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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 for products they purchase from us 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~~Most of our manufacturing facilities are outside the United States in Honduras, Mexico, Thailand, France, Germany and ~~Thailand~~Tunisia. We also use contract manufacturers to manufacture products on our behalf in China, Indonesia and Malaysia and source many of our raw materials and components from foreign suppliers. We distribute and sell our products in over 100 countries. In ~~2014,~~2016, approximately 25% 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 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, results of operations, financial condition and cash flows. Our success depends, in part, on our ability to anticipate and prevent or mitigate these risks and manage difficulties as they arise.

We may be subject to trade protection measures that are being contemplated by the United States Government that may result in new or higher tariffs, import-export restrictions and taxes. Changes in, or revised interpretations of import-export laws or international trade agreements, along with new or increased tariffs, trade restrictions or taxation on income earned or goods manufactured outside the United States may have a material adverse effect on our business, financial condition, results of operations and cash flows.

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,



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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~~



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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, Australian dollar 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 in attempts 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 identify and then properly assess and value the potential business opportunity or to successfully 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 management’s 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 we will be able to identify and successfully make strategic acquisitions of, investments in and alliances with new medical technologies or that any past or future acquisition, investment or alliance will be cost-effective, profitable or successful.

We have a significant amount of debt that could adversely affect our business.

Our indebtedness includes $250 million of 6.25% senior unsecured notes and $339 million owed on a term loan. This debt 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 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.~~all.

We intend to increase our investment in research and development activities and make acquisitions. ~~Prior to the Spin-off, our working capital and capital expenditure requirements were met from cash flow generated by our businesses and from Kimberly-Clark. Going forward,~~Accordingly, 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.~~

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.



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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.



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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.

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, including personal health 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 Spin-off and Our Separation from Kimberly-Clark~~

~~We had no operating history as a separate company prior to the Spin-off, and prior~~Prior to the Spin-off, our historical and pro-forma financial data were 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 and consolidated financial data included in this annual report on Form 10-K presents ~~the~~our results of operations, ~~and~~ financial position ofand cash flows as a stand-alone public company in 2016, 2015 and for the period from November 1, 2014 through December 31, 2014, but as Kimberly-Clark’s Health Care business through October 31, 2014 (the Spin-off date) ~~and our results as a stand-alone public company from November 1, 2014 through December 31, 2014.~~. Prior to the Spin-off date, the historical combined financial data presented the results and financial position of Kimberly-Clark’s Health Care business that was transferred to us at the Spin-off date as that business was operated by Kimberly-Clark. Our historical combined financial data included in this Form 10-K for the periods prior to the Spin-off are derived from the historical consolidated financial statements and accounting records of Kimberly-Clark. Accordingly, this data may not be indicative of our future performance, or 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 all of the periods presented. ~~This is because, among other things:~~

Prior to the Spin-off, 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. Kimberly-Clark will continue to provide some of these functions to us for a limited period of time (see Note 2, “Separation from Kimberly-Clark,” to the consolidated and combined financial statements). Our historical 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.

Prior to the Spin-off, our business was integrated with the other businesses of Kimberly-Clark. Historically, we shared economies of scale in costs, employees, vendor relationships and customer relationships with Kimberly-Clark. At the time of the Spin-off, we entered into transition agreements that govern certain commercial and other relationships between us and Kimberly-Clark after the distribution. Those transitional arrangements do not fully capture the benefits our business 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.

Prior to the Spin-off, our working capital requirements and capital for our general corporate purposes, including acquisitions, research and development and capital expenditures, were satisfied as part of the corporate-wide cash management policies of Kimberly-Clark. Following the Spin-off, we may need to obtain additional financing from banks, public offerings or private placements of debt or equity securities, strategic relationships or other arrangements.



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Subsequent to the Spin-off, the cost of capital for our business is higher than Kimberly-Clark’s cost of capital prior to the distribution due to, among other reasons, our credit rating being lower than Kimberly-Clark’s.

~~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 see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated and Combined Financial Statements and accompanying notes included elsewhere in this annual report on Form 10-K.

~~Following our separation from Kimberly-Clark, we have a significant amount of debt that could adversely affect our business.~~

In connection with the Spin-off, we issued $250 million of 6.25% senior unsecured notes and obtained a $390 million term loan. This debt 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.~~

~~Prior to the Spin-off, we had not previously operated as an independent company and our management team has been assembled for only a short time.~~

Prior to the Spin-off, we had 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 Spin-off, we became 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 have adopted separate stock-based and performance-based incentive plans for our employees and have developed our own compliance and administrative procedures necessary for a publicly-held company. We entered into an agreement with Kimberly-Clark in which Kimberly-Clark will provide certain transition services to us. See Note 2, “Separation from Kimberly-Clark,” to the Consolidated and Combined financial statements. 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, there is no assurance that as an independent company, our aggregate results of operations will~~continue at the same level as in the past. Moreover, the inability of our Board of Directors or senior management to function cohesively could delay or prevent us from implementing fully our business strategy, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.

~~We could incur significant tax liabilities if the distribution becomes a taxable event.~~

In connection with the Spin-off, Kimberly-Clark received an opinion from Baker Botts L.L.P. to the effect that the distribution of Halyard common stock qualified as a tax-free spin-off under Sections 368(a)(1)(D) and 355 of the Code. The opinion relied 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



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~~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-Clark’s 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.

~~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 entered into with Kimberly-Clark, we are 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, 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. Under the tax matters agreement, for the two-year period following the distribution date (the “Restricted Period”), Halyard is prohibited, except in certain circumstances, from, among other things:

selling 50 percent or more of the assets of the healthcare 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 have the ability to engage in certain otherwise prohibited transactions, such as additional stock issuances or stock repurchases during the Restricted Period, provided we first deliver to Kimberly-Clark a tax opinion that doing so will not adversely affect the tax-free treatment of the separation and the distribution.

The foregoing restrictions may limit our ability to pursue certain strategic transactions or other transactions that we believe to be in the best interests of our stockholders or that might increase the value of our business. In addition, under the tax matters agreement, we are 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.~~

We are installing and implementing 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-Clark’s 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-Clark’s information technology services, or our failure to implement the new systems and replace Kimberly-Clark’s 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-Clark’s other businesses.~~

There is no assurance that we will realize the potential benefits that we expect from our separation from Kimberly-Clark. The separation and Spin-off is expected to provide the following benefits, among others: (1) the ability of Halyard to focus on its



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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.

~~Following the Spin-off, we may not achieve these and other anticipated benefits for a variety of reasons, including, among others:~~

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 transition to a stand-alone company may require significant amounts of management’s time and effort, which may divert management’s attention away from Halyard’s business,~~

~~certain costs and liabilities that were otherwise less significant to Kimberly-Clark as a whole are more significant to us as a stand-alone company,~~

~~we may be more susceptible to market fluctuations and other adverse events than if we were still a part of Kimberly-Clark, and~~

~~our business is significantly less diversified than Kimberly-Clark’s business prior to the Spin-off.~~

If we fail to achieve some or all of the benefits expected to result from the separation and distribution, or if such benefits are delayed, our business, financial condition, results of operations and cash flows could be adversely affected and the value of Halyard common stock could be adversely impacted.

~~The transition services being 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 entered into a transition services agreement with Kimberly-Clark pursuant to which we and Kimberly-Clark and both our respective affiliates are providing to each other certain transition services for a period of time following the Spin-off. These services include, employee payroll and benefits administration, information technology services, financial 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.

~~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 were able to take advantage of Kimberly-Clark’s 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 Spin-off, 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

We cannot guarantee that our stock price will not decline or fluctuate significantly.

~~There has been no prior trading market for Halyard common stock.~~ The price at which Halyard common stock trades has and may continue to fluctuate significantly. The market price, or fluctuations in price, for Halyard common stock may be negatively influenced by many factors, including:

actual or unanticipated fluctuations in our quarterly and annual operating results,

our failure to achieve the quarterly financial results forecast provided from time to time by the securities analysts who cover our stock,

the outcome of litigation and enforcement actions,

developments generally affecting the healthcare industry,

changes in market valuations of comparable companies,

~~the amount of our indebtedness,~~



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the amount of our indebtedness,

general economic, industry and market conditions,

the depth and liquidity of the market for Halyard common stock,

price fluctuations in key commodities,

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.

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.

Your percentage of ownership in Halyard may be diluted in the future.

In the future, your percentage ownership in Halyard may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we may grant to our directors, officers and employees. We also anticipate that our compensation committee will grant stock options or other equity based awards to our employees 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 authorizes 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.

Certain provisions of our certificate of incorporation and by-laws and of Delaware law may 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 contained in our certificate of incorporation and by-laws and those contained in Delaware law may have the effect of delaying or preventing changes in control if our Board of Directors determines that such changes in control are not in the best interests of us and our stockholders. These provisions include, among other things, the following:

the division of our Board of Directors into three classes, each with three-year staggered terms,

the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval,

the inability of our stockholders to call a special meeting of stockholders,

stockholder action may be taken only at a special or regular meeting of stockholders,

advance notice procedures for nominating candidates to our Board of Directors or presenting matters at stockholder meetings,

stockholder removal of directors only for cause and only by a supermajority vote,

the ability of our Board of Directors, and not our stockholders, to fill vacancies on our Board of Directors, and



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supermajority voting requirements to amend our by-laws and certain provisions of our certificate of incorporation and to engage in certain types of business combinations.



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While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our Board of Directors, they could enable the Board of Directors to hinder or frustrate a transaction that some, or a majority, of the stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. We are also subject to Delaware laws that could have similar effects. One of these laws prohibits us from engaging in a business combination with a significant stockholder unless specific conditions are met.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We own or lease operating facilities located throughout the world that handle manufacturing production, assembly, research, quality assurance testing, distribution and packaging of our products. We believe our facilities are suitable and adequate for our present operations. We ~~have entered into a commercial~~ lease ~~related to~~ our principal executive offices that are located in Alpharetta, Georgia. The locations of our principal production facilities owned or leased by us around the world are as follows:



Segment	Location	Country	Owned/Leased
Medical Devices	Nogales	Mexico	Owned
Medical Devices	Nogales	Mexico	Leased
Medical Devices	Tucson, Arizona	USA	Leased
Medical Devices	Magdalena	Mexico	Leased
Medical Devices	Tijuana	Mexico	Leased
Medical Devices	Buffalo Grove, Illinois	USA	Leased
Medical Devices	Weinheim	Germany	Leased
Medical Devices	Marseille	France	Leased
Medical Devices	Sousse	Tunisia	Leased
S&IP	Tambol Prik	Thailand	Owned
S&IP	Lexington, North Carolina	USA	Owned
S&IP	Acuña	Mexico	Owned
S&IP	Nogales	Mexico	Leased
S&IP	~~San Pedro Sula~~Villanueva	Honduras	Leased
~~Medical Devices~~	~~Nogales~~	~~Mexico~~	~~Owned~~
~~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~~

ITEM 3. 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. Under the terms of the distribution agreement we entered into with Kimberly-Clark prior to the Spin-off, legal proceedings, claims and other liabilities that are primarily related to our business are our responsibility and we are obligated to indemnify and hold Kimberly-Clark harmless for such matters (“Indemnification Obligation”). For the years ended December 31, 2016 and 2015, we have incurred $20 million and $17 million, respectively, related to these matters.

The only exception to ~~this general obligation~~the Indemnification Obligation relates to the pain pump litigation referenced in the paragraph 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 cash flows.

this paragraph. We are one of several manufacturers of continuous infusion medical devices, such as our ON-Q PAINBUSTER pain pumps, that are involved in several different pending or threatened litigation matters from multiple plaintiffs alleging that use of the continuous infusion device to deliver anesthetics directly into a synovial joint after surgery resulted in postarthroscopic glenohumeral chondrolysis, or a disintegration of the cartilage covering the bones in the joint (typically, in the shoulder). Plaintiffs generally seek monetary damages and attorneys’ fees. While Kimberly-Clark ~~retained~~is retaining the liabilities related to these matters, ~~that were asserted prior to the Spin-off,~~ the distribution agreement between us and Kimberly-Clark ~~provided~~provides that we will indemnify Kimberly-Clark for any such claims or causes of actions arising after the Spin-off.



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We have an Indemnification Obligation for, and have assumed the defense of, the matter styled Bahamas Surgery Center, LLC v. Kimberly-Clark Corporation and Halyard Health, Inc., No. 2:14-cv-08390-DMG-SH (C.D. Cal.) (“Bahamas”), filed on October 29, 2014. In that case, the plaintiff brings a putative class action asserting claims for common law fraud (affirmative misrepresentation and fraudulent concealment) and violation of California’s Unfair Competition Law in connection with our marketing and sale of MicroCool surgical gowns. On June 1, 2016, the plaintiff moved for class certification of a California-only damages class and a California-only injunctive relief class. Although the plaintiff did not also move for certification of a nationwide class to determine liability, damages, or injunctive relief, it did move for certification of a nationwide “issue” class purporting to resolve certain issues allegedly “common” to members of that class. On July 8, 2016, we moved for summary judgment. On November 8, 2016, the court granted in part and denied in part the plaintiff’s motion for class certification. The court certified a California-only class for damages and injunctive relief arising from fraud by omission, but it rejected certification of a California-only class arising from affirmative fraud, and it also rejected certification of a nationwide “issue” class. The court also rejected the plaintiff’s request for “full restitution” damages, meaning the full value of the gowns. Instead, the court found any damages would be based on the difference between the purchase price of the gowns and what the purchase price would have been for gowns with no AAMI rating. On November 15, 2016, the court denied our motion for summary judgment. The parties remain engaged in discovery. The trial is scheduled to begin on March 28, 2017. We intend to continue our vigorous defense of the matter.

In June 2015, we were served with a subpoena from the Department of Veterans Affairs Office of the Inspector General (“VA OIG”) seeking information related to the design, manufacture, testing, sale and promotion of MicroCool and other Company surgical gowns, and, in July 2015, we also became aware that the subpoena and an earlier VA OIG subpoena served on Kimberly-Clark requesting information about gown sales to the federal government are related to a United States Department of Justice (“DOJ”) investigation. In May 2016, we were also served with a subpoena from the Department of Justice seeking further information related to Company gowns. The Company is cooperating with the VA OIG’s request and the DOJ investigation.

On October 12, 2016, after the DOJ submitted filings on behalf of itself and various States declining to intervene in two qui tam matters, both matters were unsealed. One of those matters is U.S. ex rel. Shahinian, et al. v. Kimberly-Clark Corporation, No. 2:14-cv-08313-JAK-JPR (C. D. Cal.) (“Shahinian”), filed on October 27, 2014. The other of those matters is U.S. ex rel. Edgett, et al. v. Kimberly-Clark Corporation, Halyard Health, Inc., et al, No. 3:15-cv-00434-B (N.D. Tex.) (“Edgett”), filed on February 9, 2015. Both cases allege, among other things, violations of both the federal and state False Claims Acts in connection with the marketing and sale of certain surgical gowns. On November 7, 2016, Dr. Shahinian served his complaint on Kimberly-Clark, and on February 6, 2017, he served an amended complaint on Kimberly-Clark. On January 9, 2017, Mr. Edgett served his complaint on both Kimberly-Clark and Halyard Health. We may have an Indemnification Obligation for the two matters under the distribution agreement with Kimberly-Clark. We intend to vigorously defend the cases.

We were served with a complaint in a matter styled Jackson v. Halyard Health, Inc., Robert E. Abernathy, Steven E. Voskuil, et al., No. 1:16-cv-05093-LTS (S.D.N.Y.), filed on June 28, 2016. In that case, the plaintiff brings a putative class action against the Company, our Chief Executive Officer, our Chief Financial Officer and other defendants, asserting claims for violations of the Securities Exchange Act, Sections 10(b) and 20(a). The plaintiff alleges that the defendants made misrepresentations and failed to disclose certain information about the safety and effectiveness of our MicroCool gowns and thereby artificially inflated the Company’s stock prices during the respective class periods. The alleged class period for purchasers of Kimberly-Clark securities who subsequently received Halyard Health securities is February 25, 2013 to October 21, 2014, and the alleged class period for purchasers of Halyard Health securities is October 21, 2014 to April 29, 2016. On February 16, 2017, we moved to dismiss the case. We intend to continue our vigorous defense of this matter.

We were also served with a complaint in a matter styled Margaret C. Richardson Trustee of the Survivors Trust Dated 6/12/84 for the Benefit of the H&M Richardson Revocable Trust v. Robert E. Abernathy, Steven E. Voskuil, et al., No. 1:16-cv-06296 (S. D. N. Y.) (“Richardson”), filed on August 9, 2016. In that case, the plaintiff sues derivatively on behalf of Halyard Health, Inc., and alleges that the defendants breached their fiduciary duty, were unjustly enriched, and violated Section 14(A) of the Securities and Exchange Act in connection with Halyard Health, Inc.’s marketing and sale of MicroCool gowns. We were also served with a complaint in a matter styled Kai Chiu v. Robert E. Abernathy, Steven E. Voskuil, et al, No. 2:16-cv-08768 (C.D. Cal.), filed on November 23, 2016. In that case, the plaintiff sues derivatively on behalf of Halyard Health, Inc., and makes allegations and brings causes of action similar to those in Richardson, but the plaintiff also adds causes of action for abuse of control, gross mismanagement, and waste of corporate assets. We intend to vigorously defend these matters.



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We were also served with a complaint in the matter styled Medline Industries, Inc. v. Kimberly-Clark Corporation, Halyard Health, Inc., et al., No. 2:16-cv-08571 (C. D. Cal.). In that case, the plaintiff makes allegations similar to those in Bahamas, Shahinian, and Edgett, and brings causes of action under federal and state false advertising laws and state unfair competition laws. We may have an Indemnification Obligation for this matter under the distribution agreement with Kimberly-Clark. We intend to vigorously defend it.

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~~may be involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.

We maintain general and professional liability, product liability and other insurance in an amount that we believe is reasonably adequate to insulate us from material liability for claims. However, our insurance policies may not cover all of these matters and may not fully cover liabilities arising out of these matters. In addition, we may be obligated to indemnify our directors and officers against these matters. Although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on our financial condition, results of operations or liquidity. However the above matters, regardless of the outcome, could disrupt our business and result in substantial costs and diversion of management attention. As of December 31, 2016 and 2015, we have an accrued liability which management believes is adequate for the matters described herein. The accrued liability is included in “Accrued Expenses” in the consolidated balance sheet in Item 8 of this report.



	17	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

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.

~~Table of Contents~~

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

The names and ages of our executive officers as of ~~March 13, 2015,~~February 27, 2017, together with certain biographical information, are as follows:



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 and General Counsel ~~and Chief Ethics and Compliance Officer~~

Robert E. Abernathy, age ~~60, is~~62, has been the Chairman of our Board of Directors and our Chief Executive ~~Officer. Prior to the~~Officer since our Spin-off hefrom Kimberly-Clark on October 31, 2014. He served as President Global Health Care ~~since~~of Kimberly-Clark from June ~~2014.~~2014 until the Spin-off. 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 Kimberly-Clark’s Group President - Europe, Global Nonwovens, and Continuous Improvement & Sustainability from 2012 to November 2013. He had overall responsibility for Kimberly-Clark’s 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~~was selected to serve as the Chairman of our Board of Directors due to his



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leadership experience as an executive vice president of Kimberly-Clark, knowledge of, and experience in, the healthcare industry, international experience and governance and public company board experience.

Rhonda D. Gibby, age ~~46,~~49, is our Senior Vice President and Chief Human Resources Officer. Prior to the Spin-off, she had been serving as Kimberly-Clark’s Vice President - Human Resources for its global business-to-business units (K-C Professional and Kimberly-Clark’s Health Care business) as well as the leader of Kimberly-Clark’s global labor relations since 2010. Prior to that, Ms. Gibby served as Kimberly-Clark’s Global Vice President of Talent Management from 2008 to 2010. Prior to joining Kimberly-Clark in 2005, Ms. Gibby held leadership roles in operations, sales and human resources in a variety of industries and employers, including most recently at Covidien, a global healthcare products company.

Christopher G. Isenberg, age ~~47,~~50, is our Senior Vice President - Global Supply Chain and Procurement. Prior to the Spin-off, he had been with Kimberly-Clark for over 25 years, serving most recently as Kimberly-Clark’s 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-Clark’s Everett, Washington Pulp and Tissue Mill. Prior to that, he served in various manufacturing operations, marketing and other roles for Kimberly-Clark’s Family Care business.

Christopher M. Lowery, age ~~50,~~53, is our Senior Vice President and Chief Operating Officer, and in that role has responsibility for leading worldwide sales, marketing, research and development, quality, regulatory and clinical affairs. Prior to the Spin-off, he had been serving as Kimberly-Clark’s 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 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,~~51, is our Senior Vice President - Business Strategy. Prior to the Spin-off, he had been serving as Kimberly-Clark’s Senior Director of Strategy - Global Health Care since January 2012 and before that served as Senior Director of Finance for Kimberly-Clark’s 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



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1987 and, while spending the majority of time in Kimberly-Clark’s 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 ~~46,~~48, is our Senior Vice President and Chief Financial Officer. Prior to the Spin-off, he had been serving as Vice President - Finance for Kimberly-Clark International since September 2011 and previously served as Kimberly-Clark’s 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-Clark’s businesses worldwide. Mr. Voskuil also served as the executive sponsor for talent development for the company’s Global Finance organization.

John W. Wesley, age ~~56,~~58, is our Senior Vice President and General ~~Counsel and Chief Ethics and Compliance Officer.~~Counsel. Prior to the Spin-off, he had been serving as Kimberly-Clark’s 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.



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PART II


ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Halyard common stock is listed on the New York Stock ~~Exchange. The~~Exchange (“NYSE”) under the ticker symbol ~~is HYH.~~

“HYH”. The following table sets forth the quarterly high and low sales ~~price~~prices per share of our common stock ~~was $46.14 and $35.56, respectively, during~~on the ~~fourth quarter of 2014, beginning~~NYSE:



	2016				2015
Three Months Ended:	High		Low		High		Low
March 31	$	33.73	$	22.76	$	49.95	$	42.29
June 30	34.10		26.05		50.92		40.14
September 30	37.31		32.50		41.84		27.76
December 31	39.54		31.59		34.88		26.58

We did not pay any dividends on ~~October 21, 2014, the date on which~~ our common stock ~~began trading~~in the years ended December 31, 2016 and 2015 and we do not expect to pay any cash dividends on ~~a when-issued basis on~~our common stock in the ~~New York Stock Exchange.~~foreseeable future.

As of ~~March 6, 2015,~~February 15, 2017, we had ~~18,179~~16,195 holders of record of our common stock.

For information relating to securities authorized for issuance under equity compensation plans, see Part III, Item 12 of this Form 10-K.

Performance

The graph below compares the cumulative total return of our common stock from October 21, 2014, the first day of trading for our common stock on a when-issued basis, through December 31, ~~2014~~2016 with the cumulative return of companies comprising the Standard and Poor’s S&P MidCap 400 Index and the S&P 500 Health Care Equipment and Services Index. The graph plots the change in value of an initial investment of $100 in each of our common stock, the S&P MidCap 400 Index and the S&P 500 Health Care Equipment and Services Index over the indicated time periods and assumes reinvestment of all dividends, if any, paid on the securities. We have not paid any cash dividends, and therefore, the cumulative total return calculation for us is based solely upon stock price appreciation and not upon reinvestment of cash dividends. The stock price performance shown on the graph is not necessarily indicative of future price performance.

10/21/14 10/28/14 11/4/14 11/11/14 11/18/14 11/25/14 12/2/14 12/9/14 12/16/14 12/23/14 12/31/14
HYH $ 100.00
$ 92.88
$ 90.17
$ 89.02
$ 95.93
$ 94.68
$ 91.54
$ 96.10
$ 93.98
$ 104.54
$ 110.90
S&P MidCap 400 100.00
102.46
103.52
105.00
105.08
106.36
104.82
105.49
101.64
106.88
107.89
S&P 500 Health Care Equipment and Services 100.00
102.18
104.50
105.49
107.68
108.03
110.10
110.71
105.98
111.01
110.93



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~~Table of Contents~~



	HYH		S&P MidCap 400		S&P 500 Health Care Equipment and Services
October 21, 2014	$	100.00	$	100.00	$	100.00
December 31, 2014	110.90		107.89		110.93
March 31, 2015	120.00		114.92		122.70
June 30, 2015	98.78		115.04		127.35
September 30, 2015	69.37		106.70		115.26
December 31, 2015	81.49		111.07		124.40
March 31, 2016	70.07		116.63		124.08
June 30, 2016	79.32		122.77		135.49
September 30, 2016	84.54		129.40		137.01
December 31, 2016	90.20		140.54		133.59


ITEM 6.	SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” in this annual report on Form 10-K (in millions, except per-share amounts):



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	Year Ended December 31,										Year Ended December 31,
	2014		2013		2012		2011		2010		2016		2015			2014		2013		2012
Income Statement Data:
Net Sales	$	1,672.1	$	1,677.5	$	1,684.0	$	1,659.9	$	1,495.8	$	1,592.3	$	1,574.4		$	1,672.1	$	1,677.5	$	1,684.0
Gross Profit	548.6		612.2		602.5		590.8		543.6		557.9		531.6			548.6		612.2		602.5
Operating Profit^(a)	94.3		225.3		228.0		210.7		157.6
Income Before Income Taxes	91.2		227.8		229.8		214.6		159.9
Net Income^(a)	27.1		154.6		152.6		142.4		88.0
Earnings Per Share
Operating Profit (Loss)											87.4		(377.7		)	94.3		225.3		228.0
Income (Loss) Before Income Taxes											55.3		(410.5		)	91.2		227.8		229.8
Net Income (Loss)^(a)(b)(c)											39.8		(426.3		)	27.1		154.6		152.6
Earnings (Loss) Per Share
Basic	$	0.58	$	3.32	$	3.28	$	3.06	$	1.89	$	0.85	$	(9.15	)	$	0.58	$	3.32	$	3.28
Diluted	$	0.58	$	3.32	$	3.28	$	3.06	$	1.89	$	0.85	$	(9.15	)	$	0.58	$	3.32	$	3.28

(a)

Net income in 2016 includes $14 million, net of tax, of spin-related transition expenses, $13 million, net of tax, of costs related to legal expenses and litigation (see “Commitments and Contingencies” in Note 11 to the consolidated financial statements in Item 8 of this report) and $11 million, net of tax, of costs related to the acquisition of Medsystems (see “Business Acquisition” in Note 2. to the consolidated financial statements in Item 8 of this report).


(b)	Net loss in 2015 includes a $474 million goodwill impairment charge, $33 million, net of tax, of spin-related transition expenses and $11 million, net of tax, of costs related to legal expenses and litigation partially offset by a $8 million net gain on the disposal of one of our exam glove manufacturing facilities in Thailand.

(c)

Net income in 2014 includes charges of $88 million, net of tax, related to the Spin-off ~~(see Note 2, “Separation from Kimberly-Clark”)~~ and $47 million, net of tax, related to our strategic changes to our manufacturing footprint ~~(see Note 3, “Manufacturing Footprint Strategic Changes”)~~ and $8 million, net of tax, related to post Spin-off transition ~~charges (see Note 2, “Separation from Kimberly-Clark”).~~charges.


	As of December 31,										As of December 31,
	2014		2013		2012		2011		2010		2016		2015		2014		2013		2012
Balance Sheet Data:
Cash	$	149.0	$	44.1	$	47.9	$	20.1	$	34.3	$	113.7	$	129.5	$	149.0	$	44.1	$	47.9
Property, Plant and Equipment, Net	277.8		324.9		325.7		320.0		326.4		260.8		279.5		277.8		324.9		325.7
Total Assets	2,527.6		2,484.0		2,534.2		2,509.5		2,518.3		2,071.8		2,000.2		2,517.9		2,484.0		2,534.2
Debt	636.2		11.9		75.9		100.0		88.2		579.0		578.1		626.5		11.9		75.9
Stockholders’ equity	1,491.2		—		—		—		—
Stockholders’ Equity											1,102.5		1,055.3		1,491.2		—		—
Kimberly-Clark’s Net Investment	—		2,098.7		2,045.6		2,000.9		1,981.6		—		—		—		2,098.7		2,045.6



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ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

This ~~management’s discussion~~Management’s Discussion and ~~analysis~~Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide investors with an understanding of our recent performance, financial condition and prospects and should be read in conjunction with the consolidated ~~and combined~~ financial statements contained in Item 8, “Financial Statements and Supplementary Data” in this annual report on Form 10-K. This ~~management’s discussion and analysis~~MD&A represents the global operations of Halyard and its subsidiaries as an independent publicly-traded company following ~~the Spin-off,~~our spin-off from Kimberly-Clark (the “Spin-off”), and a combined reporting entity comprising the financial position, results of operations and cash flows of Kimberly-Clark’s Health Care business prior to the Spin-off. The results of operations of our business after the Spin-off will be significantly different than the results of operations of our business prior to the Spin-off. This difference results from, among other things, the impact of debt 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. The following will be discussed and analyzed:

Acquisition of Medsystems Holdings, Inc.

Overview of Business

~~Separation from Kimberly-Clark~~

~~Spin-Related Transaction and Transition Costs~~

Results of Operations and Related Information

Unaudited Quarterly Data

Liquidity and Capital Resources

Critical Accounting Policies and Use of Estimates

Legal Matters

Information Concerning Forward Looking Statements

Acquisition of Medsystems Holdings, Inc.

On May 2, 2016, we acquired all of the issued and outstanding capital stock of Medsystems Holdings, Inc. (“Medsystems”) a Delaware corporation, for a purchase price of $175 million, net of cash acquired (the “Acquisition”). The Acquisition was funded with a combination of cash on hand and our revolving credit facility (see “Debt” in Note 6 to the consolidated financial statements in Item 8 of this report). Medsystems owns and conducts its primary business through CORPAK Medsystems (Medsystems and CORPAK Medsystems hereinafter referred to as “Corpak”). Corpak’s innovative enteral access feeding solutions and portfolio of nasogastric feeding tubes complement our existing enteral feeding products and create a complete offering of enteral feeding solutions within our Medical Devices segment. Upon Acquisition, we initiated activities to integrate the operations of Corpak into our company. These activities include, but are not limited to, integration of corporate functions, information technology and alignment with our operations.

In June 2016, we initiated a restructuring plan to close the Corpak corporate headquarters and operating facility in Buffalo Grove, Illinois and consolidated operations into our existing corporate and operational facilities by the third quarter of 2017 (the “Plan”). For the year ended December 31, 2016, we have accrued $4 million for severance and benefits for employees impacted by the Plan. For the year ended December 31, 2016, we have paid $1 million to affected employees and the remaining accrual for severance and employee benefits was $3 million as of December 31, 2016.

For the year ended December 31, 2016, we have incurred $18 million for the acquisition, integration and restructuring activities described above, consisting primarily of severance and benefits, consulting, legal and other costs. These costs are included in “Cost of products sold” and “Selling and general expenses” in the accompanying consolidated income statement.

Overview of Business

Halyard is a ~~global~~medical technology company ~~which seeks to advance health~~focused on eliminating pain, speeding recovery and ~~healthcare by~~ preventing infection ~~eliminating pain~~for healthcare providers and ~~speeding recovery. Our products and solutions~~patients. We are ~~designed~~committed to ~~address~~addressing some of today’s most important healthcare needs, ~~namely, preventing infection and~~such as reducing the use of ~~narcotics~~opioids while helping patients move from surgery to recovery. ~~We market~~Our Medical Devices 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”) business segments develop, manufacture and market clinically superior solutions around the globe.

Consolidated net sales increased $18 million to $1.6 billion in the year ended December 31, 2016 driven primarily by the acquisition of Corpak, which provided $36 million of incremental net sales, along with improved volume across all product categories in the Medical ~~Devices.~~Devices segment. The incremental net sales from Corpak was partially offset by lower sales of rolled

~~Separation from Kimberly-Clark~~

In November 2013, Kimberly-Clark announced its intention to evaluate a potential tax-free Spin-off of our business. The Spin-off was completed on October 31, 2014 and at that time we became a stand-alone publicly-traded company. Prior to the Spin-off, we engaged in a series of transactions with Kimberly-Clark that were designed to transfer ownership of Kimberly-Clark's Health Care business to us. Prior to the Spin-off, we borrowed $640 million through the issuance of senior unsecured notes and a secured term loan. We used the net proceeds from the senior unsecured notes and the secured term loan to fund a portion of a $680 million cash distribution we made to Kimberly-Clark prior to the Spin-off. Following the Spin-off, we became a separate public company, and Kimberly-Clark has no continuing stock ownership in us.

Prior to the Spin-off, we entered into a distribution agreement with Kimberly-Clark. In connection with the Spin-off, we also entered into various other agreements to effect the separation of our business from Kimberly-Clark's other businesses and set forth our contractual relationships with Kimberly-Clark after the Spin-off. These agreements provide for the allocation, between us and Kimberly-Clark, of Kimberly-Clark's 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 Spin-off. The agreements include a transition services agreement, a tax matters agreement, an employee matters agreement, intellectual property agreements and manufacturing and supply agreements.

Upon the Spin-off, we assumed responsibility for all of our stand-alone public company costs, including the costs of corporate services provided by Kimberly-Clark prior to the Spin-off. The corporate services provided to us include executive management, supply chain, information technology, legal, finance and accounting, investor relations, human resources, risk



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management, tax, treasury and other services. We estimate that our aggregate annual expense for these costs will be $146 million, including incremental cash expenses of $40 million per year and $11 million per year of additional depreciation expense. In addition, as a result of the separation and Spin-off we expectnon-woven materials to incur additional ongoing net expenses that we estimate will be approximately $29 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 sales to Kimberly-Clark.

~~Spin-Related Transaction and Transition Costs~~

We expect to incur $60 to $75 million of transitional costs following the Spin-off through 2016 to establish our own capabilities as a stand-alone entity. These costs are related primarily to the activities described below. Through the Spin-off date, we incurred $89 million of transaction-related costs.

~~Completion of the Sale of Disposable Glove Facility~~

~~In 2014,~~ Kimberly-Clark, initiated a plan to exit one of the disposable glove facilities in Thailand and outsource the related production to improve the underlying profitability and return on invested capital of our surgical and infection prevention business. The plan resulted in a reduction of our workforce by approximately 2,500 positions and cumulative charges of $57 million ($47 million after-tax) through the Spin-off date that were recognized in cost of sales. The charges consisted of non-cash asset impairment of $42 million, accelerated depreciation of $10 million and workforce reduction and other exit cash costs of $5 million.

The asset impairment charge was based on the excess of the carrying value of the impacted asset group of about $94 million over its fair value of $52 million. 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. The assets are reported in the accompanying consolidated and combined balance sheet in “Assets Held for Sale.”

Following the Spin-off, we incurred additional costs of $3 million ($2 million net of tax) primarily for accelerated depreciation through December 8, 2014. Payments of $5 million were made for severance and other costs in 2014 and there were no remaining accrued expenses related to the sale as of December 31, 2014.

~~On December 8, 2014, we entered into a definitive agreement to sell the disposable glove facility to a third party. We received advance cash payments of $8 million before the end of 2014,~~ which is included in ~~“Accrued Expenses”~~“Corporate and Other,” and price loss in the ~~accompanying balance sheet.~~S&IP segment. The ~~net book value of the assets are classified as “Assets Held for Sale”~~S&IP market remains challenging. However, we continue to defend our market positions and have introduced 11 new products, including five in the ~~accompanying consolidated~~Medical Devices business and ~~combined balance sheet. The sale closed in January 2015, resulting in a gain on sale of $12 million, which was recorded~~six in the ~~first quarter~~S&IP business.

Consolidated operating profit was $87 million for the year ended December 31, 2016 compared to an operating loss of ~~2015.~~$378 million in the prior year. The primary driver of last year’s operating loss was a goodwill impairment charge of $474 million. Other items that impacted operating profit in 2016 and 2015 include the following:

~~Manufacturing Alignment, Marketing and Rebranding and Incremental Transition Services from Kimberly-Clark~~

~~As a result~~Spin-related costs: In the year ended December 31, 2016, we incurred $21 million of ~~the Spin-off,~~spin-related costs, primarily for rebranding activities. Efforts to transition all of our products to Halyard-branded products are substantially complete. However, we ~~are making changes~~will continue to our plant and equipment, primarily in North America to align with our manufacturing requirements. These changes will include modifications to certain equipment and the movement of health-care equipment from Kimberly-Clark locations to Halyard facilities.

We are undertaking efforts to ensure our customers transition from the Kimberly-Clark brand to our Halyard-branded products. We have entered into a royalty agreement under which we have access to use the Kimberly-Clark brand for up to 24 months as we manage the packaging changes with global regulatory bodies. Royalties are required to be paid forsell products ~~sold~~ bearing the Kimberly-Clark brand ~~only.~~through April of 2017. In ~~addition~~the year ended December 31, 2015, we incurred $54 million of costs for spin-related activities and recognized a $12 million gain on the sale of an exam glove manufacturing facility in Thailand.

Acquisition-related costs: As mentioned earlier, we completed the acquisition of Corpak and incurred $18 million of costs incurred in connection with the Acquisition. These costs include $13 million related to acquisition and integration activities and $5 million related to restructuring activities as we consolidate Corpak’s headquarters and operating facility in Buffalo Grove, Illinois into our existing corporate and operational facilities. See “Business Acquisition” in Note 2 to the ~~royalty expense, we expect to incur costs for packaging, marketing and regulatory approval~~consolidated financial statements in ~~order to complete~~Item 8 of this ~~transition.~~report.

~~While building our own capabilities as a stand-alone company, we have entered into transition service agreements with Kimberly-Clark to provide temporary supporting services until we have~~Legal matters: In the ~~necessary resources and infrastructure in place.~~

~~From the Spin-off through~~year ended December 31, ~~2014,~~2016, we incurred ~~$12~~$20 million ($of expenses for certain litigation matters compared to $17 million in the prior year. See “Commitments and Contingencies” in Note 11 to the consolidated financial statements in Item 8 ~~million, net~~ of ~~tax) for~~this report.

Amortization expenses: In the ~~above programs.~~years ended December 31, 2016 and 2015, we recorded $22 million and $26 million, respectively, of intangibles amortization expense.

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 ~~2014~~2016 results to ~~2013~~2015 results, and ~~2013~~2015 to ~~2012.~~2014.

Net Sales



	Year Ended December 31,
(in millions)	2016		2015		Change		2014		Change
Business Segment
Medical Devices	$	567.3	$	509.5	11.3	%	$	501.7	1.6	%
S&IP	1,012.1		1,030.2		(1.8	)	1,139.3		(9.6	)
Corporate and Other	12.9		34.7		N.M.		31.1		N.M.
Total Net Sales	$	1,592.3	$	1,574.4	1.1	%	$	1,672.1	(5.8	)%



	22



Table of Contents

Percentage Change



			Changes Due To
2016 vs. 2015	Total		Volume^(a)		Pricing / Mix		Currency		Other^(b)
Consolidated	1	%	2	%	(3	)%	—	%	2	%
Medical Devices	11		4		—		—		7
S&IP	(2	)	2		(4	)	—		—

2015 vs. 2014
Consolidated	(6	)%	(1	)%	(1	)%	(3	)%	(1	)%
Medical Devices	2		3		—		(1	)	—
S&IP	(10	)	(3	)	(2	)	(3	)	(2	)

______________________________

(a) Volume excludes Corpak net sales and changes in sales volume to Kimberly-Clark.

(b) Other includes Corpak net sales, changes in sales volume to Kimberly-Clark and rounding.

N.M. - Not meaningful

Net Sales by Segment - 2016 Compared to 2015

Net sales for the year ended December 31, 2016 were 1% higher than the prior year primarily due to incremental sales provided by Corpak and higher volume in the Medical Devices segment partially offset by lower sales of non-woven materials and price loss in the S&IP segment.

Medical Devices

Net sales in the Medical Devices segment increased 11% to $567 million for the year ended December 31, 2016, an increase of $58 million compared to last year. The acquisition of Corpak provided $36 million, or 7% of the increase, and the remaining 4% is the result of improved sales volume across all product categories within the segment.

Surgical and Infection Prevention

S&IP net sales decreased 2% to $1.0 billion, a decrease of $18 million compared to last year. Volume gains from exam gloves were more than offset by volume losses in other product categories, particularly in surgical drapes and gowns, and price loss across all product categories, but particularly in exam gloves and sterilization.

Net Sales by Segment - 2015 Compared to 2014

Net sales declined 6% to $1.6 billion compared to $1.7 billion in 2014 due to unfavorable currency exchange rates and lower pricing and volume resulting from an increasingly competitive environment in the S&IP segment. This decline was partially offset by higher volume in the Medical Devices segment.

Medical Devices

Medical Devices net sales increased 2% to $510 million compared to $502 million in 2014 primarily due to higher volume in interventional pain due to healthy sales growth of COOLIEF, as well as growth in digestive health. The impacts were partially offset by lower volume in surgical pain and unfavorable currency exchange rates.

Surgical and Infection Prevention

S&IP net sales declined 10% to $1.0 billion compared to $1.1 billion in 2014. This decline was due to unfavorable currency exchange rates, lower pricing and volume particularly for exam gloves and sterilization wrap due to competitive pressure, and lower volume in facial protection and protective apparel primarily due to pandemic-related sales in 2014.



	23	~~HALYARD HEALTH, INC. - 2014 Annual Report~~



Table of Contents

~~Table of Contents~~

~~Net Sales~~

Year Ended December 31,
(in millions) 2014 2013 Change 2012 Change
Business Segment
Surgical and Infection Prevention $ 1,139.3
   $ 1,153.1
   (1.2 )% $ 1,185.1
   (2.7 )%
Medical Devices 501.7
   499.0
   0.5
477.6
   4.5
Corporate and Other 31.1
   25.4
   N.M.
21.3
   N.M.
Total Net Sales $ 1,672.1
   $ 1,677.5
   (0.3 )% $ 1,684.0
   (0.4 )%

~~Percentage Change~~

Changes Due To
2014 vs. 2013 Total Volume Pricing / Mix Currency
Other^(a)
Consolidated — % 2 % (1 )% (1 )% — %
S&IP (1 ) 1
(1 ) (1 ) —
Medical Devices 1
2
(1 ) —
—

2013 vs. 2012
Consolidated — % 1 % — % (1 )% — %
S&IP (3 ) (1 ) —
(1 ) (1 )
Medical Devices 4
5
1
(1 ) (1 )

~~____________________~~

~~(a) Other includes rounding.~~



	Year Ended December 31,
(in millions)	2016		2015		Change		2014		Change
Geography
North America	$	1,191.7	$	1,193.9	(0.2	)%	$	1,218.5	(2.0	)%
EMEA	200.6		197.4		1.6		234.9		(16.0	)
Asia Pacific and Latin America	200.0		183.1		9.2		218.7		(16.3	)
Total Net Sales	$	1,592.3	$	1,574.4	1.1	%	$	1,672.1	(5.8	)%

Net Sales by ~~Segment~~Geographic Region - ~~2014~~2016 Compared to ~~2013~~2015

~~Full-year 2014~~North America net sales ~~of $1.7 billion~~in 2016 were even compared to ~~2013 as~~2015. Net sales from the Corpak acquisition and volume ~~growth of 2% was~~gains across all Medical Device categories and exam gloves were offset by ~~the impact of price and unfavorable changes in currency exchange rates.~~

~~Surgical and Infection Prevention~~

~~S&IP net sales decreased 1% to $1.1 billion, compared to net~~lower sales of ~~$1.2 billion~~non-woven materials, price loss in the ~~prior year driven~~S&IP business, particularly in gloves, and lower S&IP volume, particularly in surgical drapes and gowns.

Net sales in EMEA increased by ~~lower pricing across~~2% primarily due to incremental sales from the ~~majority of our categories, net~~Corpak acquisition partially offset by unfavorable ~~changes in~~ currency exchange rates ~~primarily~~and price loss in both the Medical Devices and S&IP segments.

In Asia Pacific and Latin America, sales increased by 9% primarily due to volume gains, particularly in exam gloves, and across all product categories in the Medical Devices business, partially offset by ~~volume growth~~price loss in ~~facial protection, sterilization~~exam gloves and surgical drapes and gowns.

~~Medical Devices~~Net Sales by Geographic Region - 2015 Compared to 2014

Net sales ~~of Medical Devices increased 1% to $502 million~~in North America decreased by 2% compared to $499 million in the prior year driven by volume growth in digestive health, respiratory health and interventional pain management partially offset by lower selling prices in digestive health and respiratory health and net unfavorable changes in currency exchange rates2014 primarily due to ~~the weakening of the Australian dollar and the Japanese yen.~~

~~Net Sales by Segment - 2013 Compared to 2012~~

~~Net sales of $1.7 billion~~lower S&IP volume 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%.~~

~~Surgical and Infection Prevention~~

Net sales of $1.2 billion decreased 3%, 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 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 and apparel and unfavorable pricing in ~~North America.~~exam gloves, partially offset by higher Medical Devices volume in interventional pain and digestive health.

Net sales in EMEA decreased by 16% compared to 2014 primarily due to unfavorable currency exchange rates and lower S&IP volume in surgical drapes and gowns partially offset by higher Medical Devices volume in digestive health.

In Asia Pacific and Latin America, net sales decreased by 16% compared to 2014 driven by unfavorable currency exchange rates, lower S&IP volume in surgical drapes and gowns and sterilization, unfavorable pricing in surgical drapes and gowns and exam gloves partially offset by higher exam glove volume.

Operating Profit (Loss)



	Year Ended December 31,
	2016			2015			Change		2014			Change
Business Segment
Medical Devices	$	123.8		107.8			14.8	%	104.6			3.1	%
Surgical and Infection Prevention	90.7			98.4			(7.8	)	166.3			(40.8	)
Corporate and Other^(a)(b)	(108.8		)	(105.4		)	N.M.		(180.4		)	N.M.
Goodwill impairment	—			(474.0		)	N.M.		—			N.M.
Other (expense) and income, net^(c)(d)	(18.3		)	(4.5		)	N.M.		3.8			N.M.
Total Operating Profit (Loss)	$	87.4		$	(377.7	)	N.M.		$	94.3		N.M.

(a)

Corporate and Other for the year ended December 31, 2016 includes $65 million of general expenses, $22 million of post spin-related transition expenses, $18 million of acquisition, integration and restructuring expenses related to the Acquisition (see “Business Acquisition” in Note 2 to the consolidated financial statements in Item 8 of this report) and $4 million of costs related to corporate sales.


(b)	Corporate and Other for the year ended December 31, 2015 includes $47 million of general expenses, $55 million of post spin-related transition expenses and $3 million of costs related to corporate sales.


(c)	Other (expense) income for the year ended December 31, 2016 includes $20 million related to litigation matters (see “Commitments and Contingencies in Note 11 to the consolidated financial statements in Item 8 of this report).


(d)	Other (expense) income for the year ended December 31, 2015 includes $17 million related to litigation matters, as noted in (c) above, partially offset by a $12 million gain on the sale of an exam glove manufacturing facility in Thailand.

N.M. - Not meaningful.



	24	~~HALYARD HEALTH, INC. - 2014 Annual Report~~



Table of Contents

~~Table of Contents~~

Operating (Loss) Profit - 2016 Compared to 2015

In 2016, our consolidated operating profit was $87 million compared to an operating loss of $378 million. The prior year’s operating loss was driven primarily by a goodwill impairment charge of $474 million. Our operating profit is impacted by a number of items, as described previously in this MD&A under “Overview of Business.”

Medical Devices

~~Net sales of $499 million increased 4%, as higher sales volumes of 5% and improved product mix (i.e., the impact of a shift~~Operating profit in the ~~composition of products sold) were partially offset~~Medical Devices segment was 15% higher than last year. Operating profit benefited from the incremental net sales provided 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~~Corpak acquisition and ~~Africa surgical pain business contributed 2% of the gain while the respiratory and digestive health businesses each added 1% respectively.~~

Year Ended December 31,
(in millions) 2014 2013 Change 2012 Change
Geography
North America $ 1,168.8
   $ 1,147.7
1.8 % $ 1,136.8
1.0 %
Europe, Middle East and Africa 224.1
   231.9
(3.4 ) 226.8
2.2
Asia Pacific and Latin America 201.1
   206.6
(2.7 ) 227.8
(9.3 )
Related Party 78.1
   91.3
(14.5 ) 92.6
(1.4 )
Total Net Sales $ 1,672.1
$ 1,677.5
(0.3 )% $ 1,684.0
(0.4 )%

~~Net Sales by Geographic Region - 2014 Compared to 2013~~

~~Net sales in North America were up 2% compared to 2013 driven primarily by S&IP~~ volume gains in facial protection, sterilization wrap and surgical drapes and gowns and Medical Devices volume gains in interventional pain management, digestive health and respiratory health. This was partially offset by lower selling prices in S&IP primarily in sterilization wrap and exam gloves and lower Medical Devices selling prices for respiratory health and digestive health.

In Europe, Middle East and Africa, net sales decreased 3% driven primarily by lower S&IP volume for exam gloves and surgical drapes and gowns, lower Medical Devices volume in surgical pain and lower selling prices for respiratory health and surgical pain. This wasacross all product categories partially offset by increased research and development spending and higher selling expenses to drive future growth.

Surgical and Infection Prevention

S&IP ~~volume~~operating profit decreased 8% primarily due to the factors described previously in ~~facial protection, Medical Devices volume in digestive health and~~“Net Sales by Segment” partially offset by favorable currency exchange rates and lower costs for manufacturing and distribution.

Operating Profit - 2015 Compared to 2014

The operating loss in 2015 was driven ~~primarily~~ by ~~the strengthening~~a $474 million goodwill impairment charge and continued net spin-related transition costs of ~~the euro relative~~$42 million. In 2014, “Corporate and Other” included charges of $60 million related to the ~~U.S. dollar.~~exit from our glove manufacturing facility in Thailand, $89 million of pre-spin transaction charges associated with the Spin-off and incremental transition expenses of $12 million following the Spin-off.

~~In Asia Pacific~~Medical Devices

Operating profit in the Medical Devices business was 3% higher than 2014 primarily due to higher volume, manufacturing cost savings and ~~Latin America,~~lower general expenses related to lower intangible asset amortization expense partially offset by expenses related to operating as a stand-alone company.

Surgical and Infection Prevention

Operating profit in the S&IP business was 41% lower than 2014 primarily due to pricing and volume challenges noted in the discussion of net sales ~~decreased 3% driven by~~along with unfavorable currency exchange rates and higher general expenses related to operating as a stand-alone company partially offset by favorable raw materials pricing, primarily for oil-based polymers.

Interest Income and Expense

Interest income was not material in the years ended December 31, 2016 or 2015 and was $3 million in 2014.

Interest expense was $33 million in each of the years ended December 31, 2016 and 2015 and $6 million in 2014. Interest expense consists primarily of interest and amortization of debt discount and issuance costs on our senior secured term loan and our senior unsecured notes. Interest expense in 2014 represents only two months of expense since our credit facilities were established late that year. See “Debt” in Note 6 to the accompanying consolidated financial statements in Item 8 of this report for further discussion of our indebtedness.

Provision for Income Taxes

The provision for income taxes was $16 million in each of the years ended December 31, 2016 and 2015. Our effective tax rate was 28% in 2016. Our effective tax rate was (4)% in 2015 due primarily to ~~the weakening Australian dollar~~goodwill impairment. Our effective tax rate was 70% in 2014 due to spin-related foreign cash repatriation and ~~the Japanese yen relative~~non-deductible transaction costs. See “Income Taxes” in Note 7 to the ~~U.S. dollar. This was partially offset by increased demand for S&IP products primarily~~consolidated financial statements in ~~surgical drapes and gowns, sterilization wrap and exam gloves and Medical Devices volume in surgical pain and increased selling prices.~~Item 8 of this report.

~~Net Sales by Geographic Region - 2013 Compared to 2012~~

Net sales in North America increased 1% due primarily to increased Medical Devices volume in respiratory and digestive health products. Respiratory health sales benefited from a severe flu season accompanied by pandemic orders, new contract gains and ongoing expansion into the non-acute care markets. Digestive health sales were driven by market growth and a competitor’s exit from the enteral feeding tube market where we were able to gain a large portion of the stranded sales. There were also increased S&IP volume in surgical drapes and gowns resulting from improved GPO contract positions as well as new product introductions and an increase in facial protection due to a severe flu season, partially offset lower volume in medical exam gloves.

Net sales in Europe, Middle East and Africa increased 2% primarily due to increased demand in Medical Devices associated with a supply chain disruption experienced by a competitor, modest increases in S&IP volume in sterilization wrap and facial protection and favorable currency rates partially offset by reduced S&IP sales volume in medical exam gloves and surgical drapes and gowns and reduced S&IP net selling prices. The decreased sales volume in medical exam gloves and surgical drapes and gowns was reduced in certain less profitable accounts.

Net sales in Asia Pacific and Latin America decreased 9% primarily due to the weakening of the Japanese yen and the Australian dollar relative to the U.S. dollar and reduced Medical Devices sales volume partially offset by higher Medical Devices net selling prices.



	25	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

~~Table of Contents~~

~~Operating Profit~~

Year Ended December 31,
2014 2013 Change 2012 Change
Business Segment
Surgical and Infection Prevention $ 166.3
$ 151.2
10.0 % $ 155.2
(2.6 )%
Medical Devices 104.6
85.6
22.2
88.8
(3.6 )
Corporate and Other^(a)
(180.4 ) (13.9 ) N.M.
(17.5 ) N.M.
Other income and (expense), net 3.8
2.4
N.M.
1.5
N.M.
Total Operating Profit $ 94.3
$ 225.3
(58.1 )% $ 228.0
(1.2 )%


~~(a)~~	Corporate & Other includes $60 million associated with the exit of our gloves manufacturing facility in Thailand, $89 million of transaction costs associated with the Spin-off and $12 million of transition-related costs incurred following the Spin-off for the year ended December 31, 2014.

~~N.M. - Not meaningful.~~

~~Operating Profit - 2014 Compared to 2013~~

~~Total~~

Operating profit was $94 million versus $225 million in 2013. Operating profit in 2014 was impacted by Corporate and Other charges of $60 million associated with the exit from our glove manufacturing facility in Thailand, ~~$89 million~~ ~~of transaction-related charges associated with the Spin-off and $12 million of transition-related incremental expenses following the Spin-off.~~

~~Surgical and Infection Prevention~~

~~Operating profit was $166 million compared to $151 million in 2013, an increase of 10% primarily~~ ~~due to~~ ~~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.~~

~~Medical Devices~~

~~Operating profit was $105 million compared to $86 million in 2013, an increase of 22% primarily~~ ~~due to a reduction in selling and general expenses largely from decreased legal expenses and improved supply chain costs.~~

~~Operating Profit - 2013 Compared to 2012~~

Operating profit of $225 million in 2013 decreased 1% compared to the prior year. 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.

~~Surgical and Infection Prevention~~

Operating profit of $151 million decreased 3% 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.

~~Medical Devices~~

Operating profit of $86 million decreased 4% 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.

~~Interest Income and Expense~~

~~Interest income was~~ ~~$3 million~~ ~~in each of the last three years ended~~ ~~December 31, 2014~~, ~~2013~~ ~~and~~ ~~2012, respectively.~~

Interest expense was $6 million in 2014 and consisting primarily of interest expense, amortization of debt discount and amortization of deferred financing fees on $250 million of senior unsecured notes and our $390 million senior secured term loan. See Item 8, Note 9, “Debt” for further discussion of our indebtedness. Interest expense was not significant in 2013 or 2012.



Table of Contents	26	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

~~Table of Contents~~

~~Provision for Income Taxes~~

~~The provision for income taxes was $64 million in~~ ~~2014~~ ~~compared to $73 million in~~ ~~2013. Our effective tax rate in 2014 was 70% compared to 32% in 2013 due to spin-related foreign cash repatriation and non-deductible transaction costs.~~

~~The provision for income taxes was $77 million in~~ ~~2012~~ ~~and the effective tax rate was 34%.~~

Unaudited Quarterly Data

2014 2013
(in millions, except per-share amounts) Fourth Third Second First Fourth Third Second First
Net sales $ 439.4
$ 408.5
$ 413.5
$ 410.7
$ 431.3
$ 419.5
$ 415.9
$ 410.8
Gross profit 156.5
132.2
104.9
155.0
155.3
161.5
154.0
141.4
Operating profit 24.0
13.1
(4.5 ) 61.7
57.6
70.3
56.9
40.5
Net income (2.4 ) (7.4 ) (4.5 ) 41.4
39.8
47.9
38.6
28.3
Basic earnings per share (0.05 ) (0.16 ) (0.10 ) 0.89
0.86
1.03
0.83
0.61
Diluted earnings per share (0.05 ) (0.16 ) (0.10 ) 0.89
0.86
1.03
0.83
0.61



	2016								2015
(in millions, except per-share amounts)	Fourth		Third		Second		First		Fourth		Third			Second		First
Net Sales	$	410.0	$	397.5	$	400.0	$	384.8	$	401.4	$	389.5		$	389.3	$	394.2
Gross Profit	142.7		138.0		140.7		136.5		133.6		131.0			134.9		132.1
Operating Profit (Loss)^(a)(b)(c)	15.8		20.9		17.6		33.1		20.5		(461.2		)	22.1		40.9
Net Income (Loss)	10.0		9.1		6.5		14.2		14.5		(470.5		)	8.0		21.7
Earnings (Loss) Per Share:
Basic	$	0.21	$	0.19	$	0.14	$	0.30	$	0.31	$	(10.10	)	$	0.17	$	0.47
Diluted	$	0.21	$	0.19	$	0.14	$	0.30	$	0.31	$	(10.10	)	$	0.17	$	0.46

(a)

Operating profit in 2016 includes $21 million of spin-related transition costs, $20 million of costs related to legal expenses and litigation (see “Commitments and Contingencies” in Note 11 to the consolidated financial statements in Item 8 of this report) and $18 million of costs related to the acquisition of Medsystems (see “Business Acquisition” in Note 2. to the consolidated financial statements in Item 8 of this report).


(b)	Operating profit (loss) in 2015 includes $42 million of net spin-related transition costs.


(c)	Operating loss in the third quarter of 2015 includes an estimated goodwill impairment charge of $476 million. The goodwill impairment charge was reduced by $2 million when the goodwill impairment analysis was completed in the fourth quarter of 2015.

The opening market price for Halyard common stock on October 21, 2014, our first day of trading, was $37.52, and our closing market price on December 31, 2014 was $45.47. The high and low prices for the period from October 21, 2014 to December 31, 2014 were $46.14 and $35.56, respectively.

Liquidity and Capital Resources

General

Prior to the Spin-off, Kimberly-Clark provided financing, cash management and other treasury services to us. In North America, our cash balances were swept daily by Kimberly-Clark and historically, we received funding from Kimberly-Clark for most of our operating and investing cash needs. Cash transferred to and from Kimberly-Clark was recorded as intercompany receivables and payables. Upon completion of the Spin-off, we maintain separate cash management and financing functions from Kimberly-Clark for our operations. Following the Spin-off, ourOur primary sources of liquidity are cash on hand provided ~~from~~by operating activities and amounts available under our revolving credit facility.

~~Operating Activities~~

Cash provided by ~~operating activities was $148 million in 2014 compared~~operations has been and is expected to ~~$224 million in 2013 with the decrease primarily due to lower net income partially offset by cash provided by changes in operating assets and liabilities.~~

remain a primary source of funds. Cash provided by ~~operating activities was $224 million~~operations has historically generated sufficient cash to fund our investments in ~~2013 compared to $203 million in 2012 with the increase primarily due to lower income tax payments~~working capital and ~~higher cash earnings.~~

~~Investing Activities~~

During 2014, our cash used in investing activities was $71 million, compared to $51 million in the prior year. Capital expenditures in 2014 were $79 million compared to $49 million in 2013. The increase in capital ~~expenditures is primarily related to the separation from Kimberly-Clark and associated with modifying facilities necessary to operate as a stand-alone company.~~

During 2013, our capital expenditures were $49 million compared to $41 million in 2012. 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.

~~Financing Activities~~

During 2014, financing activities provided $29 million compared to $180 million used by financing activities in the prior year due to the receipt of loan proceeds and contributions from Kimberly-Clark partially offset by the Spin-off cash distribution to Kimberly-Clark.



	27	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

~~Table of Contents~~

At December 31, 2014 and 2013, debt payable within one year was $4 million and $12 million, respectively. At December 31, 2014, long-term debt consisted of $386 million from our senior secured term loan and $250 million from our senior unsecured notes.expenditures. As of December 31, ~~2013, debt consisted~~2016, $59 million of ~~a short-term bank loan executed~~our $114 million of cash and cash equivalents was held by ~~a non-U.S. subsidiary~~foreign subsidiaries. We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and ~~related party debt owed~~currently do not have plans to ~~wholly-owned Kimberly-Clark subsidiaries. The bank loan was repaid in March 2014 and the related party debt was repaid in connection with the Spin-off.~~

repatriate such earnings. 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. We believe that our ability to generate cash from domestic and international operations and the borrowing capacity under our available credit facilities are adequate to fund our requirements for working capital, capital expenditures and other investments necessary to grow our business for the foreseeable future for both our domestic and international operations.

~~Senior Unsecured Notes, Term Loan~~Cash and ~~Revolving Credit Facilities~~equivalents decreased by $16 million to $114 million as of December 31, 2016 compared to $130 million last year. The decrease was driven by $175 million used in our acquisition of Corpak and $29 million of capital expenditures partially offset by $189 million of cash provided by operating activities. The Corpak acquisition was initially funded with $103 million of available cash on hand and $72 million drawn from our revolving credit facility. The amount drawn from our revolving credit facility was repaid by the end of the year.

~~Prior~~Cash and equivalents decreased by $19 million to $130 million as of December 31, 2015 compared to $149 million as of December 31, 2014. The decrease was driven primarily by $51 million of debt repayments, which includes a $50 million prepayment on our senior secured term loan, and $70 million of capital expenditures partially offset by $98 million of cash provided by operating activities.

The $105 million increase in cash and equivalents in the year ended December 31, 2014 reflects the cash flows of Kimberly-Clark’s healthcare business through October 31, 2014 and the cash flows of Halyard Health as an independent stand-alone public company from November 1, 2014 through December 31, 2014. The Spin-off payment to Kimberly-Clark, net of transfers from Kimberly-Clark of $587 million, $79 million of capital expenditures, $14 million of debt repayments and $12 million paid for debt issuance costs were more than offset by $638 million of proceeds from the issuance of debt, $148 million of cash provided by operating activities and $8 million of proceeds from the sale of property.

Operating Activities

Operating activities provided $189 million in the year ended December 31, 2016 compared to $98 million in the prior year and was favorably impacted by improvements in working capital, particularly inventories and accrued expenses, resulting in a $92 million benefit to our operating cash flow.



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Operating activities provided $98 million in the year ended December 31, 2015 compared to $148 million in 2014 primarily due to lower net income, excluding goodwill and asset impairments, and net cash invested in working capital.

Investing Activities

For the year ended December 31, 2016, the $201 million used in investing activities included the acquisition of Corpak for $175 million, net of cash acquired (see “Business Acquisition” in Note 2 to the ~~Spin-off,~~consolidated financial statements in Item 8 of this report). Capital expenditures were $29 million, using cash on hand. As of December 31, 2016, we ~~issued $250~~had an additional $6 million of capital expenditures included in accounts payable and accrued expenses that are expected to be paid using cash on hand.

Investing activities used $63 million and $71 million in the years ended December 31, 2015 and 2014, respectively, consisting primarily of capital expenditures.

Financing Activities

During 2016, we borrowed and repaid $72 million on our revolving credit facility, and paid $1 million of debt issuance costs in conjunction with an amendment to our senior secured term loan facility (see discussion below and “Debt” in Note 6 to the consolidated financial statements in Item 8 of this report).

Financing activities used $51 million in 2015, which consisted primarily of debt repayments. In 2014, financing activities provided $29 million consisting primarily of debt proceeds and contributions from Kimberly-Clark partially offset by the spin-off cash distribution to Kimberly-Clark.

Long-Term Debt

As of December 31, 2016, total debt was $579 million, consisting of (i) $332 million, net of unamortized discount, on our senior secured term loan and (ii) $247 million, net of unamortized discount, on our senior unsecured ~~notes (the “Notes”). The Notes will mature~~notes.

Our senior secured term loan matures on October ~~15, 2022~~31, 2021 (the “Term Loan Facility”) 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.~~

~~Upon the Spin-off, we entered into~~is under a credit agreement ~~establishing credit facilities in aggregate principal amount of $640 million, including~~that also includes a ~~five-year~~ senior secured revolving credit facility ~~allowing~~that matures on October 31, 2019 which allows for borrowings of up to $250 million, with a letter of credit sub-facility in an amount of $75 million and a swingline sub-facility in an amount of $25 million (the “Revolving Credit Facility”), and a seven-year senior secured term loan of $390 million (the “Term Loan Facility”). The Term Loan Facility is secured by substantially all of our assets located in the United States and a certain percentage of our foreign subsidiaries’ capital stock.

~~In conjunction~~along with the credit agreements described above, we paid $12 million in financing fees that were deferred and will be amortized to interest expense over the life of the credit agreement using the effective interest method.

~~Borrowings under~~ the Term Loan Facility, ~~will bear interest, at Halyard’s option, at either (i) a reserve-adjusted London Interbank Offer Rate (“LIBOR”~~the “Senior Credit Facilities”). The Senior Credit Facilities allow for floating rate ~~subject to a floor of 0.75%, plus 3.25%,~~LIBOR or ~~(ii) a~~ base rate ~~subject~~loans. In December 2016, we executed an amendment to ~~a floor of 0.75%, (calculated as~~ the ~~greatest of (1) the prime rate, (2) the U.S. federal funds effective rate plus 0.50% and (3) the one month LIBOR rate plus 1.00%) plus 2.25%. The~~ Term Loan Facility ~~requires quarterly amortization payments equal~~(the “Amendment”), under which the margin, or “spread” that was charged over the available floating interest rates was reduced by 0.5%.

Funds under our Revolving Credit Facility are available for acquisitions, working capital or other requirements. On May 2, 2016, we borrowed $72 million under our Revolving Credit Facility to ~~0.25%~~partially fund our acquisition of Medsystems. See “Business Acquisition” in Note 2, to the consolidated financial statements in Item 8 of this report for a description of this acquisition. By December 31, 2016, we had repaid all of the ~~aggregate principal amount of the term loans outstanding~~borrowings on ~~the closing date.~~our Revolving Credit Facility. As of December 31, ~~2014, the interest rate in effect for the Term Loan Facility was 4.00%.~~

~~Borrowings~~2016, we had no borrowings and letters of credit of $4 million outstanding under the Revolving Credit Facility, ~~will bear~~leaving $246 million available for borrowing.

We also have $250 million of senior unsecured notes that mature on October 15, 2022, bearing interest at ~~Halyard’s option, at either (i)~~ a ~~reserve-adjusted LIBOR~~fixed interest rate ~~plus a margin initially equal to 2.25% and then, following Halyard’s delivery under the credit agreement~~ of ~~Halyard’s financial statements for Halyard’s fiscal quarter ending March 31, 2015, ranging between 1.75% to 2.50%~~6.25% per annum ~~depending~~with interest payable semi-annually in arrears on ~~Halyard’s consolidated total leverage ratio, or (ii) the base rate plus a margin initially equal to 1.25%~~April 15 and ~~then, following Halyard’s delivery~~October 15 of those financial statements, ranging between 0.75% to 1.50% per annum, depending on Halyard’s consolidated total leverage ratio. The unused portion of Halyard’s Revolving Credit Facility will be subject to a commitment fee equal to (i) 0.25% per annum, when Halyard’s consolidated total leverage ratio is less than 2.25 to 1.00 and (ii) 0.40% per annum, otherwise.each year.

For further information regarding our debt arrangements, see “Debt” in Note 6 to the consolidated financial statements in Item 8 ~~Note 9, “Debt.”~~of this report.

Obligations

The following table presents our total contractual obligations for which cash flows are fixed or determinable as of December 31, ~~2014~~2016 (in millions):



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			Payments Due by Period										Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Debt	$	632.3	$	3.9	$	7.8	$	7.8	$	612.8	$	589.0	$	—	$	—	$	339.0	$	250.0
Interest payments on long-term debt	232.1		31.2		62.5		61.8		76.6		152.0		27.6		55.4		53.4		15.6
Operating leases	79.5		11.5		18.5		14.3		35.2		100.5		16.9		27.2		15.3		41.1
Open purchase orders^(a)	200.4		199.5		0.9		—		—		222.4		196.7		25.4		0.3		—
Pension obligations	3.0		—		—		—		3.0		7.7		0.3		0.6		1.1		5.7
Other commitments^(b)	24.1		4.8		3.3		4.0		12.0		28.2		5.6		5.2		3.3		14.1
Total contractual obligations	$	1,171.4	$	250.9	$	93.0	$	87.9	$	739.6	$	1,099.8	$	247.1	$	113.8	$	412.4	$	326.5

~~________________________~~


(a)	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 payments that are discretionary or for which timing is uncertain.


(b)	Other commitments ~~includes~~consists primarily of lease executory costs for insurance, maintenance and taxes on leased properties of $22 million and uncertain tax positions of $2$3 million. See “Income Taxes” in Note 7 to the consolidated financial statements in Item 8 ~~Note 10, “Income Taxes.”~~of this report.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 consolidated and 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 tax assessments.

~~Recent~~Recently Adopted and Issued Pronouncements

~~In May 2014,~~See “Accounting Policies” in Note 1 to the ~~Financial Accounting Standards Board~~consolidated financial statements in Item 8 of this report for recently adopted and recently issued ~~Accounting Standards Update 2014-09,~~ ~~Revenue from Contracts~~accounting pronouncements.

Use of Estimates

We prepare our consolidated financial statements in accordance with ~~Customers~~,GAAP, which ~~provides a single comprehensive model for entities to use~~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.

Revenue Recognition and Accounts Receivable

Sales revenue ~~arising from contracts with~~is recognized at the time of product shipment or delivery, depending on when title passes, to unaffiliated 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 guidance permits two implementation approaches, one requiring applicationwhen all of the ~~standard retrospectively to each prior period presented~~following have occurred: evidence of a sales arrangement is in place, pricing is fixed or ~~a simplified retrospective method with the cumulative effect~~determinable, and collection is reasonably assured. Sales are reported net of initially applying the standard recognized in retained earnings with footnote disclosure of the effects on each financial statement line item. The effect of this standard on our financial position, results of operationsreturns, rebates and ~~cash flows is not yet known.~~

~~Distributor Rebate Accruals~~

freight allowed. Distributor rebates are estimated based on the historical cost ~~differences~~difference between list prices and average ~~end user~~end-user contract prices and the quantity of products expected to be sold to specific end users. ~~Changes~~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 ~~rebate accrual estimate occur due to changes in volume, list prices and/or contract prices.~~period such differences are determined. Rebate accruals were ~~$82~~$56 million and $74 million as of ~~each year ended~~ December 31, ~~2014~~2016 and ~~2013,~~2015, respectively. 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.

Goodwill and Other Intangible Assets

Goodwill is tested for impairment annually and whenever events and circumstances indicate that impairment may have occurred. ~~For 2014, we~~We completed the required annual goodwill impairment testing as of ~~goodwill~~July 1, 2016, and the fair values for ~~impairment for all~~both our



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Medical Devices and S&IP reporting units ~~using the beginning of the third quarter of 2014 as the measurement date. The fair value for all reporting units was~~were substantially in excess of their respective net asset carrying values. See “Goodwill” in Note 3 to the ~~book value. The fair value~~consolidated financial statements in Item 8 of our Medical Devices unit exceeded the carrying value of its net assets by 76%; the fair value of our S&IP unit exceeded the carrying value of its net assets by 6% primarily because of the incremental corporate and ongoing costs that we will incur as a stand-alone public company.this report for further discussion.



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future sales volumes, selling prices and costs, changes in working capital and investments in property and equipment. These assumptions and estimates were based upon our historical experience and projections of future activity. In addition, the selection of the discount rate used to determine fair value was based upon a market participant’s view considering current market rates and our current cost of financing. There can be no assurance that the assumptions and estimates made for purposes of the annual goodwill impairment test will prove to be accurate. Volatility in the equity and debt markets, or increases in interest rates, could result in a higher discount rate. Changes in sales volumes, selling prices and costs of goods sold, additional stand-alone public company costs, and increases in interest rates could cause changes in our forecasted cash flows. Unfavorable changes in any of the factors described above could result in a goodwill impairment charge in the future.

As of ~~each year ended~~ December 31, ~~2014 and 2013,~~2016 we had $6 million of indefinite-lived intangible assets, which we acquired in connection with ~~indefinite useful lives~~our acquisition of ~~$7 million related~~Corpak and represents IPR&D projects that we expect to ~~acquired in-process research and development.~~launch in 2017.

AtAs of December 31, ~~2014,~~2016, we had intangible assets with finite useful lives with a gross carrying amount of ~~$324~~$433 million and a net carrying amount of ~~$102~~$164 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.

Income Taxes

Prior to the Spin-off, for purposes of the consolidated and combined financial statements, our operations were included in Kimberly-Clark’s consolidated U.S. federal and state income tax returns and some of its foreign income tax returns. The provision for income taxes and related deferred tax balances were 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 recognize 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% likely of being realized upon ultimate settlement.

We recognize deferred tax assets for deductible temporary differences, operating loss carry-forwards and tax credit carry-forwards. We record valuation allowances to reduce deferred tax assets to amounts that are more likely than not to be realized. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. This assessment, which is completed on a taxing jurisdiction basis, takes into account a number of types of evidence, including the nature, frequency, and severity of current and cumulative financial reporting losses, sources of future taxable income, taxable income in prior carryback year(s) and tax planning strategies.

If it is determined that we would be able to realize deferred tax assets in the future in excess of our net recorded amount, an adjustment to the net deferred tax asset would increase income in the period that such determination was made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax assets in the future, an adjustment to the net deferred tax asset would decrease income in the period such determination was made. We regularly evaluate the need for valuation allowances against its deferred tax assets.



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Prior to the Spin-off, for purposes of the consolidated financial statements, our operations were included in Kimberly-Clark’s consolidated U.S. federal and state income tax returns and some of its foreign income tax returns. The provision for income taxes and related deferred tax balances were estimated as if we filed income tax returns on a stand-alone basis separate from Kimberly-Clark.

Legal Matters



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served his complaint on both Kimberly-Clark and Halyard Health. We may have an Indemnification Obligation for the two matters under the distribution agreement with Kimberly-Clark. We intend to vigorously defend the cases.

We operate in an industry characterized by extensive patent litigation and competitors may claim that our products infringe upon their intellectual property. Resolution of patent litigation or other intellectual property claims is typically time consuming and costly and can result in significant damage awards and injunctions that could prevent the manufacture and sale of the affected products or require us to make significant royalty payments in order to continue selling the affected products. At any given time we may be involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.

Information Concerning Forward-Looking Statements

This annual report on Form 10-K and other materials we have filed or furnished or will file or furnish with the SEC (as well as information included in our oral or other written statements) contain, or will contain, certain “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, 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,~~



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“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 Spin-off.~~ 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,

litigation and enforcement actions,

price fluctuations in key commodities,

fluctuations in currency exchange rates,

disruption in supply of raw materials or the distribution of finished goods,

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” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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.


ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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



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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.

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 management’s view of changes which are reasonably possible to occur over a one-year period. Also included is a description of our commodity price risk.

Foreign Currency Risk

Foreign currency risk is managed by the systematic use of foreign currency forward and swap contracts for a limited 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 affiliate’s 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, ~~2014,~~2016, 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 have an effect of $4$2 million to our consolidated ~~and combined~~ financial position, results of operations or cash flows. These hypothetical losses on transactional exposures are based on the difference between the December 31, ~~2014~~2016 rates and the assumed rates.



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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 stockholders’ 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, ~~2014,~~2016, 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 stockholders’ equity by approximately ~~$18~~$21 million. These hypothetical adjustments in UTA are based on the difference between the December 31, ~~2014~~2016 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~~consolidated 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 polypropylene and nitrile. 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.

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.

Interest Rate Risk

Our Senior Secured Term Loan ~~for $390~~with a remaining face value of $339 million is subject to a variable interest rate based on LIBOR, subject to a floor of 0.75%. As of December 31, ~~2014,~~2016, a one percentage point increase in LIBOR would result in $2$3 million of incremental interest expense.



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ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HALYARD HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED ~~AND COMBINED~~ INCOME ~~STATEMENT~~STATEMENTS

(in millions, except per share amounts)

Year Ended December 31,
2014 2013 2012
Net Sales (including related party sales of $78.7, $91.3 and $92.6, respectively) $ 1,672.1
$ 1,677.5
$ 1,684.0
Cost of products sold (including related party purchases of $72.5, $82.8 and $84.0, respectively 1,123.5
1,065.3
1,081.5
Gross Profit 548.6
612.2
602.5
Research and development 33.6
37.9
33.0
Selling and general expenses 424.5
351.4
343.0
Other (income) and expense, net (3.8 ) (2.4 ) (1.5 )
Operating Profit 94.3
225.3
228.0
Interest income 2.9
2.6
2.6
Interest expense (6.0 ) (0.1 ) (0.8 )
Income Before Income Taxes 91.2
227.8
229.8
Provision for income taxes (64.1 ) (73.2 ) (77.2 )
Net Income $ 27.1
$ 154.6
$ 152.6

Per Share Basis
Basic $ 0.58
$ 3.32
$ 3.28
Diluted $ 0.58
$ 3.32
$ 3.28



	Year Ended December 31,
	2016			2015			2014
Net Sales (including related party sales in 2014 of $78.7)	$	1,592.3		$	1,574.4		$	1,672.1
Cost of products sold (including related party purchases in 2014 of $72.5)	1,034.4			1,042.8			1,123.5
Gross Profit	557.9			531.6			548.6
Research and development	41.1			32.3			33.6
Selling and general expenses	411.1			398.5			424.5
Goodwill impairment	—			474.0			—
Other expense and (income), net	18.3			4.5			(3.8		)
Operating Profit (Loss)	87.4			(377.7		)	94.3
Interest income	0.6			0.3			2.9
Interest expense	(32.7		)	(33.1		)	(6.0		)
Income (Loss) Before Income Taxes	55.3			(410.5		)	91.2
Income tax provision	(15.5		)	(15.8		)	(64.1		)
Net Income (Loss)	$	39.8		$	(426.3	)	$	27.1

Earnings (Loss) Per Share
Basic	$	0.85		$	(9.15	)	$	0.58
Diluted	$	0.85		$	(9.15	)	$	0.58

See Notes to the Consolidated ~~and Combined~~ Financial Statements.



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HALYARD HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED ~~AND COMBINED STATEMENT~~STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)


	Year Ended December 31,								Year Ended December 31,
	2014			2013			2012		2016			2015			2014
Net Income	$	27.1		$	154.6		$	152.6
Net Income (Loss)									$	39.8		$	(426.3	)	$	27.1
Other Comprehensive Income (Loss), Net of Tax
Defined benefit plans	(0.4		)	—			—		0.6			(1.3		)	(0.4		)
Unrealized currency translation adjustments	(14.0		)	(22.6		)	6.9		(8.3		)	(22.1		)	(14.0		)
Cash flow hedges	3.6			(7.1		)	6.6		0.8			(0.7		)	3.6
Total Other Comprehensive (Loss) Income, Net of Tax	(10.8		)	(29.7		)	13.5
Comprehensive Income	$	16.3		$	124.9		$	166.1
Total Other Comprehensive Loss, Net of Tax									(6.9		)	(24.1		)	(10.8		)
Comprehensive Income (Loss)									$	32.9		$	(450.4	)	$	16.3

See Notes to the Consolidated ~~and Combined~~ Financial Statements.



	34	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

~~Table of Contents~~

~~HALYARD HEALTH, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED AND COMBINED BALANCE SHEET~~

~~(in millions, except share data)~~

December 31,
2014 2013
ASSETS
Current Assets
Cash and cash equivalents $ 149.0
$ 44.1
Accounts receivable, net of allowances 233.9
203.3
Inventories 283.1
285.6
Prepaid and other current assets 16.8
6.5
Current deferred income taxes 2.1
45.6
Total Current Assets 684.9
585.1
Property, Plant and Equipment, net 277.8
324.9
Assets Held for Sale 2.6
—
Goodwill 1,426.1
1,430.1
Other Intangible Assets, net 108.3
141.2
Other Assets 27.9
2.7
TOTAL ASSETS $ 2,527.6
$ 2,484.0

LIABILITIES AND EQUITY
Current Liabilities
Debt payable within one year $ 3.9
$ 2.8
Related party debt —
9.1
Trade accounts payable 168.7
118.5
Accrued expenses 183.4
180.0
Total Current Liabilities 356.0
310.4
Long-Term Debt 632.3
—
Other Long-Term Liabilities 48.1
94.5
Total Liabilities 1,036.4
404.9

Commitments and Contingencies

Stockholders’ Equity
Preferred stock—$0.01 par value—authorized 20,000,000 shares, none issued —
—
Common stock—$0.01 par value—authorized 300,000,000 shares in 2014;
46,535,951 outstanding at December 31, 2014 0.5
—
Additional paid-in capital 1,502.5
—
Kimberly-Clark’s net investment —
2,098.7
Retained earnings 7.3
—
Accumulated other comprehensive income (loss) (19.1 ) (19.6 )
Total Stockholders’ Equity 1,491.2
2,079.1
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,527.6
$ 2,484.0

~~See Notes to Consolidated and Combined Financial Statements.~~



	35	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

~~Table of Contents~~



Table of Contents

HALYARD HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)



	Year Ended December 31,
	2016			2015
ASSETS
Current Assets
Cash and cash equivalents	$	113.7		$	129.5
Accounts receivable, net of allowances	190.1			224.7
Inventories	272.5			303.2
Prepaid and other current assets	17.2			18.6
Total Current Assets	593.5			676.0
Property, Plant and Equipment, net	260.8			279.5
Goodwill	1,029.0			945.2
Other Intangible Assets, net	169.8			82.6
Deferred Tax Assets	15.1			14.9
Other Assets	3.6			2.0
TOTAL ASSETS	$	2,071.8		$	2,000.2

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Trade accounts payable	$	173.1		$	163.2
Accrued expenses	151.3			152.0
Total Current Liabilities	324.4			315.2
Long-Term Debt	579.0			578.1
Deferred Tax Liabilities	35.8			23.8
Other Long-Term Liabilities	30.1			27.8
Total Liabilities	969.3			944.9

Commitments and Contingencies

Stockholders’ Equity
Preferred stock - $0.01 par value - authorized 20,000,000 shares, none issued	—			—
Common stock - $0.01 par value - authorized 300,000,000 shares, 46,681,798 outstanding at December 31, 2016 and 46,614,947 outstanding at December 31, 2015	0.5			0.5
Additional paid-in capital	1,533.2			1,518.0
Accumulated deficit	(379.2		)	(419.0		)
Treasury stock	(1.9		)	(1.0		)
Accumulated other comprehensive loss	(50.1		)	(43.2		)
Total Stockholders’ Equity	1,102.5			1,055.3
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,071.8		$	2,000.2

See Notes to the Consolidated Financial Statements.



	36



Table of Contents

HALYARD HEALTH, INC. AND ~~COMBINED~~SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in millions, shares in thousands)

Common Stock
Issued

Additional
Paid-in
Capital
Kimberly-Clark’s Net Investment
Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Stockholders’
Equity
Shares Amount
Balance at December 31, 2011 —
$ —
$ —
$ 2,000.9
$ —
$ (3.4 ) $ 1,997.5
Net income —
—
—
152.6
—
—
152.6
Change in Kimberly-Clark’s investment, net —
—
—
(107.9 ) —
—
(107.9 )
Other comprehensive income, net of tax —
Unrealized translation —
—
—
—
—
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-Clark’s investment, net —
—
—
(101.5 ) —
—
(101.5 )
Other comprehensive income, net of tax
Unrealized translation —
—
—
—
—
(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
Net income —
—
—
19.8
7.3
—
27.1
Change in Kimberly-Clark’s investment, net —
—
—
61.9
—
11.3
73.2
Spin-off cash distribution to Kimberly-Clark —
—
—
(680.0 ) —
—
(680.0 )
Issuance of common stock and consummation of Spin-off 46,536
0.5
1,499.9
(1,500.4 ) —
—
—
Stock-based compensation expense —
—
2.6
—
—
—
2.6
Other comprehensive income, net of tax

Defined benefit plans —
—
—
—
—
(0.4 ) (0.4 )
Unrealized currency translation adjustments —
—
—
—
—
(14.0 ) (14.0 )
Cash flow hedges, net of tax of $0.7 —
—
—
—
—
3.6
3.6
Balance at December 31, 2014 46,536
$ 0.5
$ 1,502.5
$ —
$ 7.3
$ (19.1 ) $ 1,491.2



	Common Stock Issued			Additional Paid-in Capital		Kimberly-Clark’s Net Investment			Retained Earnings (Accumulated Deficit)			Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital		Kimberly-Clark’s Net Investment			Retained Earnings (Accumulated Deficit)			Shares	Amount			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at December 31, 2013	—	$	—	$	—	$	2,098.7		$	—		—	$	—		$	(19.6	)	$	2,079.1
Net income	—	—		—		19.8			7.3			—	—			—			27.1
Change in Kimberly-Clark’s investment, net	—	—		—		61.9			—			—	—			11.3			73.2
Spin-off cash distribution to Kimberly-Clark	—	—		—		(680.0		)	—			—	—			—			(680.0		)
Issuance of common stock and consummation of Spin-off	46,536	0.5		1,499.9		(1,500.4		)	—			—	—			—			—
Stock-based compensation expense	—	—		2.6		—			—			—	—			—			2.6
Other comprehensive loss, net of tax	—	—		—		—			—			—	—			(10.8		)	(10.8		)
Balance at December 31, 2014	46,536	0.5		1,502.5		—			7.3			—	—			(19.1		)	1,491.2
Net loss	—	—		—		—			(426.3		)	—	—			—			(426.3		)
Issuance of common stock upon the exercise or redemption of share-based awards	79	—		1.4		—			—			—	—			—			1.4
Stock-based compensation expense	—	—		14.1		—			—			—	—			—			14.1
Purchases of treasury stock	—	—		—		—			—			21	(1.0		)	—			(1.0		)
Other comprehensive loss, net of tax	—	—		—		—			—			—	—			(24.1		)	(24.1		)
Balance at December 31, 2015	46,615	0.5		1,518.0		—			(419.0		)	21	(1.0		)	(43.2		)	1,055.3
Net income	—	—		—		—			39.8			—	—			—			39.8
Issuance of common stock upon the exercise or redemption of share-based awards	67	—		0.4		—			—			—	—			—			0.4
Stock-based compensation expense	—	—		14.8		—			—			—	—			—			14.8
Purchases of treasury stock	—	—		—		—			—			32	(0.9		)	—			(0.9		)
Other comprehensive loss, net of tax	—	—		—		—			—			—	—			(6.9		)	(6.9		)
Balance at December 31, 2016	46,682	$	0.5	$	1,533.2	$	—		$	(379.2	)	53	$	(1.9	)	$	(50.1	)	$	1,102.5

See Notes to the Consolidated ~~and Combined~~ Financial Statements.



	36	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

~~Table of Contents~~

~~HALYARD HEALTH, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED AND COMBINED CASH FLOW STATEMENT~~

~~(in millions)~~

Year Ended December 31,
2014 2013 2012
Operating Activities
Net income $ 27.1
$ 154.6
$ 152.6
Depreciation and amortization 85.4
69.2
57.6
Share-based compensation 7.9
6.0
5.3
Provision for losses on accounts receivable and inventories 2.8
2.5
(11.1 )
Deferred income taxes (35.0 ) (0.9 ) (11.6 )
Asset impairments 41.9
—
—
Amortization of debt issue costs and debt discount 0.4
—
—
Net losses on asset dispositions 6.7
3.4
0.1
Changes in operating assets and liabilities, net of acquisition
Accounts receivable 15.1
(19.5 ) 26.4
Inventories (2.9 ) 14.3
(15.1 )
Prepaid expenses and other assets (4.8 ) 2.0
(0.9 )
Accounts payable 4.5
15.1
8.0
Accrued expenses 0.9
(23.8 ) (8.8 )
Other (2.1 ) 0.9
0.1
Cash Provided by Operating Activities 147.9
223.8
202.6
Investing Activities
Capital expenditures (78.5 ) (49.0 ) (40.8 )
Cash outflows for acquisitions —
(2.2 ) —
Deposit received on pending sale of assets 7.8
—
—
Proceeds from dispositions of property —
0.3
0.5
Cash Used in Investing Activities (70.7 ) (50.9 ) (40.3 )
Financing Activities
Debt proceeds 638.0
4.0
7.1
Debt issuance costs (11.8 ) —
—
Debt repayments (13.8 ) (67.9 ) (31.2 )
Spin-off cash distribution to Kimberly-Clark (680.0 ) —
—
Net transfers from (to) Kimberly-Clark 93.3
(119.3 ) (113.7 )
Other 3.5
3.2
3.9
Cash Provided by (Used in) Financing Activities 29.2
(180.0 ) (133.9 )
Effect of Exchange Rate Changes on Cash and Cash Equivalents (1.5 ) 3.3
(0.6 )
Increase (Decrease) in Cash and Cash Equivalents 104.9
(3.8 ) 27.8
Cash and Cash Equivalents - Beginning of Year 44.1
47.9
20.1
Cash and Cash Equivalents - End of Year $ 149.0
$ 44.1
$ 47.9

Supplemental Cash Flow Disclosure:
Cash paid for income taxes $ 87.6
$ 74.2
$ 94.3

~~See Notes to Consolidated and Combined Financial Statements.~~



	37	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

~~Table of Contents~~



Table of Contents

HALYARD HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED CASH FLOW STATEMENTS

(in millions)



	Year Ended December 31,
	2016			2015			2014
Operating Activities
Net income (loss)	$	39.8		$	(426.3	)	$	27.1
Depreciation and amortization	65.2			65.4			85.4
Stock-based compensation	14.8			14.1			7.9
Goodwill impairment	—			474.0			—
Asset impairment	—			—			41.9
Net losses (gains) on asset dispositions	3.7			(6.7		)	6.7
Changes in operating assets and liabilities, net of acquisition
Accounts receivable	8.4			9.0			15.1
Inventories, net of allowance	41.0			(20.2		)	(2.9		)
Prepaid expenses and other assets	1.7			(6.0		)	(4.8		)
Accounts payable	6.5			14.7			4.5
Accrued expenses	34.0			(14.5		)	0.9
Deferred income taxes and other	(26.3		)	(5.9		)	(33.9		)
Cash Provided by Operating Activities	188.8			97.6			147.9
Investing Activities
Capital expenditures	(29.1		)	(70.4		)	(78.5		)
Acquisition of business, net of cash acquired	(175.0		)	—			—
Proceeds from dispositions of property	3.2			7.8			7.8
Cash Used in Investing Activities	(200.9		)	(62.6		)	(70.7		)
Financing Activities
Line of credit facility proceeds	72.0			—			—
Line of credit facility repayments	(72.0		)	—			—
Debt proceeds	—			—			638.0
Debt issuance costs	(0.9		)	—			(11.8		)
Debt repayments	—			(51.0		)	(13.8		)
Purchase of treasury stock	(0.9		)	(1.0		)	—
Proceeds and excess tax benefits from the exercise of stock options	0.4			1.4			—
Spin-off cash distribution to Kimberly-Clark	—			—			(680.0		)
Net transfers from Kimberly-Clark	—			—			93.3
Other	—			—			3.5
Cash (Used in) Provided by Financing Activities	(1.4		)	(50.6		)	29.2
Effect of Exchange Rate Changes on Cash and Cash Equivalents	(2.3		)	(3.9		)	(1.5		)
(Decrease) Increase in Cash and Cash Equivalents	(15.8		)	(19.5		)	104.9
Cash and Cash Equivalents - Beginning of Year	129.5			149.0			44.1
Cash and Cash Equivalents - End of Year	$	113.7		$	129.5		$	149.0

Supplemental Cash Flow Disclosure:
Cash paid for income taxes	$	29.1		$	43.3		$	87.6
Cash paid for interest	$	29.9		$	32.6		$	—
Supplemental Noncash Disclosure
Capital expenditures included in accounts payable or accrued expenses	$	5.8		$	5.6		$	21.5

See Notes to the Consolidated Financial Statements.



	38



Table of Contents

HALYARD HEALTH, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED ~~AND COMBINED~~ FINANCIAL STATEMENTS

Note 1. Accounting Policies

Background and Basis of Presentation

Halyard Health, Inc. is a ~~global business which seeks to advance health~~medical technology company focused on eliminating pain, speeding recovery and ~~healthcare by~~ preventing infection ~~eliminating pain~~for healthcare providers and ~~speeding recovery.~~patients. We ~~have two business segments: Surgical and Infection Prevention (“S&IP”) and Medical Devices. Our products and solutions~~ are ~~designed~~committed to ~~address~~addressing some of today’s most important healthcare needs, ~~namely, preventing infections and~~such as reducing the use of ~~narcotics~~opioids while helping patients move from surgery to recovery. We ~~market~~operate in two business segments: Medical Devices and ~~support the efficacy, safety~~Surgical and ~~economic benefit of our products with a significant body of clinical evidence.~~Infection Prevention (“S&IP”).

References to “Halyard,” “Company,” “we,” “our” and “us” refer to Halyard Health, Inc. and its consolidated subsidiaries, and references to “Kimberly-Clark” mean Kimberly-Clark Corporation, a Delaware corporation, and its subsidiaries, unless the context otherwise requires.

~~In November 2013,~~On October 31, 2014, Kimberly-Clark ~~announced~~distributed all of our capital stock to its ~~intention to evaluate~~shareholders and completed a ~~potential tax-free~~previously announced spin-off of its ~~health care business~~healthcare division (the “Spin-off”). Halyard ~~Health, Inc.~~ was incorporated as a Delaware corporation in ~~Delaware on~~ February, ~~25,~~ 2014 ~~for~~in anticipation of that Spin-off and Kimberly-Clark transferred its Health Care business to us prior to the purpose of holding the health care business following the separation. The Spin-off was completed on October 31, 2014 and Kimberly-Clark’s health care business became Halyard Health, Inc. See Note 2, “Separation from Kimberly-Clark” for further discussion.Spin-off.

The consolidated ~~and combined~~ financial statements as of and for the years ended December 31, 2016 and 2015 represent our financial position, results of operations and cash flows as an independent publicly-traded company. The consolidated financial statements for the ~~global~~year ended December 31, 2014 represent our results of operations ~~of Halyard~~ and ~~its subsidiaries~~cash flows as an independent publicly-traded company beginning on November 1, 2014, and a combined reporting entity comprising the financial position, results of operations and cash flows of Kimberly-Clark’s ~~health care~~healthcare business prior to November 1, 2014. The consolidated ~~and combined~~ financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). ~~Certain~~

For periods prior ~~period amounts have been conformed to current presentation.~~

Our consolidated and combined financial statements include certain expenses prior to the Spin-off which Kimberly-Clark allocated to us. These expenses were 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. The total amount of these allocations from Kimberly-Clark was approximately $74 million through the Spin-off date in 2014 and $95 million in 2013 and 2012. See Note 18, “Related Party Transactions,” for additional information. Following the Spin-off, we expect Kimberly-Clark will continue to provide many of these services on a transitional basis for a fee. See Note 2, “Separation from Kimberly-Clark.”

Kimberly-Clark maintains a number of benefit and stock-based compensation programs at a corporate level. Our employees participated in those programs prior to the Spin-off, and as such, we were charged a portion of the expenses associated with these programs. However, our consolidated and combined balance sheet does not include any Kimberly-Clark net benefit plan obligations or 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 post-retirement plans, are reflected in our consolidated and combined balance sheet as well as within our operating expenses. See Note 13, “Stock-Based Compensation,” and Note 11, “Employee Defined Benefit Plans,” for further description of these stock-based compensation and defined benefit programs.

Kimberly-Clark’s net investment balance represents the cumulative net investment in us by Kimberly-Clark through the Spin-off date, including any prior net income or loss and allocations or other transactions with Kimberly-Clark. Prior to the Spin-off, current domestic income tax liabilities were deemed to be remitted in cash to Kimberly-Clark in the period the related income tax expense was recorded.

Prior to the Spin-off, Kimberly-Clark provided financing, cash management and other treasury services to us. In North America, our cash balances were swept daily by Kimberly-Clark, and we received funding from Kimberly-Clark for most of our investing and financing cash needs. Prior to the Spin-off, cash transferred to and from Kimberly-Clark ~~was recorded~~is presented as ~~intercompany receivables and payables. Those intercompany receivables and payables with~~net transfers to or from Kimberly-Clark ~~are reflected within Kimberly-Clark’s net investment~~ in the accompanying consolidated ~~and combined financial~~cash flow statements.



	38	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

~~Table of Contents~~

Principles of ~~Combination~~Consolidation

The consolidated ~~and combined~~ financial statements include our net assets and results of our operations and cash flows as described above. All intercompany transactions and accounts ~~after the Spin-off~~ within our consolidated ~~and combined~~ businesses have been eliminated.

Prior to ~~the Spin-off,~~November 1, 2014, the consolidated statements of income, comprehensive income, stockholders’ equity and ~~combined financial statements~~cash flows were prepared on a combined stand-alone basis derived from Kimberly-Clark’s consolidated financial statements and accounting records.

~~Prior to the Spin-off, all intercompany~~ All transactions between Kimberly-Clark and us ~~have been~~were included in the combined financial statements ~~prior to the Spin-off. Intercompany transactions with Kimberly-Clark or its affiliates~~and are reflected in the ~~combined statement of~~ cash flow statement for the year ended December 31, 2014 as ~~the change in Kimberly-Clark’s~~ net ~~investment~~transfers to or from Kimberly-Clark within financing ~~activities and in the consolidated combined balance sheet within Kimberly-Clark’s net investment prior to the Spin-off.~~activities.

Use of Estimates

We prepare our consolidated ~~and 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. We maintain cash balances and short-term investments in excess of insurable limits in a diversified group of major banks that are selected and monitored based on ratings by the major rating agencies in accordance with our treasury policy.



	39



Table of Contents

Inventories and Distribution Costs

~~For financial reporting purposes, most~~Most U.S. inventories are valued at the lower of cost, using the Last-In, First-Out (“LIFO”) method, or market. The balance of the U.S. and non-U.S. inventories are valued at the lower of cost (determined on the First-In, First-Out (“FIFO”) or weighted-average cost methods) or market. Distribution costs are classified as cost of products sold.

Property, Plant and Equipment and Depreciation

~~For financial reporting purposes, property,~~Property, plant and equipment are stated at cost and depreciated on the straight-line method. Buildings are depreciated over their estimated useful lives, primarily 40 years. Machinery and equipment are depreciated over their estimated useful lives, primarily ranging from 16 to 20 years. Leasehold improvements are depreciated over the assets’ estimated useful lives, or the remaining lease term, whichever is shorter. Purchases of computer software, including external costs and certain internal costs (including payroll and payroll-related costs of employees) directly associated with developing significant computer software applications for internal use, are capitalized. Computer software costs are amortized on the straight-line method over the estimated useful life of the software, which is generally three to five years. Depreciation expense is recorded in cost of products sold, research and development and selling and general expenses.

Estimated useful lives are periodically reviewed, and when warranted, changes are made to them. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss would be indicated when estimated undiscounted future cash flows from the use and eventual disposition of an asset group, which are identifiable and largely independent of the cash flows of other asset groups, are less than the carrying amount of the asset group. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent appraisals, as appropriate. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the consolidated ~~and combined~~ balance sheet and any gain or loss on the transaction is included in income.

Goodwill and Other Intangible Assets

Goodwill is tested for impairment annually and whenever events and circumstances indicate that impairment may have occurred. For 2014, we completed the required annual testing of goodwill for impairment for all reporting units using the beginning of the third quarter of 2014 as the measurement date. The fair value for all reporting units was in excess of the book value. The fair value of our Medical Devices unit exceeded the carrying value of its net assets by 76%; the fair value of our S&IP unit exceeded the carrying value of its net assets by 6% primarily because of the incremental corporate and ongoing costs that we will incur as a stand-alone public company.



	39	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

~~Table of Contents~~

The evaluation of goodwill involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. We ~~considered the market approach and~~ used a ~~discounted cash flow model~~combination of income and market approaches to estimate the current fair value of our reporting units. The fair value determination utilized key assumptions regarding the growth of the business, ~~and stand-alone public company corporate and ongoing costs,~~ each of which required ~~significant~~ management judgment, including estimated future sales volumes, selling prices and costs, changes in working capital and investments in property and equipment. These assumptions and estimates were based upon our historical experience and projections of future activity. In addition, the selection of the discount rate used to determine fair value was based upon a market participant’s view considering current market rates and our current cost of financing. There can be no assurance that the assumptions and estimates made for purposes of the annual goodwill impairment test will prove to be accurate. Volatility in the equity and debt markets, or increases in interest rates, could result in a higher discount rate. Changes in sales volumes, selling prices and costs of goods sold ~~additional stand-alone public company costs,~~ and increases in interest rates could cause changes in our forecasted cash flows. Unfavorable changes in any of the factors described above could result in a goodwill impairment charge in the future. We completed the required annual goodwill impairment testing as of July 1, 2016, and the fair values for both our Medical Devices and S&IP reporting units were substantially in excess of their respective net asset carrying values.

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.

Acquired in-process research and development (“IPR&D”) is an indefinite-lived intangible asset until the research and development project is complete. IPR&D is measured at fair value upon acquisition and reviewed for impairment annually, or whenever events or circumstances indicate that impairment may have occurred. IPR&D is written off entirely if the project is abandoned. Upon project completion, IPR&D costs are amortized over an estimated useful life, which is generally 10 to 15 years. For 2014 we have completed the required annual testing for impairment and found no indications of impairment.

Revenue Recognition and Accounts Receivable

Sales revenue is recognized at the time of product shipment or delivery, depending on when title passes, to unaffiliated customers, and when all of the following have occurred: evidence of a ~~firm~~ sales ~~agreement~~arrangement is in place, pricing is fixed or determinable, and collection is reasonably assured. Sales are reported net of returns, rebates and freight allowed. Distributor rebates are estimated based on the historical cost difference between list prices and average end user contract prices and the quantity of products expected to be sold to specific end users. We maintain liabilities at the end of each period for the estimated rebate costs incurred but unpaid for these programs. Differences between estimated and actual rebate costs are normally not



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material and are recognized in earnings in the period such differences are determined. Taxes imposed by governmental authorities on our revenue-producing activities with customers, such as sales taxes and value-added taxes, are excluded from net sales.

Net sales to one customer accounted for ~~19%~~11%, ~~19%~~18% and ~~21%~~19%, respectively, of net sales in ~~2014, 2013~~2016, 2015 and ~~2012.~~2014. No other customer accounted for more than 10% of net sales in any of the periods presented herein. As of December 31, ~~2014 and 2013,~~2016, we had ~~three and two customers, respectively,~~one customer who individually accounted for more than 10% of our consolidated ~~and combined~~ accounts receivable balance.

~~Upon the Spin-off, Kimberly-Clark retained outstanding~~ There were no customers that individually accounted for 10% or more of our consolidated accounts receivable ~~(See Note 2, “Separation from Kimberly-Clark”).~~ balance in 2015.

The allowances for doubtful accounts, ~~and~~ sales discounts ~~was $1~~and returns were $2 million as of each year ended December 31, ~~2014~~2016 and ~~2013,~~2015, respectively. The provision for doubtful accounts was not material for the years ended December 31, ~~2014, 2013~~2016, 2015 and ~~2012.~~2014.

~~Related Party Sales~~

Prior to the Spin-off, 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-Clark’s global transfer pricing policies. We entered into manufacturing and supply agreements with Kimberly-Clark prior to the Spin-off pursuant to which we or Kimberly-Clark, as the case may be, manufacture, label and package products for the other party. The manufacturing and supply agreements replaced our historical intercompany arrangements and reflect new pricing. Following the Spin-off, such sales are reflected as third party sales.



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Foreign Currency Translation

The income statements of foreign operations are translated into U.S. dollars at rates of exchange in effect each month. ~~Prior to the Spin-off, the~~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. Following the Spin-off,~~ the differences from historical exchange rates are reflected as unrealized translation adjustments in other comprehensive income.

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 ~~15, “Objectives and Strategies for Using Derivatives,~~12, “Derivative Financial Instruments,” for disclosures about derivative instruments and hedging activities.

Research and Development

Research and development expenses are expensed as incurred. Research and development expenses ~~include any impairment~~consist primarily of salaries and related expenses for ~~acquired IPR&D.~~personnel, product trial costs, outside laboratory and license fees, the costs of laboratory equipment and facilities and asset write-offs for equipment that does not reach success in product manufacturing certifications.

Stock-Based Compensation

Prior to the Spin-off, our employees participated in Kimberly-Clark’s stock-based compensation plans. Stock-based compensation expense was charged to us based on the awards and terms previously granted to our employees. Subsequent to the Spin-off, weWe have a stock-based Equity Participation Plan and an Outside Directors’ Compensation Plan ~~under which we can grant~~that provide for awards of stock options, stock appreciation rights, restricted ~~shares~~stock (and in certain limited cases, unrestricted stock), restricted stock units, performance units and ~~restricted share units~~cash awards to eligible employees (including officers who are employees), directors, advisors and ~~outside directors.~~consultants. Stock-based compensation is initially measured at the fair value of the awards on the grant date and is recognized in the financial statements over the period the employees are required to provide services in exchange for the awards. The fair value of option awards is measured on the grant date using a Black-Scholes option-pricing model. The fair value of time-based and some performance-based restricted share awards is based on the ~~Kimberly-Clark or~~ Halyard stock price at the grant date and the assessed probability of meeting future performance targets. For performance-based restricted share units for which vesting is conditioned upon achieving a measure of total shareholder return, fair value is measured using a Monte Carlo simulation. Generally, new shares are issued to satisfy vested restricted stock units and exercises of stock options. See Note ~~13,~~10, “Stock-Based Compensation.”

Income Taxes

Prior to the Spin-off, our income taxes were calculated on a separate tax return basis, although operations have been included in Kimberly-Clark’s U.S. federal, state and foreign tax returns. Our income tax results as presented were not necessarily indicative of future performance and did not necessarily reflect the results that we would have generated as an independent publicly traded company for the periods presented.

~~Following the Spin-off, we~~We account for income taxes under the asset and liability method of accounting, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Under this method, changes in tax rates and laws are recognized in income in the period such



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changes are enacted. The provision for federal, state, and foreign income taxes is calculated on income before income taxes based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes. Recording the provision for income taxes requires management to make significant judgments and estimates for matters whose ultimate resolution may not become known until the final resolution of an examination by the Internal Revenue Service (IRS) or state and foreign agencies. If it is more likely than not that some portion, or all, of a deferred tax asset will not be realized, a valuation allowance is recognized.



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Recording liabilities for uncertain tax positions involves ~~significant~~ judgment in evaluating our tax positions and developing the best estimate of the taxes ultimately expected to be paid. We include any related tax penalties and interest in income tax expense.

Prior to the Spin-off, our income taxes were calculated on a separate tax return basis, although operations have been included in Kimberly-Clark’s U.S. federal, state and foreign tax returns. Our income tax results as presented were not necessarily indicative of future performance and did not necessarily reflect the results that we would have generated as an independent publicly-traded company for the periods presented.

Employee Defined Benefit Plans

We recognize the funded status of our defined benefit ~~and post-retirement plans~~ as an asset or a liability on our balance sheet. Actuarial gains or losses are a component of our other comprehensive income, which is then included in our accumulated other comprehensive income. Pension ~~and post-retirement benefit~~ expenses are recognized over the period in which the employee renders service and becomes eligible to receive benefits. We make ~~significant~~ assumptions (including the discount rate and expected rate of return on plan ~~assets and health care trend rates)~~assets) in computing the pension ~~and post-retirement benefits~~ expense and obligations.

~~Recent~~Recently Adopted Pronouncements

In ~~August 2014,~~April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides guidance about whether a cloud computing arrangement includes a software license and the appropriate accounting for such arrangements. Notably, the guidance in this ASU already exists in the FASB Accounting Standards Codification (“ASC”) Subtopic 985-605, Software - Revenue Recognition, which is used by cloud service providers to determine whether an arrangement includes the sale or license of software. We adopted this ASU as of January 1, 2016. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.

In January 2015, the FASB issued ASU No. 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU No. 2015-01 eliminates ASC Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, which required that an entity separately classify, present, and disclose transactions and events that were determined to be both unusual and infrequent as extraordinary items. We adopted this ASU as of January 1, 2016. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, that will require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date. The new standard defines substantial doubt and provides example indicators. ~~Disclosures will be~~Disclosure is required if conditions give rise to substantial doubt. However, management ~~will need~~needs to assess if its plans will alleviate substantial doubt to determine the specific disclosures. We adopted this ASU as of December 31, 2016. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.

Recently Issued Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, that replaces the existing two-step goodwill impairment test with a simplified one-step process. This ~~standard~~ASU provides that goodwill impairment will be measured as the excess of the reporting unit’s carrying amount over its fair value and abandons the second step that requires the measurement of goodwill impairment by comparing the implied value of a reporting unit’s goodwill to the goodwill’s carrying amount. This ASU is ~~effective~~to be adopted prospectively for ~~public entities for annual periods ending~~goodwill impairment tests in fiscal years beginning after December 15, ~~2016. Earlier application~~2019, with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017. We plan to



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adopt this ASU beginning with our next annual goodwill impairment test as of July 1, 2017. Adoption of this ~~standard is permitted. This standard~~ASU is not expected to have a material effect on our financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which provides guidance in evaluating whether transactions involve the acquisition (or disposal) of assets or a business. A business has been defined as having three elements: inputs, processes and outputs. While an integrated set of assets and activities (a “set”) that is a business usually has outputs, outputs are not required to be present. Additionally, the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. This ASU provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. It is expected that this ASU will reduce the number of transactions that are treated as business combinations. This ASU is to be adopted prospectively for annual periods, and interim periods within those annual periods beginning after December 15, 2017. Adoption of the ASU is not expected to have a material effect on our financial position, results of operations or cash flows.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on the presentation and classification of certain specific cash receipts and payments in the statement of cash flows and is intended to reduce diversity in practice. This ASU is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2017, but earlier adoption is permitted. This ASU is to be adopted using a retrospective transition method to each period presented. Adoption of this ASU is not expected to have a material effect on our financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification on the statement of cash flows. Under this ASU, all excess tax benefits or deficiencies are recognized as income tax expense or benefit in the income statement and the pool of windfall tax benefits as a component of additional paid-in capital is eliminated. In regards to forfeitures, companies may make a one-time policy election to use an estimated forfeiture rate or account for forfeitures as they occur. The policy election regarding forfeitures applies only to instruments with service conditions; the requirement to estimate the probability of achieving performance conditions remains. For statutory tax withholding requirements, this ASU allows for net settlement up to the employer’s maximum statutory tax withholding requirement. Formerly, only the minimum statutory tax withholding requirement was allowed to be met through net settlement while retaining equity classification. This ASU is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2016. Earlier adoption is permitted in any interim or annual period for which financial statements have not yet been issued. The application of this ASU in regards to the accounting for income taxes, forfeitures and statutory tax withholding requirements should be applied using a modified retrospective application with a cumulative effect adjustment to additional paid-in capital as of the beginning of the period of adoption. The presentation of employee taxes paid on the statement of cash flows should be applied retrospectively. The adoption of this ASU is not expected to have a material effect on our financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU requires the recognition of assets and liabilities for leases with lease terms of more than twelve months. The recognition, measurement and presentation of expenses and cash flows arising from a lease will depend primarily on its classification as a finance or an operating lease, with the classification criteria for distinguishing between the two being similar to the classification criteria for distinguishing between capital and operating leases under current GAAP. However, unlike current GAAP, recognition of finance and operating leases on the balance sheet is required, and additional disclosures are required to help financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases. This ASU requires modified retrospective application for existing leases. This ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, however, earlier application is permitted. The adoption of this ASU will require us to recognize assets and liabilities for operating leases we have entered into for our principal executive offices as well as certain warehouse, manufacturing and distribution facilities globally. We have not yet determined the impact recognition of such assets and liabilities will have on our financial position, results of operations or cash flows.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities. This ASU requires equity investments, except those accounted for under the equity method or those that result in consolidation of the equity investee, to be measured at fair value with changes in fair value recognized in net income. However, equity investments without readily determinable fair values may be measured at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments in the same issuer. In



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addition, this ASU provides for a qualitative impairment assessment for equity investments that do not have readily determinable fair values. This ASU also clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. This ASU should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The provisions related to equity investments that do not have readily determinable fair values should be applied prospectively to such equity investments that exist as of the date of adoption. This ASU will be effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017. Early adoption of this ASU is permitted. The adoption of this ASU is not expected to have a material effect on our financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which, along with subsequent amendments, provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most ~~current~~existing revenue recognition guidance. ~~The standard~~ASU 2014-09 provides for a principles-based, five-step approach to measure and recognize revenue from contracts with customers. ASU 2014-09 is effective for public entities for annual and interim periods beginning after December 15, ~~2016.~~2017. Early adoption for periods beginning after December 15, 2016 is ~~not~~ permitted. The guidance permits two implementation approaches, one requiring retrospective application of the ~~standard retrospectively to each~~new ASU with restatement of prior ~~period presented or a simplified retrospective method~~years and one requiring prospective application of the new ASU with ~~the cumulative effect of initially applying the standard recognized in retained earnings with footnote~~ disclosure of results under old standards. While our review of the ~~effects on each financial statement line item. The~~ effect of this ~~standard~~ASU is not yet complete, based on the results of our review to date, we do not expect a material effect on our financial position, results of operations ~~and~~or cash ~~flows is~~flows. We will continue our evaluation to include the disclosure requirements along with any changes, modifications or interpretations that may affect our current conclusion. We have not ~~yet known.~~selected a transition method, but expect to do so in 2017 upon completion of further analysis.

Note 2. ~~Separation from Kimberly-Clark~~Business Acquisition

~~Separation from Kimberly-Clark~~

~~Prior to~~On May 2, 2016, Halyard acquired all of the ~~Spin-off, Halyard had no operations other than those related to the preparation to receive the health care business~~issued and outstanding capital stock of ~~Kimberly-Clark. Following the Spin-off, we became~~Medsystems Holdings, Inc. (“Medsystems”) a ~~separate public company, and Kimberly-Clark has no continuing stock ownership in us.~~

~~Prior to the Spin-off, we entered into~~Delaware corporation, for a ~~distribution agreement and various other agreements~~purchase price of $175 million, net of cash acquired (the “Acquisition”). The Acquisition was funded with ~~Kimberly-Clark to effect the separation~~a combination of our business from Kimberly-Clark's other businesses and set forth our contractual relationships with Kimberly-Clark after the Spin-off. These agreements provide for the allocation, between us and Kimberly-Clark, of Kimberly-Clark's assets, liabilities, employees and obligations (including Kimberly-Clark’s investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the Spin-off. The various other agreements include a transition services agreement, a tax matters agreement, an employee matters agreement, intellectual property agreements and manufacturing and supply agreements.

~~Using $250 million of proceeds from 6.25% senior unsecured notes and $390 million from a senior secured term loan (see Note 9, “Debt”) and~~ cash on hand and our Revolving Credit Facility (See Note 6 , “Debt”). Medsystems owns and conducts its primary business through CORPAK Medsystems (Medsystems and CORPAK Medsystems hereinafter referred to as “Corpak”). Corpak’s innovative enteral access feeding solutions and portfolio of nasogastric feeding tubes complement our existing enteral feeding products and create a complete offering of enteral feeding solutions with our Medical Devices segment.

In conjunction with the Acquisition, we ~~made~~identified intangible assets related to currently marketed products and in-process research and development (“IPR&D”) that we expect will yield economic benefits in the future. The identified intangible assets include technology, trademarks and customer relationships that were combined into composite intangible assets by product line in consideration of the following:

Our intent was to acquire the product portfolio and the related technology.

The trademarks will only be used to market the products associated with the existing technologies. Accordingly their remaining economic lives are similar.

The customer base was considered, but was not identified as a separate intangible asset because the cash ~~distribution to Kimberly-Clark equal to $680 million.~~flows are not separable from the related technology.

Low historical customer turnover rates supports longer lives for customer relationships which is consistent with the estimated remaining useful lives for the acquired technologies and trademarks.

The allocation of the purchase price was as follows (in millions):



	Purchase Price Allocation
Current assets acquired net of liabilities assumed	$	14.1
Property, plant and equipment	4.4
Identifiable intangible assets, excluding IPR&D	105.1
Identifiable IPR&D	5.7
Deferred tax liabilities	(38.4		)
Goodwill	84.1
Total	$	175.0



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~~Table of Contents~~

~~Non-Cash Activities Related~~Identifiable IPR&D includes a number of products that we expect to launch in 2017. Goodwill arising from the ~~Separation from Kimberly-Clark~~

~~Non-cash activities related to~~Acquisition is not fully tax deductible. The identifiable intangible assets, excluding IPR&D, include the ~~Spin-off, net of amounts retained or contributed by Kimberly-Clark, are as follows~~following (in millions):

Current assets $ 81.7
Property retained by Kimberly-Clark 26.5
Accounts payable (74.0 )
Accrued liabilities (7.4 )
Non-current liabilities (1.3 )
AOCI and other 5.9
Total $ 31.4



	Fair Value		Weighted Average Useful Lives (Yrs)
Portfolio of disposables	$	102.9	15
Enteral access technology	2.2		6
Total	$	105.1

~~Through~~Corpak’s results have been included in the ~~Spin-off date,~~accompanying consolidated income statement following the Acquisition on May 2, 2016. Corpak’s revenue of $36 million for the period from May 2, 2016 to December 31, 2016 is included in “Net Sales” in the accompanying consolidated income statements. Net income directly attributable to Corpak was approximately $1 million for the period from May 2, 2016 to December 31, 2016. Due to the integration of Corpak’s portfolio of products into our existing digestive health products in the Medical Devices segment, net income is not necessarily indicative of Corpak’s net income as a separate, stand-alone entity.

The following unaudited pro forma information is presented in the table below for the years ended December 31, 2016 and 2015 as if the Acquisition had occurred on January 1, 2015 (in million, except per share amounts):



	Year Ended December 31,
	2016		2015
Net sales	$	1,609.8	$	1,628.6

Net income (loss)	43.0		(430.3		)

Earnings (loss) per share:
Basic	$	0.92	$	(9.24	)
Diluted	0.91		(9.24		)

The pro forma financial information has been adjusted to include the effects of the Acquisition, including acquisition-related costs, amortization of acquired intangibles, incremental interest expense and related tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have been achieved had the Acquisition taken place as of January 1, 2015.

Upon Acquisition, we initiated activities to integrate the operations of Corpak into our company. These activities include, but are not limited to, integration of corporate functions, information technology and alignment with our operations.

For the year ended December 31, 2016, we have incurred ~~$89~~$13 million ~~($88~~for the acquisition and integration activities described above, consisting primarily of severance and benefits, consulting, legal and other costs. These costs are included in “Cost of products sold” and “Selling and general expenses” in the accompanying consolidated income statements.

Restructuring

In June 2016, we initiated a restructuring plan to close the Corpak corporate headquarters and operating facility in Buffalo Grove, Illinois and consolidate operations into our existing corporate and operational facilities by the third quarter of 2017 (the “Plan”). We expect to incur costs of $7 million ~~after tax) of transaction costs~~ related to this Plan, consisting primarily of severance and benefits, accelerated depreciation and lease termination costs. For the ~~separation from Kimberly-Clark~~year ended December 31, 2016, we have incurred $5 million of costs that are included in “Cost of products sold” and ~~$12~~“Selling and general expenses” in the accompanying consolidated income statements. These costs include $4 million ~~($8~~of severance and benefits accrued for employees impacted by the Plan. In the year ended December 31, 2016, we have paid $1 million ~~after tax) of post Spin-off transition costs.~~

~~Note 3. Manufacturing Footprint Strategic Changes~~

~~In 2014, Kimberly-Clark initiated a plan~~ to ~~exit one of the disposable glove facilities in Thailand~~affected employees and outsource the related production to improve the underlying profitability and return on invested capital of our S&IP business. In conjunction with this plan, we evaluated the impacted asset group, which includes all of our facilities in Thailand, for impairment, and we re-evaluated the remaining useful lives of the assets involved in the impacted asset group. The plan resulted in a reduction of our workforce by approximately 2,500 positions and cumulative charges of $57 million ($47 million after-tax) through the Spin-off date that were recognized in cost of sales. The charges consisted of non-cash asset impairment of $42 million, accelerated depreciation of $10 million and workforce reduction and other exit cash costs of $5 million. Accelerated depreciation represents the incremental depreciation over and above the depreciation for the original established useful life.

~~Following the Spin-off, we incurred additional costs of $3 million ($2 million net of tax) primarily for accelerated depreciation through December 8, 2014. Payments of $5 million were made~~accrual for severance and ~~other costs in 2014 and there were no remaining accrued expenses related to the sale~~employee benefits was $3 million as of December 31, ~~2014.~~2016.

On December 8, 2014, we entered into a definitive agreement to sell the disposable glove facility to a third party. We received advance cash payments of $8 million before the end of 2014, which is included in “Accrued Expenses” in the accompanying consolidated and combined balance sheet. The net book value of the disposable glove facility was $3 million and was classified as “Assets Held for Sale” in the accompanying balance sheet. The sale closed in January 2015, resulting in a gain on sale of $12 million, which was recorded in the first quarter of 2015.



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Note 3. Goodwill

We test goodwill for impairment annually (as of July 1) or more frequently whenever events or circumstances more likely than not indicate that the fair value of the reporting unit may be below its carrying amount. The fair value of our reporting units were estimated using a combination of income (discounted cash flow analysis) and market approaches. Both approaches are dependent upon several assumptions regarding future periods, including assumptions with respect to future sales growth, commodity costs and a terminal growth rate. A weighted average cost of capital (“WACC”) was used to discount future estimated cash flows to their present values. The WACC was based on externally observable data considering market participants’ cost of equity and debt, optimal capital structure and risk factors specific to our company. The market approach estimated the fair value of our business based on comparable publicly-traded companies in our industry.

We completed the required annual goodwill impairment testing as of July 1, 2016, and the fair values for both our Medical Devices and S&IP reporting units were substantially in excess of their respective net asset carrying values.

The changes in the carrying amount of goodwill by business segment are as follows (in millions):



	Medical Devices								S&IP									Consolidated
	Goodwill			Accumulated Impairment		Goodwill, net			Goodwill			Accumulated Impairment			Goodwill, net			Goodwill, net
Balance at December 31, 2014	$	681.6		$	—	$	681.6		$	744.5		$	—		$	744.5		$	1,426.1
Goodwill impairment^(a)	—			—		—			—			(474.0		)	(474.0		)	(474.0		)
Currency translation adjustment	(3.2		)	—		(3.2		)	(3.7		)	—			(3.7		)	(6.9		)
Balance at December 31, 2015	678.4			—		678.4			740.8			(474.0		)	266.8			945.2
Goodwill acquired^(b)	84.1			—		84.1			—			—			—			84.1
Currency translation adjustment	(0.2		)	—		(0.2		)	(0.1		)	—			(0.1		)	(0.3		)
Balance at December 31, 2016	$	762.3		$	—	$	762.3		$	740.7		$	(474.0	)	$	266.7		$	1,029.0


(a)	On completion of the annual goodwill impairment test as of July 1, 2015, we recognized a $474 million impairment loss for our S&IP reporting unit for the year ended December 31, 2015, which represented the amount by which the carrying value of the S&IP reporting unit’s goodwill exceeded its implied fair value.


(b)	We acquired $84 million of goodwill in conjunction with our acquisition of Corpak (see Note 2, “Business Acquisition”).

Note 4. Supplemental Balance Sheet Information

Accounts Receivable

Accounts receivable consist of the following (in millions):



	As of December 31,
	2016			2015
Accounts Receivable	$	191.6		$	226.3
Allowances and doubtful accounts	(1.5		)	(1.6		)
Accounts receivable, net	$	190.1		$	224.7



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Inventories

Inventories at the lower of cost (determined on the LIFO/FIFO or weighted-average cost methods) or market consists of the following (in millions):


	As of December 31,																As of December 31,
	2014								2013								2016								2015
	LIFO			Non- LIFO		Total			LIFO			Non- LIFO		Total			LIFO			Non- LIFO		Total			LIFO			Non- LIFO		Total
Raw Materials	$	48.4		$	1.3	$	49.7		$	40.2		$	2.4	$	42.6		$	45.8		$	2.3	$	48.1		$	49.7		$	1.1	$	50.8
Work in process	47.7			0.3		48.0			64.8			0.4		65.2			50.6			0.3		50.9			46.1			0.1		46.2
Finished goods	157.8			37.5		195.3			148.7			42.3		191.0			130.8			40.5		171.3			165.8			46.3		212.1
Supplies and other	—			11.8		11.8			—			13.6		13.6			—			12.8		12.8			0.1			11.6		11.7
	253.9			50.9		304.8			253.7			58.7		312.4			227.2			55.9		283.1			261.7			59.1		320.8
Excess of FIFO or weighted-average cost over LIFO cost	(21.7		)	—		(21.7		)	(26.8		)	—		(26.8		)	(10.6		)	—		(10.6		)	(17.6		)	—		(17.6		)
Total	$	232.2		$	50.9	$	283.1		$	226.9		$	58.7	$	285.6		$	216.6		$	55.9	$	272.5		$	244.1		$	59.1	$	303.2

We may distribute products bearing the Kimberly-Clark brand through April 2017 under a royalty agreement that we have with Kimberly-Clark. As of December 31, 2016, we had $18 million of inventory bearing the Kimberly-Clark brand. Based on management’s expectation regarding sales of Kimberly-Clark branded products, we have recorded an allowance of $10 million in cost of products sold for potential losses from inventory that we may not sell before the expiration of our royalty agreement with Kimberly-Clark.

~~Note 5.~~ Property, Plant and Equipment

Property, plant and equipment consists of the following (in millions):


	As of December 31,						As of December 31,
	2014			2013			2016			2015
Land	$	2.3		$	4.5		$	2.1		$	2.1
Buildings	67.9			104.3
Buildings and leasehold improvements							85.8			86.7
Machinery and equipment	436.3			617.2			499.8			492.8
Construction in progress	62.2			46.5			25.0			18.3
	568.7			772.5			612.7			599.9
Less accumulated depreciation	(290.9		)	(447.6		)	(351.9		)	(320.4		)
Total	$	277.8		$	324.9		$	260.8		$	279.5

~~The decrease in property, plant and equipment from 2013 is primarily due to the manufacturing footprint strategic changes related to the glove facility in Thailand (see Note 3).~~ Property, plant and equipment includes $0.4 million and $1 million of capitalized interest in the ~~year~~years ended December 31, ~~2014. As of December 31, 2014, there was $22~~2016 and 2015, respectively. There were $6 million of capital expenditures in accounts payable ~~primarily related to building facilities necessary for us to operate~~ as ~~a stand-alone company. In the prior~~of each year ~~capital expenditures in accounts payable was not material.~~

ended December 31, 2016 and 2015, respectively.

As of December 31, ~~2014~~2016 and ~~2013,~~2015, we held ~~$156~~$158 million and ~~$137~~$173 million, respectively, of net property, plant and equipment in the United States.

Depreciation expense was ~~$53~~$43 million, $40 million and ~~$38~~$53 million, respectively, in the years ended December 31, ~~2014, 2013~~2016, 2015 and ~~2012.~~2014.



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~~Note 6. Goodwill and~~ Intangible Assets

~~The changes in the carrying amount of goodwill by business segment are as follows (in millions):~~

Medical
Devices
S&IP Total
Balance at December 31, 2012 $ 684.6
$ 749.5
$ 1,434.1
Acquisitions 2.7
—
2.7
Currency changes (1.0 ) (5.7 ) (6.7 )
Balance at December 31, 2013 686.3
743.8
1,430.1
Currency changes (4.7 ) 0.7
(4.0 )
Balance at December 31, 2014 $ 681.6
$ 744.5
$ 1,426.1

~~At December 31, 2014 and 2013, we had IPR&D included in intangible assets of $7 million for both periods. The IPR&D is not subject to amortization until the project is complete.~~

Intangible assets subject to amortization consist of the following (in millions):


	As of December 31,														As of December 31,
	2014							2013							2016							2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Trademarks	$	126.6	$	(86.1	)	$	40.5	$	126.6	$	(82.2	)	$	44.4	$	125.9	$	(93.8	)	$	32.1	$	126.6	$	(90.3	)	$	36.3
Patents and acquired technologies	149.1		(99.3		)	49.8		149.9		(76.1		)	73.8		251.8		(131.1		)	120.7		149.1		(117.3		)	31.8
Other	48.3		(37.0		)	11.3		49.2		(32.9		)	16.3		55.1		(43.8		)	11.3		55.1		(40.6		)	14.5
Total	$	324.0	$	(222.4	)	$	101.6	$	325.7	$	(191.2	)	$	134.5	$	432.8	$	(268.7	)	$	164.1	$	330.8	$	(248.2	)	$	82.6

As of December 31, 2016, we had $6 million of indefinite-lived intangible assets that we acquired in connection with the Acquisition related to IPR&D projects that we expect to launch in 2017. Amortization expense for intangible assets was ~~$32~~$22 million,, ~~$29~~ $26 million and ~~$19~~$32 million for the years ended December 31, ~~2014~~, ~~2013~~2016, 2015 and ~~2012~~,2014, respectively. We estimate amortization expense for the next five years and beyond will be as follows (in millions):


For the years ending December 31,
2015	$	25.4
2016	20.2
2017	14.9		$	21.2
2018	11.1		19.0
2019	6.9		15.2
2020			13.0
2021			10.7
Thereafter	23.1		85.0
Total	$	101.6	$	164.1

Accrued Expenses

Accrued expenses consist of the following (in millions):



	As of December 31,
	2016		2015
Accrued rebates	$	55.7	$	73.9
Accrued salaries and wages	57.1		34.5
Accrued taxes - income and other	7.2		15.3
Other	31.3		28.3
Total	$	151.3	$	152.0



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~~Table of Contents~~

~~Note 7. Accrued Liabilities~~

~~Current Liabilities~~

~~Accrued liabilities consist of the following (in millions):~~

December 31,
2014 2013
Accrued rebates $ 82.2
$ 81.9
Accrued salaries and wages 46.4
37.3
Accruals for estimated litigation matters —
25.7
Accrued taxes - income and other 23.4
12.2
Deposit received on pending sale of assets 7.8
—
Other 23.6
22.9
Total $ 183.4
$ 180.0

Other Long-Term Liabilities

Other long-term liabilities consist of the following (in millions):


	December 31,				As of December 31,
	2014		2013		2016		2015
Deferred income taxes	$	27.9	$	90.5
Taxes payable	1.6		1.3		$	3.4	$	1.3
Accrued compensation benefits					9.7		9.5
Other	18.6		2.7		17.0		17.0
Total	$	48.1	$	94.5	$	30.1	$	27.8

Note 8.5. Fair Value Information

The following fair value information is based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels in the hierarchy used to measure fair value are:

Level 1—1: Unadjusted quoted prices in active markets accessible at the reporting date for identical assets and liabilities.

Level 2—2: Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets and liabilities in markets that are not considered active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3—3: Prices or valuations that require inputs that are significant to the valuation and are unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

~~During 2014 and 2013, there were no transfers among Level 1, 2 or 3 fair value determinations.~~

The derivative liabilities for foreign exchange contracts as of December 31, ~~2014~~2016 and ~~2013~~2015 were $0$1 million and $5$2 million, respectively, and are included in the consolidated ~~and combined~~ balance sheet in accrued expenses. These derivatives are classified as Level 2 of the fair value hierarchy. The fair values of derivatives used to manage foreign currency risk is based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. Additional information on our use of derivative instruments is contained in Note ~~15, “Objectives and Strategies for Using Derivatives.~~12, “Derivative Financial Instruments.”



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The following table includes the fair value of our financial instruments for which disclosure of fair value is required (in millions):


	Fair Value Hierarchy Level	December 31, 2014				December 31, 2013				Fair Value Hierarchy Level	December 31, 2016				December 31, 2015
		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value			Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Cash and cash equivalents	1	$	149.0	$	149.0	$	44.1	$	44.1	1	$	113.7	$	113.7	$	129.5	$	129.5
Liabilities
Senior unsecured notes										1	246.5		256.4		245.9		252.5
Debt	2	636.2		644.0		11.9		11.9		2	332.5		341.3		332.2		337.3

Cash equivalents are recorded at cost, which approximates fair value due to their short-term nature.

~~As of December 31, 2013, short-term debt included $9 million of debt owed to wholly-owned subsidiaries of Kimberly-Clark.~~ The ~~carrying value approximated~~ fair value ~~due to the short-term nature~~ of ~~the debt.~~

~~Long-term debt at December 31, 2014 includes the carrying amount of our senior secured term loan (including current portion) and~~ our senior unsecured notes ~~(See Note 9, “Debt”). Fair value for the debt was~~is determined using observable market prices based on ~~observed~~ trading ~~prices~~activity on a primary exchange. For the year ended December 31, 2016, there were no transfers among Level 1, 2 or 3 fair value determinations. In the prior year, the senior unsecured notes transferred from Level 2 to Level 1 of the fair value hierarchy following registration of the notes. Transfers between levels occur when there are changes in ~~a secondary market.~~the observability of inputs. Changes between levels are assumed to occur at the beginning of the year.



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Note 9.6. Debt

As of December 31, ~~2014~~2016 and ~~2013,~~2015, our debt balances were as follows (in millions):

Weighted-
Average
Interest Rate
Maturities December 31,
2014 2013
Senior Secured Term Loan 4.00% 2021 $ 386.2
$ —
Senior Unsecured Notes 6.25% 2022 250.0
—
Debt due to Kimberly-Clark 0.50% 2014 —
9.1
Bank loans and other financings in various currencies 0.60% 2014 —
2.8
Total long-term debt 636.2
11.9
Less debt payable within one year 3.9
11.9
Long-term portion $ 632.3
$ —



	Weighted- Average Interest Rate	Maturities	As of December 31,
	Weighted- Average Interest Rate	Maturities	2016			2015
Senior Secured Term Loan	3.98%	2021	$	339.0		$	339.0
Senior Unsecured Notes	6.25%	2022	250.0			250.0
Total long-term debt			589.0			589.0
Unamortized Debt Discounts and Issuance Costs
Senior Secured Term Loan			(6.5		)	(6.8		)
Senior Unsecured Notes			(3.5		)	(4.1		)
Total Debt, net			$	579.0		$	578.1

Senior Secured Term Loan and Revolving Credit Facility

The senior secured term loan (the “Term Loan Facility”) is under a credit agreement that also includes a senior secured revolving credit facility allowing borrowings of up to $250 million, with a letter of credit sub-facility in an amount of $75 million and a swingline sub-facility in an amount of $25 million (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Senior Credit Facilities”). The Senior Credit Facilities are secured by substantially all of our assets located in the United States and a certain percentage of our foreign subsidiaries’ capital stock. Unamortized debt discount and issuance costs are being amortized to interest expense over the life of the Term Loan Facility using the interest method, resulting in an effective interest rate of 3.94% as of December 31, 2016.

In December 2016, we executed an amendment to the Term Loan Facility (the “Amendment”), under which the margin, or “spread” that was charged over the available floating interest rates, as described below, was reduced by 0.5%. In conjunction with the amendment we paid fees of $1 million which are being amortized to interest expense over the remaining term of the Term Loan Facility using the interest method.

Borrowings under the Term Loan Facility, as amended, bear interest, at our option, at either (i) a reserve-adjusted LIBOR rate, subject to a floor of 0.75%, plus 2.75% (formerly 3.25% prior to the Amendment), or (ii) a base rate, subject to a floor of 0.75%, (calculated as the greatest of (1) the prime rate, (2) the U.S. federal funds effective rate plus 0.50% or (3) the one month LIBOR Rate plus 1.00%) plus 1.75% (formerly 2.25% prior to the Amendment). As of December 31, ~~2014, we were~~2016, the interest rate in ~~compliance with all~~effect for the Term Loan Facility was 3.50%.

Borrowings under the Revolving Credit Facility will bear interest, at our option, at either (i) a reserve-adjusted LIBOR rate, plus a margin ranging between 1.75% to 2.50% per annum, depending on our consolidated total leverage ratio, or (ii) the base rate plus a margin ranging between 0.75% to 1.50% per annum, depending on our consolidated total leverage ratio. The unused portion of our ~~debt covenants, which are further described below.~~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. As of December 31, ~~2014,~~2016, we had no borrowings and letters of credit of $4 million outstanding under the ~~scheduled principal payments~~Revolving Credit Facility, leaving $246 million available for borrowing. The maturity date for the Revolving Credit Facility is October 31, 2019.

On May 2, 2016, we borrowed $72 million under our Revolving Credit Facility to partially fund our acquisition of Medsystems. See Note 2, “Business Acquisition” for a description of this acquisition. By December 31, 2016, we had repaid all of the borrowings on our ~~long-term debt are $4 million each year for the next five years.~~Revolving Credit Facility.

Senior Unsecured Notes

~~Prior to the Spin-off, we issued $250 million of senior unsecured notes (the “Notes”).~~ The Senior Unsecured Notes (“Notes”) will mature on October 15, 2022 and interest ~~will accrue~~accrues at a rate of 6.25% per annum ~~from October 17, 2014~~ and ~~will be~~is payable semi-annually in arrears on April 15 and October 15 of each ~~year, beginning on April 15, 2015.~~year. The Notes are guaranteed, jointly and severally, by each of our domestic subsidiaries that guarantees the Senior Credit Facilities. Unamortized debt discount and issuance costs are being amortized to interest expense over the life of the credit agreement using the interest method, resulting in an effective interest rate of 6.54% as of December 31, 2016.



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Debt Covenants

The ~~agreement governing~~senior secured term loan and the Notes ~~contains~~are subject to similar covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to:

incur additional indebtedness, guarantee indebtedness or issue disqualified stock or, in the case of our restricted subsidiaries, preferred stock;

pay dividends on, repurchase or make distributions in respect of our capital stock;

make certain investments or acquisitions;

sell, transfer or otherwise convey certain assets;

create liens;

enter into agreements restricting certain subsidiaries’ ability to pay dividends or make other intercompany transfers;



	47	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

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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.

~~Senior Secured Term Loan and Revolving Credit Facility~~

Prior to the Spin-off, we entered into a credit agreement establishing credit facilities in aggregate principal amount of $640 million, including a five-year senior secured revolving credit facility allowing borrowings of up to $250 million, with a letter of credit sub-facility in an amount of $75 million and a swingline sub-facility in an amount of $25 million (the “Revolving Credit Facility”), and a seven-year senior secured term loan of $390 million (the “Term Loan Facility”).

The Term Loan Facility is secured by substantially all of our assets located in the United States and a certain percentage of our foreign subsidiaries’ capital stock. The credit agreement contains covenants similar to those described above. Pursuant to the restrictive covenants that limit our ability to pay dividends, we have the ability to pay dividends, repurchase stock and make investments up to an “Available Amount,” as defined in the credit agreement governing the ~~Term Loan Facility and the Revolving~~Senior Credit ~~Facility,~~Facilities, provided that we are in compliance with all required covenants, there are no events of default and upon meeting certain financial ratios.

~~In conjunction~~As of December 31, 2016, we were in compliance with ~~the credit agreements described above, we paid $12~~all of our debt covenants. The $339 million in financing fees and the loan was issued at a discount of $4 million, which amounts were deferred and will be amortized to interest expense over the life of the credit agreement using the effective interest method.

~~Borrowings~~owed under ~~the~~our Term Loan Facility will ~~bear interest, at Halyard’s option, at either (i) a reserve-adjusted LIBOR rate, subject to a floor of 0.75%, plus 3.25%, or (ii) a base rate, subject to a floor of 0.75%, (calculated as~~be due on October 31, 2021, which is the ~~greatest of (1) the prime rate, (2) the U.S. federal funds effective rate plus 0.50% or (3) the one month LIBOR Rate plus 1.00%) plus 2.25%. The~~ Term Loan ~~Facility requires quarterly amortization payments equal to 0.25% of the aggregate principal amount of the term loans outstanding on the closing~~Facility’s maturity date. As of December 31, ~~2014, the interest rate in effect for the Term Loan Facility was 4.00%.~~

Borrowings under the Revolving Credit Facility will bear interest, at Halyard’s option, at either (i) a reserve-adjusted LIBOR rate, plus a margin initially equal to 2.25% and then, following Halyard’s delivery under the credit agreement of Halyard’s financial statements for Halyard’s fiscal quarter ending March 31, 2015, ranging between 1.75% to 2.50% per annum, depending2016, there are no other scheduled principal payments due on Halyard’s consolidated total leverage ratio, or (ii) the base rate plus a margin initially equal to 1.25% and then, following Halyard’s delivery of those financial statements, ranging between 0.75% to 1.50% per annum, depending on Halyard’s consolidated total leverage ratio. The unused portion of Halyard’s Revolving Credit Facility will be subject to a commitment fee equal to (i) 0.25% per annum, when Halyard’s consolidated total leverage ratio is less than 2.25 to 1.00 and (ii) 0.40% per annum, otherwise. As of December 31, 2014, we had no borrowings and letters of credit of $2 million outstanding under the Revolving Credit Facility, leaving $248 million available for borrowing.

~~In the prior year, the~~our long-term debt due to Kimberly-Clark was subject to repayment upon demand, and accordingly was classified in current liabilities on the combined and consolidated balance sheet. The debt due to Kimberly-Clark of $9 million as of December 31, 2013 was repaid in the ~~Spin-off.~~next five years.

~~In the prior year, the bank loan operated as a short-term revolver, and the balance owed at December 31, 2013 of $3 million was repaid in March 2014.~~

Note ~~10.~~7. Income Taxes

Prior to the Spin-off, our income taxes were calculated on a separate tax return basis, although operations have been included in Kimberly-Clark’s U.S. federal, state and foreign tax returns. Kimberly-Clark’s 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. Following the Spin-off, ourOur income taxes are calculated using the asset and liability method of accounting, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Prior to the Spin-off, our income taxes were calculated on a separate tax return basis, although operations have been included in Kimberly-Clark’s U.S. federal, state and foreign tax returns.



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The provision for income taxes includes federal, state and foreign taxes currently payable and those deferred because of net operating losses and temporary differences between the ~~Consolidated and Combined Financial Statements~~consolidated financial statements and tax bases of assets and liabilities.



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The components of income (loss) before income taxes, and the provision (benefit) for income taxes are as follows (in millions):


	Year Ended December 31,									Year Ended December 31,
	2014			2013			2012			2016			2015			2014
Income before income taxes
United States	$	91.8		$	136.8		$	119.3		$	24.2		$	(424.4	)	$	91.8
Foreign	(0.6		)	91.0			110.5			31.1			13.9			(0.6		)
Total	91.2			227.8			229.8			55.3			(410.5		)	91.2
Income tax provision (benefit):
Current:
United States	71.2			41.4			49.8			29.8			13.0			71.2
State	5.5			8.2			10.6			4.4			2.7			5.5
Foreign	18.0			23.7			30.8			7.8			5.3			18.0
Total	94.7			73.3			91.2			42.0			21.0			94.7
Deferred:
United States	(9.8		)	(0.4		)	(10.0		)	(27.3		)	(8.3		)	(9.8		)
State	(1.4		)	0.2			(1.5		)	(2.9		)	(0.6		)	(1.4		)
Foreign	(19.4		)	0.1			(2.5		)	3.7			3.7			(19.4		)
Total	(30.6		)	(0.1		)	(14.0		)	(26.5		)	(5.2		)	(30.6		)
Total income tax provision	$	64.1		$	73.2		$	77.2		$	15.5		$	15.8		$	64.1

Major differences between the federal statutory rate and the effective tax rate are as follows:


	Year Ended December 31,						Year Ended December 31,
	2014		2013		2012		2016		2015		2014
Federal statutory rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
Rate of state income taxes, net of federal tax benefit	3.0		2.3		4.6		0.2		(0.3	)	3.0
Statutory rate other than U.S. statutory rate	(0.3	)	(3.2	)	(3.5	)	(6.9	)	0.6		(0.3	)
Thailand repatriation related to the Spin-off	15.5		—		—		—		—		15.5
Thailand statutory rate change							7.3		—		—
Sec. 987 regulation change, federal and state impact							(4.8	)	—		—
U.S. federal research and development credit							(4.7	)	0.6		—
Goodwill							—		(40.4	)	—
Non-deductible expenses related to the Spin-off	17.6		—		—		—		—		17.6
Change in valuation allowances	2.1		0.6		(1.9	)	—		0.1		2.1
Other, net	(2.6	)	(2.6	)	(0.6	)	1.9		0.6		(2.6	)
Effective tax rate	70.3	%	32.1	%	33.6	%	28.0	%	(3.8	)%	70.3	%



	4952	~~HALYARD HEALTH, INC. - 2014 Annual Report~~



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The following is a summary of the significant components of the Company’s deferred tax assets and liabilities (in millions):


		As of December 31,							As of December 31,
		2014			2013				2016			2015
Deferred tax assets	Deferred tax assets							Deferred tax assets
Inventories		$	—		$	23.8
Intangibles, net	Intangibles, net	13.8			—			Intangibles, net	$	—		$	15.3
Accrued liabilities	Accrued liabilities	16.7			14.8			Accrued liabilities	34.8			25.3
Stock-based compensation								Stock-based compensation	8.7			4.8
Other	Other	2.7			15.3			Other	8.4			5.9
		33.2			53.9				51.9			51.3
Valuation allowance	Valuation allowance	(0.8		)	(4.3		)	Valuation allowance	(0.5		)	(0.5		)
Total deferred assets	Total deferred assets	32.4			49.6			Total deferred assets	51.4			50.8

Deferred tax liabilities	Deferred tax liabilities							Deferred tax liabilities
Intangibles, net								Intangibles, net	17.7			—
Inventories	Inventories	17.4			—			Inventories	13.4			19.8
Property, plant and equipment, net	Property, plant and equipment, net	27.5			45.8			Property, plant and equipment, net	40.0			39.4
Intangibles, net		—			47.2
Other	Other	1.2			0.1			Other	1.0			0.5
Total deferred tax liabilities	Total deferred tax liabilities	46.1			93.1			Total deferred tax liabilities	72.1			59.7
Net deferred tax liabilities	Net deferred tax liabilities	$	13.7		$	43.5		Net deferred tax liabilities	$	20.7		$	8.9

Valuation allowances ~~increased $1 million~~remained the same during the ~~first ten months of 2014 impacting earnings by the same amount. Valuation allowances decreased by $5 million due~~year ended December 31, 2016 with no impact to ~~the Spin-off. This activity did not impact~~ earnings. ~~During the two month post spin period, valuation allowances increased $1 million impacting earnings by the same amount.~~ Valuation allowances at the end of ~~2014~~2016 and ~~2013~~2015 primarily relate to tax credits and income tax loss carryforwards.

Realization of income tax loss carryforwards is dependent on generating sufficient taxable income prior to expiration of these carryforwards. Although realization is not assured, we believe it is more likely than not that all of the deferred tax assets, net of applicable valuation allowances, will be realized. The amount of the deferred tax assets considered realizable could be reduced or increased due to changes in the tax environment or if estimates of future taxable income change during the carryforward period.

At December 31, ~~2014,~~2016, we have credit carryforwards for state income tax purposes of $3 million, all of which will expire in 2025. At December 31, 2016, certain foreign subsidiaries have net operating loss carryforwards for income tax purposes of $11 million, of which $7 million will expire in 2020. The remaining net operating losses are available for carryforward indefinitely.

At December 31, 2016, U.S. income taxes and foreign withholding taxes have not been provided on ~~$73~~$113 million of current and prior year undistributed earnings of subsidiaries operating outside the U.S. These earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends, were lent to one of our U.S. entities or if we were to sell our stock in the subsidiaries. Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not ~~practicable~~practical 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.



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A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (in millions):


	As of December 31,						As of December 31,
	2014			2013			2016			2015
Beginning of year	$	19.5		$	18.1		$	1.5		$	1.6
Gross increases for income tax positions taken during current period	0.2			1.3
Gross increases for tax positions of prior years	—			5.8			1.5			0.5
Gross decreases for tax positions of prior years	(0.9		)	(4.2		)	(0.2		)	—
Decreases for tax positions retained by Kimberly-Clark as a result of the Spin-off	(16.6		)	—
Decreases for settlements with taxing authorities	(0.5		)	(1.4		)	(0.1		)	—
Decreases for lapse of the applicable statute of limitations	(0.1		)	(0.1		)	—			(0.6		)
End of year	$	1.6		$	19.5		$	2.7		$	1.5

The amount, if recognized, that would affect our effective tax rate atas of December 31, ~~2014~~2016 and ~~2013~~2015 is $1$2 million and ~~$14~~$1 million, respectively.

We classify interest and penalties on uncertain tax benefits as income tax expense. At December 31, ~~2014~~2016 and ~~2013,~~2015, before any tax benefits, we had $1 million and $5$0.4 million, respectively, of accrued interest and penalties on unrecognized tax benefits.

During the next twelve months, we do not expect the resolution of any tax audits which could potentially reduce unrecognized tax benefits by a material amount. In addition, no expiration of the statute of limitations for a tax year in which we have recorded uncertain tax benefits will occur in the next twelve months.

~~State~~Federal and state income tax returns are generally subject to examination for a period of three to five years after filing of the respective returns. The state effect of any changes to filed federal positions remains subject to examination by various states for a period of up to two years after formal notification to the states. We have various federal and state income tax return positions in the process of examination, administrative appeals or litigation.

Note ~~11.~~8. Employee ~~Defined~~ Benefit Plans

~~International Pension Plans~~

Certain plans in our international operations are our direct obligation, and therefore, the related funded status has been recorded within our consolidated and combined balance sheet. These plans are unfunded and the aggregated projected benefit obligation as of December 31, 2014 and 2013 was $5 million and $2 million, respectively. Net periodic pension cost for the years ended December 31, 2014, 2013 and 2012 was $3 million, $1 million and $1 million, respectively. Over the next ten years, we do not expect gross benefit payments to be material in the years 2015 through 2019, and $3 million in total for the years 2020 through 2024.

Defined Contribution ~~Pension~~ Plans

Eligible employees participate in our defined contribution plans. Our 401(k) plan and supplemental plan provide for a matching contribution of a U.S. employee’s contributions and accruals, subject to predetermined limits. Halyard also has defined contribution pension plans for certain employees outside the U.S. in which eligible employees may participate. ~~Following~~We recognized $9 million of expense for our matching contributions to the 401(k) plan in each of the years ended December 31, 2016 and 2015, respectively, and $1 million of expense was recognized in the post Spin-off ~~costs charged~~period from November 1, 2014 to ~~expense~~December 31, 2014. Our matching contributions to the 401(k) plan are recognized in ~~our~~ cost of products sold, research and development and selling and general expenses in our consolidated income statements.

Defined Benefit Plans

Certain plans in our international operations are our direct obligation, and ~~combined income statement~~therefore, the related funded status has been recorded within our consolidated balance sheet. These plans are primarily unfunded and the aggregated projected benefit obligation was $8 million as of each year ended December 31, 2016 and 2015, respectively. Net periodic pension cost for ~~contributions made were~~the years ended December 31, 2016, 2015 and 2014 was $1 million, $3 million and $3 million, respectively. Over the next ten years, we expect gross benefit payments to be $2 million in total for the ~~period from November 1, 2014 to December 31, 2014.~~years 2017 through 2021, and $4 million in total for the years 2022 through 2026.

Participation in Kimberly-Clark’s ~~Pension and Other Postretirement~~ Benefit Plans

Prior to the Spin-off, eligible employees participated in ~~defined~~ benefit ~~pension and postretirement healthcare~~ plans sponsored by ~~Kimberly-Clark. Certain employees in North America were covered by these~~Kimberly-Clark including defined benefit pension plans, postretirement healthcare plans and ~~substantially all U.S. employees had access~~defined contribution plans. During 2014, prior to ~~unfunded healthcare and life insurance benefit plans. Participants from Kimberly-Clark’s other businesses also participated in~~the Spin-off, expenses of $13 million for these plans and therefore, our participation in the plans was accounted for on a multi-employer basis. As a result, the assets or liabilities associated with these plans are not reported in our consolidated and combined balance sheet. All liability relatingwere allocated to ~~Kimberly-Clark’s defined benefit pension plan were retained by Kimberly-Clark.~~us.



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Prior to the Spin-off, expense allocations for these benefits were determined based on a review of personnel by business unit and are recorded in our condensed and combined income statement within cost of products sold, research and development and selling and general expenses, as applicable. These costs are funded through transactions with Kimberly-Clark. Our allocated expenses for the defined benefit pension plans were $2 million, $2 million and $2 million for the years ended December 31, 2014, 2013 and 2012, respectively. Our allocated expenses for the postretirement healthcare plans were $3 million, $4 million and $6 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Prior to the Spin-off, our eligible employees participated in Kimberly-Clark’s defined contribution plans. Costs charged to expense in our cost of products sold, research and development and selling and general expenses for contributions made by Kimberly-Clark on our behalf were $9 million, $10 million and $10 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Note ~~12.~~9. Accumulated Other Comprehensive Income

The changes in the components of Accumulated Other Comprehensive Income (“AOCI”), net of tax, are as follows (in millions):

Year Ended December 31,
2014 2013 2012
Unrealized translation $ (14.0 ) $ (22.6 ) $ 6.9
Defined benefit pension plans (0.4 ) —
—
Cash flow hedges 4.3
(5.4 ) 6.9
(10.1 ) (28.0 ) 13.8
Tax effect (0.7 ) (1.7 ) (0.3 )
Change in AOCI $ (10.8 ) $ (29.7 ) $ 13.5



	Unrealized Translation			Cash Flow Hedges			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income
Balance, December 31, 2013	$	(16.1	)	$	(3.5	)	$	—		$	(19.6	)
Change in Kimberly-Clark’s net investment	11.8			(0.6		)	0.1			11.3
Other comprehensive (loss) income	(14.0		)	3.6			(0.4		)	(10.8		)
Balance, December 31, 2014	(18.3		)	(0.5		)	(0.3		)	(19.1		)
Other comprehensive (loss) income	(22.1		)	(0.7		)	(1.3		)	(24.1		)
Balance, December 31, 2015	(40.4		)	(1.2		)	(1.6		)	(43.2		)
Other comprehensive (loss) income	(8.3		)	0.8			0.6			(6.9		)
Balance, December 31, 2016	$	(48.7	)	$	(0.4	)	$	(1.0	)	$	(50.1	)

The net changes in the components of AOCI, including the tax effect, are as follows (in millions):



	Year Ended December 31,
	2016			2015			2014
Unrealized translation	$	(8.3	)	$	(22.1	)	$	(14.0	)

Defined benefit pension plans	0.7			(1.9		)	(0.4		)
Tax effect	(0.1		)	0.6			—
Defined benefit pension plans, net of tax	0.6			(1.3		)	(0.4		)

Cash flow hedges	1.0			(1.0		)	4.3
Tax effect	(0.2		)	0.3			(0.7		)
Cash flow hedges, net of tax	0.8			(0.7		)	3.6

Change in AOCI	$	(6.9	)	$	(24.1	)	$	(10.8	)

Note ~~13.~~10. Stock-Based Compensation

The Halyard Health, Inc. Equity Participation Plan and the Halyard Health, Inc. Outside Directors’ Compensation Plan (together, the “Plans”) provide for awards of stock options, stock appreciation rights, restricted stock (and in certain limited cases, unrestricted stock), restricted stock units, performance units and cash awards to eligible employees (including officers who are employees), directors, advisors and consultants of Halyard or its subsidiaries. A maximum of ~~4,900,000~~4.9 million shares of Halyard common stock may be issued under the Plans, and there are ~~3,914,330~~2.4 million shares remaining available for issuance as of December 31, ~~2014.~~2016.

Aggregate stock-based compensation expense under the Plans was $15 million and $14 million for the years ended December 31, 2016 and 2015, respectively, and $3 million for the post Spin-off period ~~ended~~from November 1, 2014 through December 31, ~~2014, which reflects~~2014. Stock-based compensation expense ~~incurred for awards granted after the Spin-off.~~is included in cost of sales, research and development expenses and selling and general expenses.



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Stock Options

Stock options are granted at an exercise price equal to the fair market value of Halyard’s common stock on the date of grant. Stock options are generally subject to graded vesting whereby options vest 30% at the end of each of the first two 12-month periods following the grant and 40% at the end of the third 12-month period and have a term of 10 years.

Any unvested options awarded by Kimberly-Clark held by the Halyard employees under the age of 55 at the time of the Spin-off were forfeited on the Spin-off date. Certain awards granted to employees to replace Kimberly-Clark awards forfeited at the time of Spin-off have shorter vesting periods.

The fair value of stock option awards was determined using a Black-Scholes option-pricing model utilizing a range of assumptions related to volatility, risk-free interest rate, expected term and dividend yield. Expected volatility was based on historical weekly closing stock price volatility for a peer group of companies. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The expected term was based on historical observed settlement behavior. The dividend yield was based on the expectation that no dividends are expected to be paid on our common stock.



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The weighted-average fair value of options granted in the years ended December 31, 2016 and 2015 and the period from the Spin-off date to December 31, 2014 was $7.70, $15.15 and $10.01, respectively, based on ~~an assumed volatility of 25% to 27%, risk-free interest rates of 0.8% to 1.6%, an expected term of three to five years and no dividend yield.~~ the following assumptions:



	Year Ended December 31,				November 1, 2014 to December 31, 2014
	2016(a)	2015			November 1, 2014 to December 31, 2014
Volatility	26%	25%	to	34%	25%	to	27%
Risk-free rate	1.2%	0.7%	to	1.9%	0.8%	to	1.6%
Expected term (Years)	5	2	to	7	3	to	5
Dividend Yield	0%	0%			0%


(a)	In the year ended December 31, 2016, all stock options granted had uniform terms and were awarded on the same grant date.

Stock-based compensation expense related to stock options was $5 million, $6 million and $1 million for the years ended December 31, 2016 and 2015, and the period from the Spin-off date through December 31, ~~2014.~~2014, respectively.

A summary of stock option activity is presented below:

Shares
(in thousands)

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 2013 —
$ —

Granted 616
$ 34.94

Forfeitures (5 ) $ 34.98

Outstanding at December 31, 2014 611
$ 34.94
8.9 $ 6.4

~~There were no options vested or exercisable as of December 31, 2014.~~



	Shares (in thousands)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at December 31, 2015	1,146		$	40.70
Granted	458		29.48
Exercises	(12	)	33.48
Forfeitures	(66	)	39.95
Outstanding at December 31, 2016	1,526		$	37.42	8.1	$	4.4
Vested and exercisable at December 31, 2016	469		$	36.52	7.0	$	1.1

The following table summarizes information about options outstanding as of December 31, ~~2014:~~2016:


			Options Outstanding				Options Outstanding		Options Exercisable
Range of Exercise Prices	Range of Exercise Prices		Shares (in thousands)	Weighted-Average Remaining Contractual Term (Years)	Range of Exercise Prices		Shares (in thousands)	Weighted-Average Remaining Contractual Term (Years)	Shares (in thousands)	Weighted-Average Exercise Price
$25.00	to	$30.00	87	7.3	to	$35.00	652	8.3	204	$	31.67
$30.00	to	$35.00	175	8.3
$35.00	to	$40.00	349	9.5	to	$45.00	293	7.5	174	37.53
$45.00+					$45.00+		581	8.2	91	45.53
			611	8.9			1,526	8.1	469	$	36.52

~~There~~



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In the year ended December 31, 2016, the intrinsic value of exercised options and the resulting excess tax benefit was not material. In the year ended December 31, 2015, options with an aggregate intrinsic value of $0.4 million were ~~no vested and exercisable options outstanding~~exercised resulting in an excess tax benefit of $0.2 million which was recognized as a component of additional paid in capital in the accompanying consolidated balance sheet as of December 31, ~~2014, and there~~2015. There was no exercise activity for the period from the Spin-off date through December 31, 2014. For stock options outstanding at December 31, ~~2014,~~2016, we expect to recognize an additional $5$6 million of expense over the remaining average service period of one year.

Restricted Share Units

Restricted shares, time-vested restricted share units and performance-based restricted share units granted to employees and directors are valued at the closing market price of our common stock on the grant date with vesting conditions determined upon approval of the award. ~~The fair value of restricted share units is based on our closing stock price on the date of grant.~~

Any unvested restricted share units awarded by Kimberly-Clark held by the Halyard employees under the age of 55 at the time of the Spin-off were forfeited on the Spin-off date. Certain awards granted to employees to replace Kimberly-Clark awards forfeited at the time of Spin-off have shorter vesting periods.

Stock-based compensation expense related to restricted stock units was $6 million and $8 million for the years ended December 31, 2016 and 2015, respectively, and $2 million for the period from the Spin-off date through December 31, 2014. A summary of restricted share unit activity is presented below:

Shares
(in thousands)

Weighted Average
Fair Value
Outstanding at December 31, 2013 —
$ —
Granted 377
$ 37.88
Forfeited (2 ) $ 37.88
Outstanding at December 31, 2014 375
$ 37.88
Vested at December 31, 2014 6
$ 37.88



	Shares (in thousands)		Weighted Average Fair Value
Outstanding at December 31, 2015	519		$	40.69
Granted	125		31.89
Vested	(86	)	38.08
Forfeited	(30	)	39.35
Outstanding at December 31, 2016	528		$	39.12

For restricted share units outstanding at December 31, 2016, we expect to recognize an additional $5 million of expense over the remaining average service period of one year.

We also issue restricted share units for which vesting is conditioned on meeting a defined measure of total shareholder return (“TSR units”) over a restricted period of three years. Total shareholder return is measured as our stock price performance over the restricted period compared to defined group of peer companies. The expense recognition for TSR units differs from awards with service or performance conditions in that the expense is recognized over the restricted period regardless of whether the total shareholder return target is met or not, while expense for awards with service and performance conditions is recognized based on the number of awards expected to vest. The fair value of TSR units is determined using a Monte Carlo using a volatility assumption based on the average stock-price volatility for a peer group of companies over the restricted period. For awards granted in the year ended December 31, 2016, the assumed volatility was 25% and the weighted average fair value per TSR unit was $38.64. For the year ended December 31, 2016, stock-based compensation expense related to TSR units was $5 million.

A summary of TSR unit activity is presented below.



	Shares (in thousands)		Weighted Average Fair Value
Outstanding at December 31, 2015	—		$	—
Granted	230		38.64
Forfeited	(6	)	40.12
Outstanding at December 31, 2016	224		$	38.60

For TSR units outstanding at December 31, 2016, we expect to recognize an additional $4 million of expense over the weighted average remaining restricted period of two years.

Expense under Kimberly-Clark Equity Incentive Plans

Stock-based compensation expense allocated to us by Kimberly-Clark prior to the Spin-off under their incentive plans was $5 million through the Spin-off date in 2014.



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~~For restricted share units outstanding at December 31, 2014, we expect to recognize an additional $12 million of expense over the remaining average service period of 1.2 years.~~

~~Expense under Kimberly-Clark Equity Incentive Plans~~

Kimberly-Clark maintains several equity incentive plans in which our executives and employees participated prior to the Spin-off. All awards granted under Kimberly-Clark’s plans were based on common shares of Kimberly-Clark stock and, as such, were reflected in Kimberly-Clark’s consolidated statements of equity and not in our combined statement of invested equity. Prior to the Spin-off, Kimberly-Clark allocated stock-based compensation expense to Halyard for employees of Kimberly-Clark’s health care business that became Halyard employees upon the Spin-off. Stock-based compensation expense allocated to us by Kimberly-Clark under their incentive plans was $5 million through the Spin-off date in 2014, $6 million in 2013 and $5 million in 2012.

Note ~~14.~~11. Commitments and Contingencies

Legal Matters

The only exception to ~~this general obligation~~the Indemnification Obligation relates to the pain pump litigation referenced in the next paragraph 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 cash flows.



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We operate in an industry characterized by extensive patent litigation and competitors may claim that our products infringe upon their intellectual property. Resolution of patent litigation or other intellectual property claims is typically time consuming and costly and can result in significant damage awards and injunctions that could prevent the manufacture and sale of the affected products or require us to make significant royalty payments in order to continue selling the affected products. At any given time we may be involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time. As of December 31, 2016 and 2015, we have an accrued liability which management believes is adequate for the matters described herein. The accrued liability is included in “Accrued expenses” in the accompanying consolidated balance sheet.



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Operating Leases

We have entered into operating leases for principal executive offices, located in Alpharetta, Georgia, as well as certain warehouse, manufacturing and distribution facilities. The future minimum obligations under operating leases having a non-cancelable term in excess of one year are as follows (in millions):


Year	Amount		Amount
2015	$	11.5
2016	9.5
2017	9.0		$	16.9
2018	8.1		14.9
2019	6.2		12.3
2020			8.0
2021			7.3
Thereafter	35.2		41.1
Future minimum obligations	$	79.5	$	100.5

Rental expense under operating leases was $22 million, $22 million and $17 million ~~$17 million~~in 2016, 2015 and ~~$13 million in~~ 2014, ~~2013 and 2012,~~ respectively.

Note ~~15. Objectives and Strategies for Using Derivatives~~12. Derivative Financial Instruments

~~As a multinational enterprise, we~~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, with the use of derivative instruments. ~~We use derivative instruments, such as forward swap contracts, to hedge a~~



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limited portion of our 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, we enter into derivative instruments for certain of our 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.

We enter into derivative instruments to hedge a portion of forecasted cash flows denominated in Thai ~~baht for purchases of raw materials denominated in U.S. dollars made by our affiliates in Thailand.~~baht. 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 ~~primarily~~ hedged with 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 entity’s 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 assets for foreign exchange contracts were not material as of December 31, ~~2014.~~2016 and 2015. The derivative liabilities for foreign exchange contracts as of December 31, ~~2013~~2016 and 2015 were $5$1 million and $2 million, respectively, and are included in the consolidated ~~and combined~~ balance sheet in accrued expenses.

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 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, 2016, 2015 and 2014. As of December 31, ~~2014,~~2016, the aggregate notional value of outstanding foreign exchange derivative contracts designated as cash flow hedges was approximately ~~$36~~$33 million. Cash flow hedges resulted in no significant ineffectiveness in each of the three years ended December 31, 2016, 2015 and 2014. For each of the three years ended December 31, 2016, 2015 and 2014, 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, ~~2014,~~2016, amounts to be reclassified from AOCI during the next year are not expected to be significant. The maximum maturity of cash flow hedges in place at December 31, ~~2014~~2016 is December ~~2015.~~2017.

Gains or losses on undesignated foreign exchange hedging instruments are immediately recognized in other (income) and expense, net. These gains or losses have not been significant for each of the three years ended December 31, 2016, 2015 and 2014. 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, ~~2014,~~2016, the notional amount of these undesignated derivative instruments was approximately ~~$83~~$2 million.

Note ~~16.~~13. Earnings Per Share (“EPS”)

Basic EPS is ~~based on~~calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per share is ~~based on~~calculated by dividing net income by the ~~weighted average~~ number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period, as determined using the treasury stock method. The contribution of Kimberly-Clark’s Health Care business to us was treated as a reorganization of entities under common control under Kimberly-Clark. Consequently, we are retrospectively reporting EPS for all periods presented. For all periods prior to the Spin-off, the same number of weighted average shares outstanding of 46,536 was used for basic and diluted EPS as no Halyard common stock or dilutive stock-based compensation awards were authorized or outstanding.

~~The average number of common shares outstanding is reconciled to those used in the basic and diluted EPS computations as follows as of December 31, 2014 (thousands of shares):~~



~~Basic weighted average shares outstanding~~	~~46,536~~
~~Dilutive effect of stock options and restricted share unit awards~~	2
~~Diluted weighted average shares outstanding~~	~~46,538~~



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The calculation of basic and diluted EPS for each of the three years ended December 31, 2016, 2015 and 2014 is set forth in the following table (in millions, except per share amounts):



	Year Ended December 31,
	2016		2015			2014
Net income (loss)	$	39.8	$	(426.3	)	$	27.1
Weighted Average Shares Outstanding:
Basic weighted average shares outstanding	46.6		46.6			46.5
Dilutive effect of stock options and restricted share unit awards	0.4		—			—
Diluted weighted average shares outstanding	47.0		46.6			46.5
Earnings (Loss) Per Share:
Basic	$	0.85	$	(9.15	)	$	0.58
Diluted	$	0.85	$	(9.15	)	$	0.58

Restricted share units (“RSUs”) contain provisions allowing for the equivalent of any dividends paid on common stock during the restricted period to be reinvested into additional RSUs at the then fair market value of the common stock on the date dividends are paid. Such awards are to be included in the EPS calculation under the two-class method. Currently we do not anticipate any cash dividends for the foreseeable future and our outstanding RSU awards are not material in comparison to our weighted average shares outstanding. Accordingly, all EPS amounts reflect shares as if they were fully vested and the disclosures associated with the two-class method are not presented herein.

For the year ended December 31, 2016, 1.6 million of potentially dilutive stock options and restricted share unit awards were excluded from the computation of earnings per share as their effect would have been anti-dilutive.

Note ~~17.~~14. Business Segment Information

We are organized into two operating segments based on product groupings: ~~S&IP~~Medical Devices and ~~Medical Devices.~~S&IP. 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:

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.

S&IP 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 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.



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Information concerning ~~combined~~ operations by business segment is presented in the following table (in millions):


	Year Ended December 31,									Year Ended December 31,
	2014			2013			2012			2016			2015			2014
Net Sales
Medical Devices										$	567.3		$	509.5		$	501.7
S&IP	$	1,139.3		$	1,153.1		$	1,185.1		1,012.1			1,030.2			1,139.3
Medical Devices	501.7			499.0			477.6
Corporate and Other	31.1			25.4			21.3			12.9			34.7			31.1
Total Net Sales^(a)	1,672.1			1,677.5			1,684.0			1,592.3			1,574.4			1,672.1
Operating Profit
Medical Devices										123.8			107.8			104.6
S&IP	166.3			151.2			155.2			90.7			98.4			166.3
Medical Devices	104.6			85.6			88.8
Corporate and Other^(b)(d)	(180.4		)	(13.9		)	(17.5		)	(108.8		)	(105.4		)	(180.4		)
Other income (expense), net	3.8			2.4			1.5
Total Operating Profit	94.3			225.3			228.0
Goodwill impairment										—			(474.0		)	—
Other (expense) income, net^(e)(f)										(18.3		)	(4.5		)	3.8
Total Operating Profit (Loss)										87.4			(377.7		)	94.3
Interest income	2.9			2.6			2.6			0.6			0.3			2.9
Interest expense	(6.0		)	(0.1		)	(0.8		)	(32.7		)	(33.1		)	(6.0		)
Income before Income Taxes	$	91.2		$	227.8		$	229.8
Income (Loss) before Income Taxes										$	55.3		$	(410.5	)	$	91.2

~~___________~~


(a)	Net sales in the United States to third parties totaled $1.1 billion in each of the last three years ended December 31, ~~2014, 2013 and 2012, respectively.~~2016.


(b)	Corporate and Other for the year ended December 31, 2016 includes $65 million of general expenses, $22 million of post spin-related transition expenses, $18 million of acquisition, integration and restructuring expenses related to the Acquisition (see “Business Acquisition in Note 2) and $4 million of costs related to corporate sales.


(c)	Corporate and Other for the year ended December 31, 2015 includes $47 million of general expenses, $55 million of post spin-related transition expenses and $3 million of costs related to corporate sales.


(d)	Corporate and Other for the year ended December 31, 2014 includes $60 million associated with the disposal of one of our disposable glove facilities in ~~Thailand~~Thailand.


(e)	Other (expense) income for the year ended December 31, 2016 includes $20 million related to legal expenses and litigation (see “Commitments and Contingencies” in Note ~~3, “Manufacturing Footprint Strategic Changes”), $89~~11).


(f)	Other (expense) income for the year ended December 31, 2015 includes $17 million ~~of transaction costs associated with the Spin-off (see Note 2, “Separation from Kimberly-Clark”) and~~related to litigation matters, as noted in (e) above, partially offset by a $12 million gain on the sale of ~~post Spin-off transition costs.~~an exam glove manufacturing facility in Thailand.

Within the ~~S&IP~~Medical Devices segment, ~~surgical drapes and gowns, medical exam gloves and sterilization wrap have~~our digestive health products accounted for ~~24%, 20% and~~more than 10% of total net sales ~~respectively,~~ in each of the ~~past three years. Within the Medical Devices segment, no category of~~years ended December 31, 2016 and 2015. Surgical pain products also accounted for 10% or more of total net sales in ~~any~~the year ended December 31, 2015. None of our products in the Medical Devices accounted for 10% or more of total net sales in 2014. Within the S&IP segment, surgical drapes and gowns and medical exam gloves each accounted for more than 10% of total net sales in each of the ~~last three years.~~years ended December 31, 2016, 2015 and 2014. Our sterilization products also accounted for more than 10% of total net sales in year ended December 31, 2014.



	5662	~~HALYARD HEALTH, INC. - 2014 Annual Report~~



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~~Table of Contents~~

Depreciation, amortization and capital expenditures by segment are as follows (in millions):


	Year Ended December 31,						Year Ended December 31,
	2014		2013		2012		2016		2015		2014
Depreciation and Amortization
Medical Devices							$	30.4	$	30.8	$	40.4
S&IP	$	41.4	$	31.0	$	28.7	24.6		23.3		41.4
Medical Devices	40.4		36.2		26.9
Corporate and Other	3.6		2.0		2.0		10.2		11.3		3.6
Total Depreciation and Amortization	$	85.4	$	69.2	$	57.6	$	65.2	$	65.4	$	85.4

Capital Expenditures
Medical Devices							$	17.7	$	23.2	$	19.1
S&IP	$	46.3	$	20.4	$	28.5	11.2		30.0		46.3
Medical Devices	19.1		13.4		11.5
Corporate and Other	13.1		15.2		0.8		0.2		17.2		13.1
Total Capital Expenditures	$	78.5	$	49.0	$	40.8	$	29.1	$	70.4	$	78.5

Information concerning assets by business segment is presented in the following table (in millions):


	As of December 31,				As of December 31,
	2014		2013		2016		2015
Assets
Medical Devices					$	1,197.2	$	1,030.9
S&IP	$	1,235.2	$	1,357.2	714.4		766.5
Medical Devices	1,042.2		1,055.5
Corporate and Other	250.2		71.3		160.2		202.8
Total Assets	$	2,527.6	$	2,484.0	$	2,071.8	$	2,000.2

Note ~~18.~~15. Related Party Transactions

~~A portion of our net sales results from sales to Kimberly-Clark subsidiaries and affiliates. Included in our~~Our consolidated ~~and combined~~ financial statements ~~are~~include net sales to Kimberly-Clark subsidiaries and affiliates of $79 million through the Spin-off date in ~~2014, $91 million in 2013 and $93 million in 2012.~~

Prior to the Spin-off, 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.2014.

Our consolidated ~~and combined~~ financial statements include certain expenses of Kimberly-Clark which were allocated to us for certain administrative 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.through the Spin-off date in 2014. 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 were approximately $22 million in “Cost of products sold,” $41 million in “Selling and general expenses” and $11 million in “Research and development.”

During 2015, we sold products to a company with which one of the members of our Board of Directors had a relationship. The sales transactions during the period of time that our Director was affiliated with that company were approximately $0.4 million. We determined that these sales transactions were made in the ordinary course of business.

Note 16. Supplemental Guarantor Financial Information

In October 2014, Halyard Health, Inc. (referred to below as ~~follows (in millions):~~“Parent”) issued the Notes (described in Note 6, “Debt”). The Notes are guaranteed, jointly and severally by each of our domestic subsidiaries that guarantees the Senior Credit Facilities (each, a “Guarantor Subsidiary” and collectively, the “Guarantor Subsidiaries”). The guarantees are full and unconditional, subject to certain customary release provisions as defined in the Indenture dated October 17, 2014. Each Guarantor Subsidiary is directly or indirectly 100%-owned by Halyard Health, Inc. Each of the guarantees of the Notes is a general unsecured obligation of each Guarantor and ranks equally in right of payment with all existing and future indebtedness and all other obligations (except subordinated indebtedness) of each Guarantor.

Year Ended December 31,
2014 2013 2012
Cost of products sold $ 22
$ 25
$ 25
Selling and general expenses 41
60
60
Research expenses 11
10
10
Total $ 74
$ 95
$ 95



	5763	~~HALYARD HEALTH, INC. - 2014 Annual Report~~



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~~Table of Contents~~

~~We consider~~The following condensed consolidating balance sheets as of December 31, 2016 and 2015 and the ~~expense allocation methodology~~condensed consolidating statements of income and ~~results~~cash flows for the years ended December 31, 2016, 2015 and 2014 provide condensed consolidating financial information for Halyard Health, Inc. (“Parent”), the Guarantor Subsidiaries on a combined basis, the Non-Guarantor Subsidiaries on a combined basis and the Parent and its subsidiaries on a consolidating basis.

The Parent and the Guarantor Subsidiaries use the equity method of accounting to 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 incurreflect ownership interests in subsidiaries which are eliminated upon consolidation. Eliminating entries in the ~~future.~~

~~Prior~~following condensed consolidating financial information represent adjustments to (i) eliminate intercompany transactions between or among the ~~Spin-off, Kimberly-Clark has provided financing, cash management~~Parent, the Guarantor Subsidiaries and ~~other treasury services to us. In North America, our cash balances were swept by Kimberly-Clark,~~the Non-Guarantor Subsidiaries and ~~prior to~~(ii) eliminate the Spin-off, we received funding from Kimberly-Clark for most of our operating and investing cash needs. Such cash transferred to and from Kimberly-Clark was recorded as intercompany cash. Intercompany cash, receivables and payables with Kimberly-Clark are reflected within parent company investmentinvestments in ~~the accompanying consolidated and combined financial statements.~~subsidiaries.

HALYARD HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING INCOME AND COMPREHENSIVE INCOME STATEMENTS

(in millions)



	Year Ended December 31, 2016
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net Sales	$	—		$	1,465.5		$	436.0		$	(309.2	)	$	1,592.3
Cost of products sold	—			989.5			354.1			(309.2		)	1,034.4
Gross Profit	—			476.0			81.9			—			557.9
Research and development expenses	—			40.7			0.4			—			41.1
Selling and general expenses	37.2			312.4			61.5			—			411.1
Other (income) expense, net	(1.3		)	36.3			(18.4		)	1.7			18.3
Operating (Loss) Profit	(35.9		)	86.6			38.4			(1.7		)	87.4
Interest income	0.3			0.1			2.5			(2.3		)	0.6
Interest expense	(33.1		)	(1.7		)	(0.2		)	2.3			(32.7		)
(Loss) Income Before Income Taxes	(68.7		)	85.0			40.7			(1.7		)	55.3
Income tax benefit (provision)	23.2			(23.9		)	(14.8		)	—			(15.5		)
Equity in earnings of consolidated subsidiaries	85.3			22.3			—			(107.6		)	—
Net Income (Loss)	39.8			83.4			25.9			(109.3		)	39.8
Total other comprehensive loss, net of tax	(6.9		)	(6.3		)	(7.2		)	13.5			(6.9		)
Comprehensive Income (Loss)	$	32.9		$	77.1		$	18.7		$	(95.8	)	$	32.9



	5864	~~HALYARD HEALTH, INC. - 2014 Annual Report~~



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HALYARD HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING INCOME AND COMPREHENSIVE INCOME STATEMENTS

(in millions)



	Year Ended December 31, 2015
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net Sales	$	—		$	1,470.8		$	452.2		$	(348.6	)	$	1,574.4
Cost of products sold	—			997.5			393.9			(348.6		)	1,042.8
Gross Profit	—			473.3			58.3			—			531.6
Research and development expenses	—			32.3			—			—			32.3
Selling and general expenses	30.6			309.2			58.7			—			398.5
Goodwill impairment	—			455.0			19.0			—			474.0
Other (income) expense, net	(2.7		)	45.8			(38.6		)	—			4.5
Operating (Loss) Profit	(27.9		)	(369.0		)	19.2			—			(377.7		)
Interest income	0.3			—			3.1			(3.1		)	0.3
Interest expense	(33.8		)	(2.1		)	(0.3		)	3.1			(33.1		)
(Loss) Income Before Income Taxes	(61.4		)	(371.1		)	22.0			—			(410.5		)
Income tax benefit (provision)	24.6			(29.2		)	(11.2		)	—			(15.8		)
Equity in earnings of consolidated subsidiaries	(389.5		)	22.4			—			367.1			—
Net (Loss) Income	(426.3		)	(377.9		)	10.8			367.1			(426.3		)
Total other comprehensive loss, net of tax	—			(0.1		)	(24.0		)	—			(24.1		)
Comprehensive Loss	$	(426.3	)	$	(378.0	)	$	(13.2	)	$	367.1		$	(450.4	)



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CONDENSED COMBINED CONSOLIDATING INCOME AND COMPREHENSIVE INCOME STATEMENTS

(in millions)



	Year Ended December 31, 2014
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated and Combined
Net Sales	$	—		$	1,455.0		$	619.8		$	(402.7	)	$	1,672.1
Cost of products sold	—			979.6			546.6			(402.7		)	1,123.5
Gross Profit	—			475.4			73.2			—			548.6
Research and development expenses	—			33.6			—			—			33.6
Selling and general expenses	3.0			363.0			58.5			—			424.5
Other income, net	0.1			—			(3.9		)	—			(3.8		)
Operating (Loss) Profit	(3.1		)	78.8			18.6			—			94.3
Interest income	—			2.6			0.3			—			2.9
Interest expense	(5.2		)	(0.7		)	(0.1		)	—			(6.0		)
(Loss) Income Before Income Taxes	(8.3		)	80.7			18.8			—			91.2
Income tax provision	—			(62.8		)	(1.3		)	—			(64.1		)
Equity in earnings of consolidated subsidiaries	(6.2		)	13.8			—			(7.6		)	—
Net (Loss) Income	(14.5		)	31.7			17.5			(7.6		)	27.1
Total other comprehensive loss, net of tax	—			(0.9		)	(9.9		)	—			(10.8		)
Comprehensive (Loss) Income	$	(14.5	)	$	30.8		$	7.6		$	(7.6	)	$	16.3



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HALYARD HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(in millions)



	As of December 31, 2016
	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets
Cash and cash equivalents	$	54.2	$	9.5	$	50.0	$	—		$	113.7
Accounts receivable, net	3.1		552.5		241.5		(607.0		)	190.1
Inventories	—		231.1		41.4		—			272.5
Prepaid and other current assets	5.0		10.5		2.0		(0.3		)	17.2
Total Current Assets	62.3		803.6		334.9		(607.3		)	593.5
Property, Plant and Equipment, Net	—		217.3		43.5		—			260.8
Investment in Consolidated Subsidiaries	2,029.5		328.7		—		(2,358.2		)	—
Goodwill	—		993.8		35.2		—			1,029.0
Other Intangible Assets, net	—		161.1		8.7		—			169.8
Other Assets	1.0		7.8		9.9		—			18.7
TOTAL ASSETS	$	2,092.8	$	2,512.3	$	432.2	$	(2,965.5	)	$	2,071.8

LIABILITIES AND EQUITY
Current Liabilities
Trade accounts payable	$	398.3	$	328.9	$	47.8	$	(601.9	)	$	173.1
Accrued expenses	11.1		113.8		31.8		(5.4		)	151.3
Total Current Liabilities	409.4		442.7		79.6		(607.3		)	324.4
Long-Term Debt	579.0		—		—		—			579.0
Other Long-Term Liabilities	1.9		54.4		9.6		—			65.9
Total Liabilities	990.3		497.1		89.2		(607.3		)	969.3
Total Equity	1,102.5		2,015.2		343.0		(2,358.2		)	1,102.5
TOTAL LIABILITIES AND EQUITY	$	2,092.8	$	2,512.3	$	432.2	$	(2,965.5	)	$	2,071.8



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HALYARD HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(in millions)



	As of December 31, 2015
	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets
Cash and cash equivalents	$	92.3	$	—	$	39.7	$	(2.5	)	$	129.5
Accounts receivable, net	3.0		440.8		221.7		(440.8		)	224.7
Inventories	—		258.4		44.8		—			303.2
Prepaid and other current assets	5.0		10.8		3.0		(0.2		)	18.6
Total Current Assets	100.3		710.0		309.2		(443.5		)	676.0
Property, Plant and Equipment, Net	—		228.7		50.8		—			279.5
Investment in Consolidated Subsidiaries	1,750.8		277.7		—		(2,028.5		)	—
Goodwill	—		918.6		26.6		—			945.2
Other Intangible Assets, net	—		82.6		—		—			82.6
Other Assets	1.4		0.3		15.2		—			16.9
TOTAL ASSETS	$	1,852.5	$	2,217.9	$	401.8	$	(2,472.0	)	$	2,000.2

LIABILITIES AND EQUITY
Current Liabilities
Trade accounts payable	$	251.4	$	309.4	$	42.7	$	(440.3	)	$	163.2
Accrued expenses	6.6		115.4		33.4		(3.4		)	152.0
Total Current Liabilities	258.0		424.8		76.1		(443.7		)	315.2
Long-Term Debt	578.1		—		—		—			578.1
Other Long-Term Liabilities	1.8		41.6		8.2		—			51.6
Total Liabilities	837.9		466.4		84.3		(443.7		)	944.9
Total Equity	1,014.6		1,751.5		317.5		(2,028.3		)	1,055.3
TOTAL LIABILITIES AND EQUITY	$	1,852.5	$	2,217.9	$	401.8	$	(2,472.0	)	$	2,000.2



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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(in millions)



	Year Ended December 31, 2016
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating Activities
Cash (Used in) Provided by Operating Activities	$	(33.0	)	$	207.7		$	15.8		$	(1.7	)	$	188.8
Investing Activities
Capital expenditures	—			(22.7		)	(6.4		)	—			(29.1		)
Acquisition of business, net of cash acquired	(175.0		)	—			—			—			(175.0		)
Proceeds from dispositions of property	—			3.2			—			—			3.2
Intercompany contributions	0.5			(177.9		)	2.7			174.7			—
Cash Used in Investing Activities	(174.5		)	(197.4		)	(3.7		)	174.7			(200.9		)
Financing Activities
Intercompany contributions	170.8			—			(0.3		)	(170.5		)	—
Line of credit facility proceeds	72.0			—			—			—			72.0
Line of credit facility repayments	(72.0		)	—			—			—			(72.0		)
Debt issuance costs	(0.9		)	—			—			—			(0.9		)
Purchase of treasury stock	(0.9		)	—			—			—			(0.9		)
Proceeds and excess tax benefits from the exercise of stock options	0.4			—			—			—			0.4
Cash Provided by (Used in) Financing Activities	169.4			—			(0.3		)	(170.5		)	(1.4		)
Effect of Exchange Rate on Cash and Cash Equivalents	—			(0.8		)	(1.5		)	—			(2.3		)
(Decrease) Increase in Cash and Cash Equivalents	(38.1		)	9.5			10.3			2.5			(15.8		)
Cash and Cash Equivalents, Beginning of Period	92.3			—			39.7			(2.5		)	129.5
Cash and Cash Equivalents, End of Period	$	54.2		$	9.5		$	50.0		$	—		$	113.7



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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(in millions)



	Year Ended December 31, 2015
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating Activities
Cash (Used in) Provided by Operating Activities	$	(44.7	)	$	110.5		$	34.3		$	(2.5	)	$	97.6
Investing Activities
Capital expenditures	—			(61.3		)	(9.1		)	—			(70.4		)
Proceeds from property dispositions	—			—			7.8			—			7.8
Intercompany contributions	39.9			(53.1		)	1.3			11.9			—
Cash Provided by (Used in) Investing Activities	39.9			(114.4		)	—			11.9			(62.6		)
Financing Activities
Intercompany contributions	46.5			—			(34.6		)	(11.9		)	—
Debt repayments	(51.0		)	—			—			—			(51.0		)
Purchase of treasury stock	(1.0		)	—			—			—			(1.0		)
Proceeds and excess tax benefits from the exercise of stock options	1.4			—			—			—			1.4
Cash Used in Financing Activities	(4.1		)	—			(34.6		)	(11.9		)	(50.6		)
Effect of Exchange Rate on Cash and Cash Equivalents	—			—			(3.9		)	—			(3.9		)
Decrease in Cash and Cash Equivalents	(8.9		)	(3.9		)	(4.2		)	(2.5		)	(19.5		)
Cash and Cash Equivalents, Beginning of Period	101.2			3.9			43.9			—			149.0
Cash and Cash Equivalents, End of Period	$	92.3		$	—		$	39.7		$	(2.5	)	$	129.5



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CONDENSED COMBINED CONSOLIDATING STATEMENTS OF CASH FLOWS

(in millions)



	Year Ended December 31, 2014
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated and Combined
Operating Activities
Cash Provided by Operating Activities	$	—		$	41.9		$	106.0		$	—	$	147.9
Investing Activities
Capital expenditures	—			(70.8		)	(7.7		)	—		(78.5		)
Deposit received on pending sale of assets	—			—			7.8			—		7.8
Cash (Used in) Provided by Investing Activities	—			(70.8		)	0.1			—		(70.7		)
Financing Activities
Intercompany contributions	66.7			(48.4		)	(18.3		)	—		—
Debt proceeds	636.1			—			1.9			—		638.0
Debit issuance costs	(11.8		)	—			—			—		(11.8		)
Debt repayments	—			(2.9		)	(10.9		)	—		(13.8		)
Spin-off cash distribution to Kimberly-Clark	(680.0		)	—			—			—		(680.0		)
Net transfers from (to) Kimberly-Clark	90.2			77.4			(74.3		)	—		93.3
Other	—			3.5			—			—		3.5
Cash Provided by (Used in) Financing Activities	101.2			29.6			(101.6		)	—		29.2
Effect of Exchange Rate on Cash and Cash Equivalents	—			0.1			(1.6		)	—		(1.5		)
Increase in Cash and Cash Equivalents	101.2			0.8			2.9			—		104.9
Cash and Cash Equivalents, Beginning of Period	—			3.1			41.0			—		44.1
Cash and Cash Equivalents, End of Period	$	101.2		$	3.9		$	43.9		$	—	$	149.0



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Halyard Health, Inc.

Atlanta, Georgia

We have audited the accompanying consolidated ~~and combined~~ balance sheets of Halyard Health, Inc. and subsidiaries (the "Company") as of December 31, ~~2014~~2016 and ~~2013,~~2015, and the related consolidated ~~and combined~~ statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, ~~2014.~~2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on ~~these~~the 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 Company 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 Company's 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,~~statements. An audit also includes 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 consolidated ~~and combined~~ financial statements present fairly, in all material respects, the financial position of Halyard Health, Inc. and subsidiaries as of December 31, ~~2014~~2016 and ~~2013,~~2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2014,~~2016, in conformity with accounting principles generally accepted in the United States of America.

~~As discussed~~We have also audited, in ~~Note 1 to~~accordance with the ~~financial statements, the financial statements include the allocation of certain expenses from Kimberly-Clark Corporation. These allocated expenses may not be reflective~~standards of the ~~actual level~~Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of ~~costs which would have been incurred had~~December 31, 2016, based on the ~~Company operated as a separate entity apart from Kimberly-Clark Corporation.~~

criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ D~~ELOITTE~~DELOITTE & T~~OUCHE~~TOUCHE LLP

Deloitte & Touche LLP

Atlanta, Georgia

~~March 13, 2015~~February 27, 2017



	5972	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

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Table of Contents


ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


ITEM 9A.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

AsOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, ~~2014, an~~2016. The term "disclosure controls and procedures," as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended (or the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on our evaluation, ~~was performed~~our chief executive officer and chief financial officer believe that, as of December 31, 2016, our disclosure controls and procedures were effective.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our ~~Chief Executive Officer~~principal executive officer and ~~Chief Financial Officer,~~principal financial officer, we conducted an evaluation of the effectiveness of ~~the design and operation~~our internal control over financial reporting as of December 31, 2016. The scope of management’s evaluation included all of our ~~disclosure controls~~businesses except for the businesses acquired with Medsystems Holdings, Inc. (“Medsystems”) which was acquired in May 2016 and ~~procedures.~~whose financial statements constitute 10% of our consolidated assets, 2% of our consolidated net sales and 4% of our consolidated net income as of and for the year ended December 31, 2016. For further information, see “Business Acquisition” in Note 2 to the consolidated financial statements in Item 8 of this report. Management’s evaluation was based on the criteria related to internal control over financial reporting described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on ~~that~~our evaluation, ~~our~~ management ~~including our Chief Executive Officer and Chief Financial Officer,~~ concluded that our ~~disclosure controls and procedures were~~internal control over financial reporting was effective as of December 31, ~~2014.~~2016.

~~Internal Control Over Financial Reporting~~

~~This Annual Report on~~Deloitte & Touche LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K, ~~does not include~~has issued a report, included herein, on the effectiveness of ~~management’s assessment regarding~~the Company's internal control over financial reporting ~~or an attestation report~~as of ~~the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly formed public companies.~~December 31, 2016.

Changes in Internal Control Over Financial Reporting

Historically, we have relied on Kimberly-Clark’s financial controls and resources to manage certain aspects of our business and report our results. As a result of the Spin-off, we are in the process of reviewing, revising and adopting policies, as needed, to meet all regulatory requirements applicable to us as an independent, publicly-traded company. While many of these changes in staffing, policies and systems were accomplished prior to December 31, 2014, we continue to review and document our internal controls over financial reporting and may, from time to time, make changes aimed at enhancing their effectiveness. These efforts may lead to changes in our internal control over financial reporting.

~~Other than those noted above, there~~There have been no changes in our internal control over financial reporting that occurred during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Halyard Health, Inc.

Atlanta, Georgia

We have audited the internal control over financial reporting of Halyard Health, Inc. and subsidiaries (the “Company”) as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management's Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Medsystems Holdings, Inc. (“Medsystems”) which was acquired in May 2016 and whose financial statements constitute 10% of consolidated assets, 2% of consolidated net sales and 4% of consolidated net income as of and for the year ended December 31, 2016. Accordingly, our audit did not include the internal control over financial reporting at Medsystems. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2016 of the Company and our report dated February 27, 2017 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Atlanta, Georgia

February 27, 2017



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ITEM 9B. OTHER INFORMATION

None.



	60	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following sections of our ~~2015~~2016 Proxy Statement for the Annual Meeting of Stockholders (the ~~“2015~~“2016 Proxy Statement”) are incorporated in this Item 10 by reference:

“The Nominees” and “Directors Continuing in Office” under “Proposal 1. Election of Directors,” which identifies our directors and nominees for our Board of Directors.

“Other Information—Section 16(a) Beneficial Ownership Reporting Compliance.”

“Corporate Governance—Other Corporate Governance Policies and Practices–Code of Conduct,” which describes our Code of Conduct.

“Other Information—Stockholder Nominations for Board of Directors,” which describes the procedures by which stockholders may nominate candidates for election to our Board of Directors.

“Corporate Governance—Board Committees–Audit Committee,” which identifies members of the Audit Committee of our Board of Directors and an audit committee financial expert.

Information regarding our executive officers is reported under the caption “Executive Officers of the Registrant” in Part I of this Report.

We believe we are in compliance with all applicable corporate governance requirements of the New York Stock Exchange, the Securities and Exchange Commission, the Sarbanes-Oxley Act of 2002 and the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that have become effective as of the date of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information in the sections of the ~~2015~~2016 Proxy Statement captioned “Compensation Discussion and Analysis,” “Compensation Tables,” “Director Compensation” and “Corporate Governance—Compensation Committee Interlocks and Insider Participation” is incorporated in this Item 11 by reference.


ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information in the section of the ~~2015~~2016 Proxy Statement captioned “Other Information—Security Ownership Information” is incorporated in this Item 12 by reference.

Equity Compensation Plan Information

The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of December 31, ~~2014.~~2016.

Number of securities
to be issued upon
exercise of
outstanding options,
warrants, and rights
(in thousands)
(a)

Weighted average
exercise price of
outstanding
options, warrants,
and rights
(b)

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(in thousands)
(c)
Equity compensation plans approved by stockholders⁽¹⁾
980⁽²⁾
$34.94 3,914



	Number of securities to be issued upon exercise of outstanding options, warrants, and rights (in thousands) (a)	Weighted average exercise price of outstanding options, warrants, and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (in thousands) (c)
Equity compensation plans approved by stockholders⁽¹⁾	2,278⁽²⁾	$37.42	2,424


⁽¹⁾	Includes (a) the Halyard Health, Inc. Equity Participation Plan (the “Employee Plan”), effective November 1, 2014 and (b) the Halyard Health, Inc. Outside Directors’ Compensation Plan, effective November 1, 2014 (the “Director Plan”).

⁽²⁾

Includes ~~369~~691 restricted share units granted under the Employee Plan (including shares that may be issued pursuant to outstanding performance-based restricted share units, assuming the target award is met; actual shares issued may vary, depending on actual performance). Upon vesting, a share of Halyard common stock is issued for each restricted share unit. Column (b) does not take these awards into account because they do not have an exercise price. Also includes 6 restricted share units granted under the Director Plan. Upon retirement from or any other termination of service from the Board, a share of Halyard common stock is issued for each restricted share unit. Column (b) does not take these awards into account because they do not have an exercise price.



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Halyard common stock is issued for each restricted share unit. Column (a) also includes 61 restricted share units granted under the Director Plan. Under the Director Plan, upon retirement from, or any other termination of service from the Board, a share of Halyard common stock is issued for each restricted share unit. Column (b) does not take these awards into account because they do not have an exercise price.

Halyard Health, Inc. Outside Directors’ Compensation Plan

In 2014, our Board of Directors and our stockholders approved the Director Plan. A maximum of 400,000 shares of our common stock is available for grant under this plan. The Board may grant awards in the form of stock options, stock appreciation rights, restricted stock, restricted share units or any combination of cash, stock options, stock appreciation rights, restricted stock or restricted share units under this plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information in the sections of the ~~2015~~2016 Proxy Statement captioned “Other Information—Transactions with Related Persons” and “Corporate Governance—Director Independence” is incorporated in this Item 13 by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information in the sections of the ~~2015~~2016 Proxy Statement captioned “Principal Accounting Firm Fees” and “Audit Committee Approval of Audit and Non-Audit Services” under “Proposal 2. Ratification of Auditors” is incorporated in this Item 14 by reference.



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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES


(a)	Documents filed as part of this report.


1.	Financial statements.

The financial statements are set forth under Item 8 of this report on Form 10-K.


2.	Financial statement schedules.

The following information is filed as part of this Form 10-K and should be read in conjunction with the financial statements contained in Item 8:

•Report of Independent Registered Public Accounting Firm

All other schedules have been omitted because they were not applicable or because the required information has been included in the financial statements or notes thereto.


3.	Exhibits



Exhibit No. ~~(2)~~	Distribution Agreement, dated October 31, 2014, by and between Halyard Heath, Inc. and Kimberly-Clark Corporation, incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K dated October 31, 2014.+
~~Exhibit No. (3)~~(10)a	Halyard Health, Inc. Amended and Restated ~~Certificate of Incorporation of Halyard Health, Inc., incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K dated October 31, 2014.~~
~~Exhibit No. (3)b~~	~~Amended and Restated By-laws of Halyard Health, Inc., incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K dated October 31, 2014.~~
~~Exhibit No. (4)a~~	Credit Agreement, dated October 31, 2014, by and among Halyard Health, Inc., as borrower, Morgan Stanley Senior Funding, Inc., as administrative agent, Citibank, N.A., as revolver administrative agent and swing-line lender, and the other parties thereto., incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K dated October 31, 2014.
~~Exhibit No. (4)b~~	Indenture (including form of notes), dated October 17, 2014, between Halyard Health, Inc., as the Issuer, and Deutsche Bank Trust Company Americas, as trustee, incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K dated October 17, 2014.
~~Exhibit No. (4)c~~	Registration Rights Agreement, dated as of October 17, 2014, between Halyard Health, Inc. and Morgan Stanley & Co. LLC, incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K dated October 17, 2014.
~~Exhibit No. (10)a~~	~~Transition Services Agreement, dated October 31, 2014, by and between Halyard Heath, Inc. and Kimberly-Clark Corporation,~~Executive Severance Plan, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K dated October ~~31, 2014.~~26, 2016.
Exhibit No. (10)b	~~Tax Matters Agreement, dated October 31, 2014, by~~Halyard Health, Inc. Amended and ~~between Halyard Heath, Inc. and Kimberly-Clark Corporation,~~Restated Severance Pay Plan, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K dated October ~~31, 2014.~~
~~Exhibit No. (10)c~~	Employee Matters Agreement, dated October 31, 2014, by and between Halyard Heath, Inc. and Kimberly-Clark Corporation, incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K dated October 31, 2014.
~~Exhibit No. (10)d~~	Patent and Know-How License Agreement, dated October 31, 2014, between Kimberly-Clark Worldwide, Inc. and Avent, Inc., incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K dated October 31, 2014.
~~Exhibit No. (10)e~~	Royalty-Bearing Trademark License Agreement, dated October 31, 2014 between Kimberly-Clark Worldwide, Inc. and Avent, Inc., incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K dated October 31, 2014.



	63	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

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~~Exhibit No. (10)f~~	Non Royalty-Bearing Trademark License Agreement, dated October 31, 2014 between Kimberly-Clark Worldwide, Inc. and Avent, Inc., incorporated by reference to Exhibit 10.6 of our Current Report on Form 8-K dated October 31, 2014.
~~Exhibit No. (10)g~~	~~Short-term Trademark License Agreement between Kimberly-Clark Worldwide, Inc. and Avent, Inc.~~
~~Exhibit No. (10)h~~	Long-term Trademark License Agreement, dated October 31, 2014 between Kimberly-Clark Worldwide, Inc. and Avent, Inc., incorporated by reference to Exhibit 10.7 of our Current Report on Form 8-K dated October 31, 2014.
~~Exhibit No. (10)i~~	Halyard Non-Competition Agreement between Kimberly-Clark Corporation and Halyard Health, Inc., incorporated by reference to Exhibit 10.14 to the Company’s Amendment No. 6 to Form 10 filed October 15, 2014.
~~Exhibit No. (10)j~~	Kimberly-Clark Non-Competition Agreement between Kimberly-Clark Corporation and Halyard Health, Inc., incorporated by reference to Exhibit 10.15 to the Company’s Amendment No. 6 to Form 10 filed October 15, 2014.
~~Exhibit No. (10)k~~	Employment Offer Letter for Rhonda D. Gibby, incorporated by reference to Exhibit 10.4 to the Company's Amendment No. 3 to Form 10 filed August 27, 2014.*
~~Exhibit No. (10)l~~	Employment Offer Letter for Christopher M. Lowery, incorporated by reference to Exhibit 10.5 to the Company's Amendment No. 3 to Form 10 filed August 27, 2014.*
~~Exhibit No. (10)m~~	Employment Offer Letter for Steven Voskuil, incorporated by reference to Exhibit 10.6 to the Company's Amendment No. 3 to Form 10 filed August 27, 2014.*
~~Exhibit No. (10)n~~	Employment Offer Letter for John Wesley, incorporated by reference to Exhibit 10.7 to the Company's Amendment No. 3 to Form 10 filed August 27, 2014.*
~~Exhibit No. (10)o~~	Halyard Health, Inc. Equity Participation Plan, effective as of November 1, 2014, incorporated by reference to Exhibit 10.8 of our Current Report on Form 8-K dated October 31, 2014.*
~~Exhibit No. (10)p~~	Form of Award Agreement related to the Halyard Health, Inc. Equity Participation Plan, incorporated by reference to Exhibit 10.9 of our Current Report on Form 8-K dated October 31, 2014.*
~~Exhibit No. (10)q~~	Halyard Health, Inc. Outside Directors’ Compensation Plan, effective as of November 1, 2014, incorporated by reference to Exhibit 10.10 of our Current Report on Form 8-K dated October 31, 2014.*
~~Exhibit No. (10)r~~	Form of Terms and Conditions of Awards under the Halyard Health, Inc. Outside Directors’ Compensation Plan, incorporated by reference to Exhibit 10.11 of our Current Report on Form 8-K dated October 31, 2014.*
~~Exhibit No. (10)s~~	Halyard Health, Inc. Executive Officer Achievement Award Program, effective as of November 1, 2014, incorporated by reference to Exhibit 10.12 of our Current Report on Form 8-K dated October 31, 2014.*
~~Exhibit No. (10)t~~	Halyard Health, Inc. Executive Severance Plan, effective as of November 1, 2014, incorporated by reference to Exhibit 10.13 of our Current Report on Form 8-K dated October 31, 2014.*26, 2016.
Exhibit No. (12)	Computation of ratio of earnings to fixed charges for the five years ended December 31, ~~2014,~~2016, filed herewith.
Exhibit No. (21)	Subsidiaries of the Corporation, filed herewith.
Exhibit No. (23)	Consent of Independent Registered Public Accounting Firm, filed herewith.
Exhibit No. (24)	Powers of Attorney, filed herewith.
Exhibit No. (31)a	Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), filed herewith.
Exhibit No. (31)b	Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, filed herewith.



	64	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

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Exhibit No. (32)a	Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, furnished herewith.
Exhibit No. (32)b	Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, furnished herewith.
Exhibit No. (101).INS	XBRL Instance Document
Exhibit No. (101).SCH	XBRL Taxonomy Extension Schema Document
Exhibit No. (101).CAL	XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit No. (101).DEF	XBRL Taxonomy Extension Definition Linkbase Document
Exhibit No. (101).LAB	XBRL Taxonomy Extension Label Linkbase Document
Exhibit No. (101).PRE	XBRL Taxonomy Extension Presentation Linkbase Document



+	Pursuant to Item 601(b)(2) of Regulation S-K, schedules to this Agreement have been omitted because they are not material to an investment decision. Halyard Health, Inc. agrees to furnish supplementally a copy of any omitted schedule to the Securities Exchange Commission upon request.
*	~~Indicates management contracts and compensating plan agreements.~~



	6577	~~HALYARD HEALTH, INC. - 2014 Annual Report~~

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	HALYARD HEALTH, INC.

~~March 13, 2015~~February 27, 2017	By:	/s/ Steven E. Voskuil
		Steven E. Voskuil
		Senior Vice President and
		Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



/s/ Robert E. Abernathy	Chairman of the Board and Chief Executive Officer and Director (principal executive officer)	~~March 13, 2015~~February 27, 2017
Robert E. Abernathy

/s/ Steven E. Voskuil	Senior Vice President and Chief Financial Officer (principal financial officer)	~~March 13, 2015~~February 27, 2017
Steven E. Voskuil

/s/ Renato Negro	Vice President and Controller (principal accounting officer)	~~March 13, 2015~~February 27, 2017
Renato Negro

Directors

Gary D. Blackford

John P. Byrnes

Ronald W. Dollens

Heidi ~~K. Fields~~Kunz

William A. Hawkins III

Patrick J. O’Leary

Maria Sainz

Dr. Julie Shimer



By:	/s/ ~~John W. Wesley~~S. Ross Mansbach	~~March 13, 2015~~February 27, 2017
	~~John W. Wesley~~S. Ross Mansbach Attorney-in-Fact



	6678	~~HALYARD HEALTH, INC. - 2014 Annual Report~~



Delaware		46-4987888
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)
5405 Windward Parkway Suite 100 South Alpharetta, Georgia		30004
(Address of principal executive offices)		(Zip Code)



Common Stock—$0.01 Par Value		New York Stock Exchange
(Title of each class)		(Name of each exchange on which registered)



Large accelerated filer ox		Accelerated filer o
Non-accelerated filer xo (Do not check if a smaller reporting company)		Smaller reporting company o




Part I		Page
Item 1.	Business	1
Item 1A.	Risk Factors	6
Item 1B.	Unresolved Staff Comments	1714
Item 2.	Properties	1714
Item 3.	Legal Proceedings	1714
Item 4.	Mine Safety Disclosures	1816

	Executive Officers of the Registrant	1816

Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2018
Item 6.	Selected Financial Data	2119
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2221
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	3132
Item 8.	Financial Statements and Supplementary Data	3334
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	6073
Item 9A.	Controls and Procedures	6073
Item 9B.	Other Information	6075

Part III
Item 10.	Directors, Executive Officers and Corporate Governance	6175
Item 11.	Executive Compensation	6175
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	6175
Item 13.	Certain Relationships and Related Transactions, and Director Independence	6276
Item 14.	Principal Accounting Fees and Services	6276

Part IV
Item 15.	Exhibits, Financial Statement Schedules	6377

	Signatures		6678



(Mark One)
x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



o	Transition Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934



Table of Contents		~~HALYARD HEALTH, INC. -~~ ~~2014 Annual Report~~



	10/21/14		10/28/14		11/4/14		11/11/14		11/18/14		11/25/14		12/2/14		12/9/14		12/16/14		12/23/14		12/31/14
HYH	$	100.00	$	92.88	$	90.17	$	89.02	$	95.93	$	94.68	$	91.54	$	96.10	$	93.98	$	104.54	$	110.90
S&P MidCap 400	100.00		102.46		103.52		105.00		105.08		106.36		104.82		105.49		101.64		106.88		107.89
S&P 500 Health Care Equipment and Services	100.00		102.18		104.50		105.49		107.68		108.03		110.10		110.71		105.98		111.01		110.93



			Changes Due To
2014 vs. 2013	Total		Volume		Pricing / Mix		Currency		Other^(a)
Consolidated	—	%	2	%	(1	)%	(1	)%	—	%
S&IP	(1	)	1		(1	)	(1	)	—
Medical Devices	1		2		(1	)	—		—

2013 vs. 2012
Consolidated	—	%	1	%	—	%	(1	)%	—	%
S&IP	(3	)	(1	)	—		(1	)	(1	)
Medical Devices	4		5		1		(1	)	(1	)



Current assets	$	81.7
Property retained by Kimberly-Clark	26.5
Accounts payable	(74.0		)
Accrued liabilities	(7.4		)
Non-current liabilities	(1.3		)
AOCI and other	5.9
Total	$	31.4



	Medical Devices			S&IP			Total
Balance at December 31, 2012	$	684.6		$	749.5		$	1,434.1
Acquisitions	2.7			—			2.7
Currency changes	(1.0		)	(5.7		)	(6.7		)
Balance at December 31, 2013	686.3			743.8			1,430.1
Currency changes	(4.7		)	0.7			(4.0		)
Balance at December 31, 2014	$	681.6		$	744.5		$	1,426.1



	Shares (in thousands)		Weighted Average Fair Value
Outstanding at December 31, 2013	—		$	—
Granted	377		$	37.88
Forfeited	(2	)	$	37.88
Outstanding at December 31, 2014	375		$	37.88
Vested at December 31, 2014	6		$	37.88