Halyard Health ‘squarely’ in targeted 2 to 2.5 times leverage range

By Paul Deckelman

New York, June 4 – Halyard Health, Inc. is “squarely where we want to be” in terms of its target leverage range of net debt at 2 to 2.5 times its adjusted trailing 12-month EBITDA, the company’s chairman and chief executive officer said Thursday.

Robert E. Abernathy also told investors at the Morgan Stanley leveraged finance conference in New Orleans that the Alpharetta, Ga.-based medical products and devices company ended the 2015 first quarter with full availability under its undrawn $250 million revolving credit facility and $166 million of cash and equivalents on its balance sheet.

“We do look each quarter strategically at what we should do with the cash,” he declared.

He noted that the company had said that it would use some of its cash to cut debt, “so we did use $50 million to reduce the debt, maintaining our flexibility and borrowing power for acquisitions in 2016.”

At the end of the first quarter on March 31, total debt stood at $635.3 million.

The debt consisted of $250 million of outstanding 6¼% senior notes due 2022 that the company had sold last October, about a month before the completion of its spinoff from Dallas-based consumer products giant Kimberly-Clark Corp., and $385.3 million of 4% term loan debt due 2021 that the company had entered into concurrently with the bond deal as part of the capitalization in advance of its spinoff.

The long-term portion of the debt totaled $631.4 million, with $3.9 million classified as payable within one year.

Subsequent to the end of the quarter, Halyard made a $50 million payment on the term loan obligation. That April 30 payment was made without any prepayment penalty. The company will recognize a charge of $1 million related to the write-off of related debt issuance costs and original issue discount when it reports its results for the current 2015 second quarter, which is scheduled to end on June 30.

Cash targeted for acquisitions

Halyard’s cash position increased to $166 million at the end of the first quarter from $149 million at the end of the 2014 fiscal year and fourth quarter on Dec. 31.

Abernathy noted during his presentation that cash from operations was $41 million in the fourth quarter and $40 million in the first quarter of 2015, “so we continue to have strong cash generation from operations.”

Halyard, which was formerly known as Kimberley-Clark Health Care, was spun off from parent Kimberley-Clark in a transaction that closed on Nov. 1, 2014 so the latter company could concentrate on its consumer products segment, including such products as Huggies disposable diapers, Kleenex tissues, Scott towels, Depend adult incontinence products and Kotex feminine hygiene products.

The newly independent company, like its corporate predecessor, manufactures two kinds of health-care industry products – infection-prevention products, such as sterile medical examination gloves, face masks, surgical gowns and draping, as well as medical devices used in the areas of pain management, digestive health, respiratory health, IV therapy and wound care.

Abernathy said that although the former segment, accounting for more than 70% of the company’s sales, has historically been “a strong cash generator,” producing more than half of the company’s cash, the latter segment has shown a faster growth rate and higher margins and is the centerpiece of Halyard’s medium-to-long-term strategy of “dramatically” shifting its focus more to medical devices.

He said that the company’s cash-utilization focus will be to use cash generated to deliver on this strategic growth objective, “so as we look at using the cash, we look first and foremost at acquisitions of medical device product categories, product lines or companies or technologies to be able to grow the company.”

Abernathy said that this growth phase would likely begin in early 2016; before that, he said, Halyard’s spending would be directed to completing in full its transition away from Kimberly-Clark. Although the two companies are now legally separate entities, the former parent is still providing certain services to its one-time subsidiary, such as information technology functions, under several transition services agreements. Abernathy said the goal this year would be for Halyard to establish its own capabilities in these areas, independent of its former parent.

Starting next year, though, he said that “ with that strong cash flow, we would look for organic growth first, financial discipline around flexibility to be able to do acquisitions at the appropriate time, establishing permanent and diversified capital structures to minimize any risk associated with liquidity, and then utilizing the credit facility for working capital needs as required.

“So, we’re very disciplined around making sure that we deliver the right total shareholder return, which is our focus as a company,” the CEO concluded.

© 2015 Prospect News.
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