Company Quick10K Filing
Quick10K
Avanos Medical
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$32.50 48 $1,544
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
8-K 2019-08-15 Officers, Exhibits
8-K 2019-08-06 Earnings, Exhibits
8-K 2019-06-18 Exit Costs
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-04-25 Officers, Shareholder Vote
8-K 2019-04-15 Officers
8-K 2019-02-26 Earnings, Exhibits
8-K 2018-10-25 Amend Bylaw, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-06-21 Regulation FD, Exhibits
8-K 2018-05-29 Amend Bylaw, Other Events, Exhibits
8-K 2018-05-01 Enter Agreement, M&A, Regulation FD, Exhibits
8-K 2018-04-02 Regulation FD
8-K 2018-03-20 Exit Costs
ZBH Zimmer Biomet Holdings 28,299
ALGN Align Technology 14,397
POOL Pool 7,959
PII Polaris Industries 4,834
MSA MSA Safety 3,921
AIT Applied Industrial Technologies 1,995
SPLP Steel Partners Holdings 334
RTIX RTI Surgical 192
SHLO Shiloh Industries 105
HDSN Hudson Technologies 22
AVNS 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Note 1. Accounting Policies
Note 2. Business Acquisitions
Note 3. Restructuring Activities
Note 5. Supplemental Balance Sheet Information
Note 6. Leases
Note 7. Fair Value Information
Note 8. Debt
Note 9. Accumulated Other Comprehensive Income
Note 10. Stock-Based Compensation
Note 11. Commitments and Contingencies
Note 12. Earnings per Share ("Eps")
Note 13. Business and Products Information
Note 14. Supplemental Guarantor Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II - Other Information
Item 6. Exhibits
EX-31.A avns2q2019form10qex31a.htm
EX-31.B avns2q2019form10qex31b.htm
EX-32.A avns2q2019form10qex32a.htm
EX-32.B avns2q2019form10qex32b.htm

Avanos Medical Earnings 2019-06-30

AVNS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________  
Commission file number 001-36440
 
avanoslogo.jpg
AVANOS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
 
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)
 
Registrant’s telephone number, including area code: (844) 428-2667
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common Stock - $0.01 Par Value
AVNS
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Emerging growth company
Smaller reporting company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes      No  
As of July 31, 2019, there were 47,710,425 shares of the Corporation’s common stock outstanding.    
 




Table of Contents


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

 
 

PART I – FINANCIAL INFORMATION
Item 1.     Financial Statements
AVANOS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in millions, except per share amounts)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net Sales
$
172.2

 
$
160.9

 
$
336.4

 
$
317.3

Cost of products sold
73.5

 
66.2

 
138.9

 
131.5

Gross Profit
98.7

 
94.7

 
197.5

 
185.8

Research and development
9.5

 
10.8

 
19.7

 
20.7

Selling and general expenses
94.7

 
79.8

 
201.1

 
166.2

Other expense (income), net
4.3

 
(4.7
)
 
11.1

 
(2.9
)
Operating (Loss) Income
(9.8
)
 
8.8

 
(34.4
)
 
1.8

Interest income
2.0

 
2.2

 
4.4

 
3.2

Interest expense
(3.5
)
 
(9.9
)
 
(7.2
)
 
(18.7
)
(Loss) Income Before Income Taxes
(11.3
)
 
1.1

 
(37.2
)
 
(13.7
)
Income tax benefit
3.3

 
0.2

 
8.9

 
3.7

(Loss) Income from Continuing Operations
(8.0
)
 
1.3

 
(28.3
)
 
(10.0
)
Income from Discontinued Operations, net of tax

 
34.0

 

 
65.5

Net (Loss) Income
$
(8.0
)
 
$
35.3

 
$
(28.3
)
 
$
55.5

 
 
 
 
 
 
 
 
(Loss) Earnings Per Share
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing Operations
$
(0.17
)
 
$
0.03

 
$
(0.60
)
 
$
(0.21
)
Discontinued Operations

 
0.72

 

 
1.39

Basic (Loss) Earnings Per Share
$
(0.17
)
 
$
0.75

 
$
(0.60
)
 
$
1.18

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Continuing Operations
$
(0.17
)
 
$
0.03

 
$
(0.60
)
 
$
(0.21
)
Discontinued Operations

 
0.70

 

 
1.39

Diluted (Loss) Earnings Per Share
$
(0.17
)
 
$
0.73

 
$
(0.60
)
 
$
1.18



See Notes to the Condensed Consolidated Financial Statements.

3

 
 

AVANOS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net (Loss) Income
$
(8.0
)
 
$
35.3

 
$
(28.3
)
 
$
55.5

Other Comprehensive Income (Loss), net of tax
 
 
 
 
 
 
 
Unrealized currency translation adjustments
1.9

 
(10.0
)
 
2.6

 
(0.7
)
Defined benefit plans

 
1.0

 

 
0.7

Cash flow hedges

 
(1.3
)
 

 
(0.8
)
Total Other Comprehensive Income (Loss), net of tax
1.9

 
(10.3
)
 
2.6

 
(0.8
)
Comprehensive (Loss) Income
$
(6.1
)
 
$
25.0

 
$
(25.7
)
 
$
54.7



See Notes to the Condensed Consolidated Financial Statements.



4

 
 

AVANOS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
(Unaudited)

 
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
288.1

 
$
384.5

Accounts receivable, net of allowances
124.3

 
150.5

Inventories
133.9

 
121.4

Prepaid expenses and other current assets
26.2

 
57.2

Total Current Assets
572.5

 
713.6

Property, Plant and Equipment, net
174.4

 
154.1

Operating Lease Right-of-Use Assets
67.2

 

Goodwill
782.3

 
783.6

Other Intangible Assets, net
158.5

 
168.2

Deferred Tax Assets
13.3

 
6.3

Other Assets
15.2

 
7.6

TOTAL ASSETS
$
1,783.4

 
$
1,833.4

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Current portion of operating lease liabilities
$
14.7

 
$

Trade accounts payable
99.4

 
169.9

Accrued expenses
72.9

 
94.4

Total Current Liabilities
187.0

 
264.3

Long-Term Debt
247.8

 
247.7

Operating Lease Liabilities
65.5

 

Deferred Tax Liabilities
0.6

 
4.4

Other Long-Term Liabilities
5.6

 
19.8

Total Liabilities
506.5

 
536.2

 
 
 
 
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, 47,653,527 outstanding as of June 30, 2019 and 47,444,340 outstanding as of December 31, 2018
0.5

 
0.5

Additional paid-in capital
1,586.8

 
1,578.1

Accumulated deficit
(270.7
)
 
(242.4
)
Treasury stock
(8.6
)
 
(5.3
)
Accumulated other comprehensive loss
(31.1
)
 
(33.7
)
Total Stockholders’ Equity
1,276.9

 
1,297.2

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,783.4

 
$
1,833.4


See Notes to the Condensed Consolidated Financial Statements.

5

 
 

AVANOS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in millions)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Common Stock
$
0.5

 
$
0.5

 
$
0.5

 
$
0.5

Additional Paid-in Capital, beginning of period
1,582.5

 
1,557.3

 
1,578.1

 
1,550.5

Exercise or redemption of share-based awards
2.5

 
8.3

 
2.7

 
11.6

Stock-based compensation expense
1.8

 
2.1

 
6.0

 
5.6

Additional Paid-in Capital, end of period
1,586.8

 
1,567.7

 
1,586.8

 
1,567.7

Accumulated Deficit, beginning of period
(262.7
)
 
(279.7
)
 
(242.4
)
 
(299.9
)
Net (loss) income
(8.0
)
 
35.3

 
(28.3
)
 
55.5

Accumulated Deficit, end of period
(270.7
)
 
(244.4
)
 
(270.7
)
 
(244.4
)
Treasury Stock, beginning of period
(7.2
)
 
(4.5
)
 
(5.3
)
 
(4.4
)
Purchases of treasury stock
(1.4
)
 
(0.6
)
 
(3.3
)
 
(0.7
)
Treasury Stock, end of period
(8.6
)
 
(5.1
)
 
(8.6
)
 
(5.1
)
Accumulated Other Comprehensive Loss, beginning of period
(33.0
)
 
(21.8
)
 
(33.7
)
 
(31.3
)
Other comprehensive income (loss), net of tax
1.9

 
(10.3
)
 
2.6

 
(0.8
)
Accumulated Other Comprehensive Loss, end of period
(31.1
)
 
(32.1
)
 
(31.1
)
 
(32.1
)
Total Stockholders’ Equity, end of period
$
1,276.9

 
$
1,286.6

 
$
1,276.9

 
$
1,286.6



See Notes to the Condensed Consolidated Financial Statements.



6

 
 

AVANOS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(in millions)
(Unaudited)

 
Six Months Ended
June 30,
 
2019
 
2018
Operating Activities
 
 
 
Net (loss) income
$
(28.3
)
 
$
55.5

Depreciation and amortization
16.9

 
15.6

Stock-based compensation expense
6.0

 
5.6

Net non-cash gain on Divestiture

 
(98.4
)
Net loss on asset dispositions
0.5

 
0.6

Changes in operating assets and liabilities, net of acquisition:
 
 
 
Accounts receivable
26.2

 
33.8

Inventories
(13.3
)
 
(24.2
)
Prepaid expenses and other assets
32.8

 
(32.7
)
Accounts payable
(64.6
)
 
(47.9
)
Accrued expenses
(29.3
)
 
33.2

Other
(1.9
)
 
(11.5
)
Cash Used in Operating Activities
(55.0
)
 
(70.4
)
Investing Activities
 
 
 
Capital expenditures
(35.4
)
 
(20.7
)
Acquisition of assets and investments in businesses
(7.0
)
 

Proceeds from the Divestiture

 
734.5

Cash (Used in) Provided by Investing Activities
(42.4
)
 
713.8

Financing Activities
 
 
 
Debt repayments
(0.2
)
 
(339.0
)
Purchases of treasury stock
(3.3
)
 
(0.6
)
Proceeds from the exercise of stock options
2.6

 
11.4

Cash Used in Financing Activities
(0.9
)
 
(328.2
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
1.9

 
(3.8
)
(Decrease) Increase in Cash and Cash Equivalents
(96.4
)
 
311.4

Cash and Cash Equivalents - Beginning of Period
384.5

 
219.7

Cash and Cash Equivalents - End of Period
$
288.1

 
$
531.1



See Notes to the Condensed Consolidated Financial Statements.


7

 
 

AVANOS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1.    Accounting Policies
Background and Basis of Presentation
Avanos Medical, Inc. is a medical technology company focused on delivering clinically superior breakthrough medical device solutions to improve patients’ quality of life. Headquartered in Alpharetta, Georgia, Avanos is committed to addressing some of today’s most important healthcare needs, such as reducing the use of opioids while helping patients move from surgery to recovery. We develop, manufacture and market clinically superior solutions around the globe. References to “Avanos,” “Company,” “we,” “our” and “us” refer to Avanos Medical, Inc. and its consolidated subsidiaries.
On April 30, 2018, we closed the sale of our Surgical and Infection Prevention (“S&IP”) business, including the name “Halyard Health” (and all variations thereof and related intellectual property rights) (the “Divestiture”). Accordingly, the Company’s name was changed from “Halyard Health, Inc.” to “Avanos Medical, Inc.” effective June 30, 2018. The results of operations from our former S&IP business are reported in the accompanying condensed consolidated income statements as “Income from Discontinued Operations, net of tax” for the three and six months ended June 30, 2018.
Interim Financial Statements
We prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and the condensed consolidated financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018. Our unaudited interim condensed consolidated financial statements contain all necessary material adjustments, which are of a normal and recurring nature, to fairly state our financial condition, results of operations and cash flows for the periods presented.
Use of Estimates
Preparation of our condensed consolidated financial statements in accordance with GAAP requires us 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 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 difference could be material to our financial statements. Changes in these estimates are recorded when known.
Recently Adopted Accounting Pronouncements
Effective January 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), using the transition method provided in ASU No. 2018-11, Leases (Topic 842) - Targeted Improvements, which allows for initial application on the date of adoption with recognition of a cumulative-effect adjustment, if applicable, to the opening balance of retained earnings. As of December 31, 2018, all our existing leases were operating leases, and accordingly, no adjustment to beginning retained earnings was required. In addition, we elected to use all available expedients allowed under ASU 2018-11. Other prior period amounts are not adjusted and continue to be reported under Topic 840, the previous lease guidance.
Topic 842 replaces the former guidance in Topic 840 and requires the recognition of right-of-use (“ROU”) assets and liabilities for leases with terms of more than twelve months. The recognition, measurement and presentation of expenses and cash flows arising from leases depend primarily on its classification as a finance or an operating lease, with the classification criteria for distinguishing between the two types being similar to the classification for distinguishing between capital and operating leases under Topic 840. In addition to recognition of ROU assets and liabilities, disclosures regarding lease obligations are required to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.
As a result of Topic 842 adoption, we have operating lease liabilities of $80.2 million and corresponding ROU assets of $67.2 million as of June 30, 2019. For other disclosures regarding our lease obligations, see “Leases” in Note 6 herein.
Effective January 1, 2019, we adopted ASU No. 2018-02, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU is intended to help companies reclassify certain stranded income tax effects in accumulated other comprehensive income (“AOCI”) resulting from the Tax Cuts and Jobs Act of 2017 (the “Act”), which was enacted in December 2017. ASU 2018-02 provides for the elimination of stranded tax effects of the Act by allowing reclassification of stranded tax effects from AOCI to retained earnings. We elected not to reclassify

8

 
 

stranded tax effects from AOCI to retained earnings, and accordingly, adoption of this ASU did not have a material effect on our financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU is intended to reduce complexity by aligning the requirements for capitalizing implementation costs incurred in cloud-based arrangements with the requirements for capitalization of costs incurred to develop internal-use software. Any implementation costs in cloud-based arrangements would then be amortized over the term of the service contract. This ASU is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2019, with early adoption permitted. We do not expect adoption of this ASU to have a material effect on our financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes certain disclosure requirements regarding the amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of transfers between the levels. The ASU also adds disclosure requirements regarding unrealized gains and losses included in Other Comprehensive Income for recurring Level 3 fair value measurements and regarding the range and weighted average of unobservable inputs used in Level 3 fair value measurements. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The removal of certain disclosures is to be applied retrospectively for all periods presented, but the additional required disclosures are to be prospectively applied, and early application is permitted. We do not expect any transfers between Level 1 and Level 2 of the fair value hierarchy, and as of June 30, 2019, we have no assets or liabilities with fair value measurements in Level 3 of the fair value hierarchy. Accordingly, we do not expect adoption of this ASU to have a material effect on our financial position, results of operations or cash flows.
Note 2.    Business Acquisitions
Summit Medical Products, Inc.
On July 31, 2019, we entered into an agreement to acquire substantially all the assets of Summit Medical Products, Inc. (“Summit”) for $17.5 million, subject to certain adjustments as defined in the purchase agreement. We expect to close the purchase in August 2019, subject to certain closing conditions. Summit develops and markets the ambIT® family of ambulatory electronic infusion pumps, with annual net sales of approximately $7 million.
NeoMed, Inc.
On April 16, 2019, we acquired a minority interest in NeoMed, Inc. (“NeoMed”) for $7.0 million. NeoMed is a market-leading medical device company that is focused on specialized feeding and medication dosing for low birth weight, neonatal and pediatric patients. On July 8, 2019, we acquired all of the outstanding shares of NeoMed for a purchase price of $28.0 million, subject to adjustment for certain items as defined in the purchase agreement. NeoMed’s net sales were $36 million in 2018.
Cool Systems, Inc.
On July 1, 2018, we acquired Cool Systems, Inc. for $65.7 million, net of cash acquired, which was based on a purchase price of $65.0 million plus certain adjustments as provided in the purchase agreement. Cool Systems is marketed as Game Ready® and is hereinafter referred to as “Game Ready.” In the three months ended June 30, 2019, the purchase price allocation for Game Ready was finalized, resulting in a $1.9 million reduction of goodwill. The goodwill arising from the Game Ready acquisition is now $18.7 million.
We expect the integration of our acquisitions will be substantially complete by the end of 2020.
Note 3.     Restructuring Activities
Organizational Alignment
In December 2017, in conjunction with the Divestiture (see Note 4, “Discontinued Operations”), we initiated the first phase of a multi-year restructuring plan (the “Plan”). The initial phase of the Plan is intended to align our organizational and management structure with our remaining Medical Devices business.
We expect to incur up to $18.0 million of pre-tax costs, of which approximately $10.0 million is for employee retention, severance and benefits and the remainder for third-party services and other related costs. These are cash costs that will be incurred as we execute the Plan, which we expect to substantially complete by the end of 2019.

9

 
 

In the three and six months ended June 30, 2019, we incurred $0.5 million and $2.0 million, respectively, of costs that are included in “Selling and general expenses” in the accompanying condensed consolidated income statement, compared to $3.5 million and $4.5 million, respectively, in the three and six months ended June 30, 2018.
Plan-to-date, we have incurred $16.7 million of expenses, of which $9.6 million was for employee retention, severance and benefits and the remainder for third-party services and other costs.
We have a liability associated with employee severance and benefits related to the organizational alignment phase of the Plan. The following table summarizes the accrual and payment activity (in millions):
 
Accrual
Balance, December 31, 2018
$
5.7

Charges and adjustments, net
0.4

Payments
(3.6
)
Balance, June 30, 2019
$
2.5


Information Technology Systems
The sale price the Company received upon closing the Divestiture included the sale of the Company’s IT systems. The sale of the IT systems enables the Company to migrate to an IT platform that is more appropriate for its business and size. Accordingly, in March 2018, we launched the phase of the Plan to restructure and enhance the Company’s IT systems (the “ITS Plan”).
Based on milestones achieved to date, the Company’s current expectation is to incur up to $75.0 million to complete the implementation of the ITS Plan, of which approximately $50.0 million qualifies for capitalization. The remainder, primarily consulting and other costs, are expensed as incurred. We incurred $4.1 million and $4.6 million, respectively, of costs related to the ITS Plan in the three and six months ended June 30, 2019 which are included in “Selling and general expenses” in the accompanying condensed consolidated income statements compared to $0.5 million and $2.3 million, respectively, in the three and six months ended June 30, 2018. Plan-to-date, we have incurred $11.0 million of costs that were expensed as incurred and $50.0 million of costs that were capitalized, including $5.0 million of capitalized internal labor costs. Most of the remaining expected costs will be incurred as the Company migrates to its new IT platform during the third quarter of 2019. Accordingly, the Company expects to substantially complete the ITS Plan by the end of 2019.
Cost Transformation
In June 2019, the third and final phase of the Plan was approved. This third phase relates to optimizing the Company’s procurement, manufacturing, and supply chain operations (the “Cost Transformation”). The Company expects to incur between $11.0 million and $13.0 million to execute the Cost Transformation, primarily consulting and other expenses that will be expensed as incurred. The Company also expects to spend between $8.0 million to $12.0 million of incremental capital through 2021 in support of the Cost Transformation. The Company expects to complete the Cost Transformation by the end of 2021. We have incurred $1.2 million of costs related to Cost Transformation in the three months ended June 30, 2019.
Note 4.     Discontinued Operations
The results of operations from our former S&IP business are reported in the accompanying condensed consolidated income statements as “Income from Discontinued Operations, net of tax” for the three and six months ended June 30, 2018.
The following table summarizes the financial results of our discontinued operations for the three and six months ended June 30, 2018 (in millions):

10

 
 

 
Three Months
Ended
June 30, 2018
 
Six Months
Ended
June 30, 2018
Net Sales
$
89.0

 
$
353.0

Cost of products sold
65.8

 
260.3

Research and development
0.2

 
1.1

Selling, general and other expenses
10.9

 
38.1

Gain on Divestiture
(89.9
)
 
(89.9
)
Other expense, net
0.1

 
0.4

Income from Discontinued Operations before income taxes
101.9

 
143.0

Tax provision from discontinued operations
(67.9
)
 
(77.5
)
Income from Discontinued Operations, net of tax
$
34.0

 
$
65.5


In accordance with GAAP, only expenses specifically identifiable and related to a business to be disposed may be allocated to discontinued operations. Accordingly, certain expenses that were historically presented as a component of the S&IP business were kept in continuing operations. These expenses, on a pre-tax basis, were $9.1 million and $37.0 million for the three and six months ended June 30, 2018.
The following table provides operating and investing cash flow information for our discontinued operations (in millions):
 
Six Months
Ended
June 30, 2018
Operating Activities: Stock-based compensation expense
$
(1.5
)
Investing Activities: Capital expenditures
2.9


Note 5.    Supplemental Balance Sheet Information
Accounts Receivable
Accounts receivable consist of the following (in millions):
 
June 30, 2019
 
December 31, 2018
Accounts receivable
$
127.1

 
$
152.2

Allowances and doubtful accounts:
 
 
 
Doubtful accounts
(2.4
)
 
(1.4
)
Sales discounts
(0.3
)
 
(0.2
)
Sales returns
(0.1
)
 
(0.1
)
Accounts receivable, net
$
124.3

 
$
150.5


Inventories
Inventories at the lower of cost (determined on the LIFO/FIFO or weighted-average cost methods) or market consist of the following (in millions):
 
June 30, 2019
 
December 31, 2018
 
LIFO
 
Non-
LIFO
 
Total
 
LIFO
 
Non-
LIFO
 
Total
Raw materials
$
41.1

 
$
1.3

 
$
42.4

 
$
39.6

 
$
1.5

 
$
41.1

Work in process
27.2

 
0.4

 
27.6

 
22.1

 
0.4

 
22.5

Finished goods
55.1

 
14.4

 
69.5

 
50.1

 
13.7

 
63.8

Supplies and other

 
6.0

 
6.0

 

 
5.8

 
5.8

 
123.4

 
22.1

 
145.5

 
111.8

 
21.4

 
133.2

Excess of FIFO or weighted-average cost over LIFO cost
(11.6
)
 

 
(11.6
)
 
(11.8
)
 

 
(11.8
)
Total
$
111.8

 
$
22.1

 
$
133.9

 
$
100.0

 
$
21.4

 
$
121.4



11

 
 

Property, Plant and Equipment
Property, plant and equipment consists of the following (in millions):
 
June 30, 2019
 
December 31, 2018
Land
$
1.0

 
$
0.9

Buildings
46.2

 
43.5

Machinery and equipment
146.4

 
141.2

Construction in progress
70.9

 
52.7

 
264.5

 
238.3

Less accumulated depreciation
(90.1
)
 
(84.2
)
Total
$
174.4

 
$
154.1


Construction in progress includes $50.0 million and $33.2 million of costs capitalized in connection with migration to a new IT platform and enhancements to our IT environment as of June 30, 2019 and December 31, 2018, respectively. See Note 3 for further discussion of our IT-related restructuring and enhancement activities.
Depreciation expense was $3.7 million and $7.3 million for the three and six months ended June 30, 2019 compared to $3.2 million and $6.4 million for the three and six months ended June 30, 2018, respectively.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows (in millions):
 
Goodwill
Balance, December 31, 2018
$
783.6

Purchase accounting adjustment
(1.9
)
Currency translation adjustment
0.6

Balance, June 30, 2019
$
782.3


Intangible assets subject to amortization consist of the following (in millions):
 
June 30, 2019
 
December 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Trademarks
$
83.1

 
$
(54.4
)
 
$
28.7

 
$
83.1

 
$
(52.2
)
 
$
30.9

Patents and acquired technologies
259.5

 
(150.5
)
 
109.0

 
259.5

 
(144.4
)
 
115.1

Other
54.4

 
(33.6
)
 
20.8

 
54.4

 
(32.2
)
 
22.2

Total
$
397.0

 
$
(238.5
)
 
$
158.5

 
$
397.0

 
$
(228.8
)
 
$
168.2


Amortization expense for intangible assets was $4.8 million and $9.6 million for the three and six months ended June 30, 2019 compared to $4.7 million and $9.2 million for the three months and six months ended June 30, 2018, respectively. We estimate amortization expense for the remainder of 2019 and the following four years and beyond will be as follows (in millions):
For the years ending December 31,
 
Amount
2019
 
$
16.9

2020
 
24.6

2021
 
22.3

2022
 
22.1

2023
 
20.8

Thereafter
 
51.8

Total
 
$
158.5




12

 
 

Accrued Expenses
Accrued expenses consist of the following (in millions):
 
June 30, 2019
 
December 31, 2018
Accrued rebates
$
19.1

 
$
26.1

Accrued salaries and wages
21.9

 
27.0

Accrued taxes
4.2

 
6.5

Other
27.7

 
34.8

Total
$
72.9

 
$
94.4


Accrued rebates represent amounts accrued for estimated incentives earned by customers.
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in millions):
 
June 30, 2019
 
December 31, 2018
Taxes payable
$
0.4

 
$
0.4

Accrued compensation benefits
4.2

 
4.3

Other
1.0

 
15.1

Total
$
5.6

 
$
19.8


Note 6.    Leases
Our lease obligations relate primarily to our principal executive offices along with various manufacturing, warehouse and distribution facilities located throughout the world. For leases with terms greater than twelve months, we record an ROU asset and corresponding lease obligation. As of June 30, 2019, all our leasing arrangements were operating leases. Many of our leases include escalating rent payments, renewal options and termination options, which are considered in our determination of straight-line rent expense when appropriate. Many of our leases also include additional amounts for common area maintenance and taxes. We have elected not to separate lease and non-lease components in the determination of straight-line rent expense. For a majority of our leases, an implicit lease rate is not available. Accordingly, we use a rate that approximates our incremental secured borrowing rate.
The table below summarizes information related to ROU assets and lease liabilities that are included in the accompanying condensed consolidated balance sheet (dollars in millions):
 
As of
June 30, 2019
Assets
 
Operating lease right-of-use assets
$
67.2

 
 
Liabilities
 
Current portion of operating lease liabilities
14.7

Operating lease liabilities
65.5

Total Operating Lease Liabilities
$
80.2

 
 
Weighted average remaining lease term
7.6 years

Weighted average discount rate
4.6
%

The table below summarizes costs and cash flows arising from our lease arrangements in the three and six months ended June 30, 2019 (in millions):

13

 
 

 
Three Months ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Operating lease cost
$
3.5

 
$
5.9

Short-term lease cost
0.5

 
1.1

Variable lease cost
0.5

 
0.8

Total lease cost
$
4.5

 
$
7.8

 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities
$
5.6

 
$
9.0

Right-of-use assets obtained in exchange for new operating lease liabilities
$
14.7

 
$
21.2


The future minimum obligations under operating leases having non-cancelable terms in excess of one year are as follows for the remainder of 2019 and for the four following years and beyond (in millions):
For the years ending
December 31,
 
Amount
2019
 
$
5.7

2020
 
14.5

2021
 
13.8

2022
 
13.4

2023
 
11.5

Thereafter
 
34.7

Future minimum obligations
 
$
93.6


Note 7.    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: Unadjusted quoted prices in active markets accessible at the reporting date for identical assets and liabilities.
Level 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: 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.
In the six months ended June 30, 2019, there were no transfers among Level 1, 2 or 3 fair value determinations.
The following table includes the fair value of our financial instruments for which disclosure of fair value is required (in millions):
 
 
 
June 30, 2019
 
December 31, 2018
 
Fair Value
Hierarchy
Level
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
1
 
$
288.1

 
$
288.1

 
$
384.5

 
$
384.5

Liabilities
 
 
 
 
 
 
 
 
 
Senior Unsecured Notes
1
 
247.8

 
254.9

 
247.7

 
250.9


Cash equivalents are recorded at cost, which approximates fair value due to their short-term nature. The fair value of the senior unsecured notes was based on observable market prices based on trading activity on a primary exchange.

14

 
 

Note 8.     Debt
As of June 30, 2019 and December 31, 2018, our debt balances were as follows (in millions):
 
Weighted-Average Interest Rate
 
Maturities
 
June 30, 2019
 
December 31, 2018
Senior Unsecured Notes
6.25
%
 
2022
 
$
249.8

 
$
250.0

Unamortized Debt Discounts and Issuance Costs
 
 
 
 
(2.0
)
 
(2.3
)
Total Debt, net
 
 
 
 
$
247.8

 
$
247.7


Senior Unsecured Notes
The Senior Unsecured Notes (the “Notes”) will mature on October 15, 2022 and interest accrues at a rate of 6.25% per annum and is payable semi-annually in arrears on April 15 and October 15 of each year. Unamortized debt discount and issuance costs are being amortized over the life of the Notes using the interest method, resulting in an effective interest rate of 6.52% as of June 30, 2019.
Following a divestiture of significant assets, such as the Divestiture, the credit agreement allows re-investment of the net proceeds into the business through acquisition of another business or through capital expenditures for a period of one year following the divestiture. We were required to offer to redeem a portion of the Notes at par value to the extent re-investments were not made by May 1, 2019. Accordingly, $130.5 million of the Notes were offered for redemption in the second quarter of 2019, of which $0.2 million were redeemed.
Revolving Credit Facility
We have a senior secured revolving credit facility (“Revolving Credit Facility”) that matures on October 30, 2023 which allows for borrowings up to $250.0 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.
Borrowings under the Revolving Credit Facility bear interest, at our option, at either (i) a reserve-adjusted LIBOR rate, plus a margin ranging between 1.50% to 2.25% per annum, depending on our consolidated total leverage ratio, or (ii) the base rate plus a margin ranging between 0.50% to 1.25% per annum, depending on our consolidated total leverage ratio. The unused portion of the Revolving Credit Facility is 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 or (ii) 0.38% per annum, otherwise.
To the extent we remain in compliance with certain financial covenants in our credit agreement, we have the ability to access our Revolving Credit Facility. As of June 30, 2019, we had no borrowings and letters of credit of $0.7 million outstanding under the Revolving Credit Facility.
Note 9.    Accumulated Other Comprehensive Income
The changes in the components of AOCI, net of tax, are as follows (in millions):
 
Unrealized
Translation
 
Cash Flow
Hedges
 
Defined Benefit
Pension Plans
 
Accumulated
Other
Comprehensive (Loss) Income
Balance, December 31, 2018
$
(34.3
)
 
$
0.1

 
$
0.5

 
$
(33.7
)
Other comprehensive income
2.6

 

 

 
2.6

Balance, June 30, 2019
$
(31.7
)
 
$
0.1

 
$
0.5

 
$
(31.1
)

15

 
 

The changes in the components of AOCI, including the tax effect, are as follows (in millions):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Unrealized translation
$
1.9

 
$
(10.0
)
 
$
2.6

 
$
(0.7
)
Defined benefit pension plans

 
1.2

 

 
0.9

Tax effect

 
(0.2
)
 

 
(0.2
)
Defined benefit pension plans, net of tax

 
1.0

 

 
0.7

Cash flow hedges

 
(1.6
)
 

 
(1.0
)
Tax effect

 
0.3

 

 
0.2

Cash flow hedges, net of tax

 
(1.3
)
 

 
(0.8
)
Change in AOCI
$
1.9

 
$
(10.3
)
 
$
2.6

 
$
(0.8
)

Note 10.     Stock-Based Compensation
Aggregate stock-based compensation expense was $1.8 million and $6.0 million for the three and six months ended June 30, 2019. For the three and six months ended June 30, 2018, stock-based compensation was $3.8 million and $7.0 million in continuing operations. In the prior year, there were net forfeitures of $1.7 million and $1.4 million included in discontinued operations.
Stock-based compensation expense related to stock options was $0.9 million and $1.7 million in the three and six months ended June 30, 2019 compared to $1.4 million and $1.8 million in the three and six months ended June 30, 2018, respectively.
Expense related to time-based restricted share units was $0.4 million and $2.6 million in the three and six months ended June 30, 2019 compared to $1.0 million and $2.8 million in the three months and six months ended June 30, 2018, respectively.
Stock-based compensation expense related to performance-based restricted share units was $0.5 million and $1.7 million in the three and six months ended June 30, 2019 compared to $1.4 million and $2.4 million in the three months and six months ended June 30, 2018, respectively.
Note 11.    Commitments and Contingencies
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 Corporation (“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 three and six months ended June 30, 2019, we incurred $4.7 million and $13.4 million, respectively, of expenses related to these matters compared to $1.2 million and $2.9 million in the three and six months ended June 30, 2018, respectively.
Surgical Gown Litigation and Related Matters
Bahamas Surgery Center
We have an Indemnification Obligation for 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 brought a putative class action asserting claims for common law fraud (affirmative misrepresentation and fraudulent concealment) and violation of California’s Unfair Competition Law (“UCL”) in connection with our marketing and sale of MicroCool surgical gowns.
On April 7, 2017, a jury returned a verdict for the plaintiff, finding that Kimberly-Clark was liable for $3.9 million in compensatory damages (not including prejudgment interest) and $350.0 million in punitive damages, and that Avanos was liable for $0.3 million in compensatory damages (not including prejudgment interest) and $100.0 million in punitive damages. Subsequently, the court also ruled on the plaintiff’s UCL claim and request for injunctive relief. The court found in favor of the plaintiff on the UCL claim but denied the plaintiff’s request for restitution. The court also denied the plaintiff’s request for injunctive relief.
On May 25, 2017, we filed three post-trial motions: a renewed motion for judgment as a matter of law; a motion to decertify the class; and a motion for new trial, remittitur, or amendment of the judgment. On March 30, 2018, the court ruled on the post-

16

 
 

trial motions. The court denied all three, except it granted in part the motion to reduce the award of punitive damages to a 5 to 1 ratio with compensatory damages.
On April 11, 2018, the court issued an Amended Judgment in favor of the plaintiff and against us and Kimberly-Clark. The judgment against us is $0.3 million in compensatory damages and pre-judgment interest and $1.3 million in punitive damages. The judgment against Kimberly-Clark is $3.9 million in compensatory damages, $1.3 million in pre-judgment interest, and $19.4 million in punitive damages.
On April 12, 2018, we filed a notice of appeal to the Ninth Circuit Court of Appeals. We intend to continue our vigorous defense of the Bahamas matter.
Kimberly-Clark Corporation
We have notified Kimberly-Clark that we have reserved our rights to challenge any purported obligation to indemnify Kimberly-Clark for the punitive damages awarded against them. In connection with our reservation of rights, on May 1, 2017, we filed a complaint in the matter styled Halyard Health, Inc. v. Kimberly-Clark Corporation, Case No. BC659662 (County of Los Angeles, Superior Court of California). In that case, we seek a declaratory judgment that we have no obligation, under the Distribution Agreement or otherwise, to indemnify, pay, reimburse, assume, or otherwise cover punitive damages assessed against Kimberly-Clark in the Bahamas matter, or any Expenses or Losses (as defined in the distribution agreement) associated with an award of punitive damages. On May 2, 2017, Kimberly-Clark filed a complaint in the matter styled Kimberly-Clark Corporation v. Halyard Health, Inc., Case No. 2017-0332-AGB (Court of Chancery of the State of Delaware). In that case, Kimberly-Clark seeks a declaratory judgment that (1) we must indemnify them for all damages, including punitive damages, assessed against them in the Bahamas matter, (2) we have anticipatorily and materially breached the Distribution Agreement by our failure to indemnify them, and (3) we are estopped from asserting, or have otherwise waived, any claim that we are not required to indemnify them for all damages, including punitive damages, that may be awarded in the Bahamas matter.
On May 26, 2017, we moved to dismiss or stay Kimberly-Clark’s Delaware complaint, and on June 16, 2017, Kimberly-Clark moved for summary judgment. On September 12, 2017, the Delaware court granted our motion to stay Kimberly-Clark’s complaint and therefore did not take any action on Kimberly-Clark’s motion for summary judgment. On May 30, 2018, Kimberly-Clark moved to quash service of summons we served on Kimberly-Clark in California for lack of personal jurisdiction. On December 12, 2018, the court granted Kimberly-Clark’s motion. On December 18, 2018, we filed a notice of appeal to the California Court of Appeal. On December 19, 2018, Kimberly-Clark sought to lift the stay of their complaint in Delaware, and on March 4, 2019, the court denied their motion. We intend to vigorously pursue our case against Kimberly-Clark in California and to vigorously defend against their case against us.
Government Investigation
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, April 2017 and September 2018, we received additional subpoenas from the DOJ seeking further information related to Company gowns. The Company is cooperating with the DOJ investigation.
Shahinian
On October 12, 2016, after the DOJ and various States declined to intervene, a qui tam matter was unsealed and a complaint was subsequently served on us in a matter styled 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 case alleges, among other things, violations of the federal and various state False Claims Acts in connection with the marketing and sale of certain surgical gowns. On March 8, 2017, Kimberly-Clark moved to dismiss the Shahinian complaint, and on July 14, 2017, the California court granted Kimberly-Clark’s motion. The plaintiff then filed a second amended complaint, and on August 11, 2017, Kimberly-Clark moved to dismiss that one as well. The plaintiff then filed a third amended complaint. On January 18, 2018, Kimberly-Clark moved to dismiss that one too. On September 30, 2018, the court granted Kimberly-Clark’s motion with prejudice. On November 13, 2018, Shahinian filed a notice of appeal to the Ninth Circuit Court of Appeals.
We may have an Indemnification Obligation for the Shahinian matter under the distribution agreement with Kimberly-Clark and have notified Kimberly-Clark that we reserve our rights to challenge the obligation to indemnify Kimberly-Clark for any damages or penalties which are not indemnifiable under applicable law or public policy. We intend to continue our vigorous defense of the matter.
Kromenaker
On March 17, 2017, the DOJ submitted a filing declining to intervene in another qui tam matter, and the complaint was unsealed and subsequently served on Kimberly-Clark and Avanos. That matter is styled U.S. ex rel. Kromenaker v. Kimberly-

17

 
 

Clark Corporation and Halyard Health, Inc., No. 1:15-cv-04413-SCJ (N.D. Ga.) (“Kromenaker”), filed on December 21, 2015. In that case, the plaintiff alleges, among other things, violations of the federal False Claims Act in connection with the marketing and sale of certain products, including feminine hygiene products, surgical gowns and endotracheal tubes. On June 12, 2017, Kimberly-Clark and Avanos moved to dismiss the complaint. On August 21, 2017, Kromenaker filed an amended complaint, and Kimberly-Clark and Avanos filed motions to dismiss it. On March 27, 2019, the court granted Kimberly-Clark’s and our motions to dismiss. On April 24, 2019, Kromenaker filed a Motion with the trial court seeking to have the court alter, amend, or vacate the dismissal.
We may have an Indemnification Obligation for certain parts of this matter under the distribution agreement with Kimberly-Clark and have notified Kimberly-Clark that we reserve our rights to challenge the obligation to indemnify Kimberly-Clark for any damages or penalties which are not indemnifiable under applicable law or public policy. We intend to continue our vigorous defense of this matter.
Jackson
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 former Chief Executive Officer, our former 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 Avanos securities is February 25, 2013 to October 21, 2014, and the alleged class period for purchasers of Avanos securities is October 21, 2014 to April 29, 2016. On February 16, 2017, we moved to dismiss the case. On March 30, 2018, the court granted our motion to dismiss and entered judgment in our favor. On April 27, 2018, the plaintiff filed a Motion for Relief from the Judgment and for Leave to Amend. On April 1, 2019, the court denied the plaintiff’s motion. On May 1, 2019, Jackson appealed the dismissal of the action to the 2nd Circuit Court of Appeals. We intend to continue our vigorous defense of this matter.
Richardson, Chiu and Pick
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 Avanos Medical, 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 our 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 Avanos Medical, 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 were also served with a complaint in a matter styled Lukas Pick v. Robert E. Abernathy, Steven E. Voskuil, et al., No. e:18-cv-00295 (D. Del.) filed on February 21, 2018. In that case, the plaintiff sues derivatively on behalf of Avanos Medical, Inc. and makes allegations and brings causes of action similar to those in Richardson and Chiu. We intend to continue our vigorous defense of this matter.
Medline Industries
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.), filed on November 17, 2016. In that case, the plaintiff makes allegations similar to those in Bahamas and Shahinian and brings causes of action under federal and state false advertising laws and state unfair competition laws. On March 31, 2017 we moved to dismiss certain of Medline’s claims and to transfer any surviving claims from California to Georgia. On June 2, 2017, the court granted our motion to transfer the case to Georgia and denied without prejudice our motion to dismiss. On June 30, 2017, now before the court in Georgia and with the case re-styled as Medline Industries, Inc. v. Kimberly-Clark Corporation, Halyard Health, Inc., et al., No. 1:17-cv-02032 (N.D. Ga.), Kimberly-Clark and Avanos filed renewed motions to dismiss certain of Medline’s claims. On February 28, 2018, the court granted our motion to dismiss. On March 14, 2018, Medline filed a second amended complaint. On March 28, 2018, we filed our answer and counterclaims. The counterclaims allege violations of false advertising law and state unfair competition laws. On May 9, 2018, Medline filed its answer to our counterclaims.
We may have an Indemnification Obligation for this matter under the distribution agreement with Kimberly-Clark and have notified Kimberly-Clark that we reserve our rights to challenge the obligation to indemnify Kimberly-Clark for any damages or penalties which are not indemnifiable under applicable law or public policy. We intend to continue our vigorous defense of this matter.

18

 
 

Naeyaert
On April 13, 2017, Kimberly-Clark was served with a complaint in the matter styled Christopher Naeyaert v. Kimberly-Clark Corporation, et al., No. PSC 1603503 (County of Riverside, Superior Court of California), filed on July 21, 2016. In that case, the plaintiff makes allegations similar to those in Bahamas and brings causes of action similar to those in Bahamas, except the allegations and causes of action relate to the Ultra surgical gown. On June 5, 2017, Kimberly-Clark moved to dismiss the complaint. On August 21, 2017, Naeyaert filed an amended complaint and on September 18, 2017, Kimberly-Clark filed a motion to dismiss the amended complaint. On September 28, 2018, the court granted in part Kimberly-Clark’s motion but allowed Naeyaert leave to amend his complaint. On October 12, 2018, Naeyaert filed a Third Amended Complaint. On October 26, 2018, Kimberly-Clark answered the Third Amended Complaint.
We may have an Indemnification Obligation for this matter under the distribution agreement with Kimberly-Clark and have notified Kimberly-Clark that we reserve our rights to challenge the obligation to indemnify Kimberly-Clark for any damages or penalties which are not indemnifiable under applicable law or public policy. We intend to continue our vigorous defense of this matter.
Patent Litigation
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.
General
While we maintain general and professional liability, product liability and other insurance, 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 resolution of these matters will not materially impact our liquidity, access to capital markets or ability to conduct our daily operations.
As of June 30, 2019, we have an accrued liability for the matters described herein. The accrued liability is included in “Accrued Expenses” in the accompanying condensed consolidated balance sheet. Our estimate of these liabilities is based on facts and circumstances existing at this time, along with other variables. Factors that may affect our estimate include, but are not limited to: (i) changes in the number of lawsuits filed against us, including the potential for similar, duplicate or “copycat” lawsuits filed in multiple jurisdictions, including lawsuits that bring causes or action or allege violations of law with regard to additional products; (ii) changes in the legal costs of defending such claims; (iii) changes in the nature of the lawsuits filed against us; (iv) changes in the applicable law governing any legal claims against us; (v) a determination that our assumptions used in estimating the liability are no longer reasonable; and (vi) the uncertainties associated with the judicial process, including adverse judgments rendered by courts or juries. Thus, the actual amount of these liabilities for existing and future claims could be materially different than the accrued amount. Additionally, the above matters, regardless of the outcome, could disrupt our business and result in substantial costs and diversion of management attention.
Environmental Compliance
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.

19

 
 

Note 12.    Earnings Per Share (“EPS”)
Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per share is 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 calculation of basic and diluted earnings per share for the three and six months ended June 30, 2019