UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of report (date of earliest event reported): October 17, 2014
Halyard Health, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 001-36440 | 46-4987888 | ||
(State of incorporation
or organization) |
(Commission file number) |
(I.R.S. employer identification number) |
P.O. Box 619100 Dallas, Texas |
75261-9100 | |
(Address of principal executive offices) | (Zip code) |
Registrants telephone number, including area code: (972) 281-1200
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 1.01 | Entry into a Definitive Material Agreement. |
On October 17, 2014, Halyard Health, Inc. (Halyard) issued $250.0 million aggregate principal amount of its 6.25% senior unsecured notes due October 15, 2022 (the Notes) pursuant to an Indenture, dated as of October 17, 2014, between Halyard and Deutsche Bank Trust Company Americas, as trustee (the Indenture), in reliance on Rule 144A under the Securities Act of 1933, as amended (the Securities Act), and to certain non-U.S. persons in transactions outside the United States in reliance on Regulation S under the Securities Act.
An amount equal to 100% of the issue price of the Notes was deposited in an escrow account pursuant to the terms of an Escrow Agreement, dated October 17, 2014, among Halyard and Deutsche Bank Trust Company Americas, as trustee with respect to the Notes and as the escrow agent. Such amount will be released to Halyard upon the satisfaction of certain conditions related to the separation and distribution of Halyard from Kimberly-Clark Corporation (Kimberly-Clark), which is expected to occur on October 31, 2014 (the Distribution Date). If the conditions have not been met and the proceeds have not been distributed on or prior to March 1, 2015, the escrowed funds will be used to redeem all of the Notes at a redemption price of 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.
The Notes will mature on October 15, 2022 and interest will accrue at a rate of 6.25% per annum from October 17, 2014 and will be payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2015. Initially, the Notes will not be guaranteed. Upon release of the funds from escrow on the Distribution Date, the Notes will become fully and unconditionally guaranteed on a senior unsecured basis by each of Halyards subsidiaries that will initially guarantee indebtedness under the credit agreement governing Halyards $250.0 million revolving credit facility and $340.0 million term loan facility that Halyard expects to enter into on the Distribution Date.
At any time prior to October 15, 2017, Halyard will be able to redeem all or a part of the Notes upon not less than 30 nor more than 60 days prior notice to each holder, at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus a make-whole amount as of the redemption date, and accrued and unpaid interest, if any, to, but excluding, the redemption date.
On and after October 15, 2017, Halyard will be able to redeem the Notes, in whole or in part, upon not less than 30 nor more than 60 days prior notice to each holder, at the redemption prices (expressed as percentages of principal amount of the Notes to be redeemed) set forth in the Indenture, plus accrued and unpaid interest thereon, if any, to, but excluding, the applicable redemption date.
In addition, until October 15, 2017, Halyard will be able redeem up to 35% of the Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings at a redemption price equal to 106.25% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the applicable date of redemption, subject to certain conditions.
The indenture governing the Senior Notes will contain covenants that, among other things, limit Halyards ability and the ability of its restricted subsidiaries to:
| incur additional indebtedness, guarantee indebtedness or issue disqualified stock or, in the case of Halyards restricted subsidiaries, preferred stock; |
| pay dividends on, repurchase or make distributions in respect of Halyards capital stock; |
| make certain investments or acquisitions; |
| sell, transfer or otherwise convey certain assets; |
| create liens; |
| enter into agreements restricting certain subsidiaries ability to pay dividends or make other intercompany transfers; |
| consolidate, merge, sell or otherwise dispose of all or substantially all of Halyards and its subsidiaries assets; |
| enter into transactions with affiliates; and |
| prepay certain kinds of indebtedness. |
The Notes will also have cross default provisions that apply to other indebtedness Halyard or certain of its subsidiaries may have from time to time with an outstanding principal amount of $50.0 million or more. If the Notes achieve an investment grade rating from both Moodys and S&P, Halyards obligation to comply with certain of these covenants will be suspended.
In connection with the issuance of the Notes, Halyard entered into a registration rights agreement (the Registration Rights Agreement) dated as of October 17, 2014 with the Initial Purchasers (as defined in the Registration Rights Agreement), which gives holders of the Notes certain exchange and registration rights with respect to the Notes. In the Registration Rights Agreement, Halyard and (upon the execution of a joinder agreement to the registration rights agreement) the guarantors of the Notes will agree for the benefit of the holders of the Notes to use commercially reasonable efforts to (1) file a registration statement on an appropriate registration form with respect to a registered offer to exchange the notes for new notes (the Exchange Notes) guaranteed by the guarantors, with terms substantially identical in all material respects to the notes (except that the Exchange Notes will not contain terms with respect to transfer restrictions or any increase in annual interest rate) and (2) cause the registration statement to be declared effective under the Securities Act.
The foregoing description of the Indenture and Registration Rights Agreement is only a summary and is qualified in its entirety by reference to the Indenture, including the form of the Notes attached thereto, and the Registration Rights Agreement, copies of which are filed as exhibits to this Current Report on Form 8-K and are incorporated by reference herein.
Item 2.02 Results of Operations and Financial Condition.
Furnished as Exhibit 99.1 are slides to be used in connection with presentations to be made on and after October 21, 2014 to certain Kimberly-Clark common stockholders and certain other members of the investment community in anticipation of the spin-off of Halyard from Kimberly-Clark that is expected to occur on October 31, 2014. Slides 2, 3, 27, 28 and 32-34 of Exhibit 99.1 contain certain of Halyards preliminary unaudited financial results for the quarter ended September 30, 2014 and are incorporated herein by reference. Exhibit 99.1 contains statements intended as forward-looking statements, all of which are subject to the cautionary statement about forward-looking statements set forth therein, which cautionary statement is incorporated herein by reference.
The information, including Exhibit 99.1, in Item 2.02 of this Current Report is being furnished and shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The information in Item 2.02 of this Current Report shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, except as otherwise expressly stated in such filing.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
The information provided under Item 1.01 above is incorporated by reference into this Item 2.03.
Item 7.01 | Regulation FD Disclosure |
Commencing on October 21, 2014, Halyard intends to make a series of presentations to Kimberly-Clark stockholders and other members of the investment community in anticipation of the spin-off of Halyard from Kimberly-Clark expected to occur on October 31, 2014. Slides to be used in connection with such presentations are furnished as Exhibit 99.1 to this Current Report on Form 8-K and incorporated herein by reference. The presentation contains, among other things, selected preliminary unaudited financial results for the quarter ended September 30, 2014 and statements intended as forward-looking statements, all of which are subject to the cautionary statement about forward-looking statements set forth therein, which cautionary statement is incorporated herein by reference.
The information, including Exhibit 99.1, in Item 7.01 of this Current Report is being furnished and shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The information in Item 7.01 of this Current Report shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, except as otherwise expressly stated in such filing.
Item 8.01 | Other Events. |
On October 17, 2014 Halyards Registration Statement on Form 10 (the Registration Statement) related to the spin-off became effective. On or about October 24, 2014, Kimberly-Clark expects to mail the information statement, dated as of October 17, 2014, attached hereto as Exhibit 99.2, a preliminary form of which was attached as Exhibit 99.1 to the Registration Statement, to Kimberly-Clark stockholders of record as of October 23, 2014, the record date for the spin-off.
Item 9.01 | Financial Statements and Exhibits. |
(d) | Exhibits |
Exhibit Number |
Description |
|
4.1 | Indenture (including form of notes), dated October 17, 2014, between Halyard Health, Inc., as the Issuer, and Deutsche Bank Trust Company Americas, as trustee | |
4.2 | Registration Rights Agreement, dated as of October 17, 2014, between Halyard Health, Inc. and Morgan Stanley & Co. LLC | |
99.1 | Presentation slides of Halyard Health, Inc. | |
99.2 | Information Statement of Halyard Health, Inc., dated as of October 17, 2014 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
HALYARD HEALTH, INC. | ||||||
Date: October 21, 2014 | By: |
/s/ John W. Wesley |
||||
Name: | John W. Wesley | |||||
Title: | Senior Vice President, General Counsel and Secretary |
INDEX TO EXHIBITS
Exhibit Number |
Description |
|
4.1 | Indenture (including form of notes), dated October 17, 2014, between Halyard Health, Inc., as the Issuer, and Deutsche Bank Trust Company Americas, as trustee | |
4.2 | Registration Rights Agreement, dated as of October 17, 2014, between Halyard Health, Inc. and Morgan Stanley & Co. LLC | |
99.1 | Presentation slides of Halyard Health, Inc. | |
99.2 | Information Statement of Halyard Health, Inc., dated as of October 17, 2014 |
Exhibit 4.1
HALYARD HEALTH, INC.
and
DEUTSCHE BANK TRUST COMPANY AMERICAS
as Trustee
INDENTURE
Dated as of October 17, 2014
6.250% SENIOR NOTES DUE 2022
Trust Indenture Act Section |
Indenture
Section |
|
310(a)(1) |
7.10 | |
(a)(2) |
7.10 | |
(a)(3) |
N.A. | |
(a)(4) |
N.A. | |
(a)(5) |
7.10 | |
(b) |
7.10 | |
(c) |
N.A. | |
311(a) |
7.11 | |
(b) |
7.11 | |
(c) |
N.A. | |
312(a) |
2.05 | |
(b) |
12.02 | |
(c) |
12.02 | |
313(a) |
7.06 | |
(b)(1) |
N.A. | |
(b)(2) |
7.06; 7.07 | |
(c) |
7.06; 12.01 | |
(d) |
7.06 | |
314(a) |
4.03; 12.04 | |
(b) |
N.A. | |
(c)(1) |
12.03 | |
(c)(2) |
12.03 | |
(c)(3) |
N.A. | |
(d) |
N.A. | |
(e) |
12.04 | |
(f) |
N.A. | |
315(a) |
7.01 | |
(b) |
7.05; 12.01 | |
(c) |
7.01 | |
(d) |
7.01 | |
(e) |
6.14 | |
316(a)(last sentence) |
2.09 | |
(a)(1)(A) |
6.05 | |
(a)(1)(B) |
6.04 | |
(a)(2) |
N.A. | |
(b) |
6.07 | |
(c) |
1.05; 12.02 | |
317(a)(1) |
6.08 | |
(a)(2) |
6.12 | |
(b) |
2.04 | |
318(a) |
12.16 | |
(b) |
12.16 | |
(c) |
12.16 |
N.A. means not applicable.
* | This Cross-Reference Table is not part of the Indenture. |
TABLE OF CONTENTS
Page | ||||||
ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE | 1 | |||||
SECTION 1.01 |
Definitions |
1 | ||||
SECTION 1.02 |
Other Definitions |
37 | ||||
SECTION 1.03 |
Incorporation by Reference of Trust Indenture Act |
38 | ||||
SECTION 1.04 |
Rules of Construction |
38 | ||||
SECTION 1.05 |
Acts of Holders |
39 | ||||
ARTICLE 2 THE NOTES | 41 | |||||
SECTION 2.01 |
Form and Dating; Terms |
41 | ||||
SECTION 2.02 |
Execution and Authentication |
42 | ||||
SECTION 2.03 |
Registrar and Paying Agent |
43 | ||||
SECTION 2.04 |
Paying Agent to Hold Money in Trust |
43 | ||||
SECTION 2.05 |
Holder Lists |
43 | ||||
SECTION 2.06 |
Transfer and Exchange |
44 | ||||
SECTION 2.07 |
Replacement Notes |
58 | ||||
SECTION 2.08 |
Outstanding Notes |
58 | ||||
SECTION 2.09 |
Treasury Notes |
59 | ||||
SECTION 2.10 |
Temporary Notes |
59 | ||||
SECTION 2.11 |
Cancellation |
59 | ||||
SECTION 2.12 |
Defaulted Interest |
59 | ||||
SECTION 2.13 |
CUSIP/ISIN Numbers |
60 | ||||
ARTICLE 3 REDEMPTION | 60 | |||||
SECTION 3.01 |
Notices to Trustee |
60 | ||||
SECTION 3.02 |
Selection of Notes to Be Redeemed or Purchased |
60 | ||||
SECTION 3.03 |
Notice of Purchase or Redemption |
61 | ||||
SECTION 3.04 |
Effect of Notice of Redemption |
62 | ||||
SECTION 3.05 |
Deposit of Redemption or Purchase Price |
62 | ||||
SECTION 3.06 |
Notes Redeemed or Purchased in Part |
63 | ||||
SECTION 3.07 |
Optional Redemption |
63 | ||||
SECTION 3.08 |
Mandatory Redemption; Escrow of Proceeds |
63 | ||||
SECTION 3.09 |
Offers to Repurchase by Application of Excess Proceeds |
64 | ||||
ARTICLE 4 COVENANTS | 66 | |||||
SECTION 4.01 |
Payment of Notes |
66 | ||||
SECTION 4.02 |
Maintenance of Office or Agency |
67 | ||||
SECTION 4.03 |
Reports and Other Information |
67 | ||||
SECTION 4.04 |
Compliance Certificate |
69 |
i
SECTION 4.05 |
Taxes |
69 | ||||
SECTION 4.06 |
Stay, Extension and Usury Laws |
69 | ||||
SECTION 4.07 |
Limitation on Restricted Payments |
70 | ||||
SECTION 4.08 |
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries |
76 | ||||
SECTION 4.09 |
Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock |
79 | ||||
SECTION 4.10 |
Asset Sales |
85 | ||||
SECTION 4.11 |
Transactions with Affiliates |
88 | ||||
SECTION 4.12 |
Liens |
91 | ||||
SECTION 4.13 |
Existence |
91 | ||||
SECTION 4.14 |
Offer to Repurchase Upon Change of Control |
92 | ||||
SECTION 4.15 |
Limitation on Guarantees of Indebtedness by Restricted Subsidiaries |
94 | ||||
SECTION 4.16 |
Termination of Certain Covenants |
95 | ||||
SECTION 4.17 |
Limitations on Business Activities |
95 | ||||
ARTICLE 5 SUCCESSORS | 96 | |||||
SECTION 5.01 |
Merger, Consolidation or Sale of All or Substantially All Assets |
96 | ||||
SECTION 5.02 |
Successor Corporation Substituted |
98 | ||||
ARTICLE 6 DEFAULTS AND REMEDIES | 98 | |||||
SECTION 6.01 |
Events of Default |
98 | ||||
SECTION 6.02 |
Acceleration |
101 | ||||
SECTION 6.03 |
Other Remedies |
101 | ||||
SECTION 6.04 |
Waiver of Defaults |
101 | ||||
SECTION 6.05 |
Control by Majority |
102 | ||||
SECTION 6.06 |
Limitation on Suits |
102 | ||||
SECTION 6.07 |
Rights of Holders of Notes to Receive Payment |
103 | ||||
SECTION 6.08 |
Collection Suit by Trustee |
103 | ||||
SECTION 6.09 |
Restoration of Rights and Remedies |
103 | ||||
SECTION 6.10 |
Rights and Remedies Cumulative |
103 | ||||
SECTION 6.11 |
Delay or Omission Not Waiver |
104 | ||||
SECTION 6.12 |
Trustee May File Proofs of Claim |
104 | ||||
SECTION 6.13 |
Priorities |
104 | ||||
SECTION 6.14 |
Undertaking for Costs |
105 | ||||
ARTICLE 7 TRUSTEE | 105 | |||||
SECTION 7.01 |
Duties of Trustee |
105 | ||||
SECTION 7.02 |
Rights of Trustee |
106 | ||||
SECTION 7.03 |
Individual Rights of Trustee |
107 | ||||
SECTION 7.04 |
Trustees Disclaimer |
108 | ||||
SECTION 7.05 |
Notice of Defaults |
108 |
ii
SECTION 7.06 |
Reports by Trustee to Holders of the Notes |
108 | ||||
SECTION 7.07 |
Compensation and Indemnity |
108 | ||||
SECTION 7.08 |
Replacement of Trustee |
109 | ||||
SECTION 7.09 |
Successor Trustee by Merger, etc. |
110 | ||||
SECTION 7.10 |
Eligibility; Disqualification |
111 | ||||
SECTION 7.11 |
Preferential Collection of Claims Against Issuer |
111 | ||||
ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE | 111 | |||||
SECTION 8.01 |
Option to Effect Legal Defeasance or Covenant Defeasance |
111 | ||||
SECTION 8.02 |
Legal Defeasance and Discharge |
111 | ||||
SECTION 8.03 |
Covenant Defeasance |
112 | ||||
SECTION 8.04 |
Conditions to Legal or Covenant Defeasance |
113 | ||||
SECTION 8.05 |
Deposited Money and Government Securities to Be Held in Trust; Other Miscellaneous Provisions |
114 | ||||
SECTION 8.06 |
Repayment to Issuer |
114 | ||||
SECTION 8.07 |
Reinstatement |
115 | ||||
ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER | 115 | |||||
SECTION 9.01 |
Without Consent of Holders of Notes |
115 | ||||
SECTION 9.02 |
With Consent of Holders of Notes |
116 | ||||
SECTION 9.03 |
Revocation and Effect of Consents |
118 | ||||
SECTION 9.04 |
Notation on or Exchange of Notes |
118 | ||||
SECTION 9.05 |
Trustee to Sign Amendments, etc. |
118 | ||||
SECTION 9.06 |
Payment for Consent |
119 | ||||
SECTION 9.07 |
Compliance with Trust Indenture Act |
119 | ||||
ARTICLE 10 GUARANTEES | 119 | |||||
SECTION 10.01 |
Guarantee |
119 | ||||
SECTION 10.02 |
Limitation on Guarantor Liability |
120 | ||||
SECTION 10.03 |
Execution and Delivery |
121 | ||||
SECTION 10.04 |
Subrogation |
121 | ||||
SECTION 10.05 |
Benefits Acknowledged |
121 | ||||
SECTION 10.06 |
Release of Guarantees |
122 | ||||
ARTICLE 11 SATISFACTION AND DISCHARGE | 122 | |||||
SECTION 11.01 |
Satisfaction and Discharge |
122 | ||||
SECTION 11.02 |
Application of Trust Money |
123 | ||||
ARTICLE 12 MISCELLANEOUS | 124 | |||||
SECTION 12.01 |
Notices |
124 | ||||
SECTION 12.02 |
Communication by Holders of Notes with Other Holders of Notes |
125 | ||||
SECTION 12.03 |
Certificate and Opinion as to Conditions Precedent |
125 |
iii
SECTION 12.04 |
Statements Required in Certificate or Opinion |
125 | ||||
SECTION 12.05 |
Rules by Trustee and Agents |
126 | ||||
SECTION 12.06 |
No Personal Liability of Directors, Officers, Employees and Stockholders |
126 | ||||
SECTION 12.07 |
Governing Law; Consent to Jurisdiction |
126 | ||||
SECTION 12.08 |
Waiver of Jury Trial |
127 | ||||
SECTION 12.09 |
Force Majeure |
127 | ||||
SECTION 12.10 |
No Adverse Interpretation of Other Agreements |
127 | ||||
SECTION 12.11 |
Successors |
127 | ||||
SECTION 12.12 |
Severability |
127 | ||||
SECTION 12.13 |
Counterpart Originals |
127 | ||||
SECTION 12.14 |
Table of Contents, Headings, etc. |
128 | ||||
SECTION 12.15 |
U.S.A. Patriot Act |
128 | ||||
SECTION 12.16 |
Trust Indenture Act Controls |
128 |
EXHIBITS
EXHIBIT A | Form of Note | |
EXHIBIT B | Form of Certificate of Transfer | |
EXHIBIT C | Form of Certificate of Exchange | |
EXHIBIT D | Form of Supplemental Indenture to Be Delivered by Subsequent Guarantors |
iv
INDENTURE, dated as of October 17, 2014, between Halyard Health, Inc., a Delaware corporation (the Issuer ), and Deutsche Bank Trust Company Americas, a New York banking corporation, as Trustee.
W I T N E S S E T H
WHEREAS, the Issuer has duly authorized the creation of an issue of $250,000,000 aggregate principal amount of 6.250% Senior Notes due 2022 (the Initial Notes ); and
WHEREAS, the Issuer has duly authorized the execution and delivery of this Indenture.
NOW, THEREFORE, the Issuer and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Notes (as defined herein).
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01 Definitions.
144A Global Note means a Global Note substantially in the form of Exhibit A hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of, and registered in the name of, the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the applicable series of Notes sold in reliance on Rule 144A.
Acquired Indebtedness means, with respect to any specified Person,
(1) Indebtedness of any other Person existing at the time such other Person is merged or consolidated with or into or became a Restricted Subsidiary of such specified Person, including Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Restricted Subsidiary of such specified Person, and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person;
provided that any Indebtedness of such other Person that is extinguished, redeemed, defeased, retired or otherwise repaid at the time of, or substantially concurrently with, the consummation of the transaction pursuant to which such other Person becomes a Restricted Subsidiary of the specified Person will not be Acquired Indebtedness.
Additional Interest means all additional interest then owing pursuant to the Registration Rights Agreement.
Additional Notes means additional Notes (other than the Initial Notes and any Exchange Notes issued in respect thereof) issued from time to time under this Indenture in accordance with Section 2.01 and Section 4.09 hereof.
Affiliate of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, control (including, with correlative meanings, the terms controlling , controlled by and under common control with ), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. No Person (other than the Issuer or any Subsidiary of the Issuer) in whom a Receivables Subsidiary makes an Investment in connection with a financing of accounts receivable will be deemed to be an Affiliate of the Issuer or any of its Subsidiaries solely by reason of such Investment.
Agent means any Registrar or Paying Agent.
Applicable Premium means, with respect to any Note on any redemption date, the greater of:
(1) 1.0% of the principal amount of such Note on such redemption date; and
(2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such Note at October 15, 2017 (such redemption price being set forth in the table appearing in Paragraph 5 on the reverse side of the Note attached as Exhibit A hereto), plus (ii) all required remaining interest payments due on such Note through October 15, 2017 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the applicable Treasury Rate as of such redemption date plus 50 basis points; over (b) the principal amount of such Note.
The Issuer shall determine the Applicable Premium.
Applicable Procedures means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary, Euroclear or Clearstream that apply to such transfer or exchange.
Asset Sale means:
(1) the sale, conveyance, transfer or other disposition, whether in a single transaction or a series of related transactions, of property or assets (including by way of a Sale and Leaseback Transaction) of the Issuer or any of its Restricted Subsidiaries (each referred to in this definition as a disposition ); or
(2) the issuance or sale of Equity Interests (other than directors qualifying shares or shares or interests required to be held by foreign nationals or other third parties to the extent required by applicable law) of any Restricted Subsidiary (other than Preferred Stock of Restricted Subsidiaries issued in compliance with Section 4.09), whether in a single transaction or a series of related transactions;
2
in each case, other than:
(a) any disposition of cash, Cash Equivalents or Investment Grade Securities or damaged, obsolete, unsuitable or worn out equipment or other assets, or assets no longer used or useful in the business of the Issuer and the Restricted Subsidiaries in the reasonable opinion of the Issuer, or any sale or disposition of property or assets in connection with scheduled turnarounds or maintenance, in each case in the ordinary course of business or any disposition of inventory, services or goods (or other assets) held for sale in the ordinary course of business;
(b) the disposition of all or substantially all of the assets of (1) the Issuer in a manner permitted pursuant to the provisions described under Section 5.01 hereof; or any disposition that constitutes a Change of Control pursuant to this Indenture or (2) any Guarantor to the extent that such disposition is made to a Person who either (A) is the Issuer or a Guarantor or (B) becomes a Guarantor pursuant to the provisions described under Section 5.01 hereof;
(c) the making of any Restricted Payment that is permitted to be made, and is made, under Section 4.07 hereof or any Permitted Investment;
(d) any disposition of assets or issuance or sale of Equity Interests of any Restricted Subsidiary in any transaction or series of transactions with an aggregate fair market value (as determined in good faith by the Issuer) not to exceed $15.0 million;
(e) any disposition of property or assets or issuance of securities by a Restricted Subsidiary to the Issuer or by the Issuer or a Restricted Subsidiary to another Restricted Subsidiary;
(f) to the extent allowable under Section 1031 of the Internal Revenue Code of 1986, or any comparable or successor provision, any exchange of like property (excluding any boot thereon) for use in a Similar Business;
(g) the lease, assignment or sub -lease of any real or personal property in the ordinary course of business;
(h) any issuance or sale of Equity Interests in, or Indebtedness or other securities of, an Unrestricted Subsidiary;
(i) foreclosures, condemnations or similar actions on assets (including transfers of property subject to casualty proceedings) or dispositions of assets required by law, governmental regulation or any order of any court, administrative agency or regulatory body;
(j) sales of accounts receivable, or participations therein and related assets, in connection with any Receivables Facility or similar factoring arrangements;
3
(k) the licensing or sub-licensing of intellectual property or other general intangibles in the ordinary course of business;
(l) sales, transfers and other dispositions of Investments in joint ventures to the extent required by, or made pursuant to, customary buy/sell arrangements or rights of first refusal between the joint venture parties set forth in joint venture arrangements and similar binding arrangements;
(m) the lapse or abandonment of intellectual property rights in the ordinary course of business, which in the reasonable good faith determination of the Issuer is not material to the conduct of the business of the Issuer and its Restricted Subsidiaries taken as a whole;
(n) the granting of Liens not prohibited by this Indenture;
(o) an issuance of Equity Interests pursuant to benefit plans, employment agreements, equity plans, stock subscription or shareholder agreements, stock ownership plans and other similar plans, polices, contracts or arrangements established in the ordinary course of business or approved by Issuer in good faith;
(p) any surrender or waiver of contract rights or the settlement, release, recovery on or surrender of contract, tort or other claims of any kind;
(q) dispositions of receivables in connection with the compromise, settlement or collection thereof in the ordinary course of business or in bankruptcy or similar proceedings and exclusive of factoring or similar arrangements;
(r) any financing transaction (excluding by way of a Sale and Leaseback Transaction) with respect to property constructed, acquired, replaced, repaired, or improved by the Issuer or any of its Restricted Subsidiaries after the Issue Date;
(s) the unwinding or termination of any Hedging Obligations;
(t) any other disposition pursuant to the Transactions; and
(u) dispositions of leasehold improvements or leased assets in connection with the termination of any operating lease.
Attributable Debt in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value of the total obligations of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction, including any period for which such lease has been extended or may, at the option of the lessor, be extended. Such present value shall be calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP.
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Bankruptcy Law means Title 11, U.S. Code or any similar federal or state law for the relief of debtors.
Business Day means each day which is not a Saturday, a Sunday or a day on which commercial banking institutions are not required to be open in the State of New York.
Capital Stock means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.
Capitalized Lease Obligation means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized and reflected as a liability on a balance sheet (excluding the footnotes thereto) in accordance with GAAP.
Cash Distribution means a cash distribution from the Issuer to Kimberly-Clark, in an amount determined by Kimberly-Clark, that will be funded on or prior to the Distribution Date with (i) the net cash proceeds from the Notes, plus (ii) the net cash proceeds from the term loan portion of the Senior Credit Facilities received by the Issuer on or before such distribution, plus (iii) cash held by the Issuer and its Restricted Subsidiaries on the distribution date plus (iv) the net cash proceeds resulting from the settlement of certain intercompany transactions between the Issuer and its Subsidiaries, on the one hand, and Kimberly-Clark and its subsidiaries, on the other hand, minus (v) an amount (to be not less than $40.0 million) determined by Kimberly-Clark to be retained by the Issuer or its Restricted Subsidiaries for working capital and other general corporate purposes of the Issuer and its Subsidiaries.
Cash Equivalents means:
(1) United States dollars;
(2) (a) euro, or any national currency of any member state of the European Union; or (b) in the case of any Foreign Subsidiary that is a Restricted Subsidiary, such local currencies held by them from time to time in the ordinary course of business;
(3) securities issued or directly and fully and unconditionally guaranteed or insured by (i) the U.S. government or any agency or instrumentality thereof or (ii) any foreign country whose sovereign debt is rated at least A1 by Moodys and at least A+ by S&P or any agency or
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instrumentality of such foreign country, in each case the securities of which are unconditionally guaranteed as a full faith and credit obligation of such government with maturities of 24 months or less from the date of acquisition;
(4) certificates of deposit, time deposits and dollar time deposits with maturities of one year or less from the date of acquisition, bankers acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any commercial bank having capital and surplus of not less than $500.0 million in the case of U.S. banks and $100.0 million (or the U.S. dollar equivalent as of the date of determination) in the case of non U.S. banks;
(5) repurchase obligations for underlying securities of the types described in clauses (3) and (4) of this definition above and clause (7) of this definition below entered into with any financial institution meeting the qualifications specified in clause (4) of this definition above;
(6) commercial paper rated at least P-1 by Moodys or at least A-1 by S&P (or, if at any time neither Moodys nor S&P shall be rating such obligations, an equivalent rating from another Rating Agency) and in each case maturing within 24 months after the date of creation thereof;
(7) marketable short term money market and similar securities having a rating of at least P-2 or A-2 from either Moodys or S&P, respectively (or, if at any time neither Moodys nor S&P shall be rating such obligations, an equivalent rating from another Rating Agency) and in each case maturing within 24 months after the date of creation thereof;
(8) readily marketable direct obligations issued by any state, commonwealth or territory of the United States or any political subdivision or taxing authority thereof having an Investment Grade Rating from either Moodys or S&P (or, if at any time neither Moodys nor S&P shall be rating such obligations, an equivalent rating from another Rating Agency) with maturities of 24 months or less from the date of acquisition;
(9) Investments with average maturities of 24 months or less from the date of acquisition in money market funds rated AAA (or the equivalent thereof) or better by S&P or Aaa3 (or the equivalent thereof) or better by Moodys (or, if at any time neither Moodys nor S&P shall be rating such obligations, an equivalent rating from another Rating Agency); and
(10) securities of, or other evidence of investments in, investment funds investing 95% of their assets in securities of the types described in clauses (1) through (9) of this definition above).
In the case of Investments by any Foreign Subsidiary that is a Restricted Subsidiary or Investments made in a country outside the United States of America, Cash Equivalents shall also include (i) investments of the type and maturity described in clauses (1) through (10) of this definition above of foreign obligors, which Investments or obligors (or the parents of such obligors) have ratings described in such clauses or equivalent ratings from comparable foreign rating agencies and (ii) other short-term investments utilized by Foreign Subsidiaries that are Restricted Subsidiaries in accordance with normal investment practices for cash management in investments analogous to the foregoing investments in clauses (1) through (10) of this definition and in this paragraph.
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Notwithstanding the foregoing, Cash Equivalents shall include amounts denominated in currencies other than those set forth in clauses (1) and (2) of this definition above; provided that such amounts are converted into any currency listed in clauses (1) and (2) of this definition as promptly as practicable and in any event within ten Business Days following the receipt of such amounts.
Change of Control means the occurrence of any of the following:
(1) the sale, lease or transfer, in one or a series of related transactions, of all or substantially all of the assets of the Issuer and its Subsidiaries, taken as a whole, to any Person;
(2) the Issuer becomes aware of (by way of a report or any other filing pursuant to Section 13(d) of the Exchange Act, proxy, vote, written notice or otherwise) the acquisition by any Person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act or any successor provision) in a single transaction or in a related series of transactions, by way of merger, consolidation or other business combination or purchase, of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision) of 50% or more of the total voting power of the Voting Stock of the Issuer (directly or through the acquisition of voting power of Voting Stock of any direct or indirect parent company of the Issuer); or
(3) the approval of any plan or proposal for the winding up or liquidation of the Issuer.
For purposes of this definition, any direct or indirect holding company of the Issuer shall not itself be considered a Person or group for purposes of clause (2) above; provided that no Person or group beneficially owns, directly or indirectly, 50% or more of the total voting power of the Voting Stock of such holding company. For the avoidance of doubt, the Separation and Distribution will not be considered a Change of Control.
Change of Control Repurchase Event means the occurrence of both a Change of Control and a Rating Decline.
Clearstream means Clearstream Banking, Société Anonyme.
Consolidated Depreciation and Amortization Expense means, with respect to any Person, for any period, the total amount of depreciation and amortization expense, including the amortization of deferred financing fees of such Person and its Restricted Subsidiaries for such period on a consolidated basis and otherwise determined in accordance with GAAP.
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Consolidated Fixed Charge Coverage Ratio means, as of any date of determination, the ratio of: EBITDA to Consolidated Interest Expense of the Issuer and its Restricted Subsidiaries for the most recently ended four full fiscal quarters ending immediately prior to such date for which internal financial statements are available.
In the event that the Issuer or any of its Restricted Subsidiaries (i) incurs, assumes, guarantees, redeems, retires or extinguishes any Indebtedness (other than Indebtedness incurred under any revolving credit facility or other incurrence of Indebtedness for working capital purposes pursuant to working capital facilities, unless, in each case, such Indebtedness has been permanently repaid and has not been replaced) or (ii) issues or redeems Disqualified Stock or Preferred Stock, in each case, on or subsequent to the commencement of the period for which the Consolidated Fixed Charge Coverage Ratio is being calculated but prior to or simultaneously with the event for which the calculation of the Consolidated Fixed Charge Coverage Ratio is made (the Consolidated Fixed Charge Coverage Ratio Calculation Date), then the Consolidated Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, guarantee, redemption, retirement or extinguishment of Indebtedness, or such issuance or redemption of Disqualified Stock or Preferred Stock, as if the same had occurred on the first day of the applicable four quarter period.
For purposes of making the computation referred to above, Investments, acquisitions, dispositions, mergers, amalgamations and consolidations (as determined in accordance with GAAP) and operational changes, in each case with respect to a business, a company, a segment, an operating division or unit or line of business that the Issuer or any of its Restricted Subsidiaries has determined to make and/or made during the four quarter reference period or subsequent to such reference period and on or prior to or simultaneously with the Consolidated Fixed Charge Coverage Ratio Calculation Date shall be calculated on a pro forma basis assuming that all such Investments, acquisitions, dispositions, mergers, amalgamations and consolidations and operational changes (and the change of any associated Fixed Charges and the change in EBITDA resulting therefrom) had occurred on the first day of the four quarter period. If since the beginning of such period any Person that subsequently became a Restricted Subsidiary or was merged with or into the Issuer or any of its Restricted Subsidiaries since the beginning of such period shall have made any Investment, acquisition, disposition, merger, amalgamation and consolidation and operational changes, in each case with respect to a business, a company, a segment, an operating division or unit or line of business that would have required adjustment pursuant to this definition, then the Consolidated Fixed Charge Coverage Ratio shall be calculated giving pro forma effect thereto for such period as if such Investment, acquisition, disposition, merger, amalgamation and consolidation and operational changes had occurred at the beginning of the applicable four quarter period.
For purposes of this definition, whenever pro forma effect is to be given to a transaction, the pro forma calculations shall be made in good faith by a responsible financial or accounting officer of the Issuer. Any such pro forma calculation may include adjustments appropriate, in the reasonable determination of the Issuer, as set forth in an Officers Certificate, to reflect reasonably identifiable and factually supportable cost-savings, operating expense reductions, restructuring charges and expenses and other operating improvements or synergies reasonably expected to result from any action taken or expected to be taken within 12 months after the date of any acquisition, disposition, merger, amalgamation, consolidation or operational changes;
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provided that no such amounts shall be included pursuant to this paragraph to the extent duplicative of any amounts that are otherwise added back in computing EBITDA with respect to such period.
If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the Consolidated Fixed Charge Coverage Ratio Calculation Date had been the applicable rate for the entire four quarter period (taking into account any Hedging Obligations applicable to such Indebtedness). Interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by a responsible financial or accounting officer of the Issuer to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP. For purposes of making the computation referred to above, interest on any Indebtedness under a revolving credit facility computed on a pro forma basis shall be computed based upon the average daily balance of such Indebtedness during the applicable four quarter period. Interest on Indebtedness that may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen, or, if none, then based upon such optional rate chosen as the Issuer may designate.
Consolidated Indebtedness means, as of any date of determination, the sum, without duplication, of (1) the total amount of (A) Indebtedness for borrowed money, (B) Indebtedness evidenced by bonds, notes (other than notes in favor of trade creditors evidencing trade payables incurred in the ordinary course of business), debentures or other similar instruments for the payment of which such Person is liable, (C) Capitalized Lease Obligations, (D) the Notes and (E) guarantees of the foregoing, in each case, of the Issuer and its Restricted Subsidiaries (excluding (x) Indebtedness in respect of letters of credit and bankers acceptances (or, without duplication, reimbursement agreements in respect thereof), except to the extent of unreimbursed amounts drawn thereunder, (y) intercompany Indebtedness and (z) Indebtedness in respect of Hedging Obligations not yet due and owing), outstanding on such date; minus (2) up to $40.0 million of unrestricted cash included in the consolidated balance sheet of the Issuer and its Restricted Subsidiaries, as of the most recently ended fiscal period (with such pro forma adjustments as are appropriate and consistent with the pro forma adjustment provisions set forth in the definition of Consolidated Fixed Charge Coverage Ratio as determined in good faith by the Issuer); plus (3) the greater of (i) the aggregate liquidation preference and (ii) maximum fixed repurchase price without regard to any change of control or redemption premiums of all Disqualified Stock of the Issuer and the Guarantors and all Preferred Stock of Restricted Subsidiaries, in each case determined on a consolidated basis in accordance with GAAP. For purposes of this definition, the maximum fixed repurchase price of any Disqualified Stock or Preferred Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Stock or Preferred Stock as if such Disqualified Stock or Preferred Stock were purchased on any date on which Consolidated Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Stock or Preferred Stock, such fair market value shall be the fair market value (as determined in good faith by the Issuer).
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Consolidated Interest Expense means, with respect to any Person for any period, without duplication, the sum of:
(1) consolidated interest expense of such Person and its Restricted Subsidiaries for such period to the extent such expense was deducted (and not added back) in computing Consolidated Net Income (including (a) amortization of original issue discount resulting from the issuance of Indebtedness at less than par, (b) all commissions, discounts and other fees and charges owed with respect to letters of credit or bankers acceptances, (c) non-cash interest expense (but excluding any non-cash interest expense attributable to the movement in the mark to market valuation of Hedging Obligations or other derivative instruments pursuant to GAAP), (d) the interest component of Capitalized Lease Obligations, (e) imputed interest with respect to Attributable Debt and (f) net payments, if any, pursuant to interest rate Hedging Obligations with respect to Indebtedness, and excluding (w) Additional Interest paid in respect of the Notes to the extent that the Issuer is no longer required to pay Additional Interest in respect thereof, (x) amortization of deferred financing fees, debt issuance costs, commissions, fees and expenses, (y) any expensing of bridge, commitment and other financing fees and (z) commissions, discounts, yield and other fees and charges (including any interest expense) related to any Receivables Facility); plus
(2) consolidated capitalized interest of such Person and such Subsidiaries for such period, whether paid or accrued; plus
(3) any interest expense of Indebtedness of another Person Guaranteed by such Person or one or more of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries to the extent such Guarantee or Lien is called upon; plus
(4) whether or not treated as interest expense in accordance with GAAP, all cash dividends or other distributions accrued (excluding dividends payable solely in Equity Interests (other than Disqualified Stock) of the Issuer) on any series of Disqualified Stock or any series of Preferred Stock during such period.
For purposes of this definition, interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by such Person to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP.
Consolidated Net Income means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, and otherwise determined in accordance with GAAP (it being understood that for purposes of calculating Consolidated Net Income of the Issuer and its Restricted Subsidiaries for any period prior to the Separation and Distribution, such calculation shall be based on the combined audited or unaudited financial statements of Kimberly-Clarks health care business included in the Offering Memorandum, as applicable); provided , however , that, without duplication:
(1) any after-tax effect of extraordinary, non-recurring or unusual gains, charges, costs, losses, income or expenses (including expenses relating to (a) severance and relocation costs or (b) any rebranding or corporate name change shall be excluded,
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(2) the Net Income for such period shall not include the cumulative effect of a change in accounting principles during such period,
(3) any after-tax effect of income (loss) from disposed, abandoned or discontinued operations and any net after-tax gains or losses on disposal of disposed, abandoned or discontinued operations shall be excluded,
(4) any after-tax effect of gains or losses (less all fees and expenses relating thereto) attributable to asset dispositions other than in the ordinary course of business, as determined in good faith by the Issuer, shall be excluded,
(5) the Net Income for such period of any Person that is not a Subsidiary, or is an Unrestricted Subsidiary, or that is accounted for by the equity method of accounting, shall be excluded; provided that Consolidated Net Income of the Issuer shall be increased by the amount of dividends or distributions or other payments that are actually paid in cash (or to the extent converted into cash or Cash Equivalents) to the Issuer or a Restricted Subsidiary in respect of such period,
(6) solely for the purposes of determining the amount available for Restricted Payments under clause (3) of Section 4.07(a), the Net Income for such period of any Restricted Subsidiary that is not a Guarantor shall be excluded if the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of its Net Income is not at the date of determination wholly permitted without any prior governmental approval (which has not been obtained) or, directly or indirectly, by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule, or governmental regulation applicable to that Restricted Subsidiary or its stockholders, unless such restriction with respect to the payment of dividends or similar distributions has been legally waived; provided that Consolidated Net Income of the Issuer will be increased by the amount of dividends or other distributions or other payments actually paid in cash (or to the extent converted into cash or Cash Equivalents) to the Issuer or a Restricted Subsidiary thereof in respect of such period, to the extent not already included therein,
(7) any after-tax effect of income (loss) from the early extinguishment of Indebtedness or Hedging Obligations or other derivative instruments shall be excluded,
(8) any royalties incurred during such period in connection with the Transactions and any fees and expenses incurred during such period, or any amortization thereof for such period, in connection with the Transactions and any acquisition, Investment, Asset Sale, issuance or repayment of Indebtedness, issuance of Equity Interests, refinancing transaction or amendment or modification of any debt instrument (in each case, including any such transaction consummated prior to the Issue Date and any such transaction undertaken but not completed) and any charges or non-recurring merger costs incurred during such period as a result of any such transaction shall be excluded;
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(9) to the extent covered by insurance and actually reimbursed, or, so long as the Issuer has made a determination that there exists reasonable evidence that such amount will in fact be reimbursed by the insurer and only to the extent that such amount is in fact reimbursed within 365 days of the date of such determination (with a deduction in the applicable future period for any amount so excluded to the extent not so reimbursed within such 365 day period), expenses, charges or losses with respect to liability or casualty events or business interruption shall be excluded;
(10) any non-cash compensation expense realized from employee benefit plans or other post-employment benefit plans, grants of stock appreciation or similar rights, stock options or other rights to officers, directors and employees of such Person or any of its Restricted Subsidiaries shall be excluded;
(11) any impairment charge or asset write-off, in each case, pursuant to GAAP and the amortization of intangibles arising pursuant to GAAP shall be excluded; and
(12) effects of adjustments in the property and equipment and other intangible assets, deferred revenue and debt line items in such Persons consolidated financial statements pursuant to GAAP resulting from the application of purchase accounting in relation to any consummated acquisition after the Escrow Release Date and any increase in amortization or depreciation or other noncash charges resulting therefrom and any write-off of any amounts thereof, net of taxes, shall be excluded.
Consolidated Secured Leverage Ratio , as of any date of determination, means the ratio of (1) Consolidated Indebtedness of the Issuer and its Restricted Subsidiaries that is secured by a Lien as of such date, to (2) EBITDA of the Issuer and its Restricted Subsidiaries for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding such date, in each case with such pro forma adjustments to Consolidated Indebtedness and EBITDA as are appropriate and consistent with the pro forma adjustment provisions set forth in the definition of Consolidated Fixed Charge Coverage Ratio.
Consolidated Total Leverage Ratio as of any date of determination, means the ratio of (1) Consolidated Indebtedness of the Issuer and its Restricted Subsidiaries, to (2) EBITDA of the Issuer and its Restricted Subsidiaries for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding such date, in each case with such pro forma adjustments to Consolidated Indebtedness and EBITDA as are appropriate and consistent with the pro forma adjustment provisions set forth in the definition of Consolidated Fixed Charge Coverage Ratio.
Contingent Obligations means, with respect to any Person, any obligation of such Person guaranteeing any leases, dividends or other obligations that do not constitute Indebtedness ( primary obligations ) of any other Person (the primary obligor ) in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent:
(1) to purchase any such primary obligation or any property constituting direct or indirect security therefor,
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(2) to advance or supply funds:
(a) for the purchase or payment of any such primary obligation, or
(b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, or
(c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation against loss in respect thereof.
Corporate Trust Office of the Trustee shall be at the address of the Trustee specified in Section 12.01 hereof or such other address as to which the Trustee may give notice to the Holders and the Issuer, or the designated corporate trust office of any successor Trustee (or such other address as such successor Trustee may designate from time to time by notice to the Holders and the Issuer).
Credit Facilities means, with respect to the Issuer or any of its Restricted Subsidiaries, one or more debt facilities, including the Senior Credit Facilities, or other financing arrangements (including, without limitation, commercial paper facilities, receivables financing or indentures) providing for revolving credit loans, term loans, letters of credit, bankers acceptances or other Indebtedness, including any notes, mortgages, guarantees, collateral documents, instruments and agreements executed in connection therewith, and any amendments, supplements, modifications, extensions, renewals, restatements or refundings thereof and any indentures or credit facilities or commercial paper facilities that replace, refund or refinance any part of the loans, notes, other credit facilities or commitments thereunder, including any such replacement, refunding or refinancing facility or indenture that increases the amount permitted to be borrowed thereunder or alters the maturity thereof ( provided that such increase in borrowings is permitted under Section 4.09 hereof) or adds Restricted Subsidiaries as additional borrowers or guarantors thereunder and whether by the same or any other agent, lender or group of lenders.
Custodian means the Trustee when serving as custodian for the Depositary with respect to the Global Notes, or any successor entity thereto.
Default means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default.
Definitive Notes means any certificated Note registered in the name of the Holder thereof and issued in accordance with Section 2.06(c) hereof, substantially in the form of Exhibit A hereto, except that such Note shall not bear the Global Note Legend and shall not have the Schedule of Exchanges of Interests in the Global Note attached thereto.
Depositary means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, and any and all successors thereto appointed as Depositary hereunder and having become such pursuant to the applicable provision of this Indenture.
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Designated Non-cash Consideration means the fair market value (as determined in good faith by the Issuer) of non-cash consideration received by the Issuer or any of its Restricted Subsidiaries in connection with an Asset Sale.
Disqualified Stock means, with respect to any Person, any Capital Stock of such Person which, by its terms, or by the terms of any security into which it is convertible or for which it is putable or exchangeable, or upon the happening of any event, matures or is mandatorily redeemable (other than solely as a result of a change of control or asset sale) pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof (other than solely as a result of a change of control or asset sale), in whole or in part, in each case prior to the date 91 days after the earlier of the maturity date of the Notes or the date the Notes are no longer outstanding; provided , however , that only the portion of Capital Stock which so matures or is mandatorily redeemable, is so convertible or exchangeable or is so redeemable at the option of the holder thereof prior to such date shall be deemed to be Disqualified Stock; provided , further , however , that if such Capital Stock is issued to any employee or any plan for the benefit of employees of the Issuer or its Subsidiaries or by any such plan to such employees, such Capital Stock shall not constitute Disqualified Stock solely because it may be required to be repurchased by the Issuer or its Subsidiaries in order to satisfy applicable statutory or regulatory obligations or as a result of any such employees termination, death or disability; provided , further , however , that any class of Capital Stock of such Person that by its terms authorizes such Person to satisfy its obligations thereunder by delivery of Capital Stock that is not Disqualified Stock shall not be deemed to be Disqualified Stock.
Distribution means Kimberly-Clarks distribution of the shares of the Issuers common stock to Kimberly-Clarks stockholders.
Distribution Agreement means the Distribution Agreement between Kimberly-Clark and the Issuer, to be dated on or prior to the Distribution Date.
Distribution Date means the date on which the Distribution is made.
Domestic Subsidiary means any Subsidiary that is organized or existing under the laws of the United States, any state thereof or the District of Columbia, but excluding any such Subsidiary that is a Subsidiary of a Foreign Subsidiary.
EBITDA means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period:
(1) increased, to the extent deducted (and not added back in computing Consolidated Net Income, without duplication), by:
(a) provision for taxes based on income or profits or capital gains, including, without limitation, federal, state, non-U.S. franchise, excise, value added and similar taxes and foreign withholding taxes of such Person paid or accrued during such period, including any penalties and interest relating to such taxes or arising from any tax examinations; plus
(b) Consolidated Interest Expense of such Person for such period; plus
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(c) Consolidated Depreciation and Amortization Expense of such Person for such period; plus
(d) any fees, expenses or charges related to any Equity Offering, Permitted Investment, acquisition, disposition, recapitalization or the incurrence, modification, amendment or repayment of Indebtedness permitted to be incurred by this Indenture (including a refinancing thereof) (whether or not successful), including (i) such fees, expenses or charges related to the offering of the Notes and the Senior Credit Facilities and the other Transactions and any amendment or modification of Indebtedness permitted to be incurred by this Indenture and (ii) commissions, discounts, yield and other fees, charges and expenses (including interest expense) related to any Receivables Facility; plus
(e) the amount of any restructuring charge or reserve, including any restructuring costs incurred in connection with acquisitions, mergers or consolidations after the Issue Date and costs related to the closure and/or consolidation of facilities, retention charges, systems establishment costs, excess pension charges and severance costs; plus
(f) any other non-cash charges, including any write offs or write downs and non-cash compensation expenses recorded from grants of stock appreciation or similar rights, stock options, restricted stock or other rights (provided that if any such non-cash charges represent an accrual or reserve for potential cash items in any future period, the cash payment in respect thereof in such future period shall be subtracted from EBITDA in such future period to the extent paid, but excluding from this proviso, for the avoidance of doubt, amortization of a prepaid cash item that was paid in a prior period); plus
(g) the amount of any minority interest expense consisting of Subsidiary income attributable to minority equity interests of third parties in any non-Wholly Owned Subsidiary; plus
(h) the amount of loss on sale of receivables and related assets to the Receivables Subsidiary in connection with a Receivables Facility; plus
(i) any costs or expense incurred by the Issuer or a Restricted Subsidiary pursuant to any management equity plan or stock option plan or any other management or employee benefit plan or agreement or any stock subscription or shareholder agreement, to the extent that such cost or expenses are funded with cash proceeds contributed to the capital of the Issuer or net cash proceeds of an issuance of Equity Interest of the Issuer (other than Disqualified Stock) solely to the extent that such net cash proceeds are excluded from the calculation set forth in clause (3) of Section 4.07(a) hereof; plus
(j) the amount of cost savings, operating expense reductions, other operating improvements and initiatives and synergies projected by the Issuer in good faith to be reasonably anticipated to be realizable within 12 months of the
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date of any Investment, acquisition, disposition, merger, consolidation, restructuring, cost-savings initiative, or initiative or other action being given pro forma effect (which will be added to EBITDA as so projected until fully realized and calculated on a pro forma basis as though such cost savings, operating expense reductions, other operating improvements and initiatives and synergies had been realized on the first day of such period), net of the amount of actual benefits realized during such period from such actions; provided that (x) substantially all steps have been taken or procedures are in place for realizing such cost savings, operating expense reductions, other operating improvements and initiatives and synergies and (y) such cost savings, operating expense reductions, other operating improvements and initiatives and synergies are reasonably identifiable and factually supportable (in the good faith determination of the Issuer);
(2) decreased by (without duplication) non-cash gains increasing Consolidated Net Income of such Person for such period, excluding any non-cash gains to the extent they represent the accrual of revenue in the ordinary course of business or the reversal of an accrual or reserve for a potential cash item that reduced EBITDA in any prior period; and
(3) increased or decreased by (without duplication):
(a) any net loss or gain resulting in such period from Hedging Obligations and the application of Financial Accounting Codification No. 815-Derivatives and Hedging;
(b) any net loss or gain resulting in such period from currency translation gains or losses related to currency remeasurements of Indebtedness (including any net loss or gain resulting from hedge agreements for currency exchange risk); and
(c) any adjustment of the nature used in connection with the calculation of Adjusted EBITDA, as set forth in footnote 3 to the section SummarySummary Historical and Pro Forma Combined Financial Data in the Offering Memorandum.
Employee Matters Agreement means the Employee Matters Agreement between Kimberly-Clark and the Issuer, to be dated on or prior to the Distribution Date.
EMU means economic and monetary union as contemplated in the Treaty on European Union.
Escrow Agent means Deutsche Bank Trust Company Americas, as the escrow agent.
Escrow Agreement means the Escrow Agreement, dated as of the Issue Date, among the Issuer, Trustee and the Escrow Agent.
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Equity Interests means Capital Stock and all warrants, options or other rights to acquire Capital Stock, but excluding any debt security that is convertible into, or exchangeable for, Capital Stock.
Equity Offering means any public or private sale of common stock or Preferred Stock of the Issuer (excluding Disqualified Stock), other than:
(1) public offerings with respect to any of the Issuers common stock registered on Form S-4 or Form S-8;
(2) issuances to any Subsidiary of the Issuer; and
(3) Refunding Capital Stock.
euro means the single currency of participating member states of the EMU.
Euroclear means Euroclear S.A./N.V., as operator of the Euroclear system.
Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder.
Exchange Notes means the Notes of the Issuer issued pursuant to this Indenture in exchange for, and in an aggregate principal amount equal to, the Initial Notes or any Additional Notes in compliance with the terms of the applicable Registration Rights Agreement and containing terms substantially identical to the Initial Notes or any Additional Notes, as applicable (except that (1) such Exchange Notes will be registered under the Securities Act and will not be subject to transfer restrictions or bear the Private Placement Legend, and (2) the provisions relating to Additional Interest will be eliminated).
Exchange Offer means an offer by the Issuer to the Holders of the Initial Notes or any Additional Notes to exchange outstanding Notes for Exchange Notes, as provided for in the applicable Registration Rights Agreement.
Exchange Offer Registration Statement means the Exchange Offer Registration Statement as defined in the applicable Registration Rights Agreement.
Exchanging Dealer means a broker-dealer that holds Notes that were acquired for its own account as a result of market-making activities or other trading activities (other than Notes acquired directly from the Issuer or any of its Affiliates) that is participating in the Exchange Offer contemplated by the applicable Registration Rights Agreement.
Foreign Subsidiary means any Subsidiary that is not a Domestic Subsidiary.
Form 10 means the registration statement on Form 10 originally filed by the Issuer with the SEC on May 6, 2014, as amended or supplemented.
GAAP means generally accepted accounting principles in the United States which are in effect on the Issue Date except with respect to any reports or financial information required to be delivered pursuant to Section 4.03, which shall be prepared in accordance with GAAP as in effect on the date thereof.
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Global Note Legend means the legend set forth in Section 2.06(g)(ii) hereof, which is required to be placed on all Global Notes issued under this Indenture.
Global Notes means, individually and collectively, each of the Restricted Global Notes and the Unrestricted Global Notes, substantially in the form of Exhibit A hereto, as the case may be, issued in accordance with Section 2.01, Section 2.06(b), Section 2.06(d) or Section 2.06(f) hereof.
Government Securities means securities that are:
(1) direct obligations of, or obligations guaranteed by, the United States of America for the timely payment of which its full faith and credit is pledged; or
(2) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America,
which, in either case, are not callable or redeemable at the option of the issuers thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such Government Securities or a specific payment of principal of or interest on any such Government Securities held by such custodian for the account of the holder of such depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Securities or the specific payment of principal of or interest on the Government Securities evidenced by such depository receipt.
guarantee means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness or other obligations.
Guarantee means the guarantee by any Guarantor of the Issuers Obligations under the Notes and this Indenture.
Guarantor means each Restricted Subsidiary that incurs a Guarantee of the Notes; provided that upon the release or discharge of such Person from its Guarantee in accordance with this Indenture, such Person automatically ceases to be a Guarantor.
Hedging Obligations means, with respect to any Person, the obligations of such Person under any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, commodity swap agreement, commodity cap agreement, commodity collar agreement, foreign exchange contract, currency swap agreement or similar agreement providing
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for the transfer or mitigation of interest rate, commodity price or currency risks either generally or under specific contingencies (including indemnity agreements or arrangements in connection with the foregoing).
Holder means the Person in whose name a Note is registered on the Registrars books.
Indebtedness means, with respect to any Person, without duplication:
(1) any indebtedness (including principal and premium) of such Person, whether or not contingent:
(a) in respect of borrowed money;
(b) evidenced by bonds, notes, debentures or similar instruments or letters of credit or bankers acceptances (or, without duplication, reimbursement agreements in respect thereof);
(c) representing the balance deferred and unpaid of the purchase price of any property or services, except (i) any such balance that constitutes a trade payable or similar obligation to a trade creditor, in each case accrued in the ordinary course of business, (ii) any earn-out obligations until such obligation becomes due and payable and is not so paid, and (iii) liabilities accrued in the ordinary course of business; or
(d) representing any Hedging Obligations,
if and to the extent that any of the foregoing Indebtedness (other than letters of credit, bankers acceptances (or reimbursement agreements in respect thereof) and Hedging Obligations) would appear as a liability upon a balance sheet (excluding the footnotes thereto) of such Person prepared in accordance with GAAP;
(2) all Attributable Debt and all Capitalized Lease Obligations;
(3) to the extent not otherwise included, any obligation by such Person to be liable for, or to pay, as obligor, guarantor or otherwise, on Indebtedness of the type referred to in clause (1) of a third Person (whether or not such items would appear upon the balance sheet of such obligor or guarantor), other than by endorsement of negotiable instruments for collection in the ordinary course of business; and
(4) to the extent not otherwise included, Indebtedness of the type referred to in clause (1) of a third Person secured by a Lien on any asset owned by such first Person (other than Liens on Equity Interests of Unrestricted Subsidiaries securing Indebtedness of such Unrestricted Subsidiaries), whether or not such Indebtedness is assumed by such first Person; provided , for purposes hereof the amount of such Indebtedness shall be the lesser of the Indebtedness so secured and the fair market value of the assets of the first person securing such Indebtedness;
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provided , however , that notwithstanding the foregoing, Indebtedness shall be deemed not to include (a) Contingent Obligations incurred in the ordinary course of business, (b) deferred or prepaid revenues, or (c) obligations under or in respect of Receivables Facilities. Furthermore, notwithstanding the foregoing, any Indebtedness that has been defeased in accordance with GAAP or defeased pursuant to the deposit of cash or Cash Equivalents (in an amount sufficient to satisfy all such obligations relating to Indebtedness at maturity or redemption, as applicable, and all payments of interest and premium, if any) in a trust or account created or pledged for the sole benefit of the holders of such Indebtedness, and subject to no other Liens, and the other applicable terms of the instrument governing such Indebtedness, shall not constitute or be deemed Indebtedness; provided that such defeasance has been made in a manner not prohibited by this Indenture.
Indenture means this Indenture, as amended or supplemented from time to time.
Independent Financial Advisor means an accounting, appraisal, investment banking firm or consultant to Persons engaged in Similar Businesses of nationally recognized standing that is, in the good faith judgment of the Issuer, qualified to perform the task for which it has been engaged.
Indirect Participant means a Person who holds a beneficial interest in a Global Note through a Participant.
Initial Notes has the meaning assigned to such term in the recitals hereto.
Initial Purchasers means Morgan Stanley &Co. LLC (as Representative ) and the other Initial Purchasers represented by such Representative.
Intellectual Property Agreements means each of the intellectual property license agreements and trademark license agreements between Kimberly-Clark or its Subsidiaries and the Issuer or its Subsidiaries, to be dated on or prior to the Distribution Date.
interest in respect of the Notes, unless the context otherwise requires, means interest and Additional Interest, if any.
Interest Payment Date means April 15 and October 15 of each year to stated maturity.
Investment Grade Rating means a rating equal to or higher than Baa3 (or the equivalent) by Moodys and BBB- (or the equivalent) by S&P, or an equivalent rating by any other Rating Agency, and in each such case with a stable or better outlook.
Investment Grade Securities means:
(1) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof (other than Cash Equivalents);
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(2) debt securities or debt instruments with an Investment Grade Rating, but excluding any debt securities or instruments constituting loans or advances among the Issuer and its Subsidiaries;
(3) investments in any fund that invests exclusively in investments of the type described in clauses (1) and (2) which fund may also hold immaterial amounts of cash pending investment or distribution; and
(4) corresponding instruments in countries other than the United States customarily utilized for high quality investments.
Investments means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the form of loans (including guarantees), advances or capital contributions (excluding accounts receivable, trade credit, deposits, advances to customers, dealers, distributors and suppliers, commission, payroll, travel and similar advances to officers and employees, in each case made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities issued by any other Person and investments that are required by GAAP to be classified on the balance sheet (excluding the footnotes) of such Person in the same manner as the other investments included in this definition to the extent such transactions involve the transfer of cash or other property. For purposes of the definition of Unrestricted Subsidiary and Section 4.07 hereof:
(1) Investments shall include the portion (proportionate to the Issuers direct or indirect equity interest in such Subsidiary) of the fair market value (as determined in good faith by the Issuer) of the net assets of a Subsidiary of the Issuer at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided , however , that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Issuer or applicable Restricted Subsidiary shall be deemed to continue to have a permanent Investment in an Unrestricted Subsidiary in an amount (if positive) equal to:
(a) the Issuers direct or indirect Investment in such Subsidiary at the time of such redesignation; less
(b) the portion (proportionate to the Issuers direct or indirect equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, as determined in good faith by the Issuer.
If the Issuer or any Restricted Subsidiary sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary, the Issuer will be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed. The acquisition by the Issuer or any Restricted Subsidiary of a Person that holds an Investment in a third Person will be deemed to be an Investment by the Issuer or such Restricted Subsidiary in such third Person in an amount equal to the fair market value of the Investment held by the acquired Person in such third Person
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The amount of any Investment outstanding at any time shall be the original cost of such Investment, reduced by any dividend, distribution, interest payment, return of capital, repayment or other amount received in cash by Issuer or a Restricted Subsidiary in respect of such Investment.
Issue Date means October 17, 2014.
Issuer has the meaning set forth in the Preamble hereto.
Issuer Order means a written request or order signed on behalf of the Issuer by Officers of the Issuer, who must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Issuer, and delivered to the Trustee.
Kimberly-Clark means Kimberly-Clark Corporation, a Delaware corporation.
Lien means, with respect to any asset, any mortgage, lien (statutory or otherwise), pledge, hypothecation, charge, security interest, preference, priority or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or similar agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction; provided that in no event shall an operating lease be deemed to constitute a Lien.
Manufacturing and Supply Agreements means one or more manufacturing and supply, distribution and non-competition agreements between Kimberly-Clark and the Issuer (or their respective Affiliates) to be dated on or prior to the Distribution Date.
Moodys means Moodys Investors Service, Inc. and any successor to its rating agency business.
Net Income means, with respect to any Person, the net income (loss) attributable to such Person and its Restricted Subsidiaries, determined in accordance with GAAP and before any reduction in respect of Preferred Stock dividends.
Net Proceeds means the aggregate cash proceeds and the fair market value of any Cash Equivalents received by the Issuer or any of its Restricted Subsidiaries in respect of any Asset Sale, including any cash received upon the sale or other disposition of any Designated Non-cash Consideration received in any Asset Sale, net of the direct costs relating to such Asset Sale and the sale or disposition of such Designated Non-cash Consideration, including legal, accounting and investment banking fees, and brokerage and sales commissions, any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), in the case of any Asset Sale by a Restricted Subsidiary that is not a Wholly Owned Subsidiary, the pro-rata portion of the net proceeds thereof attributable to minority interests and not available for distribution to or
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for the account of the Issuer or a Restricted Subsidiary, amounts required to be applied to the repayment of principal, premium, if any, and interest on Indebtedness (other than Subordinated Indebtedness) required (other than required by clause (1) of Section 4.10(b) hereof) to be paid as a result of such transaction, any costs associated with unwinding any related Hedging Obligations in connection with such transaction and any deduction of appropriate amounts to be provided by the Issuer or any of its Restricted Subsidiaries as a reserve in accordance with GAAP against any liabilities associated with the asset disposed of in such transaction and retained by the Issuer or any of its Restricted Subsidiaries after such sale or other disposition thereof, including pension and other post-employment benefit liabilities and liabilities related to environmental matters or against any indemnification obligations associated with such transaction.
Non-Guarantor Subsidiary means any Restricted Subsidiary that is not a Guarantor.
Non-U.S. Person means a Person who is not a U.S. Person.
Notes means any Note authenticated and delivered under this Indenture, including without limitation the Initial Notes. For all purposes of this Indenture, the term Notes shall also include any Additional Notes that may be issued hereafter and any Exchange Notes.
Obligations means any principal (including any accretion), interest (including any interest accruing subsequent to the filing of a petition in bankruptcy, reorganization or similar proceeding at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable state, federal or foreign law), penalties, fees, indemnifications, reimbursements (including reimbursement obligations with respect to letters of credit and bankers acceptances), damages and other liabilities, and guarantees of payment of such principal (including any accretion), interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities, payable under the documentation governing any Indebtedness.
Offering Memorandum means the offering memorandum, dated October 2, 2014, relating to the sale of the Initial Notes.
Officer means the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, the President, any Executive Vice President, Senior Vice President or Vice President, the Treasurer, Assistant Treasurer, the Secretary or the Assistant Secretaries of the Issuer.
Officers Certificate means a certificate signed on behalf of the Issuer by an Officer of the Issuer, who must be the principal executive officer, the principal financial officer or the principal accounting officer of the Issuer that meets the requirements set forth in this Indenture.
Opinion of Counsel means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Issuer.
Pari Passu Indebtedness means indebtedness of the Issuer or a Guarantor that ranks equally in right of payment with the Notes or such Guarantors Guarantee, as applicable.
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Participant means, with respect to the Depositary, Euroclear or Clearstream, a Person who has an account with the Depositary, Euroclear or Clearstream, respectively (and, with respect to DTC, shall include Euroclear and Clearstream).
Permitted Investments means:
(1) any Investment in the Issuer or any of its Restricted Subsidiaries;
(2) any Investment in cash, Cash Equivalents or Investment Grade Securities;
(3) any Investment by the Issuer or any of its Restricted Subsidiaries in a Person that is engaged in a Similar Business if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary; or
(b) such Person, in one transaction or a series of related transactions, is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Issuer or a Restricted Subsidiary; and, in each case, any Investment held by such Person,
provided , that such Investment was not acquired by such Person in contemplation of such acquisition, merger, consolidation or transfer;
(4) any Investment in securities or other assets not constituting cash or Cash Equivalents or Investment Grade Securities and received in connection with an Asset Sale made pursuant to the provisions of Section 4.10 hereof or any other disposition of assets not constituting an Asset Sale;
(5) any Investment (a) existing on the Issue Date or made pursuant to binding commitments in effect on the Issue Date or an Investment consisting of any replacement, extension, modification or renewal of any Investment existing on the Issue Date; provided that the amount of any such Investment may only be increased as required by the terms of such Investment as in existence on the Issue Date, or (b) made or acquired pursuant to the Transactions;
(6) any Investment acquired by the Issuer or any of its Restricted Subsidiaries:
(a) in exchange for any other Investment or accounts receivable held by the Issuer or any such Restricted Subsidiary in connection with or as a result of a bankruptcy workout, reorganization or recapitalization of the issuer of such other Investment or accounts receivable;
(b) as a result of a foreclosure by the Issuer or any of its Restricted Subsidiaries with respect to any secured Investment or other transfer of title with respect to any secured Investment in default; or
(c) as a result of the settlement, compromise or resolution of litigation, arbitration or other disputes or in satisfaction of judgments against other Persons, in each case, with Persons who are not Affiliates of the Issuer;
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(7) Hedging Obligations permitted under clause (9) of Section 4.09(b) hereof;
(8) Investments the payment for which consists of Equity Interests (exclusive of Disqualified Stock) of the Issuer;
(9) guarantees of Indebtedness permitted under Section 4.09 hereof;
(10) any transaction to the extent it constitutes an Investment that is permitted and made in accordance with the provisions of Section 4.11(b) hereof (except transactions described in clauses (2), (6), (8), (9) and (11) of Section 4.11(b) hereof);
(11) Investments consisting of (x) purchases and acquisitions of inventory, supplies, material, services or equipment, or other similar assets or purchases of contract rights or licenses or leases of intellectual property, in each case in the ordinary course of business or (y) the licensing or contribution of intellectual property pursuant to joint marketing arrangements with other Persons;
(12) additional Investments having an aggregate fair market value (as determined in good faith by the Issuer), taken together with all other Investments made pursuant to this clause (12) that are at that time outstanding (without giving effect to the sale of an Unrestricted Subsidiary to the extent the proceeds of such sale do not consist of cash or marketable securities), not to exceed the greater of (x) $125.0 million and (y) 5.0% of Total Assets at the time of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value);
(13) Investments in a Receivables Subsidiary or any Investment by a Receivables Subsidiary in any Person that, in the good faith determination of the Issuer is necessary or advisable to effect any Receivables Facility or any repurchases in connection therewith;
(14) advances to, or guarantees of Indebtedness of, officers, directors and employees not in excess of $10.0 million outstanding at any one time, in the aggregate;
(15) loans and advances to officers, directors and employees for business-related travel expenses, moving expenses, payroll expenses and other similar expenses, in each case incurred in the ordinary course of business or consistent with past practices or to fund such Persons purchase of Equity Interests of the Issuer;
(16) any Investment by the Issuer or any of its Restricted Subsidiaries in an Unrestricted Subsidiary or a joint venture engaged in a Similar Business in an aggregate amount, taken together with all other Investments made pursuant to this clause (16) that are at the time outstanding, not to exceed the greater of (x) $100.0 million and (y) 4.0% of Total Assets (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value);
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(17) any Investment in any Subsidiary or joint venture in connection with intercompany cash management arrangements or related activities arising in the ordinary course of business;
(18) advances, guarantees, endorsements for collection or deposit or customary trade arrangements with customers, suppliers, vendors or distributors in the ordinary course of business;
(19) lease, utility and other similar deposits in the ordinary course of business; and
(20) guarantees by the Issuer or any of its Restricted Subsidiaries of operating leases or of other obligations that do not constitute Indebtedness, in each case entered into by the Issuer or any Restricted Subsidiary in the ordinary course of business.
Permitted Liens means, with respect to any Person:
(1) pledges, deposits or security by such Person under workmens compensation laws, unemployment insurance, employers health tax, and other social security laws or similar legislation or other insurance related obligations (including, but not limited to, in respect of deductibles, self-insured retention amounts and premiums and adjustments thereto) or indemnification obligations of (including obligations in respect of letters of credit or bank guarantees for the benefit of) insurance carriers providing property, casualty or liability insurance, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of cash or U.S. government bonds to secure surety, stay, customs or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, performance and return of money bonds and other similar obligations (including letters of credit issued in lieu of any such bonds or to support the issuance thereof and including those to secure health, safety and environmental obligations), in each case incurred in the ordinary course of business;
(2) Liens imposed by law or regulation, such as carriers, warehousemens and mechanics Liens, in each case for sums not yet overdue for a period of more than 30 days or being contested in good faith by appropriate proceedings or other Liens arising out of judgments or awards against such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review if adequate reserves with respect thereto are maintained on the books of such Person in accordance with GAAP;
(3) Liens for taxes, assessments or other governmental charges not yet overdue for a period of more than 30 days or which are being contested in good faith by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of such Person in accordance with GAAP;
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(4) Liens in favor of issuers of performance, surety bonds or bid, indemnity, warranty, release, appeal or similar bonds or with respect to other regulatory requirements or letters of credit issued pursuant to the request of and for the account of such Person in the ordinary course of its business;
(5) survey exceptions, encumbrances, easements or reservations of, or rights of others for, licenses, rights-of-way, sewers, electric lines, telegraph and telephone lines, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not incurred in connection with Indebtedness or other covenants, conditions, restrictions and minor defects or irregularities in title ( Other Encumbrances ), in each case which Liens and Other Encumbrances do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person;
(6) Liens securing Indebtedness permitted to be incurred pursuant to clause (4) or (17) of Section 4.09(b) hereof; provided that (x) Liens securing Indebtedness permitted to be incurred pursuant to clause (4) of Section 4.09(b) hereof extend only to the assets and/or Capital Stock, the acquisition, lease, construction, repair, replacement or improvement of which is financed thereby and any replacements, additions and accessions thereto and any income or profits thereof, and (y) Liens securing Indebtedness permitted to be incurred pursuant to clause (17) of Section 4.09(b) hereof extend only to the assets of Non-Guarantor Subsidiaries;
(7) Liens existing on the Issue Date or incurred in connection with the Transactions (other than incurred under the Senior Credit Facilities);
(8) Liens on property or shares of stock of a Person at the time such Person becomes a Subsidiary; provided , however , such Liens are not created or incurred in connection with, or in contemplation of, such other Person becoming such a Subsidiary; provided further , however , that such Liens may not extend to any other property owned by the Issuer or any of its Restricted Subsidiaries;
(9) Liens on property at the time the Issuer or a Restricted Subsidiary acquired the property, including any acquisition by means of a merger or consolidation with or into the Issuer or any of its Restricted Subsidiaries; provided , however , that such Liens are not created or incurred in connection with, or in contemplation of, such acquisition, merger or consolidation; provided , further , however , that the Liens may not extend to any other property owned by the Issuer or any of its Restricted Subsidiaries;
(10) Liens securing Indebtedness or other obligations of a Restricted Subsidiary owing to the Issuer or any Restricted Subsidiary permitted to be incurred in accordance with Section 4.09(b) hereof;
(11) Liens securing Hedging Obligations;
(12) Liens on specific items of inventory or other goods and proceeds of any Person securing such Persons obligations in respect of bankers acceptances or trade letters of credit issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods;
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(13) (a) leases, subleases, licenses or sublicenses (including of real property and intellectual property) granted to others in the ordinary course of business and, (b) with respect to any leasehold interest held by the Issuer or any of its Subsidiaries, the terms of the leases granting such leasehold interest and the rights of lessors thereunder, in the case of each of (a) and (b) which do not materially interfere with the ordinary conduct of the business of the Issuer or any of its Restricted Subsidiaries and do not secure any Indebtedness;
(14) Liens arising from Uniform Commercial Code (or equivalent statute) financing statement filings regarding operating leases entered into by the Issuer and its Restricted Subsidiaries in the ordinary course of business;
(15) Liens in favor of the Issuer or any Guarantor;
(16) Liens on equipment of the Issuer or any of its Restricted Subsidiaries granted in the ordinary course of business;
(17) Liens on accounts receivable and related assets incurred in connection with a Receivables Facility;
(18) Liens to secure any refinancing, refunding, extension, renewal or replacement (or successive refinancings, refundings, extensions, renewals or replacements) as a whole, or in part, of any Indebtedness secured by any Lien referred to in the foregoing clauses (6), (7), (8), (9) and this clause (18); provided , however , that (a) such new Lien shall be limited to all or part of the same property that secured the original Lien (plus improvements on such property), and (b) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (i) the outstanding principal amount or, if greater, committed amount of the Indebtedness described under clauses (6), (7), (8), (9) and this clause (18) at the time the original Lien became a Permitted Lien under this Indenture, and (ii) an amount necessary to pay any fees and expenses, including premiums, and accrued and unpaid interest related to such refinancing, refunding, extension, renewal or replacement;
(19) Liens on insurance policies and proceeds thereof, or other deposits, to secure insurance premium financings, in each case, made in the ordinary course of business;
(20) other Liens securing Obligations which do not exceed the greater of (x) $50.0 million and (y) 2.0% of Total Assets in aggregate principal amount at any one time outstanding;
(21) Liens securing judgments for the payment of money not constituting an Event of Default under clause (5) under Section 6.01 hereof so long as such Liens are adequately bonded and any appropriate legal proceedings that may have been duly initiated for the review of such judgment have not been finally terminated or the period within which such proceedings may be initiated has not expired;
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(22) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;
(23) Liens (i) of a collection bank arising under Section 4-210 of the Uniform Commercial Code or any comparable or successor provision on items in the course of collection, (ii) attaching to commodity trading accounts or other commodity brokerage accounts incurred in the ordinary course of business, and (iii) in favor of banking or other financial institutions arising as a matter of law or pursuant to customary depositary terms encumbering deposits (including the right of set-off) and which are within the general parameters customary in the banking industry;
(24) Liens deemed to exist in connection with Investments in repurchase agreements permitted under Section 4.09 hereof; provided that such Liens do not extend to any assets other than those that are the subject of such repurchase agreement;
(25) Liens encumbering reasonable customary initial deposits and margin deposits and similar Liens attaching to commodity trading accounts or other brokerage accounts incurred in the ordinary course of business and not for speculative purposes;
(26) bankers liens, Liens that are statutory, common law or contractual rights of set-off and other similar Liens, in each case (i) relating to the establishment of depository relations with banks not given in connection with the issuance of Indebtedness, (ii) relating to pooled deposit or sweep accounts of the Issuer or any of its Restricted Subsidiaries to permit satisfaction of overdraft or similar obligations incurred in the ordinary course of business of the Issuer and its Restricted Subsidiaries or (iii) relating to purchase orders and other agreements entered into with customers of the Issuer or any of its Restricted Subsidiaries in the ordinary course of business;
(27) Liens on assets of Non-Guarantor Subsidiaries securing Indebtedness of such Non-Guarantor Subsidiary;
(28) Liens on the Equity Interests of Unrestricted Subsidiaries that secure Indebtedness of such Unrestricted Subsidiaries;
(29) any encumbrance or restriction (including put and call arrangements) with respect to capital stock of any joint venture or similar arrangement pursuant to any joint venture or similar agreement;
(30) Liens on property or assets used to defease or to irrevocably satisfy and discharge Indebtedness; provided that such defeasance or satisfaction and discharge is not prohibited by this Indenture;
(31) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into in the ordinary course of business;
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(32) Liens incurred to secure cash management services or to implement cash pooling arrangements in the ordinary course of business; and
(33) Liens solely on any cash earnest money deposits made by the Issuer or any of its Restricted Subsidiaries in connection with any letter of intent or purchase agreement in respect of any Investment permitted hereunder.
For purposes of this definition, the term Indebtedness shall be deemed to include interest on and the costs in respect of such Indebtedness.
Person means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.
Preferred Stock means any Equity Interest with preferential rights of payment of dividends or upon liquidation, dissolution, or winding up.
Private Placement Legend means the legend set forth in Section 2.06(g)(i) hereof to be placed on all Notes issued under this Indenture, except where otherwise permitted by the provisions of this Indenture.
QIB means a qualified institutional buyer as defined in Rule 144A.
Rating Agencies means Moodys and S&P or if Moodys or S&P or both shall not make a rating on the Notes publicly available, a nationally recognized statistical rating agency or agencies, as the case may be, selected by the Issuer which shall be substituted for Moodys or S&P or both, as the case may be.
Rating Category means (a) with respect to S&P, any of the following categories: BB, B, CCC, CC, C and D (or equivalent successor categories); (b) with respect to Moodys, any of the following categories: Ba, B, Caa, Ca, C and D (or equivalent successor categories); and (c) the equivalent of any such category of S&P or Moodys used by another Rating Agency selected by the Issuer. In determining whether the rating of the Notes has decreased by one or more gradations, gradations within Rating Categories ((i) + and for S&P; (ii) 1, 2 and 3 for Moodys; and (iii) the equivalent gradations for another Rating Agency selected by the Issuer) shall be taken into account (e.g., with respect to S&P, a decline in a rating from BB+ to BB, or from BB- to B+, will constitute a decrease of one gradation).
Rating Date means the date which is 90 days prior to the earlier of (a) a Change of Control or (b) public notice of the occurrence of a Change of Control or of the intention by the Issuer to effect a Change of Control.
Rating Decline with respect to the Notes shall be deemed to occur if, within 90 days after public notice of the occurrence of a Change of Control (which period shall be extended so long as the rating of the Notes is under publicly announced consideration for possible downgrade by either of the Rating Agencies with respect to a Rating Category), the rating of the Notes by each Rating Agency shall be decreased by one or more gradations to or within a Rating Category (including gradations within Rating Categories as well as between Rating Categories) as compared to the rating of the Notes on the Rating Date.
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Receivables Facility means any of one or more securitization or receivables financing facilities as amended, supplemented, modified, extended, renewed, restated or refunded from time to time, the Obligations of which are non-recourse (except for customary representations, warranties, covenants and indemnities made in connection with such facilities) to the Issuer or any of its Restricted Subsidiaries (other than a Receivables Subsidiary) pursuant to which the Issuer or any of its Restricted Subsidiaries contributes, sells or otherwise conveys its accounts receivable, and related assets to either (a) a Person that is not a Restricted Subsidiary or (b) a Receivables Subsidiary that in turn sells, or grants a security interest in, its accounts receivable and related assets to a Person that is not a Restricted Subsidiary.
Receivables Fees means distributions or payments made directly or by means of discounts with respect to any accounts receivable or participation interest therein issued or sold in connection with, and other fees paid to a Person that is not a Restricted Subsidiary in connection with, any Receivables Facility.
Receivables Subsidiary means any Subsidiary formed for the purpose of, and that solely engages only in one or more Receivables Facilities and other activities reasonably related thereto.
Record Date for the interest payable on any applicable Interest Payment Date means April 1 or October 1 (whether or not a Business Day) next preceding such Interest Payment Date.
Registration Rights Agreements means the Registration Rights Agreement with respect to the Notes, dated the Issue Date, among the Issuer and the Initial Purchasers and any similar registration rights agreements with respect to any Additional Notes.
Regulation S means Regulation S promulgated under the Securities Act.
Regulation S Global Note means a Regulation S Temporary Global Note or Regulation S Permanent Global Note, as applicable.
Regulation S Permanent Global Note means a permanent Global Note in the form of Exhibit A hereto, bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Regulation S Temporary Global Note of the applicable series upon expiration of the Restricted Period.
Regulation S Temporary Global Note means a temporary Global Note in the form of Exhibit A hereto, bearing the Global Note Legend, the Private Placement Legend and the Regulation S Temporary Global Note Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Notes of the applicable series initially sold in reliance on Rule 903.
Regulation S Temporary Global Note Legend means the legend set forth in Section 2.06(g)(iii) hereof.
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Related Business Assets means (a) substantially all the assets of a business operating or engaged in a Similar Business, (b) Capital Stock in any Person operating or engaged in a Similar Business that results in the Issuer or any of its Restricted Subsidiaries, as the case may be, owning an amount of the Capital Stock of such Person such that it constitutes a Restricted Subsidiary or (c) any other property or assets (other than cash or Cash Equivalents) used or useful in a Similar Business; provided that any assets received by the Issuer or a Restricted Subsidiary in exchange for assets transferred by the Issuer or a Restricted Subsidiary shall not be deemed to be Related Business Assets if they consist of securities of a Person, unless upon receipt of the securities of such Person, such Person would become a Restricted Subsidiary.
Responsible Officer means, when used with respect to the Trustee, any officer within the corporate trust department of the Trustee, including any director, vice president, assistant vice president, associate or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such Persons knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture.
Restricted Definitive Note means a Definitive Note bearing the Private Placement Legend.
Restricted Global Note means a Global Note bearing the Private Placement Legend.
Restricted Investment means an Investment other than a Permitted Investment.
Restricted Period means the 40-day distribution compliance period as defined in Regulation S.
Restricted Subsidiary means, at any time, each direct and indirect Subsidiary of the Issuer (including any Foreign Subsidiary) that is not then an Unrestricted Subsidiary; provided , however , that upon the occurrence of an Unrestricted Subsidiary ceasing to be an Unrestricted Subsidiary, such Subsidiary shall be included in the definition of Restricted Subsidiary .
Rule 144 means Rule 144 promulgated under the Securities Act.
Rule 144A means Rule 144A promulgated under the Securities Act.
Rule 903 means Rule 903 promulgated under the Securities Act.
Rule 904 means Rule 904 promulgated under the Securities Act.
S&P means Standard & Poors, a division of McGraw Hill Financial, Inc., and any successor to its rating agency business.
Sale and Leaseback Transaction means any direct or indirect arrangement providing for the leasing by the Issuer or any of its Restricted Subsidiaries of any real or tangible personal property, which property has been or is to be sold or transferred for value by the Issuer or such Restricted Subsidiary to a third Person in contemplation of such leasing.
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SEC means the U.S. Securities and Exchange Commission.
Secured Indebtedness means any Indebtedness of the Issuer or any of its Restricted Subsidiaries secured by a Lien. For the avoidance of doubt, Attributable Debt will be considered to be secured by the asset that is the subject of the Sale and Leaseback Transaction.
Securities Act means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.
Senior Credit Facilities means the credit facility under the credit agreement to be entered into in connection with the Transactions by and among the Issuer, the Guarantors, the lenders party thereto in their capacities as lenders thereunder, including any guarantees, collateral documents, instruments and agreements executed in connection therewith, and any amendments, supplements, modifications, extensions, renewals, restatements, refundings or refinancings thereof and any indentures or credit facilities or commercial paper facilities with banks or other institutional lenders or investors that replace, refund or refinance any part of the loans, notes, other credit facilities or commitments thereunder, including any such replacement, refunding or refinancing facility or indenture that increases the amount borrowable thereunder or alters the maturity thereof ( provided that such increase in borrowings is permitted under Section 4.09 hereof).
Separation means the series of internal transactions, including those described under the The Separation and Distribution, Our Relationship with Kimberly-Clark after the Distribution and Certain Relationships and Related Party Transactions or otherwise described in the Form 10 (including the payment by the Issuer of the Cash Distribution to Kimberly-Clark), following which the Issuer will hold the business constituting Kimberly-Clarks health care business.
Separation and Distribution Documents means the Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement, Intellectual Property Agreements, Manufacturing and Supply Agreements and any other instruments, assignments, documents and agreements executed in connection with the implementation of the transactions contemplated by any of the foregoing.
Shelf Registration Statement means a Shelf Registration Statement as defined in the applicable Registration Rights Agreement.
Significant Subsidiary means any Restricted Subsidiary that would be a significant subsidiary as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such regulation is in effect on the Issue Date.
Similar Business means any business conducted or proposed to be conducted by the Issuer and its Restricted Subsidiaries as described in the Offering Memorandum or any business that is similar, reasonably related, incidental or ancillary thereto.
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Subordinated Indebtedness means,
(1) any Indebtedness of the Issuer which is by its terms subordinated in right of payment to the Notes, and
(2) any Indebtedness of a Guarantor which is by its terms subordinated in right of payment to the Guarantee of such entity.
Subsidiary means, with respect to any Person:
(1) any corporation, association, or other business entity (other than a partnership, joint venture, limited liability company or similar entity) of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time of determination owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person or a combination thereof; and
(2) any partnership, joint venture, limited liability company or similar entity of which
(a) more than 50% of the capital accounts, distribution rights, total equity and voting interests or general or limited partnership interests, as applicable, are owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person or a combination thereof whether in the form of membership, general, special or limited partnership or otherwise, and
(b) such Person or any Restricted Subsidiary of such Person is a controlling general partner or otherwise controls such entity.
Tax Matters Agreement means the Tax Matters Agreement between Kimberly-Clark and the Issuer, to be dated on or prior to the Distribution Date.
Total Assets means total assets of the Issuer and its Restricted Subsidiaries on a consolidated basis, shown on the most recent balance sheet of the Issuer and its Restricted Subsidiaries as may be expressly stated without giving effect to any amortization of the amount of intangible assets since the Issue Date, with such pro forma adjustments as are appropriate and consistent with the pro forma adjustment provisions set forth in the definition of Consolidated Fixed Charge Coverage Ratio .
Transactions means (1) (A) the Separation, (B) the Distribution, (C) the Cash Distribution, (D) any other transactions contemplated by, or pursuant to, the Separation and Distribution Documents or otherwise in connection with the Separation and Distribution (including any cancellation or termination of Indebtedness, agreements, arrangements, commitments or understandings, including intercompany accounts payables, receivables or Indebtedness, between the Issuer or any of its Restricted Subsidiaries, on the one hand, and Kimberly-Clark or any of its other Subsidiaries, on the other hand, and making certain
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intercompany contributions and dividend payments) and (E) any other transactions pursuant to agreements or arrangements in effect on the Distribution Date on substantially the terms described in the Offering Memorandum or any amendment, modification, addition or supplement thereto or replacement thereof, as long as the terms of such agreement or arrangement, as so amended, modified, added, supplemented or replaced are not materially more disadvantageous to the Holders when taken as a whole compared to the applicable agreements as described in the Offering Memorandum (as determined in good faith by the Issuer), (2) the issuance of the Notes, (3) the entering into of the Senior Credit Facilities and the borrowing of the term loan thereunder and (4) the payment of fees and expenses in connection with the foregoing.
Transaction Services Agreement means the Transaction Services Agreement between Kimberly-Clark and Issuer, to be dated on or prior to the Distribution Date.
Treasury Rate means, as of any redemption date, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two Business Days prior to the redemption date (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from the redemption date to October 15, 2017; provided , however , that if the period from the redemption date to October 15, 2017 is less than one year, the weekly average yield on actively traded United States Treasury securities adjusted to a constant maturity of one year will be used.
Trust Indenture Act means the Trust Indenture Act of 1939, as amended (15 U.S.C. §§ 77aaa-77bbbb).
Trustee means Deutsche Bank Trust Company Americas, a New York banking corporation, as trustee, until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder.
Unrestricted Definitive Note means one or more Definitive Notes that do not bear and are not required to bear the Private Placement Legend.
Unrestricted Global Note means a permanent Global Note, substantially in the form of Exhibit A attached hereto that bears the Global Note Legend and that has the Schedule of Exchanges of Interests in the Global Note attached thereto, and that is deposited with or on behalf of and registered in the name of the Depositary, representing Notes that do not bear the Private Placement Legend.
Unrestricted Subsidiary means:
(1) any Subsidiary of the Issuer which at the time of determination is an Unrestricted Subsidiary (as designated by the Issuer, as provided below); and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Issuer may designate any Subsidiary of the Issuer (including any existing Subsidiary and any newly acquired or newly formed Subsidiary but excluding each Issuer) to be an
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Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Equity Interests or Indebtedness of, or owns or holds any Lien on, any property of, the Issuer or any Subsidiary of the Issuer (other than solely any Subsidiary of the Subsidiary to be so designated); provided that:
(1) such designation complies with Section 4.07 hereof; and
(2) each of: (a) the Subsidiary to be so designated; and (b) its Subsidiaries has not at the time of designation, and does not thereafter, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to any Indebtedness pursuant to which the lender has recourse to any of the assets of the Issuer or any Restricted Subsidiary except for Liens described in clause (28) of the definition of Permitted Liens.
The Issuer may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that, immediately after giving effect to such designation, no Default shall have occurred and be continuing and either:
(1) the Issuer could incur at least $1.00 of additional Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio test described in Section 4.09(a) hereof; or
(2) the Consolidated Fixed Charge Coverage Ratio for the Issuer and its Restricted Subsidiaries would be greater than or equal to such ratio immediately prior to such designation,
in each case on a pro forma basis taking into account such designation.
Any such designation by the Issuer shall be notified by the Issuer to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors of the Issuer or any committee thereof giving effect to such designation and an Officers Certificate certifying that such designation complied with the foregoing provisions.
U.S. Person means a U.S. person as defined in Rule 902(k) under the Securities Act.
Voting Stock of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the board of directors or other governing body of such Person.
Weighted Average Life to Maturity means, when applied to any Indebtedness, Disqualified Stock or Preferred Stock, as the case may be, at any date, the quotient obtained by dividing:
(1) the sum of the products of the number of years from the date of determination to the date of each successive scheduled principal payment of such Indebtedness or scheduled redemption or similar payment with respect to such Disqualified Stock or Preferred Stock multiplied by the amount of such payment; by
(2) the sum of all such payments.
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Wholly-Owned Subsidiary of any Person means a Subsidiary of such Person, 100% of the outstanding Equity Interests of which (other than directors qualifying shares or shares or interests required to be held by foreign nationals or other third parties to the extent required by applicable law) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person.
SECTION 1.02 Other Definitions.
Term |
Defined in Section |
|
Acceptable Commitment | 4.10 | |
Affiliate Transaction | 4.11 | |
Applicable Law | 12.15 | |
Asset Sale Offer | 4.10 | |
Authentication Order | 2.02 | |
Change of Control Offer | 4.14 | |
Change of Control Payment | 4.14 | |
Change of Control Payment Date | 4.14 | |
Covenant Defeasance | 8.03 | |
DTC | 2.03 | |
Escrow Conditions | 3.08 | |
Escrow Release Date | 3.08 | |
Event of Default | 6.01 | |
Excess Proceeds | 4.10 | |
Expiration Date | 1.05 | |
incur, incurrence | 4.09 | |
Indemnified Person | 7.07 | |
Legal Defeasance | 8.02 | |
Mandatory Redemption Event | 3.08 | |
Note Register | 2.03 | |
Offer Amount | 3.09 | |
Offer Period | 3.09 | |
Outside Date | 3.08 | |
Paying Agent | 2.03 | |
Purchase Date | 3.09 | |
Refinancing Indebtedness | 4.09 | |
Refunding Capital Stock | 4.07 | |
Registrar | 2.03 | |
Restricted Payments | 4.07 | |
Special Mandatory Redemption | 3.08 | |
Special Mandatory Redemption Date | 3.08 | |
Special Mandatory Redemption Notice | 3.08 | |
Special Mandatory Redemption Price | 3.08 | |
Successor | 5.01 | |
Successor Company | 5.01 | |
Successor Person | 5.01 |
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SECTION 1.03 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the Trust Indenture Act as applicable to this Indenture, the provision is incorporated by reference in and made a part of this Indenture.
The following Trust Indenture Act terms used in this Indenture have the following meanings:
indenture securities means the Notes;
indenture security holder means a Holder of a Note; indenture to be qualified means this Indenture;
indenture trustee or institutional trustee means the Trustee; and
obligor on the Notes and the Guarantees means the Issuer and the Guarantors, respectively, and any successor obligor upon the Notes and the Guarantees, respectively.
All other terms used in this Indenture that are defined by the Trust Indenture Act, defined by Trust Indenture Act reference to another statute or defined by SEC rule under the Trust Indenture Act have the meanings so assigned to them.
SECTION 1.04 Rules of Construction.
Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP;
(c) or is not exclusive;
(d) words in the singular include the plural, and in the plural include the singular;
(e) references to shall and will are intended to have the same meaning;
(f) provisions apply to successive events and transactions;
(g) references to sections of, or rules under, the Securities Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the SEC from time to time;
(h) unless the context otherwise requires, any reference to an Article , Section or clause refers to an Article, Section or clause, as the case may be, of this Indenture;
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(i) the words herein , hereof and hereunder and other words of similar import refer to this Indenture as a whole and not any particular Article, Section, clause or other subdivision;
(j) unless otherwise specifically indicated, the term consolidated with respect to any Person refers to such Person consolidated with the Issuer and its Restricted Subsidiaries, and excludes from such consolidation any Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate of such Person;
(k) the words include , includes and including shall be deemed to be followed by the phrase without limitation ; and
(l) references to times of day are to local time in New York City, New York unless otherwise stated.
SECTION 1.05 Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustee and, where it is hereby expressly required, to the Issuer. Proof of execution of any such instrument or of a writing appointing any such agent, or the holding by any Person of a Note, shall be sufficient for any purpose of this Indenture and (subject to Section 7.01) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Section 1.05.
(b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by or on behalf of any legal entity other than an individual, such certificate or affidavit shall also constitute proof of the authority of the Person executing the same. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient.
(c) The ownership of Notes shall be proved by the Note Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Note shall bind every future Holder of the same Note and the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof, in respect of any action taken, suffered or omitted by the Trustee or the Issuer in reliance thereon, whether or not notation of such action is made upon such Note.
(e) The Issuer may, in the circumstances permitted by the Trust Indenture Act, set a record date for purposes of determining the identity of Holders entitled to make, give
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or take any request, demand, authorization, direction, notice, consent, waiver or take any other act, or to vote or consent to any action by vote or consent authorized or permitted to be given or taken by Holders. Unless otherwise specified, if not set by the Issuer prior to the first solicitation of a Holder made by any Person in respect of any such action, or in the case of any such vote, prior to such vote, any such record date shall be the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Holders furnished to the Trustee prior to such solicitation. If any record date is set pursuant to this clause (e), the Holders on such record date, and only such Holders, shall be entitled to make, give or take such request, demand, authorization, direction, notice, consent, waiver or other action (including revocation of any action), whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless made, given or taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Notes, or each affected Holder, as applicable, on such record date.
(f) Without limiting the foregoing, a Holder entitled to take any action hereunder with regard to any particular Note may do so with regard to all or any part of the principal amount of such Note or by one or more duly appointed agents, each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. Any notice given or action taken by a Holder or its agents with regard to different parts of such principal amount pursuant to this clause shall have the same effect as if given or taken by separate Holders of each such different part.
(g) Without limiting the generality of the foregoing, a Holder, including DTC, may make, give or take, by a proxy or proxies duly appointed in writing, any request, demand, authorization, direction, notice, consent, waiver or other action provided in this Indenture to be made, given or taken by Holders, and DTC may provide its proxy or proxies to the beneficial owners of interests in any such Global Note through such depositarys standing instructions and customary practices.
(h) The Issuer may fix a record date for the purpose of determining the Persons who are beneficial owners of interests in any Global Note held by DTC entitled under the procedures of such depositary to make, give or take, by a proxy or proxies duly appointed in writing, any request, demand, authorization, direction, notice, consent, waiver or other action provided in this Indenture to be made, given or taken by Holders. If such a record date is fixed, the Holders on such record date or their duly appointed proxy or proxies, and only such Persons, shall be entitled to make, give or take such request, demand, authorization, direction, notice, consent, waiver or other action, whether or not such Holders remain Holders after such record date. No such request, demand, authorization, direction, notice, consent, waiver or other action shall be valid or effective if made, given or taken more than 90 days after such record date.
(i) With respect to any record date set pursuant to this Section 1.05, the party hereto that sets such record date may designate any day as the Expiration Date and from time to time may change the Expiration Date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Notes in the manner set forth in Section 12.02, on or prior to both the existing and the new Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section 1.05, the party hereto which set such
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record date shall be deemed to have initially designated the 90th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this clause (i).
ARTICLE 2
THE NOTES
SECTION 2.01 Form and Dating; Terms.
(a) General . The Notes and the Trustees certificate of authentication shall be substantially in the form of Exhibit A hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rules or usage. Each Note shall be dated the date of the Trustees authentication. The Notes shall be in minimum denominations of $2,000 and integral multiples of $1,000 in excess of $2,000.
(b) Global Notes . Notes issued in global form shall be substantially in the form of Exhibit A attached hereto (including the Global Note Legend thereon and the Schedule of Exchanges of Interests in the Global Note attached thereto). Notes issued in definitive form shall be substantially in the form of Exhibit A attached hereto (but without the Global Note Legend thereon and without the Schedule of Exchanges of Interests in the Global Note attached thereto). Each Global Note shall represent such of the outstanding Notes as shall be specified in the Schedule of Exchanges of Interests in the Global Note attached thereto and each shall provide that it shall represent up to the aggregate principal amount of Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased, as applicable, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee as Custodian, in accordance with written instructions given by the Holder thereof as required by Section 2.06 hereof.
(c) Temporary Global Notes . Notes offered and sold in reliance on Regulation S shall be issued initially in the form of the Regulation S Temporary Global Note, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee as Custodian, and registered in the name of the Depositary or the nominee of the Depositary for the accounts of designated agents holding on behalf of Euroclear or Clearstream, duly executed by the Issuer and authenticated by the Trustee as hereinafter provided. Upon the expiry of the Restricted Period, beneficial interests in each Regulation S Temporary Global Note shall be exchanged for beneficial interests in a Regulation S Permanent Global Note of the same series pursuant to the Applicable Procedures. Simultaneously with the authentication of a Regulation S Permanent Global Note, the Trustee shall cancel the corresponding Regulation S Temporary Global Note. The aggregate principal amount of a Regulation S Temporary Global Note and a Regulation S Permanent Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided.
(d) Terms . The aggregate principal amount of Notes that may be authenticated and delivered under this Indenture is unlimited.
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The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Issuer and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling.
The Notes shall be subject to repurchase by the Issuer pursuant to an Asset Sale Offer as provided in Section 4.10 hereof or a Change of Control Offer as provided in Section 4.13. The Notes shall not be redeemable, other than as provided in Article 3.
Additional Notes ranking pari passu with the Initial Notes may be created and issued from time to time by the Issuer without notice to or consent of the Holders and shall be consolidated with and form a single class with the other Notes of the applicable series (including any Initial Notes, Exchange Notes or other Additional Notes composing such series) and shall have the same terms as to status, redemption or otherwise (other than issue date, issue price and, if applicable, the first Interest Payment Date and the first date from which interest will accrue) as such Notes; provided that the Issuers ability to issue Additional Notes shall be subject to the Issuers compliance with Section 4.09 hereof; provided further that if any Additional Notes are not fungible with the applicable series of Notes for U.S. federal income tax purposes, such Additional Notes will be issued as a separate series under this Indenture and will have a separate CUSIP number and ISIN from the applicable series of Notes. Any Additional Notes shall be issued with the benefit of an indenture supplemental to this Indenture.
(e) Euroclear and Clearstream Procedures Applicable . The provisions of the Operating Procedures of the Euroclear System and Terms and Conditions Governing Use of Euroclear and the General Terms and Conditions of Clearstream Banking and Customer Handbook of Clearstream shall be applicable to transfers of beneficial interests in the Regulation S Temporary Global Note and the Regulation S Permanent Global Notes that are held by Participants through Euroclear or Clearstream.
SECTION 2.02 Execution and Authentication.
At least one Officer of the Issuer shall execute the Notes by manual or facsimile signature.
If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid.
A Note shall not be entitled to any benefit under this Indenture or be valid or obligatory for any purpose until authenticated substantially in the form of Exhibit A attached hereto by the manual signature of the Trustee. The signature shall be conclusive evidence that the Note has been duly authenticated and delivered under this Indenture.
On the Issue Date, the Trustee shall, upon receipt of on Issuer Order (an Authentication Order ), authenticate and deliver the Initial Notes. In addition, at any time, from time to time, the Trustee shall upon receipt of an Authentication Order authenticate and deliver any Additional Notes in an aggregate principal amount specified in such Authentication Order for such Additional Notes issued hereunder.
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The Trustee may appoint an authenticating agent acceptable to the Issuer to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holders or an Affiliate of the Issuer.
SECTION 2.03 Registrar and Paying Agent.
The Issuer shall maintain (i) an office or agency in the Borough of Manhattan, City of New York, the State of New York where Notes may be presented for registration of transfer or for exchange ( Registrar ) and (ii) an office or agency in the Borough of Manhattan, the City of New York, the State of New York where Notes may be presented for payment (the Paying Agent ). The Registrar shall maintain a register reflecting ownership of the Notes outstanding from time to time ( Note Register ) and shall make payments on and facilitate transfer of Notes on behalf of the Issuer. The Issuer may appoint one or more co-registrars and one or more additional paying agents. The term Registrar includes any co-registrar. The term Paying Agent includes any additional paying agents. The Issuer initially appoints the Trustee as (i) Registrar and Paying Agent and (ii) the Custodian with respect to the Global Notes. The Issuer may change the Paying Agents or the Registrars without prior notice to the Holders. The Issuer shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Issuer fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Issuer or any of its Subsidiaries may act as a Paying Agent or a Registrar.
The Issuer initially appoints The Depository Trust Company ( DTC ) to act as Depositary with respect to the Global Notes.
SECTION 2.04 Paying Agent to Hold Money in Trust.
The Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium, if any, or interest on the Notes, and will notify the Trustee in writing of any default by the Issuer in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Issuer at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Issuer or one of its Subsidiaries) shall have no further liability for the money. If an Issuer or one of its respective Subsidiaries acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Issuer, the Trustee shall serve as Paying Agent for the Notes.
SECTION 2.05 Holder Lists.
The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with Trust Indenture Act Section 312(a). If the Trustee is not the Registrar, the Issuer shall furnish to the Trustee at least two Business Days before each Interest Payment Date and at such
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other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Notes and the Issuer shall otherwise comply with Trust Indenture Act Section 312(a).
SECTION 2.06 Transfer and Exchange.
(a) Transfer and Exchange of Global Notes . Except as otherwise set forth in this Section 2.06, a Global Note may be transferred, in whole and not in part, only to another nominee of the Depositary or to a successor thereto or a nominee of such successor. A beneficial interest in a Global Note shall be exchangeable for a Definitive Note of the same series if (A) the Depositary notifies the Issuer that it is unwilling or unable to continue as Depositary for such Global Note and a successor Depositary is not appointed by the Issuer within 90 days of such notice or (B) in the case of any Global Note, there shall have occurred and be continuing an Event of Default with respect to such Global Note and the Depositary has requested the issuance of Definitive Notes. Upon the occurrence of any of the preceding events in (A) or (B) above, Definitive Notes delivered in exchange for any Global Note of the same series or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the Depositary (in accordance with its customary procedures). Global Notes also may be exchanged or replaced, in whole or in part, as provided in Section 2.07 and 2.10 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a Global Note of the same series or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Note, except for Definitive Notes issued subsequent to any of the preceding events in (A) or (B) above and pursuant to Section 2.06(c) hereof. A Global Note may not be exchanged for another Note other than as provided in this Section 2.06(a); provided , however , beneficial interests in a Global Note may be transferred and exchanged as provided in Section 2.06(b), (c) or (f) hereof.
(b) Transfer and Exchange of Beneficial Interests in the Global Notes . The transfer and exchange of beneficial interests in the Global Notes shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes shall be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Beneficial interests in Global Notes shall be transferred or exchanged only for beneficial interests in Global Notes pursuant to this clause (b). Transfers of beneficial interests in the Global Notes also shall require compliance with either subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following subparagraphs, as applicable:
(i) Transfer of Beneficial Interests in the Same Global Note . Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Private Placement Legend; provided , however , that prior to the expiration of the Restricted Period, transfers of beneficial interests in a Regulation S Temporary Global Note may not be made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Beneficial interests in any Unrestricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.06(b)(i).
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(ii) All Other Transfers and Exchanges of Beneficial Interests in Global Notes . In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(i) hereof, the transferor of such beneficial interest must deliver to the Registrar either (A) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note of the same series in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Note of the same series in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in (1) above; provided that in no event shall Definitive Notes be issued upon the transfer or exchange of beneficial interests in a Regulation S Temporary Global Note prior to (A) the expiration of the Restricted Period and (B) the receipt by the Registrar of any certificates required pursuant to Rule 903. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.06(h) hereof.
(iii) Transfer of Beneficial Interests to Another Restricted Global Note . A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of Section 2.06(b)(ii)hereof and the Registrar receives the following:
(A) if the transferee will take delivery in the form of a beneficial interest in a 144A Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; or
(B) if the transferee will take delivery in the form of a beneficial interest in a Regulation S Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof.
(iv) Transfer and Exchange of Beneficial Interests in a Restricted Global Note for Beneficial Interests in an Unrestricted Global Note . A beneficial interest in any Restricted Global Note may be exchanged by any holder thereof for a beneficial interest in an Unrestricted Global Note or transferred to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note, if the exchange or transfer complies with the requirements of Section 2.06(b)(ii) hereof and
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(A) such exchange or transfer is effected pursuant to an Exchange Offer in accordance with the applicable Registration Rights Agreement and the holder of the beneficial interest to be transferred, in the case of an exchange, or the transferee, in the case of a transfer, certifies that it is not (1) an Exchanging Dealer, (2) a Person participating in a distribution of Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Issuer;
(B) such transfer is effected pursuant to a Shelf Registration Statement in accordance with the applicable Registration Rights Agreement; or
(C) the Registrar receives the following:
(1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Note of the same series, a certificate from such Holder substantially in the form of Exhibit C hereto, including the certifications in item (1)(a) thereof; or
(2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note of the same series, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof;
and, if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act.
If any such transfer is effected pursuant to this Section 2.06(b)(iv) at a time when an Unrestricted Global Note has not yet been issued, the Issuer shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the aggregate principal amount of beneficial interests transferred pursuant to this Section 2.06(b)(iv).
(v) Transfer and Exchange of Beneficial Interests in an Unrestricted Global Note for Beneficial Interests in a Restricted Global Note Prohibited . Beneficial interests in an Unrestricted Global Note cannot be exchanged for, or transferred to Persons who take delivery thereof in the form of, beneficial interests in a Restricted Global Note.
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(c) Transfer or Exchange of Beneficial Interests for Definitive Notes . Beneficial interests in Global Notes shall be exchanged for Definitive Notes only pursuant to this clause (c).
(i) Beneficial Interests in Restricted Global Notes to Restricted Definitive Notes . If any holder of a beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Definitive Note, then, upon the occurrence of any of the events in clause (A) or (B) of Section 2.06(a) hereof, subject to satisfaction of the conditions set forth in Section 2.06(b)(ii) and receipt by the Registrar of the following documentation:
(A) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note, a certificate from such holder substantially in the form of Exhibit C hereto, including the certifications in item (2)(a) thereof;
(B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A, a certificate substantially in the form of Exhibit B hereto, including the certifications in item (1) thereof;
(C) if such beneficial interest is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904, a certificate substantially in the form of Exhibit B hereto, including the certifications in item (2) thereof;
(D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate substantially in the form of Exhibit B hereto, including the certifications in item (3)(a) thereof;
(E) if such beneficial interest is being transferred to the Issuer or any of its Restricted Subsidiaries, a certificate substantially in the form of Exhibit B hereto, including the certifications in item (3)(b) thereof; or
(F) if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate substantially in the form of Exhibit B hereto, including the certifications in item (3)(c) thereof,
the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Issuer shall execute and the Trustee shall authenticate and mail to the Person designated in the instructions a Definitive Note in the applicable principal amount. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall mail such Definitive Notes to the Persons in whose names
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such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c)(i) shall bear the Private Placement Legend and shall be subject to all restrictions on transfer contained therein.
(ii) Beneficial Interests in Regulation S Temporary Global Note to Definitive Notes . Notwithstanding Section 2.06(c)(i)(A) and (i)(C) hereof, a beneficial interest in a Regulation S Temporary Global Note may not be exchanged for a Definitive Note or transferred to a Person who takes delivery thereof in the form of a Definitive Note prior to (A) the expiration of the Restricted Period and (B) the receipt by the Registrar of any certificates required pursuant to Rule 903(b)(3)(ii)(B) of the Securities Act.
(iii) Beneficial Interests in Restricted Global Notes to Unrestricted Definitive Notes . A holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Definitive Note or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note only upon the occurrence of any of the events in clause (A) or (B) of Section 2.06(a) and satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof and if:
(A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the applicable Registration Rights Agreement and the holder of such beneficial interest, in the case of an exchange, or the transferee, in the case of a transfer, certifies that it is not (1) an Exchanging Dealer, (2) a Person participating in a distribution of Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Issuer;
(B) such transfer is effected pursuant to a Shelf Registration Statement in accordance with the applicable Registration Rights Agreement;
(C) such transfer is effected by an Exchanging Dealer pursuant to the Exchange Registration Statement in accordance with the applicable Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for an Unrestricted Definitive Note, a certificate from such holder substantially in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or
(2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such holder substantially in the form of Exhibit B hereto, including the certifications in item (4) thereof;
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and, if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act.
(iv) Beneficial Interests in Unrestricted Global Notes to Unrestricted Definitive Notes . If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon the occurrence of any of the events in clause (A) or (B) of Section 2.06(a) hereof and satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Issuer shall execute and the Trustee shall authenticate and mail to the Person designated in the instructions a Definitive Note in the applicable principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iv) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from or through the Depositary and the Participant or Indirect Participant. The Trustee shall mail such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iv) shall not bear the Private Placement Legend.
(d) Transfer and Exchange of Definitive Notes for Beneficial Interests . Restricted Definitive Notes shall be exchanged for beneficial interests in Restricted Global Notes only pursuant to this clause (d).
(i) Restricted Definitive Notes to Beneficial Interests in Restricted Global Notes . If any Holder of a Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note or to transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Note, then, upon receipt by the Registrar of the following documentation:
(A) if the Holder of such Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note, a certificate from such Holder substantially in the form of Exhibit C hereto, including the certifications in item (2)(b) thereof;
(B) if such Restricted Definitive Note is being transferred to a QIB in accordance with Rule 144A, a certificate substantially in the form of Exhibit B hereto, including the certifications in item (1) thereof;
(C) if such Restricted Definitive Note is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904, a certificate substantially in the form of Exhibit B hereto, including the certifications in item (2) thereof;
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(D) if such Restricted Definitive Note is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate substantially in the form of Exhibit B hereto, including the certifications in item (3)(a) thereof;
(E) if such Restricted Definitive Note is being transferred to the Issuer or any of its Restricted Subsidiaries, a certificate substantially in the form of Exhibit B hereto, including the certifications in item (3)(b) thereof; or
(F) if such Restricted Definitive Note is being transferred pursuant to an effective registration statement under the Securities Act, a certificate substantially in the form of Exhibit B hereto, including the certifications in item (3)(c) thereof,
the Trustee shall cancel the Restricted Definitive Note, increase or cause to be increased the aggregate principal amount of, in the case of clause (A) above, the applicable Restricted Global Note, in the case of clause (B) above, the applicable 144A Global Note, and in the case of clause (C) above, the applicable Regulation S Global Note.
(ii) Restricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes . A Holder of a Restricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note only if:
(A) such exchange or transfer is effected pursuant to an Exchange Offer in accordance with the applicable Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) an Exchanging Dealer, (2) a Person participating in a distribution of Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Issuer;
(B) any such transfer is effected pursuant to a Shelf Registration Statement in accordance with the applicable Registration Rights Agreement;
(C) any such transfer is effected by an Exchanging Dealer pursuant to an Exchange Registration Statement in accordance with the applicable Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Definitive Notes proposes to exchange such Notes for a beneficial interest in the Unrestricted Global Note, a certificate from such Holder substantially in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or
(2) if the Holder of such Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of a beneficial interest in the Unrestricted Global Note, a certificate from such Holder substantially in the form of Exhibit B hereto, including the certifications in item (4) thereof;
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and, if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act.
Upon satisfaction of the conditions of any of the subparagraphs in this Section 2.06(d)(ii), the Trustee shall cancel the Definitive Notes and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Note.
(iii) Unrestricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes . A Holder of an Unrestricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note at any time. Upon receipt of a request for such an exchange or transfer, the Trustee shall cancel the applicable Unrestricted Definitive Note and increase or cause to be increased the aggregate principal amount of one of the Unrestricted Global Notes.
If any such exchange or transfer from a Definitive Note to a beneficial interest is effected pursuant to subparagraph (ii)(B), (ii)(D) or (iii) above at a time when an Unrestricted Global Note has not yet been issued, the Issuer shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of Definitive Notes so transferred.
(e) Transfer and Exchange of Definitive Notes for Definitive Notes . Upon request by a Holder of Definitive Notes and such Holders compliance with the provisions of this Section 2.06(e), the Registrar shall register the transfer or exchange of Definitive Notes. Definitive Notes shall be exchanged for Definitive Notes only pursuant to this clause (e). Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by its attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.06(e):
(i) Restricted Definitive Notes to Restricted Definitive Notes . Any Restricted Definitive Note may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Definitive Note if the Registrar receives the following:
(A) if the transfer will be made pursuant to a QIB in accordance with Rule 144A, then the transferor must deliver a certificate substantially in the form of Exhibit B hereto, including the certifications in item (1) thereof;
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(B) if the transfer will be made pursuant to Rule 903 or Rule 904 then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; or
(C) if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications required by item (3) thereof, if applicable.
(ii) Restricted Definitive Notes to Unrestricted Definitive Notes . Any Restricted Definitive Note may be exchanged by the Holder thereof for an Unrestricted Definitive Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Definitive Note if:
(A) such exchange is effected pursuant to an Exchange Offer in accordance with the applicable Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) an Exchanging Dealer, (2) a Person participating in a distribution of Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Issuer;
(B) any such transfer is effected pursuant to a Shelf Registration Statement in accordance with the applicable Registration Rights Agreement;
(C) any such transfer is effected by an Exchanging Dealer pursuant to an Exchange Registration Statement in accordance with the applicable Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Restricted Definitive Notes proposes to exchange such Notes for an Unrestricted Definitive Note, a certificate from such Holder substantially in the form of Exhibit C hereto, including the certifications in item (1)(d) thereof; or
(2) if the Holder of such Restricted Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such Holder substantially in the form of Exhibit B hereto, including the certifications in item (4) thereof;
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and, if the Registrar so requests, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act.
(iii) Unrestricted Definitive Notes to Unrestricted Definitive Notes . A Holder of Unrestricted Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note. Upon receipt of a request to register such a transfer, the Registrar shall register the Unrestricted Definitive Notes pursuant to the instructions from the Holder thereof.
(f) Exchange Offer . Upon the occurrence of an Exchange Offer in accordance with the applicable Registration Rights Agreement, the Issuer shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee or an authenticating agent shall authenticate (i) one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of the beneficial interests in the Restricted Global Notes tendered for acceptance by Persons that certify in the applicable Letters of Transmittal that (x) they are not Exchanging Dealers, (y) they are not participating in a distribution of Exchange Notes and (z) they are not affiliates (as defined in Rule 144) of the Issuer, and accepted for exchange in an Exchange Offer and (ii) Unrestricted Definitive Notes in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes tendered for acceptance by Persons that certify in the applicable Letters of Transmittal that (x) they are not Exchanging Dealers, (y) they are not participating in a distribution of Exchange Notes and (z) they are not affiliates (as defined in Rule 144) of the Issuer, and accepted for exchange in an Exchange Offer. Concurrently with the issuance of such Notes, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Notes to be reduced accordingly, and the Issuer shall execute and the Trustee or an authenticating agent shall authenticate and mail to the Persons designated by the Holders of Definitive Notes so accepted Unrestricted Definitive Notes in the applicable principal amount. Any Notes that remain outstanding after the consummation of an Exchange Offer, and Exchange Notes issued in connection with an Exchange Offer, shall be treated as a single class of securities under this Indenture.
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(g) Legends . The following legends shall appear on the face of all Global Notes and Definitive Notes issued under this Indenture unless specifically stated otherwise in the applicable provisions of this Indenture:
(i) Private Placement Legend .
(A) Except as permitted by subparagraph (B) below, each Global Note and each Definitive Note (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT (RULE 144A)) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION PURSUANT TO RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT (REGULATION S), (2) AGREES THAT IT WILL NOT, PRIOR TO THE DATE THAT IS ONE YEAR AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) AND THE LAST DATE ON WHICH HALYARD HEALTH, INC. (THE COMPANY) OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY, OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY AND THE TRUSTEE SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING IN THE INDENTURE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE.
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(B) Notwithstanding the foregoing, any Global Note or Definitive Note issued pursuant to subparagraph (b)(iv), (c)(iii), (c)(iv), (d)(ii), (d)(iii), (e)(ii) or (e)(iii) of this Section 2.06 (and all Notes issued in exchange therefor or substitution thereof) shall not bear the Private Placement Legend.
(ii) Global Note Legend . Each Global Note shall bear a legend in substantially the following form:
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.06(h) OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE ISSUER. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (DTC) TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
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(iii) Regulation S Temporary Global Note Legend . The Regulation S Temporary Global Note shall bear a legend in substantially the following form:
THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN).
(h) Cancellation and/or Adjustment of Global Notes . At such time as all beneficial interests in a particular Global Note have been exchanged for Definitive Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Definitive Notes, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note shall be increased accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase.
(i) General Provisions Relating to Transfers and Exchanges .
(i) To permit registrations of transfers and exchanges, the Issuer shall execute and the Trustee shall authenticate Global Notes and Definitive Notes upon receipt of an Authentication Order in accordance with Section 2.02 hereof.
(ii) The Registrar and the Trustee may require a Holder to furnish appropriate endorsements and transfer documents in connection with a transfer of Notes.
(iii) Each Holder agrees to indemnify the Issuer and the Trustee against any liability that may result from the transfer, exchange or assignment of such Holders Note in violation of any provision of this Indenture and/or applicable United States federal or state securities law.
(iv) No service charge shall be made to a holder of a beneficial interest in a Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, but Holders shall pay all taxes due on transfer (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Section 2.07, Section 2.10, Section 3.06, Section 3.09, Section 4.10, Section 4.13 and Section 9.04 hereof).
(v) Neither the Registrar nor the Issuer shall be required to register the transfer of or exchange any Note selected for redemption.
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(vi) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange.
(vii) The Issuer shall not be required (A) to issue, register the transfer of or exchange any Note for a period of 15 days before the mailing of a notice of redemption of Notes to be redeemed, (B) to transfer or exchange any Note selected for redemption, (C) to register the transfer of or to exchange a Note between a Record Date and the next succeeding Interest Payment Date or (D) to register the transfer of or to exchange any Notes selected for redemption or tendered (and not withdrawn) for repurchase in connection with a Change of Control Offer or an Asset Sale Offer.
(viii) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Issuer may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of (and premium, if any) and interest on such Notes and for all other purposes, and none of the Trustee, any Agent or the Issuer shall be affected by notice to the contrary.
(ix) Upon surrender for registration of transfer of any Note at the office or agency of the Issuer designated pursuant to Section 4.02 hereof, the Issuer shall execute, and the Trustee shall authenticate and mail (upon receipt of an Authentication Order), in the name of the designated transferee or transferees, one or more replacement Notes of any authorized denomination or denominations of a like aggregate principal amount.
(x) At the option of the Holder, Notes may be exchanged for other Notes of any authorized denomination or denominations of a like aggregate principal amount upon surrender of the Notes to be exchanged at such office or agency. Whenever any Global Notes or Definitive Notes are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and mail (upon receipt of an Authentication Order), the replacement Global Notes and Definitive Notes which the Holder making the exchange is entitled to in accordance with the provisions of Section 2.02 hereof.
(xi) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.06 to effect a registration of transfer or exchange may be submitted by facsimile.
(xii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note (including any transfers between or among Depositary Participants or beneficial owners of interests in any Global Notes) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof.
(xiii) Neither the Trustee nor any Agent shall have any responsibility or liability for any actions taken or not taken by the Depositary.
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SECTION 2.07 Replacement Notes.
If any mutilated Note is surrendered to the Trustee, the Registrar or the Issuer or if a Holder claims that its Note has been lost, destroyed or wrongfully taken, and the Trustee receives evidence to its satisfaction of the ownership and destruction, loss or theft of any Note, the Issuer shall issue and the Trustee, upon receipt of an Authentication Order, shall authenticate a replacement Note if the Trustees requirements are met. Notwithstanding the foregoing provisions of this Section 2.07, in case any mutilated, lost, destroyed or wrongfully taken Note has become or is about to become due and payable, the Issuer in its discretion may, instead of issuing a new Note, pay such Note. If required by the Trustee or the Issuer, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Issuer to protect the Issuer, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Issuer may charge for its expenses (including the expenses of the Trustee) in replacing a Note.
Every replacement Note is a contractual obligation of the Issuer and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder.
SECTION 2.08 Outstanding Notes.
The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section 2.08 as not outstanding. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Issuer or an Affiliate of the Issuer holds such Note.
If a Note is replaced or repaid pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a protected purchaser, as such term is defined in Section 8-303 of the Uniform Commercial Code in effect in the State of New York.
If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue from and after the date or such payment.
If the Paying Agent (other than the Issuer, a Subsidiary of the Issuer or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest.
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SECTION 2.09 Treasury Notes .
In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Issuer, or by any Affiliate of the Issuer, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded.
SECTION 2.10 Temporary Notes .
Until certificates representing Notes are ready for delivery, the Issuer may prepare and the Trustee, upon receipt of an Authentication Order, shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of certificated Notes but may have variations that the Issuer consider appropriate for temporary Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Issuer shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes.
Holders and beneficial holders, as the case may be, of temporary Notes shall be entitled to all of the benefits accorded to Holders, or beneficial holders, respectively, of Notes under this Indenture.
SECTION 2.11 Cancellation .
The Issuer at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee or, at the direction of the Trustee, the Registrar or the Paying Agent and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall dispose of cancelled Notes (subject to the record retention requirement of the Exchange Act) in accordance with its customary procedures. Certification of the disposal of all cancelled Notes shall be delivered to the Issuer upon its written request. The Issuer may not issue new Notes to replace Notes that it has paid or that have been delivered to the Trustee for cancellation.
SECTION 2.12 Defaulted Interest .
If the Issuer defaults in a payment of interest on a series of Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Notes and in Section 4.01 hereof. The Issuer shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Note and the date of the proposed payment, and at the same time the Issuer shall deposit with the Trustee, an amount of money equal to the aggregate amount proposed to be paid in respect of such defaulted interest or shall make arrangements satisfactory to the Trustee, for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such defaulted interest as provided in this Section 2.12. The Trustee shall fix or cause to be fixed each such special record date and payment date; provided that no such special record date shall be less than ten days prior to the related payment date for such defaulted
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interest. The Trustee shall notify the Issuer of such special record date promptly, and in any event at least 25 days before such special record date. At least 15 days before the special record date, the Issuer (or, upon the five-day prior written request of the Issuer, the Trustee, in the name and at the expense of the Issuer) shall mail, or deliver by electronic transmission in PDF format, or cause to be mailed, first-class postage prepaid, or delivered by electronic transmission in PDF format, to each Holder a notice at his or her address as it appears in the Note Register that states the special record date, the related payment date and the amount of such interest to be paid.
Subject to the foregoing provisions of this Section 2.12 and for greater certainty, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note.
SECTION 2.13 CUSIP/ISIN Numbers .
The Issuer in issuing the Notes may use CUSIP or ISIN numbers, as applicable, (if then generally in use) and, if so, the Trustee shall use CUSIP or ISIN numbers, as applicable, in notices of redemption or exchange or in offers to repurchase as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. The Issuer will as promptly as practicable notify the Trustee in writing of any change in the CUSIP or ISIN Code numbers, as applicable. Additional Notes will not be issued with the same CUSIP, if any, as any existing Notes unless such Additional Notes are fungible with such existing Notes for U.S. federal income tax purposes.
ARTICLE 3
REDEMPTION
SECTION 3.01 Notices to Trustee .
If the Issuer elects to redeem Notes pursuant to Section 3.07 hereof, it shall furnish to the Trustee, at least five Business Days before notice of redemption is mailed or caused to be mailed, or delivered by electronic transmission in PDF format, to the applicable Holders pursuant to Section 3.03 (unless a shorter notice shall be agreed to by the Trustee), an Officers Certificate setting forth (i) the paragraph or subparagraph of such Note and/or Section of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of the Notes to be redeemed and (iv) the redemption price.
SECTION 3.02 Selection of Notes to Be Redeemed or Purchased .
If the Issuer is redeeming or repurchasing less than all of the Notes at any time, the Trustee shall select the Notes to be redeemed or purchased (a) on a pro rata basis to the extent practicable or (b) by lot or such other similar method, in each case in accordance with the procedures of DTC, unless otherwise required by law; provided that no Notes of $2,000 or less shall be redeemed or repurchased in part. In the event of partial redemption or purchase by lot, the particular Notes to be redeemed or purchased shall be selected, unless otherwise provided herein, not less than 30 nor more than 60 days prior to the redemption date by the Trustee from the outstanding Notes not previously called for redemption or purchase.
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The Trustee shall promptly notify the Issuer in writing of the Notes selected for redemption or purchase and, in the case of any Note selected for partial redemption or purchase, the principal amount thereof to be redeemed or purchased. Notes and portions of Notes selected shall be in amounts of $2,000 or whole multiples of $1,000 in excess thereof; no Notes of $2,000 or less can be redeemed in part, except that if all of the Notes of a Holder are to be redeemed or purchased, the entire outstanding amount of Notes held by such Holder, even if not a multiple of $1,000, shall be redeemed or purchased. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption or purchase also apply to portions of Notes called for redemption or purchase.
SECTION 3.03 Notice of Purchase or Redemption .
Subject to Section 3.09 hereof, the Issuer shall mail, deliver by electronic transmission in PDF format, or cause to be mailed by first-class mail, postage prepaid, or delivered by electronic transmission in PDF format, notices of purchase or redemption at least 30 days but not more than 60 days before the purchase or redemption date to each Holder of Notes to be redeemed at such Holders registered address, except that redemption notices may be mailed more than 60 days prior to a redemption date if the notice is issued in connection with Article 8 or Article 11 hereof.
The notice shall identify the Notes (including the CUSIP or ISIN number) to be purchased or redeemed and shall state:
(a) the purchase or redemption date;
(b) the purchase or redemption price;
(c) if any Note is to be redeemed in part only, the portion of the principal amount of that Note that has been or is to be purchased or redeemed and that, after the redemption date upon surrender of such Note, the Issuer will issue a new Note or Notes in principal amount equal to the unredeemed portion of the original Note in the name of the Holder upon cancellation of the original Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price;
(f) that, unless the Issuer defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date;
(g) the paragraph or subparagraph of the Notes and/or Section of this Indenture pursuant to which the Notes called for purchase or redemption are being redeemed;
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(h) that no representation is made as to the correctness or accuracy of the CUSIP or ISIN number, as applicable, if any, listed in such notice or printed on the Notes;
(i) if in connection with a redemption pursuant to Paragraph 5(c) of the applicable Note, any condition to such redemption; and
(j) all information required by Section 3.04(b) hereof, if applicable.
At the Issuers request, the Trustee shall give the notice of purchase or redemption in the Issuers names and at its expense; provided that the Issuer shall have delivered to the Trustee, at least five (5) Business Days before notice of redemption is required to be mailed, or delivered by electronic transmission in PDF format, or caused to be mailed or delivered by electronic transmission in PDF format to Holders pursuant to this Section 3.03 (unless a shorter notice shall be agreed to by the Trustee), an Officers Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph.
SECTION 3.04 Effect of Notice of Redemption .
(a) Subject to Section 3.04(b) hereof, once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price (except as provided for in Paragraph 5(c) of the applicable Note). The notice, if mailed or delivered by electronic transmission in PDF format in a manner herein provided, shall be conclusively presumed to have been given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Note designated for redemption in whole or in part shall not affect the validity of the proceedings for the redemption of any other Note. Subject to Section 3.05 hereof, on and after the redemption date, interest ceases to accrue on Notes or portions of Notes called for redemption.
(b) Notwithstanding anything to the contrary herein, in connection with any redemption of Notes (including with funds in an equal aggregate amount not exceeding the net cash proceeds of an Equity Offering), any such redemption may, at the Issuers discretion, be subject to one or more conditions precedent, including any related Equity Offering. In addition, if such redemption or notice is subject to satisfaction of one or more conditions precedent, such notice shall state that, in the Issuers discretion, the redemption date may be delayed until such time as any or all such conditions shall be satisfied, or such redemption may not occur and such notice may be rescinded in the event that any or all such conditions shall not have been satisfied by the redemption date, or by the redemption date so delayed.
SECTION 3.05 Deposit of Redemption or Purchase Price .
No later than 10:00 a.m. on the redemption or purchase date, the Issuer shall deposit with the Paying Agent money sufficient to pay the redemption or purchase price of and accrued and unpaid interest on all Notes to be redeemed or purchased on that date. The Paying Agent shall promptly return to the Issuer any money deposited with the Paying Agent by the Issuer in excess of the amounts necessary to pay the redemption price of, and accrued and unpaid interest on, all Notes to be redeemed or purchased.
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If the Issuer complies with the provisions of the preceding paragraph, on and after the redemption or purchase date, interest shall cease to accrue on the Notes or the portions of Notes called for redemption or purchase. If a Note is redeemed or purchased on or after a Record Date but on or prior to the related Interest Payment Date, then any accrued and unpaid interest to the redemption or purchase date shall be paid to the Person in whose name such Note was registered at the close of business on such Record Date. If any Note called for redemption or purchase shall not be so paid upon surrender for redemption or purchase because of the failure of the Issuer to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption or purchase date until such principal is paid, and to the extent lawful on any interest accrued to the redemption or purchase date not paid on such unpaid principal, in each case at the rate provided in the Notes and in Section 4.01 hereof.
SECTION 3.06 Notes Redeemed or Purchased in Part .
Upon surrender of a Note that is redeemed or purchased in part, the Issuer shall issue and the Trustee shall authenticate (upon receipt of an Authentication Order) for the Holder at the expense of the Issuer a new Note equal in principal amount to the unredeemed or unpurchased portion of the Note surrendered representing the same indebtedness to the extent not redeemed or purchased; provided that each new Note will be in a principal amount of $2,000 or an integral multiple of $1,000 in excess thereof. It is understood that, notwithstanding anything in this Indenture to the contrary, only an Authentication Order and not an Opinion of Counsel or Officers Certificate is required for the Trustee to authenticate such new Note.
SECTION 3.07 Optional Redemption .
The Notes may be redeemed, at any time in whole, or from time to time in part, subject to the conditions and at the redemption prices set forth in Paragraph 5 of the form of Notes set forth in Exhibit A hereto, which is hereby incorporated by reference and made a part of this Indenture, together with accrued and unpaid interest, if any, to the redemption date.
SECTION 3.08 Mandatory Redemption; Escrow of Proceeds .
(a) Subject to Section 3.08(b) hereof, the Issuer shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes.
(b) In the event that (i) the Separation and Distribution are not consummated on or prior to March 1, 2015 (the Outside Date ) or (ii) the Issuer determines, in its sole discretion, that the Escrow Conditions cannot be satisfied by the Outside Date (any such event being a Mandatory Redemption Event ), the Issuer shall be required to redeem the Notes (the Special Mandatory Redemption ) at a redemption price equal to 100% of the aggregate initial offering price of the Notes, plus accrued and unpaid interest thereon to, but excluding, the date of redemption (the Special Mandatory Redemption Price ). Written notice of the occurrence of a Mandatory Redemption Event will be delivered by the Issuer (a Special Mandatory Redemption Notice ) within five Business Days following the occurrence of a Mandatory Redemption Event, to the Holders, the Trustee and the Escrow Agent. At the Issuers written
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request, the Trustee shall give the notice of redemption in the Issuers name and at its expense; provided that the Issuer shall have delivered to the Trustee, at least five Business Days prior the special mandatory redemption dates specified in such notice (unless such shorter time shall be agreed by the Trustee) an Officers Certificate requesting the Trustee send (by first-class mail to each Holders registered address or otherwise in accordance with the procedures of DTC) a Special Mandatory Redemption Notice. The Special Mandatory Redemption shall occur (the date of such redemption, the Special Mandatory Redemption Date ) on the date set forth in the Special Mandatory Redemption Notice (which shall be no later than three Business Days from the date such notice is delivered).
(c) In the event that the Escrow Conditions are satisfied on or before the Outside Date, the Issuer shall be entitled to direct the Escrow Agent to release the escrowed funds from the escrow account in accordance with the terms of the Escrow Agreement (the date of such release, the Escrow Release Date ). Pursuant to the Escrow Agreement, the Issuer shall only be permitted to obtain release of the escrow funds concurrently with, and conditional upon, satisfaction of the following conditions (the Escrow Conditions ) based on an Officers Certificate certifying that:
(i) all conditions precedent to the consummation of the Distribution set forth in the Distribution Agreement therefor have been satisfied or waived, other than:
(A) the closing of the Senior Credit Facilities; and
(B) the release of other debt proceeds necessary to fund the Cash Distribution; and
(ii) no Event of Default under this Indenture shall have occurred and be continuing (or result therefrom).
(d) As long as the escrow funds are deposited with the Escrow Agent, the escrow funds will be invested by the Escrow Agent in Cash Equivalents as specifically directed in writing by the Issuer. If the Escrow Agent receives a Special Mandatory Redemption Notice, the Escrow Agent will liquidate all escrow property then held by it not later than 11:00 a.m. the last Business Day prior the Special Mandatory Redemption Date. The Issuer shall direct the Escrow Agent to pay, on the Business Day prior to the Special Mandatory Redemption Date, to the Trustee for payment to each Holder the Special Mandatory Redemption Price for such Holders Notes and, concurrently with the payment to such Holders, deliver any excess escrow property (if any) to the Issuer and the Issuer shall be permitted to use such excess escrow property at its discretion.
SECTION 3.09 Offers to Repurchase by Application of Excess Proceeds .
(a) In the event that, pursuant to Section 4.10 hereof, the Issuer shall be required to commence an Asset Sale Offer, it shall follow the procedures specified below.
(b) The Asset Sale Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the Offer Period ). No later than five Business Days after the termination
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of the Offer Period (the Purchase Date ), the Issuer shall apply all Excess Proceeds (the Offer Amount ) to the purchase of Notes and, if required by the terms of any Pari Passu Indebtedness, such Pari Passu Indebtedness (on a pro rata basis, if applicable), or, if less than the Offer Amount has been tendered, all Notes and Pari Passu Indebtedness tendered in response to the Asset Sale Offer. Payment for any Notes so purchased shall be made in the same manner as interest payments are made.
(c) If the Purchase Date is on or after a Record Date and on or before the related Interest Payment Date, any accrued and unpaid interest, if any, up to but excluding the Purchase Date, shall be paid to the Person in whose name a Note is registered at the close of business on such Record Date, and no additional interest shall be payable to Holders who tender Notes pursuant to the Asset Sale Offer.
(d) Upon the commencement of an Asset Sale Offer, the Issuer shall send, by first-class mail or electronic transmission, a notice to each of the Holders, with a copy to the Trustee and Agents. The notice shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Asset Sale Offer. The Asset Sale Offer shall be made to all Holders and, if required by the terms of any Pari Passu Indebtedness, holders of such Pari Passu Indebtedness. The notice, which shall govern the terms of the Asset Sale Offer, shall state:
(i) that the Asset Sale Offer is being made pursuant to this Section 3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer shall remain open;
(ii) the Offer Amount, the purchase price and the Purchase Date;
(iii) that any Note not tendered or accepted for payment shall continue to accrue interest;
(iv) that, unless the Issuer defaults in making such payment, any Note accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Purchase Date;
(v) that Holders electing to have a Note purchased pursuant to any Asset Sale Offer shall be required to surrender the Note, with the form entitled Option of Holder to Elect Purchase attached to the Note completed, or transfer by book-entry transfer, to the Issuer, the Depositary, if appointed by the Issuer, or a Paying Agent at the address specified in the notice prior to the close of business on the third Business Day prior to the Purchase Date;
(vi) that Holders shall be entitled to withdraw their election if the Issuer, the Depositary or the Paying Agent, as the case may be, receive, not later than the expiration of the Offer Period, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased;
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(vii) that, if the aggregate principal amount of Notes and Pari Passu Indebtedness surrendered by the Holders thereof exceeds the Offer Amount, the Trustee shall select the Notes (in accordance with customary procedures) and the Issuer shall select such Pari Passu Indebtedness to be purchased (a) if the Notes or such Pari Passu Indebtedness are listed on any national securities exchange, in compliance with the requirements of the principal national securities exchange on which the Notes or such Pari Passu Indebtedness, as applicable, are listed or (b) by lot or such similar method in accordance with the procedures of DTC, unless otherwise required by law; provided that no notes of $2,000 or less shall be repurchased in part; and
(viii) that Holders whose Notes were purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer) representing the same indebtedness to the extent not repurchased.
(e) On or before the Purchase Date, the Issuer shall, to the extent lawful, (1) accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Notes or portions thereof validly tendered pursuant to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all Notes tendered and (2) deliver or cause to be delivered to the Trustee the Notes properly accepted together with an Officers Certificate stating the aggregate principal amount of Notes or portions thereof so tendered.
(f) The Issuer, the Depositary or the Paying Agent, as the case may be, shall promptly mail or deliver to each tendering Holder an amount equal to the purchase price of the Notes properly tendered by such Holder and accepted by the Issuer for purchase, and the Issuer shall promptly issue a new Note, and the Trustee, upon receipt of an Authentication Order, shall authenticate and mail or deliver (or cause to be transferred by book-entry) such new Note to such Holder (it being understood that, notwithstanding anything in this Indenture to the contrary, no Opinion of Counsel or Officers Certificate is required for the Trustee to authenticate and mail or deliver such new Note) in a principal amount equal to any unpurchased portion of the Note surrendered representing the same indebtedness to the extent not repurchased; provided , that each such new Note shall be in a principal amount of $2,000 or an integral multiple of $1,000 in excess of $2,000. Any Note not so accepted shall be promptly mailed or delivered by the Issuer to the Holder thereof. The Issuer shall publicly announce the results of the Asset Sale Offer on or as soon as practicable after the Purchase Date.
Other than as specifically provided in this Section 3.09 or Section 4.10 hereof, any purchase pursuant to this Section 3.09 shall be made pursuant to the applicable provisions of Section 3.01 through Section 3.06 hereof.
ARTICLE 4
COVENANTS
SECTION 4.01 Payment of Notes .
The Issuer shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes. Principal, premium, if any, and
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interest shall be considered paid on the date due if the Paying Agent, if other than the Issuer or a Subsidiary, holds as of 10:00 a.m. on the due date money deposited by the Issuer in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due.
The Issuer shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest at the same rate to the extent lawful.
SECTION 4.02 Maintenance of Office or Agency .
The Issuer shall maintain the office or agency required under Section 2.03 (which may be an office of the Trustee or an Affiliate of the Trustee) where Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Issuer in respect of the Notes and this Indenture may be served. The Issuer shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Issuer shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee.
The Issuer may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided that no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain an office or agency required under Section 2.03. The Issuer shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.
The Issuer hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Issuer in accordance with Section 2.03 hereof.
SECTION 4.03 Reports and Other Information .
Notwithstanding that the Issuer may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act or otherwise report on an annual and quarterly basis on forms provided for such annual and quarterly reporting pursuant to rules and regulations promulgated by the SEC, the Issuer shall file with the SEC (and make available (without exhibits), without cost, to (i) Holders of the Notes, upon their request, and (ii) the Trustee, within 15 days after it files such reports and information with the SEC, to the extent not publicly available on the SECs EDGAR system or the Issuers public website ( provided , however , that the Trustee shall have no responsibility whatsoever to determine whether such filing or any other filing described below has occurred) from and after the Issue Date,
(a) within the time period then in effect under the rules and regulations of the Exchange Act with respect to the filing of a Form 10-K by a non-accelerated filer, annual reports on Form 10-K, or any successor or comparable form, containing the information required to be contained therein, or required in such successor or comparable form;
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(b) within the time period then in effect under the rules and regulations of the Exchange Act with respect to the filing of a Form 10-Q by a non-accelerated filer, for each of the first three fiscal quarters of each fiscal year, reports on Form 10-Q containing all quarterly information that would be required to be contained in Form 10-Q, or any successor or comparable form; and
(c) within the time period then in effect under the rules and regulations of the Exchange Act with respect to the filing of a Form 8-K, after the occurrence of an event required to be therein reported, such other reports on Form 8-K, or any successor or comparable form;
in each case, taking into account any extension of time, deemed filing date or safe harbor contemplated or provided by Rule 12b-25, Rule 13a-11(c) and Rule 15d-11(c) under the Exchange Act or successor provisions and in a manner that complies in all material respects with the requirements specified in such form; provided that the Issuer shall not be so obligated to file such reports with the SEC if the SEC does not permit such filing, in which event the Issuer shall post such reports on a website, which may, in the Issuers sole discretion, be non-public to which Holders are given access, within 15 days after the time the Issuer would have been required to file such information with the SEC, if it were subject to Sections 13 or 15(d) of the Exchange Act.
The filing requirements set forth above for the applicable period may be satisfied by the Issuer prior to the commencement of the Exchange Offer or the effectiveness of the Shelf Registration Statement by (i) the posting of such reports or the information required to be set forth therein on the Issuers public website (which may include a press release of the Issuer), or (ii) the filing with the SEC of an Exchange Offer Registration Statement and/or a Shelf Registration Statement, and any amendments thereto, with such financial information that satisfies Regulation S-X of the Securities Act; provided that, this paragraph shall not supersede or in any manner suspend or delay the Issuers reporting obligations, or the time periods required therefor, set forth above.
Notwithstanding the foregoing, if any parent of the Issuer becomes a guarantor of the Notes (there being no obligation of such parent to do so), the reports, information and other documents required to be filed and provided as described above may, at the option of the Issuer, be filed by and be those of the parent, rather than those of the Issuer, so long as such filings would satisfy the SECs requirements; provided that such reports include a reasonable explanation of the material differences between the assets, liabilities and results of operations of such parent and its consolidated Subsidiaries on the one hand, and the Issuer and its Restricted Subsidiaries on the other hand.
In addition, to the extent not satisfied by the foregoing, for so long as any Notes are outstanding the Issuer shall furnish to Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. For the avoidance of doubt, this Section 4.03 will not require the Issuer or the Restricted Subsidiaries to provide or file any information pursuant to the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC that would not otherwise be applicable to them.
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Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustees receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Issuers compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on an Officers Certificate).
To the extent that any reports or other information is not furnished within the time periods specified above and such reports or other information is subsequently furnished prior to the time such failure results in an Event of Default, the Issuer will be deemed to have satisfied its obligations with respect thereto and any Default with respect thereto shall be deemed to have been cured.
Prior to the Escrow Release Date, the Issuer will be deemed to be in compliance with the reporting obligations set forth in this Section 4.03 by virtue of filing the Form 10.
SECTION 4.04 Compliance Certificate .
(a) The Issuer shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Issuer ending after the Issue Date, a certificate from the principal executive officer, principal financial officer or principal accounting officer stating that a review of the activities of the Issuer and the Restricted Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officer with a view to determining whether the Issuer has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to such Officer signing such certificate, that to the best of his or her knowledge the Issuer has kept, observed, performed and fulfilled each and every condition and covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions, covenants and conditions of this Indenture (or, if a Default shall have occurred and is continuing, describing all such Defaults of which he or she may have knowledge and what action the Issuer is taking or propose to take with respect thereto).
(b) The Issuer shall, within 30 days after becoming aware of any Default, deliver to the Trustee by registered or certified mail, by facsimile transmission or electronic transmission in PDF format an Officers Certificate specifying such Default (unless such Default has been cured before the end of the 30-day period) and what action the Issuer proposes to take with respect thereto.
SECTION 4.05 Taxes .
The Issuer shall pay, and shall cause each of its Restricted Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and governmental levies except such as are contested in good faith and by appropriate negotiations or proceedings or where the failure to effect such payment is not adverse in any material respect to the Holders.
SECTION 4.06 Stay, Extension and Usury Laws .
The Issuer and each of the Guarantors covenant (to the extent that they may lawfully do so) that they shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any
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time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Issuer and each of the Guarantors (to the extent that they may lawfully do so) hereby expressly waive all benefit or advantage of any such law, and covenant that they shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted.
SECTION 4.07 Limitation on Restricted Payments .
(a) (1) The Issuer shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any payment or distribution on account of the Issuers or any of its Restricted Subsidiaries Equity Interests, including any dividend or distribution payable in connection with any merger or consolidation other than:
(A) dividends, payments or distributions payable by the Issuer in Equity Interests (other than Disqualified Stock) of the Issuer; or
(B) dividends, payments or distributions by a Restricted Subsidiary so long as, in the case of any dividend, payment or distribution payable on or in respect of any class or series of securities issued by a Restricted Subsidiary other than a Wholly-Owned Subsidiary, the Issuer or a Restricted Subsidiary receives at least its pro rata share of such dividend, payment or distribution in accordance with its Equity Interests in such class or series of securities;
(ii) purchase, redeem, defease or otherwise acquire or retire for value any Equity Interests of the Issuer, including in connection with any merger or consolidation;
(iii) make any principal payment on, or redeem, repurchase, defease or otherwise acquire or retire for value, in each case prior to any scheduled repayment, sinking fund payment or maturity, any Subordinated Indebtedness other than the payment, redemption, repurchase, defeasance, acquisition or retirement of:
(A) Indebtedness permitted under clause (7) of Section 4.09(b); or
(B) Subordinated Indebtedness in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of purchase, redemption, repurchase, defeasance, acquisition or retirement; or
(iv) make any Restricted Investment
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(all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as Restricted Payments ), unless, at the time of such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof;
(2) immediately after giving effect to such transaction on a pro forma basis, the Issuer could incur $1.00 of additional Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio test set forth in Section 4.09(a) hereof; and
(3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Issuer and its Restricted Subsidiaries (and not rescinded or refunded) after the Issue Date (including Restricted Payments permitted by clauses (1) and (9) of Section 4.07(b) hereof, but excluding all other Restricted Payments permitted by Section 4.07(b) hereof), is less than the sum of (without duplication):
(a) the sum of (x) $25.0 million and (y) 50.0% of the Consolidated Net Income of the Issuer for the period (taken as one accounting period) beginning from October 1, 2014 to the end of the Issuers most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit); plus
(b) 100% of the aggregate net cash proceeds and the fair market value, as determined in good faith by the Issuer, of marketable securities or other property received by the Issuer since immediately after the Issue Date from the issue or sale of:
(i) Equity Interests of the Issuer, but excluding cash proceeds and the fair market value, as determined in good faith by the Issuer, of marketable securities or other property received from the sale of Equity Interests to employees, officers, managers, directors or consultants of the Issuer after the Issue Date to the extent such amounts have been applied to Restricted Payments made in accordance with clause (4) of Section 4.07(b) hereof; and
(ii) Indebtedness or Disqualified Stock of the Issuer or a Restricted Subsidiary that has been converted into or exchanged for Equity Interests of the Issuer;
provided , however , that this clause (b) shall not include the proceeds from (w) the issuance or sale of Equity Interests or the fair market value of any assets received by the Issuer or any Restricted Subsidiary in connection with the Transactions, (x) Refunding Capital Stock (as defined below), (y) Equity Interests, Indebtedness or Disqualified Stock of the Issuer sold to a Restricted Subsidiary or the Issuer or (z) Disqualified Stock or Indebtedness that has been converted or exchanged into Disqualified Stock; plus
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(c) 100% of the aggregate amount of cash and the fair market value, as determined in good faith by the Issuer, of marketable securities or other property contributed to the capital of the Issuer following the Issue Date (other than (i) by a Restricted Subsidiary or the Issuer or (ii) the fair market value of any assets received by the Issuer or any Restricted Subsidiary in connection with the Transactions); plus
(d) 100% of the aggregate amount received in cash and the fair market value of marketable securities or other property received by means of:
(i) the sale or other disposition (other than to the Issuer or a Restricted Subsidiary) of Restricted Investments made by the Issuer or its Restricted Subsidiaries and repurchases and redemptions of such Restricted Investments from the Issuer or its Restricted Subsidiaries and repayments of loans or advances, and releases of guarantees, which constitute Restricted Investments by the Issuer or its Restricted Subsidiaries, in each case after the Issue Date; or
(ii) the sale (other than to the Issuer or a Restricted Subsidiary) of the stock of an Unrestricted Subsidiary (other than to the extent the Investment in such Unrestricted Subsidiary constituted a Permitted Investment) or a dividend or distribution from an Unrestricted Subsidiary after the Issue Date (other than to the extent the Investment in such Unrestricted Subsidiary constituted a Permitted Investment)
in the case of either clause (i) or (ii) of this paragraph (d), except to the extent any such amount was already included in the calculation of Consolidated Net Income; plus
(e) in the case of the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary after the Issue Date, the fair market value of the Investment in such Unrestricted Subsidiary (as determined by the Issuer in good faith) at the time of the redesignation of such Unrestricted Subsidiary as a Restricted Subsidiary other than an Unrestricted Subsidiary to the extent the Investment in such Unrestricted Subsidiary constituted a Permitted Investment.
(b) Section 4.07(a) shall not prohibit:
(1) the payment of any dividend or distribution or the consummation of any irrevocable redemption within 60 days after the date of declaration thereof or the giving of such irrevocable notice, as applicable, if at the date of declaration or the giving of such notice such payment would have complied with the provisions of this Indenture;
(2) the purchase, redemption, repurchase, defeasance, retirement or other acquisition of any Equity Interests of the Issuer, or of Subordinated Indebtedness of the Issuer or any Guarantor, in exchange for, or out of the proceeds of the substantially concurrent issuance or sale (other than to a Restricted Subsidiary or to an employee stock ownership plan or any trust established by the Issuer or any Restricted Subsidiary) of, Equity Interests of the Issuer (other than Disqualified Stock) (collectively, the Refunding Capital Stock );
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(3) the purchase, redemption, defeasance, repurchase or other acquisition or retirement of (x) Subordinated Indebtedness of the Issuer or a Guarantor made in exchange for, or out of the proceeds of the substantially concurrent incurrence of, new Indebtedness of the Issuer or a Guarantor, as the case may be, or (y) Disqualified Stock of the Issuer or any Guarantor in exchange for, or out of the proceeds of the substantially concurrent issuance of Disqualified Stock of the Issuer or any Guarantor, in each case which is incurred or issued in compliance with Section 4.09 hereof so long as:
(a) the principal amount (or accreted value, if applicable) of such new Indebtedness or the liquidation preference of such new Disqualified Stock does not exceed the principal amount of (or accreted value, if applicable), plus any accrued and unpaid interest on, the Subordinated Indebtedness or the liquidation preference of, plus any accrued and unpaid dividends on, the Disqualified Stock, as applicable, being so purchased, redeemed, defeased, repurchased, acquired or retired, plus the amount of any premium required to be paid under the terms of the instrument governing the Subordinated Indebtedness or Disqualified Stock being so purchased, redeemed, defeased, repurchased, acquired or retired and any fees and expenses incurred in connection with the issuance of such new Indebtedness or Disqualified Stock;
(b) such new Indebtedness is subordinated to the Notes or the applicable Guarantee at least to the same extent as such Subordinated Indebtedness so purchased, redeemed, defeased, repurchased, acquired or retired for value;
(c) such new Indebtedness or Disqualified Stock has a final scheduled maturity date equal to or later than (i) the final scheduled maturity date of the Subordinated Indebtedness or Disqualified Stock being so purchased, redeemed, defeased, repurchased, acquired or retired or (ii) the date that is six months after the maturity date of the Notes; and
(d) such new Indebtedness or Disqualified Stock has a Weighted Average Life to Maturity equal to or greater than the remaining Weighted Average Life to Maturity of the Subordinated Indebtedness or Disqualified Stock being so purchased, redeemed, defeased, repurchased, acquired or retired;
(4) a Restricted Payment to pay for the repurchase, retirement or other acquisition or retirement for value of Equity Interests (other than Disqualified Stock) of the Issuer held by any future, present or former employee, officer, manager, director or consultant of the Issuer or any of its Subsidiaries pursuant to any management equity plan or stock option plan or any other management or employee benefit plan or agreement, or any stock subscription or shareholder agreement, or other similar arrangement; provided , however , that the aggregate Restricted Payments made under this clause (4) do not exceed in any calendar year $15.0 million (with unused amounts in any calendar year being carried over for one additional calendar year); provided further that such amount in any calendar year may be increased by an amount not to exceed:
(a) the cash proceeds from the sale of Equity Interests (other than Disqualified Stock) of the Issuer to employees, officers, managers, directors or consultants of the Issuer or any of its Subsidiaries that occurs after the Issue Date, to the extent the cash proceeds from the sale of such Equity Interests have not otherwise been applied to the payment of Restricted Payments by virtue of clause (3) of Section 4.07(a) hereof; plus
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(b) the cash proceeds of key man life insurance policies received by the Issuer or any of its Restricted Subsidiaries after the Issue Date; less
(c) the amount of any Restricted Payments previously made with the cash proceeds described in clauses (a) and (b) of this clause (4);
and provided further that cancellation of Indebtedness owing to the Issuer or any Restricted Subsidiary from employees, officers, managers, directors or consultants of the Issuer or any of the Issuers Restricted Subsidiaries in connection with a repurchase of Equity Interests of the Issuer will not be deemed to constitute a Restricted Payment for purposes of this Section 4.07 or any other provision of this Indenture;
(5) purchases, redemptions, repurchases or other acquisitions of Equity Interests deemed to occur (i) upon exercise of stock options, stock appreciation rights, warrants or similar rights if such Equity Interests represent a portion of the exercise price of such options, stock appreciation rights or warrants or (ii) for purposes of satisfying any federal, state or local income tax obligation (including any required tax withholding obligation) upon the exercise or vesting of a grant or award that was granted or awarded to an employee;
(6) other Restricted Payments in an aggregate amount taken together with all other Restricted Payments made pursuant to this clause (6) not to exceed the greater of (i) $125.0 million and (ii) 5.0% of Total Assets;
(7) distributions or payments of Receivables Fees;
(8) any Restricted Payment used to fund and effect the Transactions;
(9) the repurchase, redemption, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness pursuant to the provisions similar to those described under Section 4.10 and Section 4.13 hereof; provided that prior to any such repurchase, redemption, defeasance or other acquisition or retirement for value, all Notes tendered by Holders in connection with a Change of Control Offer or Asset Sale Offer, as applicable, have been repurchased, redeemed or acquired for value;
(10) the repurchase, redemption or other acquisition for value of Equity Interests of the Issuer deemed to occur in connection with paying cash in lieu of
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fractional shares of such Equity Interests in connection with a share dividend, distribution, share split, reverse share split, merger, consolidation, amalgamation or other business combination of the Issuer or its Subsidiaries, in each case, permitted under this Indenture;
(11) the distribution, by dividend or otherwise, of shares of Capital Stock of, or Indebtedness owed to the Issuer or a Restricted Subsidiary by, Unrestricted Subsidiaries (other than Unrestricted Subsidiaries, the primary assets of which are cash and/or Cash Equivalents);
(12) for any taxable period in which the taxable income of the Issuer and/or any of its Subsidiaries is included in a consolidated, combined or similar income tax group of which a direct or indirect parent of the Issuer is the common parent (a Tax Group ), an amount not to exceed the tax liabilities that the Issuer and the applicable Subsidiaries, in the aggregate, would have been required to pay in respect of such taxable income if such entities were a standalone group of corporations separate from such Tax Group (it being understood and agreed that, if Issuer or any Subsidiary pays any portion of such tax liabilities directly to any taxing authority, a Restricted Payment in duplication of such amount shall not be permitted to be made pursuant to this clause (12)); provided that, from and after the execution of the Tax Matters Agreement and while such agreement remains in effect, payments in respect of any taxes pursuant to this clause (12) shall not exceed the amounts required to be paid in respect of such taxes pursuant to such agreement;
(13) the declaration and payment of regularly scheduled or accrued dividends to holders of any class or series of Disqualified Stock of the Issuer or any Restricted Subsidiary or Preferred Stock of any Restricted Subsidiaries issued or incurred in accordance with Section 4.09 hereof;
(14) payments of cash, or dividends, distributions or advances by the Issuer or any Restricted Subsidiary to allow the payment of cash in lieu of the issuance of fractional shares upon the exercise of options or warrants or upon the conversion or exchange of Capital Stock of any such Person;
(15) mandatory redemptions or repurchases of Disqualified Stock the issuance of which itself constituted a Restricted Payment or Permitted Investment otherwise permissible hereunder;
(16) the making of any Restricted Payments if, at the time of the making of such payments, and after giving pro forma effect thereto (including, without limitation, the incurrence of any Indebtedness to finance such payment), the Consolidated Total Leverage Ratio would not exceed 1.50 to 1.00; and
(17) the declaration and payment of dividends on the Issuers common Equity Interests, not to exceed $30.0 million in any calendar year;
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provided , however , that at the time of, and after giving effect to, any Restricted Payment permitted under clauses (6), (11) or (16), no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof.
(c) As of the Issue Date, all of the Issuers Subsidiaries will be Restricted Subsidiaries. The Issuer shall not permit any Unrestricted Subsidiary to become a Restricted Subsidiary except pursuant to the last two sentences of the definition of Unrestricted Subsidiary . For purposes of designating any Restricted Subsidiary as an Unrestricted Subsidiary, all outstanding Investments by the Issuer and its Restricted Subsidiaries (except to the extent repaid) in the Subsidiary so designated shall be deemed to be an Investment in an amount determined as set forth in the definition of Investment . Such designation shall be permitted only if an Investment in such amount would be permitted at such time, whether as a Restricted Payment or a Permitted Investment, and if such Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. Unrestricted Subsidiaries will not be subject to any of the covenants set forth in this Indenture.
(d) In the event that a Restricted Payment or Permitted Investment meets the criteria of more than one of the types of Restricted Payments described in the above clauses (including, without limitation, Section 4.07(a) hereof) or Permitted Investment described in the definition thereof, the Issuer and its Restricted Subsidiaries, in their sole discretion, may divide, classify or reclassify all or any portion of such Restricted Payment or Permitted Investment in any manner that complies with this Section 4.07 and such Restricted Payment or Permitted Investment shall be treated as having been made pursuant to only the clause or clauses of this Section 4.07 or of the definition of Permitted Investment to which such Restricted Payment or Permitted Investment has been classified or reclassified; provided that the Issuer may not reclassify any Restricted Payments as having been made under clause (16) of Section 4.07(b) if originally made under any other clause of Section 4.07(b) or under Section 4.07(a).
SECTION 4.08 Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries .
(a) The Issuer shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or consensual restriction on the ability of any such Restricted Subsidiary to:
(1) (A) pay dividends or make any other distributions to the Issuer or any of its Restricted Subsidiaries on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits, or
(B) pay any Indebtedness owed to the Issuer or any of its Restricted Subsidiaries;
(2) make loans or advances to the Issuer or any of its Restricted Subsidiaries; or
(3) sell, lease or transfer any of its properties or assets to the Issuer or any of its Restricted Subsidiaries.
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(b) The restrictions in Section 4.08(a) hereof shall not apply to encumbrances or restrictions existing under or by reason of:
(1) contractual encumbrances or restrictions (i) in effect on the Issue Date, (ii) created, incurred, assumed or suffered to exist, directly or indirectly, on or before the Escrow Release Date, in connection with the Transactions, or (iii) pursuant to the Senior Credit Facilities and the related documentation and related Hedging Obligations;
(2) (i) this Indenture, the Notes, the Escrow Agreement and the Guarantees (and any Exchange Notes and related Guarantees) and (ii) any agreement governing Indebtedness permitted to be incurred pursuant to Section 4.09 hereof; provided , that the provisions relating to restrictions of the type described in clauses (1) through (3) of Section 4.08(a) hereof contained in such agreement, taken as a whole, are not materially more restrictive than the provisions contained in the Senior Credit Facilities, or in this Indenture, in each case as in effect when initially executed;
(3) purchase money obligations for property acquired in the ordinary course of business and Capitalized Lease Obligations that impose restrictions of the nature discussed in clause (3) of Section 4.08(a) hereof on the property so acquired or leased;
(4) applicable law or any applicable rule, regulation or order;
(5) any agreement or other instrument of a Person (including an Unrestricted Subsidiary that becomes a Restricted Subsidiary) acquired by or merged or consolidated with or into the Issuer or any of its Restricted Subsidiaries in existence at the time of such transaction (but not created in contemplation thereof), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person and its Subsidiaries, or the property or assets of the Person and its Subsidiaries, so acquired;
(6) contracts for the sale of assets (including the Capital Stock of a Subsidiary), including customary restrictions with respect to a Subsidiary of the Issuer, that impose restrictions solely on the assets to be sold;
(7) Secured Indebtedness otherwise permitted to be incurred pursuant to Section 4.09 hereof and Section 4.12 hereof that limit the right of the debtor to dispose of the assets securing such Secured Indebtedness or places any restriction on the Issuers or its Restricted Subsidiaries use of the assets securing such Secured Indebtedness;
(8) restrictions on cash or other deposits or net worth imposed by customers, suppliers, utilities or landlords or required by insurance, surety or bonding companies, in each case, under contracts entered into in the ordinary course of business;
(9) other Indebtedness, Disqualified Stock or Preferred Stock of Non-Guarantor Subsidiaries permitted to be incurred subsequent to the Issue Date pursuant to Section 4.09 hereof;
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(10) customary provisions limiting the disposition or distribution of assets or property in partnership and joint venture agreements or arrangements, operating agreements, stock sale agreements, sale and leaseback agreements and other similar agreements or arrangements (including agreements entered into in connection with a Restricted Investment) entered into in the ordinary course of business, which limitation is applicable only to the assets that are the subject of such agreements;
(11) customary provisions contained in leases, sub-leases, licenses or sub-licenses and other agreements, in each case, entered into in the ordinary course of business;
(12) other encumbrances and restrictions created in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Issuer or any Restricted Subsidiary thereof in any manner material to the Issuer or any Restricted Subsidiary thereof;
(13) restrictions created in connection with any Receivables Facility that, in the good faith determination of the Issuer, are necessary or advisable to effect such Receivables Facility; provided that such restrictions apply only to the applicable Receivables Subsidiary;
(14) any other agreement or instrument governing any Indebtedness, Disqualified Stock, or Preferred Stock permitted to be incurred or issued pursuant to Section 4.09 hereof entered into after the Issue Date that contains encumbrances and other restrictions that either (x) are no more restrictive in any material respect taken as a whole with respect to any Restricted Subsidiary than (i) the restrictions contained in this Indenture as of the Issue Date or (ii) those encumbrances and other restrictions that are in effect on the Issue Date with respect to that Restricted Subsidiary pursuant to agreements in effect on the Issue Date, (y) are not materially more disadvantageous, taken as a whole, to the Holders than is customary in comparable financings for similarly situated issuers or (z) will not otherwise materially impair the Issuers ability to make payments on the Notes when due, in each case in the good faith judgment of the Issuer; and
(15) any encumbrances or restrictions of the type referred to in clauses (1), (2) and (3) of Section 4.08(a) hereof imposed by any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of the contracts, instruments or obligations referred to in clauses (1) through (14) of this Section 4.08(b); provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are, in the good faith judgment of the Issuer, no more restrictive in any material respect with respect to such encumbrance and other restrictions taken as a whole than those prior to such amendment, modification, restatement, renewal, increase, supplement, refunding, replacement or refinancing;
For purposes of determining compliance with this Section 4.08, (i) the priority of any Preferred Stock in receiving dividends or liquidating distributions prior to dividends or liquidating
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distributions being paid on common stock shall not be deemed a restriction on the ability to make distributions on Capital Stock and (ii) the subordination of loans or advances made to the Issuer or a Restricted Subsidiary to other Indebtedness incurred by the Issuer or any such Restricted Subsidiary shall not be deemed a restriction on the ability to make loans or advances.
SECTION 4.09 Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock .
(a) The Issuer shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently, or otherwise (collectively, incur and collectively, an incurrence ) with respect to any Indebtedness (including Acquired Indebtedness) and the Issuer shall not issue any shares of Disqualified Stock and shall not permit any Restricted Subsidiary to issue any shares of Disqualified Stock or Preferred Stock; provided , however , that the Issuer may incur Indebtedness (including Acquired Indebtedness) or issue shares of Disqualified Stock, and any Restricted Subsidiary may incur Indebtedness (including Acquired Indebtedness), issue shares of Disqualified Stock and issue shares of Preferred Stock, if the Consolidated Fixed Charge Coverage Ratio at the time such additional Indebtedness is incurred or such Disqualified Stock or Preferred Stock is issued would have been at least 2.0 to 1.0, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or Preferred Stock had been issued, as the case may be, and the application of proceeds therefrom had occurred at the beginning of the most recently ended four fiscal quarters for which internal financial statements are available; provided further , however , that Non-Guarantor Subsidiaries may not incur Indebtedness or issue Disqualified Stock or Preferred Stock if, after giving pro forma effect to such incurrence or issuance, the aggregate amount of Indebtedness or Disqualified Stock or Preferred Stock of Non-Guarantor Subsidiaries outstanding pursuant to this Section 4.09(a) and clause (17) of Section 4.09(b) hereof would exceed the greater of (1) $100.0 million and (2) 4.0% of Total Assets determined at the time of incurrence.
(b) The provisions of Section 4.09(a) hereof shall not apply to:
(1) the incurrence of Indebtedness under Credit Facilities by the Issuer or any of its Restricted Subsidiaries and the issuance and creation of letters of credit and bankers acceptances thereunder (with letters of credit and bankers acceptances being deemed to have a principal amount equal to the face amount thereof); provided , however , that immediately after giving effect to any such incurrence, the then outstanding aggregate principal amount of all Indebtedness under this clause (1) does not exceed at any one time the sum of (i) $895.0 million plus (ii) the maximum principal amount of Secured Indebtedness that could be incurred such that after giving effect to such incurrence, the Consolidated Secured Leverage Ratio would be no greater than 2.50 to 1.00;
(2) the incurrence by the Issuer and any Guarantor of Indebtedness represented by (i) the Notes (including any Guarantee) (other than any Additional Notes) and (ii) any Exchange Notes and any related Guarantees to be issued pursuant to a registered exchange offer in accordance with the Registration Rights Agreement in exchange for the Notes or Additional Notes, if any, issued in compliance with this Indenture;
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(3) Indebtedness of the Issuer and its Restricted Subsidiaries in existence on the Issue Date or incurred on or before the Escrow Release Date in connection with the Transactions (in each case, other than Indebtedness described in clauses (1) and (2) of this Section 4.09(b));
(4) Indebtedness (including Capitalized Lease Obligations and Attributable Debt), Disqualified Stock and Preferred Stock incurred or issued by the Issuer or any of its Restricted Subsidiaries to finance the purchase, lease, construction, repair or improvement of property (real or personal) or equipment that is used or useful in a Similar Business, whether through the direct purchase of assets or the Capital Stock of any Person owning such assets, and any Indebtedness incurred to refinance any such Indebtedness, in an aggregate principal amount or liquidation preference which, when aggregated with the principal amount of all other Indebtedness, Disqualified Stock and Preferred Stock then outstanding under this clause (4) does not exceed the greater of (x) $100.0 million and (y) 4.0% of Total Assets determined at the time of incurrence;
(5) Indebtedness incurred by the Issuer or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit, bankers acceptances, bank guarantees, warehouse receipts or similar facilities issued or entered into in the ordinary course of business, including letters of credit in respect of workers compensation claims, performance or surety bonds, health, disability, social security or other employee benefits, property, casualty or liability insurance or self-insurance or other Indebtedness with respect to reimbursement type obligations regarding workers compensation claims, performance or surety bonds, health, disability, social security or other employee benefits or property, casualty or liability insurance or self-insurance;
(6) Indebtedness arising from agreements of the Issuer or its Restricted Subsidiaries providing for indemnification, holdback, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the acquisition or disposition of any business, assets or a Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or a Subsidiary for the purpose of financing such acquisition;
(7) Indebtedness of the Issuer to a Restricted Subsidiary or of a Restricted Subsidiary to the Issuer or another Restricted Subsidiary; provided that any such Indebtedness (other than such as may arise from ordinary course intercompany cash management obligations) owing by the Issuer or a Guarantor to a Non-Guarantor Subsidiary is expressly subordinated in right of payment to the Notes or the applicable Guarantee, as applicable; and provided further that any subsequent issuance or transfer of any Capital Stock or any other event which results in any Restricted Subsidiary ceasing to be a Restricted Subsidiary or any other subsequent transfer of any such Indebtedness (except to the Issuer or another Restricted Subsidiary or any pledge of such Indebtedness constituting a Permitted Lien) shall be deemed, in each case, to be an incurrence of such Indebtedness not permitted by this clause (7);
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(8) shares of Preferred Stock of a Restricted Subsidiary issued to the Issuer or another Restricted Subsidiary; provided that any subsequent issuance or transfer of any Capital Stock or any other event which results in such Preferred Stock being beneficially owned by a Person other than the Issuer or any Restricted Subsidiary or any other subsequent transfer of any such shares of Preferred Stock (except to the Issuer or another of its Restricted Subsidiaries) shall be deemed in each case to be an issuance of such shares of Preferred Stock not permitted by this clause (8);
(9) Hedging Obligations incurred in the ordinary course of business (excluding Hedging Obligations entered into for speculative purposes);
(10) obligations in respect of performance, bid, appeal, custom and surety bonds and completion guarantees and similar obligations provided by the Issuer or any of its Restricted Subsidiaries or obligations in respect of letters of credit, bank guarantees or similar instruments related thereto, in each case in the ordinary course of business or consistent with past practice;
(11) Indebtedness or Disqualified Stock of the Issuer and Indebtedness, Disqualified Stock or Preferred Stock of the Issuer or Guarantor not otherwise permitted hereunder in an aggregate principal amount or liquidation preference, which when aggregated with the outstanding principal amount and liquidation preference of all other Indebtedness, Disqualified Stock and Preferred Stock then outstanding and incurred pursuant to this clause (11) (including any refinancing thereof), does not at any one time outstanding exceed the greater of (x) $75.0 million and (y) 3.0% of Total Assets determined at the time of incurrence;
(12) the incurrence by the Issuer or any Restricted Subsidiary of Indebtedness, Disqualified Stock or Preferred Stock which serves to refund or refinance:
(i) any Indebtedness, Disqualified Stock or Preferred Stock incurred or issued as permitted under Section 4.09(a) hereof and clauses (2) and (3) of this Section 4.09(b), this clause (12) and clause (13) of this Section 4.09(b), or
(ii) any Indebtedness, Disqualified Stock or Preferred Stock incurred or issued to so refund or refinance the Indebtedness, Disqualified Stock or Preferred Stock described in clause (12)(i) of this Section 4.09(b),
including, in each case, additional Indebtedness, Disqualified Stock or Preferred Stock incurred to pay premiums (including tender premiums), accrued interest, defeasance costs and reasonable fees and expenses in connection therewith (collectively, the Refinancing Indebtedness ); provided , however , that such Refinancing Indebtedness:
(A) has a Weighted Average Life to Maturity at the time such Refinancing Indebtedness is incurred which is not less than the remaining Weighted Average Life to Maturity of the Indebtedness, Disqualified Stock or Preferred Stock being refunded or refinanced,
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(B) to the extent such Refinancing Indebtedness refinances (i) Indebtedness subordinated or pari passu to the Notes or any Guarantee thereof, such Refinancing Indebtedness is subordinated or pari passu , as the case may be, to the Notes or the Guarantee at least to the same extent as the Indebtedness being refinanced or refunded or (ii) Disqualified Stock or Preferred Stock, such Refinancing Indebtedness must be Disqualified Stock or Preferred Stock, respectively, and
(C) shall not include:
(i) Indebtedness, Disqualified Stock or Preferred Stock of a Non-Guarantor Subsidiary that refinances Indebtedness, Disqualified Stock or Preferred Stock of the Issuer;
(ii) Indebtedness, Disqualified Stock or Preferred Stock of a Non Guarantor Subsidiary that refinances Indebtedness, Disqualified Stock or Preferred Stock of a Guarantor; or
(iii) Indebtedness, Disqualified Stock or Preferred Stock of the Issuer or a Restricted Subsidiary that refinances Indebtedness, Disqualified Stock or Preferred Stock of an Unrestricted Subsidiary;
and provided further that subclause (A) of this clause (12) will not apply to any refunding or refinancing of Indebtedness under the Senior Credit Facilities;
(13) Indebtedness, Disqualified Stock or Preferred Stock of (x) the Issuer or a Restricted Subsidiary incurred to finance an acquisition or (y) Persons that are acquired by the Issuer or any Restricted Subsidiary or merged into or consolidated with the Issuer or a Restricted Subsidiary in accordance with the terms of this Indenture; provided that after giving effect to such acquisition, merger or consolidation, either:
(a) the Issuer would be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio test set forth in Section 4.09(a) hereof, or
(b) the Consolidated Fixed Charge Coverage Ratio is greater than or equal to the Consolidated Fixed Charge Coverage Ratio immediately prior to such acquisition, merger or consolidation;
(14) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument drawn against insufficient funds in the ordinary course of business or other cash management services in the ordinary course of business; provided that such Indebtedness is extinguished within ten Business Days of notice of its incurrence;
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(15) Indebtedness of the Issuer or any of its Restricted Subsidiaries supported by a letter of credit or bank guarantee issued pursuant to the Credit Facilities, in a principal amount not in excess of the stated amount of such letter of credit or bank guarantee;
(16) (a) any guarantee by the Issuer or a Restricted Subsidiary of Indebtedness or other obligations of any Restricted Subsidiary so long as the incurrence of such Indebtedness incurred by such Restricted Subsidiary is permitted under the terms of this Indenture, or
(b) any guarantee by a Restricted Subsidiary of Indebtedness of the Issuer; provided that such guarantee is incurred in accordance with Section 4.15 hereof;
(17) Indebtedness of Non-Guarantor Subsidiaries in an aggregate principal amount, which when aggregated with the principal amount of all other Indebtedness of Non-Guarantor Subsidiaries then outstanding and incurred pursuant to this clause (17) and under Section 4.09(a) hereof, does not exceed the greater of (i) $100.0 million and (ii) 4.0% of Total Assets at any one time outstanding (including any refinancing thereof);
(18) Indebtedness of the Issuer or any of its Restricted Subsidiaries consisting of (i) the financing of insurance premiums or (ii) take-or-pay obligations contained in supply arrangements in each case, incurred in the ordinary course of business;
(19) Indebtedness of the Issuer or any of its Restricted Subsidiaries undertaken in connection with cash management, overdraft protection and related activities with respect to any Subsidiary or joint venture in the ordinary course of business;
(20) Indebtedness consisting of Indebtedness issued by the Issuer or any of its Restricted Subsidiaries to current or former employees, officers, managers, directors and consultants thereof, their respective estates, spouses or former spouses, in each case to finance the purchase or redemption of Equity Interests of the Issuer to the extent described in clause (4) of Section 4.07(b) hereof; and
(21) guarantees incurred in the ordinary course of business in respect of obligations of (or to) suppliers, customers, lessors and licensees that, in each case, are non-Affiliates.
(c) For purposes of determining compliance with this Section 4.09, in the event that an item of Indebtedness, Disqualified Stock or Preferred Stock (or any portion thereof) meets the criteria of more than one of the categories of permitted Indebtedness, Disqualified Stock or Preferred Stock described in clauses (1) through (21) of Section 4.09(b) hereof or is entitled to be incurred pursuant to Section 4.09(a) hereof, the Issuer, in its sole discretion, will divide and/or classify on the date of incurrence and may later redivide and/or reclassify such item of Indebtedness, Disqualified Stock or Preferred Stock (or any portion thereof) and will
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only be required to include the amount and type of such Indebtedness, Disqualified Stock or Preferred Stock in one of the above clauses of Section 4.09(b) or in Section 4.09(a); provided that all Indebtedness outstanding under the Credit Facilities on the Escrow Release Date will be treated as incurred under clause (1) of Section 4.09(b) and will not later be reclassified.
(d) Accrual of interest or dividends, the accretion of accreted value and the payment of interest in the form of additional indebtedness with the same terms, the payment of dividends in the form of additional shares of Disqualified Stock or Preferred Stock, as applicable, of the same class, and accretion of original issue discount or liquidation preference will not be deemed to be an incurrence of Indebtedness, Disqualified Stock or Preferred Stock for purposes of this Section 4.09. Guarantees of, or obligations in respect of letters of credit relating to, Indebtedness which is otherwise included in the determination of a particular amount of Indebtedness shall not be included in the determination of such amount of Indebtedness; provided that the incurrence of the Indebtedness represented by such guarantee or letter of credit, as the case may be, was in compliance with this Section 4.09.
(e) For purposes of determining compliance with any U.S. dollar-denominated restriction on the incurrence of Indebtedness, the U.S. dollar-equivalent principal amount of Indebtedness denominated in a foreign currency shall be calculated based on the relevant currency exchange rate in effect on the date such Indebtedness was incurred, in the case of term debt, or first committed or first incurred (whichever is lower), in the case of revolving credit debt; provided that if such Indebtedness is incurred to refinance other Indebtedness denominated in a foreign currency, and such refinancing would cause the applicable U.S. dollar-denominated restriction to be exceeded if calculated at the relevant currency exchange rate in effect on the date of such refinancing, such U.S. dollar-denominated restriction shall be deemed not to have been exceeded so long as the principal amount of such refinancing Indebtedness does not exceed the principal amount of such Indebtedness being refinanced plus the amount of any reasonable premium (including reasonable tender premiums), defeasance costs and any reasonable fees and expenses incurred in connection with the issuance of such Indebtedness. For the avoidance of doubt and notwithstanding any other provision of this Section 4.09, the maximum amount of Indebtedness that may be incurred pursuant to this Section 4.09 shall not be deemed to be exceeded solely as a result of fluctuations in the exchange rate of currencies.
(f) The principal amount of any Indebtedness incurred to refinance other Indebtedness, if incurred in a different currency from the Indebtedness being refinanced, shall be calculated based on the currency exchange rate applicable to the currencies in which such respective Indebtedness is denominated that is in effect on the date of such refinancing. The principal amount of any non-interest bearing Indebtedness or other discount security constituting Indebtedness at any date shall be the principal amount thereof that would be shown on a balance sheet of the Issuer dated such date prepared in accordance with GAAP.
(g) The Issuer will not, and will not permit any Guarantor to, directly or indirectly, incur any Indebtedness (including Acquired Indebtedness) that is subordinated or junior in right of payment to any Indebtedness of the Issuer or such Guarantor, as the case may be, unless such Indebtedness is expressly subordinated in right of payment to the Notes or such Guarantors Guarantee to the extent and in the same manner as such Indebtedness is subordinated to other Indebtedness of the Issuer or such Guarantor, as the case may be.
(h) For the purposes of this Indenture, Indebtedness that is unsecured is not deemed to be subordinated or junior to Secured Indebtedness merely because it is unsecured, and Indebtedness is not deemed to be subordinated or junior to any other Indebtedness merely because it has a junior priority with respect to the same collateral.
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SECTION 4.10 Asset Sales .
(a) The Issuer shall not, and shall not permit any of its Restricted Subsidiaries to, consummate an Asset Sale, unless:
(1) the Issuer or any such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value (as determined in good faith by the Issuer) of the assets sold or otherwise disposed of; and
(2) in the Issuers good faith determination, at least 75% of the consideration therefor received by the Issuer or any such Restricted Subsidiary, as the case may be, is in the form of (i) cash or Cash Equivalents, (ii) Related Business Assets or (iii) any combination of the consideration specified in clauses (i) and (ii); provided that the amount of:
(A) any liabilities (as shown on the Issuers most recent consolidated balance sheet or in the footnotes thereto, or if incurred or accrued subsequent to the date of such balance sheet, such liabilities that would have been reflected on the Issuers consolidated balance sheet or in the footnotes thereto if such incurrence or accrual had taken place on or prior to the date of such balance sheet, as determined in good faith by the Issuer) of the Issuer or such Restricted Subsidiary (other than Contingent Obligations and liabilities that are by their terms subordinated to the Notes or any Guarantee) that are assumed by the transferee of any such assets (or are otherwise extinguished by the transferee in connection with the transactions relating to such Asset Sale) and for which the Issuer and all such Restricted Subsidiaries have been released,
(B) any notes or other obligations or securities received by the Issuer or such Restricted Subsidiary from such transferee that are converted by the Issuer or such Restricted Subsidiary into cash or Cash Equivalents, or by their terms are required to be satisfied for cash or Cash Equivalents (to the extent of the cash or Cash Equivalents received), in each case, within 180 days following the closing of such Asset Sale, and
(C) any Designated Non-cash Consideration received by the Issuer or such Restricted Subsidiary in such Asset Sale having an aggregate fair market value (as determined in good faith by the Issuer), taken together with all other Designated Non-cash Consideration received pursuant to this clause (c) since the Issue Date that is at that time outstanding (but, to the extent that any
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such Designated Non-cash Consideration is sold or otherwise liquidated for cash, minus the lesser of (a) the amount of the cash received (less the cost of disposition, if any) and (b) the initial amount of such Designated Non-cash Consideration) not to exceed the greater of (x) $50.0 million and (y) 2.0% of Total Assets, with the fair market value (as determined in good faith by the Issuer) of each item of Designated Non-cash Consideration being measured at the time received and without giving effect to subsequent changes in value,
shall be deemed to be cash for purposes of this provision and for no other purpose.
(b) Within 365 days after the receipt of any Net Proceeds of any Asset Sale, the Issuer or such Restricted Subsidiary, at its option, may apply the Net Proceeds from such Asset Sale,
(1) to permanently reduce:
(A) Obligations under one or more Credit Facilities and to correspondingly reduce commitments with respect thereto;
(B) Obligations under Pari Passu Indebtedness that is secured by a Lien, which Lien is permitted by this Indenture, and to correspondingly reduce commitments with respect thereto;
(C) Obligations under the Notes ( provided that such purchases are at or above 100% of the principal amount thereof) or any other Pari Passu Indebtedness of the Issuer or a Guarantor (and to correspondingly reduce commitments with respect thereto, if applicable); provided that if such Net Proceeds are applied to other Pari Passu Indebtedness (other than the Senior Credit Facilities or other Secured Indebtedness) then the Issuer shall (i) equally and ratably (based on the aggregate principal amount (or accreted value, as applicable)) reduce Obligations under the Notes (x) as provided under Section 3.07 or (y) through open market purchases ( provided that such purchases are at or above 100% of the principal amount thereof) or (ii) make an offer (in accordance with Section 4.10(c) hereof) to all Holders of Notes to purchase their Notes at 100% of the principal amount thereof, plus the amount of accrued but unpaid interest, if any, on the principal amount of Notes that would otherwise be redeemed under clause (i), or
(D) Indebtedness of a Non-Guarantor Subsidiary, other than Indebtedness owed to the Issuer or another Restricted Subsidiary; or
(2) to make (A) an Investment in any one or more businesses; provided that such Investment in any business is in the form of the acquisition of Capital Stock and results in the Issuer or one of its Restricted Subsidiaries, as the case may be, owning an amount of the Capital Stock of such business such that it constitutes a Restricted Subsidiary, (B) acquire properties (other than working capital), (C) make capital expenditures or (D) acquire other assets (other than working capital) that, in the case of each of (A), (B), (C) and (D) are either (x) used or useful in a Similar Business or (y) replace the businesses, properties and/or assets that are the subject of such Asset Sale;
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provided that, in the case of clause (2) above, a binding commitment shall be treated as a permitted application of the Net Proceeds from the date of such commitment so long as the Issuer, or such other Restricted Subsidiary enters into such commitment with the good faith expectation that such Net Proceeds will be applied to satisfy such commitment within 180 days of such commitment (an Acceptable Commitment ); provided further that if any Acceptable Commitment is later cancelled or terminated for any reason before such Net Proceeds are applied, then such Net Proceeds shall constitute Excess Proceeds; or
(3) any combination of the foregoing.
(c) Any Net Proceeds from an Asset Sale that are not invested or applied as provided and within the time period set forth in Section 4.10(b) (it being understood that any portion of such Net Proceeds used to make an offer to purchase Notes, as described in clause (1) above, shall be deemed to have been invested whether or not such offer is accepted) will be deemed to constitute Excess Proceeds. When the aggregate amount of Excess Proceeds exceeds $25.0 million, the Issuer or any Restricted Subsidiary shall make an offer to all Holders of the Notes and, if required by the terms of any Pari Passu Indebtedness, to the holders of such Pari Passu Indebtedness (an Asset Sale Offer ) to purchase the maximum aggregate principal amount (or accreted value, as applicable) of the Notes in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof and such Pari Passu Indebtedness that may be purchased out of the Excess Proceeds at an offer price in cash in an amount equal to 100% of the principal amount thereof (or accreted value, as applicable), plus accrued and unpaid interest, if any (or, in respect of such Pari Passu Indebtedness, such lesser price, if any, as may be provided for or permitted by the terms of such Pari Passu Indebtedness), to, but excluding, the date fixed for the closing of such offer, in accordance with the procedures set forth in this Indenture.
(d) The Issuer shall commence an Asset Sale Offer with respect to Excess Proceeds within ten Business Days after the date that Excess Proceeds exceed $25.0 million by electronically delivering or mailing the notice required pursuant to the terms of this Indenture, with a copy to the Trustee.
(e) To the extent that the aggregate principal amount (or accreted value, as applicable) of Notes and such Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Issuer may use any remaining Excess Proceeds for general corporate purposes, subject to the other covenants contained in this Indenture, and they will no longer constitute Excess Proceeds. If the aggregate amount (determined as above) of Notes and the Pari Passu Indebtedness surrendered in an Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the Notes (in accordance with customary procedures) and the Issuer shall select such Pari Passu Indebtedness to be purchased (a) if the Notes or such Pari Passu Indebtedness are listed on any national securities exchange, in compliance with the requirements of the principal national securities exchange on which the Notes or such Pari Passu Indebtedness, as applicable, are listed or (b) by lot or such similar method in accordance with the procedures of DTC, unless otherwise required by law; provided that no Notes of $2,000 or less shall be repurchased in part. Upon completion of any such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
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(f) Pending the final application of any Net Proceeds pursuant to this Section 4.10, the holder of such Net Proceeds may apply such Net Proceeds temporarily to reduce Indebtedness outstanding under a revolving credit facility or otherwise invest such Net Proceeds in any manner not prohibited by this Indenture.
(g) The Issuer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws or regulations are applicable in connection with the repurchase of the Notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Indenture, the Issuer shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in this Indenture by virtue thereof.
(h) Notwithstanding anything to the contrary herein, the Issuers obligations to make an Asset Sale Offer under this Section 4.10 may be waived or modified with the written consent of the Holders of a majority in aggregate principal amount of the then outstanding Notes.
SECTION 4.11 Transactions with Affiliates .
(a) The Issuer shall not, and shall not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate of the Issuer (each of the foregoing, an Affiliate Transaction ) involving aggregate payments or consideration in excess of $10.0 million, unless:
(1) such Affiliate Transaction is on terms, taken as a whole, that are not materially less favorable to the Issuer or its relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Issuer or such Restricted Subsidiary with an unrelated Person on an arms-length basis; and
(2) any Affiliate Transaction or series of related Affiliate Transactions involving aggregate payments or consideration in excess of $50.0 million is approved by the majority of the disinterested members of the Board of Directors of the Issuer.
(b) Section 4.11(a) hereof shall not apply to the following:
(1) transactions between or among the Issuer and any of its Restricted Subsidiaries;
(2) Restricted Payments permitted by Section 4.07 hereof and Permitted Investments;
(3) the payment of customary fees and compensation paid to, and indemnities and reimbursements and employment and severance arrangements and agreements provided on behalf of, or entered into with, officers, directors, employees or consultants of the Issuer or any of its Restricted Subsidiaries;
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(4) (A) any agreement, instrument or arrangement as in effect as of the Issue Date (or transactions pursuant thereto), (B) any other agreements, instruments or arrangements (or transactions pursuant thereto) as in effect on the Distribution Date (including the Separation and Distribution Documents) or pursuant to or in connection with the Separation and Distribution Documents (including the Transactions) or (C) any amendment, modification or supplement to the agreements referenced in clause (A) or (B) above or any replacement thereof, as long as the terms of such agreement or arrangement, as so amended, modified, supplemented or replaced are not materially more disadvantageous to the Holders when taken as a whole compared to the applicable agreements, instruments or arrangements as in effect on the Issue Date or as described in the Offering Memorandum, as applicable, as determined in good faith by the Issuer;
(5) the Transactions and the payment of all fees and expenses related to the Transactions;
(6) transactions with customers (including leases or other arrangements for the use of advertising space), clients, suppliers, or purchasers or sellers of goods or services, or transactions otherwise relating to the purchase or sale of goods or services, in each case in the ordinary course of business and otherwise in compliance with the terms of this Indenture which are fair to the Issuer and its Restricted Subsidiaries, in the reasonable determination of the Board of Directors of the Issuer or the senior management thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party;
(7) the issuance or transfer of Equity Interests (other than Disqualified Stock) of the Issuer and the granting of registration and other customary rights in connection therewith;
(8) sales of accounts receivable, or participations therein, and related assets and any other customary transaction effected in connection with any Receivables Facility;
(9) payments, loans, advances or guarantees (or cancellation of payments, loans, advances or guarantees) to employees, directors or consultants of the Issuer or any of its Restricted Subsidiaries and employment agreements, benefit plans, equity plans, stock option and stock ownership plans and other similar arrangements with such employees, directors or consultants which, in each case, are approved by the Issuer in good faith;
(10) transactions with joint ventures or Unrestricted Subsidiaries for the purchase or sale of goods, equipment and services entered into in the ordinary course of business;
(11) transactions in which the Issuer or any Restricted Subsidiary, as the case may be, delivered to the Trustee a letter from an Independent Financial Advisor stating that such transaction is fair to the Issuer or such Restricted Subsidiary from a financial point of view or meets the requirements of clause (1) of Section 4.11(a);
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(12) the issuances of securities or other payments, loans (or cancellation of loans) awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, benefit plans, equity plans, stock option and stock ownership plans or similar employee benefit plans approved by the Board of Directors of the Issuer in good faith;
(13) any contribution to the capital of the Issuer (other than in consideration of Disqualified Stock);
(14) the provision to Unrestricted Subsidiaries of cash management, accounting and other overhead services in the ordinary course of business undertaken in good faith and not for the purpose of circumventing any covenant set forth in this Indenture;
(15) any transaction with a Person (other than an Unrestricted Subsidiary) that would constitute an Affiliate Transaction solely because the Issuer or any of its Restricted Subsidiaries owns an Equity Interest in or otherwise controls such Person;
(16) any transaction in which the only consideration paid by the Issuer or any of its Restricted Subsidiaries is in the form of Equity Interests (other than Disqualified Stock) of the Issuer to Affiliates of the Issuer or any contribution to the capital of the Issuer or any Restricted Subsidiary (other than in consideration of Disqualified Stock);
(17) intellectual property licenses in the ordinary course of business;
(18) transactions between the Issuer or any of its Restricted Subsidiaries and any Person that would constitute an Affiliate Transaction solely because a director of which is also a director of the Issuer or any other direct or indirect parent of the Issuer; provided , that such director abstains from voting as a director of the Issuer or such direct or indirect parent of the Issuer, as the case may be, on any matter involving such other Person;
(19) (A) the guarantee by the Issuer or any Restricted Subsidiary of the Indebtedness of any parent company of the Issuer that becomes the parent company of the Issuer in a Change of Control transaction consummated in accordance with this Indenture, or of any Indebtedness of Subsidiaries of such parent company; provided that such guarantee was permitted by the terms of this Indenture to be incurred and (B) the granting by the Issuer or any of its Restricted Subsidiaries of any Liens to secure such Indebtedness or such guarantee; provided that such Liens are permitted to be incurred under this Indenture;
(20) any non-recourse pledge of Equity Interests of an Unrestricted Subsidiary to support the Indebtedness of such Unrestricted Subsidiary; and
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(21) prior to the Separation and Distribution, (A) any cash management transactions or related transactions between or among the Issuer or any of its Restricted Subsidiaries, on the one hand, and Kimberly-Clark or any of its other Subsidiaries, on the other hand, (B) any cancellation of Indebtedness, intercompany accounts, balances, credits or debits between or among the Issuer or any of its Restricted Subsidiaries, on the one hand, and Kimberly-Clark or any of its other Subsidiaries, on the other hand, and (C) any other transactions between or among the Issuer or any of its Restricted Subsidiaries, on the one hand, and Kimberly-Clark or any of its other Subsidiaries, on the other hand, in each case under this clause (C) in the ordinary course of business. Notwithstanding anything to the contrary set forth herein, no provision of this Indenture shall restrict the transactions described in clauses (A) and (B) of this clause (21) of this Section 4.11(b) in each case entered into in the ordinary course of business.
SECTION 4.12 Liens .
The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien (except Permitted Liens) that secures Indebtedness, on any asset or property of the Issuer or any Restricted Subsidiary, or any income or profits therefrom, unless:
(1) in the case of Liens securing Subordinated Indebtedness, the Notes and related Guarantees are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens; or
(2) in all other cases, the Notes or the Guarantees are equally and ratably secured.
The foregoing shall not apply to (A) Liens securing the Notes and the related Guarantees, (B) Liens securing Indebtedness permitted to be incurred under Credit Facilities, including any letter of credit facility relating thereto, that was permitted by the terms of this Indenture to be incurred pursuant to clause (1) of Section 4.09(b) hereof, and (C) Liens securing Pari Passu Indebtedness (including Credit Facilities) permitted to be incurred pursuant to Section 4.09 hereof; provided that at the time of any incurrence of such Pari Passu Indebtedness and after giving pro forma effect thereto (in a manner consistent with the calculation of the Consolidated Fixed Charge Coverage Ratio) under this clause (C), the Consolidated Secured Leverage Ratio shall not be greater than 3.00 to 1.00.
Any Lien created for the benefit of the Holders of the Notes pursuant to this Section 4.12 shall be deemed automatically and unconditionally released and discharged upon the release and discharge of the applicable Lien described in clauses (1) and (2) of this Section 4.12.
SECTION 4.13 Existence .
Subject to Article 5 hereof, the Issuer shall do or cause to be done all things necessary to preserve and keep in full force and effect (a) its existence, and the existence of each of its Restricted Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Issuer or any such Restricted Subsidiary and (b) the rights (charter and statutory), licenses and franchises of the Issuer and its Restricted Subsidiaries;
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provided that the Issuer shall not be required to preserve any such right, license or franchise, or the existence of any of its Restricted Subsidiaries, if (i) the Issuer in good faith shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Issuer and its Restricted Subsidiaries, taken as a whole, or (ii) the failure to preserve such right, license or franchise, or such existence, is not adverse in any material respect to the Holders of the Notes.
SECTION 4.14 Offer to Repurchase Upon Change of Control .
(a) If a Change of Control Repurchase Event occurs after the Issue Date, unless the Issuer has previously or concurrently mailed, or delivered by electronic transmission, a redemption notice with respect to all the outstanding Notes as described under Section 3.07 hereof, the Issuer shall make an offer to purchase all of the Notes pursuant to the offer described below (the Change of Control Offer ) at a price in cash (the Change of Control Payment ) equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to, but excluding, the date of purchase, subject to the right of Holders of the Notes of record on the relevant Record Date to receive interest due on the relevant Interest Payment Date. Within 30 days following any Change of Control Repurchase Event, unless the Issuer has previously or concurrently mailed, or delivered by electronic transmission, a redemption notice with respect to all the outstanding Notes as described under Section 3.07 hereof, the Issuer shall send notice of such Change of Control Offer by first-class mail or electronically in PDF format, with a copy to the Trustee, to each Holder of Notes to the address of such Holder appearing in the security register or otherwise in accordance with the procedures of DTC, with the following information:
(1) that a Change of Control Offer is being made pursuant to this Section 4.14 and that all Notes properly tendered pursuant to such Change of Control Offer will be accepted for payment by the Issuer;
(2) the purchase price and the purchase date, which will, subject to clause (8) of this Section 4.14(a), be no earlier than 30 days nor later than 60 days from the date such notice is mailed (the Change of Control Payment Date );
(3) that any Note not properly tendered will remain outstanding and continue to accrue interest;
(4) that unless the Issuer defaults in the payment of the Change of Control Payment, all Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest on the Change of Control Payment Date;
(5) that Holders electing to have any Notes purchased pursuant to a Change of Control Offer will be required to surrender such Notes, with the form entitled Option of Holder to Elect Purchase on the reverse of such Notes completed, to the paying agent specified in the notice at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date;
(6) that Holders will be entitled to withdraw their tendered Notes and their election to require the Issuer to purchase such Notes; provided that the paying agent receives, not later than the close of business on the third Business Day preceding the Change of Control Payment Date, a facsimile transmission or letter setting forth the name
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of the Holder of the Notes, the principal amount of Notes tendered for purchase, and a statement that such Holder is withdrawing its tendered Notes and its election to have such Notes purchased;
(7) that if the Holders tender less than all of the Notes, the Holders of the remaining Notes will be issued new Notes and such new Notes will be equal in principal amount to the unpurchased portion of the Notes surrendered. The unpurchased portion of the Notes must be equal to $2,000 or an integral multiple of $1,000 in excess thereof;
(8) if such notice is delivered prior to the occurrence of a Change of Control, stating that the Change of Control Offer is conditional on the occurrence of such Change of Control, and if applicable, shall state that, in the Issuers discretion, the Change of Control Payment Date may be delayed until such time as the Change of Control shall occur, or that such redemption may not occur and such notice may be rescinded in the event that the Issuer shall determine that such condition will not be satisfied by the Change of Control Payment Date or by the Change of Control Payment as so delayed; and
(9) the other instructions, as determined by the Issuer, consistent with this Section 4.13, that a Holder must follow.
The Issuer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws or regulations are applicable in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Indenture, the Issuer shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof.
(b) On the Change of Control Payment Date, the Issuer will, to the extent permitted by law,
(1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer,
(2) deposit with the Paying Agent no later than 10:00 a.m. on the due date an amount equal to the aggregate Change of Control Payment in respect of all Notes or portions thereof so tendered, and
(3) deliver, or cause to be delivered, to the Trustee for cancellation the Notes so accepted together with an Officers Certificate to the Trustee stating that such Notes or portions thereof have been tendered to and purchased by the Issuer.
(c) The Issuer shall not be required to make a Change of Control Offer following a Change of Control Repurchase Event if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Issuer and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer.
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Notwithstanding anything to the contrary herein, a Change of Control Offer may be made in advance of a Change of Control, conditional upon such Change of Control, if a definitive agreement is in place for the Change of Control at the time of making of the Change of Control Offer.
(d) Notes repurchased by the Issuer pursuant to a Change of Control Offer will have the status of Notes issued but not outstanding or will be retired and canceled at the option of the Issuer. Notes purchased by a third party pursuant to Section 4.14(c) will have the status of Notes issued and outstanding unless transferred to the Issuer.
(e) Other than as specifically provided in this Section 4.13, any purchase pursuant to this Section 4.13 shall be made pursuant to the provisions of Section 3.02, Section 3.05 and Section 3.06 hereof.
(f) In the event that Holders of not less than 90% in aggregate principal amount of the outstanding Notes accept a Change of Control Offer and the Issuer (or any third party making such Change of Control Offer in lieu of the Issuer as described above) purchases all of the Notes held by such Holders, the Issuer will have the right, upon notice as provided in this Indenture, given not more than 30 days following the purchase pursuant to the Change of Control Offer described above, to redeem all of the Notes that remain outstanding following such purchase at a redemption price equal to the Change of Control Payment, plus, to the extent not included in the Change of Control Payment, accrued and unpaid interest, if any, on the Notes that remain outstanding, to, but excluding, the date of redemption, subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date.
(g) For the avoidance of doubt, the Separation and Distribution shall not constitute a Change of Control or an Asset Sale.
(h) Notwithstanding anything to the contrary herein, the obligations of the Issuer to make a Change of Control Offer under this Section 4.14 may be waived or modified with the written consent of the Holders of a majority in aggregate principal amount of the then outstanding Notes.
SECTION 4.15 Limitation on Guarantees of Indebtedness by Restricted Subsidiaries .
The Issuer shall not permit any Restricted Subsidiary that is not a Guarantor to guarantee the payment of any Indebtedness of the Issuer or any Guarantor unless:
(1) within 20 days after such Restricted Subsidiary guarantees such other Indebtedness, such Restricted Subsidiary executes and delivers a supplemental indenture to this Indenture, the form of which is attached as Exhibit D hereto, providing for a Guarantee by such Restricted Subsidiary, except that with respect to a guarantee of Indebtedness of the Issuer or any Guarantor:
(a) if the Notes or such Guarantors Guarantee is subordinated in right of payment to such Indebtedness, the Guarantee under the supplemental indenture shall be subordinated to such Restricted Subsidiarys guarantee with respect to such Indebtedness substantially to the same extent as the Notes or such Guarantors Guarantee is subordinated to such Indebtedness; and
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(b) if such Indebtedness is by its express terms subordinated in right of payment to the Notes or such Guarantors Guarantee, any such guarantee by such Restricted Subsidiary with respect to such Indebtedness shall be subordinated in right of payment to such Restricted Subsidiarys Guarantee of the Notes substantially to the same extent as such Indebtedness is subordinated to the Notes or such Guarantors Guarantee; and
(2) the Issuer shall within 20 days deliver to the Trustee an Opinion of Counsel reasonably satisfactory to the Trustee;
provided that this Section 4.15 shall not be applicable to any guarantee of any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary. The Issuer may elect, in its sole discretion, to cause any Subsidiary that is not otherwise required to be a Guarantor to become a Guarantor, in which case such Subsidiary shall not be required to comply with the 20 day periods described in this Section 4.15.
For the avoidance of doubt, this Section 4.15 shall not prohibit a guarantee or pledge by a Non-Guarantor Subsidiary securing the payment of Indebtedness of another Non-Guarantor Subsidiary.
SECTION 4.16 Termination of Certain Covenants .
(a) If on any date following the Escrow Release Date: (i) the Notes have Investment Grade Ratings from both of the Rating Agencies, (ii) no Default or Event of Default under this Indenture has occurred and is continuing and (iii) the Issuer has delivered an Officers Certificate to the Trustee certifying that the conditions set forth in clauses (i) and (ii) above are satisfied, the Issuer and its Restricted Subsidiaries shall not be subject to, and will be permanently released from their obligations under, Section 4.07 hereof, Section 4.08 hereof, Section 4.09 hereof, Section 4.10 hereof, Section 4.11 hereof, Section 4.17 hereof and clause (4) of Section 5.01(a) hereof and no failure by the Issuer or any Subsidiary to comply with any of the foregoing provisions shall constitute a Default or Event of Default under this Indenture.
(b) The Issuer shall deliver promptly to the Trustee an Officers Certificate notifying it of any such occurrence under this Section 4.16.
SECTION 4.17 Limitations on Business Activities .
The Issuer shall not, and shall not permit any Restricted Subsidiary to, engage in any business other than Similar Businesses, except as would not be material to the Issuer and its Restricted Subsidiaries, taken as a whole.
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ARTICLE 5
SUCCESSORS
SECTION 5.01 Merger, Consolidation or Sale of All or Substantially All Assets .
(a) The Issuer may not consolidate or merge with or into or wind up into (whether or not such Person is the surviving Person), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to any Person unless:
(1) the Issuer, is the surviving Person or the Person formed by or surviving any such consolidation, merger or winding up (if other than the Issuer) or the Person to whom such sale, assignment, transfer, lease, conveyance or other disposition will have been made is a corporation, partnership (including a limited partnership), trust or limited liability company organized or existing under the laws of the United States, any state or commonwealth thereof, the District of Columbia or any territory thereof (such Person, as the case may be, being herein called the Successor Company ); provided , that if such Person is not a corporation, a co-obligor of the Notes is a corporation organized or existing under such laws;
(2) the Successor Company, if other than the Issuer, expressly assumes all the obligations of the Issuer under this Indenture, the Registration Rights Agreement and the Notes pursuant to a supplemental indenture or other documents or instruments in form reasonably satisfactory to the Trustee;
(3) immediately after such transaction, no Default exists;
(4) immediately after giving pro forma effect to such transaction and any related financing transactions, as if such transactions had occurred at the beginning of the applicable four-quarter period,
(A) the Successor Company or the Issuer, as applicable, would be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio test set forth in Section 4.09(a) hereof or
(B) the Consolidated Fixed Charge Coverage Ratio for the Successor Company or the Issuer, as applicable, and its Restricted Subsidiaries would be greater than or equal to such ratio for the Issuer and its Restricted Subsidiaries immediately prior to such transaction;
(5) if the Issuer is not the Successor Company, each Guarantor, unless it is the other party to the transactions described above, shall have by supplemental indenture confirmed that its Guarantee shall apply to such Persons obligations under this Indenture and the Notes; and
(6) the Issuer shall have delivered to the Trustee an Officers Certificate and an Opinion of Counsel, each stating that (i) such consolidation, merger or
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transfer and such supplemental indentures, if any, comply with this Indenture and (ii) with respect to the Opinion of Counsel, such supplemental indenture (or other documents setting forth the assumption of the obligations of the Issuer) constitutes a legal, valid and binding obligation of the Successor Company, enforceable against the Successor Company in accordance with its terms.
The Successor Company will succeed to, and be substituted for, the Issuer under this Indenture, the Registration Rights Agreement and the Notes and, except in the case of a lease, the Issuer will automatically be released and discharged from its obligations under this Indenture and the Notes. Notwithstanding clauses (3) and (4) of Section 5.01(a) hereof,
(1) any Restricted Subsidiary may consolidate with, merge into or wind up into or sell, assign, transfer, lease, convey or otherwise dispose of all or part of its properties and assets to the Issuer or any Restricted Subsidiary; and
(2) the Issuer may merge with an Affiliate of the Issuer solely for the purpose of reorganizing the Issuer in a state or commonwealth of the United States, the District of Columbia or any territory thereof so long as the amount of Indebtedness of the Issuer and its Restricted Subsidiaries is not increased thereby.
Notwithstanding anything to the contrary herein, the Separation and Distribution and the related transactions shall be permitted by this Article 5.
(b) Subject to certain limitations described in this Indenture governing release of a Guarantee by a Guarantor, no Guarantor will, and the Issuer will not permit any such Guarantor to, consolidate or merge with or into or wind up into (whether or not such Guarantor is the surviving Person), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets, in one or more related transactions, to any Person unless:
(1) (A) such Guarantor is the surviving Person or the Person formed by or surviving any such consolidation, merger or winding up (if other than such Guarantor) or to which such sale, assignment, transfer, lease, conveyance or other disposition will have been made is a Person organized or existing under the laws of the jurisdiction of organization of such Guarantor, as the case may be, or the laws of the United States, any state or commonwealth thereof, the District of Columbia or any territory thereof (such Guarantor or such Person, as the case may be, being herein called the Successor Person );
(B) the Successor Person, if other than such Guarantor or another Guarantor, expressly assumes all the obligations of such Guarantor under this Indenture, the Registration Rights Agreement, and such Guarantors related Guarantee pursuant to supplemental indentures or other documents or instruments in form reasonably satisfactory to the Trustee;
(C) immediately after such transaction, no Default exists; and
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(D) if such Guarantor or another Guarantor is not the Successor Person, the Issuer shall have delivered to the Trustee (i) an Officers Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indentures, if any, comply with this Indenture and (ii) with respect to the Opinion of Counsel, such supplemental indentures (or other documents setting forth the assumption of the obligations of the applicable Guarantor) constitute a legal, valid and binding obligation of the Successor Person, enforceable against such Successor Person in accordance with its terms; or
(2) the disposition is not prohibited by Section 4.10 hereof.
In the case of clause 5.01(b)(1) above, the Successor Person will succeed to, and be substituted for, such Guarantor under this Indenture and such Guarantors Guarantee and, except in the case of a lease, such Guarantor will automatically be released and discharged from its obligations under this Indenture and such Guarantors Guarantee. Notwithstanding the foregoing, any Guarantor may (1) merge into or transfer all or part of its properties and assets to another Guarantor or the Issuer, (2) merge with an Affiliate of the Issuer solely for the purpose of reincorporating the Guarantor in the United States, any state thereof, the District of Columbia or any territory thereof or (3) convert into a corporation, partnership, limited partnership, limited liability corporation or trust organized or existing under the laws of the jurisdiction of organization of such Guarantor.
SECTION 5.02 Successor Corporation Substituted .
Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Issuer, in accordance with Section 5.01 hereof, the successor Person formed by such consolidation or with which the Issuer is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the Issuer shall refer instead to the successor Person and not to the Issuer), and may exercise every right and power of the Issuer under this Indenture with the same effect as if such successor Person had been named as the Issuer herein; provided that the predecessor Issuer shall not be relieved from the obligation to pay the principal of and interest, if any, on the Notes except in the case of a sale, assignment, transfer, conveyance or other disposition of all of the assets of the Issuer (except in the case of a lease), that meets the requirements of Section 5.01 hereof.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.01 Events of Default .
(a) An Event of Default wherever used herein, means any one of the following events:
(1) default in payment when due and payable, upon redemption, acceleration or otherwise, of principal of the Notes;
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(2) default for 30 days or more in the payment when due of interest on or with respect to the Notes;
(3) failure by the Issuer or any Restricted Subsidiary for 60 days after receipt of written notice given by the Trustee or the Holders of not less than 25% in principal amount of the Notes then outstanding to comply with any of its other obligations, covenants or agreements (other than a default referred to in clauses (1), (2) or (4) of this Section 6.01(a)) contained in this Indenture or the Notes;
(4) failure by the Issuer for 180 days after receipt of written notice given by the Trustee or the Holders of not less than 25% in principal amount of the Notes then outstanding to comply with the provisions described in Section 4.03 hereof;
(5) default under any mortgage, indenture or instrument under which there is issued or by which there is secured or evidenced any Indebtedness for money borrowed by the Issuer or any of its Restricted Subsidiaries or the payment of which is guaranteed by the Issuer or any of its Restricted Subsidiaries, other than Indebtedness owed to the Issuer or a Restricted Subsidiary, whether such Indebtedness or guarantee now exists or is created after the issuance of the Notes, if both:
(i) such default either results from the failure to pay any principal of such Indebtedness at its stated final maturity (after giving effect to any applicable grace periods) or relates to an obligation other than the obligation to pay principal of any such Indebtedness at its stated final maturity and results in the holder or holders of such Indebtedness causing such Indebtedness to become due prior to its stated maturity; and
(ii) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at stated final maturity (after giving effect to any applicable grace periods), or the maturity of which has been so accelerated, aggregate to $50.0 million or more;
(6) failure by the Issuer or any Significant Subsidiary to pay final judgments aggregating in excess of $50.0 million (excluding amounts covered by insurance provided by a reputable and solvent carrier that has not disclaimed coverage or amounts covered by valid third party indemnification obligations from a third party that is solvent), which final judgments remain unpaid, undischarged and unstayed for a period of more than 60 days after such judgment becomes final, and in the event such judgment is not covered by insurance, an enforcement proceeding has been commenced by any creditor upon such judgment or decree which is not promptly stayed;
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(7) the Issuer or any Significant Subsidiary, pursuant to or within the meaning of any Bankruptcy Law:
(i) commences proceedings to be adjudicated bankrupt or insolvent;
(ii) consents to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under applicable Bankruptcy law;
(iii) consents to the appointment of a receiver, liquidator, assignee, trustee or other similar official of it or for all or substantially all of its property;
(iv) makes a general assignment for the benefit of its creditors; or
(v) fails generally to pay its debts as they become due;
(8) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(i) is for relief against the Issuer or any Significant Subsidiary in a proceeding in which the Issuer or any Significant Subsidiary is to be adjudicated bankrupt or insolvent;
(ii) appoints a receiver, liquidator, assignee, trustee or other similar official of the Issuer or any Significant Subsidiary or for all or substantially all of the property of the Issuer or any Significant Subsidiary; or
(iii) orders the liquidation of any Issuer or any Significant Subsidiary;
and the order or decree remains unstayed and in effect for 60 consecutive days; or
(9) the Guarantee of any Significant Subsidiary shall for any reason cease to be in full force and effect or be declared null and void or any responsible officer of such Guarantor that is a Significant Subsidiary, as the case may be, denies that it has any further liability under its Guarantee or gives notice to such effect, in each case other than by reason of the termination of this Indenture or the release of any such Guarantee in accordance with this Indenture.
(b) Notwithstanding anything to the contrary set forth herein, no provision of this Indenture shall prevent the completion of any of the Transactions, nor shall the Transactions give rise to any Default or impair or reduce the availability or constitute the utilization of any basket or other exceptions (other than any such baskets or other exceptions that expressly refer to the Transactions or the Separation and Distribution) in the covenants under this Indenture or the Notes.
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SECTION 6.02 Acceleration .
(a) If any Event of Default (other than an Event of Default specified in clause (7) or (8) of Section 6.01(a) hereof) occurs and is continuing with respect to the Notes, the Trustee or the Holders of at least 25% in principal amount of the then total outstanding Notes may declare the principal, interest and any other monetary obligations on all the then outstanding Notes to be due and payable immediately.
(b) Upon the effectiveness of such declaration, such principal and interest with respect to the Notes shall be due and payable immediately. The Trustee shall have no obligation to accelerate the Notes if it in good faith determines that acceleration is not in the best interest of the Holders of the Notes.
(c) Notwithstanding the foregoing, in the case of an Event of Default arising under clause (7) or (8) of Section 6.01(a) hereof, all outstanding Notes shall be due and payable immediately without further action or notice.
(d) The Trustee may withhold from the Holders notice of any continuing Default, except a Default relating to the payment of principal or interest, if it determines that withholding notice is in the Holders interest. In addition, the Trustee shall have no obligation to accelerate the Notes if in the best judgment of the Trustee acceleration is not in the best interest of the Holders of the Notes.
SECTION 6.03 Other Remedies .
Subject to the duties of the Trustee as provided for in Article 7, if an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law.
SECTION 6.04 Waiver of Defaults .
(a) Holders of a majority in aggregate principal amount of the then outstanding Notes by written notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default and its consequences under this Indenture, except a continuing Default in the payment of interest on, or the principal of, any Note held by a non-consenting Holder; provided that Holders of a majority in aggregate principal amount of the then outstanding Notes may rescind any acceleration and its consequences with respect to the Notes, including any related payments that resulted from such acceleration (except if such recession would conflict with any judgment of a court of competent jurisdiction). Upon any such written waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon.
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(b) In the event of any Event of Default specified in clause (5) of Section 6.01(a), such Event of Default and all consequences thereof (excluding any resulting payment default, other than as a result of acceleration of the Notes) shall be annulled, waived and rescinded, automatically and without any action by the Trustee or the Holders, if within 20 days after such Event of Default arose:
(1) the Indebtedness or guarantee that is the basis for such Event of Default has been discharged; or
(2) the holders thereof have rescinded or waived the acceleration, notice or action (as the case may be) giving rise to such Event of Default; or
(3) the default that is the basis for such Event of Default has been cured.
SECTION 6.05 Control by Majority .
Holders of a majority in principal amount of the total outstanding Notes may direct in writing the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or this Indenture or that the Trustee determines is unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability.
SECTION 6.06 Limitation on Suits .
Subject to the provisions of this Indenture relating to the duties of the Trustee hereunder, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under this Indenture at the request or direction of any of the Holders of the Notes unless the Holders have offered to the Trustee indemnity or security satisfactory to the Trustee against any loss, liability or expense. Except to enforce the right to receive payment of principal, or interest, when due, no Holder of a Note may pursue any remedy with respect to this Indenture or the Notes unless:
(1) such Holder has previously given the Trustee written notice that an Event of Default is continuing with respect to such series of Notes;
(2) Holders of at least 25% in principal amount of the total outstanding Notes have requested (in writing) the Trustee to pursue the remedy;
(3) Holders have offered the Trustee security or indemnity satisfactory to the Trustee against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after the receipt thereof and the offer of security or indemnity; and
(5) Holders of a majority in principal amount at maturity of the total outstanding Notes have not given the Trustee a direction inconsistent with such request within such 60-day period.
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A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder (it being understood that the Trustee does not have an affirmative duty to ascertain whether or not such actions or forbearances are unduly prejudicial to such Holders).
SECTION 6.07 Rights of Holders of Notes to Receive Payment .
Notwithstanding any other provision of this Indenture, the right of any Holder receive payment of principal, premium, if any, and interest on the Note, on or after the respective due dates expressed in the Note (including in connection with an Asset Sale Offer or a Change of Control Offer), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder.
SECTION 6.08 Collection Suit by Trustee .
If an Event of Default specified in Section 6.01(a)(1) or (2) hereof occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Issuer for the whole amount of principal of, and interest remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation of the Trustee and the reasonable and documented out-of-pocket expenses, disbursements and advances of the Trustee, its agents and counsel, in each case as set forth in Section 7.07 hereof.
SECTION 6.09 Restoration of Rights and Remedies .
If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceedings, the Issuer, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding has been instituted.
SECTION 6.10 Rights and Remedies Cumulative .
Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in Section 2.07 hereof, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.
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SECTION 6.11 Delay or Omission Not Waiver .
No delay or omission of the Trustee or of any Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be.
SECTION 6.12 Trustee May File Proofs of Claim .
The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relative to the Issuer (or any other obligor upon the Notes including the Guarantors), its creditors or its property and shall be entitled and empowered to participate as a member in any official committee of creditors appointed in such matter and to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation and the reasonable and documented out-of-pocket expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 6.13 Priorities.
If the Trustee or any Agent collects any money or property pursuant to this Article 6, it shall pay out the money in the following order:
(1) to the Trustee, the Agents, their agents and attorneys for amounts due under Section 7.07 hereof, including payment of all reasonable compensation, expenses and liabilities incurred, and all advances made, by the Trustee or any Agent and the costs and expenses of collection;
(2) to Holders for amounts due and unpaid on the Notes for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal and interest, respectively; and
(3) to the Issuer or to such party as a court of competent jurisdiction shall direct including a Guarantor, if applicable.
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The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section 6.13.
SECTION 6.14 Undertaking for Costs .
In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.14 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes.
ARTICLE 7
TRUSTEE
SECTION 7.01 Duties of Trustee .
(a) If an Event of Default has occurred (and has not been cured), the Trustee shall, in the exercise of its power, use the degree of care of a prudent person in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculation or other facts stated therein).
(c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that:
(i) this clause (c) does not limit the effect of clause (b) of this Section 7.01;
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(ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved in a court of competent jurisdiction that the Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to clauses (a), (b) and (c) of this Section 7.01.
(e) Subject to this Article 7, whether or not an Event of Default has occurred and is continuing, the Trustee shall be under no obligation to exercise any of the rights or powers under this Indenture at the request or direction of any Holder or Holders of the Notes unless such Holder or Holders have offered to the Trustee indemnity or security satisfactory to the Trustee against any loss, liability or expense.
(f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Issuer. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law.
SECTION 7.02 Rights of Trustee .
(a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Issuer, personally or by agent or attorney at the sole cost of the Issuer and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation.
(b) Before the Trustee acts or refrains from acting, it may require an Officers Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers Certificates or Opinion of Counsel. The Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the advice or opinion of such counsel.
(c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent or attorney appointed with due care.
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(d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture; provided , however , that the Trustees conduct does not constitute willful misconduct or gross negligence.
(e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Issuer shall be sufficient if signed by an Officer of the Issuer.
(f) None of the provisions of this Indenture shall require the Trustee to expend or risk its own funds or otherwise to incur any liability, financial or otherwise, in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or indemnity satisfactory to it against such risk or liability is not assured to it.
(g) The Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a Default is received by the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Notes and this Indenture.
(h) In no event shall the Trustee be responsible or liable for special, indirect, punitive or consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit) irrespective of whether the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action.
(i) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and each agent, custodian and other Person employed to act hereunder.
(j) The Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder.
(k) The Trustee may request that the Issuer deliver a certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture.
SECTION 7.03 Individual Rights of Trustee .
The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Issuer or any Affiliate of an Issuer with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Section 7.10 and Section 7.11 hereof.
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SECTION 7.04 Trustees Disclaimer .
The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Issuers use of the proceeds from the Notes or any money paid to the Issuer or upon the Issuers direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication.
SECTION 7.05 Notice of Defaults .
If a Default occurs and is continuing and if it is actually known to a Responsible Officer of the Trustee, the Trustee shall mail to Holders of Notes a notice of the Default within 90 days after it occurs. Except in the case of a Default relating to the payment of principal, premium, if any, or interest on any Note, the Trustee may withhold from the Holders notice of any continuing Default if it determines that withholding notice is in the interest of the Holders of the Notes. The Trustee shall not be deemed to know of any Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is such a Default is received by the Trustee at the Corporate Trust Office of the Trustee.
SECTION 7.06 Reports by Trustee to Holders of the Notes .
Within 60 days after each January 15, beginning with the January 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with Trust Indenture Act Section 313(a) (but if no event described in Trust Indenture Act Section 313(a) has occurred within the 12 months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with Trust Indenture Act Section 313(b)(2). The Trustee shall also transmit by mail all reports as required by Trust Indenture Act Section 313(c).
A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Issuer and filed with the SEC and each stock exchange on which the Notes are listed in accordance with Trust Indenture Act Section 313(d). The Issuer shall promptly notify the Trustee in writing when any series of Notes are listed on any stock exchange or any delisting thereof.
SECTION 7.07 Compensation and Indemnity .
The Issuer shall pay to the Trustee from time to time such compensation for its acceptance of this Indenture and services hereunder as the parties shall agree in writing from time to time. The Trustees compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall reimburse the Trustee promptly upon request for all reasonable and documented out-of-pocket disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable and documented out-of-pocket compensation, disbursements and expenses of the Trustees agents and counsel. The Trustee shall provide the Company reasonable notice of any expenditures not in the ordinary course of business.
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The Issuer and the Guarantors, jointly and severally, shall indemnify the Trustee, its officers, directors, employees, representatives and agents (each an Indemnified Person ) for, and hold each Indemnified Person harmless against, any and all loss, damage, claims, liability or expense (including reasonable and documented out-of-pocket attorneys fees and expenses) incurred by it (as evidenced in an invoice from the Trustee) in connection with the acceptance or administration of this trust and the performance of its duties hereunder (including the costs and expenses of enforcing this Indenture against the Issuer or any of the Guarantors (including this Section 7.07) or defending itself against any claim whether asserted by any Holder, the Issuer or any Guarantor, or liability in connection with the acceptance, exercise or performance of any of its powers or duties hereunder). The Trustee shall notify the Issuer promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Issuer shall not relieve the Issuer of its obligations hereunder. The Issuer shall defend the claim and the Trustee shall provide reasonable cooperation at the Issuers expense in the defense. The Trustee may have separate counsel and the Issuer shall pay the fees and expenses of such counsel; provided , however , that the Issuer shall not be required to pay such fees and expenses if (a) its assumes such the Trustees defense, (b) in the Trustees reasonable judgment, there is no conflict of interest between the Issuer and the Trustee in connection with such defense, and (c) there is no legal defenses available to the Trustee that are different from or are in addition to those available to the Issuer (so long as there is no good faith disagreement between the Issuer and the Trustee as to the action (or inaction) of counsel in respect to the defenses at issue). The Issuer need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustees own willful misconduct or gross negligence.
The obligations of the Issuer under this Section 7.07 shall survive the satisfaction and discharge of this Indenture or the earlier resignation or removal of the Trustee.
To secure the payment obligations of the Issuer and the Guarantors in this Section 7.07, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(a)(7) or (8) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law.
The Trustee shall comply with the provisions of Trust Indenture Act Section 313(b)(2) to the extent applicable.
SECTION 7.08 Replacement of Trustee .
A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustees acceptance of appointment as provided in this Section 7.08. The Trustee may resign in writing by giving 30 days prior written notice of such resignation to the Issuer at any time and be discharged from the trust hereby created by so notifying the Issuer. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Issuer in writing. The Issuer may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
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(b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a receiver, custodian or other public officer takes charge of the Trustee or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Issuer shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Issuer.
If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee (at the Issuers expense), the Issuer or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee, after written request by any Holder who has been a Holder for at least six months, fails to comply with Section 7.10 hereof, such Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee; provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Issuers obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee.
SECTION 7.09 Successor Trustee by Merger, etc .
If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee.
In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at
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that time any of the Notes shall not have been authenticated, any successor to the Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have.
SECTION 7.10 Eligibility; Disqualification .
There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the requirements of Trust Indenture Act Sections 310(a)(1), (2) and (5). The Trustee is subject to Trust Indenture Act Section 310(b).
SECTION 7.11 Preferential Collection of Claims Against Issuer .
The Trustee is subject to Trust Indenture Act Section 311(a), excluding any creditor relationship listed in Trust Indenture Act Section 311(b). A Trustee who has resigned or been removed shall be subject to Trust Indenture Act Section 311(a) to the extent indicated therein.
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.01 Option to Effect Legal Defeasance or Covenant Defeasance .
The Issuer may, at its option and at any time, elect to have either Section 8.02 or Section 8.03 hereof applied to all outstanding Notes upon compliance with the conditions set forth below in this Article 8.
SECTION 8.02 Legal Defeasance and Discharge .
Upon the Issuers exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Issuer and the Guarantors shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from their obligations with respect to all outstanding Notes and Guarantees and to have cured all then existing Events of Default with respect to the Notes on the date the conditions set forth below are satisfied ( Legal Defeasance ). For this purpose, Legal Defeasance means that the Issuer shall be deemed to have paid and discharged the entire Indebtedness represented by the Notes, which shall thereafter be deemed to be outstanding only for the purposes of Section 8.05 hereof and the other Sections of this Indenture referred to in (a) and (b) below, to have satisfied all of its other obligations under the Notes and this Indenture including that of the Guarantors and to have cured all then existing Events of Default with respect to the Notes (and the Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging the same), and this Indenture shall cease to be of further effect as to all Notes and the Guarantees except for the following provisions which shall survive until otherwise terminated or discharged hereunder:
(a) the rights of Holders to receive payments in respect of the principal of, premium, if any, and interest such series of Notes when such payments are due solely out of the trust created pursuant to this Indenture;
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(b) the Issuers obligations with respect to the Notes concerning issuing temporary Notes, registration of such Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust;
(c) the rights, powers, trusts, duties and immunities of the Trustee, and the Issuers obligations in connection therewith; and
(d) the provisions of this Section 8.02.
Subject to compliance with this Article 8, the Issuer may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 hereof.
SECTION 8.03 Covenant Defeasance .
Upon the Issuers exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Issuer and the Guarantors shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from their obligations under the covenants contained in Section 4.03, Section 4.04, Section 4.05, Section 4.07, Section 4.08, Section 4.09, Section 4.10, Section 4.11, Section 4.12, Section 4.13 (other than the existence of the Issuer (subject to Section 5.01 hereof)), Section 4.13, Section 4.15, and Section 4.17 hereof and clauses (3) and (4) of Section 5.01(a) hereof with respect to the outstanding Notes on and after the date the conditions set forth in Section 8.04 hereof are satisfied ( Covenant Defeasance ), and the Notes shall thereafter be deemed not outstanding for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed outstanding for all other purposes hereunder (it being understood that the Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to outstanding Notes, the Issuer or any Guarantor, as applicable, may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and the Notes shall be unaffected thereby. In addition, upon the Issuers exercise under Section 8.01 hereof of the option applicable to this Section 8.03 hereof, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Section 6.01(a)(3), Section 6.01(a)(4), Section 6.01(a)(5), Section 6.01(a)(6), Section 6.01(a)(7) (solely with respect to Restricted Subsidiaries that are Significant Subsidiaries), Section 6.01(a)(8) (solely with respect to Restricted Subsidiaries that are Significant Subsidiaries) and Section 6.01(a)(9) hereof shall not constitute Events of Default.
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SECTION 8.04 Conditions to Legal or Covenant Defeasance .
The following shall be the conditions to the application of either Section 8.02 or Section 8.03 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance with respect to the Notes:
(1) the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, cash in U.S. dollars, Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized investment bank, appraisal firm or firm of independent public accountants, to pay the principal amount of, premium, if any, and interest due on the Notes on the stated maturity date or on the redemption date, as the case may be, of such principal amount, premium, if any, or interest on the Notes and the Issuer must specify whether the Notes are being defeased to maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions,
(A) the Issuer has received from, or there has been published by, the United States Internal Revenue Service a ruling, or
(B) since the issuance of the Notes, there has been a change in the applicable U.S. federal income tax law,
in either case to the effect that, and based thereon, such Opinion of Counsel shall confirm that, subject to customary assumptions and exclusions, the Holders will not recognize income, gain or loss for U.S. federal income tax purposes, as applicable, as a result of such Legal Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Issuer shall have delivered to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, the Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Covenant Defeasance and will be subject to such U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred;
(4) no Default (other than that resulting from borrowing funds to be applied to make such deposit and any similar and simultaneous deposit relating to other Indebtedness, and, in each case the granting of Liens in connection therewith) shall have occurred and be continuing on the date of such deposit with respect to the Notes;
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(5) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under the Senior Credit Facilities or any other material agreement or instrument (other than this Indenture) to which, the Issuer or any Guarantor is a party or by which the Issuer or any Guarantor is bound (other than that resulting from borrowing of funds to be applied to make such deposit and any similar and simultaneous deposit relating to other Indebtedness and, in each case, the granting of Liens in connection therewith);
(6) the Issuer shall have delivered to the Trustee an Officers Certificate stating that the deposit was not made by the Issuer with the intent of defeating, hindering, delaying or defrauding any creditors of the Issuer or any Guarantor or others; and
(7) the Issuer shall have delivered to the Trustee an Officers Certificate and an Opinion of Counsel (which Opinion of Counsel may be subject to customary assumptions and exclusions) each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance, as the case may be, have been complied with.
SECTION 8.05 Deposited Money and Government Securities to Be Held in Trust; Other Miscellaneous Provisions .
Subject to the provisions of Section 8.06 hereof, all money and Government Securities (including the proceeds thereof) deposited with the Trustee pursuant to Section 8.04 hereof shall be held in trust and applied by the Trustee in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Issuer or a Guarantor acting as Paying Agent), the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee.
The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes.
SECTION 8.06 Repayment to Issuer.
Anything in this Article 8 or Article 11 to the contrary notwithstanding, each of the Trustee and each Paying Agent shall promptly deliver or pay to the Issuer upon request any money or Government Securities held by it in accordance with this Article 8 or Article 11 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(1) hereof), are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Legal Defeasance, Covenant Defeasance or discharge in accordance with Article 11 hereof.
Any money deposited with the Trustee or any Paying Agent, or then held by the Issuer, in trust for the payment of the principal of, premium, if any, or interest on any Note and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due
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and payable shall be paid to the Issuer on its request or (if then held by the Issuer) shall be discharged from such trust; and the Holder of such Note shall thereafter look only to the Issuer for payment thereof, and all liability of the Trustee or any Paying Agent with respect to such trust money, and all liability of the Issuer as trustee thereof, shall thereupon cease.
SECTION 8.07 Reinstatement .
If the Trustee or the Paying Agent is unable to apply any United States dollars or Government Securities in accordance with Section 8.02 or Section 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Issuers obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or Section 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or Section 8.03 hereof, as the case may be; provided that, if the Issuer makes any payment of principal of, premium or interest on any Note following the reinstatement of its obligations, the Issuer shall be subrogated to the rights of the Holders to receive such payment from the money held by the Trustee or the Paying Agent.
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.01 Without Consent of Holders of Notes .
Notwithstanding Section 9.02 hereof, the Issuer, any Guarantor (with respect to a Guarantee or this Indenture to which it is a party) and the Trustee may amend or supplement this Indenture, any Guarantee, the Escrow Agreement or the Notes without the consent of any Holder:
(1) to cure any ambiguity, omission, mistake, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or in place of certificated Notes;
(3) to comply with Section 5.01 hereof;
(4) to provide the assumption of the Issuers or any Guarantors obligations to the Holders;
(5) to make any change that would provide any additional rights or benefits to the Holders or that does not materially adversely affect the legal rights under this Indenture of any such Holder;
(6) to add covenants for the benefit of the Holders or to surrender any right or power conferred upon the Issuer or any Guarantor;
(7) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act;
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(8) to evidence and provide for the acceptance and appointment under this Indenture of a successor Trustee thereunder pursuant to the requirements thereof;
(9) to provide for the issuance of Exchange Notes or private exchange notes, which are identical to exchange notes except that they are not freely transferable;
(10) to add a Guarantor under this Indenture or to secure the Obligations hereunder or to release any Guarantor from its Guarantee if such release is in accordance with the terms of this Indenture;
(11) to conform the text of this Indenture, the Guarantees or the Notes to any provision of the Description of Notes section of the Offering Memorandum as described in an Officers Certificate;
(12) to make any amendment to the provisions of this Indenture relating to the transfer and legending of Notes as permitted by this Indenture, including, without limitation, to facilitate the issuance and administration of the Notes; provided , however , that (i) compliance with this Indenture as so amended would not result in Notes being transferred in violation of the Securities Act or any applicable securities law and (ii) such amendment does not materially and adversely affect the rights of Holders to transfer Notes;
(13) to provide for the issuance of Additional Notes in accordance with the terms of this Indenture; or
(14) to comply with the rules of any applicable securities depositary.
SECTION 9.02 With Consent of Holders of Notes .
Except as provided below in this Section 9.02, the Issuer and the Trustee may amend or supplement this Indenture, any Guarantee, the Escrow Agreement and the Notes with the consent of the Holders of at least a majority in principal amount of Notes (including Additional Notes) then outstanding voting as a single class, (including consents obtained in connection with a purchase of, or tender offer or exchange offer for the Notes), and any existing Default or Event of Default (other than a continuing Default in the payment of interest on, or the principal of, any Note, except a payment default resulting from an acceleration that has been rescinded) or compliance with any provision of this Indenture or the Notes issued hereunder may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes, (including consents obtained in connection with a purchase of, tender offer or exchange offer for, the Notes). Section 2.08 and Section 2.09 hereof shall determine which series of Notes are considered to be outstanding for the purposes of this Section 9.02.
The consent of the Holders of Notes under this Section 9.02 is not necessary under this Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment.
After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Issuer shall deliver electronically or mail to the Holders of Notes affected thereby a notice
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briefly describing the amendment, supplement or waiver. Any failure of the Issuer to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment, supplement or waiver.
Without the consent of each affected Holder, an amendment or waiver may not, with respect to the Notes held by a non-consenting Holder:
(1) reduce the principal amount of the Notes whose Holders must consent to an amendment, supplement or waiver;
(2) reduce the principal amount of or change the fixed final maturity of any Note or alter or waive the provisions (other than any amendment or waiver of any minimum notice period for redemption, which may be amended or waived with the consent of Holders of at least a majority in principal amount of the Notes then outstanding) with respect to the redemption of Notes (other than provisions relating to Section 3.09, Section 4.10 and Section 4.13 hereof);
(3) reduce the rate of or change the time for payment of interest on any Note;
(4) waive a Default or Event of Default in (a) the payment of principal of, or interest on the Notes, except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration, or (b) in respect of a covenant or provision contained in this Indenture or any Guarantee which cannot expressly by its terms be amended or modified without the consent of all Holders;
(5) make any Note payable in money other than that stated therein;
(6) make any change in the provisions of this Indenture relating to waivers of past Defaults or the rights of Holders to receive payments of principal of, or interest on the Notes;
(7) make any change in these amendment and waiver provisions as it relates to the Notes;
(8) impair the right of any Holder to receive payment of principal of, or interest on such Holders Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holders Notes;
(9) make any change to or modify the ranking of the Notes that would adversely affect the Holders; or
(10) except as expressly permitted by this Indenture, modify the terms of the Guarantees of any Significant Subsidiary in any manner adverse to the Holders of the Notes.
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SECTION 9.03 Revocation and Effect of Consents .
Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder of a Note and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holders Note, even if notation of the consent is not made on any Note. However, any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the earlier of the date the waiver, supplement or amendment becomes effective and the date on which the Trustee receives an Officers Certificate from the Issuer certifying that the requisite principal amount of Notes have consented. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder.
The Issuer may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement, or waiver. If a record date is fixed, then, notwithstanding the preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only such Persons, shall be entitled to consent to such amendment, supplement, or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 120 days after such record date unless the consent of the requisite principal amount of Notes has been obtained.
SECTION 9.04 Notation on or Exchange of Notes .
The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Issuer in exchange for all Notes may issue and the Trustee shall, upon receipt of an Authentication Order, authenticate new Notes that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.05 Trustee to Sign Amendments, etc .
The Trustee shall sign any amendment, supplement or waiver authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In executing any amendment, supplement or waiver, the Trustee (subject to Section 7.01 hereof) shall be fully protected in conclusively relying upon, in addition to the documents required by Section 12.03 hereof, an Officers Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture and that such amendment, supplement or waiver is the legal, valid and binding obligation of the Issuer and any Guarantors party thereto, enforceable against them in accordance with its terms, subject to customary exceptions. No Opinion of Counsel will be required by the immediately preceding sentence for the Trustee to execute any amendment or supplement whose sole purpose is to add a new Guarantor under this Indenture.
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SECTION 9.06 Payment for Consent .
The Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder of Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Notes unless such consideration is offered to be paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement.
SECTION 9.07 Compliance with Trust Indenture Act .
From the date on which this Indenture is qualified under the Trust Indenture Act, every amendment, waiver or supplement to this Indenture or any series of Notes shall comply with the Trust Indenture Act as then in effect.
ARTICLE 10
GUARANTEES
SECTION 10.01 Guarantee.
Subject to this Article 10 and following the Escrow Release Date, each of the Guarantors hereby, jointly and severally, unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Notes or the obligations of the Issuer hereunder or thereunder: (a) the performance and full and punctual payment when due, whether at maturity, by acceleration or otherwise, of all obligations of the Issuer under this Indenture and the Notes, whether for payment of principal of or interest on the Notes, expenses, indemnification or otherwise, on the terms set forth in this Indenture; and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantors shall be jointly and severally obligated to pay the same immediately. Each Guarantor agrees that this is a guarantee of payment and not a guarantee of collection.
The Guarantors hereby agree that their obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Issuer, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, protest, notice and all demands whatsoever and covenants that this Guarantee shall not be discharged except by complete performance of the obligations contained in the Notes and this Indenture.
If any Holder or the Trustee is required by any court or otherwise to return to the Issuer, the Guarantors or any custodian, trustee, liquidator or other similar official acting in relation to either the Issuer or the Guarantors, any amount paid either to the Trustee or such Holder, this Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect.
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Each Guarantor also agrees to pay any and all reasonable and documented out-of-pocket costs and expenses (including reasonable and documented out-of-pocket attorneys fees and expenses) incurred by the Trustee or any Holder in enforcing any rights under this Section 10.01.
Each Guarantor further agrees that, as between the Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 hereof for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article 6 hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Guarantee. Any Guarantor that makes a payment under its Guarantee shall be entitled upon payment in full of all guaranteed obligations under this Indenture to a contribution from each other Guarantor in an amount equal to such other Guarantors pro rata portion of such payment based on the respective net assets of all the Guarantors at the time of such payment determined in accordance with GAAP.
Each Guarantee shall remain in full force and effect and continue to be effective should any petition be filed by or against the Issuer for liquidation, reorganization, should the Issuer become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of the Issuers assets, and shall, to the fullest extent permitted by law, continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Notes are, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee on the Notes or Guarantees, whether as a voidable preference, fraudulent transfer or otherwise, all as though such payment or performance had not been made. In the event that any payment or any part thereof, is rescinded, reduced, restored or returned, the Notes shall, to the fullest extent permitted by law, be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.
In case any provision of any Guarantee shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
Each payment to be made by a Guarantor in respect of its Guarantee shall be made without set-off, counterclaim, reduction or diminution of any kind or nature.
SECTION 10.02 Limitation on Guarantor Liability .
Each Guarantor, and by its acceptance of Notes, each Holder, hereby confirms that it is the intention of all such parties that the Guarantee of such Guarantor not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to any Guarantee. To effectuate the foregoing intention, the Trustee, the Holders and
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the Guarantors hereby irrevocably agree that the obligations of each Guarantor shall be limited to the maximum amount as will, after giving effect to such maximum amount and all other contingent and fixed liabilities of such Guarantor that are relevant under such laws and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under this Article 10, result in the obligations of such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer under applicable law.
SECTION 10.03 Execution and Delivery .
To evidence its Guarantee set forth in Section 10.01 hereof, each Guarantor hereby agrees that this Indenture shall be executed on behalf of such Guarantor by an Officer of such Guarantor.
Each Guarantor hereby agrees that its Guarantee set forth in Section 10.01 hereof shall remain in full force and effect notwithstanding the absence of the endorsement of any notation of such Guarantee on the Notes.
If an Officer whose signature is on this Indenture no longer holds that office at the time the Trustee authenticates the Note, the Guarantee shall be valid nevertheless.
The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Guarantee set forth in this Indenture on behalf of the Guarantors.
If required by Section 4.15 hereof, the Issuer shall cause any existing Restricted Subsidiary and any newly created or acquired Restricted Subsidiary to comply with the provisions of Section 4.15 hereof and this Article 10, to the extent applicable.
SECTION 10.04 Subrogation .
Each Guarantor shall be subrogated to all rights of Holders of Notes against the Issuer in respect of any amounts paid by any Guarantor pursuant to the provisions of Section 10.01 hereof; provided that, no Guarantor shall be entitled to enforce or receive any payments arising out of, or based upon, such right of subrogation until all obligations of the Issuer under this Indenture and the Notes shall have been paid in full.
SECTION 10.05 Benefits Acknowledged .
Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that the guarantee and waivers made by it pursuant to its Guarantee are knowingly made in contemplation of such benefits.
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SECTION 10.06 Release of Guarantees .
A Guarantee by a Guarantor shall be automatically and unconditionally released and discharged, and no further action by such Guarantor, the Issuer or the Trustee is required for the release of such Guarantors Guarantee upon:
(1) any direct or indirect sale, exchange or transfer (by merger, consolidation or otherwise) of (i) the Capital Stock of such Guarantor (including any sale, exchange or transfer), after which the applicable Guarantor is no longer a Restricted Subsidiary or (ii) all or substantially all the assets of such Guarantor, whether or not such Guarantor is the surviving Person in such transaction, to a Person which is not the Issuer or a Restricted Subsidiary; provided that such sale, exchange or transfer of Capital Stock or assets is made in a manner that is not prohibited by the applicable provisions of this Indenture;
(2) the release or discharge of such Guarantor from the guarantee of Indebtedness that resulted in the obligation of such Guarantor to guarantee the Notes (including the Senior Credit Facilities), except as a result of payment under such guarantee;
(3) the proper designation of any Restricted Subsidiary that is a Guarantor as an Unrestricted Subsidiary; or
(4) the Issuer exercising its Legal Defeasance option or Covenant Defeasance option in accordance with Article 8 hereof or the Issuers obligations under this Indenture being discharged in accordance with the terms of this Indenture.
Upon request of the Issuer, the Trustee shall evidence such release by a supplemental indenture or other instrument which may be executed by the Trustee without the consent of any Holder; provided that the Issuer has delivered to the Trustee an Officers Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for in this Indenture relating to such transaction have been complied with.
ARTICLE 11
SATISFACTION AND DISCHARGE
SECTION 11.01 Satisfaction and Discharge .
This Indenture shall be discharged and shall cease to be of further effect, when either:
(1) all the Notes theretofore authenticated and delivered, except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust, have been delivered to the Trustee for cancellation; or
(2) (A) all the Notes not theretofore delivered to the Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise, will become due and payable within one year or are to be called for redemption and redeemed within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Issuer, and the Issuer or any Guarantor has irrevocably deposited or caused to be
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deposited with the Trustee as trust funds in trust solely for the benefit of the Holders cash in U.S. dollars, Government Securities, or a combination thereof, in such amounts as will be sufficient (in the opinion of a nationally recognized investment bank, appraisal firm or firm of independent public accountants) without consideration of any reinvestment of interest to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation for principal, premium, if any, and accrued interest to the date of maturity or redemption;
(B) the Issuer has paid or caused to be paid all sums payable by it under this Indenture; and
(C) the Issuer has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at maturity or the redemption date, as the case may be.
In addition, the Issuer must deliver an Officers Certificate and an Opinion of Counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been satisfied.
Notwithstanding the satisfaction and discharge of this Indenture, if money shall have been deposited with the Trustee pursuant to subclause (A) of clause (2) of this Section 11.01, the provisions of Section 11.02 and Section 8.06 hereof shall survive.
SECTION 11.02 Application of Trust Money .
Subject to the provisions of Section 8.06 hereof, all money and Government Securities (including the proceeds thereof) deposited with the Trustee pursuant to Section 11.01 hereof shall be held in trust and applied by it, in accordance with the provisions of the of Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Issuer or Guarantor acting as the Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law.
If the Trustee or Paying Agent is unable to apply any money or Government Securities in accordance with Section 11.01 hereof by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Issuers and any Guarantors obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 11.01 hereof until such time as the Trustee or any Paying Agent is permitted to apply all such money or Government Securities in accordance with Section 11.01 hereof; provided that if the Issuer has made any payment of principal of, premium, if any, or interest on any Notes because of the reinstatement of its obligations, the Issuer shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or Government Securities held by the Trustee or Paying Agent.
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ARTICLE 12
MISCELLANEOUS
SECTION 12.01 Notices.
Any notice or communication by the Issuer, any Guarantor, the Trustee or any Paying Agent to the others is duly given if in writing and delivered in person, via facsimile or electronic transmission in PDF format, or mailed by first-class mail (registered or certified, return receipt requested) or overnight air courier guaranteeing next day delivery, to the others address:
If to the Issuer and/or any Guarantor:
Halyard Health, Inc.
5405 Windward Parkway
Suite 100, South
Alpharetta, GA 30003
Attention: General Counsel
Facsimile: (770) 587-7749
If to the Trustee:
Deutsche Bank Trust Company Americas
Trust & Agency Services
60 Wall Street, 16th Floor
Mail Stop: NYC60-1630
New York, New York 10005
Attn: Corporates Team Halyard Health, Inc.
Fax: 732-578-4635
With a copy to:
Deutsche Bank Trust Company Americas
c/o Deutsche Bank National Trust Company
Trust & Agency Services
100 Plaza One, Mailstop JCY03-0699
Jersey City, New Jersey 07311
Attn: Corporates Team Halyard Health, Inc.
Fax: 732-578-4635
The Issuer, any Guarantor, the Trustee or any Paying Agent, by notice to the others, may designate additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five calendar days after being deposited in the mail, postage prepaid, if mailed by first-class mail (or in the case of Notes in global form, on the date the notice is sent pursuant to the applicable procedures of the Depositary); when receipt acknowledged, if faxed; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery; and,
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subject to compliance with the Trust Indenture Act, on the first date of which publication is made, if given by publication; provided that any notice or communication delivered to the Trustee shall be deemed effective upon actual receipt thereof.
Any notice or communication to a Holder shall be mailed by first-class mail (certified or registered, return receipt requested) or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in Trust Indenture Act Section 313(c), to the extent required by the Trust Indenture Act. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it.
If the Issuer mail a notice or communication to Holders, they shall mail a copy to the Trustee and each Agent at the same time.
SECTION 12.02 Communication by Holders of Notes with Other Holders of Notes .
Holders may communicate pursuant to Trust Indenture Act Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Issuer, the Trustee, the Registrar and anyone else shall have the protection of Trust Indenture Act Section 312(c).
SECTION 12.03 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Issuer or any of the Guarantors to the Trustee to take any action under this Indenture (except in connection with the original issuance of the Notes), the Issuer or such Guarantor, as the case may be, shall furnish to the Trustee (except as set forth in section 9.05 hereof):
(a) an Officers Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.04 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.04 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied.
SECTION 12.04 Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to Section 4.04 hereof or Trust Indenture Act Section 314(a)(4)) shall comply with the provisions of Trust Indenture Act Section 314(e) and shall include:
(a) a statement that the Person making such certificate or opinion has read such covenant or condition;
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(b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with (which examination or investigation, in the case of an Opinion of Counsel, may be limited to reliance on an Officers Certificate as to matters of fact); and
(d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with; provided , however , that with respect to matters of fact an Opinion of Counsel may rely on an Officers Certificate or certificates of public officials.
SECTION 12.05 Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions.
SECTION 12.06 No Personal Liability of Directors, Officers, Employees and Stockholders.
No past, present or future director, officer, employee, incorporator, member or stockholder of the Issuer or any Guarantor shall have any liability for any obligations of the Issuer or the Guarantors under the Notes, the Guarantees or this Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder by accepting Notes waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes.
SECTION 12.07 Governing Law; Consent to Jurisdiction
THIS INDENTURE, THE NOTES AND ANY GUARANTEE WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
To the fullest extent permitted by applicable law, the Issuer, each Guarantor and the Trustee hereby irrevocably submits to the jurisdiction of any federal or state court located in the Borough of Manhattan in The City of New York, New York in any suit, action or proceeding based on or arising out of or relating to this Indenture or any Securities and irrevocably agrees that all claims in respect of such suit or proceeding may be determined in any such court. Each of the Issuer, each Guarantor and the Trustee irrevocably waives, to the fullest extent permitted by law, any objection which it may have to the laying of the venue of any such suit, action or proceeding brought in an inconvenient forum. Each of the Issuer, each Guarantor and the Trustee agrees that final judgment in any such suit, action or proceeding brought in such a court
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shall be conclusive and binding upon the Issuer, each Guarantor or the Trustee, and may be enforced in any courts to the jurisdiction of which the Issuer, each Guarantor or the Trustee, as applicable, are subject by a suit upon such judgment, provided that service of process is effected upon the Issuer, such Guarantor or the Trustee, as applicable, in a manner permitted by law.
SECTION 12.08 Waiver of Jury Trial.
THE ISSUER, THE GUARANTORS, THE TRUSTEE AND THE HOLDERS HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE, THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 12.09 Force Majeure.
In no event shall the Trustee incur any liability for not performing any act or fulfilling any duty, obligation or responsibility hereunder by reason of any occurrence beyond the control of the Trustee (including but not limited to any act or provision of any present or future law or regulation or governmental authority, any act of God or war, civil unrest, local or national disturbance or disaster, any act of terrorism, or the unavailability of the Federal Reserve Bank wire or facsimile or other wire or communication facility).
SECTION 12.10 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Issuer or any of the Restricted Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture.
SECTION 12.11 Successors.
All agreements of the Issuer in this Indenture and the Notes shall bind its successors. All agreements of the Trustee or any Agent in this Indenture shall bind its successors. All agreements of each Guarantor in this Indenture shall bind its successors, except as otherwise provided in Section 10.05 hereof.
SECTION 12.12 Severability.
In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 12.13 Counterpart Originals.
The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. The exchange of copies of this Indenture and of signature pages by facsimile or PDF transmission shall constitute effective execution and delivery of this Indenture as to the parties hereto and may be used in lieu of the original Indenture and signature pages for all purposes.
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SECTION 12.14 Table of Contents, Headings, etc.
The Table of Contents, Cross-Reference Table and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof.
SECTION 12.15 U.S.A. Patriot Act.
In order to comply with the laws, rules, regulations and executive orders in effect from time to time applicable to banking institutions, including, without limitation, those relating to the funding of terrorist activities and money laundering, including Section 326 of the USA PATRIOT Act of the United States (Applicable Law), the Trustee and Agents are required to obtain, verify, record and update certain information relating to individuals and entities which maintain a business relationship with the Trustee and Agents. Accordingly, each of the parties agree to provide to the Trustee and Agents, upon their request from time to time such identifying information and documentation as may be available for such party in order to enable the Trustee and Agents to comply with Applicable Law.
SECTION 12.16 Trust Indenture Act Controls.
If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by, or with another provision (an incorporated provision) included in this Indenture by operation of, Sections 310 to 318 of the Trust Indenture Act, inclusive, such imposed duties or incorporated provision shall control.
[Signatures on following pages]
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IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date and year first above written.
HALYARD HEALTH, INC., as Issuer | ||||
By: |
/s/ Steven E. Voskuil |
|||
Name: | Steven E. Voskuil | |||
Title: | Senior Vice President and | |||
Chief Financial Officer |
Signature Page to Indenture
DEUTSCHE BANK TRUST COMPANY AMERICAS, as Trustee | ||||
By: Deutsche Bank National Trust Company | ||||
By: |
/s/ Annie Jaghatspanyan |
|||
Name: | Annie Jaghatspanyan | |||
Title: | Vice President | |||
By: |
/s/ Jacqueline Bartnick |
|||
Name: | Jacqueline Bartnick | |||
Title: | Director |
Signature Page to Indenture
EXHIBIT A
[FACE OF NOTE]
[Insert the Global Note Legend, if applicable pursuant to the provisions of the Indenture]
[Insert the Private Placement Legend, if applicable pursuant to the provisions of the Indenture]
[Insert the Regulation S Temporary Global Note Legend, if applicable pursuant to the provisions of the Indenture]
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[Rule 144A Global Note: 40650V AA8 / US40650VAA89]
[Regulation S Global Note: U4062X AA9 / USU4062XAA91]
[[RULE 144A][REGULATION S] GLOBAL NOTE
representing up to
$250,000,000
6.250% Senior Notes due 2022
No. | [$ ] |
HALYARD HEALTH, INC.
promises to pay to [ ] or registered assigns, the principal sum [set forth on the Schedule of Exchanges of Interests in the Global Note attached hereto] [of United States Dollars] on October 15, 2022.
Interest Payment Dates: April 15 and October 15, commencing April 15, 2015
Record Dates: April 1 and October 1
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IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed.
HALYARD HEALTH, INC. | ||
By: |
|
|
Name: | ||
Title: |
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This is one of the Notes referred to in the within-mentioned Indenture:
Dated:
DEUTSCHE BANK TRUST COMPANY AMERICAS, as Trustee | ||
By: | Deutsche Bank National Trust Company | |
By: |
|
|
Authorized Signatory |
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[Back of Note]
6.250% Senior Notes due 2022
Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. HALYARD HEALTH, INC., a Delaware Corporation (the Issuer ), promises to pay interest on the principal amount of this Note at 6.250% per annum from October 17, 2014 1 until maturity. The Issuer will pay interest semi-annually in arrears on April 15 and October 15 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each, an Interest Payment Date ). The first Interest Payment Date shall be April 15, 2015 2 . Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance. The Issuer will pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at the interest rate on the Notes; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest, if any, from time to time on demand at the interest rate on the Notes. At maturity, the Issuer will pay accrued and unpaid interest from the most recent date to which interest has been paid or provided for. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.
2. METHOD OF PAYMENT. The Issuer will pay interest on the Notes to the Persons who are registered Holders of Notes at the close of business on the April 1 or October 1 (whether or not a Business Day), as the case may be, immediately preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. Payment of interest may be made by check mailed to the Holders at their addresses set forth in the register of Holders; provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest and premium, if any, on, all Global Notes and all other Notes the Holders of which shall have provided wire transfer instructions to the Issuer or the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, Deutsche Bank Trust Company Americas will act as Paying Agent and Registrar. The Issuer may change the Paying Agents or the Registrars without prior notice to the Holders. The Issuer or any of its Subsidiaries, including the Issuer, may act as a Paying Agent or Registrar.
4. INDENTURE. The Issuer issued the Notes under an Indenture, dated as of October 17, 2014 (the Indenture ), between the Issuer and Deutsche Bank Trust Company Americas, as Trustee (the Trustee ). This Note is one of a duly authorized issue of notes of the Issuer designated as its 6.250% Senior Notes due 2022. The Issuer shall be entitled to issue Additional Notes pursuant to Sections 2.01 and 4.09 of the Indenture. The terms of the Notes
1 | With respect to the Initial Notes. |
2 | With respect to the Initial Notes. |
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include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the Trust Indenture Act ). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling.
5. OPTIONAL REDEMPTION.
(a) Except as described below under clauses 5(b), 5(c) and 6 hereof, the Issuer will not be entitled to redeem the Notes at its option prior to October 15, 2017.
(b) At any time prior to October 15, 2017, the Issuer may redeem all or a part of the Notes upon notice as described in Section 3.03 of the Indenture, at a redemption price equal to 100% of the principal amount of Notes redeemed plus the Applicable Premium as of the redemption date (the Redemption Date ), and, without duplication, accrued and unpaid interest, if any, to, but excluding, the Redemption Date, subject to the rights of Holders on the relevant record date to receive interest due on the relevant Interest Payment Date.
(c) Until October 15, 2017, the Issuer may, at its option, upon notice as described in Section 3.03 of the Indenture, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Notes issued by them at a redemption price equal to 106.250% of the aggregate principal amount thereof plus accrued and unpaid interest thereon, if any, to, but excluding, the applicable Redemption Date, subject to the right of Holders on the relevant record date to receive interest due on the relevant interest payment date, with an amount of cash not greater than the net cash proceeds of one or more Equity Offerings; provided that at least 65% of the aggregate principal amount of the Notes originally issued under the Indenture remains outstanding immediately after the occurrence of each such redemption; provided further that each such redemption occurs within 180 days of the date of closing of each such Equity Offering. Notice of any redemption upon any Equity Offering may be given prior to such Equity Offering, and any such redemption or notice may, at the Issuers discretion, be subject to completion of the related Equity Offering.
(d) On and after October 15, 2017, the Issuer may redeem the Notes, in whole or in part, upon notice as described in Section 3.03 of the Indenture, at the redemption prices (expressed as percentages of principal amount of the Notes to be redeemed) set forth below, plus accrued and unpaid interest thereon, if any, to, but excluding, the applicable Redemption Date, subject to the right of Holders of record on the relevant Record Date to receive interest due on the relevant Interest Payment Date, if redeemed during the twelve-month period beginning on October 15 of each of the years indicated below:
Year |
Percentage | |||
2017 |
104.688 | % | ||
2018 |
103.125 | % | ||
2019 |
101.563 | % | ||
2020 and thereafter |
100.000 | % |
(e) Any redemption pursuant to this paragraph 5 shall be made pursuant to the provisions of Sections 3.01 through 3.06 of the Indenture.
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6. MANDATORY REDEMPTION. Except as provided in Section 3.08(b) of the Indenture, the Issuer shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes.
7. NOTICE OF REDEMPTION. Subject to Section 3.03 of the Indenture, notice of redemption will be mailed, or delivered by electronic transmission in PDF format, by first-class mail at least 30 days but not more than 60 days before the redemption date (except that redemption notices may be mailed, or delivered electronically, more than 60 days prior to a redemption date if the notice is issued in connection with Article 8 or Article 11 of the Indenture) to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $2,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption.
8. OFFERS TO REPURCHASE.
(a) Upon the occurrence of a Change of Control Repurchase Event, the Issuer shall make an offer (a Change of Control Offer ) to each Holder to repurchase all or any part (equal to $2,000 or an integral multiple of $1,000 in excess thereof) of each Holders Notes at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of purchase (the Change of Control Payment ). The Change of Control Offer shall be made in accordance with Section 4.14 of the Indenture.
(b) If the Issuer or any of its Restricted Subsidiaries consummates an Asset Sale, within ten Business Days of each date that Excess Proceeds exceed $25.0 million, the Issuer or any other Restricted Subsidiary shall commence an offer to all Holders of the Notes and, if required by the terms of any Pari Passu Indebtedness, to the holders of such Pari Passu Indebtedness (an Asset Sale Offer ), to purchase the maximum principal amount of Notes (including any Additional Notes) and such other Pari Passu Indebtedness that may be purchased out of the Excess Proceeds at an offer price in cash in an amount equal to 100% of the principal amount thereof (or accreted value, as applicable) plus accrued and unpaid interest thereon, if any (or, in respect of such Pari Passu Indebtedness, such lesser price, if any, as may be provided for or permitted by the terms of such Pari Passu Indebtedness), to, but excluding, the date fixed for the closing of such offer, in accordance with the procedures set forth in the Indenture. To the extent that the aggregate principal amount (or accreted value, as applicable) of Notes and such Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Issuer may use any remaining Excess Proceeds for general corporate purposes, subject to other covenants contained in the Indenture, and they will no longer constitute Excess Proceeds. If the aggregate amount of Notes and the Pari Passu Indebtedness surrendered in an Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the Notes (in accordance with customary procedures) and the Issuer shall select such Pari Passu Indebtedness to be purchased (a) if the Notes or such Pari Passu Indebtedness are listed on any national securities exchange, in compliance with the requirements of the principal national securities exchange on which the Notes or such Pari Passu Indebtedness, as applicable, are listed or (b) by lot or such similar method in accordance with the procedures of DTC, unless otherwise required by law; provided that no Notes of $2,000 or less shall be repurchased in part. Upon completion of any such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
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9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder to furnish appropriate endorsements and transfer documents in connection with a transfer of the Notes. Holders shall pay all taxes due on transfer. The Issuer is not required to transfer or exchange any Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, the Issuer is not required to issue, transfer or exchange any Notes for a period of 15 days before the mailing of a notice of redemption of Notes to be redeemed.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. The Indenture, the Guarantees or the Notes may be amended or supplemented as provided in the Indenture.
12. DEFAULTS AND REMEDIES. The Events of Default relating to the Notes are defined in Section 6.01 of the Indenture. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Notes will become due and payable immediately without further action or notice. Holders may not enforce the Indenture, the Notes or the Guarantees except as provided in the Indenture. Subject to certain limitations, Holders of a majority in aggregate principal amount of the then outstanding Notes may direct the Trustee in writing in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing Default (except a Default relating to the payment of principal, premium, if any, or interest) if it determines that withholding notice is in their interest. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default and its consequences under the Indenture except a continuing Default in payment of the principal of, premium, if any, or interest on, any of the Notes held by a non-consenting Holder. The Issuer is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Issuer is required within ten Business Days after becoming aware of any Default, to deliver to the Trustee a statement specifying such Default and what action the Issuer proposes to take with respect thereto.
13. AUTHENTICATION. This Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose until authenticated by the manual signature of the Trustee.
14. GOVERNING LAW. THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THE INDENTURE, THE NOTES AND THE GUARANTEES.
15. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuer has caused CUSIP
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numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon.
The Issuer will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to the Issuer at the following address:
Halyard Health, Inc.
5405 Windward Parkway
Suite 100, South
Alpharetta, GA 30003
Attention: General Counsel
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ASSIGNMENT FORM
To assign this Note, fill in the form below:
(I) or (we) assign and transfer this Note to: |
|
|
(Insert assignee legal name) |
(Insert assignees soc. sec. or tax I.D. no.)
(Print or type assignees name, address and zip code)
and irrevocably appoint
to transfer this Note on the books of the Issuer. The agent may substitute another to act for him.
Date: |
|
Your Signature: |
|
(Sign exactly as your name appears on the face of this Note)
Signature Guarantee*: |
|
* | Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). |
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OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer pursuant to Section 4.10 or 4.14 of the Indenture, check the appropriate box below:
¨ Section 4.10 | ¨ Section 4.14 |
If you want to elect to have only part of this Note purchased by the Issuer pursuant to Section 4.10 or Section 4.14 of the Indenture, state the amount you elect to have purchased:
$ .
Date: |
|
Your Signature: |
|
(Sign exactly as your name appears on the face of this Note)
Tax Identification No.:
Signature Guarantee*: |
|
* | Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). |
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SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE*
The initial outstanding principal amount of this Global Note is $ . The following exchanges of a part of this Global Note for an interest in another Global Note or for a Definitive Note, or exchanges of a part of another Global or Definitive Note for an interest in this Global Note, have been made:
Date of Exchange |
Amount of
decrease in Principal Amount |
Amount of
increase in Principal Amount of this Global Note |
Principal Amount
of this Global Note following such decrease or increase |
Signature of
authorized signatory of Trustee or Note Custodian |
||||
* | This schedule should be included only if the Note is issued in global form. |
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EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
DB Services Americas, Inc.
5022 Gate Parkway, Suite 200,
Jacksonville, FL 32256 USA
Attention: Transfer Dept.
Email: dwac.processing@db.com
With copy:
Deutsche Bank Trust Company Americas
c/o Deutsche Bank National Trust Company
100 Plaza One 6 th floor
MSJCY03-0699
Jersey City, New Jersey 07311
Fax: 732-578-4635
Re: 6.250% Senior Notes due 2022
Reference is hereby made to the Indenture, dated as of October 17, 2014 (the Indenture ), between Halyard Health, Inc. and the Trustee (as defined therein). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture.
[ ] (the Transferor ) owns and proposes to transfer the Note[s] or interest in such Note[s] specified in Annex A hereto, in the principal amount of $ in such Note[s] or interests (the Transfer ), to (the Transferee ), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that:
[CHECK ALL THAT APPLY]
1. ¨ CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE RELEVANT 144A GLOBAL NOTE OR A RELEVANT DEFINITIVE NOTE PURSUANT TO RULE 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the Securities Act ), and, accordingly, the Transferor hereby further certifies that the beneficial interest or Definitive Note is being transferred to a Person that the Transferor reasonably believes is purchasing the beneficial interest or Definitive Note for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a qualified institutional buyer within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer is in compliance with all applicable securities laws of the states of the United States and other jurisdictions.
2. ¨ CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE RELEVANT REGULATION S GLOBAL NOTE OR A DEFINITIVE
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NOTE PURSUANT TO REGULATION S. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) if the proposed transfer is being made prior to the expiration of the Restricted Period, the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on Transfer enumerated in the Indenture and the Securities Act.
3. ¨ CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE RELEVANT DEFINITIVE NOTE PURSUANT TO ANY PROVISION OF THE SECURITIES ACT OTHER THAN RULE 144A OR REGULATION S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Notes and Restricted Definitive Notes and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one):
a) ¨ such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act;
or
b) ¨ such Transfer is being effected to the Issuer or a subsidiary thereof;
or
c) ¨ such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act.
4. ¨ CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE OR OF AN UNRESTRICTED DEFINITIVE NOTE.
a) ¨ CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i) The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue
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sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture.
b) ¨ CHECK IF TRANSFER IS PURSUANT TO REGULATION S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture.
c) ¨ CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any State of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will not be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes or Restricted Definitive Notes and in the Indenture.
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This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer.
[Insert Name of Transferor] | ||
By: |
|
|
Name: | ||
Title: |
Dated: |
|
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ANNEX A TO CERTIFICATE OF TRANSFER
5. The Transferor owns and proposes to transfer the following:
[CHECK ONE OF (a) OR (b)]
a) ¨ a beneficial interest in the:
(i) ¨ 144A Global Note (CUSIP/ISIN: ), or
(ii) ¨ Regulation S Global Note (CUSIP/ISIN: ), or
b) ¨ a Restricted Definitive Note.
6. After the Transfer the Transferee will hold:
[CHECK ONE]
a) ¨ a beneficial interest in the:
(i) ¨ 144A Global Note (CUSIP/ISIN: ), or
(ii) ¨ Regulation S Global Note (CUSIP/ISIN: ), or
(iii) ¨ Unrestricted Global Note (CUSIP/ISIN: ); or
b) ¨ a Restricted Definitive Note; or
c) ¨ an Unrestricted Definitive Note, in accordance with the terms of the Indenture
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EXHIBIT C
FORM OF CERTIFICATE OF EXCHANGE
DB Services Americas, Inc.
5022 Gate Parkway, Suite 200,
Jacksonville, FL 32256 USA
Attention: Transfer Dept.
Email: dwac.processing@db.com
With copy:
Deutsche Bank Trust Company Americas
c/o Deutsche Bank National Trust Company
100 Plaza One 6 th floor
MSJCY03-0699
Jersey City, New Jersey 07311
Fax: 732-578-4635
Re: 6.250% Senior Notes due 2022
Reference is hereby made to the Indenture, dated as of October 17, 2014 (the Indenture ), between Halyard Health, Inc. and the Trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture.
[ ] (the Owner ) owns and proposes to exchange the Note[s] or interest in such Note[s] specified herein, in the principal amount of $[ ] in such Note[s] or interests (the Exchange ). In connection with the Exchange, the Owner hereby certifies that:
1) EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN A RESTRICTED GLOBAL NOTE FOR UNRESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN AN UNRESTRICTED GLOBAL NOTE
a) ¨ CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE OF THE SAME SERIES. In connection with the Exchange of the Owners beneficial interest in a Restricted Global Note for a beneficial interest in an Unrestricted Global Note of the same series in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owners own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the United States Securities Act of 1933, as amended (the Securities Act ), (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States.
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b) ¨ CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO UNRESTRICTED DEFINITIVE NOTE OF THE SAME SERIES. In connection with the Exchange of the Owners beneficial interest in a Restricted Global Note for an Unrestricted Definitive Note of the same series, the Owner hereby certifies (i) the Definitive Note is being acquired for the Owners own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States.
c) ¨ CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE OF THE SAME SERIES. In connection with the Owners Exchange of a Restricted Definitive Note for a beneficial interest in an Unrestricted Global Note of the same series, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owners own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest is being acquired in compliance with any applicable blue sky securities laws of any state of the United States.
d) ¨ CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO UNRESTRICTED DEFINITIVE NOTE OF THE SAME SERIES. In connection with the Owners Exchange of a Restricted Definitive Note for an Unrestricted Definitive Note of the same series, the Owner hereby certifies (i) the Unrestricted Definitive Note is being acquired for the Owners own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States.
2) EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN RESTRICTED GLOBAL NOTES FOR RESTRICTED DEFINITIVE NOTES OF THE SAME SERIES OR BENEFICIAL INTERESTS IN RESTRICTED GLOBAL NOTES OF THE SAME SERIES
a) ¨ CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO RESTRICTED DEFINITIVE NOTE OF THE SAME SERIES. In connection with the Exchange of the Owners beneficial interest in a Restricted Global Note for a Restricted Definitive Note of the same series with an equal principal amount, the Owner hereby certifies that the Restricted Definitive Note is being acquired for the Owners own account without transfer. Upon consummation of the proposed Exchange
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in accordance with the terms of the Indenture, the Restricted Definitive Note issued will continue to be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Definitive Note and in the Indenture and the Securities Act.
b) ¨ CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE OF THE SAME SERIES. In connection with the Exchange of the Owners Restricted Definitive Note for a beneficial interest in the [CHECK ONE] ¨ 144A Global Note ¨ Regulation S Global Note of the same series, with an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owners own account without transfer and (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, and in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the beneficial interest issued will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the relevant Restricted Global Note and in the Indenture and the Securities Act.
This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer and are dated
[Insert Name of Transferor] | ||
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EXHIBIT D
[FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED BY SUBSEQUENT GUARANTORS]
Supplemental Indenture (this Supplemental Indenture ), dated as of , among [ ] (the Guaranteeing Subsidiary ), a Subsidiary of Halyard Health, Inc., a Delaware corporation (the Issuer ), the Issuer, and Deutsche Bank Trust Company Americas, a New York banking corporation, as trustee (the Trustee ).
W I T N E S S E T H
WHEREAS, the Issuer has heretofore executed and delivered to the Trustee an indenture (the Indenture ), dated as of October 17, 2014, providing for the issuance of an unlimited aggregate principal amount of Senior Notes due 2022 (the Notes );
WHEREAS, the Indenture provides that under certain circumstances the Guaranteeing Subsidiary shall execute and deliver to the Trustee a supplemental indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally guarantee all of the Issuers Obligations under the Notes and the Indenture on the terms and conditions set forth herein and under the Indenture (the Guarantee ); and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows:
(1) Capitalized Terms . Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture.
(2) Agreement to Guarantee . The Guaranteeing Subsidiary hereby agrees as follows:
(a) Along with all Guarantors named in the Indenture, to jointly and severally unconditionally guarantee to each Holder authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Notes or the obligations of the Issuer hereunder or thereunder, that:
(i) the principal of and interest and premium on the Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Notes, if any, if lawful, and all other obligations of the Issuer to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and
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(ii) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantors and the Guaranteeing Subsidiary shall be jointly and severally obligated to pay the same immediately. This is a guarantee of payment and not a guarantee of collection.
(b) The obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder with respect to any provisions hereof or thereof, the recovery of any judgment against the Issuer, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor.
(c) The following is hereby waived: diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, protest, notice and all demands whatsoever.
(d) This Guarantee shall not be discharged except by complete performance of the obligations contained in the Notes, the Indenture and this Supplemental Indenture, and the Guaranteeing Subsidiary accepts all obligations of a Guarantor under the Indenture.
(e) If any Holder or the Trustee is required by any court or otherwise to return to the Issuer, the Guarantors (including the Guaranteeing Subsidiary), or any custodian, trustee, liquidator or other similar official acting in relation to either the Issuer or the Guarantors, any amount paid either to the Trustee or such Holder, this Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect.
(f) As between the Guaranteeing Subsidiary, on the one hand, and the Holders and the Trustee, on the other hand, (i) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 of the Indenture for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (ii) in the event of any declaration of acceleration of such obligations as provided in Article 6 of the Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guaranteeing Subsidiary for the purpose of this Guarantee.
(g) To the extent that the Guaranteeing Subsidiary makes a payment under its Guarantee, the Guaranteeing Subsidiary shall be entitled upon payment in full of all guaranteed obligations under the Indenture to a contribution from each other Guarantor in an amount equal to such other Guarantors pro rata portion of such payment based on the respective net assets of all the Guarantors at the time of such payment determined in accordance with GAAP.
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(h) Pursuant to Section 10.02 of the Indenture, after giving effect to all other contingent and fixed liabilities that are relevant under any applicable Bankruptcy Law or fraudulent conveyance laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under Article 10 of the Indenture, this new Guarantee shall be limited to the maximum amount permissible such that the obligations of such Guaranteeing Subsidiary under this Guarantee will not constitute a fraudulent transfer or conveyance.
(i) This Guarantee shall remain in full force and effect and continue to be effective should any petition be filed by or against the Issuer for liquidation, reorganization, should the Issuer become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of the Issuers assets, and shall, to the fullest extent permitted by law, continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Notes are, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee on the Notes and Guarantee, whether as a voidable preference , fraudulent transfer or otherwise, all as though such payment or performance had not been made. In the event that any payment or any part thereof, is rescinded, reduced, restored or returned, the Note shall, to the fullest extent permitted by law, be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.
(j) In case any provision of this Guarantee shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
(k) This Guarantee shall be a general unsecured senior obligation of such Guaranteeing Subsidiary.
(l) Each payment to be made by the Guaranteeing Subsidiary in respect of this Guarantee shall be made without set-off, counterclaim, reduction or diminution of any kind or nature.
(3) Execution and Delivery . The Guaranteeing Subsidiary agrees that the Guarantee shall remain in full force and effect notwithstanding the absence of the endorsement of any notation of such Guarantee on the Notes.
(4) Merger, Consolidation or Sale of All or Substantially All Assets .
(a) Except as otherwise provided in Section 5.01(b) of the Indenture, the Guaranteeing Subsidiary may not consolidate or merge with or into or wind up into (whether or not the Issuer or Guaranteeing Subsidiary is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets, in one or more related transactions, to any Person unless:
(i) (A) the Guaranteeing Subsidiary is the surviving corporation or the Person formed by or surviving any such consolidation or
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merger (if other than the Guaranteeing Subsidiary) or to which such sale, assignment, transfer, lease, conveyance or other disposition will have been made is a corporation organized or existing under the laws of the jurisdiction of organization of the Guaranteeing Subsidiary, as the case may be, or the laws of the United States, any state thereof, the District of Columbia, or any territory thereof (the Guaranteeing Subsidiary or such Person, as the case may be, being herein called the Successor Person );
(B) the Successor Person, if other than the Guaranteeing Subsidiary, expressly assumes all the obligations of the Guaranteeing Subsidiary under the Indenture and the Guaranteeing Subsidiarys related Guarantee pursuant to supplemental indentures or other documents or instruments in form reasonably satisfactory to the Trustee;
(C) immediately after such transaction, no Default exists; and
(D) the Issuer shall have delivered to the Trustee an Officers Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indentures, if any, comply with the Indenture, and, with respect to the Opinion of Counsel, such supplemental indentures (or other documents setting forth the assumption of the obligations of the applicable Guarantor) constitute a legal, valid and binding obligation of the Successor Person, enforceable against such Successor Person in accordance with its terms; or
(ii) the transaction is not prohibited by the Indenture;
(b) Subject to certain limitations described in the Indenture, the Successor Person will succeed to, and be substituted for, the Guaranteeing Subsidiary under the Indenture and the Guaranteeing Subsidiarys Guarantee. Notwithstanding the foregoing, the Guaranteeing Subsidiary may merge into or transfer all or part of its properties and assets to another Guarantor or the Issuer.
(5) Releases . The Guarantee of the Guaranteeing Subsidiary shall be automatically and unconditionally released and discharged, and no further action by the Guaranteeing Subsidiary, the Issuer or the Trustee is required for the release of the Guaranteeing Subsidiarys Guarantee, upon:
(a) (i) any direct or indirect sale, exchange or transfer (by merger or otherwise) of (i) the Capital Stock of the Guaranteeing Subsidiary (including any sale, exchange or transfer), after which the Guaranteeing Subsidiary is no longer a Restricted Subsidiary or (ii) all or substantially all the assets of the Guaranteeing Subsidiary which sale, exchange or transfer is not prohibited by the applicable provisions of the Indenture;
(ii) the release or discharge of the Guaranteeing Subsidiary from the guarantee of Indebtedness that resulted in the obligation of the Guaranteeing Subsidiary to guarantee the Notes (including the Senior Credit Facilities), except a discharge or release by or as a result of payment under such guarantee;
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(iii) the proper designation of the Guaranteeing Subsidiary as an Unrestricted Subsidiary; or
(iv) the Issuer exercising its Legal Defeasance option or Covenant Defeasance option in accordance with Article 8 of the Indenture or the Issuers obligations under the Indenture being discharged in accordance with the terms of the Indenture; and
(b) the Issuer delivering to the Trustee an Officers Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for in the Indenture relating to such transaction have been complied with.
(6) No Recourse Against Others . No director, officer, employee, incorporator or stockholder of the Guaranteeing Subsidiary shall have any liability for any obligations of the Issuer or the Guarantors (including the Guaranteeing Subsidiary) under the Notes, any Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting Notes waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes.
(7) Governing Law . THIS SUPPLEMENTAL INDENTURE WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(8) Counterparts . The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. The exchange of copies of this Supplemental Indenture and of signature pages by facsimile or PDF transmission shall constitute effective execution and delivery of this Supplemental Indenture as to the parties hereto and may be used in lieu of the original Supplemental Indenture and signature pages for all purposes.
(9) Effect of Headings . The Section headings herein are for convenience only and shall not affect the construction hereof.
(10) The Trustee . The Trustee accepts the amendments of the Indenture effected by this Supplemental Indenture, but on the terms and conditions set forth in the Indenture, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guaranteeing Subsidiary.
(11) Subrogation . The Guaranteeing Subsidiary shall be subrogated to all rights of Holders of Notes against the Issuer in respect of any amounts paid by the Guaranteeing Subsidiary pursuant to the provisions of Section 2 hereof and Section 10.01 of the Indenture;
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provided that the Guaranteeing Subsidiary shall not be entitled to enforce or receive any payments arising out of, or based upon, such right of subrogation until all obligations of the Issuer under the Indenture and the Notes shall have been paid in full.
(12) Benefits Acknowledged . The Guaranteeing Subsidiarys Guarantee is subject to the terms and conditions set forth in the Indenture. The Guaranteeing Subsidiary acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Indenture and this Supplemental Indenture and that the guarantee and waivers made by it pursuant to this Guarantee are knowingly made in contemplation of such benefits.
(13) Successors . All agreements of the Guaranteeing Subsidiary in this Supplemental Indenture shall bind its Successors, except as otherwise provided in Section 2(j) hereof or elsewhere in this Supplemental Indenture. All agreements of the Trustee in this Supplemental Indenture shall bind its successors.
(14) Representation and Warranty . The Guaranteeing Subsidiary hereby represents and warrants that this Supplemental Indenture is its legal, valid and binding obligation, enforceable against it in accordance with its terms.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the date first above written.
HALYARD HEALTH, INC., as Issuer | ||
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DEUTSCHE BANK TRUST COMPANY AMERICAS, as Trustee | ||
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Exhibit 4.2
REGISTRATION RIGHTS AGREEMENT
Dated as of October 17, 2014
among
HALYARD HEALTH, INC.,
as Issuer,
and
MORGAN STANLEY & CO. LLC,
as representative of the several Initial Purchasers
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this Agreement ) is made and entered into as of October 17, 2014, among HALYARD HEALTH, INC., a Delaware corporation (the Company ), and MORGAN STANLEY & CO. LLC, as representative of the several initial purchasers set forth on Schedule I hereto (the Initial Purchasers ).
This Agreement is made pursuant to the Purchase Agreement, dated October 2, 2014, among the Company, the Initial Purchasers and the Guarantors (as defined below) (the Purchase Agreement ), which provides for the sale by the Company to the Initial Purchasers of an aggregate of $250,000,000 principal amount of the Companys 6.250% Senior Notes due 2022 (the Notes ). The Notes are being issued in connection with the spin-off (the Spin-Off ) of the Company from Kimberly-Clark Corporation, a Delaware corporation ( Kimberly-Clark ), and the gross proceeds of the Notes are being deposited in escrow pending the satisfaction of certain conditions in connection with the Spin-Off. Upon the release of the gross proceeds from escrow, (i) the Notes will be fully and unconditionally guaranteed on a senior unsecured basis by the subsidiaries of the Company listed on Schedule II hereto (the Guarantors ) and (ii) the Guarantors will execute a joinder to this Agreement (the Registration Rights Joinder Agreement ), the form of which is included as Annex A hereto, whereby the Guarantors will agree to be bound by the terms hereof and will agree to undertake and perform all of the obligations of a Guarantor set forth herein. In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company and (upon execution of the Registration Rights Joinder Agreement) the Guarantors agree to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions .
As used in this Agreement, the following capitalized defined terms shall have the following meanings:
1933 Act shall mean the Securities Act of 1933, as amended from time to time.
1934 Act shall mean the Securities Exchange Act of 1934, as amended from time to time.
Additional Interest shall have the meaning set forth in Section 2(d) hereof.
Closing Date shall mean the Closing Date as defined in the Purchase Agreement.
Company shall have the meaning set forth in the preamble and shall also include the Companys successors.
DTC shall mean The Depository Trust Company, New York, New York.
Exchange Offer shall mean an exchange offer by the Company and the Guarantors of Exchange Securities for the Registrable Securities pursuant to Section 2(a) hereof.
Exchange Offer Registration shall mean a registration under the 1933 Act effected pursuant to Section 2(a) hereof.
Exchange Offer Registration Statement shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form) and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.
Exchange Securities shall mean a series of securities, issued by the Company and guaranteed by the Guarantors under the Indenture containing terms identical to the Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Notes or, if no such interest has been paid, from the Closing Date, (ii) the Exchange Securities will not contain restrictions on transfer and (iii) the Exchange Securities will not be entitled to Additional Interest) and to be offered to Holders of the Notes in exchange for the Notes pursuant to the applicable Exchange Offer.
Free Writing Prospectus shall mean each free writing prospectus (as defined in Rule 405 under the 1933 Act) prepared by or on behalf of the Company or used by the Company in connection with the Registrable Securities or the Exchange Securities.
Guarantors shall have the meaning set forth in the preamble and shall also include any Guarantors successor.
Holder shall mean, for the Registrable Securities, the Initial Purchasers, for so long as they own any Registrable Securities, and each of their respective successors, assigns and direct and indirect transferees who become registered owners of the Registrable Securities under the Indenture; provided that for purposes of Sections 4 and 5 hereof, the term Holder shall include Participating Broker-Dealers (as defined in Section 4(a) hereof).
Indenture shall mean the indenture relating to the Notes dated as of October 17, 2014 between the Company and Deutsche Bank Trust Company Americas, as trustee thereunder, and as the same may be amended or supplemented from time to time in accordance with the terms thereof.
Initial Purchasers shall have the meaning set forth in the preamble.
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Issuer Information shall mean material information about the Company, the Guarantors or any of their respective securities that has been provided by or on behalf of the Company and/or the Guarantors.
Kimberly-Clark shall have the meaning set forth in the preamble.
Majority Holders shall mean, for the Registrable Securities, the Holders of a majority of the aggregate principal amount of outstanding Registrable Securities; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or any of its affiliates (as such term is defined in Rule 405 under the 1933 Act) (other than the Initial Purchasers or subsequent Holders of Registrable Securities if such subsequent holders are deemed to be such affiliates solely by reason of their holding of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage or amount.
Notes shall have the meaning set forth in the preamble.
Person shall mean an individual, partnership, limited liability company, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof.
Prospectus shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to such prospectus, and in each case including all material incorporated by reference therein.
Purchase Agreement shall have the meaning set forth in the preamble.
Registrable Securities shall mean the Notes and the guarantee thereof by the Guarantors; provided , however , that the Notes and the guarantees thereof shall cease to be Registrable Securities (i) when a Registration Statement with respect to such Notes and the guarantees thereof shall have been declared effective under the 1933 Act and such Notes and the guarantees thereof shall have been exchanged for Exchange Securities or disposed of pursuant to such Registration Statement, (ii) when such Notes and the guarantees thereof shall have otherwise ceased to be outstanding when such Notes are exchanged for Exchange Securities, (ii) when such Notes are distributed to any Person pursuant to Rule 144 under the 1933 Act or (iv) on October 17, 2018, the date that is three (3) years from the Closing Date.
Registration Default shall mean the occurrence of any of the following: (i) the Exchange Offer is not consummated on or prior to the Target Registration Date or the Shelf Registration Statement, if required pursuant to Section 2(b)(i) or Section 2(b)(ii) hereof, has not become effective on or prior to the Target Registration Date, (ii) if the
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Company receives a Shelf Request pursuant to Section 2(b) hereof, the Shelf Registration Statement required to be filed thereby has not become effective on or prior to the later of (A) the Target Registration Date or (B) ninety (90) days after delivery of such Shelf Request or (iii) the Shelf Registration Statement, if required by this Agreement, has become effective and thereafter ceases to be effective or the Prospectus contained therein ceases to be usable for resales of Registrable Securities (A) on more than two occasions of at least thirty (30) consecutive days in any twelve-month period during the Shelf Effectiveness Period or (B) at any time during the Shelf Effectiveness Period, and such failure to remain effective or usable for resales of Registrable Securities exists for more than ninety (90) days (whether or not consecutive) in any twelve-month period, in each case whether or not permitted by this Agreement.
Registration Expenses shall mean any and all expenses incident to performance of or compliance by the Company and the Guarantors with this Agreement, including, without limitation: (i) all SEC, stock exchange or Financial Industry Regulatory Authority, Inc. registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable and documented fees and disbursements of one counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Securities or Registrable Securities), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the reasonable and documented fees and disbursements of the Trustee and its counsel, (vii) the fees and disbursements of counsel for the Company and the Guarantors and, in the case of a Shelf Registration Statement, the reasonable and documented fees and disbursements of one counsel for the Holders of the Notes (which counsel shall be selected by the Majority Holders of the Notes and which counsel may also be counsel for the Initial Purchasers) and (viii) the fees and disbursements of the independent public accountants of the Company and the Guarantors, including the expenses of any special audits or cold comfort letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the underwriters (other than fees and expenses set forth in clause (ii) above) or the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder.
Registration Rights Joinder Agreement shall have the meaning set forth in the preamble.
Registration Statement shall mean any registration statement of the Company and the Guarantors that covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated or deemed by the securities laws to be incorporated by reference therein.
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SEC shall mean the Securities and Exchange Commission.
Shelf Effectiveness Period shall have the meaning set forth in Section 2(b) hereof.
Shelf Registration shall mean a registration effected pursuant to Section 2(b) hereof.
Shelf Registration Statement shall mean a shelf registration statement of the Company and the Guarantors pursuant to the provisions of Section 2(b) hereof which covers all of the Registrable Securities on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated or deemed incorporated by the securities laws to be incorporated by reference therein.
Spin-Off shall have the meaning set forth in the preamble.
Target Registration Date shall mean October 17, 2015.
Trustee shall mean the trustee with respect to the Notes under the Indenture.
Underwriter shall have the meaning set forth in Section 3 hereof.
Underwritten Registration or Underwritten Offering shall mean a registration in which Registrable Securities are sold to an Underwriter for reoffering to the public.
2. Registration Under the 1933 Act .
(a) To the extent not prohibited by any applicable law or applicable interpretations of the Staff of the SEC, the Company and the Guarantors shall use their commercially reasonable efforts to file or cause to be filed an Exchange Offer Registration Statement covering an offer by the Company and the Guarantors to the Holders to exchange all of the Registrable Securities for Exchange Securities and to cause such Registration Statement to be declared effective, and to remain effective until the closing of the Exchange Offer, under the 1933 Act. The Company and the Guarantors shall commence the Exchange Offer promptly after the Exchange Offer Registration Statement has been declared effective by the SEC and use their commercially reasonable efforts to have the Exchange Offer consummated not later than sixty (60) days after such effective date. The Company and the Guarantors shall commence the Exchange Offer by mailing the related exchange offer Prospectus and accompanying documents to each Holder, through DTC or otherwise, stating in such Prospectus or accompanying documents, in addition to such other disclosures as are required by applicable law:
(i) that the Exchange Offer is being made pursuant to this Agreement and that all Registrable Securities validly tendered and not withdrawn will be accepted for exchange;
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(ii) the dates of acceptance for exchange (which shall be a period of at least twenty (20) business days from the date such notice is mailed) (the Exchange Date );
(iii) that any Registrable Security not tendered will remain outstanding and continue to accrue interest and be subject to all the terms and conditions specified in the Indenture, including transfer restrictions, but will not retain any rights under this Agreement;
(iv) that Holders electing to have a Registrable Security exchanged pursuant to the Exchange Offer will be required to surrender such Registrable Security, together with the enclosed letter of transmittal, to the institution and at the address and in the manner specified in the notice prior to the close of business on the last Exchange Date; and
(v) that Holders will be entitled to withdraw their election, not later than the close of business on the last Exchange Date, by sending to the institution and at the address and in the manner specified in the notice a facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities delivered for exchange and a statement that such Holder is withdrawing his, her or its election to have such Notes exchanged.
As soon as practicable after the last Exchange Date, the Company shall:
(i) accept for exchange Registrable Securities or portions thereof validly tendered and not properly withdrawn pursuant to the Exchange Offer; and
(ii) deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Securities or portions thereof so accepted for exchange by the Company and issue, and cause the Trustee to promptly authenticate and deliver to each Holder, an Exchange Security equal in principal amount to the principal amount of the Registrable Securities surrendered by such Holder.
The Company and the Guarantors shall use their commercially reasonable efforts to complete the Exchange Offer as provided above and shall comply with the applicable requirements of the 1933 Act, the 1934 Act and other applicable laws and regulations in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate any applicable law or applicable interpretations of the Staff of the SEC and that no action or proceeding has been instituted or threatened in any court or by or before any governmental agent relating to the Exchange Offer which, in the Companys judgment, could reasonably be expected to impair the Companys ability to proceed with the Exchange Offer. The Company shall inform the Initial Purchasers of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right, subject to applicable law, to contact such Holders and otherwise facilitate the tender of Registrable Securities in the Exchange Offer.
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If the Company and the Guarantors effect the Exchange Offer, the Company and the Guarantors shall be entitled to close the Exchange Offer twenty (20) business days after such commencement (provided that the Company and the Guarantors have accepted all the Notes theretofore validly tendered and not withdrawn in accordance with the terms of the Exchange Offer).
Each Holder participating in the Exchange Offer shall be required to represent to the Company and the Guarantors in writing that at the time of the consummation of the Exchange Offer (i) any Exchange Securities received by such Holder will be acquired in the ordinary course of business, (ii) such Holder will have no arrangements or understanding with any Person to participate in the distribution (within the meaning of the 1933 Act) of the Exchange Securities, (iii) such Holder is not an affiliate of either the Company or any of the Guarantors within the meaning of Rule 405 under the 1933 Act, (iv) if such Holder is not a broker dealer, that it is not engaged in, and does not intend to engage in, the distribution of the Exchange Securities and (v) if such Holder is a broker dealer, that it will receive Exchange Securities for its own account in exchange for Notes that were acquired as a result of market making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with the resale of such Exchange Securities.
(b) In the event that (i) the Company and the Guarantors determine that the Exchange Offer Registration provided for in Section 2(a) above is not available or may not be consummated as soon as practicable after the last Exchange Date because it would violate applicable law or the applicable interpretations of the Staff of the SEC, (ii) the Exchange Offer is not for any other reason consummated by the Target Registration Date or (iii) prior to the last Exchange Date with respect to such Exchange Offer, the Company receives a written request (a Shelf Request ) from any Initial Purchaser representing that it holds Registrable Securities that are or were ineligible to be exchanged in such Exchange Offer, the Company and the Guarantors shall use their commercially reasonable efforts to file or cause to be filed as soon as practicable after such determination a Shelf Registration Statement providing for the sale by the Holders of all of the Registrable Securities and to have such Shelf Registration Statement become or be declared effective by the SEC.
In the event the Company and the Guarantors are required to file a Shelf Registration Statement solely as a result of the matters referred to in clause (iii) of the preceding sentence, the Company and the Guarantors shall use their commercially reasonable efforts to file and have become or be declared effective by the SEC both an Exchange Offer Registration Statement pursuant to Section 2(a) hereof with respect to all Registrable Securities and a Shelf Registration Statement (which may be a combined Registration Statement with the Exchange Offer Registration Statement) with respect to offers and sales of Registrable Securities held by the Initial Purchasers after completion of the Exchange Offer.
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The Company and the Guarantors agree to use their commercially reasonable efforts to keep the Shelf Registration Statement continuously effective until the date on which the Notes covered thereby cease to be Registrable Securities (the Shelf Effectiveness Period ). The Company and the Guarantors further agree to supplement or amend the Shelf Registration Statement if required by the rules, regulations or instructions applicable to the registration form used by the Company and the Guarantors for such Shelf Registration Statement or by the 1933 Act or by any other rules and regulations thereunder for shelf registration or if reasonably requested by a Holder with respect to information relating to such Holder, and to use their commercially reasonable efforts to cause any such amendment to become effective and such Shelf Registration Statement to become usable as soon as thereafter practicable. The Company and the Guarantors agree to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the SEC. To the extent that the Company and the Guarantors are required to include any Registrable Securities in a Shelf Registration Statement, the Company and the Guarantors may include such Registrable Securities on any other shelf registration statement otherwise filed by the Company with respect to any of its other securities.
(c) The Company and the Guarantors shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) or Section 2(b) hereof. Each Holder shall pay all underwriting discounts and commissions, brokerage commissions and transfer taxes, if any, relating to the sale or disposition of such Holders Registrable Securities pursuant to the Shelf Registration Statement.
(d) An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC or is automatically effective upon filing with the SEC as provided in Rule 462 under the 1933 Act; provided , however , that, if, after it has been declared effective, the offering of Registrable Securities pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement with respect to the Registrable Securities will be deemed not to have become effective during the period of such interference until the offering of Registrable Securities pursuant to such Registration Statement may legally resume.
If a Registration Default occurs with respect to the Registrable Securities, the interest rate on the Registrable Securities will be increased by (i) 0.25% per annum for the first 90-day period beginning on the day immediately following such Registration Default and (ii) an additional 0.25% per annum with respect to each subsequent 90-day period, in each case until and including the date such Registration Default ends, up to a maximum increase of 1.00% per annum ( Additional Interest ). A Registration Default ends with respect to any Note when such Note ceases to be a Registrable Security or, if earlier, (y) in the case of a Registration Default under clause (i) or (ii) of the definition thereof, when the Exchange Offer is completed or when the Shelf Registration Statement covering such Registrable Securities becomes effective or (z) in the case of a Registration Default under clause (iii) of the definition thereof, when the Shelf Registration Statement again becomes effective or the Prospectus again becomes usable. If at any
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time more than one Registration Default has occurred and is continuing, then, until the next date that there is no Registration Default, the increase in interest rate provided for by this paragraph shall apply as if there occurred a single Registration Default that begins on the date that the earliest such Registration Default occurred and ends on such next date that there is no Registration Default.
Notwithstanding anything to the contrary in this Agreement, if the applicable Exchange Offer is consummated, any Holder who was, at the time such Exchange Offer was pending and consummated, eligible to exchange, and did not validly tender, or withdrew, its Notes for Exchange Notes in such Exchange Offer will not be entitled to receive any additional interest pursuant to the preceding paragraph, and such Notes will no longer constitute Registrable Securities hereunder.
(e) The Company shall be entitled to suspend its obligation to file any amendment to a Shelf Registration Statement, furnish any supplement or amendment to a Prospectus included in a Shelf Registration Statement or any Free Writing Prospectus, make any other filing with the SEC that would be incorporated by reference into a Shelf Registration Statement, cause a Shelf Registration Statement to remain effective or the Prospectus or any Free Writing Prospectus usable or take any similar action (collectively, Suspension Actions ) without paying Additional Interest, if there is a possible acquisition, disposition or business combination or other transaction, business development or event involving the Company or its subsidiaries that may require disclosure in the Shelf Registration Statement or Prospectus and the Company determines that such disclosure is not in the best interest of the Company and its stockholders or obtaining any financial statements relating to any such acquisition or business combination required to be included in the Shelf Registration Statement or Prospectus would be impracticable. Upon the occurrence of any of the conditions described in the foregoing sentence, the Company shall give prompt notice of the delay or suspension (but not the basis thereof) to the Participating Holders. The Company may only provide the foregoing notice with respect to any Suspension Action or a notice pursuant to the third paragraph under Section 3 twice during any twelve-month period and any such suspension may not exceed 30 consecutive calendar days or an aggregate of 60 calendar days in any twelve-month period, and there may not be more than two suspensions in any twelve-month period. Upon the termination of such condition, the Company shall promptly proceed with all Suspension Actions that were delayed or suspended and, if required, shall give prompt notice to the Participating Holders of the cessation of the delay or suspension (but not the basis thereof).
(f) Without limiting the remedies available to the Initial Purchasers and the Holders, the Company and the Guarantors acknowledge that any failure by the Company or the Guarantors to comply with their obligations under Section 2(a) and Section 2(b) hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Companys or the Guarantors obligations under Section 2(a) and Section 2(b) hereof.
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3. Registration Procedures .
In connection with the obligations of the Company and the Guarantors with respect to the Registration Statements pursuant to Section 2(a) and Section 2(b) hereof, the Company and the Guarantors shall:
(a) use their commercially reasonable efforts to prepare and file with the SEC a Registration Statement on the appropriate form under the 1933 Act, which form (x) shall be selected by the Company and the Guarantors and (y) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the selling Holders thereof and (z) shall comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the SEC to be filed therewith, and use their commercially reasonable efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof;
(b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period and cause each Prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424 under the 1933 Act; to keep each Prospectus current during the period described under Section 4(3) and Rule 174 under the 1933 Act that is applicable to transactions by brokers or dealers with respect to the Registrable Securities or Exchange Securities;
(c) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, to counsel for the Initial Purchasers, to counsel for the Holders and to each Underwriter of an Underwritten Offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or Underwriter may reasonably request in writing, in order to facilitate the public sale or other disposition of the Registrable Securities; and the Company and the Guarantors consent, subject to the obligations of the Holders in this Section 3 to suspend the use of such Prospectus or to discontinue disposition of Registrable Securities, to the use of such Prospectus and any amendment or supplement thereto in accordance with applicable law by each of the selling Holders of Registrable Securities and any such Underwriters in connection with the offering and sale of the Registrable Securities covered by and in the manner described in such Prospectus or any amendment or supplement thereto in accordance with applicable law;
(d) use their commercially reasonable efforts to register or qualify the Registrable Securities under all applicable state securities or blue sky laws of such jurisdictions as any Holder of Registrable Securities covered by a Registration Statement shall reasonably request in writing by the time the applicable Registration Statement is declared effective by the SEC, to cooperate with such Holders in connection with any
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filings required to be made with the Financial Industry Regulatory Authority, Inc. and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided , however , that neither the Company nor any Guarantor shall be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process or (iii) subject itself to taxation in any such jurisdiction if it is not so subject;
(e) in the case of a Shelf Registration, notify each Holder of Registrable Securities who has provided contact information to the Company, counsel for the Holders and counsel for the Initial Purchasers promptly and, if requested by any such Holder or counsel, confirm such advice in writing (i) when a Registration Statement has become effective and when any post-effective amendment thereto has been filed and becomes effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company or any Guarantor contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in all material respects or if the Company or any Guarantor receives any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event during the period a Shelf Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Registration Statement or Prospectus in order to make the statements therein not misleading and (vi) of any determination by the Company or any Guarantor that a post-effective amendment to a Registration Statement would be appropriate;
(f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment and provide prompt notice to each Holder of the withdrawal of any such order;
(g) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested);
(h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and
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enable such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders may reasonably request at least one business day prior to the closing of any sale of Registrable Securities;
(i) in the case of a Shelf Registration, upon the occurrence of any event contemplated by Section 3(e)(v) hereof, use their commercially reasonable efforts to prepare and file with the SEC a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Company and the Guarantors agree to notify the Holders to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and the Holders hereby agree to suspend use of the Prospectus until the Company and the Guarantors have amended or supplemented the Prospectus to correct such misstatement or omission;
(j) a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Initial Purchasers and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) and make such of the representatives of the Company and the Guarantors as shall be reasonably requested by the Initial Purchasers or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) available for discussion of such document, and shall not at any time file or make any amendment to the Registration Statement, any Prospectus or any amendment of or supplement to a Registration Statement or a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus, of which the Initial Purchasers and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) shall not have previously been advised and furnished a copy or to which the Initial Purchasers or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) shall reasonably object in writing within two (2) business days after receipt thereof;
(k) obtain a CUSIP number for all Exchange Securities or Registrable Securities, as the case may be, not later than the effective date of a Registration Statement;
(l) cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the TIA ), in connection with the registration of the Exchange Securities or Registrable Securities, as the case may be, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for such Indenture to be so
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qualified in accordance with the terms of the TIA and execute, and use their commercially reasonable efforts to cause the applicable Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner;
(m) in the case of a Shelf Registration, make available for inspection by a representative of the Holders of the Registrable Securities, any Underwriter participating in any disposition pursuant to such Shelf Registration Statement, and attorneys and accountants designated by the Holders, at reasonable times and in a reasonable manner, all financial and other records, pertinent documents and properties of the Company and the Guarantors, and cause the respective officers, directors and employees of the Company and the Guarantors to supply all information reasonably requested by any such representative, Underwriter, attorney or accountant in connection with a Shelf Registration Statement;
(n) in the case of a Shelf Registration, use their commercially reasonable efforts to cause all Registrable Securities to be listed on any securities exchange or any automated quotation system on which similar securities issued by the Company or any Guarantor are then listed if requested by the Majority Holders, to the extent such Registrable Securities satisfy applicable listing requirements;
(o) use their commercially reasonable efforts to cause the Registrable Securities or the Exchange Securities, as the case may be, to continue to be rated by two nationally recognized statistical rating organizations (as such term is defined in Section 3(a)(62) under the 1934 Act);
(p) if reasonably requested by any Holder of Registrable Securities covered by a Registration Statement, (i) promptly incorporate (by reference or otherwise) in a Prospectus supplement or post-effective amendment such information with respect to such Holder as such Holder reasonably requests to be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as reasonably practicable after the Company has received notification of the matters to be incorporated in such filing; and
(q) in the case of a Shelf Registration, enter into such customary agreements and take all such other actions in connection therewith (including those requested by the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities including, but not limited to, an Underwritten Offering and in such connection, (i) provided that the selling Holders representations and warranties are of the substance and scope as are customarily made by selling securityholders in underwritten offerings, to the extent possible, make such representations and warranties to the selling Holders and any Underwriters of such Registrable Securities with respect to the business of the Company and its subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorporated by reference, if any, in each case, in form, substance and scope as
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are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested, (ii) obtain opinions of counsel to the Company and the Guarantors (which counsel and opinions, in form, scope and substance, shall be reasonably satisfactory to such Holders and Underwriters and their respective counsel) addressed to each selling Holder and Underwriter of such Registrable Securities, covering the matters customarily covered in opinions requested in connection with underwritten firm commitment offerings, (iii) obtain cold comfort letters from the independent certified public accountants of the Company and the Guarantors (and, if necessary, any other certified public accountant of any subsidiary of the Company or any Guarantor, or of any business acquired by the Company or any Guarantor for which financial statements and financial data are or are required to be included in the Registration Statement) addressed to each selling Holder and Underwriter of such Registrable Securities, such letters to be in customary form and covering matters of the type customarily covered in cold comfort letters in connection with underwritten firm commitment offerings, and (iv) deliver such documents and certificates as may be reasonably requested by the Holders of a majority in principal amount of the Registrable Securities being sold or the Underwriters, and which are customarily delivered in underwritten offerings, to evidence the continued validity of the representations and warranties of the Company and the Guarantors made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in an underwriting agreement.
In the case of a Shelf Registration Statement, the Company and the Guarantors may require each Holder of Registrable Securities to furnish to the Company and the Guarantors such information regarding the Holder and the proposed distribution by such Holder of such Registrable Securities as the Company and the Guarantors may from time to time reasonably request in writing and to agree to be bound by the indemnification and other obligations of a Holder in this Agreement. Each Holder of Registrable Securities as to which any Shelf Registration is being effected agrees to furnish promptly to the Company all information required to be disclosed so that the information previously furnished to the Company by such Holder is not materially misleading and does not omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made.
In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company and the Guarantors of the happening of any event of the kind described in Section 3(e)(iii) or Section 3(e)(v) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holders receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof, and, if so directed by the Company and the Guarantors, such Holder will deliver to the Company and the Guarantors (at its expense) all copies in its possession, other than permanent file copies then in such Holders possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. If the Company and the Guarantors shall give any such notice to suspend the disposition of Registrable Securities pursuant to a Registration Statement, the Company and the Guarantors shall extend the period
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during which the Registration Statement shall be maintained effective pursuant to this Agreement by the number of days during the period from and including the date of the giving of such notice to and including the date when the Holders shall have received copies of the supplemented or amended Prospectus necessary to resume such dispositions.
The Holders of Registrable Securities covered by a Shelf Registration Statement who desire to do so may sell such Registrable Securities in an Underwritten Offering. In any such Underwritten Offering, the investment banker or investment bankers and manager or managers (the Underwriters ) that will administer the offering will be selected by the Majority Holders of the Registrable Securities included in such offering.
4. Participation of Broker-Dealers in Exchange Offer .
(a) The Staff of the SEC has taken the position that any broker-dealer that receives Exchange Securities for its own account in the Exchange Offer in exchange for Notes that were acquired by such broker-dealer as a result of market-making or other trading activities (a Participating Broker-Dealer ), may be deemed to be an underwriter within the meaning of the 1933 Act and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Securities.
The Company and the Guarantors understand that it is the Staffs position that if the Prospectus contained in the Exchange Offer Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating Broker-Dealers may resell the Exchange Securities, without naming the Participating Broker-Dealers or specifying the amount of Exchange Securities owned by them, such Prospectus may be delivered by Participating Broker-Dealers to satisfy their prospectus delivery obligation under the 1933 Act in connection with resales of Exchange Securities for their own accounts, so long as the Prospectus otherwise meets the requirements of the 1933 Act.
(b) In light of the above, notwithstanding the other provisions of this Agreement, the Company and the Guarantors agree that the provisions of this Agreement as they relate to a Shelf Registration shall also apply to an Exchange Offer Registration to the extent, and with such reasonable modifications thereto as may be, reasonably requested by the Initial Purchasers or by one or more Participating Broker-Dealers, in each case as provided in clause (ii) below, in order to expedite or facilitate the disposition of any Exchange Securities by Participating Broker-Dealers consistent with the positions of the staff of the SEC recited in Section 4(a) above; provided that:
(i) the Company and the Guarantors shall not be required to amend or supplement the Prospectus contained in the Exchange Offer Registration Statement with respect to the Registrable Securities, as would otherwise be contemplated by Section 3(i) hereof, (A) after the Participating Broker-Dealers shall have disposed of the Registrable Securities or (B) for a period exceeding 180 days after the last Exchange Date with respect to the Registrable Securities (as such period may be extended pursuant to the penultimate paragraph of Section 3 hereof) and Participating Broker-Dealers shall not be authorized by the Company and the Guarantors to deliver and shall not deliver such Prospectus after such period in connection with the resales contemplated by this Section 4; and
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(ii) the application of the Shelf Registration procedures set forth in Section 3 hereof to an Exchange Offer Registration, to the extent not required by the positions of the Staff of the SEC or the 1933 Act and the rules and regulations thereunder, will be in conformity with the reasonable request to the Company and the Guarantors by the Initial Purchasers or with the reasonable request in writing to the Company and the Guarantors by one or more broker-dealers who certify to the Initial Purchasers and the Company and the Guarantors in writing that they anticipate that they will be Participating Broker-Dealers; and provided further that, in connection with such application of the Shelf Registration procedures set forth in Section 3 hereof to an Exchange Offer Registration, the Company and the Guarantors shall be obligated (x) to deal only with one entity representing the Participating Broker-Dealers, which shall be Morgan Stanley & Co. LLC unless it elects not to act as such representative, (y) to pay the fees and expenses of only one counsel representing the Participating Broker-Dealers, which shall be counsel to the Initial Purchasers unless such counsel elects not to so act and (z) to cause to be delivered only one, if any, cold comfort letter with respect to the Prospectus in the form existing on the last Exchange Date and with respect to each subsequent amendment or supplement, if any, effected during the period specified in clause (i) above.
(c) The Initial Purchasers shall have no liability to the Company, any Guarantor or any Holder with respect to any request that they may make pursuant to Section 4(b) above.
5. Indemnification and Contribution .
(a) Each of the Company and (upon execution of the Registration Rights Joinder Agreement) the Guarantors agrees, jointly and severally, to indemnify and hold harmless the Initial Purchasers and each Holder, their respective affiliates, directors and officers and each Person, if any, who controls any Initial Purchasers or any Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, or is under common control with, or is controlled by, any Initial Purchasers or any Holder, from and against all losses, claims, damages and liabilities (including, without limitation, any reasonable legal or other expenses reasonably incurred by the Initial Purchaser, any Holder and their respective affiliates, directors and officers or any such controlling or affiliated Person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Exchange Securities or Registrable Securities were registered under the 1933 Act, including all documents incorporated therein by reference, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or caused by any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (as amended or supplemented if the Company and the Guarantors shall have furnished any amendments or supplements thereto), any Free Writing Prospectus or any Issuer Information filed or required to be filed pursuant to Rule 433(d) under
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the 1933 Act, or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to the Initial Purchasers or any Holder furnished to the Company or the Guarantors in writing through Morgan Stanley & Co. LLC or any selling Holder expressly for use therein. In connection with any Underwritten Offering permitted by Section 3 hereof, the Company and each of the Guarantors, jointly and severally, will also indemnify the Underwriters, if any, selling brokers, dealers and similar securities industry professionals participating in the distribution, their affiliates, officers and directors and each Person who controls such Persons (within the meaning of the 1933 Act and the 1934 Act) to the same extent as provided above with respect to the indemnification of the Holders, if requested in connection with any Registration Statement, any Prospectus, any Free Writing Prospectus or any Issuer Information.
(b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, the Guarantors, the Initial Purchasers and their affiliates and the other selling Holders, and each of their respective directors, officers who sign the Registration Statement and each Person, if any, who controls the Company, the Guarantors, any Initial Purchaser and any other selling Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as the foregoing indemnity from the Company and the Guarantors to the Initial Purchasers and the Holders, but only with reference to information relating to such Holder furnished to the Company and the Guarantors in writing by such Holder expressly for use in any Registration Statement (or any amendment thereto), any Prospectus (or any amendment or supplement thereto) or any Free Writing Prospectus.
(c) In case any proceeding (including any governmental investigation) shall be instituted involving any Person in respect of which indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above, such Person (the indemnified party ) shall promptly notify the Person against whom such indemnity may be sought (the indemnifying party ) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (a) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Initial Purchasers and all
17
Persons, if any, who control any Initial Purchaser within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, (b) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company and the Guarantors, their directors, their officers who sign the Registration Statement and each Person, if any, who controls the Company or the Guarantors within the meaning of either such Section and (c) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Holders and all Persons, if any, who control any Holder within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In such case involving the Initial Purchasers and Persons who control the Initial Purchasers, such firm shall be designated in writing by the Initial Purchasers. In such case involving the Holders and such Persons who control Holders, such firm shall be designated in writing by the Majority Holders. In all other cases, such firm shall be designated by the Company. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but, if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify, subject to and in accordance with this Section 5, the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which such indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement (i) includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding and (ii) does not include any statements as to or any findings of fault, culpability or failure to act by or on behalf of any indemnified party.
(d) If the indemnification provided for in paragraph (a) or paragraph (b) of this Section 5 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company and the Guarantors, on the one hand, and the Holders, 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 to state a material fact relates to information supplied by the Company or the Guarantors, on the one hand, or by the Holders, on the other hand, and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Holders respective obligations to contribute pursuant to this Section 5(d) are several in proportion to the respective principal amount of Registrable Securities of such Holder that were registered pursuant to a Registration Statement.
(e) The Company, the Guarantors and each Holder agree that it would not be just or equitable if contribution pursuant to this Section 5 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a
18
result of the losses, claims, damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5, no Holder shall be required to indemnify or contribute any amount in excess of the amount by which the total price at which Registrable Securities were sold by such Holder exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 5 are not exclusive and shall not limit any rights or remedies that may otherwise be available to any indemnified party at law or in equity.
The indemnity and contribution provisions contained in this Section 5 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Initial Purchasers or any of their affiliates, any Holder or any Person controlling any Initial Purchaser or any Holder, or by or on behalf of the Company, the Guarantors, their officers or directors or any Person controlling the Company or the Guarantors, (iii) acceptance of any of the Exchange Securities and (iv) any sale of Registrable Securities pursuant to a Shelf Registration Statement.
6. Miscellaneous .
(a) No Inconsistent Agreements . Neither the Company nor the Guarantors have entered into, and on or after the date of this Agreement will not enter into, any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Companys or the Guarantors other issued and outstanding securities under any such agreements.
(b) Amendments and Waivers . The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company and the Guarantors have obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or consent; provided , however , that no amendment, modification, supplement, waiver or consent to any departure from the provisions of Section 5 hereof shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder.
(c) Notices . All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of
19
this Section 6(c), which address initially is, with respect to the Initial Purchasers, the address set forth in the Purchase Agreement; and (ii) if to the Company or the Guarantors, initially at the Companys address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c).
All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands, or other communications shall be concurrently delivered by the Person giving the same to the Trustee, at the address specified in the Indenture.
(d) Successors and Assigns . This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof. The Initial Purchasers (in their capacity as Initial Purchasers) shall have no liability or obligation to the Company or the Guarantors with respect to any failure by a Holder to comply with, or any breach by any Holder of, any of the obligations of such Holder under this Agreement.
(e) Purchases and Sales of Notes . For so long as there are Registrable Securities outstanding, the Issuer (i) shall not resell any Securities that have been or will be acquired by it, and (ii) shall not permit any of its affiliates (as defined in Rule 144 under the 1933 Act) to resell any of the Securities that have been or will be acquired by any of them other than (A) to the Issuer or (B) in compliance with the provisions of Rule 144 under the 1933 Act.
(f) Third Party Beneficiary . The Holders shall be third party beneficiaries to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent any such Holder deems such enforcement necessary or advisable to protect its rights or the rights of any other Holders hereunder.
(g) Counterparts . This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by facsimile or other electronic transmission (e.g., a pdf or tif) shall be effective as delivery of a manually executed counterpart thereof.
20
(h) Headings . The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law . This Agreement shall be governed by the laws of the State of New York.
(j) Entire Agreement; Severability . This Agreement contains the entire agreement between the parties relating to the subject matter hereof and supersedes all oral statements and prior writings with respect thereto. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.
[Signature Pages Follow]
21
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
Very truly yours, |
||||||
HALYARD HEALTH, INC. | ||||||
By: |
/s/ John W. Wesley |
|||||
Name: | John W. Wesley | |||||
Title: | Senior Vice President, General Counsel and Secretary |
[Signature Page to Registration Rights Agreement]
Confirmed and accepted as of
|
||||
MORGAN STANLEY & CO. LLC | ||||
Acting on behalf of itself and
|
||||
MORGAN STANLEY & CO. LLC | ||||
By: |
/s/ Pramod Raju |
|||
Name: | Pramod Raju | |||
Title: | Authorized Signatory |
[Signature Page to Registration Rights Agreement]
SCHEDULE I
Initial Purchasers
Morgan Stanley & Co. LLC
Citigroup Global Markets Inc.
Deutsche Bank Securities Inc.
RBC Capital Markets, LLC
BBVA Securities Inc.
BMO Capital Markets Corp.
Mitsubishi UFJ Securities (USA), Inc.
U.S. Bancorp Investments, Inc.
Schedule I-1
SCHEDULE II
Guarantors
Avent, Inc.
Kimberly-Clark Health Care, Inc.
Halyard Sales, LLC
Halyard North Carolina, Inc.
Schedule II-1
ANNEX A
Form of Joinder Agreement
HALYARD HEALTH, INC.
$250,000,000 6.250% SENIOR NOTES DUE 2022
JOINDER TO REGISTRATION RIGHTS AGREEMENT
[ ], 2014
Morgan Stanley & Co. LLC
As Representative of the Initial Purchasers listed on
Schedule I of the Registration Rights Agreement
c/o Morgan Stanley & Co. LLC
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
Reference is made to the Registration Rights Agreement dated as of October 17, 2014 (the Registration Rights Agreement ), between Halyard Health, Inc. (the Issuer ) and Morgan Stanley & Co. LLC, as the representative (the Representative ) of the initial purchasers (the Initial Purchasers ) listed on Schedule I to the Registration Rights Agreement. Capitalized terms used in this joinder to the Registration Rights Agreement (this Joinder Agreement ) without definition have the respective meanings given to them in the Registration Rights Agreement.
1. Joinder . Each of the undersigned hereby agrees to accede to the terms of the Registration Rights Agreement and to undertake and perform all of the obligations of a Guarantor set forth therein as though such undersigned had entered into the Registration Rights Agreement on the Closing Date and been named as a Guarantor therein. Each of the undersigned agrees that such obligations include, without limitation, (a) all of the obligations of a Guarantor to perform and comply with all of the agreements thereof contained in the Registration Rights Agreement, including the obligation to pay any Additional Interest, and (b) a Guarantors indemnification and other obligations contained in Section 5 of the Registration Rights Agreement. Each of the undersigned acknowledges and agrees that all references to Guarantors in the Registration Rights Agreement shall include the undersigned and that the undersigned shall be bound by all provisions of the Registration Rights Agreement containing such references.
2. Representations and Warranties and Agreements . Each of the undersigned hereby represents and warrants to, and agrees with, the Initial Purchasers that it has all the requisite corporate power and authority to execute, deliver and perform its obligations under this Joinder Agreement and that the consummation of the transactions contemplated hereby has been
Annex A-1
duly and validly authorized and that when this Joinder Agreement is executed and delivered, it will constitute a valid and legally binding agreement enforceable against such undersigned in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles (whether considered in a proceeding in equity or at law).
3. Successors and Assigns . This Joinder Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders.
4. Third Party Beneficiary . The Holders shall be third party beneficiaries to the agreements made hereunder between the Issuer and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder.
5. Counterparts . This Joinder Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Joinder Agreement by electronic transmission shall be effective as delivery of a manually executed counterpart thereof.
6. Headings . The headings in this Joinder Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
7. Governing Law . This Joinder Agreement shall be governed by the laws of the State of New York.
8. Severability . In the event that any one or more of the provisions contained in this Joinder Agreement, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.
9. Amendments and Waivers . This Joinder Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit.
[ Remainder of page intentionally left blank ]
IN WITNESS WHEREOF, the undersigned has executed this Joinder Agreement as of the date first written above.
Annex A-2
AVENT, INC. | ||
By: |
|
|
Name: | ||
Title: | ||
KIMBERLY-CLARK HEALTH CARE INC. | ||
By: |
|
|
Name: | ||
Title: | ||
HALYARD SALES, LLC | ||
By: |
|
|
Name: | ||
Title: | ||
HALYARD NORTH CAROLINA, INC. | ||
By: |
|
|
Name: | ||
Title: |
Annex A-3
The foregoing Joinder Agreement is hereby confirmed and accepted by the Initial Purchasers as of the date first above written. | ||
MORGAN STANLEY & CO. LLC | ||
By: |
|
|
Name: | ||
Title: | ||
For itself and the other Initial Purchasers named in Schedule I of the Registration Rights Agreement. |
Annex A-4
Halyard Health
Halyard Health
Investor Presentation
Exhibit 99.1
|
2
Legal Disclaimer
Legal Disclaimer
PRELIMINARY FINANCIAL RESULTS
This presentation contains Halyard Healths preliminary financial results for the
quarter ended September 30, 2014. This financial information is preliminary and
subject
to completion of quarter-end financial reporting processes and review.
FORWARD-LOOKING
INFORMATION
Certain
matters in this presentation and in todays discussion constitute 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
Halyard Healths separation from Kimberly-Clark and the
distribution of Halyard
Healths common stock to the shareholders of Kimberly-Clark which is expected to occur on October 31, 2014 (the spin-off). The matters
discussed in these forward-looking statements are based on the current plans and expectations of
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 risks include but are not
limited to actions by governmental and regulatory authorities; delays, costs and difficulties related
to the spin-off; and general economic and political conditions
globally and in the markets
in which Halyard Health does business. There can be no assurance that these future events will occur as anticipated or that Halyard
Healths results will be as estimated. For a description of additional factors that could cause
Halyard Healths future results to differ materially from those
expressed in any such
forward-looking statements, see Risk Factors under Item 1A of Halyard Healths Registration Statement on Form 10 (as amended) filed
with the Securities and Exchange Commission.
The
forward-looking statements contained in this presentation are made only as of October 21, 2014. We do not undertake, and specifically decline any obligation,
to update any forward-looking statements or to publicly announce the results of any revisions to
any of such statements to reflect future events or developments
except as required by law,
including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission.
NOT AN OFFER
Nothing contained in this presentation shall be deemed an offer to sell or the solicitation of an
offer to buy any securities of Halyard Health, Inc. or Kimberly-Clark
Corporation.
|
3
Legal Disclaimer (Continued)
Legal Disclaimer (Continued)
BASIS OF PRESENTATION
The information included in this presentation about Halyard Health assumes the
completion of the transfer by Kimberly-Clark of its health care business to the
Company and
the spin-off of Halyard Health. Halyard Healths historical financial data presented herein is derived from the consolidated financial statements and
accounting records of Kimberly-Clark using the historical results of operations and historical
costs basis of the assets and liabilities that comprised its health care
business and give
effect to allocations of expenses from Kimberly-Clark. This historical financial data is not indicative of our future performance and does not reflect
what Halyard Healths financial position, results of operations and cash flows would have been
had it been a separate stand-alone entity. In addition, pro forma
financial data is
presented herein that is derived by the application of pro forma adjustments to Halyard Healths historical financial data to effect the spin-off and
related transactions as if they had occurred on January 1, 2013. The pro forma adjustments are based
on currently available information and certain assumptions that
Halyard Health believes are
reasonable, but actual results may differ from the pro forma adjustments. A reconciliation of pro forma net sales and pro forma net income
to Halyard Healths historical net sales and net income can be found in the Appendix to this
presentation.
STATEMENT REGARDING NON-GAAP FINANCIAL MEASURES
This presentation contains
non-GAAP financial measures, that are financial measures that either exclude or include amounts that are not excluded or included in the
most directly comparable measures calculated and presented in accordance with generally accepted
accounting principles. Specifically, we make use of the non-
GAAP financial measures
EBITDA and Adjusted EBITDA and Pro Forma Adjusted EBITDA. Management believes that EBITDA and Adjusted EBITDA are useful
tools for investors and other users of our financial statements in assessing our ability to service or
incur indebtedness, maintain current operating levels of capital
assets and acquire additional
operations and businesses. Management believes that the most directly comparable GAAP measure is net income (loss). These
measures should be considered in addition to results prepared in accordance with GAAP, but are not a
substitute for GAAP results. Certain adjustments used in
calculating Adjusted EBITDA and Pro
Forma Adjusted EBITDA are based on estimates and assumptions of management and do not purport to reflect actual historical
results. In addition, you should be aware when evaluating Adjusted EBITDA and Pro Forma Adjusted
EBITDA that in the future we may incur expenses similar to
those excluded when calculating
these measures. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other
companies, because all companies do not calculate Adjusted EBITDA in the same fashion.
A reconciliation of EBITDA and Adjusted EBITDA to our net income (loss)
under GAAP for each of the periods presented can be found in the Appendix to this presentation.
We also present financial data for the twelve months ended September 30, 2014 that is derived by
subtracting the data for the nine months ended September 30,
2013 from our historical financial
data for the year ended December 31, 2013 and then adding corresponding financial data for the nine months ended September 30,
2014. This financial data is for informational purposes only and the reconciliation can be found
in the Appendix to this presentation.
|
4
Transaction Overview
Transaction Overview
Company
Halyard Health, Inc.
Ticker (When-Issued)
HYH-WI
Ticker (Regular Way)
HYH
When-Issued Trading Begins
Tuesday, October 21
st
Record Date
Thursday, October 23
rd
Spin Effective / Distribution Date
Friday, October 31
st
Distribution Ratio
8 to 1 (KMB to HYH)
Ex-Dividend Date /
First Regular Way Day of Trading
Monday, November 3
rd
Expected Shares Outstanding
Approximately 46.5 MM
Spin-off Overview and Timing Considerations
|
Todays Presenters and Halyard Representatives
Todays Presenters and Halyard Representatives
5
Robert Abernathy
Chairman &
Chief Executive Officer
Christopher Lowery
SVP & Chief Operating Officer
20+ years of healthcare
industry experience in
Sales & Marketing, most
recently at Covidien
Former VP of Global
Health Care Sales &
Marketing at Kimberly-
Clark
Steven Voskuil
SVP & Chief Financial Officer
20+ years of experience
with Kimberly-Clark
Former VP of Finance at
Kimberly-Clark
International
Former Treasurer of
Kimberly-Clark
20+ years in
Kimberly-Clark senior
management across all
business units and
geographies
Former President of
Global Health Care at
Kimberly-Clark,
1997 -
2004
8+ years of experience
with Kimberly-Clark
Former Senior Finance
Director of Health Care at
Kimberly-Clark
Former Assistant
Treasurer of Kimberly-
Clark
David Crawford
VP Treasurer, FP&A and
Investor Relations
|
Compelling Investment Opportunity
Compelling Investment Opportunity
6
Diverse Business with Leading Positions
1
Global Manufacturing and Sales Organization
2
Strategic Focus Shifts to Medical Devices
3
Proven and Experienced Management Team
5
Significant Cash Flow Generation to Fund Opportunistic
Acquisitions and to Drive Total Shareholder Return
4
|
7
Over 30 Years of Innovation in Medical Products
Over 30 Years of Innovation in Medical Products
Founded health care business in the late 1970s with a focus on products
leveraging Kimberly-Clarks patented, innovative nonwovens technology
providing protection from liquids, while remaining breathable
Introduced Kimguard Sterilization Wrap
Launched international expansion strategy, leveraging existing regional
headquarters in Belgium, Japan and Australia
Expanded S&IP product portfolio with the acquisition of Tecnol Medical
Products, a leading provider of facial protection and other disposable
medical products
Increased presence in medical devices with the acquisition of Ballard Medical
Products, a disposable medical devices company focused on respiratory care
and digestive
health
Acquired Safeskin Corporation, a market-leading exam glove provider, to
deliver head-to-toe customer protection
Kimberly-Clark
Global
Business
Plan
designates
S&IP
run
for
cash
and
emphasizes increased medical device focus
Acquired Baylis Medicals pain management device business and I-Flow
Corporation, a provider of elastomeric infusion pumps used in surgical pain
management
and
other
infusion
therapies
Led change in exam glove market from latex to nitrile
1970
1976
1990
1997
1999
2000
2005
2009
2014
2007
|
Spin-off Benefits and Rationale
Spin-off Benefits and Rationale
8
Capital
Flexibility
Eliminates competition for capital with a larger consumer business
Creates
greater
flexibility
to
invest
in
innovation
and
business
development
Strategic
Health Care
Focus
Employee
Incentives
Enables Halyard to pursue its own distinct strategies and operating priorities,
which have diverged over time from those of Kimberly-Clark
Allows management to concentrate on Halyards specific product markets,
customers and long-term strategies for value creation
Improves ability to attract and retain key employees focused on healthcare
Aligns executive incentive programs more directly to financial performance
Spin-off Creates a Diversified, Global Med Tech Company
with a Growing Medical Device Platform
|
Halyards Strategic Vision
Halyards Strategic Vision
9
Traditional S&IP Focus Has
Created a Stable and Reliable
Platform with Significant
Cash Flow...
...Which We Expect to Enable
Halyard to Grow Medical Devices
and Transform the Portfolio
Over Time
|
10
Halyard Health Overview
Diverse Business with Leading Positions
Halyard Health Overview
Diverse Business with Leading Positions
Halyard is a global, market-leading company that addresses some of todays
most important health
and
healthcare
needs,
offering
products
and
solutions
to
prevent
infection,
eliminate
pain
and
speed
recovery across the healthcare continuum
$1.7Bn of 2013 net sales
16,500 employees globally
(1)
Two
segments:
Surgical
&
Infection
Prevention
(S&IP)
and
Medical
Devices
North
America
Europe,
Middle East
& Africa
Asia Pacific &
Latin America
Other
(3)
S&IP
Medical
Devices
1.
As part of the previously announced closing of Halyards Exam Glove facility
in Thailand, Halyard will reduce employee headcount by approximately 3,000 employees.
2.
Excludes Corporate and other.
3.
Includes related party sales to Kimberly-Clark.
4.
Estimated global addressable market size based on industry data and internal
marketing estimates.
S&IP
Medical
Devices
($Bn)
~
~
1
Net Sales by Segment
(2)
Net Sales by Region
2013A
2013A
Global Addressable
Market Potential
(4)
70%
30%
68%
14%
12%
6%
$7.0
$5.0
|
11
Surgical & Infection Prevention Overview
Surgical & Infection Prevention Overview
The S&IP segment offers products to help
prevent health
care-acquired infections (HAIs)
and provide protection
for both healthcare workers and patients
Infection prevention is an important issue that affects both
caregivers and patients and creates a significant burden /
cost on the healthcare system
Halyard seeks to reduce infections in healthcare settings
Key Highlights and Strategy
1
Overview
30-year track record
market leadership positions
across product portfolio
Strong cash flow generation
Build on history of differentiated innovation to maintain
market leadership
Ongoing focus on operational efficiencies and margin
expansion
Historical Financial Performance
FYE 12/31 ($MM)
Surgical & Infection Prevention Net Sales
Operating Profit Margin
One in 25 hospitalized patients, or approximately
700,000 incidents, acquires an infection in the U.S.
per year
1,188
1,185
1,153
1,133
12.6%
13.1%
13.1%
13.8%
11.0%
12.0%
13.0%
14.0%
0
500
1,000
1,500
2,000
2011A
2012A
2013A
LTM 9/30/14A
|
12
Diversified S&IP Product Portfolio with Leading Brands
Diversified S&IP Product Portfolio with Leading Brands
Sterilization Wraps
KIMGUARD
QUICK CHECK
SMART-FOLD
Surgical Drapes & Gowns
AERO BLUE
MICROCOOL
Facial Protection
TECNOL
FLUIDSHIELD
Protective Apparel
CONTROL
SPUNCARE
Medical Exam Gloves
SAFESKIN
LAVENDER
STERLING
PURPLE NITRILE
1
|
13
Medical Device Overview
Medical Device Overview
Medical Device segment focused on four therapeutic areas:
Surgical Pain Management
Interventional Pain Management
Respiratory Health
Digestive Health
Large market opportunity to reduce narcotic-based pain control
Currently less than 10% penetration in applicable
surgical procedures
Market driven by physician education and awareness,
reimbursement, clinical evidence supporting outcomes and
relative cost effectiveness
Key Highlights and Strategy
1
Overview
Leading market positions in pain, respiratory and digestive
health
Invest
for
growth
both
organic
and
inorganic
opportunities
Leverage global sales and marketing infrastructure
Aggressively move into category adjacencies to expand
product portfolio
Historical Financial Performance
FYE 12/31 ($MM)
Medical Device Net Sales
Operating Profit Margin
452
478
499
506
17.0%
18.6%
17.2%
19.5%
12.0%
15.0%
18.0%
21.0%
24.0%
0
250
500
750
1,000
2011A
2012A
2013A
LTM 9/30/14A
|
14
Portfolio of Innovative Medical Devices
Portfolio of Innovative Medical Devices
Surgical Pain
Management
ON-Q
HOMEPUMP
ECHOBRIGHT
Interventional Pain
Management
COOLIEF
TRANSDISCAL
SINERGY
Respiratory Health
BALLARD
MICROCUFF
TRACH CARE
Digestive Health
MIC-KEY
MIC
MIC-KEY SF
1
|
Global commercial infrastructure drives cost efficiencies, enables innovation and
strategically positions
Halyard for growth in new markets
Products sold in 100+ countries
Well-recognized sales force of approximately 600 representatives in 11
countries
Sales force supports customers with robust product training and
customer education programs
Diversified manufacturing base and vertical
integration in nonwovens manufacturing a significant
differentiator from
our key competitors
Global Commercial Infrastructure with Efficient Footprint
and Effective Direct Sales Force
Global Commercial Infrastructure with Efficient Footprint
and Effective Direct Sales Force
2
Other
Direct Sales
Geography
North America
Europe,
Middle East
and Africa
Asia Pacific and
Latin America
Other
Global Commercial Infrastructure
68%
14%
12%
6%
15
|
16
Position For
Success
(spin through
2015)
Successful spin execution and retirement of spin-related costs
Focus on efficiency / effectiveness of stand-alone operations, including
commercial
footprint optimization
Accelerate innovation engine
Fuel Growth
Pipeline
(2016 -
2017)
Invest in growth programs and aggressively move into category adjacencies to
expand product portfolio
Round out portfolio, employing a disciplined approach to opportunistic
acquisitions
and portfolio optimization
Continue to drive margins
Long-Term
Device Focus
(2018 and
beyond)
Strategic Focus
Shift Towards Medical Devices Portfolio
Strategic Focus
Shift Towards Medical Devices Portfolio
3
Positioned as medical devices company with revenue growth and higher margins
Natural portfolio evolution as the fastest growing part of the portfolio also has
the
highest margins
Adjacency and / or Geographic Expansions for:
Surgical Pain, Interventional Pain, Digestive Health and Respiratory Health
Focused Execution to Accelerate Portfolio
Growth of Medical Devices
|
17
Increased R&D Investment
Increased R&D Investment
Incremental S&IP R&D to maintain current leadership
Accelerated spending on R&D within our Medical Devices segment, particularly
pain management
Increased spending on new adjacent medical device
products
R&D as % of Net Sales
<
~ 1% of Net Sales into S&IP
~ 5-6% of Net Sales into Medical Devices
3
~
3
4%
Doubling R&D Investment over Time to Drive
Profitable Growth and Margins
2%
Today
Long-Term Goal
|
18
Disciplined Approach to Complementary Medical
Devices M&A
Disciplined Approach to Complementary Medical
Devices M&A
Focus on complementary acquisitions within adjacent therapeutic areas to our
existing Medical
Devices segment
Viewed through disciplined lens with delineated growth, margin and return on
invested capital
targets
As part of Kimberly-Clark, external growth opportunities were not a consistent
focus
Halyard expects to actively pursue acquisition opportunities that fit
its strategic criteria
(Pain Mgmt Segment)
Tecnol
Medical
1997
1999
2000
2009
2014
3
|
19
Capex
FYE 12/31 ($MM)
Free Cash Flow
(1)
FYE 12/31 ($MM)
Strong cash flow expected following retirement of spin-related costs and as
Halyard efficiencies increase
Capital spending post-spin expected to be
less than 3% of net sales
Cash available to fund opportunistic
acquisitions
Ability to utilize cash flow to drive Total Shareholder
Return
% Margin
(2)
2.4
2.9
2.4
1.
Defined as Cash Flow from Operations less Capex.
2.
Calculated as a percentage of Net Sales.
Significant Cash Flow Generation to Fund Opportunistic
Acquisitions and Drive Total Shareholder Return
Significant Cash Flow Generation to Fund Opportunistic
Acquisitions and Drive Total Shareholder Return
4
100
162
175
0
50
100
150
200
2011A
2012A
2013A
40
41
49
0
25
50
75
100
2011A
2012A
2013A
|
20
Proven
ability
to
drive
value
through
growing
global
businesses,
expanding
into
ancillary
markets
and
integrating
complementary platform acquisitions
Years of leadership and operational experience from prior roles at Kimberly-Clark
Supported by years of diverse healthcare experience across Research and Development, Sales and
Marketing, Product
Supply, Product Quality and Clinical Affairs
Experienced healthcare-oriented Board with Ronald Dollens, former President and CEO of Guidant, as
Lead Director
Robert Abernathy
Chairman & CEO
Rhonda Gibby
SVP & Chief Human
Resources Officer
Christopher Isenberg
SVP, Global Supply Chain
& Procurement
Warren Machan
SVP, Business Strategy
John Wesley
SVP, General Counsel and
Chief Ethics & Compliance Officer
Christopher Lowery
SVP & COO
Steven Voskuil
SVP & CFO
20+ years in Kimberly-Clark senior
management across all business units
and geographies
Former President of Global Health
Care
at
Kimberly-Clark,
1997
-
2004
20+ years of healthcare industry
experience in Sales & Marketing, most
recently at Covidien
Former VP of Global Health Care
Sales & Marketing at Kimberly-Clark
20+ years of experience with
Kimberly-Clark
Former VP of Finance at Kimberly-
Clark International
Former Treasurer of Kimberly-Clark
VP of Human Resources for
Kimberly Clarks global
business-to-business units
since 2010
Previous leadership roles at
Covidien
VP of Manufacturing and
Supply Chain at Kimberly-
Clark Global Health Care
since 2012
Former Senior
Manufacturing Director for
K-C Professional
Senior Director of Strategy
at Kimberly-Clark Global
Health Care since 2012
Former Senior Director of
Finance at Kimberly-Clark
Global Health Care
VP, Deputy General Counsel
and Corporate Secretary at
Kimberly-Clark since 2009
Former Partner at Dallas-based
Carrington, Coleman, Sloman &
Blumenthal
Proven and Experienced Management Team
Proven and Experienced Management Team
5
|
Compelling Investment Opportunity
Compelling Investment Opportunity
21
Diverse Business with Leading Positions
1
Global Manufacturing and Sales Organization
2
Strategic Focus Shifts to Medical Devices
3
Proven and Experienced Management Team
5
Significant Cash Flow Generation to Fund Opportunistic
Acquisitions and to Drive Total Shareholder Return
4
|
FINANCIAL REVIEW
|
Financial Overview
Financial Overview
23
Strong, Diversified Cash Flow
Well-capitalized with Financial Flexibility
Limited Need for Capital Expenditures
Near-term Focus on Elimination of TSAs and
Other Transactional Costs
Disciplined Approach to Cash Deployment with a Focus on
Total Shareholder Return
Leverage Heritage of Cost Savings and Operational Efficiencies
|
Halyard expects $640MM of aggregate principal amount of debt at spin-off
$390MM
senior
secured
term
loan
facility
due
2021
(L+325
floating
rate,
0.75%
LIBOR
floor)
$250MM
senior
unsecured
notes
due
2022
(6.250%
coupon)
closed
on
October
17,
2014
Halyard also expects to have a $250MM revolving credit facility (L+225 floating
rate, no LIBOR floor)
Net proceeds will be used to partially fund a cash
distribution to Kimberly-Clark
Long-term
leverage
target
range
of
2.0
2.5x;
provides
flexibility
to
increase
leverage
for
opportunistic
M&A
24
Halyard Capitalization
Halyard Capitalization
($MM)
Tranche
Amount
Multiple of LTM (9/30/2014)
Pro Forma Adjusted EBITDA (x)
$250MM Revolver due 2019
-
-
Term Loan due 2021
390
1.6
Senior Notes due 2022
250
1.0
Total Debt
640
2.6
Cash
(40)
Net Debt
600
2.5
Pro Forma Capitalization
Capital Structure Assures Flexibility to Fund Growth
|
25
Halyard Stand-Alone and Transitional Costs
Halyard Stand-Alone and Transitional Costs
1.
During the twelve months ended September 30, 2014, Halyard incurred approximately $95.0 million in
corporate cost allocation from Kimberly-Clark for these services. Halyard estimates that its aggregate annual
incremental
cash
expense
for
these
services
will
be
approximately
$40.0
million
per
year
(for
a
combined
total
of
$135.0
million
of
cash
expense)
2.
In
addition
to
the
$40.0
million
incremental
cash
costs,
Halyard
estimates
an
incremental
$11.0
million
per
year
of
additional
depreciation
and
amortization
expense.
3.
As a result of the separation and distribution, Halyard expects to incur additional ongoing net
expenses that it estimates will be approximately $29.2 million on an annual basis related primarily to (1) a decline of
purchasing scale, (2) stranded facility costs as a result of excess manufacturing capacity in certain
facilities, underutilization of certain of Halyards distribution facilities and inefficiencies in shipping costs and (3) a
reduction in related party sales.
4.
Halyard expects to incur a total of $60.0 million to $75.0 million of transitional costs after the
distribution through 2016 to establish its own capabilities as a stand-alone entity. These costs are related primarily to the
transition services Halyard expects to receive from Kimberly-Clark, as well as Halyards
branding and other supply chain costs.
5.
Additional
adjustments
are
also
made
to
Kimberly-Clark
operating
profit
to
account
for
transition
costs,
Thailand
glove
facility
restructuring,
corporate
adjustments,
pension
allocations and other items.
Information Technology
Finance
Human Resources
Decreased Purchasing
Scale
Stranded Facility Costs
Reduced Related Party
Sales
K-C Segment
Operating Profit
Incremental
Corporate Costs
IT Depreciation
Transaction
Dis-Synergies
Total Transitional
Costs
Incurred
20142016
Only
80% Expected 2015
Transition Service
Agreements
Branding
Royalties
Start Up
Ongoing Incremental Expenses
As A Stand-Alone Company
Stand-Alone Halyard
Operating Profit
Incremental D&A
Expense
(1)
(2)
(3)
(4)
Excludes $100-$125MM of pre-spin costs
(5)
40
11
29
6075
|
Historical Segment Performance
Historical Segment Performance
26
Net Sales
FYE 12/31 ($MM)
(1)
1.
Excludes Corporate & Other.
2.
2011
2013
actuals
do
not
reflect
the
ongoing
costs
of
separation.
3.
Adjusted
EBITDA
for
the
twelve-months
ended
September
30,
2014
is
$313.4
million;
however,
when
presented
on
a
pro
forma
basis
to
give
effect
to
the
spin-off
and
related
transactions as if they had occurred on January 1, 2013, is approximately $244
million. Our pro forma Adjusted EBITDA includes approximately $69.2 million in cash expenses expected
to be incurred on an annual basis as a result of the spin-off in order to
operate as a stand-alone company. These expenses are not included in our actual Adjusted EBITDA for the same
period.
See
the
Appendix
for
more
information
regarding
the
calculation
of
Adjusted
EBITDA
for
the
actual
and
pro
forma
periods
presented
above.
Adj. EBITDA
FYE 12/31 ($MM)
(3)
(2)
(2)
(2)
1,188
1,185
1,153
1,133
452
478
499
506
1,640
1,663
1,652
1,639
0
500
1,000
1,500
2,000
2011A
2012A
2013A
LTM 9/30/14A
Surgical & Infection Prevention
Medical Devices
262
286
295
244
140
190
240
290
340
2011A
2012A
2013A
LTM 9/30/14
313
|
27
September 30, 2014 YTD Pro Forma Financial Performance
September 30, 2014 YTD Pro Forma Financial Performance
Pro Forma
(1)
($MM)
Nine Months Ended
9/30/2013
9/30/2014
S&IP
860.1
840.2
Medical Devices
366.8
373.5
Net Sales
1,226.9
1,213.7
September 30, 2014 YTD Pro Forma Financial Performance and Commentary
Pro Forma Adjusted EBITDA up 13% driven by:
Reduced SG&A (on a normalized basis):
Patent infringement settlement and lower
litigation costs
Benefit from strategic sales and
marketing headcount reductions taken in
Q4 2013
Lower sales incentive payments
Implementation of manufacturing costs
saving programs and productivity gains (on
a normalized basis)
Offsets from lower selling price in S&IP and
unfavorable mix shift and flat overall volume
growth in surgical pain
Currency losses from translational exposure
EBITDA
(2)
210.6
175.0
Adjusted EBITDA
(2)
166.6
188.0
Net
Income
91.7
46.2
1.
Pro forma financial data gives effect to the spin-off and related transactions as if they had
occurred on January 1, 2013. A reconciliation of pro forma net sales and pro forma net income
to Halyard Healths historical net sales and net income can be found in the Appendix to this
presentation.
2.
A
reconciliation
of
EBITDA
and
Adjusted
EBITDA
to
our
net
income
(loss)
under
GAAP
for
each
of
the
periods
presented
can
be
found
in
the
Appendix
to
this
presentation.
|
28
Q3 2014 Pro Forma Financial Performance
Q3 2014 Pro Forma Financial Performance
Pro Forma
(1)
($MM)
Three Months Ended
9/30/2013
9/30/2014
S&IP
287.0
279.2
Medical Devices
126.2
122.5
Net Sales
413.2
401.7
Q3 2014 Pro Forma Financial Performance and Commentary
Difficult comparison to prior year; second highest
quarter ever
Q3 2013 Pro Forma Adjusted EBITDA was
$14 million above the quarterly average for
the year
Decline in Pro Forma Adjusted EBITDA
approximately equal weightings between:
Expected price loss in exam gloves and
sterilization
Device sales lower due to surgical pain
volume related to competition in our category
Negative currency impact
EBITDA
(2)
83.9
63.8
Adjusted EBITDA
(2)
69.2
57.1
Net Income
40.2
7.9
1.
Pro forma financial data gives effect to the spin-off and related transactions
as if they had occurred on January 1, 2013. A reconciliation of pro forma net sales and pro forma net income
to Halyard Healths historical net sales and net income can be found in the
Appendix to this presentation.
2.
A
reconciliation
of
EBITDA
and
Adjusted
EBITDA
to
our
net
income
(loss)
under
GAAP
for
each
of
the
periods
presented
can
be
found
in
the
Appendix
to
this
presentation.
|
29
Halyards Long-Term Financial Objectives
Halyards Long-Term Financial Objectives
Organic Revenue
Growth
<1%
Portfolio optimized for higher growth
Improving growth rate especially in higher margin
categories
Organic Adjusted
Earnings Growth
<3%
Earnings growth driven by margin expansion
Growth in higher margin categories
R&D Expense
<2%
Increased investment; ~3-4% of net sales
Focused on organic innovation and new products for
adjacency expansion
Capital Expenditures
<3%
~3% of net sales
Funding growth and innovation initiatives
Total Shareholder
Return
N/A
Focus metric for Management
1.
Organic Revenue and Earnings Growth based on 2013 2-year CAGR.
2.
These goals are forward-looking, are subject to significant business, economic,
regulatory and competitive uncertainties and contingencies, many of which are beyond the control of
the Company and its management, and are based upon assumptions with respect to
future decisions, which are subject to change. Actual results will vary and those variations may
be
material.
For
discussion
of
some
of
the
important
factors
that
could
cause
these
variations,
please
consult
Risk
Factors
under
Item
1A
of
Halyard
Healths
Registration
Statement
on Form 10 (as amended) filed with the Securities and Exchange Commission. Nothing
in this presentation should be regarded as a representation by any person that these goals will
be achieved. Halyard Health undertakes no obligation to update these goals and
forward-looking statements to reflect events or circumstances occurring after the date of this
presentation,
except
as
required
by
law,
including
the
securities
laws
of
the
United
States
and
the
rules
and
regulations
of
the
SEC.
You
should
not
place
undue
reliance
on
these
goals and forward-looking statements, which speak only as of October 21,
2014.
Today
Longer Term Goals
(2)
(1)
|
Focus
on Total Shareholder Return
30
Maintain balance sheet flexibility and focus on working capital efficiency
Disciplined growth funding
Capital spending
Research and development
Mergers and acquisitions
Infrastructure efficiency
Continued focus on margin accretion
Gross margin improvement from shift to increased medical device focus
Operating margin efficiency by eliminating spin-related transaction
costs
Return excess cash to shareholders through potential share repurchases
and
dividends
Focus on Key Long-Term Drivers of
Total Shareholder Return
|
APPENDIX
APPENDIX
|
32
Halyard Health Net Income to Pro Forma Adjusted
EBITDA Reconciliation
Halyard Health Net Income to Pro Forma Adjusted
EBITDA Reconciliation
Unaudited
($MM)
Three Months Ended
Nine Months Ended
9/30/2013
9/30/2014
9/30/2013
9/30/2014
Net Sales
419.5
408.5
1,246.2
1,232.7
Related
Party
Sales
(1)
(6.3)
(6.8)
(19.3)
(19.0)
Pro Forma Net Sales
413.2
401.7
1,226.9
1,213.7
Net Income (GAAP)
47.9
(7.4)
114.8
29.5
Related
Party Sales
(1)
(0.6)
(0.6)
(1.8)
(1.8)
Transaction Costs
(2)
-
35.4
-
61.2
Royalties
(3)
(2.6)
(2.6)
(7.9)
(7.9)
Interest Expense (Income)
(4)
(8.6)
(8.6)
(25.8)
(25.8)
Provision for Income Taxes
(5)
4.1
(8.3)
12.4
(9.0)
Pro Forma Net Income
40.2
7.9
91.7
46.2
Provision for Income Taxes (Benefit)
19.0
29.8
42.1
52.7
Interest Expense (Income)
7.9
7.8
24.2
23.0
Depreciation and Amortization
16.8
18.3
52.6
53.1
Pro Forma EBITDA
83.9
63.8
210.6
175.0
Thailand Restructuring
(6)
-
5.7
-
54.7
Royalties
(7)
2.6
2.6
7.9
7.9
Ongoing Separation and Distribution Impact
(8)
(17.3)
(17.3)
(51.9)
(51.9)
Unusual Items in the Period
(9)
-
2.3
-
2.3
Pro Forma Adjusted EBITDA
69.2
57.1
166.6
188.0
Note: Reference footnote disclosures on p. 34.
Operating Profit
70.3
13.1
167.7
70.3
|
33
Halyard Health Net Income to Pro Forma Adjusted
EBITDA Reconciliation (Continued)
Halyard Health Net Income to Pro Forma Adjusted
EBITDA Reconciliation (Continued)
Unaudited
($MM)
FY 2011
FY 2012
FY 2013
Less 9
Months
(2013)
Add 9
Months
(2014)
Combined
LTM
Sept. 30,
2014
Pro Forma
LTM
Sept. 30,
2014
(11)
Net Income
142.4
152.6
154.6
114.8
29.5
69.3
78.3
Provision for Income Taxes (Benefit)
72.2
77.2
73.2
54.5
43.6
62.3
67.2
Interest Expense (Income)
(3.9)
(1.8)
(2.5)
(1.6)
(2.9)
(3.8)
30.7
Depreciation and Amortization
51.1
57.6
69.2
52.6
53.1
69.7
69.7
EBITDA
261.8
285.6
294.5
220.3
123.3
197.5
245.9
Thailand Restructuring
(6)
54.7
54.7
54.7
Transaction Costs
(10)
61.2
61.2
-
Ongoing Stand-Alone Charges
(8)
(69.2)
Royalties
(7)
10.6
Unusual Items in the Quarter
(9)
2.3
Adjusted EBITDA
261.8
285.6
294.5
220.3
239.2
313.4
244.3
Note: Reference footnote disclosures on p. 34.
|
34
Halyard Health Net Income to Pro Forma Adjusted
EBITDA Reconciliation (Supporting Footnotes)
Halyard Health Net Income to Pro Forma Adjusted
EBITDA Reconciliation (Supporting Footnotes)
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. This
adjustment applies only to Corporate & Other and does not affect our S&IP or Medical Devices
segments. The net effect of the adjustment was a decrease in net sales of $6.8 million and $6.3
million and cost of products sold of $0.6 million and $0.6 million for the three months ended September
30, 2014 and 2013; a decrease in net sales of $19.0 million and $19.3 million and cost of
products sold of $1.8 million and $1.8 million for the nine months ended September 30, 2014 and 2013.
Transaction costs expected to be incurred in 2014 in connection with the distribution are estimated to
be between $100.0 million and $125.0 million, which include costs related to legal, accounting,
information technology services and consulting services. We expect all these costs to be expensed.
Reflects an adjustment to remove $35.4 million and $61.2 million, respectively, of transaction
costs directly related to the distribution that were incurred during the three and nine months ended
September 30, 2014.
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 was an increase in selling and general expenses of $2.6 million for the three
months ended September 30, 2014 and 2013; and $7.9 million for the nine months ended September 30, 2014
and 2013.
On October 17, 2014 we issued $250.0 aggregate principal amount of 6.25% Senior Notes due 2022.
Reflects an adjustment for the estimated interest expense and the amortization of deferred
financing costs on our new borrowings of $250.0 million under our senior notes, anticipated borrowings
under the secured term loan facility we expect to enter into at the time of the spin-off and the
revolving credit facility of up to $250.0 million that we expect to enter into at the time of the
spin-off. Pro forma interest expense reflects an assumed annual interest rate of 4.0% on indebtedness to
be incurred in conjunction with the borrowings under the secured term loan facility. We expect
borrowings under the secured term loan facility to bear interest at an adjusted LIBOR rate plus 3.25%
or a base rate plus 2.25%, at our option, and the secured term loan facility is expected to mature in
October 2021. Each one-eighth point change in our assumed interest rate on the borrowings
under the secured term loan facility would result in a $0.5 million change in our aggregate annual
interest expense.
Reflects an income tax expense adjustment for the items noted above, calculated at the U.S. federal
statutory rate of 35%.
Consists of certain restructuring costs related to our plan to exit one of our disposable glove
facilities in Thailand and outsource the related production.
Adjusted to exclude transitional royalties expected to be paid to Kimberly-Clark for the use of
certain Kimberly-Clark intellectual property for a transition period ending on the second anniversary of
the distribution. See note (3) above.
Upon the distribution, we will assume responsibility for all of our stand-alone public company
costs, including the costs of corporate services currently provided by Kimberly-Clark. The corporate
services currently provided to us include executive management, supply chain, information technology,
legal, finance and accounting, investor relations, human resources, risk management, tax,
treasury and other services. During three and nine months ended September 30, 2014 and 2013, and the
twelve months ended September 30, 2014, and we incurred approximately $23.8 million,
$47.5
million, and $95.0 million in corporate cost allocation from Kimberly-Clark for these services. We estimate that our aggregate annual incremental cash expense for these services will be
approximately $40.0 million per year (for a combined total of $135.0 million of cash expense) and an
incremental $11.0 million per year of additional depreciation and amortization expense (which
is
not reflected in the table above). In addition, as a result of the separation and distribution, we expect to incur additional ongoing net expenses that we estimate will be approximately $29.2 million
on an annual basis related primarily to (1) a decline of purchasing scale, (2) stranded facility costs
as a result of excess manufacturing capacity in certain facilities, underutilization of certain of our
distribution facilities and inefficiencies in shipping costs and (3) a reduction in related party
sales.
In addition, as a result of the separation and distribution, we expect to incur
$60.0 million to $75.0 million of transitional costs after the distribution through 2016 to establish our own capabilities as a
stand-alone entity. These costs are related primarily to the transition services we expect to
receive from Kimberly-Clark, as well as our branding and other supply chain transition costs. Our pro
forma Adjusted EBITDA has not been adjusted to account for these transitional costs. These costs are
estimates only and we may have to pay higher costs as a result of these transition services
than
currently expected. See Risk FactorsRisks Related to the Distribution and Our Separation from Kimberly-Clark contained in our Registration Statement on Form 10 (as amended) filed with
the Securities and Exchange Commission.
Adjusted to exclude the following one-time costs incurred during the three months ended September
30, 2014: (1) approximately $1.3 million associated with the collapse of the roof and a wall at
our Southaven distribution facility due to severe weather and (2) approximately $1 million of Medical
Devices inventory was written off in connection with an inventory review in preparation for the
spin-off.
During the nine and twelve months ended September 30, 2014, we incurred transaction costs directly
relating to the separation and distribution in the amount of $61.2 million. Transaction costs
associated with the separation and distribution are estimated to be between $100.0 million and $125.0
million for the full year 2014. See note (2) above.
Reflects adjustments to give effect to the spin-off and related transactions as if they had
occurred on January 1, 2013. Please see our Unaudited Pro Forma Condensed Combined Financial
Statements included in our Registration Statement on Form 10 (as amended) filed with the Securities and
Exchange Commission for a description of the adjustments to the items below for the year
ended
December 31, 2013. See page 32 of this presentation for adjustments for the nine months ended September 30, 2013 and 2014.
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Exhibit 99.2
October 17, 2014
Dear Fellow Kimberly-Clark Stockholder:
I am pleased to inform you that on October 6, 2014 the executive committee of 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 October 31, 2014. If you hold Kimberly-Clark common stock at the close of business on the record date for the spin-off, which is October 23, 2014, you will receive a distribution of one share of Halyard common stock for every eight 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 will 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
October 17, 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 has been authorized 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 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 October 31, 2014, which we refer to as the distribution date, to the holders of record of Kimberly-Clark common stock on October 23, 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 eight 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 have been authorized 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 October 17, 2014.
This information statement was first mailed to Kimberly-Clark stockholders on or about October 24, 2014.
TABLE OF CONTENTS
Page | ||||
Summary |
1 | |||
Questions and Answers about the Separation and Distribution |
6 | |||
Risk Factors |
12 | |||
Cautionary Statement Concerning Forward-Looking Statements |
26 | |||
The Separation and Distribution |
27 | |||
Material U.S. Federal Income Tax Consequences |
34 | |||
Our Relationship with Kimberly-Clark after the Distribution |
36 | |||
Dividend Policy |
41 | |||
Description of Material Indebtedness |
41 | |||
Capitalization |
45 | |||
Unaudited Pro Forma Condensed Combined Financial Statements |
47 | |||
Selected Historical Combined Financial Data |
54 | |||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
56 | |||
Business |
71 | |||
Management |
87 | |||
Executive Compensation |
95 | |||
Ownership of Halyard Stock by Certain Beneficial Owners and Management |
127 | |||
Description of Halyard Capital Stock |
129 | |||
Certain Relationships and Related Party Transactions |
134 | |||
2015 Annual Meeting of Stockholders |
136 | |||
Where You Can Find More Information |
136 | |||
Index to Financial Statements |
F-1 |
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 separation and 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. In September 2014, after further review and evaluation of the potential spin-off, Kimberly-Clarks Board of Directors authorized its executive committee to approve the final terms and conditions of the distribution. On October 6, 2014, the executive committee of 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 eight shares of Kimberly-Clark common stock held as of the close of business on October 23, 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 $640.0 million through the issuance of senior unsecured notes and a secured term loan. We also anticipate entering into a revolving credit facility allowing borrowings of up to $250.0 million. We expect to use the net proceeds from the senior unsecured notes and the secured term loan to fund a portion of the cash distribution to Kimberly-Clark as described below. Funds under the revolving credit facility are expected to be available for our working capital and other requirements after the distribution. For additional information regarding our indebtedness see, Description of Material Indebtedness.
Immediately prior to the distribution, we will make a cash distribution to Kimberly-Clark equal to the estimated amount of all of our available cash on the distribution date in excess of the minimum amount (as defined herein). The minimum amount is equal to $40.0 million plus the estimated net amount of certain intercompany assets and liabilities on the distribution date that are to be retained by Kimberly-Clark plus approximately $1.0 million associated with certain retention bonus obligations to be transferred to Halyard; provided, that the minimum amount will be no less than $40.0 million.
We will fund the cash distribution with the net proceeds from our senior unsecured notes and secured term loan and the remainder will be funded with cash on hand and cash transferred to us by Kimberly-Clark in settlement of intercompany transactions associated with the separation. Kimberly-Clark expects to use the proceeds of this cash distribution to make open-market share repurchases.
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.
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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. |
| 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 separation and 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 (678) 425-9273. 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 October 31, 2014 to holders of record of Kimberly-Clark common stock on the record date. | |
What is the record date for the distribution? | October 23, 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 eight shares of Kimberly-Clark common stock you own as of the close of business on the record date. For example, if you own 80 shares of Kimberly-Clark common stock on the record date, you will receive 10 shares of Halyard common stock in the distribution. Based on approximately 372,114,350 shares of Kimberly-Clark common stock that we expect to be outstanding on the record date, Kimberly-Clark will distribute a total of approximately 46,514,294 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 eight 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. | |
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, |
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the making of a cash distribution from Halyard to Kimberly-Clark prior to the distribution in an amount equal to all of Halyards available cash on the distribution date in excess of the minimum amount,
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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Can Kimberly-Clark decide to cancel the distribution of Halyard common stock even if all of the conditions have been met? | Yes. The distribution is subject to the satisfaction or waiver of certain conditions. Until the distribution has occurred, Kimberly-Clarks Board of Directors has the right to cancel the distribution, even if all of the conditions are satisfied. See the section entitled The Separation and Distribution Distribution Conditions and Termination. |
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What if I want to sell my Kimberly-Clark common stock or my Halyard common stock? | You should consult with your financial advisors, such as your stockbroker, bank or tax advisor. | |
What is regular-way and ex-distribution trading of Kimberly-Clark stock? |
Beginning on or shortly before the record date and continuing up to and through the distribution date, it is expected 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 in the regular-way market will trade with an entitlement to shares of Halyard common stock distributed pursuant to the distribution. Shares that trade in the ex-distribution market will trade without an entitlement to shares of Halyard common stock distributed pursuant to the distribution.
If you decide to sell your Kimberly-Clark common stock before the distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your Kimberly-Clark common stock with or without your entitlement to Halyard common stock pursuant to the distribution. |
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Is the distribution taxable for U.S. federal income tax purposes? | The distribution is conditioned on the receipt by Kimberly-Clark of an opinion from its outside tax counsel, Baker Botts L.L.P., to the effect that the contribution of our business to us by Kimberly-Clark and the distribution of our common stock will qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code. Assuming the separation and the distribution qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code, for U.S. federal income tax purposes, gain or loss generally will not be recognized by Kimberly-Clark on the distribution and, except for gain realized on the receipt of cash paid in lieu of fractional shares, no gain or loss will be recognized by you, and no amount will be included in your income for U.S. federal income tax purposes, upon the receipt of shares of Halyard common stock in the distribution. For more information regarding the potential U.S. federal income tax consequences to Kimberly-Clark and to you of the distribution, see Material U.S. Federal Income Tax Consequences. | |
How will the distribution affect my tax basis in Kimberly-Clark common stock? | For U.S. federal income tax purposes, your basis in the Kimberly-Clark common stock will be allocated between the Kimberly-Clark common stock and Halyard common stock received in the distribution in proportion to their relative fair market values on the date of the distribution. Within a reasonable | |
time after the distribution is completed, Kimberly-Clark will provide to U.S. taxpayers information to enable them to compute their tax bases in both Kimberly-Clark and Halyard common stock and other information they will need to report their receipt of Halyard common stock on their 2014 U.S. federal income tax return as a tax-free transaction. See Material U.S. Federal Income Tax Consequences for a more complete description of the effects on your tax basis. | ||
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. |
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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 have been authorized 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 $640.0 million of indebtedness upon completion of the distribution. Prior to the distribution, we expect to borrow approximately $640.0 million through the issuance of senior unsecured notes and a secured term loan. We also anticipate entering into a revolving credit facility allowing borrowings of up to $250.0 million. See Description of Material Indebtedness. | |
Who will be the distribution agent, transfer agent and registrar for the Halyard common stock? |
The distribution agent, transfer agent and registrar 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. (866) 286-9199 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-Clark, you should contact:
Kimberly-Clark Corporation P.O. Box 619100 Dallas, Texas 75261-9100 Attention: Stockholder Services (972) 281-1522 www.kimberly-clark.com |
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After the distribution, Halyard stockholders who have any questions relating to Halyard should contact us at:
Halyard Health, Inc. 5405 Windward Parkway Suite 100, South Alpharetta, GA 30004 Attention: Stockholder Services (678) 425-9273 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 are less than the expenses we expect would have been 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 agreements that will govern certain commercial and other relationships between us and Kimberly-Clark after the distribution, those transitional arrangements will 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. |
| 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. |
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| 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 approximately $640.0 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 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
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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. 2013-32, 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. |
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.
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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. |
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.
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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 a transition services agreement 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 agreement, 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 Agreement for more information on the transition services agreement.
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 have to pay higher costs for certain materials used in our products due to a decline in purchasing scale if we are unable to obtain other 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. |
These and other factors may lower the market price of Halyard common stock, regardless of our actual financial condition or operating performance.
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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. Following the distribution, we expect to issue replacement equity awards to Halyard employees who forfeited Kimberly-Clark equity awards in connection with the distribution as described in further detail under the heading The Separation and Distribution Treatment of Equity-Based Compensation Halyard Participants. As of the date of this information statement, the exact number of shares of Halyard common stock that will be subject to the replacement equity awards is not determinable as such amount will be based on the price of Kimberly-Clark and Halyard common stock after the distribution date, and, therefore, it is not possible to determine the extent to which your percentage ownership in Halyard could be diluted as a result of the vesting or conversion of such replacement equity awards. We also anticipate that our compensation committee will grant stock options or other equity based awards to our employees in the future. 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, |
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| 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. |
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. In September 2014, after further review and evaluation of the potential spin-off, Kimberly-Clarks Board of Directors authorized its executive committee to approve the final terms and conditions of the distribution. On October 6, 2014, the executive committee of 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 eight shares of Kimberly-Clark common stock held as of the close of business on October 23, 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.
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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 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 separation and 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 separation and 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.
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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 way of direct registration in book-entry form on the basis of one share of Halyard common stock for every eight shares of Kimberly-Clark common stock (the distribution ratio) held on the record date of October 23, 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 payments made in lieu of fractional shares. If you own less than eight 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 agreements, 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 |
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| 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. |
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 46.5 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 October 23, 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 have been authorized 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 distribution. 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 $640.0 million through the issuance of senior unsecured notes and a secured term loan. We also anticipate entering into a revolving credit facility allowing borrowings of up to $250.0 million. We expect to use the net proceeds from the senior unsecured notes and the secured term loan will be used to fund a portion of the cash distribution to Kimberly-Clark as described below. 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.
Immediately prior to the distribution, we will make a cash distribution to Kimberly-Clark equal to the estimated amount of all of our available cash on the distribution date in excess of the minimum amount. See SummaryThe Separation and DistributionFormation of Halyard above.
We will fund the cash distribution with the net proceeds from our senior unsecured notes and secured term loan and the remainder will be funded with cash on hand and cash transferred to us by Kimberly-Clark in settlement of intercompany transactions associated with the separation. Kimberly-Clark expects to use the proceeds of this cash distribution to make open-market share repurchases of its shares.
Distribution Conditions and Termination
The distribution will be effective on the distribution date, October 31, 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 from Halyard to Kimberly-Clark prior to the distribution in an amount equal to all of Halyards available cash on the distribution date in excess of the minimum amount, |
| 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, |
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| 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. |
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. 2013-32, 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 agreements described below that are material to Halyard are 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.
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 to Kimberly-Clark in an amount equal to the estimated amount of all of our available cash on the distribution date in excess of the minimum amount. See Summary The Separation and Distribution Formation of Halyard above. Kimberly-Clark will 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 eight shares of Kimberly-Clark common stock held by such stockholders. Kimberly-Clark stockholders will receive cash in lieu of any fractional shares of Halyard.
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
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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 agreement, the tax matters agreement, the employee matters agreement, the intellectual property license agreements, the manufacture and supply, distribution and noncompetition 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, 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.
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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, 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 agreement 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 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
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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.
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.
The employee matters agreement will govern Kimberly-Clarks and our compensation and employee benefit obligations with respect to the current and former employees 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
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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 plans 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 and Canada, 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 two patent license agreements with Kimberly-Clark pursuant to which each party will grant a license to the other to use certain intellectual property and patents 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 agreements described below) for use in the conduct of the others business as of the separation.
In connection with the distribution, we will obtain ownership of the majority of the trademarks necessary to operate our business. In addition, we expect to enter into certain trademark license agreements with Kimberly-Clark in connection with the distribution pursuant to which Kimberly-Clark or Halyard, as the case may be, will license rights to use certain trademarks necessary to run each partys respective businesses following the distribution. These agreements include (i) a royalty-free, perpetual trademark license agreement pursuant to which Kimberly-Clark will grant us a license to use Kimberly-Clarks KIMGUARD and DAISY design marks, and (ii) a two-year royalty-bearing trademark license agreement pursuant to which Kimberly-Clark will grant us a license to continue to use certain of Kimberly-Clarks other trademarks, trade names and service marks that are used in the health care business as of the distribution date (e.g., KIMBERLY-CLARK and other KIM-formative marks). We will also enter into certain royalty-bearing fixed term trademark license agreements, in which we will grant Kimberly-Clark licenses to continue to use marks that will become owned by us as a result of the separation and distribution but are used by Kimberly-Clark in its other business segments, including marks for gloves and other products.
Manufacturing and Supply, Distribution and Non-Competition 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. In addition, we expect to enter into certain distribution agreements with Kimberly-Clark in connection with the distribution pursuant to which Kimberly-Clark or Halyard, as the case may be, will distribute certain products used in the other partys business following the distribution. In connection with these agreements, we expect to enter into certain non-competition agreements with Kimberly-Clark such that we and Kimberly-Clark, following the distribution, will generally follow the distribution and business practices of Halyard and Kimberly-Clark prior to the distribution. Each of these agreements is of the type entered into in the ordinary course of business, Halyard and its business will not be dependent on any of these agreements and the loss of any of these agreements would not result in any material change in business, operations, or financial position of Halyard.
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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 $640.0 million through the issuance of $250.0 million aggregate principal amount of 6.250% Senior Notes (Senior Notes) and a secured term loan of $390.0 million (the Term Loan Facility). We also anticipate entering into a revolving credit facility allowing borrowings of up to $250.0 million (the Revolving Credit Facility). We expect to use the net proceeds from the Senior Notes and the Term Loan Facility to fund a portion of the cash distribution to be made by us 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.
The following summary of our Senior Notes, Term Loan Facility and Revolving Credit Facility does not purport to be complete and is subject to, and qualified in its entirety by reference to, the form agreements filed as exhibits to the registration statement on Form 10 of which this information statement is a part.
6.250% Senior Notes due 2022
Prior to the distribution, Halyard expects to issue up to an aggregate principal amount of $250 million of the Senior Notes. The issuance of the Senior Notes is expected to occur on October 17, 2014, subject to customary closing conditions.
An amount equal to 100% of the issue price of the Senior Notes will be deposited in an escrow account pursuant to the terms of an escrow agreement with Deutsche Bank Trust Company Americas, as trustee with respect to the Senior Notes and as the escrow agent. Such amount will be released to Halyard on the distribution date upon the satisfaction of certain conditions related to the distribution. If the conditions have not been met and the proceeds have not been distributed on or prior to March 1, 2015, the escrowed funds will be used to redeem all of the Senior Notes at a redemption price of 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.
The Senior Notes will mature on October 15, 2022 and interest will be payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2015. Initially, the Senior Notes will not be guaranteed. Upon release of the funds from escrow on the distribution date, the Senior Notes will become fully and unconditionally guaranteed on a senior unsecured basis by each of our subsidiaries that will initially guarantee indebtedness under the credit agreement governing the Revolving Credit Facility and the Term Loan Facility.
At any time prior to October 15, 2017, Halyard will be able to redeem all or a part of the Senior Notes upon not less than 30 nor more than 60 days prior notice to each holder, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus a make-whole amount as of the redemption date, and accrued and unpaid interest, if any, to, but excluding, the redemption date.
41
On and after October 15, 2017, Halyard will be able to redeem the Senor Notes, in whole or in part, upon not less than 30 nor more than 60 days prior notice to each holder, at the redemption prices (expressed as percentages of principal amount of the Senior Notes to be redeemed) set forth below, plus accrued and unpaid interest thereon, if any, to, but excluding, the applicable redemption date:
Year |
Percentage | |||
2017 |
104.688 | % | ||
2018 |
103.125 | % | ||
2019 |
101.563 | % | ||
2020 and thereafter |
100.000 | % |
In addition, until October 15, 2017, we will be able redeem up to 35% of the Senior Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings at a redemption price equal to 106.250% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the applicable date of redemption, subject to certain conditions.
The indenture governing the Senior Notes will contain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:
| incur additional indebtedness, guarantee indebtedness or issue disqualified stock or, in the case of our restricted subsidiaries, preferred stock; |
| pay dividends on, repurchase or make distributions in respect of our capital stock; |
| make certain investments or acquisitions; |
| sell, transfer or otherwise convey certain assets; |
| create liens; |
| enter into agreements restricting certain subsidiaries ability to pay dividends or make other intercompany transfers; |
| consolidate, merge, sell or otherwise dispose of all or substantially all of our and our subsidiaries assets; |
| enter into transactions with affiliates; and |
| prepay certain kinds of indebtedness. |
The Senior Notes will also have cross default provisions that apply to other indebtedness we or certain of our subsidiaries may have from time to time with an outstanding principal amount of $50.0 million or more. If the Senior Notes achieve an investment grade rating from both Moodys and S&P, our obligation to comply with certain of these covenants will be suspended.
We expect to enter into a registration rights agreement with respect to the Senior Notes. In the registration rights agreement, we and (upon the execution of a joinder agreement to the registration rights agreement) the guarantors of the Senior Notes will agree for the benefit of the holders of the Senior Notes to use commercially reasonable efforts to (1) file a registration statement on an appropriate registration form with respect to a registered offer to exchange the notes for new notes guaranteed by the guarantors, with terms substantially identical in all material respects to the notes (except that the Exchange Notes will not contain terms with respect to transfer restrictions or any increase in annual interest rate) and (2) cause the registration statement to be declared effective under the Securities Act.
This information statement and the registration statement on Form 10 of which it is a part shall not be deemed an offer to sell or a solicitation of an offer to buy the Senior Notes.
42
Revolving Credit Facility and Term Loan Facility
In connection with the distribution, Halyard, as borrower, expects to enter into a credit agreement providing for the Revolving Credit Facility and the Term Loan Facility, in an expected aggregate principal amount of $640.0 million, which we expect will consist of:
| five-year senior secured revolving credit facility in a principal amount of $250.0 million, with a letter of credit subfacility in an amount of $75 million and a swingline subfacility in an amount of $25.0 million; and |
| a seven-year senior secured term loan facility in a principal amount of $390.0 million. |
We expect that the administrative agent under the Term Loan Facility and the collateral agent under the Term Loan Facility and the Revolving Credit Facility will be Morgan Stanley Senior Funding, Inc. and that the administrative agent for the Revolving Credit Facility will be Citibank, N.A.
The closing of the credit agreement will be conditioned on the satisfaction of certain conditions, including the consummation of the distribution substantially contemporaneously with such closing.
We expect all obligations under the credit agreement and obligations under certain hedging agreements and cash management arrangements to be (i) guaranteed by us and each of our direct and indirect, existing and future, material wholly-owned domestic restricted subsidiaries and (ii) secured by substantially all of our and the guarantors present and after-acquired personal property and material fee-owned real property, subject to certain exceptions.
In addition, we expect the credit agreement to contain an accordion feature that will allow us, subject to the satisfaction of certain conditions, including our receipt of increased commitments from existing lenders or new commitments from new lenders, to incur additional term loans under the Term Loan Facility or under new term loan facilities or to increase the amount of the commitments under the Revolving Credit Facility, including through the establishment of one or more tranches under the Revolving Credit Facility, in an aggregate principal amount not to exceed the sum of (i) $255 million, plus (ii) voluntary prepayments of loans under the Term Loan Facility and voluntary commitment reductions under the Revolving Credit Facility, plus (iii) an unlimited amount, so long as our consolidated net secured leverage ratio is equal to or less than 2.50 to 1.00, after giving pro forma effect to the incurrence of any such incremental loans or commitments. We also expect that the credit agreement will contain a feature that will allow us, subject to consent of the extending lenders, to extend the maturity of the commitments or loans outstanding under each of the Term Loan Facility and Revolving Credit Facility.
We expect that borrowings under the Term Loan Facility will bear interest, at our option, at either (i) a reserve-adjusted LIBOR rate or (ii) a base rate, in each case plus a margin.
We expect that borrowings under the Revolving Credit Facility will bear interest, at our option, at either (i) a reserve-adjusted LIBOR rate, plus a margin ranging between 1.75% to 2.50% per annum, depending on our consolidated total leverage ratio, or (ii) the base rate, which is calculated as the greatest of (1) the prime rate, (2) the U.S. federal funds effective rate plus 0.50% and (3) the one month LIBOR Rate plus 1.00%, plus a margin ranging between 0.75% to 1.50% per annum, depending on our consolidated total leverage ratio. We expect that the unused portion of our Revolving Credit Facility will be subject to a commitment fee equal to (i) 0.25% per annum, when our consolidated total leverage ratio is less than 2.25 to 1.00 and (ii) 0.40% per annum, otherwise.
We expect that the credit agreement will contain certain affirmative and negative covenants that we consider usual and customary for an agreement of this type. Such covenants will, subject to exceptions, limit our ability and the ability of our restricted subsidiaries to, among other things:
| incur additional indebtedness and guarantee indebtedness; |
43
| pay dividends or make other distributions or repurchase or redeem our capital stock; |
| prepay, redeem or repurchase subordinated indebtedness or modify the agreements relating thereto; |
| make loans, investments and acquisitions; |
| sell, transfer or otherwise dispose of assets; |
| create or incur liens; |
| enter into certain types of transactions with affiliates; |
| enter into agreements restricting certain of our restricted subsidiaries ability to pay dividends; |
| consolidate, merge or sell all or substantially all of our assets; and |
| create unrestricted subsidiaries. |
In addition, we expect the Revolving Credit Facility to be subject to financial covenants requiring us to maintain a maximum consolidated net secured leverage ratio of 2.50 to 1.00 and a minimum consolidated interest coverage ratio of 3.00 to 1.00.
We expect that repayment of borrowings under the Term Loan Facility and Revolving Credit Facility will be subject to acceleration upon the occurrence of certain events of default that we consider usual and customary for an agreement of this type, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults and cross-acceleration to material indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, actual or asserted failure of material loan or security documents to be in force and effect, and change of control. We expect that failure to comply with the financial covenants described above will not constitute an event of default under the Term Loan Facility unless and until the Revolving Credit Facility is terminated and accelerated by the requisite lenders thereunder.
We expect that we will be permitted to prepay all or a portion of the term loans and revolving loans under the credit agreement at any time, subject, in the case of the Term Loan Facility, to a 1.00% premium if we effect a repricing transaction in the first year after the closing date. We expect borrowings under the credit agreement to be subject to mandatory prepayments with the net cash proceeds of certain issuances of debt, certain asset sales and other dispositions and certain casualty events, and, starting with the fiscal year ending December 31, 2015, with excess cash flow if our consolidated net secured leverage ratio exceeds 1.00 to 1.00. In addition, we expect the Term Loan Facility to require quarterly amortization payments equal to 0.25% of the aggregate principal amount of the term loans outstanding on the closing date.
We expect that the administrative agents and certain of the parties to the credit agreement and certain of their respective affiliates will have performed in the past, and may perform in the future, banking, investment banking or other advisory services for us and our affiliates from time to time for which they have received, or will receive, customary fees and expenses.
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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 (1)(2) |
$ | 48.5 | $ | 40.0 | ||||
|
|
|
|
|||||
Indebtedness: |
||||||||
Short-term debt (3)(5) |
$ | 10.4 | $ | 3.9 | ||||
Long-term debt |
||||||||
6.25% Senior Notes due 2022 (1)(4) |
| 250.0 | ||||||
Term Loan Facility (1)(5) |
| 386.1 | ||||||
Revolving Credit Facility (6) |
| | ||||||
|
|
|
|
|||||
Total Indebtedness |
10.4 | 640.0 | ||||||
|
|
|
|
|||||
Stockholders equity: |
||||||||
Common stock, par value $0.01 per share, 50,000,000 shares authorized and 46,514,294 shares issued and outstanding on a pro forma basis |
| 0.5 | ||||||
Additional paid-in capital |
| 1,437.8 | ||||||
Kimberly-Clarks net investment (1) |
2,088.9 | | ||||||
Accumulated other comprehensive income (loss) |
(11.6 | ) | (11.6 | ) | ||||
|
|
|
|
|||||
Total stockholders equity (7) |
2,077.3 | 1,426.7 | ||||||
|
|
|
|
|||||
Total Capitalization |
$ | 2,087.7 | $ | 2,066.7 | ||||
|
|
|
|
(1) | Immediately prior to the distribution, we will make a cash distribution to Kimberly-Clark equal to the estimated amount of all of Halyards available cash on the distribution date in excess of the minimum amount (see note (2) below). |
We will fund the cash distribution with the net proceeds from our senior unsecured notes and secured term loan and the remainder will be funded with cash on hand and cash transferred to us by Kimberly-Clark in settlement of intercompany transactions associated with the separation.
(2) | Following the cash distribution to Kimberly-Clark, Halyard will retain an amount of cash equal to the minimum amount. The minimum amount is equal to $40.0 million plus the estimated net amount of certain intercompany assets and liabilities on the distribution date that are to be retained by Kimberly-Clark plus approximately $1.0 million associated with retention bonus obligations to be transferred to Halyard; provided, that the minimum amount will be no less than $40.0 million. |
(3) | 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. |
(4) | Represents the aggregate principal amount of the Senior Notes excluding any offering discounts. Due to the special mandatory redemption provision, the Senior Notes may initially be classified on our balance sheet as debt included in current liabilities. After we complete the distribution, the notes will be reclassified on our balance sheet as long-term debt. See Description of Material Indebtedness. |
45
(5) | In connection with the distribution, we expect to enter into and borrow approximately $390.0 million under a Term Loan Facility. Due to the amortization provisions of the Term Loan Facility, $3.9 million of indebtedness thereunder is classified on our unaudited pro forma condensed combined balance sheet as short term debt. In addition, we expect the indebtedness under the Term Loan Facility to be issued at a discount to the principal amount thereof equal to $3.9 million. We intend to use the proceeds of the Term Loan Facility to fund a portion of the cash distribution to Kimberly-Clark. See Description of Material Indebtedness. |
(6) | In connection with the distribution, we expect to enter into the Revolving Credit Facility providing for aggregate borrowings of up to $250.0 million, subject to certain limitations, which we anticipate will remain undrawn at the completion of the distribution. |
(7) | 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). |
46
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.
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 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 agreement 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 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 Agreement.
47
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 $95.0 million in the year ended December 31, 2013 and $48.0 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 agreement 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 corporate services currently provided by Kimberly-Clark. The corporate services currently provided to us include executive management, supply chain, information technology, legal, finance and accounting, investor relations, human resources, risk management, tax, treasury and other services. We estimate that our aggregate annual expense for these costs will be approximately $146.0 million, including incremental expenses of $40.0 million per year of cash expense and $11.0 million per year of additional depreciation and amortization expense. In addition, as a result of the separation and distribution we expect to incur additional ongoing net expenses that we estimate will be approximately $29.2 million on an annual basis related primarily to (1) a decline in purchasing scale; (2) stranded facility costs as a result of excess manufacturing capacity in certain facilities, underutilization of certain of our distribution facilities and inefficiencies in shipping costs; and (3) a reduction in related party sales.
In addition, as a result of the separation and distribution, we expect to incur $60.0 million to $75.0 million of transitional costs after the distribution through 2016 to establish our own capabilities as a stand-alone entity. These costs are related primarily to the transition services we expect to receive from Kimberly-Clark, as well as our branding and other supply chain transition costs.
No pro forma adjustments have been made for these stand-alone public company costs.
The unaudited pro forma condensed combined income statement also does not reflect certain non-recurring items that we expect to incur in connection with the Pro Forma Transactions, including costs related to legal, accounting and consulting services, which are estimated to be from $100.0 million to $125.0 million in 2014. We expect all of these costs to be expensed.
48
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 | ||||||||
|
|
|
|
|
|
|||||||
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 |
| (17.2 | )(d) | (17.2 | ) | |||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
59.1 | 2.2 | 61.3 | |||||||||
Provision for income taxes |
(22.2 | ) | (0.8 | )(e) | (23.0 | ) | ||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 36.9 | $ | 1.4 | $ | 38.3 | ||||||
|
|
|
|
|
|
|||||||
Pro forma earnings per share: |
||||||||||||
Basic |
$ | 0.82 | ||||||||||
|
|
|||||||||||
Diluted |
$ | 0.82 | ||||||||||
|
|
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
49
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 | ) | (34.2 | )(d) | (34.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
227.8 | (47.3 | ) | 180.5 | ||||||||
Provision for income taxes |
(73.2 | ) | 16.6 | (e) | (56.6 | ) | ||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 154.6 | $ | (30.7 | ) | $ | 123.9 | |||||
|
|
|
|
|
|
|||||||
Pro forma earnings per share: |
||||||||||||
Basic |
$ | 2.66 | ||||||||||
|
|
|||||||||||
Diluted |
$ | 2.66 | ||||||||||
|
|
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
50
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.
51
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 $100.0 million and $125.0 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 the Senior Notes and Borrowings of $390.0 million under the Term Loan Facility. Due to the amortization provisions of the Term Loan Facility, $3.9 million of indebtedness thereunder is classified as debt payable within one year. We also anticipate entering into the Revolving Credit Facility allowing borrowings of up to $250.0 million, which we anticipate will be undrawn as of the distribution. The adjustments also reflect capitalization of approximately $10.7 million of deferred financing costs that we will incur under the Senior Notes, Term Loan Facility and Revolving Credit Agreement. The Term Loan Facility is presented net of an assumed original issue discount of $3.9 million. 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 estimated interest expense and the amortization of deferred financing costs on our new borrowings under these financing arrangements. Pro forma interest expense reflects an assumed annual interest rate of 4.0% on indebtedness to be incurred in conjunction with the borrowings under the Term Loan Facility. Borrowings under the Term Loan Facility will bear interest at an adjusted LIBOR rate plus 3.25% or a base rate plus 2.25%, at our option, and the Term Loan Facility matures in October 2021. Each one-eighth point change in our assumed interest rate on the borrowings under the Term Loan Facility would result in a $0.5 million change in our aggregate annual interest expense. See Description of Material Indebtedness.
(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%.
52
(f) | Elimination of Assets Retained and Liabilities Assumed by Kimberly-Clark |
Represents the elimination of certain accounts receivable, inventory, accrued liabilities, and property, plant and equipment that will be retained by Kimberly-Clark pursuant to the distribution agreement.
In connection with the distribution, certain accounts receivable and accounts payable primarily related to the health care business will be retained by Kimberly-Clark and Kimberly-Clark will make a cash payment to us equal to the net amount thereof at the distribution date, subject to a post-distribution true up. No adjustment has been made for these transactions. The one-time impact of these transactions had the distribution occurred on June 30, 2014 would have been a decrease to accounts payable of $99.7 million, a decrease to accounts receivable of $144.9 million and an offsetting increase to cash of $45.2 million. These amounts do not reflect the actual amount of accounts payable and accounts receivable to be retained by Kimberly-Clark or the cash balance as of the distribution date, which amounts are not known at this time.
(g) | Distribution Adjustments |
This 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 will be at a par value of $0.01 per share.
Immediately prior to the distribution, we will make a cash distribution to Kimberly-Clark equal to the estimated amount of all of Halyards available cash on the distribution date in excess of the minimum amount. See SummaryThe Separation and DistributionFormation of Halyard above.
We will fund the cash distribution with the net proceeds from the Senior Notes and the Term Loan Facility and the remainder will be funded with cash on hand and cash transferred to us by Kimberly-Clark in settlement of intercompany transactions associated with the separation. Therefore, the exact amount of the cash distribution cannot be determined at this time.
Following the cash distribution, Halyard will retain an amount of cash equal to the minimum amount. The exact amount of the minimum amount will not be determined until the distribution date but will be no less than $40.0 million.
(h) | Related Party Debt |
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.
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 46,514,294, the number of shares expected to be outstanding immediately following the distribution.
Pro forma diluted shares outstanding were not adjusted for the potential dilution of common shares related to equity awards granted to our employees, as we cannot fully estimate those amounts at this time.
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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 |
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 |
54
(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 |
55
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.
56
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. As a result of the planned mill closure, we expect to improve pre-tax cash flow by approximately $10 million annually from lower outsourced exam glove costs, a reduction in facility capital expenses and improved working capital.
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 a transition services agreement, a tax matters agreement, an employee matters agreement, intellectual property agreements, manufacturing and supply agreements, distribution agreements and non-competition 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 be discontinued as a result of the distribution. 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
57
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 agreement described above. See Our Relationship with Kimberly-Clark after the Distribution Transition Services Agreement.
58
Results By Business Segment
Year-to-Date Results
Six Months Ended June 30 | ||||||||||||
(millions of dollars) |
2014 | 2013 | Change | |||||||||
NET SALES |
||||||||||||
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. | |||||||||
|
|
|
|
|||||||||
TOTAL NET SALES |
$ | 824.2 | $ | 826.7 | (0.3 | )% | ||||||
|
|
|
|
|||||||||
OPERATING PROFIT |
||||||||||||
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 | ) | | |||||||
|
|
|
|
|||||||||
TOTAL OPERATING PROFIT |
$ | 57.2 | $ | 97.4 | (41.3 | )% | ||||||
|
|
|
|
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 | |||||||||
|
|
|
|
|||||||||
TOTAL NET SALES |
$ | 824.2 | $ | 826.7 | (0.3 | )% | ||||||
|
|
|
|
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 |
||||||||||||||||||||
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. |
59
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 |
||||||||||||||||||||||||||||
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.
60
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
61
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 |
|||||||||||||||
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 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
TOTAL NET SALES |
$ | 1,677.5 | $ | 1,684.0 | (0.4 | )% | $ | 1,659.9 | 1.5 | % | ||||||||||
|
|
|
|
|
|
Percentage Change
Total |
Changes Due To | |||||||||||||||||||
NET SALES |
Sales
Volume |
Net
Price (a) |
Currency |
Mix/
Other (b) |
||||||||||||||||
2013 versus 2012 |
||||||||||||||||||||
Total |
(0.4 | ) | 1 | | (1 | ) | | |||||||||||||
Surgical and Infection Prevention |
(2.7 | ) | (1 | ) | | (1 | ) | (1 | ) | |||||||||||
Medical Devices |
4.5 | 5 | | (1 | ) | | ||||||||||||||
2012 versus 2011 |
||||||||||||||||||||
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 |
||||||||||||||||||||||||||||
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 |
||||||||||||||||||||||||||||
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. |
62
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 $640.0 million through the issuance of senior unsecured notes and a secured term loan. We also anticipate entering into a revolving credit facility allowing borrowings of up to $250.0 million. We expect to use the net proceeds from the senior unsecured notes and the secured term loan to fund a portion of the cash distribution to to be made to Kimberly-Clark immediately prior to the distribution as described above under Summary The Separation and Distribution Formation of Halyard. 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 term loan 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.
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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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$ | 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. Sensitivity of the fair value estimate to changes in assumptions for sales volumes, selling prices and costs is 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.
We are in the process of completing the required annual testing of goodwill for impairment for 2014 for all reporting units using the beginning of the third quarter 2014 as the measurement date. Our preliminary analysis indicates that our approximately $1.4 billion of goodwill is not impaired because the estimated fair values of both reporting units, Medical Devices and S&IP, are in excess of their respective carrying values. Our analysis indicates that the fair value of our Medical Device unit continues to be substantially in excess of the carrying value of its net assets; however, the fair value of our S&IP unit is no longer substantially in excess of the carrying value of its net assets, primarily because of the incremental stand-alone public company corporate and ongoing costs described elsewhere in this information statement. See Unaudited Pro Forma Condensed Combined Financial Statements Corporate Allocations and Stand-Alone Public Company Costs. Our preliminary analysis indicates that the fair value of our S&IP unit exceeded the carrying value of its net assets by approximately four to eight percent. As of June 30, 2014, approximately $750.0 million of goodwill was assigned to our S&IP unit and approximately $680.0 million of goodwill was assigned to our Medical Devices unit.
The fair value determination utilizes key assumptions regarding growth of the business and stand-alone public company corporate and ongoing costs, each of which requires significant management judgment, including estimating future sales volumes, selling prices and costs, changes in working capital, and investments in property and equipment. These assumptions and estimates are based upon our historical experience and projections of future activity. In addition, the selection of the discount rate used to determine fair value is based upon current market rates and the Companys current cost of financing. There can be no assurance that the assumptions and estimates made for purposes of the annual goodwill impairment test will prove to be accurate. Volatility in the equity and debt markets, or increases in interest rates, could result in a higher discount rate. Changes in sales volumes, selling prices and costs of goods sold, additional stand-alone public company costs, and increases in interest rates could cause changes in our forecasted cash flows. For a discussion of these and other factors that could negatively impact our cash flows, see Risk FactorsRisks Related to Our Business and Industry above. Unfavorable changes in any of the factors described above could result in a goodwill impairment charge in the future.
We expect to finalize the goodwill impairment test for 2014 prior to filing our quarterly report on Form 10-Q for the quarter ended September 30, 2014.
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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.
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.
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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.
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
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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 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 (678)-425-9273.
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 |
Country |
Owned/Leased |
|||
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 | |||||||||
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$ | 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 September 15, 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 47, 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 48, 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 49, 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 October 1, 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. The directors designated as Class I directors will have terms expiring at the first annual meeting of stockholders following the distribution, which we expect to hold in 2015. The directors designated as Class II directors will have terms expiring at the second annual meeting of stockholders, which we expect to hold in 2016, and the directors designated as Class III directors will have terms expiring at the third annual meeting of stockholders, which we expect to hold in 2017. 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 |
Director Class |
||
Robert E. Abernathy | Chairman of the Board and Chief Executive Officer | III | ||
Ronald W. Dollens | Lead Director | III | ||
Heidi K. Fields | Director | III | ||
Dr. Julie Shimer | Director | II | ||
John P. Byrnes | Director | II | ||
Patrick J. OLeary | Director | I | ||
Gary D. Blackford | Director | I |
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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 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.
Dr. Julie Shimer , 62, is currently a private investor and has 30 years of product development experience, including many years with major communications companies. From March 2007 to April 2012 she served as Chief Executive Officer of Welch Allyn, Inc., a manufacturer of frontline medical products and solutions, having served on the board of directors beginning in July 2002. Previously Dr. Shimer was President and Chief Executive Officer of Vocera Communications, Inc., a provider of wireless communications systems, also serving on the board of directors. She also has served as general manager at 3Com Corporation and Motorola and has been a product development leader at Motorola and AT&T Bell Laboratories. Since March 2007, Dr. Shimer has been a director of Netgear, Inc., a home and small business network solutions provider, and since July 2013 she has served as a director of EarthLink Holdings Corp., a leading managed network and cloud services provider. She also has served as the Chairwoman of Empire State Development Corp., the State of New Yorks economic development organization. Dr. Shimer has been selected to serve as a director of our Board of Directors due to her leadership experience as a chief executive, knowledge of, and experience in, the healthcare industry, international experience and governance and public company board experience.
John P. Byrnes , age 56, has served as the Chairman of the Board of Lincare Holdings, Inc. (Lincare) since March 2000 and as a director of Lincare since May 1997. Mr. Byrnes was the Chief Executive Officer of Lincare from 1997 until 2012. Mr. Byrnes also served as Lincares President from June 1996 until April 2003. Prior to becoming Lincares President, Mr. Byrnes served in a number of capacities at Lincare over a ten-year period, including serving as Chief Operating Officer throughout 1996. Mr. Byrnes was a director of Kinetic Concepts, Inc. from January 2003 until February 2011 and of U.S. Renal Care, Inc. from August 2005 until 2012. Mr. Byrnes has been selected to serve as a 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.
Patrick J. OLeary , age 57, served as Executive Vice President and Chief Financial Officer of SPX Corporation, a global industrial and technological services and products company, from December 2004 until August 2012, when he retired. Prior to that time, he served as Chief Financial Officer and Treasurer of SPX Corporation from October 1996 to December 2004. Mr. OLeary has been a director of PulteGroup, Inc. (NYSE: PHM), since 2005. Mr. OLeary has been selected to serve as a director of our Board of Directors due to his executive
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leadership experience as a chief financial officer, financial literacy and experience in finance and accounting, international experience, and governance and public company board experience.
Gary D. Blackford , age 57, is the Chairman of the Board and Chief Executive Officer of Universal Hospital Services, Inc. (UHS), a leading, nationwide provider of medical technology outsourcing and services to the health care industry. He has been the Chief Executive Officer since 2002. Mr. Blackford was the Chief Executive Officer of Curative Health Services, Inc., a specialty pharmacy and health services company, from 2001 to 2002. He was also the Chief Executive Officer of ShopforSchool, Inc., from 1999 to 2001. Mr. Blackford has been a director of Wright Medical Group, Inc. (WMGI), since 2008. Mr. Blackford has been selected to serve as a director of our Board of Directors due to his executive leadership experience as a chief executive officer, financial literacy and experience in finance and accounting, 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
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. Heidi K. Fields is expected to serve as the chairperson of the Audit Committee with Patrick J. OLeary and Gary D. Blackford serving as additional members.
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, |
| 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. |
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Compensation Committee
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. Dr. Julie Shimer is expected to serve as the chair of the Compensation Committee with Ronald W. Dollens and John P. Byrnes serving as additional members of the compensation committee.
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
The Corporate Governance Committee will be comprised of all of our 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, |
| Overseeing over healthcare legal, regulatory and compliance programs, |
| Advising the Board of Directors on: |
| Board organization, membership, function, performance and compensation, |
| 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. |
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Executive Committee
Our by-laws provide that our Board of Directors may appoint an Executive Committee. If appointed the Executive Committee will consist of a majority of directors who meet the independence requirements of the NYSE.
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 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.
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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, |
| 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.
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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 held for more than six months will vest pro rata, based on the number of full years of employment. Unvested performance-based restricted stock units held for less than six months will be forfeited. 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 held for more than six months will be payable in full based on attainment of the performance goal at the end of the restricted period. Unvested performance-based restricted stock units held for less than six months will be forfeited.
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
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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, 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, in addition to the replacement grants for forfeited Kimberly-Clark equity awards, 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 |
750,000 | |||
Rhonda D. Gibby |
350,000 | |||
Christopher M. Lowery |
850,000 | |||
John W. Wesley |
400,000 |
We expect these long-term incentive awards to consist of 25% stock options and 75% restricted stock units 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.
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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Halyard will issue replacement equity grants for the forfeited Kimberly-Clark equity awards held by the Halyard named executive officers following the distribution as detailed above under the heading The Separation and Distribution Treatment of Equity-Based Compensation Halyard Participants.
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.
108
(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. |
109
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. |
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(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.
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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 $104.46 per share. |
113
Option Exercises and Stock Vested
The following table sets forth information concerning Kimberly-Clark stock options exercised and stock awards vested during 2013 for the Halyard named executive officers.
Option Exercises and Stock Vested in 2013
Name |
Option Awards | Stock Awards | ||||||||||||||
Number of
Shares Acquired on Exercise(#) |
Value
Realized on Exercise($) (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. |
114
(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 |
115
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.
116
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 beneficial owner of more than five percent of Kimberly-Clarks common stock, 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 October 1, 2014 (and assuming a distribution ratio of one share of Halyard common stock for every eight shares of Kimberly-Clark common stock). The mailing address of each of the Halyard directors and named executive officers 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) |
||||||
BlackRock, Inc. (2) |
3,326,441 | 7.0 | % | |||||
Capital World Investors (3) |
3,232,513 | 6.7 | % | |||||
State Street Corporation (4) |
2,396,802 | 5.0 | % | |||||
The Vanguard Group (5) |
2,326,910 | 5.0 | % | |||||
Robert E. Abernathy |
9,963 | * | ||||||
Ronald W. Dollens |
| * | ||||||
Heidi K. Fields |
5 | * | ||||||
Dr. Julie Shimer |
| * | ||||||
John P. Byrnes |
29 | * | ||||||
Patrick J. OLeary |
50 | * | ||||||
Gary D. Blackford |
| * | ||||||
Steven E. Voskuil |
2,896 | * | ||||||
Rhonda D. Gibby |
594 | * | ||||||
Christopher M. Lowery |
446 | * | ||||||
John W. Wesley |
1,155 | * | ||||||
All directors, nominees and executive officers as a group (11 persons) |
15,138 | * |
(1) | An asterisk indicates that the percentage of common stock projected to be beneficially owned by the Halyard named individual following the distribution does not exceed one percent of Halyard common stock. |
(2) | The address for BlackRock, Inc. is 40 East 52nd Street, New York, NY 10022. The address and stock information above for BlackRock, Inc. is derived from the Schedule 13G/A filed by BlackRock, Inc. with the Securities and Exchange Commission on January 29, 2014. According to the filing, BlackRock, Inc. had sole voting power with respect to 22,360,615 shares of Kimberly-Clark common stock, sole dispositive power with respect to 26,611,531 shares of Kimberly-Clark common stock, and did not have shared voting or dispositive power as to any shares of Kimberly-Clark common stock. |
(3) | The address for Capital World Investors is 333 South Hope Street, Los Angeles, CA 90071. The address and stock information above for Capital World Investors is derived from the Schedule 13G filed by Capital World Investors with the Securities and Exchange Commission on February 13, 2014. According to the filing, Capital World Investors had sole voting power with respect to 25,860,100 shares of Kimberly-Clark common stock, sole dispositive power with respect to 25,860,100 shares of Kimberly-Clark common stock, and did not have shared voting or dispositive power as to any shares of Kimberly-Clark common stock. |
(4) | The address for State Street Corporation is State Street Financial Center, One Lincoln Street, Boston, MA 02111. The address and stock information above for State Street Corporation is derived from the Schedule 13G filed by State Street Corporation with the Securities and Exchange Commission on February 3, 2014. According to the filing, State Street Corporation had shared voting and dispositive power with respect to 19,174,415 shares of Kimberly-Clark common stock and did not have sole voting or dispositive power as to any shares of Kimberly-Clark common stock. |
(5) |
The address for The Vanguard Group is 100 Vanguard Boulevard, Malvern, PA 19355. The address and stock information for The Vanguard Group is based on the Schedule 13G filed by The Vanguard Group |
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with the SEC on February 11, 2014. According to the filing, The Vanguard Group had sole voting power with respect to 620,715 shares of Kimberly-Clark common stock, sole dispositive power with respect to 18,615,281 shares of Kimberly-Clark common stock, shared dispositive power with respect to 586,144 shares of Kimberly-Clark common stock and did not have shared voting power as to any shares of Kimberly-Clark 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 currently no outstanding options or warrants to purchase, or securities convertible into, any shares of Halyard common stock or preferred stock. In connection with the distribution, 4,500,000 shares of common stock will be authorized for the issuance of stock options, restricted stock units and other equity awards under the Halyard 2014 Plan. Based on approximately 372,114,350 shares of Kimberly-Clark common stock that we expect to be outstanding on the record date, approximately 46,514,294 shares of Halyard common stock will be outstanding immediately following the distribution. and there will be approximately 24,500 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 have been authorized 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.
135
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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Index to Financial Statements
Page | ||||
Health Care Business |
||||
Report of Independent Registered Public Accounting Firm |
F-2 | |||
Combined Financial Statements |
F-3 | |||
Combined Income Statement |
F-3 | |||
Combined Statement of Comprehensive Income |
F-4 | |||
Combined Balance Sheet |
F-5 | |||
Combined Statement of Invested Equity |
F-6 | |||
Combined Cash Flow Statement |
F-7 | |||
Notes to Combined Financial Statements |
F-8 | |||
Unaudited Interim Combined Financial Statements |
F-24 | |||
Combined Income Statement |
F-24 | |||
Combined Statement of Comprehensive Income |
F-25 | |||
Combined Balance Sheet |
F-26 | |||
Combined Cash Flow Statement |
F-27 | |||
Notes to Interim Unaudited Combined Financial Statements |
F-28 | |||
Halyard Health, Inc. |
||||
Report of Independent Registered Public Accounting Firm |
F-35 | |||
Balance Sheet as of April 30, 2014 |
F-36 | |||
Notes to the Financial Statement |
F-37 | |||
Unaudited Interim Balance Sheet |
F-38 | |||
Notes to the Unaudited Financial Statement |
F-39 |
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 |
||||||||||||
Unrealized currency translation adjustments |
(22.6 | ) | 6.9 | (10.1 | ) | |||||||
Cash flow hedges |
(7.1 | ) | 6.6 | (4.5 | ) | |||||||
|
|
|
|
|
|
|||||||
Total Other Comprehensive Income (Loss), Net of Tax |
(29.7 | ) | 13.5 | (14.6 | ) | |||||||
|
|
|
|
|
|
|||||||
Comprehensive Income |
$ | 124.9 | $ | 166.1 | $ | 127.8 | ||||||
|
|
|
|
|
|
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 |
|||||||||
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: |
||||||||||||
Unrealized currency translation adjustments |
| (10.1 | ) | (10.1 | ) | |||||||
Cash flow hedges, net of tax benefit of $1.9 |
| (4.5 | ) | (4.5 | ) | |||||||
|
|
|
|
|
|
|||||||
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: |
||||||||||||
Unrealized currency translation adjustments |
| 6.9 | 6.9 | |||||||||
Cash flow hedges, net of tax of $0.3 |
| 6.6 | 6.6 | |||||||||
|
|
|
|
|
|
|||||||
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: |
||||||||||||
Unrealized currency translation adjustments |
| (22.6 | ) | (22.6 | ) | |||||||
Cash flow hedges, net of tax of $1.7 |
| (7.1 | ) | (7.1 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2013 |
$ | 2,098.7 | $ | (19.6 | ) | $ | 2,079.1 | |||||
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-6
COMBINED CASH FLOW STATEMENT
Year Ended December 31 | ||||||||||||
(Millions of dollars) |
2013 | 2012 | 2011 | |||||||||
Operating Activities |
||||||||||||
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: |
||||||||||||
(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 | |||||||||
|
|
|
|
|
|
|||||||
Cash Provided by Operations |
223.8 | 202.6 | 139.6 | |||||||||
|
|
|
|
|
|
|||||||
Investing Activities |
||||||||||||
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 | |||||||||
|
|
|
|
|
|
|||||||
Cash Used for Investing |
(50.9 | ) | (40.3 | ) | (39.5 | ) | ||||||
|
|
|
|
|
|
|||||||
Financing Activities |
||||||||||||
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 | |||||||||
|
|
|
|
|
|
|||||||
Cash Used for Financing |
(180.0 | ) | (133.9 | ) | (115.1 | ) | ||||||
|
|
|
|
|
|
|||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
3.3 | (0.6 | ) | 0.8 | ||||||||
|
|
|
|
|
|
|||||||
(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 | |||||||||
|
|
|
|
|
|
|||||||
Cash and Cash Equivalents - End of Year |
$ | 44.1 | $ | 47.9 | $ | 20.1 | ||||||
|
|
|
|
|
|
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 |
||||||||||||||||||||||||
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 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
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 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 226.9 | $ | 58.7 | $ | 285.6 | $ | 237.4 | $ | 64.3 | $ | 301.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 |
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(Millions of dollars) |
2014 | 2013 | ||||||
Net Income |
$ | 36.9 | $ | 66.9 | ||||
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Other Comprehensive Income (Loss), Net of Tax |
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Unrealized currency translation adjustments |
3.8 | (14.0 | ) | |||||
Cash flow hedges |
4.2 | (4.3 | ) | |||||
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Total Other Comprehensive Income (Loss), Net of Tax |
8.0 | (18.3 | ) | |||||
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Comprehensive Income |
$ | 44.9 | $ | 48.6 | ||||
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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 |
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(Millions of dollars) |
2014 | 2013 | ||||||
Operating Activities |
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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: |
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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 | ) | |||||
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Cash Provided by Operations |
83.7 | 86.0 | ||||||
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Investing Activities |
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Capital spending |
(28.0 | ) | (25.0 | ) | ||||
Cash outflows for acquisitions and investments |
| (2.2 | ) | |||||
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Cash Used for Investing |
(28.0 | ) | (27.2 | ) | ||||
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Financing Activities |
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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 | ||||||
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Cash Used for Financing |
(50.8 | ) | (61.5 | ) | ||||
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Effect of Exchange Rate Changes on Cash and Cash Equivalents |
(0.5 | ) | 1.5 | |||||
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Increase (Decrease) in Cash and Cash Equivalents |
4.4 | (1.2 | ) | |||||
Cash and Cash Equivalents - Beginning of Period |
44.1 | 47.9 | ||||||
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Cash and Cash Equivalents - End of Period |
$ | 48.5 | $ | 46.7 | ||||
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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 |
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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 | ||||||||||||||||||
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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 | ) | ||||||||||||||
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Total |
$ | 243.8 | $ | 57.5 | $ | 301.3 | $ | 226.9 | $ | 58.7 | $ | 285.6 | ||||||||||||
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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 | ||||||
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617.8 | 772.5 | |||||||
Less accumulated depreciation |
(332.9 | ) | (447.6 | ) | ||||
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Total |
$ | 284.9 | $ | 324.9 | ||||
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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 | ||||||||
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Balance at June 30, 2014 |
$ | 683.7 | $ | 749.1 | $ | 1,432.8 | ||||||
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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 |
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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 | ||||||||||||
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Total |
$ | 325.9 | $ | 207.5 | $ | 325.7 | $ | 191.2 | ||||||||
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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 | ||||||
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Total |
$ | 152.4 | $ | 180.0 | ||||
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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 | ||||||
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Total |
$ | 95.2 | $ | 94.5 | ||||
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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) |
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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: |
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Unrealized currency translation adjustments |
| 3.8 | | (14.0 | ) | |||||||||||
Cash flow hedges, net of tax |
| 4.2 | | (4.3 | ) | |||||||||||
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Balance at End of Period |
$ | 2,088.9 | $ | (11.6 | ) | $ | 2,098.8 | $ | (8.2 | ) | ||||||
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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.
F-33
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 October 7, 2014, which is the date the combined financial statements are available to be issued.
F-34
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 |
F-35
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.
F-36
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.
F-37
BALANCE SHEET
(June 30, 2014 data is unaudited)
June 30, 2014 | April 30, 2014 | |||||||
(whole dollars) |
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ASSETS |
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Cash and cash equivalents |
$ | 149,295 | $ | 150,000 | ||||
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TOTAL ASSETS |
$ | 149,295 | $ | 150,000 | ||||
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TOTAL LIABILITIES |
$ | | $ | | ||||
STOCKHOLDER EQUITY |
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Common stock ($0.01 par value per share, 1,000 shares authorized, 1,000 shares issued and outstanding) |
10 | 10 | ||||||
Additional paid-in capital |
149,990 | 149,990 | ||||||
Accumulated other comprehensive income (loss) |
(705 | ) | | |||||
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Total stockholders equity |
149,295 | 150,000 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDER EQUITY |
$ | 149,295 | $ | 150,000 | ||||
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See Notes to Financial Statement.
F-38
NOTES TO THE UNAUDITED 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 June 30, 2014.
Subsequent Events
The Company has evaluated all events that have occurred subsequent to June 30, 2014 through October 7, 2014, which is the date the financial statement is available to be issued.
F-39