Halyard Health, Inc. reported first quarter 2018 results and provided its 2018 earnings outlook.

"I'm pleased with our continued momentum and volume growth, achieving 6 percent organic top-line growth in medical devices," said Joe Woody, Halyard chief executive officer. "We delivered solid earnings, at the same time investing to further enhance commercial execution and product innovation. With the divestiture of S&IP now complete, we are in a strong position to take advantage of attractive opportunities that fit within our dual-track growth strategy, focused on M&A and product development."

First Quarter 2018 Financial Highlights

• First quarter continuing operations, or Medical Device sales, were $156 million, a 7 percent increase from the prior year. On a constant currency basis, sales increased 6 percent. 

• Net income for the first quarter was $20 million, compared to $13 million in the prior year. Adjusted net income was $36 million, up from $23 million a year ago. Additionally, Medical Device operating profit for the first quarter increased 6 percent to $40 million. 

• First quarter diluted earnings per share totaled $0.43, compared to $0.27 a year ago. 

• Adjusted diluted earnings per share were $0.76, up 58 percent compared to the prior year. 

• First quarter EBITDA was $42 million compared to $43 million in the prior year. On an adjusted basis, EBITDA increased 12 percent to $59 million for the quarter, compared to the prior year.

Operational and Business Highlights

• Completed the divestiture of Surgical and Infection Prevention (S&IP) on April 30, 2018 - which transforms the company into a pure-play Medical Devices business and provides additional financial capacity to fund dual-track growth strategy. 

• Initiated the installation of a new IT system that will be completed in 2019 and is expected to generate $15 to $19 million in cost savings. 

• Repaid $40 million of the Term Loan B credit facility and plan to pay off the balance with the proceeds from the sale of the S&IP business. 

• Focused on establishing an enhanced organizational structure for a pure-play Medical Devices business, strengthening the leadership team, including recent appointment of Arjun Sarker, as Senior Vice President - International.

First Quarter 2018 Operating Results from Continuing Operations

Medical Device net sales totaled $156 million, a 6 percent increase compared to the first quarter last year, on a constant currency basis.

Performance was driven by increased demand in interventional pain, digestive health and respiratory health as volumes increased 6 percent and favorable currency exchange rates benefited sales by 1 percent.

Operating loss was $7 million compared to a loss of $18 million in 2017. Volume growth and lower expenses related to excluded items helped drive performance. On an adjusted basis, operating profit was $2 million compared to a loss of $2 million in 2017.

As a result of the previously announced divestiture, the S&IP segment operating results are reflected as discontinued operations for all periods presented. Treating S&IP as discontinued operations results in significant shared overhead costs previously allocated to the S&IP business that are now included in continuing operations. Included in first quarter continuing operations are costs previously allocated to S&IP of $28 million in 2018 and$29 million in 2017.

Adjusted operating profit for the first quarter excludes $3 million of restructuring and IT charges, $2 million for litigation matters and $5 million of intangible amortization expense.

Adjusted EBITDA for the first quarter, excluding divestiture-related charges, restructuring and IT charges, and litigation expenses was, $59 million compared to $53 million in the prior year.

Cash Flow and Balance Sheet

Total debt at the end of the first quarter was $542 million, consisting of a secured term loan and unsecured notes, compared to $581 million at the end of 2017. The decrease in total debt was due to the $40 million repayment of the secured term loan, as required in the company's credit agreement for excess cash generation in the prior year.

Cash from operations less capital expenditures, or free cash flow, for the quarter was $17 million compared to $27 million a year ago. The decrease was primarily due to changes in working capital. The company's cash balance was $203 million at the end of the quarter, compared to $220 million at the end of 2017.

Discontinued Operations

First quarter net sales from discontinued operations were $264 million, a 6 percent increase, compared to the first quarter a year ago. On a constant currency basis, sales were up 4 percent. Five percent volume growth was driven by continued strong demand for exam gloves and an increase in facial protection due to the cold and flu season. Volume growth was partially offset by 2 percent lower selling prices, concentrated in exam gloves. Adjusted net income for the quarter totaled $41 million compared to $28 million in the prior year.

2018 Key Planning Assumptions

For the full-year 2018, the company expects to earn adjusted diluted earnings per share of $1.65 to $1.85, which includes earnings from both continuing and discontinued operations. Additionally, the key planning assumptions that it provided on its Year-End 2017 conference call remain unchanged.

Non-GAAP Financial Measures

This press release and the accompanying tables include the following financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S., or GAAP, and are therefore referred to as non-GAAP financial measures:

• Adjusted net income 

• Adjusted diluted earnings per share 

• Adjusted gross and operating profit 

• Adjusted effective tax rate 

• Adjusted EBITDA 

• Free cash flow

These non-GAAP financial measures exclude the following items, as applicable, for the relevant time periods as indicated in the accompanying non-GAAP reconciliations to the comparable GAAP financial measures:

• Expenses associated with the divestiture of the S&IP business and the corporate restructuring and IT transformation costs.

• Prior year transition costs relating to the separation from Kimberly-Clark Corporation, which included costs to establish Halyard Health's capabilities as a stand-alone entity. These costs are related primarily to rebranding and other supply chain transition costs.

• Expenses associated with the amortization of intangible assets associated with prior business acquisitions.

• The positive or negative effect of changes in currency exchange rates during the year.

• Expenses associated with certain litigation matters.

• Certain prior year acquisition and integration charges related to the acquisition of CORPAK MedSystems, Inc.

• Prior periods impact of tax regulatory changes.

The company provides these non-GAAP financial measures as supplemental information to our GAAP financial measures. Management and the company's Board of Directors use net sales on a constant currency basis, adjusted net income, adjusted diluted earnings per share, adjusted operating profit, adjusted EBITDA, and free cash flow to (a) evaluate the company's historical and prospective financial performance and its performance relative to its competitors, (b) allocate resources and (c) measure the operational performance of the company's business units and their managers. Management also believes that the use of an adjusted effective tax rate provides improved insight into the tax effects of our ongoing business operations.

Additionally, the Compensation Committee of the company's Board of Directors will use certain of the non-GAAP financial measures when setting and assessing achievement of incentive compensation goals. These goals are based, in part, on the company's net sales on a constant currency basis and adjusted EBITDA, which will be determined by excluding certain items that are used in calculating these non-GAAP financial measures.