Halyard Health, Inc. reported fourth quarter and full-year 2016 results and provided its 2017 outlook and related key planning assumptions.

Executive Summary

• 2016 fourth quarter net sales were $410 million, a 2 percent increase compared to the prior year.

• Net income for the fourth quarter 2016 was $10 million compared to net income of $15 million in the fourth quarter of 2015. Fourth quarter adjusted net income was $24 million compared to adjusted net income of $27 million in the prior year.

• The fourth quarter diluted earnings per share were $0.21, compared to $0.31 diluted earnings per share in the fourth quarter of 2015. Adjusted diluted earnings per share in the quarter were $0.50, compared to adjusted diluted earnings per share of $0.57 in the prior year.

• Full-year net sales of $1.6 billion increased 1 percent compared to the prior year.

• Net income for 2016 was $40 million, compared to net loss of $(426) million in 2015. The prior year's operating loss was driven primarily by a non-cash goodwill impairment charge of $474 million. For 2016, adjusted net income was $93 million, compared to adjusted net income of $99 million in the prior year.

• Full-year 2016 diluted earnings per share totaled $0.85, compared to $(9.15) of diluted earnings per share in 2015. Adjusted diluted earnings per share for the year were $1.97, compared to adjusted diluted earnings per share of $2.11 in the prior year.

• 2017 full-year adjusted diluted earnings per share are expected to be $1.70 to $2.00, which incorporates anticipated commodity inflation of $10 to $20 million. The outlook reflects expectations that total net sales will be even to up 2 percent, on a constant currency basis.

"Last year we met our financial goals, completed our first acquisition and took strategic steps to advance the company's transformation into a leading Medical Devices company. Progress of our transformation is evident from the increasing shift in our portfolio to Medical Devices, which generated the majority of our operating profit," said Robert Abernathy, Halyard chairman and CEO. "In 2017, we will remain focused on delivering our plan and using our strong financial position to invest in growth opportunities. I am confident in our strategy and in our team's ability to execute."

Fourth Quarter Operating Results

Net sales of $410 million increased 2 percent compared to the prior year, including CORPAK that contributed 3 percent of growth. Excluding Corporate and Other Sales and CORPAK, volumes increased 2 percent compared to the prior year and selling prices were lower by 4 percent.

Operating profit was $16 million in the fourth quarter 2016 versus $21 million in the prior year. On an adjusted basis, operating profit was $40 million compared to $41 million in 2015. Volume growth in Medical Devices, including CORPAK, manufacturing cost savings and favorable currency exchange rates were offset by lower selling prices in S&IP and higher selling, general and administrative expenses.

Adjusted operating profit for fourth quarter 2016 excludes $10 million in post-spin related charges, $6 million of intangible amortization expense, $5 million for litigation matters, and $3 million for acquisition-related charges.

Adjusted EBITDA for the fourth quarter, excluding spin-related transition charges, acquisition-related charges and litigation expenses was $51 million, even compared to the prior year.

Fourth Quarter Business Segment Results

Medical Devices

Net sales of Medical Devices in the fourth quarter 2016 increased 15 percent to $154 million compared to the prior year, driven by a 5 percent increase in volume and 10 percent growth attributed to the CORPAK acquisition. Growth was partially offset by 1 percent lower selling prices.

Operating profit for Medical Devices was $33 million in 2016 compared to $21 million in the prior year. Results were driven by higher sales volumes, manufacturing cost savings, and favorable currency exchange rates, offset by planned higher research and development investment and marketing expense to help fuel growth.

Surgical and Infection Prevention

S&IP net sales totaled $252 million, down 4 percent compared to the fourth quarter of 2015. On a constant currency basis, sales declined 5 percent. Excluding sales to Kimberly-Clark, volumes were even compared to the prior year. Continued strong demand in exam gloves was offset by soft demand in surgical drapes and gowns. Lower selling prices of 5 percent were primarily concentrated in exam gloves and sterilization.

S&IP operating profit for the quarter was $19 million compared to $27 million in last year's fourth quarter. Manufacturing cost savings, favorable currency exchange rates, and commodity costs were offset by lower selling prices.

Full-Year Results

Full-year 2016 net sales of $1.6 billion increased 1 percent compared to 2015, including CORPAK sales that contributed 2 percent of the growth. Excluding Corporate and Other Sales and CORPAK, volumes increased 3 percent and were offset by 3 percent lower selling prices.

Operating profit was $87 million in 2016 compared to an operating loss of $(378) million. On an adjusted basis, 2016 operating profit was $168 million, compared to adjusted operating profit of $181 million in the prior year. Results were impacted by lower selling prices in S&IP and higher research and development investment to fund growth, which were partially offset by a favorable shift in product volume to Medical Devices, manufacturing cost savings and favorable currency exchange rates.

2016 adjusted operating profit excludes $21 million post-spin related charges, $22 million of intangible amortization expense, $20 million for litigation matters and $18 million acquisition-related charges.

Adjusted EBITDA for 2016, excluding spin-related transition charges, acquisition-related charges and litigation expenses was $211 million compared to $220 million in 2015.

Full-Year Business Segment Results

Medical Devices

Net sales of Medical Devices increased 11 percent to $567 million, compared to the prior year, including 7 percent growth attributed to CORPAK. Performance was driven by 4 percent volume growth across all product categories.

Operating profit increased 15 percent to $124 million from $108 million in 2015. Higher sales volume and favorable currency exchange rates were partially offset by planned higher research and development investment, selling expense and marketing expense to fuel growth.

Surgical and Infection Prevention

2016 S&IP net sales totaled $1,012 million, down 2 percent compared to 2015. Volumes increased 2 percent driven by continued robust demand in exam gloves, which was partially offset by lower volume in surgical drapes and gowns and protective apparel. Four percent lower selling prices primarily in exam gloves and sterilization also impacted sales.

S&IP operating profit was $91 million compared to $98 million in 2015. Favorable currency exchange rates and manufacturing savings were offset by lower selling prices.

Cash Flow and Balance Sheet

Cash from operations less capital expenditures, or free cash flow, for the fourth quarter was $38 million compared to $17 million a year ago. For the year, free cash flow was $160 million compared to $27 million in the prior year. The increase in 2016 was primarily driven by improvements in working capital and lower capital spending. At year-end 2016, the company's cash balance was $114 million.

Capital spending for the fourth quarter was $7 million compared to $6 million in 2015, while full-year 2016 capital spending totaled $29 million compared to $70 million in the prior year. The full-year decrease in capital spending was due to spin-related activities in the prior year. Total debt at the end of 2016 was $579 million, consisting of a secured term loan and unsecured notes, compared to total debt of $578 million at the end of 2015.

2017 Outlook and Key Planning Assumptions

Based on current trends, the company expects 2017 net sales, on a constant currency basis, to be even to up 2 percent compared to 2016, which includes the impact from CORPAK. Adjusted earnings per diluted share are anticipated to be in the range of $1.70 to $2.00 for the full-year. This outlook reflects certain key assumptions, which are listed below:

• Building on our momentum in 2016, we expect Medical Devices net sales to increase 7 to 9 percent, on a constant currency basis. This includes approximately 3 percent growth attributed to the CORPAK acquisition.

• Based on the current market conditions and excluding sales to Kimberly-Clark, we expect S&IP net sales to be even to down 2 percent, on a constant currency basis.

• S&IP net sales to Kimberly-Clark which were $52 million in 2016, are expected to range between $40 and $45 million.

• Corporate sales are expected to range between $10 and $15 million.

• We expect a foreign currency translation impact to net sales of 0 to down 2 percent compared to the prior year.

• Inflation in key cost inputs of $10 to $20 million.

• Research and development investment is expected to range from $40 to $45 million, to support the company's focus on product innovation.

• The adjusted effective tax rate is anticipated to be between 32 and 34 percent.