |
Related Party Debt
We have entered into certain related party debt agreements with Kimberly-Clark and one or more of its wholly-owned subsidiaries. At December 31, 2013 and June 30, 2014, the amount outstanding under these debt agreements was $9.1 million and $10.4 million, respectively. The related party debt is subject to repayment upon demand by the related party lenders, and accordingly is classified as a current liability on the unaudited interim combined balance sheet at June 30, 2014. The related party debt bears interest annually at a variable rate. During the year ended December 31, 2013, we paid $0.1 million in interest to the related party lenders. The related party debt is expected to be repaid in connection with the distribution.
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Agreements with Kimberly-Clark
In connection with the distribution, we will enter into certain agreements with Kimberly-Clark to define our ongoing relationship with Kimberly-Clark after the distribution. These other agreements will define responsibility for obligations arising before and after the distribution date, including, among others, obligations relating to our employees, certain transition services and taxes. See Our Relationship with Kimberly-Clark after the Distribution.
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2015 ANNUAL MEETING OF STOCKHOLDERS
Our by-laws provide that an annual meeting of stockholders will be held each year on a date specified by our Board of Directors. The first annual meeting of our stockholders after the distribution is expected to be held on April 30, 2015. In order to be considered for inclusion in our proxy materials for the 2015 annual stockholders meeting, any proposals by stockholders must be received at our principal executive offices at Halyard Health, Inc., Attn: Corporate Secretary, 5405 Windward Parkway, Suite 100, South, Alpharetta, GA 30004, prior to January 31, 2015. We anticipate commencing the mailing of proxies for the 2015 annual stockholders meeting in March 2015. In addition, stockholders at the 2015 annual stockholders meeting may consider proposals or nominations brought by a stockholder of record on the record date for the meeting who is entitled to vote at such meeting and who has complied with the advance notice procedures established by our by-laws. A stockholder proposal or nomination intended to be brought before the 2015 annual stockholders meeting must be received by our corporate secretary on or after December 31, 2014 and on or prior to January 31, 2015. See Description of Halyard Capital Stock Anti-Takeover Effects of Certain Provisions of Our Certificate of Incorporation and By-Laws and of Delaware Law.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form 10, of which this information statement constitutes a part, with respect to Halyard common stock being received by Kimberly-Clark stockholders in the distribution. This information statement does not contain all of the information set forth in the registration statement. For further information with respect to our business and Halyard common stock being received by Kimberly-Clark stockholders in the distribution, please refer to the registration statement, including its exhibits and schedules. While we have provided a summary of the material terms of certain agreements and other documents, the summary does not describe all of the details of the agreements and other documents. Statements made in this information statement relating to any contract or other document are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may review a copy of the registration statement, including its exhibits and schedules, at the SECs public reference room, located at 100 F Street, N.E., Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330 as well as on the Internet website maintained by the SEC at www.sec.gov. Information contained on any website referenced in this information statement is not incorporated by reference in this information statement.
Upon completion of the distribution, we will become subject to the information and periodic reporting requirements of the Exchange Act, and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SECs public reference rooms and the SECs Web site.
We intend to furnish Halyard stockholders as required annual reports containing consolidated financial statements prepared in accordance with GAAP and audited and reported on, with an opinion expressed, by an independent registered public accounting firm.
You should rely only on the information contained in this information statement and other documents referred to in this information statement. Neither we nor Kimberly-Clark has authorized anyone to provide you with information that is different. This information statement is being furnished solely to provide information to Kimberly-Clark stockholders who will receive Halyard common stock in the distribution. It is not, and it is not to be construed as, an inducement or encouragement to buy or sell any securities of Kimberly-Clark or Halyard. We and Kimberly-Clark believe that the information presented herein is accurate as of the date hereof. Changes will occur after the date of this information statement, and neither we nor Kimberly-Clark will update the information except to the extent required in the normal course of our and Kimberly-Clarks respective public disclosure practices and as required pursuant to federal securities laws.
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kimberly-Clark Corporation:
We have audited the accompanying combined balance sheets of the health care business (Health Care Business), a wholly owned business of Kimberly-Clark Corporation (Kimberly-Clark), as of December 31, 2013 and 2012, and the related combined statements of income, comprehensive income, invested equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of Kimberly-Clarks management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Health Care Business is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Health Care Business internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Health Care Business at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, the accompanying financial statements have been prepared from the separate records maintained by the Health Care Business and Kimberly-Clark. The combined financial statements also include expense allocations for certain corporate functions historically provided by Kimberly-Clark. These allocations may not be reflective of the actual expense which would have been incurred had the Health Care Business operated as a separate entity apart from Kimberly-Clark
/s/ Deloitte & Touche LLP |
Dallas, Texas |
May 6, 2014 |
F-2
COMBINED INCOME STATEMENT
Year Ended December 31 | ||||||||||||
(Millions of dollars) |
2013 | 2012 | 2011 | |||||||||
Net Sales (including related party sales of $91.3, $92.6 and $85.1) |
$ | 1,677.5 | $ | 1,684.0 | $ | 1,659.9 | ||||||
Cost of products sold (including related party purchases of $82.8, $84.0 and $82.9) |
1,065.3 | 1,081.5 | 1,069.1 | |||||||||
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Gross Profit |
612.2 | 602.5 | 590.8 | |||||||||
Research and development |
37.9 | 33.0 | 31.2 | |||||||||
Selling and general expenses |
351.4 | 343.0 | 351.7 | |||||||||
Other (income) and expense, net |
(2.4 | ) | (1.5 | ) | (2.8 | ) | ||||||
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Operating Profit |
225.3 | 228.0 | 210.7 | |||||||||
Interest income |
2.6 | 2.6 | 4.1 | |||||||||
Interest expense |
(0.1 | ) | (0.8 | ) | (0.2 | ) | ||||||
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Income Before Income Taxes |
227.8 | 229.8 | 214.6 | |||||||||
Provision for income taxes |
(73.2 | ) | (77.2 | ) | (72.2 | ) | ||||||
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Net Income |
$ | 154.6 | $ | 152.6 | $ | 142.4 | ||||||
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See Notes to Combined Financial Statements.
F-3
COMBINED STATEMENT OF COMPREHENSIVE INCOME
Year Ended December 31 | ||||||||||||
(Millions of dollars) |
2013 | 2012 | 2011 | |||||||||
Net Income |
$ | 154.6 | $ | 152.6 | $ | 142.4 | ||||||
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Other Comprehensive Income (Loss), Net of Tax |
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Unrealized currency translation adjustments |
(22.6 | ) | 6.9 | (10.1 | ) | |||||||
Cash flow hedges |
(7.1 | ) | 6.6 | (4.5 | ) | |||||||
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Total Other Comprehensive Income (Loss), Net of Tax |
(29.7 | ) | 13.5 | (14.6 | ) | |||||||
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Comprehensive Income |
$ | 124.9 | $ | 166.1 | $ | 127.8 | ||||||
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See Notes to Combined Financial Statements.
F-4
COMBINED BALANCE SHEET
See Notes to Combined Financial Statements.
F-5
COMBINED STATEMENT OF INVESTED EQUITY
(Millions of dollars) |
Kimberly-Clarks
Net Investment |
Accumulated
Other Comprehensive Income (Loss) |
Total Invested
Equity |
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Balance at December 31, 2010 |
$ | 1,981.6 | $ | 11.2 | $ | 1,992.8 | ||||||
Net income |
142.4 | | 142.4 | |||||||||
Change in Kimberly-Clarks investment, net |
(123.1 | ) | | (123.1 | ) | |||||||
Other comprehensive income: |
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Unrealized currency translation adjustments |
| (10.1 | ) | (10.1 | ) | |||||||
Cash flow hedges, net of tax benefit of $1.9 |
| (4.5 | ) | (4.5 | ) | |||||||
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Balance at December 31, 2011 |
2,000.9 | (3.4 | ) | 1,997.5 | ||||||||
Net income |
152.6 | | 152.6 | |||||||||
Change in Kimberly-Clarks investment, net |
(107.9 | ) | | (107.9 | ) | |||||||
Other comprehensive income: |
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Unrealized currency translation adjustments |
| 6.9 | 6.9 | |||||||||
Cash flow hedges, net of tax of $0.3 |
| 6.6 | 6.6 | |||||||||
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Balance at December 31, 2012 |
2,045.6 | 10.1 | 2,055.7 | |||||||||
Net income |
154.6 | | 154.6 | |||||||||
Change in Kimberly-Clarks investment, net |
(101.5 | ) | | (101.5 | ) | |||||||
Other comprehensive income: |
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Unrealized currency translation adjustments |
| (22.6 | ) | (22.6 | ) | |||||||
Cash flow hedges, net of tax of $1.7 |
| (7.1 | ) | (7.1 | ) | |||||||
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Balance at December 31, 2013 |
$ | 2,098.7 | $ | (19.6 | ) | $ | 2,079.1 | |||||
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See Notes to Combined Financial Statements.
F-6
COMBINED CASH FLOW STATEMENT
Year Ended December 31 | ||||||||||||
(Millions of dollars) |
2013 | 2012 | 2011 | |||||||||
Operating Activities |
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Net income |
$ | 154.6 | $ | 152.6 | $ | 142.4 | ||||||
Depreciation and amortization |
69.2 | 57.6 | 51.1 | |||||||||
Share-based compensation charged by Kimberly-Clark |
6.0 | 5.3 | 2.6 | |||||||||
Provision for losses on accounts receivable and inventories |
2.5 | (11.1 | ) | 6.8 | ||||||||
Deferred income taxes |
(0.9 | ) | (11.6 | ) | 3.5 | |||||||
Net losses on asset dispositions |
3.4 | 0.1 | 0.2 | |||||||||
Changes in operating working capital: |
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(Increase) decrease in accounts receivable |
(19.5 | ) | 26.4 | (20.0 | ) | |||||||
Decrease (increase) in inventories |
14.3 | (15.1 | ) | (13.1 | ) | |||||||
Decrease (increase) in prepaid expenses and other assets |
2.0 | (0.9 | ) | | ||||||||
Increase (decrease) in trade accounts payable |
15.1 | 8.0 | (7.6 | ) | ||||||||
Decrease in accrued expenses |
(16.6 | ) | (12.0 | ) | (29.9 | ) | ||||||
(Decrease) increase in accrued income taxes |
(7.2 | ) | 3.2 | 2.3 | ||||||||
Other |
0.9 | 0.1 | 1.3 | |||||||||
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Cash Provided by Operations |
223.8 | 202.6 | 139.6 | |||||||||
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Investing Activities |
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Capital spending |
(49.0 | ) | (40.8 | ) | (39.7 | ) | ||||||
Cash outflows for acquisitions and investments |
(2.2 | ) | | (3.7 | ) | |||||||
Proceeds from dispositions of property |
0.3 | 0.5 | 3.9 | |||||||||
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Cash Used for Investing |
(50.9 | ) | (40.3 | ) | (39.5 | ) | ||||||
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Financing Activities |
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Debt proceeds |
4.0 | 7.1 | 53.2 | |||||||||
Debt repayments |
(67.9 | ) | (31.2 | ) | (41.4 | ) | ||||||
Change in Kimberly-Clarks net investment |
(119.3 | ) | (113.7 | ) | (127.7 | ) | ||||||
Other |
3.2 | 3.9 | 0.8 | |||||||||
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Cash Used for Financing |
(180.0 | ) | (133.9 | ) | (115.1 | ) | ||||||
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Effect of Exchange Rate Changes on Cash and Cash Equivalents |
3.3 | (0.6 | ) | 0.8 | ||||||||
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(Decrease) Increase in Cash and Cash Equivalents |
(3.8 | ) | 27.8 | (14.2 | ) | |||||||
Cash and Cash Equivalents - Beginning of Year |
47.9 | 20.1 | 34.3 | |||||||||
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Cash and Cash Equivalents - End of Year |
$ | 44.1 | $ | 47.9 | $ | 20.1 | ||||||
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See Notes to Combined Financial Statements.
F-7
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Note 1. | Accounting Policies |
Background
The Health Care Business (the Business) is a global business which seeks to advance health and healthcare by preventing infection, stopping pain and speeding recovery. Our products and solutions are designed to address some of todays most important healthcare needs, namely, preventing infection and reducing the use of narcotics while helping patients move from crisis to recovery. We market and support the efficacy, safety and economic benefit of our products with a significant body of clinical evidence.
References to Business, we, our and us mean the health care operations that have been carved out that relate to Kimberly-Clarks health care business. References to Kimberly-Clark mean Kimberly-Clark Corporation, a Delaware corporation, and its subsidiaries, other than the Business, unless the context otherwise requires.
On November 14, 2013, Kimberly-Clark announced that its Board of Directors authorized management to evaluate a potential tax-free spin-off of its health care business. Halyard Health, Inc. (the Company) was incorporated in Delaware on February 25, 2014 for the purpose of holding the Business following the separation.
Basis of Presentation
These combined financial statements represent the global operations of Kimberly-Clarks health care business, and have been prepared on a stand-alone basis. The combined financial statements are derived from Kimberly-Clarks consolidated financial statements and accounting records, and reflect our financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). Dollar amounts are reported in millions, unless otherwise noted.
Our combined financial statements include certain expenses which Kimberly-Clark allocated to us. These expenses have been charged to us on the basis of direct usage when identifiable, with the remainder allocated on the relative percentage of net sales or headcount. We consider the expense allocation methodology and results to be reasonable for all periods presented. However, these allocations may not be indicative of the actual expenses we would have incurred as a separate, stand-alone public company or of the costs we will incur in the future. Following the distribution, we expect Kimberly-Clark will continue to provide many of these services on a transitional basis for a fee. The total amount of these allocations from Kimberly-Clark was approximately $95 in 2013 and 2012, and $80 in 2011. See Note 15, Related Party Transactions, for additional information.
Kimberly-Clark maintains a number of benefit and stock-based compensation programs at a corporate level. Our employees participate in those programs, and as such, we were charged a portion of the expenses associated with these programs. However, our combined balance sheet does not include any Kimberly-Clark net benefit plan obligations nor Kimberly-Clark equity related to the stock-based compensation programs. Any benefit plan net liabilities that are our direct obligation, such as certain pension and postretirement plans, are reflected in our combined balance sheet as well as within our operating expenses. See Note 10, Stock-Based Compensation, and Note 9, Employee Postretirement Benefits, for further description of these stock-based compensation and postretirement benefit programs.
Kimberly-Clarks net investment balance represents the cumulative net investment in us by Kimberly-Clark through that date, including any prior net income or loss and allocations or other transactions with Kimberly-Clark. Current domestic income tax liabilities are deemed to be remitted in cash to Kimberly-Clark in the period the related income tax expense is recorded.
F-8
Historically, Kimberly-Clark has provided financing, cash management and other treasury services to us. In North America, our cash balances are swept daily by Kimberly-Clark, and historically, we have received funding from Kimberly-Clark for most of our investing and financing cash needs. Cash transferred to and from Kimberly-Clark has historically been recorded as intercompany receivables and payables. Intercompany receivables and payables with Kimberly-Clark are reflected within Kimberly-Clarks net investment in the accompanying combined financial statements.
Principles of Combination
The combined financial statements include our net assets and results of our operations as described above. All transactions and accounts within our combined businesses have been eliminated.
All intercompany transactions between Kimberly-Clark and us have been included in these combined financial statements. Intercompany transactions with Kimberly-Clark or its affiliates are reflected in the combined statement of cash flow as change in Kimberly-Clarks net investment within financing activities and in the combined balance sheet within Kimberly-Clarks net investment.
Use of Estimates
We prepare our combined financial statements in accordance with GAAP, which requires that we 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.
Inventories and Distribution Costs
For financial reporting purposes, 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. inventories and inventories of combined operations outside the U.S. are valued at the lower of cost, using either 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
For financial reporting purposes, 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. 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 generally does not exceed 5 years.
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.
F-9
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 combined balance sheet and any gain or loss on the transaction is included in income.
Goodwill and Other Intangible Assets
Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not amortized, but rather is tested for impairment annually and whenever events or circumstances indicate that impairment may have occurred. Impairment testing compares the reporting unit carrying amount of goodwill with its fair value. Fair value is estimated based on discounted cash flows. If the reporting unit carrying amount of goodwill exceeds its fair value, an impairment charge would be recorded. For 2013, we completed the required annual testing of goodwill for impairment for all reporting units using the beginning of the third quarter 2013 as the measurement date, and have determined that goodwill is not impaired.
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: a firm sales agreement 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.
The allowance for doubtful accounts and sales discounts was $1.3 and $1.5 at December 31, 2013 and 2012, respectively.
Related Party Sales
Sales to other Kimberly-Clark subsidiaries and affiliates of supplies and other finished products have been reflected as related party sales in our combined financial statements. These sales have historically been transacted under cost-plus pricing arrangements, which is consistent with Kimberly-Clarks global transfer pricing policies. We expect to enter into one or more manufacturing and supply agreements with Kimberly-Clark prior to the distribution pursuant to which we or Kimberly-Clark, as the case may be, will manufacture, label and package products for the other party. The manufacturing and supply agreements are expected to modify our historical intercompany arrangements and reflect new pricing.
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 in invested equity as unrealized translation adjustments.
F-10
Derivative Instruments and Hedging
All derivative instruments are recorded as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives are either recorded in the income statement or other comprehensive income, as appropriate. The effective portion of the gain or loss on derivatives designated as cash flow hedges is included in other comprehensive income in the period that changes in fair value occur, and is reclassified to income in the same period that the hedged item affects income. Any ineffective portion of cash flow hedges is immediately recognized in income. Certain foreign-currency derivative instruments not designated as hedging instruments have been entered into to manage a portion of our foreign currency transactional exposures. The gain or loss on these derivatives is included in income in the period that changes in their fair values occur. Our policies allow the use of derivatives for risk management purposes and prohibit their use for speculation. Our policies also prohibit the use of any leveraged derivative instrument. Consistent with our policies, foreign currency derivative instruments are entered into with major financial institutions. At inception we formally designate certain derivatives as cash flow hedges and establish how the effectiveness of these hedges will be assessed and measured. This process links the derivatives to the transactions they are hedging. See Note 13, Objectives and Strategies for Using Derivatives, for disclosures about derivative instruments and hedging activities.
Insurance
We participate in Kimberly-Clarks various insurance programs which consist of selected levels of property and casualty risks, primarily related to employee health care, workers compensation claims and other casualty losses. Many of the potential losses are covered under conventional insurance programs with third-party carriers with high deductible limits. In other areas, Kimberly-Clark is self-insured with stop-loss coverage. Accrued liabilities for incurred but not reported losses related to these retained risks are calculated based upon loss development factors which contemplate a number of factors including claims history and expected trends.
Stock-Based Compensation
Our employees have historically participated in Kimberly-Clarks stock-based compensation plans. Stock-based compensation expense has been charged to us based on the awards and terms previously granted to our employees. The stock-based compensation was 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 performance-based restricted share awards is based on the Kimberly-Clark stock price at the grant date and the assessed probability of meeting future performance targets. See Note 10, Stock-Based Compensation.
Income Taxes
For purposes of the combined financial statements, our income tax expense and deferred tax balances have been estimated as if we filed income tax returns on a stand-alone basis separate from Kimberly-Clark. As a stand-alone entity, our deferred taxes and effective tax rate may differ from those in the historical periods.
We recognized tax benefits in our financial statements when our uncertain tax positions are more likely than not to be sustained upon audit. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
We recognized deferred tax assets for deductible temporary differences, operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.
F-11
Note 2. | Inventories |
Inventories consists of the following:
December 31 | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
LIFO |
Non-
LIFO |
Total | LIFO |
Non-
LIFO |
Total | |||||||||||||||||||
At the lower of cost, determined on the FIFO or weighted-average cost methods, or market |
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Raw materials |
$ | 40.2 | $ | 2.4 | $ | 42.6 | $ | 39.9 | $ | 3.4 | $ | 43.3 | ||||||||||||
Work in process |
64.8 | 0.4 | 65.2 | 63.8 | 1.0 | 64.8 | ||||||||||||||||||
Finished goods |
148.7 | 42.3 | 191.0 | 157.8 | 47.9 | 205.7 | ||||||||||||||||||
Supplies and other |
| 13.6 | 13.6 | | 12.0 | 12.0 | ||||||||||||||||||
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253.7 | 58.7 | 312.4 | 261.5 | 64.3 | 325.8 | |||||||||||||||||||
Excess of FIFO or weighted-average cost over LIFO cost |
(26.8 | ) | | (26.8 | ) | (24.1 | ) | | (24.1 | ) | ||||||||||||||
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Total |
$ | 226.9 | $ | 58.7 | $ | 285.6 | $ | 237.4 | $ | 64.3 | $ | 301.7 | ||||||||||||
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Note 3. | Property, Plant and Equipment |
Property, plant and equipment consists of the following:
December 31 | ||||||||
2013 | 2012 | |||||||
Land |
$ | 4.5 | $ | 4.8 | ||||
Buildings |
104.3 | 102.5 | ||||||
Machinery and equipment |
617.2 | 614.6 | ||||||
Construction in progress |
46.5 | 33.0 | ||||||
|
|
|
|
|||||
772.5 | 754.9 | |||||||
Less accumulated depreciation |
(447.6 | ) | (429.2 | ) | ||||
|
|
|
|
|||||
Total |
$ | 324.9 | $ | 325.7 | ||||
|
|
|
|
Property, plant and equipment, net in the United States as of December 31, 2013 and 2012 was $193.6 and $183.7, respectively.
Depreciation expense in 2013, 2012 and 2011 was $39.9, $38.3 and $38.3, respectively.
Note 4. | Goodwill and Intangible Assets |
The changes in the carrying amount of goodwill by business segment are as follows:
Medical Devices |
Surgical and
Infection Prevention |
Total | ||||||||||
Balance at December 31, 2011 |
$ | 684.1 | $ | 748.9 | $ | 1,433.0 | ||||||
Currency and other |
0.5 | 0.6 | 1.1 | |||||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2012 |
684.6 | 749.5 | 1,434.1 | |||||||||
Acquisitions |
2.7 | | 2.7 | |||||||||
Currency and other |
(1.0 | ) | (5.7 | ) | (6.7 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2013 |
$ | 686.3 | $ | 743.8 | $ | 1,430.1 | ||||||
|
|
|
|
|
|
At December 31, 2013 and 2012, we had intangible assets with indefinite useful lives of $6.7 and $11.1, respectively, related to acquired in-process research and development.
F-12
Intangible assets subject to amortization consist of the following at December 31:
2013 | 2012 | |||||||||||||||
Gross
Carrying Amount |
Accumulated
Amortization |
Gross
Carrying Amount |
Accumulated
Amortization |
|||||||||||||
Trademarks |
$ | 126.6 | $ | 82.2 | $ | 126.8 | $ | 78.2 | ||||||||
Patents and acquired technologies |
149.9 | 76.1 | 151.1 | 56.5 | ||||||||||||
Other |
49.2 | 32.9 | 50.3 | 27.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 325.7 | $ | 191.2 | $ | 328.2 | $ | 162.5 | ||||||||
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $29.3, $19.3 and $12.8 in 2013, 2012 and 2011, respectively. Amortization expense is estimated to be $32.4 in 2014, $25.6 in 2015, $20.3 in 2016, $15.0 in 2017 and $11.1 in 2018.
Note 5. | Accrued Expenses |
Accrued expenses consist of the following:
December 31 | ||||||||
2013 | 2012 | |||||||
Accrued rebates |
$ | 81.9 | $ | 70.6 | ||||
Accruals for estimated litigation matters |
25.7 | 32.7 | ||||||
Accrued salaries and wages |
37.3 | 41.3 | ||||||
Accrued taxes - income and other |
12.2 | 20.7 | ||||||
Other |
22.9 | 15.7 | ||||||
|
|
|
|
|||||
Total |
$ | 180.0 | $ | 181.0 | ||||
|
|
|
|
Note 6. | Long Term Liabilities |
Long term liabilities consists of the following:
December 31 | ||||||||
2013 | 2012 | |||||||
Deferred income taxes |
$ | 90.5 | $ | 96.4 | ||||
Taxes payable |
1.3 | 4.2 | ||||||
Accrual for estimated litigation matters |
| 10.9 | ||||||
Other |
2.7 | 7.9 | ||||||
|
|
|
|
|||||
Total |
$ | 94.5 | $ | 119.4 | ||||
|
|
|
|
Note 7. | Debt |
Debt payable within one year is composed of a bank loan and related party amounts owed to Kimberly-Clark or one of its wholly-owned subsidiaries.
The bank loan operates as a short-term revolver, and the balance owed at December 31, 2013 and 2012 was $2.8 and $9.3, respectively. The variable interest rate on the bank loan was 0.6% at December 31, 2013, and the related expense is recorded in interest expense on the combined income statement. The bank loan was repaid in March 2014.
F-13
The related party debt is subject to repayment upon demand by the related party lenders, and accordingly is classified in current liabilities on the combined balance sheet. The related party debt at December 31, 2013 and 2012 was $9.1 and $66.6, respectively. The variable interest rate on the related party debt was 0.5% at December 31, 2013, and the related expense is recorded in interest expense on the combined income statement. The related party debt will be settled at the distribution date.
Note 8. | Income Taxes |
Our income taxes were calculated on a separate tax return basis, although operations have historically generally been included in Kimberly-Clarks U.S. federal, state and foreign tax returns. Kimberly-Clarks global tax model has been developed based on its entire portfolio of businesses. Accordingly, our income tax results as presented are not necessarily indicative of future performance and do not necessarily reflect the results that we would have generated as an independent publicly traded company for the periods presented.
An analysis of the provision for income taxes follows:
Year Ended December 31 | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Current income taxes |
||||||||||||
United States |
$ | 41.4 | $ | 49.8 | $ | 28.9 | ||||||
State |
8.2 | 10.6 | 8.9 | |||||||||
Other countries |
23.7 | 30.8 | 22.8 | |||||||||
|
|
|
|
|
|
|||||||
Total |
73.3 | 91.2 | 60.6 | |||||||||
|
|
|
|
|
|
|||||||
Deferred income taxes |
||||||||||||
United States |
(0.4 | ) | (10.0 | ) | 12.1 | |||||||
State |
0.2 | (1.5 | ) | 0.3 | ||||||||
Other countries |
0.1 | (2.5 | ) | (0.8 | ) | |||||||
|
|
|
|
|
|
|||||||
Total |
(0.1 | ) | (14.0 | ) | 11.6 | |||||||
|
|
|
|
|
|
|||||||
Total provision for income taxes |
$ | 73.2 | $ | 77.2 | $ | 72.2 | ||||||
|
|
|
|
|
|
Income before income taxes is earned in the following tax jurisdictions:
Year Ended December 31 | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
United States |
$ | 136.8 | $ | 119.3 | $ | 144.2 | ||||||
Other countries |
91.0 | 110.5 | 70.4 | |||||||||
|
|
|
|
|
|
|||||||
Total income before income taxes |
$ | 227.8 | $ | 229.8 | $ | 214.6 | ||||||
|
|
|
|
|
|
F-14
Deferred income tax assets and liabilities are composed of the following:
December 31 | ||||||||
2013 | 2012 | |||||||
Deferred tax assets |
||||||||
Inventories |
$ | 23.8 | $ | 26.8 | ||||
Accrued liabilities |
14.8 | 24.1 | ||||||
Other |
15.3 | 13.3 | ||||||
|
|
|
|
|||||
53.9 | 64.2 | |||||||
Valuation allowance |
(4.3 | ) | (2.8 | ) | ||||
|
|
|
|
|||||
Total deferred assets |
49.6 | 61.4 | ||||||
|
|
|
|
|||||
Deferred tax liabilities |
||||||||
Property, plant and equipment, net |
45.8 | 47.9 | ||||||
Intangibles, net |
47.2 | 57.0 | ||||||
Other |
0.1 | 0.8 | ||||||
|
|
|
|
|||||
Total deferred tax liabilities |
93.1 | 105.7 | ||||||
|
|
|
|
|||||
Net deferred tax liabilities |
$ | (43.5 | ) | $ | (44.3 | ) | ||
|
|
|
|
Valuation allowances increased $1.5 in 2013 and decreased $4.2 in 2012, impacting earnings by the same amount. Valuation allowances at the end of 2013 primarily relate to tax credits and income tax loss carryforwards of $4.3.
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.
The total amount of taxes paid was $74.2, $94.3 and $58.4 in 2013, 2012 and 2011, respectively.
Presented below is a reconciliation of the income tax provision computed at the U.S. federal statutory tax rate to the actual effective tax rate:
Year Ended December 31 | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
U.S. statutory rate applied to income before income taxes |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Rate of state income taxes, net of federal tax benefit |
2.3 | 4.6 | 3.5 | |||||||||
Statutory rates other than U.S. statutory rate |
(3.2 | ) | (3.5 | ) | 0.1 | |||||||
Valuation allowance, net |
0.6 | (1.9 | ) | (0.7 | ) | |||||||
Other - net (a) |
(2.6 | ) | (0.6 | ) | (4.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Effective income tax rate |
32.1 | % | 33.6 | % | 33.6 | % | ||||||
|
|
|
|
|
|
(a) | Other - net is composed of numerous items, none of which is greater than 1.75% of income before income taxes. |
At December 31, 2013, U.S. income taxes and foreign withholding taxes have not been provided on $177.9 of unremitted 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
F-15
our U.S. entities or if we were to sell our stock in the subsidiaries. Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not practicable because of the complexities associated with this hypothetical calculation. We do not expect restrictions or taxes on repatriation of cash held outside of the United States to have a material adverse effect on our overall liquidity, financial condition or results of operations for the foreseeable future.
Presented below is a reconciliation of the beginning and ending amounts of unrecognized income tax benefits:
2013 | 2012 | 2011 | ||||||||||
Balance at January 1 |
$ | 18.1 | $ | 17.7 | $ | 18.6 | ||||||
Gross increases for tax positions of prior years |
5.8 | 2.1 | 0.4 | |||||||||
Gross decreases for tax positions of prior years |
(4.2 | ) | (1.9 | ) | (1.6 | ) | ||||||
Gross increases for tax positions of the current year |
1.3 | 1.3 | 1.0 | |||||||||
Settlements |
(1.4 | ) | (1.1 | ) | (0.7 | ) | ||||||
Lapse of statute of limitations |
(0.1 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Balance at December 31 |
$ | 19.5 | $ | 18.1 | $ | 17.7 | ||||||
|
|
|
|
|
|
Of the amounts recorded as unrecognized tax benefits at December 31, 2013, $14.3 would reduce our effective tax rate if recognized.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2013, 2012 and 2011, the net cost in interest and penalties was not significant. Total accrued penalties and net accrued interest was $4.9 and $6.0 at December 31, 2013 and 2012, respectively.
It is reasonably possible that a number of uncertainties could be resolved within the next 12 months. The most significant uncertainties involve tax credits and transfer pricing. It is reasonably possible the aggregate resolution of the uncertainties could be up to $6.8, while none of the uncertainties is individually significant. Resolution of these matters is not expected to have a material effect on our financial condition, results of operations or liquidity.
State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. 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 state income tax return positions in the process of examination, administrative appeals or litigation.
Note 9. | Employee Postretirement Benefits |
Participation in Kimberly-Clarks Pension and Other Postretirement Benefit Plans
Eligible Business employees participate in defined benefit pension and postretirement healthcare plans sponsored by Kimberly-Clark. Certain employees in North America are covered by these defined benefit pension plans, and substantially all U.S. employees have access to unfunded healthcare and life insurance benefit plans. Participants from Kimberly-Clarks other businesses also participate in these plans and therefore, our participation in the plans are accounted for on a multi-employer basis. As a result, the assets or liabilities associated with these plans are not reported in our combined balance sheet.
Expense allocations for these benefits were determined based on a review of personnel by business unit and are recorded in our combined income statement within cost of products sold, research and development and selling and general expenses, as applicable. These costs are funded through intercompany transactions with Kimberly-Clark. Our allocated expenses for the defined benefit pension plans were $1.9, $2.3 and $1.8 for the years ended December 31, 2013, 2012 and 2011, respectively. Our allocated expenses for the postretirement healthcare plans were $3.9, $5.9 and $6.7 for the years ended December 31, 2013, 2012 and 2011, respectively.
F-16
International Pension Plans
Certain plans in our international operations are our direct obligation, and therefore, the related funded status has been recorded within our combined balance sheet. These plans are unfunded and the aggregated projected benefit obligation as of December 31, 2013 and 2012 was $2.4. Net periodic pension cost for the years ended December 31, 2013, 2012 and 2011 was $1.4, $1.2 and $2.3, respectively. Over the next ten years, we expect gross benefit payments to be $0.9 in each of 2014 through 2018, and $5.2 in total in 2019 through 2023.
Defined Contribution Pension Plans
Eligible Business employees participate in Kimberly-Clarks defined contribution plans. Kimberly-Clarks 401(k) profit sharing plan and supplemental plan provide for a matching contribution of a U.S. employees contributions and accruals, subject to predetermined limits, as well as a discretionary profit sharing contribution, in which contributions are based on Kimberly-Clarks profit performance. Kimberly-Clark also has defined contribution pension plans for certain employees outside the U.S. in which eligible Business employees may participate. Costs charged to expense in our cost of products sold, research and development and selling and general expenses in our combined income statement for contributions made by Kimberly-Clark on our behalf were $9.8, $9.9 and $9.4 for the years ended December 31, 2013, 2012 and 2011, respectively.
Note 10. | Stock-Based Compensation |
Kimberly-Clark maintains several incentive plans in which our executives and employees participate. All awards granted under the plans are based on Kimberly-Clarks common shares and, as such, are reflected in Kimberly-Clarks consolidated statements of equity and not in our combined statement of invested equity.
Stock-based compensation expense for our direct employees of $6.0, $5.3 and $2.6 and related deferred income tax benefits of $2.2, $1.6 and $0.8 were recognized for 2013, 2012 and 2011, respectively. These amounts were based on the awards and terms previously granted to our employees by Kimberly-Clark, but may not reflect the equity awards or results that we would have experienced or expect to experience as a separate stand-alone public company.
Stock options were granted at an exercise price equal to the fair market value of Kimberly-Clarks common stock on the date of grant. Stock options are 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 by Kimberly-Clark using a Black-Scholes option-pricing model utilizing a range of assumptions related to dividend yield, volatility, risk-free interest rate and employee exercise behavior. Dividend yield was based on historical experience and expected future dividend actions. Expected volatility was based on a blend of historical volatility and implied volatility from traded options on Kimberly-Clarks common stock. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. Forfeitures were estimated based on historical data.
The weighted-average fair value of options granted was estimated at $7.15, $3.25 and $2.98 in 2013, 2012 and 2011, respectively, per option on the date of grant based on the following assumptions:
Year Ended December 31 | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Dividend yield |
3.70 | % | 4.50 | % | 5.00 | % | ||||||
Volatility |
15.40 | % | 12.86 | % | 12.54 | % | ||||||
Risk-free interest rate |
0.87 | % | 1.08 | % | 2.26 | % | ||||||
Expected life - years |
5.1 | 5.8 | 6.3 |
F-17
A summary of stock option activity is presented below:
Shares
(in thousands) |
Weighted-
Average Exercise Price |
Weighted-
Average Remaining Contractual Term |
Aggregate
Intrinsic Value |
|||||||||||||
Outstanding at January 1, 2013 |
560 | $ | 65.40 | |||||||||||||
Granted |
117 | 103.29 | ||||||||||||||
Exercised |
(257 | ) | 62.99 | |||||||||||||
Options related to employees transferred to or from other Kimberly-Clark operations |
(5 | ) | 82.83 | |||||||||||||
Forfeited or expired |
(27 | ) | 82.83 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Outstanding at December 31, 2013 |
388 | $ | 77.48 | 7.1 | $ | 10.5 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Exercisable and vested at December 31, 2013 |
178 | $ | 63.24 | 5.2 | $ | 7.3 | ||||||||||
|
|
|
|
|
|
|
|
The following table summarizes information about options outstanding and exercisable at December 31, 2013:
Options Outstanding | Options Exercisable | |||||||||||||||
Range of Exercise
|
Shares (in
thousands) |
Weighted-Average
Remaining Contractual Term |
Shares (in
thousands) |
Weighted-Average
Remaining Contractual Term |
||||||||||||
$49.61 - $58.73 | 40 | 4.6 | 40 | 4.6 | ||||||||||||
61.02 - 64.81 | 117 | 6.1 | 87 | 5.7 | ||||||||||||
71.88 - 78.54 | 122 | 6.9 | 51 | 4.8 | ||||||||||||
103.29 | 109 | 9.3 | | | ||||||||||||
|
|
|
|
|||||||||||||
388 | 7.1 | 178 | 5.2 | |||||||||||||
|
|
|
|
The following summarizes activity related to options granted to our eligible employees as part of Kimberly-Clarks annual stock option program:
Year Ended December 31 | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Stock options granted (in thousands) |
117 | 127 | 113 | |||||||||
Weighted average exercise price of stock options granted |
$ | 103.29 | $ | 78.54 | $ | 64.81 | ||||||
Intrinsic value of stock options exercised |
$ | 9.8 | $ | 8.6 | $ | 4.0 | ||||||
Cash received from options exercised and remitted to Kimberly-Clark |
$ | 16.2 | $ | 31.1 | $ | 24.5 | ||||||
Actual tax benefit realized for tax deductions from options exercised |
$ | 2.8 | $ | 3.5 | $ | 0.4 |
Restricted shares, time-vested restricted share units and performance-based restricted share units granted to employees are valued at the closing market price of our common stock on the grant date and vest generally at the end of three years. The number of performance-based share units that ultimately vest ranges from zero to 200% of the number granted, based on performance tied to return on invested capital (ROIC) and net sales during the three-year performance period. ROIC and net sales targets are set at the beginning of the performance period. Dividend equivalents are credited on restricted share units on the same date and at the same rate as dividends are paid on Kimberly-Clarks common stock.
F-18
The following summarizes activity related to other stock-based awards granted to our eligible employees as part of Kimberly-Clarks annual incentive programs:
Time-Vested
Restricted Share Units |
Performance-Based
Restricted Share Units |
|||||||||||||||
Shares
(in thousands) |
Weighted-
Average Grant-Date Fair Value |
Shares
(in thousands) |
Weighted-
Average Grant-Date Fair Value |
|||||||||||||
Nonvested at January 1, 2013 |
36 | $ | 78.07 | 141 | $ | 68.17 | ||||||||||
Granted |
5 | 98.31 | 62 | 102.18 | ||||||||||||
Vested |
(3 | ) | 69.71 | (21 | ) | 64.10 | ||||||||||
Forfeited |
(4 | ) | 79.10 | (35 | ) | 68.64 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Nonvested at December 31, 2013 |
34 | $ | 81.75 | 147 | $ | 82.87 | ||||||||||
|
|
|
|
|
|
|
|
Year Ended December 31 | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Number of awards granted (in thousands) |
67 | 85 | 74 | |||||||||
Weighted average market price per award granted |
$ | 101.88 | $ | 78.02 | $ | 65.03 | ||||||
Total fair value of other stock-based awards distributed to participants |
$ | 2.2 | $ | 4.4 | $ | 1.9 |
The total remaining unrecognized compensation costs and amortization period are as follows:
December 31,
2013 |
Weighted-Average
Service Years |
|||||||
Stock options |
$ | 0.5 | 1.1 | |||||
Time-based restricted stock units |
1.1 | 1.3 | ||||||
Performance-based restricted stock units |
4.8 | 1.6 |
Note 11. | Leases |
We have entered into operating leases for certain warehouse facilities, automobiles and equipment. The future minimum obligations under operating leases having a noncancelable term in excess of one year are as follows:
Year Ending
December 31 |
||||
2014 |
$ | 8.8 | ||
2015 |
7.8 | |||
2016 |
6.5 | |||
2017 |
4.9 | |||
2018 |
4.4 | |||
Thereafter |
2.8 | |||
|
|
|||
Future minimum obligations |
$ | 35.2 | ||
|
|
Combined rental expense under operating leases was $16.7, $13.4 and $12.5 in 2013, 2012 and 2011, respectively.
F-19
Note 12. | 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. Although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on our business, financial condition, results of operations or liquidity.
We are one of several manufacturers of continuous infusion medical devices, such as our ON-Q PAINBUSTER pain pumps, that are involved in several different pending or threatened litigation matters from multiple plaintiffs alleging that use of the continuous infusion device to deliver anesthetics directly into a synovial joint after surgery resulted in postarthroscopic glenohumeral chondrolysis, or a disintegration of the cartilage covering the bones in the joint (typically, in the shoulder). Plaintiffs generally seek monetary damages and attorneys fees. While Kimberly-Clark is retaining the liabilities related to these matters, the distribution agreement between us and Kimberly-Clark is expected to provide that we will indemnify Kimberly-Clark for any such claims or causes of actions arising after the distribution.
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 are involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.
We are subject to federal, state and local environmental protection laws and regulations with respect to our business operations and are operating in compliance with, or taking action aimed at ensuring compliance with, these laws and regulations. None of our compliance obligations with environmental protection laws and regulations, individually or in the aggregate, is expected to have a material adverse effect on our business, financial condition, results of operations or liquidity.
Note 13. | Objectives and Strategies for Using Derivatives |
As a multinational enterprise, we are exposed to financial risks, such as changes in foreign currency exchange rates, interest rates and commodity prices. We employ a number of practices to manage these risks, including operating activities and, where appropriate, the use of derivative instruments. Kimberly-Clark uses derivative instruments, such as forward swap contracts, to hedge a limited portion of its exposure to market risk arising from changes in prices of certain commodities. These derivatives are designated as cash flow hedges of specific quantities of the underlying commodity expected to be purchased in future months. In addition, Kimberly-Clark enters into derivative instruments for certain of its non-U.S. operations to hedge a portion of forecasted cash flows for raw materials, imports of intercompany finished goods and other intercompany goods and services denominated in U.S. dollars. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is recognized in earnings in the same period that the hedged exposure affects earnings. For hedging activity that is centrally managed by Kimberly-Clark, the associated derivative assets and liabilities and amounts recognized in accumulated other comprehensive income have not been included on our combined balance sheet. The portion of the amounts recognized to earnings for these commodity-based derivatives that relate to the Business operations have been allocated and included in cost of products sold on the combined income statement.
We enter into derivative instruments to hedge a portion of forecasted cash flows denominated in Mexican pesos for purchases of intercompany services provided to our U.S. operations and for intercompany sales of inventory denominated in U.S. dollars made by our affiliates in Thailand. The derivative instruments used to manage these exposures are designated and qualify as cash flow hedges. The foreign currency exposure on certain non-functional currency denominated monetary assets and liabilities, primarily intercompany loans and accounts payable, is hedged with primarily undesignated derivative instruments.
F-20
Translation adjustments result from translating foreign entities financial statements into U.S. dollars from their functional currencies. The risk to any particular entitys net assets is reduced to the extent that the entity is financed with local currency borrowing. Translation exposure, which results from changes in translation rates between functional currencies and the U.S. dollar, is not hedged.
The derivative liabilities for foreign exchange contracts as of December 31, 2013 were $4.5 and are included in the combined balance sheet in accrued expenses. The derivative assets for foreign exchange contracts as of December 31, 2012 were $1.9 and are included in the combined balance sheet in other current assets.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is initially recorded in accumulated other comprehensive income (AOCI), net of related income taxes, and recognized in earnings in the same period that the hedged exposure affects earnings. These gains or losses recognized to earnings were not significant in each of the three years ended December 31, 2013. As of December 31, 2013, the aggregate notional values of outstanding foreign exchange derivative contracts designated as cash flow hedges were approximately $100. Cash flow hedges resulted in no significant ineffectiveness in each of the three years ended December 31, 2013. For each of the three years ended December 31, 2013, no gains or losses were reclassified into earnings as a result of the discontinuance of cash flow hedges due to the original forecasted transaction no longer being probable of occurring. At December 31, 2013, amounts to be reclassified from AOCI during the next twelve months are not expected to be significant. The maximum maturity of cash flow hedges in place at December 31, 2013 is December 2014.
Gains or losses on undesignated foreign exchange hedging instruments are immediately recognized in other (income) and expense, net. These gains or losses have not been significant for each of the three years ended December 31, 2013. The effect on earnings from the use of these non-designated derivatives is substantially neutralized by the transactional gains and losses recorded on the underlying assets and liabilities. At December 31, 2013, the notional amount of these undesignated derivative instruments was approximately $25.
Note 14. | Business Segment Information |
We are organized into two operating segments based on product groupings: Surgical and Infection Prevention and Medical Devices. These operating segments, which are also our reportable global business segments, were determined in accordance with how our executive managers develop and execute global strategies to drive growth and profitability. These strategies include global plans for branding and product positioning, technology, research and development programs, cost reductions including supply chain management, and capacity and capital investments for each of these businesses. Segment management is evaluated on several factors, including operating profit. Segment operating profit excludes other (income) and expense, net.
The principal sources of revenue in each global business segment are described below:
| Surgical and Infection Prevention provides healthcare supplies and solutions that target the prevention and management of healthcare associated infections. This segment has recognized brands across its portfolio of product offerings, including in sterilization wrap, surgical drapes and gowns, facial protection, protective apparel and medical exam gloves. This business is also a global leader in education to prevent healthcare-associated infections. |
| Medical Devices 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. |
Net sales to Owens & Minor, Inc. were approximately 20% and Cardinal Health, Inc. were approximately 10% in 2013, 2012 and 2011.
F-21
Information concerning combined operations by business segment is presented in the following table:
Surgical and
Infection Prevention |
Medical Devices |
Corporate
& Other |
Combined Total | |||||||||||||
Net Sales (a) |
||||||||||||||||
2013 |
$ | 1,153.1 | $ | 499.0 | $ | 25.4 | $ | 1,677.5 | ||||||||
2012 |
1,185.1 | 477.6 | 21.3 | 1,684.0 | ||||||||||||
2011 |
1,187.6 | 452.3 | 20.0 | 1,659.9 | ||||||||||||
Operating Profit (b) |
||||||||||||||||
2013 |
151.2 | 85.6 | (11.5 | ) | 225.3 | |||||||||||
2012 |
155.2 | 88.8 | (16.0 | ) | 228.0 | |||||||||||
2011 |
150.0 | 76.8 | (16.1 | ) | 210.7 | |||||||||||
Depreciation and Amortization |
||||||||||||||||
2013 |
31.0 | 36.2 | 2.0 | 69.2 | ||||||||||||
2012 |
28.7 | 26.9 | 2.0 | 57.6 | ||||||||||||
2011 |
28.9 | 20.7 | 1.5 | 51.1 | ||||||||||||
Assets |
||||||||||||||||
2013 |
1,357.2 | 1,055.5 | 71.3 | 2,484.0 | ||||||||||||
2012 |
1,405.8 | 1,065.9 | 62.5 | 2,534.2 | ||||||||||||
2011 |
1,391.7 | 1,082.0 | 35.8 | 2,509.5 | ||||||||||||
Capital Spending |
||||||||||||||||
2013 |
20.4 | 13.4 | 15.2 | 49.0 | ||||||||||||
2012 |
28.5 | 11.5 | 0.8 | 40.8 | ||||||||||||
2011 |
26.5 | 9.1 | 4.1 | 39.7 |
(a) | Net sales in the United States to third parties totaled $1,117.2, $1,104.6 and $1,117.7 in 2013, 2012 and 2011, respectively. |
(b) | Segment operating profit excludes other (income) and expense, net. |
Surgical drapes and gowns, medical exam gloves, and sterilization wrap represent approximately 24%, 21% and 11%, respectively, of combined total net sales in each of the three years ended December 31, 2013. No other product category represented 10% or more of combined total net sales.
Note 15. | Related Party Transactions |
A portion of our net sales results from sales to Kimberly-Clark subsidiaries and affiliates. Included in our combined financial statements are net sales from intercompany sales of $91.3 in 2013, $92.6 in 2012 and $85.1 in 2011.
During 2013, 2012 and 2011, we utilized manufacturing facilities and resources managed by affiliates of Kimberly-Clark to conduct our business. The expenses associated with these transactions, which primarily relate to production of semi-finished goods for our surgical and infection prevention business, are included in cost of products sold in our combined income statement.
F-22
Our combined financial statements include certain expenses of Kimberly-Clark which were allocated to us for certain functions, including general expenses related to supply chain, finance, legal, information technology, human resources, compliance, shared services, insurance, employee benefits and incentives and stock-based compensation. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on the relative percentage of net sales or headcount. The total amount of these allocations from Kimberly-Clark was approximately as follows:
Year Ended
December 31 |
||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cost of products sold |
$ | 25 | $ | 25 | $ | 20 | ||||||
Selling and general expenses |
60 | 60 | 50 | |||||||||
Research expenses |
10 | 10 | 10 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 95 | $ | 95 | $ | 80 | ||||||
|
|
|
|
|
|
We consider the expense allocation methodology and results to be reasonable for all periods presented. However, these allocations may not be indicative of the actual expenses we would have incurred as a separate, stand-alone public company or of the costs we will incur in the future.
Historically, Kimberly-Clark has provided financing, cash management and other treasury services to us. In North America, our cash balances are swept by Kimberly-Clark, and historically, we have received funding from Kimberly-Clark for most of our operating and investing cash needs. Cash transferred to and from Kimberly-Clark has historically been recorded as intercompany cash. Intercompany cash, receivables and payables with Kimberly-Clark are reflected within parent company investment in the accompanying combined financial statements.
Note 16. | Subsequent Events |
The Business has evaluated all events that have occurred subsequent to December 31, 2013 through May 6, 2014, which is the date the financial statements are available to be issued.
The Company was incorporated in Delaware on February 25, 2014 for the purpose of holding Kimberly-Clarks health care business following the separation of the Business from Kimberly-Clark. Prior to the separation, the Company and Kimberly-Clark expect to engage in a series of transactions that are designed to transfer ownership of Kimberly-Clarks health care business to the Company. Prior to the transfer by Kimberly-Clark to the Company of its health care business, the Company will have no operations other than those incident to its formation and in preparation for the separation.
The initial capitalization of the Company was one hundred fifty thousand dollars.
F-23
UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS
HEALTH CARE BUSINESS
(Unaudited)
Six Months Ended
June 30 |
||||||||
(Millions of dollars) |
2014 | 2013 | ||||||
Net Sales (including related party sales of $45.6 and $44.5) |
$ | 824.2 | $ | 826.7 | ||||
Cost of products sold (including related party purchases of $41.7 and $40.9) |
564.3 | 531.3 | ||||||
|
|
|
|
|||||
Gross Profit |
259.9 | 295.4 | ||||||
Research and development |
17.6 | 15.3 | ||||||
Selling and general expenses |
186.8 | 184.4 | ||||||
Other (income) and expense, net |
(1.7 | ) | (1.7 | ) | ||||
|
|
|
|
|||||
Operating Profit |
57.2 | 97.4 | ||||||
Interest income |
1.9 | 1.1 | ||||||
Interest expense |
| (0.2 | ) | |||||
|
|
|
|
|||||
Income Before Income Taxes |
59.1 | 98.3 | ||||||
Provision for income taxes |
(22.2 | ) | (31.4 | ) | ||||
|
|
|
|
|||||
Net Income |
$ | 36.9 | $ | 66.9 | ||||
|
|
|
|
See Notes to Combined Financial Statements.
F-24
HEALTH CARE BUSINESS
COMBINED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Six Months Ended
June 30 |
||||||||
(Millions of dollars) |
2014 | 2013 | ||||||
Net Income |
$ | 36.9 | $ | 66.9 | ||||
|
|
|
|
|||||
Other Comprehensive Income (Loss), Net of Tax |
||||||||
Unrealized currency translation adjustments |
3.8 | (14.0 | ) | |||||
Cash flow hedges |
4.2 | (4.3 | ) | |||||
|
|
|
|
|||||
Total Other Comprehensive Income (Loss), Net of Tax |
8.0 | (18.3 | ) | |||||
|
|
|
|
|||||
Comprehensive Income |
$ | 44.9 | $ | 48.6 | ||||
|
|
|
|
See Notes to Combined Financial Statements.
F-25
HEALTH CARE BUSINESS
(2014 Data is Unaudited)
See Notes to Combined Financial Statements.
F-26
HEALTH CARE BUSINESS
(Unaudited)
Six Months Ended
June 30 |
||||||||
(Millions of dollars) |
2014 | 2013 | ||||||
Operating Activities |
||||||||
Net income |
$ | 36.9 | $ | 66.9 | ||||
Depreciation and amortization |
34.8 | 35.8 | ||||||
Share-based compensation charged by Kimberly-Clark |
2.1 | 3.2 | ||||||
Provision for losses on accounts receivable and inventories |
0.3 | 1.9 | ||||||
Deferred income taxes |
(14.2 | ) | (0.4 | ) | ||||
Asset impairment |
41.9 | | ||||||
Net losses on asset dispositions |
2.4 | 0.8 | ||||||
Changes in operating working capital: |
||||||||
Decrease (increase) in accounts receivable |
7.9 | (8.1 | ) | |||||
(Increase) decrease in inventories |
(15.9 | ) | 3.6 | |||||
Decrease (increase) in prepaid expenses and other assets |
1.0 | (0.2 | ) | |||||
Increase in trade accounts payable |
8.1 | 11.2 | ||||||
Decrease in accrued expenses |
(23.5 | ) | (21.8 | ) | ||||
Increase (decrease) in accrued income taxes |
0.2 | (3.1 | ) | |||||
Other |
1.7 | (3.8 | ) | |||||
|
|
|
|
|||||
Cash Provided by Operations |
83.7 | 86.0 | ||||||
|
|
|
|
|||||
Investing Activities |
||||||||
Capital spending |
(28.0 | ) | (25.0 | ) | ||||
Cash outflows for acquisitions and investments |
| (2.2 | ) | |||||
|
|
|
|
|||||
Cash Used for Investing |
(28.0 | ) | (27.2 | ) | ||||
|
|
|
|
|||||
Financing Activities |
||||||||
Debt proceeds |
1.3 | | ||||||
Debt repayments |
(2.9 | ) | (39.7 | ) | ||||
Change in Kimberly-Clarks net investment |
(51.0 | ) | (23.4 | ) | ||||
Other |
1.8 | 1.6 | ||||||
|
|
|
|
|||||
Cash Used for Financing |
(50.8 | ) | (61.5 | ) | ||||
|
|
|
|
|||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
(0.5 | ) | 1.5 | |||||
|
|
|
|
|||||
Increase (Decrease) in Cash and Cash Equivalents |
4.4 | (1.2 | ) | |||||
Cash and Cash Equivalents - Beginning of Period |
44.1 | 47.9 | ||||||
|
|
|
|
|||||
Cash and Cash Equivalents - End of Period |
$ | 48.5 | $ | 46.7 | ||||
|
|
|
|
See Notes to Combined Financial Statements.
F-27
HEALTH CARE BUSINESS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
Note 1. | Background and Basis of Presentation |
The Health Care Business (the Business) is a global business which seeks to advance health and healthcare by preventing infection, eliminating pain and speeding recovery. Our products and solutions are designed to address some of todays most important healthcare needs, namely, preventing infection and reducing the use of narcotics while helping patients move from surgery to recovery. We market and support the efficacy, safety and economic benefit of our products with a significant body of clinical evidence.
References to Business, we, our and us mean the health care operations that have been carved out that relate to Kimberly-Clarks health care business. References to Kimberly-Clark mean Kimberly-Clark Corporation, a Delaware corporation, and its subsidiaries, other than the Business, unless the context otherwise requires.
On November 14, 2013, Kimberly-Clark announced that its Board of Directors authorized management to evaluate a potential tax-free spin-off of its health care business. Halyard Health, Inc. (the Company) was incorporated in Delaware on February 25, 2014 for the purpose of holding the Business following the separation. During the six months ended June 30, 2014, $25.8 was recorded in selling and general expenses for transaction and related costs associated with the potential spin-off of the health care business.
These unaudited combined interim financial statements represent the global operations of Kimberly-Clarks health care business, and have been prepared on a stand-alone basis. The combined financial statements are derived from Kimberly-Clarks consolidated financial statements and accounting records, and reflect our financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments, which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in millions, unless otherwise noted.
For further information, refer to the audited combined financial statements and footnotes included elsewhere in this information statement.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers , which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. The effect of this standard on our financial position, results of operations and cash flows is not known.
Note 2. | Manufacturing Footprint Strategic Changes |
In June 2014, we initiated a plan to exit one of our disposable glove facilities in Thailand and outsource the related production to improve the competitive position of our surgical and infection prevention business. The restructuring is expected to result in a reduction of our workforce by approximately 3,000 positions.
The plan is expected to be completed by December 31, 2015 and result in estimated cumulative charges of approximately $70 ($50 after-tax) over that period. We anticipate that the charges will consist of a noncash asset impairment and incremental depreciation charges of $55 and workforce reduction and other exit cash costs of $15.
F-28
Plan charges recognized in cost of sales during the six months ended June 30, 2014 were $49.0 ($35.0 after-tax), consisting of an asset impairment charge of $41.9 and a charge of $7.1 related to workforce reductions.
The asset impairment charge was based on the excess of the carrying value of the impacted asset group of about $94 versus its fair value of about $52. The fair value was measured using discounted cash flows expected over the time the asset group would remain in use. The use of the discounted cash flows represents a level 3 measure under the fair value hierarchy.
Accrued expenses for the plan were $7.1 as of June 30, 2014, and no cash payments were made during the six months ended June 30, 2014.
See Note 11 for additional information related to the plan charges by segment.
Note 3. | Inventories |
Inventories consist of the following:
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
LIFO |
Non-
LIFO |
Total | LIFO |
Non-
LIFO |
Total | |||||||||||||||||||
At the lower of cost, determined on the FIFO or weighted-average cost methods, or market |
||||||||||||||||||||||||
Raw materials |
$ | 46.3 | $ | 1.5 | $ | 47.8 | $ | 40.2 | $ | 2.4 | $ | 42.6 | ||||||||||||
Work in process |
61.4 | 1.1 | 62.5 | 64.8 | 0.4 | 65.2 | ||||||||||||||||||
Finished goods |
163.1 | 40.1 | 203.2 | 148.7 | 42.3 | 191.0 | ||||||||||||||||||
Supplies and other |
| 14.8 | 14.8 | | 13.6 | 13.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
270.8 | 57.5 | 328.3 | 253.7 | 58.7 | 312.4 | |||||||||||||||||||
Excess of FIFO or weighted-average cost over LIFO cost |
(27.0 | ) | | (27.0 | ) | (26.8 | ) | | (26.8 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 243.8 | $ | 57.5 | $ | 301.3 | $ | 226.9 | $ | 58.7 | $ | 285.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Note 4. | Property, Plant and Equipment |
Property, plant and equipment consist of the following:
June 30, 2014 | December 31, 2013 | |||||||
Land |
$ | 3.0 | $ | 4.5 | ||||
Buildings |
76.4 | 104.3 | ||||||
Machinery and equipment |
495.8 | 617.2 | ||||||
Construction in progress |
42.6 | 46.5 | ||||||
|
|
|
|
|||||
617.8 | 772.5 | |||||||
Less accumulated depreciation |
(332.9 | ) | (447.6 | ) | ||||
|
|
|
|
|||||
Total |
$ | 284.9 | $ | 324.9 | ||||
|
|
|
|
Property, plant and equipment, net in the United States as of June 30, 2014 and December 31, 2013 was $199.2 and $193.6, respectively.
Depreciation expense for the six months ended June 30, 2014 and 2013 was $18.7 and $21.0, respectively.
F-29
Note 5. | Goodwill and Intangible Assets |
The changes in the carrying amount of goodwill by business segment are as follows:
Medical Devices |
Surgical and
Infection Prevention |
Total | ||||||||||
Balance at December 31, 2013 |
$ | 686.3 | $ | 743.8 | $ | 1,430.1 | ||||||
Currency and other |
(2.6 | ) | 5.3 | 2.7 | ||||||||
|
|
|
|
|
|
|||||||
Balance at June 30, 2014 |
$ | 683.7 | $ | 749.1 | $ | 1,432.8 | ||||||
|
|
|
|
|
|
At June 30, 2014 and December 31, 2013, we had intangible assets with indefinite useful lives of $6.7 related to acquired in-process research and development.
Intangible assets subject to amortization consist of the following:
June 30, 2014 | December 31, 2013 | |||||||||||||||
Gross
Carrying Amount |
Accumulated
Amortization |
Gross
Carrying Amount |
Accumulated
Amortization |
|||||||||||||
Trademarks |
$ | 126.7 | $ | 84.2 | $ | 126.6 | $ | 82.2 | ||||||||
Patents and acquired technologies |
149.9 | 87.9 | 149.9 | 76.1 | ||||||||||||
Other |
49.3 | 35.4 | 49.2 | 32.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 325.9 | $ | 207.5 | $ | 325.7 | $ | 191.2 | ||||||||
|
|
|
|
|
|
|
|
Amortization expense for intangible assets for the six months ended June 30, 2014 and 2013 was $16.1 and $14.8, respectively.
Note 6. | Accrued Expenses |
Accrued expenses consist of the following:
June 30, 2014 | December 31, 2013 | |||||||
Accrued rebates |
$ | 67.2 | $ | 81.9 | ||||
Accrued litigation matters |
16.5 | 25.7 | ||||||
Accrued salaries and wages |
33.1 | 37.3 | ||||||
Accrued workforce reduction |
7.1 | | ||||||
Accrued taxes - income and other |
11.9 | 12.2 | ||||||
Other |
16.6 | 22.9 | ||||||
|
|
|
|
|||||
Total |
$ | 152.4 | $ | 180.0 | ||||
|
|
|
|
Note 7. | Long Term Liabilities |
Long term liabilities consist of the following:
June 30, 2014 | December 31, 2013 | |||||||
Deferred income taxes |
$ | 90.1 | $ | 90.5 | ||||
Taxes payable |
1.3 | 1.3 | ||||||
Other |
3.8 | 2.7 | ||||||
|
|
|
|
|||||
Total |
$ | 95.2 | $ | 94.5 | ||||
|
|
|
|
F-30
Note 8. | Invested Equity |
The amounts of invested equity from the beginning of the period to the end of the period are as follows:
Six Months Ended | ||||||||||||||||
June 30, 2014 | June 30, 2013 | |||||||||||||||
(Millions of dollars) |
Kimberly-Clarks
Net Investment |
Accumulated
Other Comprehensive Income (Loss) |
Kimberly-Clarks
Net Investment |
Accumulated
Other Comprehensive Income (Loss) |
||||||||||||
Balance at Beginning of Period |
$ | 2,098.7 | $ | (19.6 | ) | $ | 2,045.6 | $ | 10.1 | |||||||
Net income |
36.9 | | 66.9 | | ||||||||||||
Change in Kimberly-Clarks investment, net |
(46.7 | ) | | (13.7 | ) | | ||||||||||
Other comprehensive income: |
||||||||||||||||
Unrealized currency translation adjustments |
| 3.8 | | (14.0 | ) | |||||||||||
Cash flow hedges, net of tax |
| 4.2 | | (4.3 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at End of Period |
$ | 2,088.9 | $ | (11.6 | ) | $ | 2,098.8 | $ | (8.2 | ) | ||||||
|
|
|
|
|
|
|
|
Note 9. | 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. Although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on our business, financial condition, results of operations or liquidity.
We are one of several manufacturers of continuous infusion medical devices, such as our ON-Q PAINBUSTER pain pumps, that are involved in several different pending or threatened litigation matters from multiple plaintiffs alleging that use of the continuous infusion device to deliver anesthetics directly into a synovial joint after surgery resulted in postarthroscopic glenohumeral chondrolysis, or a disintegration of the cartilage covering the bones in the joint (typically, in the shoulder). Plaintiffs generally seek monetary damages and attorneys fees. While Kimberly-Clark is retaining the liabilities related to these matters, the distribution agreement between us and Kimberly-Clark will provide that we will indemnify Kimberly-Clark for any such claims or causes of actions arising after the distribution.
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 are involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.
We 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.
F-31
Note 10. | Objectives and Strategies for Using Derivatives |
As a multinational enterprise, we are exposed to financial risks, such as changes in foreign currency exchange rates, interest rates and commodity prices. We employ a number of practices to manage these risks, including operating activities and, where appropriate, the use of derivative instruments. Kimberly-Clark uses derivative instruments, such as forward swap contracts, to hedge a limited portion of its exposure to market risk arising from changes in prices of certain commodities. These derivatives are designated as cash flow hedges of specific quantities of the underlying commodity expected to be purchased in future months. In addition, Kimberly-Clark enters into derivative instruments for certain of its non-U.S. operations to hedge a portion of forecasted cash flows for raw materials, imports of intercompany finished goods and other intercompany goods and services denominated in U.S. dollars. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is recognized in earnings in the same period that the hedged exposure affects earnings. For hedging activity that is centrally managed by Kimberly-Clark, the associated derivative assets and liabilities and amounts recognized in accumulated other comprehensive income have not been included on our combined balance sheet. The portion of the amounts recognized to earnings for these commodity-based derivatives that relate to the Business operations have been allocated and included in cost of products sold on the combined income statement.
We enter into derivative instruments to hedge a portion of forecasted cash flows denominated in Mexican pesos for purchases of intercompany services provided to our U.S. operations and for intercompany sales of inventory denominated in U.S. dollars made by our affiliates in Thailand. The derivative instruments used to manage these exposures are designated and qualify as cash flow hedges. The foreign currency exposure on certain non-functional currency denominated monetary assets and liabilities, primarily intercompany loans and accounts payable, is hedged with primarily undesignated derivative instruments.
Translation adjustments result from translating foreign entities financial statements into U.S. dollars from their functional currencies. The risk to any particular entitys net assets is reduced to the extent that the entity is financed with local currency borrowing. Translation exposure, which results from changes in translation rates between functional currencies and the U.S. dollar, is not hedged.
The derivative liabilities for foreign exchange contracts at December 31, 2013 were $4.5 and are included in the combined balance sheet in accrued expenses. The derivative assets for foreign exchange contracts as of June 30, 2014 and December 31, 2013 were not significant.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is initially recorded in accumulated other comprehensive income (AOCI), net of related income taxes, and recognized in earnings in the same period that the hedged exposure affects earnings. These gains or losses recognized to earnings were not significant in the six months ended June 30, 2014 and 2013. As of June 30, 2014, the aggregate notional values of outstanding foreign exchange derivative contracts designated as cash flow hedges were approximately $75. Cash flow hedges resulted in no significant ineffectiveness in the six months ended June 30, 2014 and 2013. For the six months ended June 30, 2014 and 2013, no gains or losses were reclassified into earnings as a result of the discontinuance of cash flow hedges due to the original forecasted transaction no longer being probable of occurring. At June 30, 2014, amounts to be reclassified from AOCI during the next twelve months are not expected to be significant. The maximum maturity of cash flow hedges in place at June 30, 2014 is June 2015.
Gains or losses on undesignated foreign exchange hedging instruments are immediately recognized in other (income) and expense, net. These gains or losses have not been significant for the six months ended June 30, 2014 and 2013. The effect on earnings from the use of these non-designated derivatives is substantially neutralized by the transactional gains and losses recorded on the underlying assets and liabilities. At June 30, 2014, the notional amount of these undesignated derivative instruments was approximately $30.
F-32
Note 11. | Business Segment Information |
We are organized into two operating segments based on product groupings: Surgical and Infection Prevention and Medical Devices. These operating segments, which are also our reportable global business segments, were determined in accordance with how our executive managers develop and execute global strategies to drive growth and profitability. These strategies include global plans for branding and product positioning, technology, research and development programs, cost reductions including supply chain management, and capacity and capital investments for each of these businesses. Segment management is evaluated on several factors, including operating profit. Segment operating profit excludes restructuring charges, transaction costs related to the potential spin-off, and other (income) and expense, net.
The principal sources of revenue in each global business segment are described below:
| Surgical and Infection Prevention provides products that address the prevention of healthcare associated infections and provide protection for both healthcare workers and patients. This segment has recognized brands across its portfolio of product offerings, including in sterilization wrap, surgical drapes and gowns, facial protection, protective apparel and medical exam gloves. |
| Medical Devices is comprised of a diverse set of medical device solutions focused on improving patient outcomes, patient safety and reducing the cost of care. This innovative portfolio includes post-operative pain management solutions, minimally invasive interventional (or chronic) pain therapies, closed airway suction systems, and enteral feeding tubes. |
Information concerning unaudited combined operations by business segment is presented in the following table:
Six Months Ended
June 30 |
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2014 | 2013 | Change | ||||||||||
NET SALES |
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Surgical and Infection Prevention |
$ | 561.0 | $ | 573.1 | (2.1 | )% | ||||||
Medical Devices |
251.0 | 240.6 | +4.3 | % | ||||||||
Corporate & Other |
12.2 | 13.0 | N.M. | |||||||||
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COMBINED TOTAL NET SALES |
$ | 824.2 | $ | 826.7 | (0.3 | )% | ||||||
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OPERATING PROFIT |
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Surgical and Infection Prevention |
$ | 81.3 | $ | 67.8 | +19.9 | % | ||||||
Medical Devices |
56.2 | 35.4 | +58.8 | % | ||||||||
Corporate & Other (a) |
(82.0 | ) | (7.5 | ) | N.M. | |||||||
Other (income) and expense, net |
(1.7 | ) | (1.7 | ) | | |||||||
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COMBINED TOTAL OPERATING PROFIT |
$ | 57.2 | $ | 97.4 | (41.3 | )% | ||||||
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N.M. - Not Meaningful
(a) | Corporate & Other for the six months ended June 30, 2014 includes $49.0 associated with Manufacturing Footprint Strategic Changes (see Note 2) and $25.8 of transaction costs associated with the potential spin-off. |
Note 12. | Related Party Transactions |
A portion of our net sales results from sales to Kimberly-Clark subsidiaries and affiliates. Included in our combined financial statements are net sales from intercompany sales of $45.6 and $44.5 in the six month period ended June 30, 2014 and 2013, respectively.
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During the six months ended June 30, 2014 and 2013, we utilized manufacturing facilities and resources managed by affiliates of Kimberly-Clark to conduct our business. The expenses associated with these transactions, which primarily relate to production of semi-finished goods for our surgical and infection prevention business, are included in cost of products sold in our combined income statement.
Our combined financial statements include certain expenses of Kimberly-Clark which were allocated to us for certain functions, including general expenses related to supply chain, finance, legal, information technology, human resources, compliance, shared services, insurance, employee benefits and incentives and stock-based compensation. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on the relative percentage of net sales or headcount. The total amount of these allocations from Kimberly-Clark was approximately as follows:
Six Months Ended
June 30 |
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2014 | 2013 | |||||||
Cost of products sold |
$ | 12 | $ | 13 | ||||
Selling and general expenses |
31 | 30 | ||||||
Research expenses |
5 | 5 | ||||||
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Total |
$ | 48 | $ | 48 | ||||
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We consider the expense allocation methodology and results to be reasonable for all periods presented. However, these allocations may not be indicative of the actual expenses we would have incurred as a separate, stand-alone public company or of the costs we will incur in the future.
Historically, Kimberly-Clark has provided financing, cash management and other treasury services to us. In North America, our cash balances are swept by Kimberly-Clark, and historically, we have received funding from Kimberly-Clark for most of our operating and investing cash needs. Cash transferred to and from Kimberly-Clark has historically been recorded as intercompany cash. Intercompany cash, receivables and payables with Kimberly-Clark are reflected within parent company investment in the accompanying combined financial statements.
Note 13. | Subsequent Events |
The Business has evaluated all events that have occurred subsequent to June 30, 2014 through August 27, 2014, which is the date the combined financial statements are available to be issued.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kimberly-Clark Corporation:
We have audited the accompanying balance sheet of Halyard Health, Inc. (the Company), a wholly-owned subsidiary of Kimberly-Clark Corporation, as of April 30, 2014. This financial statement is the responsibility of the Companys management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects, the financial position of the Company as of April 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP |
Dallas, Texas |
May 6, 2014 |
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BALANCE SHEET
(whole dollars) |
April 30, 2014 | |||
ASSETS |
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Cash and cash equivalents |
$ | 150,000 | ||
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TOTAL ASSETS |
$ | 150,000 | ||
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TOTAL LIABILITIES |
$ | | ||
STOCKHOLDERS EQUITY |
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Common stock ($0.01 par value per share, 1,000 shares authorized, 1,000 shares issued and outstanding) |
10 | |||
Additional paid-in capital |
149,990 | |||
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Total stockholders equity |
$ | 150,000 | ||
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 150,000 | ||
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See Notes to Financial Statement.
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NOTES TO THE FINANCIAL STATEMENT
Background and Presentation
Halyard Health, Inc. (the Company) was incorporated in Delaware on February 25, 2014 for the purpose of holding Kimberly-Clarks health care business following the separation of the health care business from Kimberly-Clark. Prior to the separation, the Company and Kimberly-Clark expect to engage in a series of transactions that are designed to transfer ownership of Kimberly-Clarks health care business to the Company. Prior to the transfer by Kimberly-Clark to the Company of its health care business, the Company will have no operations other than those incident to its formation and in preparation for the separation and distribution.
The accompanying financial statement is prepared in conformity with accounting principles generally accepted in the United States.
The Company has authorized 1,000 shares of $0.01 par value per share common stock. 1,000 of these shares are issued and outstanding at April 30, 2014.
Subsequent Events
The Company has evaluated all events that have occurred subsequent to April 30, 2014 through May 6, 2014, which is the date the financial statement is available to be issued.
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