ConvaTec Group
Annual Report 2015

Plain-text annual report

2015 Annual Report We exist to improve the lives of the people we touch Table of Contents A message from CEO, Paul Moraviec Our Business Risk Factors Management’s Discussion and Analysis of Financial Condition and Results of Operations Management Principal Shareholders Certain Relationships and Related Party Transactions Description of Certain Financing Arrangements Glossary Index to financial statements Page 2 3 19 41 57 62 63 65 71 F‑1 A message from CEO, Paul Moraviec In my first year as CEO of ConvaTec, I have been delighted with the progress we have made, both as a company and as a team, towards building a world class organization. A global business which is well positioned for long term sustainable performance, and culturally rooted in our core values of caring for people, continually driving innovation and excellence, and earning the trust of our stakeholders, every day and in everything we do. 2015 was a pivotal year for ConvaTec; not only did we achieve a constant currency organic revenue growth rate for the total company of 4.2%, and Adjusted EBITDA growth of 7.7%, but all four franchises delivered growth, with strong performances from our Wound Therapeutics business at 5.3%, Continence & Critical Care at 5.9% and Infusion Devices delivering 6.2%. Additionally, our ostomy business returned to growth in 2015, as we began to realize the results of investments in our product portfolio, new patient capture initiatives and our direct to consumer marketing programs. ConvaTec has always been at the forefront of driving innovation and excellence; this is one of our key growth strategies. One of the best examples of this is our AQUACEL® portfolio and in particular, our recently launched AQUACEL® Foam and AQUACEL® Ag+ platforms, where we have seen strong growth and market penetration for these advanced dressings. This year we mark the 20th anniversary of AQUACEL® and the pace of new products deriving from this platform continues to accelerate in response to further unmet needs. We have also invested into our other businesses and as a result continue to see strong growth in intermittent catheters with our GentleCath™ product line, our U.S. distributor 180 Medical, and from our key business relationships in Infusion Devices. This past year, we have significantly expanded the depth and experience of our executive leadership team. I have been personally delighted to welcome to the team Mike Sgrignari, EVP Operations, Marc Reuss, EVP Human Resources, and Tim Moran and George Poole, Presidents of our Americas and APAC regions, respectively. As well as focusing on revenue growth, we have also initiated a multi-year program designed to improve our efficiencies and profitability through both manufacturing operations and supply chain. In 2015 we made significant progress in remediating our Quality and Finance functions. The US Food and Drug Administration (“FDA”) completed follow-up inspections of our Slovakian manufacturing facility in January where we received a Warning Letter in 2014. They also visited our Greensboro, North Carolina facilities in September 2015. The visit to Greensboro was as a follow-up to the Warning Letter issued in 2013 to the now closed Skillman, New Jersey facility. I am pleased to report that the FDA formally closed out both of these Warning Letters. We have also successfully remediated the material weaknesses we had previously identified in our financial reporting controls. At ConvaTec, we exist to improve the lives of the people we touch. In the areas of healthcare that we serve, we feel a deep and personal connection to our customers, many of whom rely on us to help them lead a more normal life. Our vision is to be the most respected and successful MedTech company, worldwide. We drive for excellence in all we do – anticipating and addressing our customers’ needs with advanced technologies and best-in-class products and services. The focus, hard work and commitment that everyone at ConvaTec has demonstrated in 2015 gives me confidence that we will achieve our vision, and I would like to thank all of our 9,100 employees for their contributions to making this a pivotal year for our company. I am very pleased with the momentum we have built in 2015 and with the foundations we have established. Paul Moraviec Chief Executive Officer, ConvaTec Our Business Except where the context otherwise requires, all references in this Annual Report to the “Company”, “ConvaTec”, “we”, “us”, “our” or similar words or phrases are to ConvaTec Healthcare B S.à r.l. (“CHB”) and its subsidiaries on a consolidated basis. Overview We are a global medical products and technologies company, with leading market positions in wound therapeutics, ostomy care, continence and critical care, and infusion devices. Our products provide our customers — including doctors, nurses and patients — with a range of clinical and economic benefits, including infection prevention, protection of vulnerable skin, improved patient outcomes and reduced total cost of care. Acquisition”), expanding our product offerings in continence and critical care and into infusion devices and 180 Medical Holdings, Inc. (“180 Medical”) in September 2012, through which we distribute disposable, intermittent urological catheters to customer in the United States (“U.S.”). Today, we have almost 9,100 employees, with 11 manufacturing sites in eight countries, and conduct business in more than 100 countries. ConvaTec was founded in 1978 as a division of E.R. Squibb & Sons, Inc. Our first product, Stomahesive® skin barrier, revolutionized ostomy care and established our reputation as an innovator of skin adhesives. Our product portfolio grew to include a complete ostomy care line and advanced wound care line, including AQUACEL® Hydrofiber® and DuoDERM® dressings. In 2008, Nordic Capital and Avista Capital Partners acquired the ConvaTec business from Bristol‑Myers Squibb (“BMS”) (the “ConvaTec Acquisition”). We subsequently acquired Unomedical Holdings a/s (“Unomedical”) in September 2008 (the “Unomedical For the year ended December 31, 2015, we generated net sales of $1,650.5 million, net loss of $209.0 million and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) of $474.0 million. For the definition of Adjusted EBITDA, an explanation of why we present it and a description of the limitations of this non‑GAAP measure, as well as the reconciliation from net loss, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within this Annual Report. 3 ConvaTec Healthcare B S.à.r.l. and SubsidiariesOur Franchises Wound Therapeutics Market Size $5.5bn +5–6% Ostomy Care Market Size $2.1bn +4–5% 3% 3 $1650.5m 3 1 % 21% Continence & Critical Care Market Size 15% Infusion Devices Market Size $4.3bn +4–5% +5–6% Market size and annual growth rates represent our latest estimate (source: external reports/ ConvaTec internal estimates). Refer for further discussion below regarding each franchise market size and growth rates. $2.0bn 4 ConvaTec Healthcare B S.à.r.l. and SubsidiariesWe operate in attractive growing markets where underlying trends are expected to create increased demand globally. A majority of our business is derived from medical consumables tied to the management of chronic conditions, generating consistent recurring revenues. We report sales in four major franchises: Wound Therapeutics, Ostomy Care, Continence & Critical Care (“CCC”) and Infusion Devices. For the year ended December 31, 2015, our Wound Therapeutics, Ostomy Care, CCC, and Infusion Devices franchises generated 33%, 31%, 21%, and 15% of total net sales, respectively. Wound Therapeutics 2015 Net Sales $536.1m +5.3% Our Wound Therapeutics franchise includes advanced wound dressings and skin care products. These dressings and products are used for the management of acute and chronic wounds, such as those resulting from traumatic injury, burns, invasive surgery, diabetes, venous disease, immobility and other factors. We market a comprehensive portfolio of advanced wound dressings, including antimicrobial and foam dressings. Our advanced dressings have long been products of choice by healthcare professionals treating chronic wounds associated with aging populations, such as pressure ulcers, venous leg ulcers and diabetic foot ulcers. We have successfully expanded our offerings in the acute wound area, with advanced dressings for partial‑thickness burns and surgical‑site incisions, where the potential for infection is a clinical and institutional concern. Key products include our AQUACEL® line of advanced dressings, which features ConvaTec’s proprietary Hydrofiber® Technology. These dressings provide a wound contact layer that transforms into a gel on contact with wound fluid, absorbing and retaining excess exudate to help create an optimal healing environment. The gel contours to the wound bed to help minimize dead space where bacteria can grow. 5 In addition to the base AQUACEL® formulation, we offer AQUACEL® Ag, which contains bacteria‑killing silver, AQUACEL® Foam, which combines the comfort and simplicity of foam with the benefits of Hydrofiber® Technology, and AQUACEL® SURGICAL Cover Dressing, which combines hydrocolloid technology with Hydrofiber® Technology. Together, these products represent the growth drivers of our wound therapeutics business. AQUACEL® Ag+ dressings are designed to address three key barriers to wound healing‑excess exudate, infection and biofilm by combining HydroFiber™ Technology with Ag+ Technology. In 2015, its growth was pivotal in making ConvaTec the leader in the Silver/Antimicrobial segment in Europe, Middle East and Africa (“EMEA”). Clinical evidence supports the product’s success: a multi‑country clinical evaluation of AQUACEL® Ag+ published in the January 2015 issue of the Journal of Wound Care showed that 95% of wounds studied either improved or healed completely (observed over an average treatment period of 4.1 weeks). In addition, a clinical study of venous leg ulcers exhibiting clinical signs of infection was published in June 2015 online in The International Wound Journal showing that 88% of wounds observed either improved or healed completely after eight weeks. AQUACEL® Ag+ Extra dressings received CE mark approval (a European regulatory marking to signify compliance with applicable regulatory standards) in 2013 and are available in select countries in the European Union (“EU”), as well as Canada, Hong Kong and Malaysia. In the U.S., AQUACEL® Ag+ Extra dressings have not yet received Food and Drug Administration (“FDA”) clearance and were not available for commercial sale in 2015. We continue to invest in the commercialization of AQUACEL® Foam, the only foam dressing with the comfort and simplicity of foam plus the benefits of a Hydrofiber® interface. Launched in 2012, AQUACEL® Foam continues to be one of the fastest growing products in the more than $1 billion market for foam dressings. In 2015, we added several new sizes of AQUACEL® Foam dressing, which are designed for a wider variety of anatomical wound care applications, including the head and neck, shoulder, lower leg and wrist, as well as the lower abdomen for appendectomies, cesarean sections and midline incisions. The new sizes are available in the United Kingdom (“U.K.”), the Nordic countries, Canada, Bulgaria, Malaysia, the Netherlands, Australia, New Zealand and the U.S., with other countries to follow. ConvaTec Healthcare B S.à.r.l. and SubsidiariesWe also launched AQUACEL® Foam Pro in 2015, a multi‑layered silicone foam dressing that is designed to protect the skin from breakdown, when used as a part of a protocol of care, where there is a risk of pressure ulcer formation. Available in two sacral sizes, AQUACEL® Foam Pro is available in the U.S. AQUACEL®/ AQUACEL® Ag SURGICAL continued to be a contributor to revenue growth in 2015, and clinical evidence supported that growth. Results of a randomized controlled trial were published in the September 2015 issue of the American Journal of Orthopedics showing that the use of AQUACEL® Ag SURGICAL Cover Dressing significantly reduced wound complications and significantly improved patient satisfaction rates after joint replacement surgery. Additional products include our DuoDERM® family of hydrocolloid dressings and our Aloe Vesta® and Sensi‑Care® skin care products. The global Wound Therapeutics market is approximately $5.5 billion and is expected to grow 5–6% per annum over the next five years, driven by an increase in the number of addressable wounds and a shift from traditional products to more advanced therapies. ConvaTec is a market leader in advanced wound dressings, competing globally with Mölnlycke, Smith & Nephew, Coloplast and Systagenix (an Acelity company). We also compete with other local medical products companies offering wound care products, such as Medline in the U.S. and Urgo in France. In skin care, a predominantly U.S.‑based business, our competitors include Coloplast, Medline and 3M. Ostomy Care 2015 Net Sales $515.6m +1.3% colorectal cancer, inflammatory bowel disease, bladder cancer and other causes. Technology today allows us to offer cutting‑edge products and services to make a real difference in the lives of people with an ostomy. We have the tools and expertise to help patients, caregivers and medical professionals see ostomy care as simple, easy and accessible. For more than 35 years, ConvaTec has provided products, accessories and services designed to dramatically improve life with an ostomy. From the first days after surgery to the first months of recovery and beyond, ConvaTec supports every person with an ostomy throughout his or her entire journey. Our literature and online resources provide the facts, photos and details of what to expect before and after surgery, in recovery and at home. Our customer call centers‑made up of Wound, Ostomy and Continence nurses and product specialists around the globe‑provide advice and answers on how to make living with an ostomy easier. ConvaTec markets a comprehensive product portfolio of one‑ and two‑piece ostomy systems and accessories to address a full range of customer needs and preferences. One‑piece systems consist of an integrated skin barrier and pouch, while two‑piece systems consist of a skin barrier separate from the pouch, allowing users to change the pouch without having to remove the skin barrier. Skin barriers (or wafers) adhere the system to the skin around the stoma, also serving to protect the skin from harmful bodily waste. Our systems are available with a variety of closure and drainage options, deodorizing filters and pouch materials. A line of accessory products complements our pouch systems and offers the opportunity to increase per‑customer revenue. Our accessories include pastes, powders, strips, seals, adhesive removers and a special line of clothing. Approximately 50% of people with an ostomy develop peristomal skin complications, commonly stemming from bodily waste leaking in between the stoma and the skin barrier. This cycle of leakage and skin breakdown can negatively impact quality of life, physically and emotionally. Therefore, the security of the fit of the pouching system to the body is paramount to enabling our customers to live their lives normally. Our Ostomy Care franchise includes devices, accessories and services for our customers. Our customers are people with an ostomy or stoma (a surgically‑created opening where bodily waste is discharged) commonly resulting from Addressing this fundamental customer need, all of our core products, including our advanced pouch ranges of Natura+® (two piece) and Esteem+® (one piece), feature our skin‑friendly and clinically‑proven adhesives (Stomahesive®, 6 ConvaTec Healthcare B S.à.r.l. and SubsidiariesDurahesive® and ConvaTec Moldable Technology™). Key accessory products include Stomahesive® paste and powder, Sensi‑Care® sting free skin care, Diamonds™ gelling sachets and the Ostomysecrets® clothing line. In 2015, we launched a new direct‑to‑consumer service program in the U.S. called me+™, that offers people living with an ostomy and their caregivers, the support, insights and products they need throughout their life with an ostomy. This program will be expanded globally in 2016. In 2015, we further expanded our range of products with Esteem® +ConvaTec Moldable Technology™ in extra‑large sizes to further meet customer needs for enhanced security and ease of use. Traditional skin barriers are cut to fit the stoma opening; Moldable Technology requires no cutting, and instead creates an elastic‑like seal that “rebounds” to fit any stoma size and shape. New products launched in 2015 include Natura™+ Two‑Piece Urostomy Pouch with Soft tap which incorporates a new pouch shape that has been redesigned with a soft body‑side comfort panel. Pouch baffling evenly distributes urine for a slimmer profile and less tugging. An upgraded Flexible Soft Tap is designed for security and added comfort. Within our two‑piece ostomy product offerings, we also continued to roll out our Natura® Accordion flange range with new options to further meet our customers’ needs. The flange lifts easily to provide generous finger room so coupling is easy and comfortable and is designed for tender abdomens or for anyone who wants everyday comfort. Within our accessories range we further added to our Eakin Cohesive® seal offering through launching the Eakin Cohesive® StomaWrap™ in our North America markets. The Eakin Cohesive® StomaWrap™ is designed for large or oval shaped stomas and is for people with limited dexterity or for quick pouching routine. The global Ostomy Care market is approximately $2.1 billion and is expected to grow 4–5% per annum over the next five years, driven by favorable demographics. We are one of three global market leaders in ostomy care, competing with Coloplast and Hollister Incorporated (including Dansac, part of the Hollister group). In addition, we compete with smaller regional providers of ostomy and ostomy‑related products, including B. Braun in France and Germany, Salts, Eakin‑Pelican and Welland in the U.K., and Alcare in Japan and China. 7 Continence & Critical Care 2015 Net Sales $348.2m +5.9% Our CCC franchise includes products for people with urinary continence issues related to spinal cord injuries, multiple sclerosis, spina bifida and other urological disorders. The franchise also includes devices and products used in intensive care units and hospital settings. In Continence Care, ConvaTec offers a portfolio of intermittent urinary catheters, which are predominantly used by people who self‑catheterize in order to drain urine from the bladder. Key brands include our GentleCath™ line of intermittent urinary catheters. The 2013 launch of the GentleCath™ line marked the entry of ConvaTec, one of the world’s largest producers of catheters, into the estimated $2.1 billion market for intermittent self‑catherization. Designed for maximum comfort, safety and ease of use, the GentleCath™ line includes a variety of catheter styles to meet a wide range of customer needs. In November 2015, we launched the GentleCath™ Pro Closed‑System Intermittent Catheter that provides for “no‑touch” catheterization to help minimize the risk of infection, while providing the convenience to catheterize where and when it is needed. Simultaneously, we also launched the GentleCath™ Insertion Kit that provides all necessary catheter insertion supplies required to perform sterile technique intermittent catheterization. Our Critical Care portfolio includes advanced systems for managing acute fecal incontinence, monitoring urine production output (hourly diuresis) and monitoring intra‑abdominal pressure (“IAP”). Acute fecal incontinence is a serious healthcare problem for patients in critical care and can lead to skin breakdown, the development of pressure ulcers and the spread of C. difficile infection. Hourly diuresis and IAP monitoring provide clinicians with important indicators of a patient’s condition. Monitoring IAP is vital for the early detection of intra‑abdominal hypertension, ConvaTec Healthcare B S.à.r.l. and Subsidiariesestimated to affect up to half of all critical care patients, and enables timely intervention against potential consequences, including abdominal compartment syndrome, multiple organ failure and death. Key products in this range include Flexi‑Seal® Fecal Management Systems (“FMS”), UnoMeter™ hourly diuresis management systems and AbViser® and Abdo‑Pressure™ intra‑abdominal pressure measurement devices. In September 2015, we received a letter from FDA which officially closed the 2014 voluntary recall of our FlexiSeal® CONTROL Fecal Management System. For more information, see note 17 titled “Commitments and Contingencies” of the notes to consolidated financial statements within this Annual Report. In October 2015 we launched Flexi‑Seal™ Signal FMS with odor barrier, designed with advanced odor‑absorbing technology that helps maintain a better environment for patients, visitors and caregivers. Our Hospital Care portfolio provides a wide range of high‑quality disposable medical devices for use in high‑volume procedures in urology, intensive care, operating rooms and other hospital departments — helping care teams complete necessary everyday procedures safely and efficiently. Products include wound drainage systems; urine collection bags and catheters; airway management and oxygen/ aerosol therapy devices; suction handles and tubes; gastroenterology tubes; and securement devices. In 2015, based on our CCC commercial strategy to focus on strategic growth products, we announced the elimination of certain non‑strategic Hospital Care products with low profitability and limited growth potential, specific to our product lines in urological drainage, airway management, and respiratory & anesthesia. For more information, see the “Manufacturing and Raw Materials” section within this Annual Report. The global market for our CCC product segments is approximately $4.3 billion and is expected to grow 4–5% per annum over the next five years, driven by increases in general, non‑elective care consumption and reimbursement coverage. We hold market‑leading positions in fecal management (globally) and in urine monitoring (in Europe). Our primary competitors in Critical Care and Hospital Care include C.R. Bard, Covidien (now Medtronic Minimally Invasive Therapies), Hollister and Teleflex. In Continence Care, our primary competitors include Coloplast, Wellspect and C.R. Bard. Infusion Devices 2015 Net Sales $250.6m +6.2% Our Infusion Devices franchise, previously referred to as Infusion Devices/Industrial Sales, provides disposable infusion sets to manufacturers of insulin pumps for diabetes and similar pumps used in continuous infusion treatments for other conditions. In addition, the franchise supplies a range of products to hospitals and the home healthcare sector. An insulin pump is an external computer‑controlled device allowing diabetes patients to get continuous delivery of insulin to the body. Infusion sets are the disposable parts connected to the pump via tubing and injected into the patient’s body, allowing the insulin to be delivered subcutaneously (under the skin). Insulin pumps are a well‑established and recognized technology for treatment of many type 1 and severe type 2 diabetes patients. In addition to insulin pump therapy for diabetes, we also work with pharmaceutical companies and other partners on infusion sets for continuous subcutaneous drug delivery for other diseases, including apomorphine for Parkinson’s disease, immunoglobulins for primary immunodeficiencies, and Thalassaemia and morphine for palliative pain management. Key products for insulin pump therapy include Quick‑set™, mio™, Sure‑T™, Silhouette™ (which are trademarks of Medtronic MiniMed, Inc.), Comfort™ and the InSet™ range of products, each of which is tailored for specific patient needs. Outside of diabetes care, we use the product name neria™. The franchise’s portfolio also includes a broad variety of products for hospital and home healthcare that we sell directly to large customers. We use our global manufacturing capabilities and supply chain economies of scale to provide our customers with high‑volume, high‑quality products, including DEHP‑, phthalate‑ and PVC‑free materials and newly developed multi‑layer polyolefin materials. 8 ConvaTec Healthcare B S.à.r.l. and SubsidiariesThe global Infusion Devices market is approximately $2 billion and is expected to grow 5–6% per annum over the next five years, driven by the increasing prevalence of diabetes and expanded reimbursement coverage for insulin pump therapy. We are the leading provider of disposable infusion sets used for insulin pump therapy. Our primary competitors include original equipment manufacturers (“OEM”) manufacturing infusion sets themselves as well as a variety of specialized manufacturers. Geographic Information We market our products in more than 100 countries through direct sales and local distributors. In 2015, approximately 40.4% of our revenues were generated from customers in EMEA, our largest commercial region and Europe being our principal international market. The U.S., our single largest individual market, generated 31.3% of our revenues. Customers Our products are marketed and distributed to a wide range of customers, including healthcare providers, patients and manufacturers. In the U.S., the majority of products in our Wound Therapeutics, Ostomy Care and CCC franchises are sold through distributors, wholesalers and other channel partners, such as hospital buying companies and group purchasing organizations (“GPO”). In Europe, products in these three franchises are also sold through bandagists (specialized medical stores), as well as directly to hospitals, home care companies and other healthcare providers. Our Ostomy and CCC customers include end users who receive products from retailers, distributors or directly from public healthcare providers. We also sell Ostomy and Continence Care products directly to consumers through our subsidiary home delivery companies, Amcare in the U.K. and 180 Medical/Symbius Medical, LLC (“Symbius”) in the U.S. For the year ended December 31, 2015, no single customer generated more than 10% of our net sales. To service our customers, we operate a network of distribution centers with regional hubs strategically located to support our key markets. Seasonality All of our foreign operations are subject to risks inherent in conducting business abroad, including price and currency exchange controls, fluctuations in the relative values of currencies, political and economic instability and restrictive governmental actions including possible nationalization or expropriation. Changes in the relative values of currencies may materially affect our results of operations. For a discussion of these risks, see “Risk Factors” within this Annual Report. Each of our major markets has a professional sales force, the composition and focus of which varies according to local market and customer dynamics. Generally speaking, our full time representatives call on specialist nurses and physicians involved in the management of wound, ostomy and continence care. We target acute‑ and post‑acute care settings with a sales focus on wound care clinics, intensive care units, operating rooms and other departments within hospitals, home care nurses, and long‑term care settings, as well as the purchasers/payers who oversee wound care, intensive care and related departmental budgets. Our Infusion Devices franchise has a concentrated business‑to‑business customer base, primarily consisting of the leading insulin pump manufacturers, global urology/ continence players and respiratory/airway management players. The contractual relationships we hold with a number of these manufacturers are strategic partnerships involving joint product development and specialized manufacturing capabilities. The end‑use of our products is generally not seasonal in nature because ostomy and continence products, wound dressings, hospital‑related products and infusion sets are non‑elective chronic‑related use products that are used on a routine basis by end users. However, in any given year our sales may be weighted toward a higher percentage in the second half of the year. We believe this trend may be impacted by the following factors: ⁽I⁾ distributor buy‑in 9 ConvaTec Healthcare B S.à.r.l. and Subsidiariesprior to the winter holiday season; ⁽II⁾ increased purchases from certain U.S. customers and GPOs to achieve certain contractual volume rebates or to use their allowable allotments under U.S. healthcare programs; ⁽III⁾ annual discretionary price increases in the U.S. that have typically been made effective during the fourth quarter of the year, thereby resulting in increased purchases prior to the effective dates of such increases; and ⁽IV⁾ reimbursement practices impacting purchasing trends such as in Ostomy Care, in which customers in the U.S. can purchase up to three months of ostomy supplies in one month and customers in Japan are given vouchers twice a year for the purchase of Ostomy Care products. Competition We operate in highly competitive markets. Our Wound Therapeutics franchise and the Hospital Care sub‑group of our CCC franchise compete with both large and small companies, including several large, diversified companies and numerous smaller niche companies. In Ostomy Care, Infusion Devices, and the Continence and Critical Care sub‑groups of our CCC franchise, we generally compete with a small number of large competitors in the market. Our competitors include C.R. Bard, Coloplast, Covidien (now Medtronic Minimally Invasive Therapies), Hollister (including Dansac), Mölnlycke, Smith & Nephew and Teleflex, among others. The success of our business depends on our ability to develop innovative products that address unmet customer needs and differentiate ourselves from our competitors. Strong patent protection, reliable product quality and dependable service are also important to our market position. Research & Development Our Research & Development (“R&D”) department works to develop and deliver innovative technologies that meet the most important needs of patients and to help clinicians advance their medical practice in caring for patients. We are continually focused upon improving our existing portfolio of products and upon developing the next generation of technologies for each of our business areas. Most of our product development is conducted internally at our R&D centers in Deeside, U.K. and Osted, Denmark. These centers have developed a strong reputation among key opinion leaders and are considered among the leading research institutes within their respective fields, especially in the areas of infection prevention and skin integrity. Core R&D competencies include microbiology, infection detection, anti‑infective therapies, biofilm science, adhesive science, polymer science, fluid handling technologies, tissue physiology, injection molding, product design engineering Many healthcare industry companies, including medical device companies, are consolidating to create larger companies. As the healthcare industry consolidates, competition to provide products and services to industry participants may become more intense. In addition, many of our distribution channels and purchasing entities are consolidating, and industry participants may try to use their purchasing power to negotiate price concessions or reductions for the products that we manufacture and market. Consolidation may have an impact on price or may enable a competitor to offer a more complete portfolio of products to customers. If we are forced to reduce our prices or suffer other competitive disadvantages because of consolidation in the healthcare industry, our revenues could decrease, and our business, financial condition and results of operations could be adversely affected. and materials chemistry. We continue to supplement our internal development efforts with targeted scouting initiatives for innovative technologies and products in relevant areas of our business where we see opportunities for accelerating commercial growth. Our investment expense in R&D during the years ended December 31, 2015 and 2014 were $41.2 million and $37.2 million, respectively. As of December 31, 2015, approximately 300 employees were involved in our R&D efforts. In 2015, we delivered a number of new products and product line extensions. These included new size additions to our AQUACEL® Foam dressing range and the launch of AQUACEL® Foam Pro dressing, which features enhanced adhesion for skin protection in addition to the exudate management and wound progression benefits of our 10 ConvaTec Healthcare B S.à.r.l. and SubsidiariesHydrofiber® Technology. We expanded our GentleCath™ line of intermittent urinary catheters to add a closed system and an insertion kit, and we launched FlexiSeal® Signal FMS with odor barrier; extensions to our Ostomy Care range which leverage the proven skin protection of ConvaTec Moldable Technology™ adhesives and extensions to our range of Accordion Flange two‑piece Ostomy Care products. Our future developments in Wound Therapeutics will focus upon expanding our Hydrofiber® Technology and Ag+ Technology ranges, together with introducing novel technologies to further advance infection prevention in wound management. In Ostomy Care, our focus will be on further expanding the range of products with our Moldable Technology™ and on the development of innovative technologies to create new products which provide discretion, comfort, ease of use, and the best possible skin protection and confidence that leaks will not occur. Future developments in CCC will focus upon further expanding our GentleCath™ range through the incorporation of new material technologies and innovative design features, together with new technology innovations in the field of continence care. In Infusion Devices, we will continue to focus on needle‑safe systems and systems with additional user benefits in relation to ease of use and wear‑time and infection prevention. Our new product development pipeline of proprietary technologies and products spans all business areas and comprises projects at all stages of development from innovation to launch: Innovation Concept Development Launch Wound Therapeutics Ostomy Care Total Continence & Critical Care Infusion Devices Intellectual Property 23 22 23 14 We hold an extensive portfolio of patents and trademarks across our key franchises and geographies. We actively establish and maintain our rights and assess our risks with respect to our intellectual property. We file and maintain patents and patent applications in those countries in which we have, or desire to have, a strong business presence. 11 ConvaTec Healthcare B S.à.r.l. and SubsidiariesThe majority of our patents are related to key technologies, compositions, processes or product features, and many of our key products have patent protection. We also have licenses to issued patents and patent applications that cover certain of our products and technologies. For additional information relating to our patents and trademarks, see “Risk Factors — Risks Related to Our Business” within this Annual Report. Government Regulations Our business is highly regulated. We are subject to various government regulations, reimbursement policies and healthcare cost‑containment programs in the countries in which we operate. FDA The major regulatory agencies with regulatory authority over our products include the FDA, the U.K. Medicines and Healthcare Products Regulatory Agency, the Japanese Ministry of Health, Labour and Welfare, the China Food and Drug Administration and the Australian Therapeutic Goods Administration. The general trend is towards more onerous regulatory obligations and increased enforcement by government authorities. Our research, development, manufacturing and marketing operations are subject to extensive regulation in the U.S. and other countries. Most notably, all of our products sold in the U.S. are subject to the Federal Food, Drug and Cosmetic Act (“FDCA”) as implemented and enforced by the FDA. The FDA regulates the following activities that we perform or that are performed on our behalf to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended uses: • product design, development and manufacture; • product safety, non‑clinical and clinical testing, labeling, packaging and storage; • record keeping procedures; • product marketing, sales, advertising, promotion and distribution; • post‑marketing surveillance or post market studies, complaint handling, medical device reporting, reporting of deaths, serious injuries or device malfunctions and repair or recall of products; and • import and export. We and our products are subject to numerous FDA regulatory requirements including: • product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action; • Quality System Regulation (“QSR”) which requires manufacturers, including third‑party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; • labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off‑label use or indication; • clearance or approval of new products or certain product modifications; • medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur; • post‑approval restrictions or conditions, including post‑approval study commitments; • post‑market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and • notices of correction or removal and recall regulations. Unless an exemption applies, each medical device commercially distributed in the U.S. requires either FDA clearance of a 510(k) premarket notification, or approval of a premarket approval (“PMA”) application. Under the FDCA, medical devices are classified into one of three classes — Class I, Class II or Class III — depending on the degree of risk associated with each medical device and the extent of manufacturer and regulatory control needed to ensure its safety and effectiveness. Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the QSR facility registration and product listing, reporting of adverse medical events, and truthful and non‑misleading labeling, advertising, and promotional materials. Class II devices are subject to the FDA’s General Controls, and special controls 12 ConvaTec Healthcare B S.à.r.l. and Subsidiariesas deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, post‑market surveillance, patient registries and FDA guidance documents. While most Class I devices are exempt from the 510(k) premarket notification requirement, manufacturers of most Class II devices are required to submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. The FDA’s permission to commercially distribute a device subject to a 510(k) premarket notification is generally known as 510(k) clearance. Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in Class III, requiring approval of a PMA. Some pre‑amendment devices are unclassified, but are subject to FDA’s premarket notification and clearance process in order to be commercially distributed. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a legally marketed device, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Bench tests, pre‑clinical and/or clinical data are sometimes required to support substantial equivalence. The PMA approval pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on data obtained in clinical trials. Both of these processes can be expensive and lengthy and entail significant fees, unless exempt. The FDA’s 510(k) marketing clearance process usually takes from three to 12 months, but it can last longer. The process of obtaining PMA approval is much more costly and uncertain than the 510(k) marketing clearance process. It generally takes from one to three years, or even longer, from the time the PMA application is submitted to the FDA, until an approval is obtained. In the U.S., our currently commercialized products have received pre‑market clearance under Section 510(k) of the FDCA. Certain products also require pre‑market clinical testing for safety and efficacy. The FDA has broad regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine our compliance with the QSR and other regulatory requirements, and these inspections may include the manufacturing facilities of some of our subcontractors. Failure by us or our subcontractors to comply with applicable regulatory requirements can result 13 in enforcement action by the FDA or other regulatory authorities, which may result in sanctions including, but not limited to: • untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; • unanticipated expenditures to address or defend such actions; • customer notifications for repair, replacement, and/or refunds; • recall, detention or seizure of our products; • operating restrictions or partial suspension or total shutdown of production; • refusing or delaying our requests for 510(k) clearance or PMA approval of new products or modified products; • withdrawing 510(k) clearances or PMA approvals that have already been granted; • refusal to grant export approval for our products; or • criminal prosecution. For further information regarding the potential impact of compliance with FDA’s regulations, see “Risk Factors” within this Annual Report. To market our products in the EU, we apply for CE Marking in accordance with the EU’s Medical Device Directive. The Directive regulates the manufacture and distribution of medical devices in EU member states, ensuring they meet quality standards and requirements. Coverage and Reimbursement Our product portfolios are subject to hospital payment levels, community reimbursement policies and fees of third‑party payors in each country in which our products are sold. Coverage and reimbursement in international markets vary significantly by country and include both government‑sponsored healthcare and private insurance. Increasing per capita healthcare consumption in developed markets as a result of increased longevity, increased incidence of chronic illnesses, defensive medicine and other factors have driven healthcare reforms in many countries where we sell our products. Combined with government austerity programs following the global recession, these reforms have generally been accelerated in an effort to reduce overall healthcare spending. As a result, global healthcare systems have sought ways to limit cost increases, placing downward pressure on the prices of many of our ConvaTec Healthcare B S.à.r.l. and Subsidiariesproducts while putting increased emphasis on differentiated products and support services that can provide improved patient outcomes and cost‑effective benefits to patients. In the U.S., reforms mandated by the Affordable Care Act (“ACA”) have increased provider regulation and risk of payment penalties for poor patient outcomes. Increasingly, manufacturers need to demonstrate with clinical evidence that their products not only perform on individual patients, but also help providers meet ACA‑mandated quality and outcomes measures. This requires us to provide higher levels of evidence of the benefits of new technologies and creates increased pricing pressures for our older, existing technologies that may not have the requisite evidence. Some of these impacts are spread over several years due to multi‑year contracts. The ACA also expanded the Durable Medical Equipment, Prosthetics, Orthotics and Supplies (“DMEPOS”) Competitive Bidding Program for medical devices sold in retail settings outside of the hospital. None of the products manufactured by us are in categories currently included in the Competitive Bidding Program however, retail supplier consolidation as a result of the program may place downward pressure on our prices as larger retailers qualify for discounted volume pricing. The ACA also imposed a 2.3% excise tax on medical device manufacturers’ U.S. sales, beginning January 1, 2013. Under the Consolidated Appropriations Act, 2016, this tax is suspended from January 1, 2016, to December 31, 2017, and, absent further action, will be reinstated starting January 1, 2018. We believe that many of our products meet the requirements of the “retail exemption” Safe Harbor or the Facts and Circumstances Tests, as outlined in the final rule issued by the Internal Revenue Service (“IRS”) and are, thus, exempt from the tax. Further, the final rule also defines a “Safe Harbor” for certain classes of devices categorized as prosthetic devices under the U.S. Social Security Act. We believe that most of our ostomy products are included in the proposed IRS Safe Harbor regulations and are thereby also excluded from the tax. The total cost incurred by us for the medical device excise tax during 2015 and 2014 was $1.7 million and $1.6 million, respectively. In the U.K., decentralization of large portions of the National Health Service (“NHS”) is encouraging new business and contracting models involving economic decision makers. Reforms creating internal and external market forces on healthcare delivery, shifting care “closer to home” to less expensive settings and increasing focus on prevention and management of chronic disease are changing the landscape in which we sell. While the increased focus on quality and efficiency provides selling opportunities for our products with strong value messages for care providers and prescribers, this focus has yet to fully filter through to procurement bodies which still largely base decisions solely on price. Healthcare reforms in certain European countries are triggering government payers to implement cost‑cutting measures that result in reduced recognition of brand differences for medical technologies in reimbursement schemes, reduced consumption, slower uptake of innovations and higher clinical and health economic evidence requirements. Also, governmental procurement processes in certain countries are shifting away from regional tenders to national tenders. This shift increases pressure for obtaining contracts and on pricing. We continue to monitor the continued impact of global economic conditions as well as government healthcare reform and the related impact on pricing discounts, creditworthiness of our customers and our ability to collect outstanding receivables from our customers. Currently, we believe the general economic environment will not have a material impact on our liquidity, cash flow or financial flexibility. Further, we believe our development of enhanced and innovative product offerings provides customers with strategic business solutions to help improve quality of care, patient outcomes and total cost of care. We believe that our product offerings are aligned with the current direction of healthcare policies and, as such, will be viewed positively by healthcare providers. Other Healthcare Laws We are also subject to healthcare regulation and enforcement by the federal government and the states and foreign governments in which we conduct our business. These laws include, without limitation, state and federal anti‑kickback, fraud and abuse, false claims, physician sunshine and privacy and security laws and regulations. The federal Anti‑Kickback Statute prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs. The Anti‑Kickback Statute is subject to evolving interpretations. In the past, the government has enforced 14 ConvaTec Healthcare B S.à.r.l. and Subsidiariesthe Anti‑Kickback Statute to reach large settlements with healthcare companies based on sham consulting and other financial arrangements with physicians. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti‑Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act. The majority of states also have anti‑kickback laws which establish similar prohibitions and in some cases may apply to items or services reimbursed by any third‑party payor, including commercial insurers. Additionally, the civil False Claims Act prohibits knowingly presenting or causing the presentation of a false, fictitious or fraudulent claim for payment to the U.S. government. Actions under the False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the False Claims Act can result in very significant monetary penalties and treble damages. The federal government is using the False Claims Act, and the accompanying threat of significant liability, in its investigation and prosecution of device and biotechnology companies throughout the country, for example, in connection with the promotion of products for unapproved uses and other sales and marketing practices. The government has obtained multi‑million and multi‑billion dollar settlements under the False Claims Act in addition to individual criminal convictions under applicable criminal statutes. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws. To the extent we directly bill government healthcare programs for the provision of our products, our financial relationships with referring physicians may be subject to the Stark Law, which prohibits, among other things, physicians who have a financial relationship, including an investment, ownership or compensation relationship with an entity, from referring Medicare and Medicaid patients to that entity for designated health services, which include the provision of DMEPOS, unless an exception applies. Similarly, entities may not bill Medicare, Medicaid or any other party for services furnished pursuant to a prohibited referral. Unlike the federal Anti‑Kickback Statute, the Stark Law is a strict liability statute, meaning that all of the requirements of a Stark Law exception must be met in order for referrals to an entity by a physician with a financial relationship with the 15 entity to be compliant with the law. Penalties for violating the Stark Law include denial of payment, civil monetary penalties of up to $15,000 per claim submitted, and exclusion from federal health care programs, as well as a penalty of up to $100,000 for attempts to circumvent the law. The federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), also created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third‑party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti‑Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. There has also been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers. The ACA, among other things, imposed new reporting requirements on device manufacturers for payments made by them to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely, accurately and completely reported in an annual submission. Device manufacturers were required to begin collecting data on August 1, 2013 and must submit annual reports to CMS by the 90th day of each calendar year. Certain states also mandate implementation of compliance programs, impose restrictions on device manufacturer marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians. We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as by the Health Information Technology and Clinical Health Act of 2009 (“HITECH”), and their respective implementing regulations, including the final omnibus ConvaTec Healthcare B S.à.r.l. and Subsidiariesrule published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance efforts. See note 17 titled “Commitments and Contingencies” of the notes to consolidated financial statements within this Annual Report for additional information. Manufacturing and Raw Materials Our manufacturing network includes 11 sites in eight countries, many of which are in relatively low cost labor markets. Recently, we completed a comprehensive evaluation and analysis of our global manufacturing facilities utilization and strategy. Based on the analysis of our sites that support our Wound and Ostomy businesses, as well as our CCC commercial strategy to rationalize our Hospital Care portfolio, we made a decision to close three manufacturing facilities (Reynosa HC (Mexico), Sungai Petani (Malaysia) and Greensboro (U.S.)) with plans to consolidate manufacturing in the remaining facilities or outsource production. Refer to note 5 titled “Restructuring” and note 18 titled “Subsequent Events” of the notes to consolidated financial statements within this Annual Report for additional information. Environment Our facilities and operations are subject to national, state and local environmental laws and regulations and other requirements in both the U.S. and countries outside the U.S., including those regulations governing the generation, use, manufacture, handling, transport, storage, treatment and disposal of, or exposure to, hazardous materials, discharges to air and water, the cleanup of contamination and occupational health and safety matters. We believe we are in compliance in all material respects with applicable environmental laws and regulations. Existing environmental protection legislation and regulations, and compliance therewith, had no material adverse effect on our capital expenditures, earnings or competitive position. Although we continue to make capital expenditures for environmental protection, we do not anticipate any significant expenditures in order to comply with such laws Our global network provides significant operational flexibility and the ability to drive continuous improvements in productivity and overall profitability. We rely on various suppliers for the components and raw materials required for the production of our products. Wherever possible, we attempt to source materials from multiple suppliers. We have not been impacted by major supply disruptions. Our core manufacturing capability is supported by third‑party contract manufacturers and linked to a reliable supply chain and broad distribution network. The overall supply chain configuration enables us to meet the production expectations of our customers while maintaining a high level of product quality, preserving operational flexibility and improving productivity and overall profitability. and regulations that would have a material impact on our earnings and competitive position. We are not aware of any pending litigation or significant financial obligations arising from current or past environmental practices that are likely to have a material adverse effect on our financial position. We cannot assure, however, that environmental problems relating to facilities owned or operated by us will not develop in the future, and we cannot predict whether any such problems, if they were to develop, would require significant expenditure on our part. In addition, we are not able to predict what legislation or regulations may be adopted or enacted in the future with respect to environmental protection and waste disposal. 16 ConvaTec Healthcare B S.à.r.l. and SubsidiariesEmployees As of December 31, 2015, we had approximately 9,100 employees. These employees included approximately 6,000 in operations, 2,200 in sales and marketing, 600 in general and administrative positions, and 300 in R&D. The majority of our employees are located in the U.S., the U.K., the Dominican Republic, Slovakia, Malaysia and Mexico, where we operate our largest manufacturing facilities. We consider our relations with our employees to be satisfactory and have not experienced any significant labor disputes, work stoppages or slowdowns that have materially impeded our business operations. All U.S. employees are non‑unionized. Some of our employees in Europe, Mexico and in the Asia‑Pacific jurisdictions are covered by collective bargaining agreements that are customary for the industry or are members of labor unions. Insurance We maintain insurance policies to cover risks including those related to physical damage to, and loss of, our equipment and properties, as well as product liability coverage against claims and general liabilities which may arise through the course of our normal business operations. We renew most of our insurance policies annually, and most insurance premiums are denominated in U.S. Dollars. We also maintain various other insurance policies to cover a number of other risks related to our business, such as director and officer cover, employment practices and fiduciary liability coverage. In addition, we maintain insurance policies to cover various other risks such as automobile liability and physical damage, workers’ compensation and employer’s liability and marine cargo transit. We believe that the types and amounts of insurance coverage we currently maintain are in line with customary practice in the medical device industry and are adequate for the conduct of our business. We cannot assure, however, that our insurance coverage will adequately protect us from all risks that may arise or in amounts sufficient to prevent any material loss. See “Risk Factors — Risks Related to Our Business — Our business may be harmed as a result of litigation, particularly if the number of product liability claims increases significantly and/or our insurance proves inadequate” within this Annual Report for more information. 17 ConvaTec Healthcare B S.à.r.l. and SubsidiariesProperties We believe that we have sufficient facilities to conduct our operations during 2016. All of these facilities are well‑maintained and suitable for operations conducted in them. We manufacture products at 11 worldwide locations, most of which are owned by us. Our manufacturing locations and their square footage were as follows at December 31, 2015: Location Haina (Dominican Republic) Greensboro (U.S.)⁽¹⁾ Deeside (Wales, U.K.) Rhymney (Wales, U.K.)⁽²⁾ Osted (Denmark) Reynosa ID (Mexico) Sungai Petani (Malaysia)⁽¹⁾ Minsk (Belarus) Michalovce (Slovakia) Reynosa HC (Mexico)⁽¹⁾ Herlev (Denmark) Leased or Owned Approximate Square Footage Leased Owned Owned Leased Owned Owned Leased Owned Leased Leased/Owned Owned 192,000 144,000 223,000 60,000 78,000 164,000 139,000 46,000 264,000 37,000 101,000 ⁽¹⁾ Recently, we completed a comprehensive evaluation and analysis of our global manufacturing facilities utilization and strategy along with an analysis of our CCC commercial strategy and we made a decision to cease our manufacturing operations as follows: ⁽I⁾ Reynosa Hospital Care (“HC”), Mexico by mid‑2016, ⁽II⁾ Sangai Petani, Malaysia by the end of 2016, and ⁽III⁾ Greensboro, U.S. by early 2017. Going forward, the HC facility will be repurposed to support the expansion of the infusion devices business and its customers and we will expand our capabilities at the Deeside, U.K., Haina, Dominican Republic, Michalovce, Slovakia, Rhymney, U.K., and Herlev, Denmark facilities to optimize our supply chain for the Wound, Ostomy, and CCC franchises. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent developments” within this Annual Report for further information. ⁽²⁾ We hold a long‑term leasehold on this property with a term of 99 years from August 23, 2000. Legal Proceedings See note 17 titled “Commitments and Contingencies” of notes to consolidated financial statements within this Annual Report, which is incorporated by reference herein. 18 ConvaTec Healthcare B S.à.r.l. and SubsidiariesConvaTec Healthcare B S.à r.l. and Subsidiaries Risk Factors You should carefully consider these risk factors in evaluating our business. In addition to the following risks, there may also be risks that we do not yet know of or that we currently think are immaterial that may also affect our business. If any of the following risks occur, our business, results of operations, cash flows or financial condition could be adversely affected. Risks Related to Our Financial Statements We have identified in previous years material weaknesses in our internal control over financial reporting. In preparing our Consolidated Financial Statements as of and for the year ended December 31, 2014, we identified control deficiencies in the design and operation of our internal control over financial reporting that together constituted material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weaknesses identified related to the corporate governance and oversight of the financial reporting process and revenue recognition. These material weaknesses were first identified during the preparation of our Consolidated Financial Statements as of and for the year ended December 31, 2013, and have been fully remediated as of and for the year ended December 31, 2015. We continue to strengthen our control environment, however, we can give no assurances that any material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control over financial reporting. Risks Related to Our Regulatory Environment Act of 2002, which requires public As we are not a public company in the U.S., we are not subject to the U.S. companies to have and maintain effective disclosure controls and procedures to ensure timely disclosure of material information, and have management review the effectiveness of those controls on a quarterly basis. We are also not subject to the U.S. Securities Act of 1933, as amended (the "Securities Act"). The Securities Act also requires public companies to have and maintain effective internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements, and have management review the effectiveness of those controls on an annual basis (and have the independent auditor attest to the effectiveness of such internal controls). We will not be required to comply with these requirements and therefore we might not have procedures comparable to public companies in the U.S. We and our customers are subject to substantial national and local government regulation that could have a material adverse effect on our results of operations, including: (i) Exposing us to liabilities in numerous areas of our business. The medical device products we design, develop, test, manufacture, label, distribute, market and export/import are subject to rigorous regulation by governmental authorities such as the FDA in the U.S., the EU National Competent Authorities (the “NCAs”) of the Member States of the European Economic Area (“EEA”), and numerous other national and/or state governmental authorities in the countries in which we manufacture and sell our products. These regulations govern, among other things: the research, testing, manufacturing, safety, clinical efficacy, effectiveness and performance, product standards, packaging requirements, labeling requirements, import/export restrictions, storage, recordkeeping, promotion, distribution, production, tariffs, duties and tax requirements. Our products and operations are also often subject to the norms of industrial standards bodies, such as the International Standards Organization or the rules of associations of healthcare professionals. In the U.S., our products are subject to regulation by the FDA pursuant to its authority under the federal FDCA and its implementing regulations. In the U.S., before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we must first receive either premarket clearance under Section 510(k) of the FDCA, or approval of a PMA from the FDA, unless an exemption applies. In the 510(k) marketing clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a legally marketed device, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Bench tests, pre- clinical and/or clinical data are sometimes required to support substantial equivalence. The PMA approval pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on data obtained in clinical trials. Both of these processes can be expensive and lengthy and entail significant fees, unless exempt. The FDA’s 510(k) marketing clearance process usually takes from three to 12 months, but it can last longer. The process of obtaining PMA approval is 19 ConvaTec Healthcare B S.à r.l. and Subsidiaries much more costly and uncertain than the 510(k) marketing clearance process. It generally takes from one to three years, or even longer, from the time the PMA application is submitted to the FDA, until an approval is obtained. There is no assurance that we will be able to obtain FDA clearance or approval for any of our new products on a timely basis, or at all. In the U.S., our currently commercialized products have received pre-market clearance under Section 510(k) of the FDCA. If the FDA requires us to go through the lengthier more rigorous examination for future products or modifications to existing products than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may determine that future products will require the more costly, lengthy and uncertain PMA process. Although we do not currently market any devices under PMA, the FDA may demand that we obtain a PMA prior to marketing certain of our future products. Many of the laws and regulations applicable to our products in other countries, such as the Council Directive 93/42/EEC of 14 June 1993 concerning medical devices, as amended (the “EU Medical Devices Directive”) (as transposed into the respective national laws and regulations of the EEA Member States), are generally comparable to those of the FDCA in their aim to ensure safety and effectiveness of medical devices, but the applicable standards and proceedings are not globally harmonized. Such regulations are subject to continuous revision, which may entail increased requirements, and, more generally, there appears to be a trend toward more stringent regulatory oversight throughout the world. We do not anticipate this trend to diminish in the near future. Due to the movement towards harmonization of standards in the EU and the expansion of the EU, we expect a changing regulatory environment in Europe characterized by a shift from a regulatory system single regulatory system. The timing of this harmonization and its effect on us cannot currently be predicted. to a Likewise, EU medical devices legislative framework is currently under review (the “Recast” or “Revision” of the Medical Device Directive) and this may result in more stringent regulation of, at least, some medical devices, the details and impact of which cannot yet be fully predicted. In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently cleared products on a timely basis. For example, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the program, and in January 2011, announced several proposed actions intended to reform the review process governing the clearance of medical devices, which governs a significant proportion of our currently marketed devices. The FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as well as bolster patient safety. In addition, as part of the Food and Drug Administration Safety and Innovation Act (“FDASIA”), Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms which are further intended to clarify and improve medical device regulation both pre- and post-clearance or approval. The changing regulatory environment, as partially evidenced by the former examples, may have a material impact on existing device marketing authorizations as well as future device registration applications, requirements and timings, which may, in turn, have material impacts upon our ability to continue or begin to market existing and new devices. We are also subject to antitrust, laws, such as the U.S. Foreign Corrupt Practices and Act (the “FCPA”) and similar laws in other countries, as well as to obligations to business partners, including the World Bank Group, related to anti-corruption compliance. Actual or alleged violations of applicable laws, regulations, or anti-corruption compliance contractual requirements could create a substantial liability for us and also damage our reputation or cause a loss of business opportunity in the market. The FCPA prohibits U.S. companies and issuers, along with their officers, directors, employees, shareholders and agents acting on their behalf from offering, promising, authorizing or making improper payments to "foreign officials" for the purpose of obtaining or retaining business abroad or otherwise obtaining favorable treatment or an improper business advantage. U.S. issuers must also maintain records that fairly and accurately reflect transactions and maintain adequate internal accounting controls. We regularly interact with individuals who may be considered to be foreign officials under the FCPA, including regulatory authorities from whom we obtain and retain regulatory approvals and healthcare professionals employed by government-owned hospitals and clinics. We interact with foreign officials and otherwise have business in some countries generally recognized as having business environments with heightened corruption risks. Our activities in these countries create the risk of unauthorized payments by one or offers of payments by our employees or agents that could be in violation of various laws including the FCPA. We have implemented safeguards and policies to discourage these practices by our employees and agents, and we conduct internal investigations from time to time related to our anti-corruption compliance program. However, as for similar businesses, there is a risk our existing safeguards and any 20 ConvaTec Healthcare B S.à r.l. and Subsidiaries future compliance enhancements may not be effective to fully mitigate these corruption risks. If we, our employees or our agents violate our policies and engage in improper conduct, we may be subject to sanctions. If we are found to have violated the FCPA or other similar laws, we may face sanctions including significant fines and criminal penalties, disgorgement of profits and suspension or debarment of our ability to contract with government agencies or public international organizations, or to receive export licenses, as well as reputational harm. (ii) Causing us to expend material time and money in bringing new products to market and in making them eligible for government reimbursement. In addition, in many countries the government health or other regulatory organizations require our products to be qualified before they can be marketed with the benefit of reimbursement eligibility. In emerging markets, new regulations and product registration requirements continue to evolve. Failure to receive or delays in the receipt of, relevant national or state qualifications could have a material adverse effect on our business, results of operations and financial condition. We are required to expend significant time, effort and expense in bringing new products to market and to adhering to requirements. Even after we have obtained the proper regulatory clearance or approval to market a product, we have ongoing responsibilities under government authorities’ regulations. Among other things, we are required to implement and maintain stringent reporting, labeling and record keeping procedures and must make available our manufacturing facilities and records for periodic inspections by governmental agencies, to assess compliance with current good manufacturing practice (“CGMP”) requirements in the applicable jurisdiction. For example, in the U.S., we and our third party manufacturers and suppliers are required to comply with the FDA’s Quality System Regulation, which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. phase both in terms of surveillance and vigilance Regulatory agencies are increasingly applying requirements to the This trend is likely to continue and could as well as in terms of reporting requirements and post market clinical result in the need for more frequent clinical studies or registry studies, increasing the costs involved in maintaining product registrations and keeping our products on the market. The failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as untitled letter or warning letters, fines, injunctions, civil penalties, termination of distribution, recalls or seizures of products, delays in the introduction of products into the market, total or partial suspension of production, refusal to grant future clearances or approvals, withdrawals or suspensions of current clearances or approvals, and criminal penalties. Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, results of operations and financial condition. (iii) Subjecting our business to increasingly complex and changing laws and third-party audits. The medical device industry also is subject to an immense number of complex laws governing healthcare reimbursement and healthcare fraud and abuse laws, with these laws and regulations being subject to interpretation. Recent legislative and regulatory changes have been or are in the process of being implemented. In addition, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations. For instance, 180 Medical, a fully consolidated subsidiary of the Company, is required to have a Medicare supplier number in order to bill Medicare for services provided to Medicare patients. In order to maintain billing privileges in the Medicare program, durable medical equipment (“DME”) suppliers, including 180 Medical, must satisfy certain supplier standards, one of which is to comply with applicable state licensure and regulatory laws. Such laws vary from state to state and are subject to change, and 180 Medical must ensure that it maintains each of its state licenses and is continually in compliance with the laws of the states in which 180 Medical operates. In the event that 180 Medical fails to comply with any such state’s laws regulating DME suppliers, 180 Medical will be unable to operate as a DME supplier in such state until it regains compliance. In addition, 180 Medical may lose its Medicare supplier number, which could jeopardize its Medicare as well as certain Medicaid contracts and, as a result, 180 Medical would experience a decrease in its revenues. Commercial insurers may also cancel their agreement with 180 Medical by giving notice per their agreements, resulting in a further loss of revenue to 180 Medical. 180 Medical may also be subject to certain fines and/or penalties, including criminal penalties. As a Medicare supplier, 180 Medical is also subject to periodic audits by the Medicare and Medicaid programs, and the oversight agencies for these programs have authority to assert remedies against it if they determine that 180 Medical has overcharged the programs or failed to comply with program requirements. These agencies could seek to require 180 Medical to repay any overcharges or amounts billed in violation of program requirements, or could make deductions from future 21 ConvaTec Healthcare B S.à r.l. and Subsidiaries amounts otherwise due to 180 Medical from these programs. Further, the recently enacted Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “ACA”) requires that overpayments be reported and returned within 60 days of identification of the overpayment. Any overpayment retained after this deadline will be considered an “obligation” for purposes of the False Claims Act and subject to fines and penalties. (iv) Exposing us to regulatory inspections and potential penalties and fines. Various national and state agencies have become increasingly vigilant in recent years in their investigation of various business practices. If we fail to achieve acceptable results in an inspection or to comply with applicable regulatory requirements, we could be subject to enforcement action or could otherwise be required to take corrective action and, in severe cases, we could suffer a disruption of our operations and manufacturing delays or shutdowns. We cannot assure you that the FDA, the NCAs or other governmental authorities would agree with our interpretation of applicable regulatory requirements or that we have in all instances fully complied with all applicable requirements. Any failure to comply with applicable requirements could adversely affect our product sales and profitability. For example, in 2013 and 2014, the FDA issued us warning letters following routine inspections of our now closed Skillman, New Jersey and Michalovce, Slovakia facilities, respectively. While both of these warning letters have been formally resolved, we cannot assure you that the FDA or other governmental authorities will not take similar action with respect to the matters identified in these warning letters, or that we will not receive any future warnings letters or be subject to any other enforcement action in the future. Governmental and regulatory actions against us can result in various actions that could adversely impact our operations, including: • • • • • • • • • • the recall or seizure of products; the issuance of warning letters or untitled letters; operating restrictions or the suspension or revocation of the authority necessary for the production or sale of a product; the suspension of shipments from particular manufacturing facilities; the delay in approvals of products by governmental authorities outside of the U.S.; the imposition of fines and penalties; the delay of our ability to introduce new products into the market; the exclusion of our products from being reimbursed by national healthcare programs; the issuance of an alert blocking the export of our products from or the import of our products into a particular jurisdiction; and other civil or criminal sanctions against us. Any actions, in combination or alone, or even a public announcement that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, results of operations and financial condition. As government authorities and courts interpreting the relevant laws and regulations throughout the world have become increasingly stringent, we may be subject to more rigorous regulation in the future. If we fail to adequately address any of these regulations, our business may be harmed. We are subject, directly or indirectly, to healthcare fraud and abuse regulation, false claims and physician payment transparency laws and regulations and could face substantial penalties if we are unable to fully comply with such laws. We are subject to healthcare fraud and abuse regulation and enforcement in the jurisdictions in which we conduct our business. These healthcare laws and regulations include, for example: • the U.S. Statute, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or recommendation of, any item or services for which payment may be made under a U.S. federal healthcare program such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. In addition, the government 22 ConvaTec Healthcare B S.à r.l. and Subsidiaries may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act; • • • • • • the Stark Law, which prohibits a physician from referring Medicare or Medicaid patients to an entity providing “designated health services,” including a company that furnishes DME, in which the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement; federal false claims laws which, prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other payers that are false or fraudulent; the federal Civil Monetary Penalties law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier; HIPAA, which established new federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation; the federal Physician Payment Sunshine Act (the "Sunshine Act"), which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children's Health Insurance Program to report annually to the Centers for Medicare & Medicaid Services (“CMS”) certain "transfers of value" to U.S. physicians or teaching hospitals. The Sunshine Act also requires manufacturers and group purchasing organizations to report ownership and investment interests held by physicians and their immediate family members. Manufacturers are required to submit reports to CMS by the 90th day of each calendar year; and and false claims laws, which may state law equivalents of each of the above federal laws, such as payer, including commercial insurers; state laws that require apply to items or services reimbursed by any device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. The risk of our being found in violation of these or similar laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including our relationships with physicians and other healthcare providers, some of whom recommend, purchase and/or prescribe our products, could be subject to challenge under one or more of such laws. The shifting compliance environment and the need to implement systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may violate one or more of the requirements. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Our activities are subject to national and state privacy and security laws and regulations, which could have an impact on our operations. In the EU, we are subject to laws relating to our collection, control, processing and other use of personal data (for example, employee and patient data) which impact our operations. The data privacy regime in the EU is harmonized by Directive 95/46/ EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data and by the EU Privacy and Electronic Communications Directive 2002/58/EC (as amended by Directive 2009/136/EC) (together, the “Directives”). Although this legislation has been implemented at a European level, it is for each EU member state to enact 23 ConvaTec Healthcare B S.à r.l. and Subsidiaries legislation to incorporate the Directives into their national data privacy regime. The laws applicable in each member state therefore differ from jurisdiction to jurisdiction. We must therefore ensure compliance with the rules in each jurisdiction in which we use personal data. In particular, to the extent that we process, control or otherwise use sensitive data relating to living individuals (which includes the health or medical information relating to an individual who order our products directly), more stringent rules will apply and will limit the circumstances and the manner in which we are legally permitted to process and transfer that data outside of the EU. Local laws are amended from time to time and guidance is issued reasonably frequently by regulators and the Article 29 Working Party (a body formed of the European regulators). Any changes in law and new guidance may impact, and require changes to, our current operations. In addition, the EU Commission is undertaking a review of the entire European regime over the next two years. The outcome of this could further impact our operations. While we have taken steps to ensure compliance with the current regime in all material respects, given its nature and our geographical diversity, there could be areas where we are Should we not be in compliance with this legislation or any changes thereto, we may be subject to sanctions which could include giving undertakings to regulatory authorities to change our operations, adverse publicity, substantial financial penalties and/or criminal proceedings. In the U.S., we may be subject to the Health Insurance Portability and Accountability Act ("HIPAA"), as amended by HITECH, and their respective implementing regulations, including the final omnibus rule published on January 25, 2013. HIPAA established uniform standards for certain “covered entities” (healthcare providers, health plans and healthcare clearinghouses) governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of protected health information, and requires the adoption of administrative, physical and technical safeguards to protect such information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates” - independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and criminal penalties and could adversely affect our profitability. In addition to U.S. federal regulations issued under HIPAA and HITECH, some U.S. states have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the more stringent state laws. If we fail to comply with applicable laws and regulations, we could be subject to additional sanctions. We are subject to medical device reporting regulations for certain adverse events or malfunctions associated with our products, which could result in corrective actions or agency enforcement actions. Under the FDA Medical Device Reporting (“MDR”) regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. In addition, all manufacturers placing medical devices in European markets are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the relevant authority in whose jurisdiction the incident occurred. We anticipate that in the future it is likely that we could experience events that would require reporting to the applicable governmental organizations pursuant to these regulations. Any adverse event involving our products could result in future voluntary corrective actions, such as product actions or customer notifications, or agency actions, such as inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results. In addition, we may experience an increase in the number of incidents that could lead to incident reports which we might need to file. The decision to file a report involves a judgment by us as the manufacturer. We have made decisions that certain types of events are not reportable under the MDR or others regulations; however, there can be no assurance that the FDA will agree with our decisions. If we fail to report within the required timeframes, or at all, or if the FDA or applicable EU regulatory entity disagrees with any of our determinations regarding the reportability of certain events, the government could take enforcement actions against us, which could have an adverse impact on our reputation and financial results. 24 ConvaTec Healthcare B S.à r.l. and Subsidiaries Our products may in the future be subject to product actions that could harm our reputation, business operation and financial results. Manufacturers may, on their own initiative, initiate actions, including a non-reportable market withdrawal or a reportable product recall, for the purpose of correcting a material deficiency, improving device performance, or other reasons. We have initiated recalls and other post-market actions in the past, and may in the future initiate additional recalls or post- market actions. For example, in April 2014, we voluntarily recalled our Flexi-Seal CONTROL Fecal Management System product, which later became classified as a Class I recall by the FDA. This recall has been formally closed out by the FDA. In October 2014, we became aware of an issue with our NicoFix securement device and have undertaken a voluntary recall of the lots affected. In May 2015 and June 2015, we initiated voluntary recalls of certain batches of our Steel cannula infusion set devices and our Suction Catheter devices, respectively, after receiving complaints regarding breakage of the products. Most recently, in January 2016, we initiated a voluntary recall of a range of nebulizer products due to an increase in complaints related to the products’ failure to generate an atomized spray as intended. Additionally, health or governmental authorities have the authority to require an involuntary recall of commercialized products in the event of material deficiencies or defects in design, manufacturing or labeling or in the event that a product poses an unacceptable risk to health. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that a device intended for human use would cause serious, adverse health consequences or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Product actions involving any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. Companies are required to maintain certain records of actions, even if they determine such actions are not reportable to the FDA. If we determine that certain actions do not require notification of the FDA, the FDA may disagree with our determinations and require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted or failing to timely report or initiate a reportable product action. Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new approvals or clearances for the device before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including, for example, warning letters, product seizure, injunctions, administrative penalties, or civil or criminal fines. If a regulatory agency determines that we have promoted an off label use of our products in violation of applicable regulations, we may be subject to various penalties, including civil or criminal penalties, and the off label use of our products may result in injuries that lead to product liability suits, which could be costly to our business. In the U.S., the Department of Health and Human Services ("HHS"), the Office of Inspector General (“OIG”), the FDA, the DOJ and other regulatory agencies actively enforce regulations prohibiting the promotion of a product for a use that has not been cleared or approved by the FDA. Use of a product outside its cleared or approved indications is known as “of use. Physicians may use our products for of uses, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the OIG, the FDA or another U.S. or international regulatory agency determines that our promotional materials, training or activities constitute improper promotion of an of use, it could request that we modify our promotional materials, training or activities, or subject us to regulatory enforcement actions, including, among other things, the issuance of an untitled letter or warning letter, injunction, seizure, civil fine and criminal penalties. Although our policy is to refrain from statements and activities that could be considered of promotion of our products, the FDA, the DOJ or another regulatory agency could disagree and conclude that we have engaged in of use of our products promotion and, potentially, aided and abetted in the submission of false claims. In addition, the of may increase the risk of injury to patients, and, in turn, the risk of product liability claims. Product liability claims are expensive to defend and could divert our management’s attention and result in substantial damage awards against us. 25 ConvaTec Healthcare B S.à r.l. and Subsidiaries We may fail to receive positive clinical results for our products in development that require clinical trials, and even if we receive positive clinical results, we may still fail to receive the necessary clearance or approvals to market our products. In the development of new products or new indications for, or modifications to, existing products, we may be required to conduct or sponsor clinical trials. Clinical trials are expensive and require significant investment of time and resources and may not generate the data we need to support a submission to applicable regulatory bodies. Delay in or failure to receive necessary clearance or approvals to market our products may have an adverse effect on our financial condition and results of operations. Failure to comply with relevant regulations and directives in the country where a clinical trial is being conducted, including, but not limited to, failure to obtain adequate informed consent of subjects, failure to adequately disclose financial conflicts or failure to report data or adverse events accurately, could result in, among other things, fines, penalties, suspension of trials and the inability to use the data to support the marketing authorization process and subsequent reimbursement filings. If we are unable to continue to develop and market new products and technologies in a timely manner, the demand for our products may decrease or our products could become obsolete, and our revenue and profitability may decline. The markets for many of our products are highly competitive and dominated by a small number of large companies. We are continually engaged in product development, research and improvement efforts to sustain our history of innovation. New products and line extensions of existing products represent a significant component of our growth rate. Our ability to continue to grow sales effectively depends on our capacity to keep up with existing or new products and technologies in the wound care, ostomy, continence, and infusion devices products markets. The process of obtaining regulatory clearances and approvals to market a new medical device, or a significant modification to an existing device, can be costly and time consuming and approvals and clearances might not be granted for future products on a timely basis, if at all. The FDA can delay, limit or deny clearance or approval of a device for many reasons, including: • • • we may not be able to demonstrate to the FDA’s satisfaction that our products are safe and effective for their intended users; the data from our required; and studies and clinical trials may be insufficient to support clearance or approval, where the manufacturing process or facilities we use may not meet applicable requirements. Further, any modification we make to a 510(k) cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, technology, materials, packaging and certain manufacturing processes, may require us to submit a new 510(k) or, possibly, a PMA. The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) or PMA in the first instance, but the FDA may review the manufacturer’s decision and, if it disagrees, require the manufacturer to submit a new 510(k) or PMA for the modified device. FDA also has the authority to require a manufacturer to cease marketing and recall the modified device until the new 510(k) or PMA is obtained. We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. Our currently commercialized devices are either 510(k) exempt or have received clearance under Section 510(k) of the FDCA. However, no assurance can be given that the FDA would agree with any of our future decisions not to seek 510(k) clearance or a PMA. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMAs for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, or any future decisions not to seek a new 510(k) for changes or modifications to existing devices and requires new approvals or clearances, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, which could require us to redesign our products or conduct clinical trials to support any modifications, and we may be subject to significant regulatory fines or penalties. In addition, the FDA may not approve or clear our products for the indications that are necessary or desirable for successful commercialization or could require clinical trials to support any modifications. Any delay or failure in obtaining required clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. Any of these actions would harm our operating results. Moreover, clearances and approvals are subject to continual review, and the later discovery of previously unknown problems can result in product labeling restrictions or withdrawal of the product from the market. The loss of previously received approvals or clearances or the failure to comply with existing or future regulatory requirements could reduce our sales, profitability and future growth prospects. 26 ConvaTec Healthcare B S.à r.l. and Subsidiaries Changes in FDA clearance or approval policies or the adoption of new regulations may also impact our ability to obtain timely clearances and approvals for our products. For example, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the 510(k) program, and in January 2011, announced several proposed actions intended to reform the review process governing the clearance of medical devices, which could make the 510(k) process more costly and burdensome. More recently, on July 9, 2012, FDASIA was signed into law, which, among other requirements, obligated the FDA to prepare a report for Congress on the FDA’s approach for determining when a new 510(k) will be required for modifications or changes to a previously cleared device. The FDA submitted this report to Congress and concluded that, although FDA’s 1997 Guidance on this topic includes certain areas that should be updated or revised, the 1997 Guidance is a solid foundation and should remain mostly unchanged. The FDA intends to issue revised guidance for making a determination as to whether or not a new 510(k) is required for a change or modification to a device. Until then, manufacturers may continue to adhere to the FDA’s 1997 guidance on this topic when making a determination as to whether or not a new 510(k) is required for a change or modification to a device, but the practical impact of the FDA’s continuing scrutiny of these issues remains unclear. medical devices (Class I In the EEA, our devices are required to comply with the essential requirements of the EU Medical Devices Directive before they can be commercialized. Compliance with these requirements entitles us to affix the CE conformity mark to our medical devices. In order to demonstrate compliance with the essential requirements and obtain the right to affix the CE conformity mark, we must undergo a conformity assessment procedure, which varies according to the type of medical device and its devices), where the manufacturer classification. Except for some can issue an EC Declaration of Conformity based on a of the conformity of its products with the essential requirements of the EU Medical Devices Directive, a conformity assessment procedure requires the intervention of an organization accredited by a Member State of the EEA to conduct conformity assessments (a “Notified Body”). In September 2012, the European Commission published proposals for the revision of the E.U. regulatory framework for medical devices. The proposal would replace the Medical Devices Directive and the Active Implantable Medical Devices Directive with a new regulation (the “Medical Devices Regulation”). Unlike the Directives that must be implemented into national laws, the Medical Devices Regulation would be directly applicable in all EEA Member States and so is intended to eliminate current national differences in regulation of medical devices. In October 2013, the European Parliament approved a package of reforms to the European Commission's proposals. Under the revised proposals, only designated "special notified bodies" would be entitled to conduct conformity assessments of high-risk devices. These special notified bodies will need to notify the European Commission when they receive an application for a conformity assessment for a new high-risk device. The European Commission will then forward the notification and the accompanying documents on the device to the Medical Devices Coordination Group (“MDCG”), (a new, yet to be created, body chaired by the European Commission, and representatives of Member States) for an opinion. These new procedures may result in increased regulatory oversight of certain devices (most likely higher risk devices, which could include some ConvaTec products) and this may, in turn, increase the costs, time and requirements that need to meet in order to maintain or place such devices on the EEA market. If finally adopted, the Medical Devices Regulation is expected to enter into force in 2016 and become applicable three years thereafter. The adoption of the Medical Devices Regulation may, however, be materially delayed. In its current form it would, among other things, also impose additional reporting requirements on manufacturers of high risk medical devices, impose an obligation on manufacturers to appoint a "qualified person" responsible for regulatory compliance, and provide for more strict clinical evidence requirements. Delays in receipt of, or failure to obtain, approvals and clearances for future products, or failure to comply with the regulations applicable to our current products, could result in delayed realization of product revenues or in substantial additional costs which could have a material adverse effect on our business or results of operations. Clearance or approval by the FDA does not ensure marketing authorization by regulatory authorities in other countries or jurisdictions, and marketing authorization by one foreign regulatory authority does not ensure marketing authorization by regulatory authorities in other foreign countries or by the FDA. In addition, if our competitors’ new products and technologies reach the market before our products, they may gain a competitive advantage or render our products obsolete. See “Our Franchises - Competition” under each of our franchises in the “Our Business” section of this Annual Report for more information about our competitors. The ultimate success of our product development efforts will depend on many factors, including, but not limited to, our ability to create innovative designs and materials, provide innovative medical solutions and techniques for our customers, accurately anticipate and meet customers’ needs, commercialize new products in a timely manner and manufacture and deliver products in sufficient volumes on time. 27 ConvaTec Healthcare B S.à r.l. and Subsidiaries Moreover, research and development efforts may require a substantial investment of time and resources before we are able to determine the commercial viability of a new product, technology, material or other innovation. Even in the event that we are able to successfully develop innovations, they may not produce revenue in excess of the costs of development and may be quickly rendered obsolete as a result of changing customer preferences or the introduction by our competitors of products embodying new technologies or features. Sales may decline if our customers do not receive adequate levels of coverage and reimbursement from third party payers for our products and if certain types of healthcare programs are adopted in our key markets. In many countries, patients or healthcare providers that purchase our products (e.g., hospitals, physicians and other healthcare payers (principally national, state and private health insurance plans) to cover providers) rely on payments from all or a portion of the cost of our products. In institutional care settings, such as acute care hospitals, third party payments to providers are often made under a prospective payment system in the form of a pre-determined, “lump sum” amount based on a patient’s diagnosis and/or procedures. With few exceptions, there is no separate reimbursement for medical supplies such as ostomy supplies and wound dressings in hospital or other institutional settings. Reductions in lump sum payment amounts by payers has an indirect impact on our sales as hospital operating margins are compressed and hospitals, in turn, put pressure on manufacturer selling prices. Outside of the hospital, separate reimbursement of medical supplies exists in most developed countries. Reductions in reimbursement amounts for medical supplies in this setting can have a direct impact on our sales depending on the product categories impacted and the degree of the impact on reimbursement amounts and patient We believe that nurses, surgeons, hospitals and other healthcare providers may not use, purchase or prescribe our products payers do not provide adequate coverage of and reimbursement and patients may not purchase our products if these for the costs of our products or the procedures involving the use of our products. In the event that payers deny coverage or reduce their current levels of reimbursement, we may be unable to sell certain products on a profitable basis, thereby materially adversely impacting our results of operations. Further, payers are continuing to carefully review their coverage policies with respect to existing and new therapies and can, without notice, deny coverage for treatments that may include the use of our products. Due to cost containment pressures in many countries, legislation has been passed, and we expect will continue to be introduced and passed, to limit governmental healthcare coverage and reimbursement expenditures. For example, in the U.S., the Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a competitive bidding program for items of durable medical equipment, prosthetics, orthotics and supplies (“DMEPOS”), a category of products under which our products dispensed to patients for home use are classified. This competitive program - also referred to as “the Medicare DMEPOS Competitive Bidding Program” - is implemented by the Secretary of the HHS. The program replaces the existing DMEPOS fee schedule payment amounts with amounts derived from bids. Round 1 of the program went into effect January 1, 2011 in nine areas of the U.S. and reduced fees by an average of 32% compared to the Medicare fee schedule. Round 2 of the program went into effect July 1, 2013 and resulted in payment amounts that are on average 45% less than Medicare’s fee schedule rates for eight product categories in 100 geographic markets in the U.S. Round 1 Recompete rates went into effect on January 1, 2014 and resulted in payment amounts; reimbursement rates from the re-bidding process were publicly released by CMS on October 1, 2013. CMS announced average savings of approximately 37% off the current standard Medicare payment rates in effect from the product categories included in competitive bidding. The Round 1 Recompete contract period for all product categories expires on December 31, 2016, and Round 1 2017 contracts are scheduled to become effective on January 1, 2017 in the same nine metropolitan statistical areas as the Round 1 Recompete. CMS is conducting the Round 2 Recompete in the same geographic areas that were included in Round 2. Round 2 Recompete contracts are scheduled to become effective on July 1, 2016 and will expire on December 31, 2018. In addition, the ACA required CMS to expand competitive bidding further to additional geographic markets or to use competitive bid pricing information to adjust the payment amounts otherwise in effect for areas that are not competitive bidding areas by January 1, 2016. On November 6, 2014, CMS published a final rule defining methodologies to implement this requirement and adjust the fee schedule amounts for DME in areas where competitive bidding programs are not implemented. CMS began phasing in these adjustments on January 1, 2016, before they will take full effect on July 1, 2016. Although no ConvaTec device categories were included in Round 1 or Round 2 of the Competitive Bidding Program, we cannot provide any assurances that our current or future products will not be subject to competitive bidding in the future, which could have a material adverse effect on our business, results of operations and financial condition. 28 ConvaTec Healthcare B S.à r.l. and Subsidiaries In the majority of the markets in which our products are sold, government healthcare systems mandate the coverage and reimbursement rates and clinical evidence requirements for medical devices and procedures. If adequate levels of coverage and reimbursement from payers are not obtained, sales of our products may decline. In addition, some insurance plans in the U.S. have adopted, or are considering the adoption of, a system in which the providers contract to provide comprehensive healthcare for a fixed cost per person. In the event that the U.S. considers the adoption of a national healthcare system in which prices are controlled and patient care is managed by the government, such regulation could have a material adverse effect on our business, results of operations and financial condition. See “Risk Factors- Risks Related to Our Regulatory Environment - National and state healthcare reform and cost control efforts include provisions that could adversely impact our business, results of operations and financial condition.” Private insurers in a managed care system may attempt to control costs by authorizing fewer elective surgical procedures or by requiring the use of the least expensive products available. Many markets, including Canada, and some European and Asian countries, have in the past reduced reimbursement rates. Our ability to continue to sell certain products profitably in these markets may diminish if the government managed healthcare systems continue to reduce reimbursement rates for our products. In response to these and other pricing pressures, our competitors may lower the prices for their products. We may not be able to match the prices offered by our competitors, thereby adversely impacting our results of operations and future prospects. Healthcare reform and cost control efforts include provisions that could adversely impact our business, results of operations and financial condition. From time to time the passage of new healthcare laws and other governmental healthcare reform measures have significantly affected the manner in which healthcare services and products are dispensed and reimbursed. Major reform was passed in March 2010, when the President of the United States signed into law the ACA. Several provisions of the ACA specifically impact the medical device industry. In addition to changes in Medicare reimbursement for DME, prosthetics and supplies and an expansion of competitive bidding programs, the ACA imposed an annual federal excise tax on certain medical device manufacturers and importers. Specifically, for sales on or after January 1, 2013, manufacturers, producers, and importers of taxable medical devices paid as an excise tax 2.3% of the price for which the devices are sold. Under the Consolidated Appropriations Act, 2016, this tax is suspended from January 1, 2016, to December 31, 2017, and, absent further legislative action, will be reinstated starting January 1, 2018. The total cost incurred by us for the medical device excise tax during 2015 and 2014 was $1.7 million and $1.6 million, respectively. The ACA also establishes new Medicare and Medicaid program integrity provisions, including expanded documentation requirements for Medicare DME prescriptions written by physicians and more stringent procedures for screening competitive bidding program suppliers responsible for dispensing DME products to patients, along with broader expansion of federal fraud and abuse authorities. Although the eventual impact of the health care reform provisions of the ACA and recent regulatory changes are still uncertain, it is possible that the new laws, regulations and their guidelines will have a material adverse impact on our business, results of operations and financial condition. Other legislative changes have been proposed and adopted in the U.S. since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments, will stay in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, and in turn could significantly reduce the projected value of certain development projects and reduce our profitability. Similarly, many U.S. states have adopted or are considering changes in state healthcare payer and regulatory policies as a result of state budgetary shortfalls. While expansions of the Medicaid program will have some positive impact on the volume of claims submitted and paid, it will also pressure state budgets further over the next few years. Medicaid changes implemented recently by several states have included expanded enrollment of beneficiaries into “managed care” 29 ConvaTec Healthcare B S.à r.l. and Subsidiaries programs and reductions in provider and supplier reimbursement of “optional benefits,” including in some cases reduced reimbursement for our products and/or other Medicaid coverage restrictions. Optional benefits, which may include coverage of ostomy supplies and wound dressings, are those which states are not required to provide in order to qualify for matching federal funds. As states continue to face significant financial pressures, it is possible that state health policy changes will adversely affect our profitability. Risks Related to Our Business We operate in a highly competitive business environment, and our inability to compete effectively could adversely affect our business prospects, results of operations and financial condition. We operate in highly competitive and fragmented markets. Our Wound Therapeutics franchise and the Hospital Care of our CCC franchise compete with both large and small companies, including several large, diversified companies with significant market share and numerous smaller niche companies, particularly in the wound care products market. Our Ostomy Care and Infusion Devices franchises and the AFI of our CCC franchise generally compete with a small number of competitors in the market. We may not be able to offer products similar to, or more desirable than, those of our competitors or at a price comparable to that of our competitors. Existing or new competitors could introduce innovative new technologies that may be preferred by our customers, which could have a direct impact on our businesses, either through market share losses or price reductions. Our competition could also decide to more aggressively compete on price, causing us and others in the industry to counter by reducing prices accordingly in an effort to maintain market share. This would impact profitability and potentially the attractiveness of the product and/or market segment. In addition to our direct competitors who make products similar to ours, many of our advanced products compete with traditional products for the same applications. For example, because our advanced wound care products compete with conventional wound care products such as gauze, we also compete with manufacturers of such products. If we are not successful in driving the shift from conventional to advanced products, we may face greater competition from manufacturers who do not directly compete with us but make alternatives to our products. We are also facing increased competition from our channel partners, especially in markets such as the U.S., Germany and the U.K. In some cases, channel partners have launched their own private label brands of our products to directly compete with us. If this practice increases, or if we are otherwise not able to compete effectively with our direct and indirect competitors as described above, our business, results of operations and financial condition may be adversely affected. The success of many of our products depends heavily on acceptance by healthcare professionals who prescribe and recommend our products and by end users of our products, and our failure to maintain a high level of confidence in our products could adversely affect our business. We maintain customer relationships with numerous specialized nurses, surgeons, primary care physicians, home healthcare providers, other specialist physicians and other healthcare professionals. We believe that sales of our products depend significantly on their confidence in, and recommendations of, our products. In addition, our success depends on end users’ acceptance and confidence in the effectiveness, comfort and of our products, including our new products. In order to achieve acceptance by end users and healthcare professionals alike, we seek to educate patients and the healthcare community fectiveness of our products compared to as to the distinctive characteristics, perceived benefits, clinical efficacy and alternative products, including the products offered by our competitors. Acceptance of our products also requires effective training of patients and healthcare professionals in the proper use and application of our products. Failure to effectively educate and failure to continue to develop relationships with leading healthcare professionals and train our customers and and new patients could result in a less frequent recommendation of our products, which may adversely affect our sales and profitability. Our business may be harmed as a result of litigation, particularly if the number of product liability claims increases significantly and/or our insurance proves inadequate. From time to time we may be party to legal proceedings that arise in the ordinary course of business, including in connection with contractual disputes, which could have an adverse effect on our business, results of operations and financial condition. Additionally, the manufacture and sale of medical devices and related products exposes us to a significant risk of litigation, particularly product liability claims. From time to time, we have been, and we currently are, subject to a number of product 30 ConvaTec Healthcare B S.à r.l. and Subsidiaries liability claims alleging that the use of our products resulted in adverse effects. In addition, we are exposed to claims that material design or manufacturing failures in our products, quality system failures, or other safety issues warrant the recall of some of our products. Even if we are successful in defending against any claims, such claims could nevertheless divert the time, energy and efforts of our management, result in substantial costs, harm our reputation, adversely affect the sales of all our products and otherwise harm our business. If there is a significant increase in the number of product liability claims, our business could be adversely affected. We maintain product liability insurance that is subject to annual renewal and includes elements. Our existing product liability insurance coverage may be inadequate to satisfy liabilities we might incur. If a product liability claim or series of claims is brought against us for uninsured liabilities or is in excess of our insurance coverage limits, our business could suffer and our results of operations and financial condition could be materially adversely impacted. Our international operations, particularly those in emerging markets, expose us to risks related to conducting business outside developed markets and may cause our profitability to decline due to increased costs. The international scope of our operations exposes us to economic, regulatory and other risks, particularly outside developed markets. We intend to continue to pursue growth opportunities in emerging markets, which could expose us to additional risks associated with such sales and operations. Our operations outside the U.S., Europe and other developed markets are, and will continue to be, subject to a number of risks and potential costs, including: • • • • • • • • • • diminished protection of intellectual property; greater payables risk due to difficulty in collecting accounts receivable and longer collection periods; trade protection measures and import or export licensing and/or product registration requirements; difficulty in staffing, training and managing local operations; differing legal and labor regulations; labor disputes; increased costs of transportation or shipping; potential adverse tax consequences, including consequences from changes in tax laws and the imposition or increase of withholding and other taxes on remittances and other payments by international subsidiaries, which, among other things, may preclude payments or dividends from certain subsidiaries from being used for our debt service, and exposure to adverse tax regimes; political and economic instability; and security risks associated with criminal activity in certain countries. In addition, as we aim to grow our operations in emerging markets, we may become increasingly dependent on local distributors for our compliance and adherence to local laws and regulations that we may not be familiar with, and we cannot assure you that these distributors will adhere to such laws and regulations or adhere to our own business practices and policies. Any violation of laws and regulations by local distributors or a failure of such distributors to comply with our business practices and policies could result in legal or regulatory sanctions against us or potentially damage our reputation in that respective market. If we fail to manage these risks effectively, our business, results of operations and financial condition may be materially adversely affected. We are exposed to market risk due to changes in currency exchange rates, which impact profitability measures and cash flows. We manufacture and sell our products in various countries around the world and as a result of the global nature of our operations, we are exposed to risks arising from changes in currency exchange rates. Transactions that are to be settled in a currency that is not the functional currency of the transacting entity are recorded to the income statement at each remeasurement date or settlement date. Additionally, assets and liabilities of subsidiaries whose functional currency is not the U.S. Dollar are translated 31 ConvaTec Healthcare B S.à r.l. and Subsidiaries into U.S. Dollars at the exchange rate at each balance sheet date. Any cumulative translation difference is recorded within equity. Our primary net foreign currency translation exposures are the Euro, British Pound Sterling, and Danish Krone. Significant increases in the value of the U.S. Dollar relative to foreign currencies could have a material adverse effect on our results of operations. Assets and liabilities are converted based on the exchange rate on the balance sheet date, and income statement items are converted based on the average exchange rate during the period. Where possible, we manage foreign currency risk by managing same currency revenues to same currency expenses and strategically denominating our debt in certain functional currencies in order to match with the projected functional currency exposures within our operations. We currently do not utilize foreign currency forward contracts. Refer to the "Quantitative and Qualitative Disclosure About Market Risk" section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Annual Report for more information. If we lose one of our key suppliers or one of our contract manufacturers stops making the raw materials and components used in our products, we may be unable to meet customer orders for our products in a timely manner or within our budget. We rely on a limited number of suppliers for the raw materials and components used in our products. Wherever possible, we attempt to source materials from multiple suppliers. However, some key components and raw materials are from a single by the FDA. One or more of our suppliers may decide to cease source, and in some cases, these suppliers are supplying us with raw materials and components for reasons beyond our control. The FDA or other government regulations may require additional testing of any raw materials or components from new suppliers prior to our use of those materials or components. In addition, in the case of a device which is the subject of a PMA, we may be required to obtain prior permission from the FDA or another regulatory body (which may or may not be given), which could delay or prevent our access or use of such raw materials or components. If we are unable to obtain materials we need from our suppliers or our agreements with our suppliers are terminated, and we cannot obtain these materials from other sources, we may be unable to manufacture our products to meet customer orders in a timely manner or within our manufacturing budget. In that event, our business, results of operations and financial condition could be adversely affected. In addition, we rely on third parties to manufacture some of our products as well as some subcomponents of our other products. contract manufacturers accounted for approximately 14.8% of our cost of goods sold for the year ended December 31, 2015. If we encounter a cessation, interruption or delay in the supply of the products purchased from our manufacturers, we may be unable to obtain such products through other sources on acceptable terms, within a reasonable amount of time or at all. In addition, if our agreements with the manufacturing companies are terminated, we may not be able to find suitable replacements within a reasonable amount of time or at all. Any such cessation, interruption or delay affecting our global supply chain may impair our ability to meet scheduled deliveries of our products to our customers and may cause our customers to cancel orders. In that event, our reputation, business, results of operations and financial condition may be adversely affected. Many of our products are sourced from only a single internal manufacturing facility, so an event affecting our manufacturing capabilities, such as a natural or man made disaster, could have a material adverse effect on our business. We have 11 manufacturing operations located in eight countries. Significant portions of our products for certain franchises are produced in one or two manufacturing facilities as follows: • Michalovce (Slovakia): majority of our CCC urinary bags and catheters; • • • Rhymney/Deeside (U.K.): majority of our Wound Therapeutics Hydrofiber Technology based products; Haina (Dominican Rep): majority of our Ostomy Care pouches; and Reynosa ID (Mexico): majority of our Infusion Device products. For many of our products, we do not have redundancy or excess capacity, either in terms of space or equipment, to manufacture products at a different location in our network in the event of failure or unavailability of one of our facilities. In the event that any of our facilities is severely damaged or destroyed, including as a result of a natural or disaster, we would be manufacturers. In some cases, shifting production forced to shift production to our other facilities and/or rely on 32 ConvaTec Healthcare B S.à r.l. and Subsidiaries to an alternate site could take three to six months or more, which could result in loss of sales, back orders, penalties, damage to our reputation, and loss of our customers to our competitors, among other things. Such an event could have a material adverse effect on our business, results of operations and financial condition. We also have a facility in Schaffhausen, Switzerland which commenced operations in October 2009. Functions served in Schaffhausen include EMEA regional management, EMEA logistics and distribution management and global production and inventory planning as well as all supporting functions such as human resources, quality, finance, marketing and customer service for some of the European markets. The distribution operation manages regional distribution centers located in Germany, Poland, France, Italy, Spain, Sweden and Singapore. We may experience delays or outages in our information technology system and computer networks. We may be subject to information technology system failures and network disruptions. These may be caused by delays or disruptions due to system updates, natural disasters, malicious attacks, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins or similar events or disruptions. Because we have grown over the years through various acquisitions and our operations are geographically diverse, we have many disparate information technology systems across our organization, certain of which are outdated and due for replacement. As a result of these disparate information technology systems, we face the challenge of supporting older systems and implementing upgrades when necessary. We may in the future add applications to replace outdated systems and to operate more efficiently. Predictions regarding benefits resulting from the implementation of these projects are subject to uncertainties. We may not be able to successfully implement the projects without experiencing difficulties. In addition, any expected benefits of implementing projects might not be realized, or the costs of implementation might outweigh the benefits realized. A disruption in our information technology systems because of a catastrophic event or security breach could interrupt or damage our operations. In addition, we could be subject to reputational harm or liability if confidential customer information is misappropriated from our information technology systems. Despite our security measures and business continuity plans, these systems could be vulnerable to disruption, and any such disruption could negatively affect our financial condition and results of operations. If our patents and other intellectual property rights do not adequately protect our products, we may lose market share to our competitors and may not be able to operate our business profitably. We rely on a combination of patents, trade secrets, copyrights, trademarks, license agreements and contractual provisions to establish and protect our intellectual property rights in our products and the processes for the development, manufacture and marketing of our products. proprietary We use , trade secrets, processes and other proprietary information and currently employ various methods to protect this proprietary information, including confidentiality agreements, invention assignment agreements and proprietary information agreements with vendors, employees, independent sales agents, distributors, consultants, and others. However, these agreements may be breached. Governmental agencies or other national or state regulatory bodies may require the disclosure of such information in order for us to have the right to market a product. An agency or regulator may also disclose such information on its own initiative if it should decide that such information is not confidential business or trade secret information. Trade secrets, and other unpatented proprietary technology may also otherwise become known to or independently developed by our competitors. patents relating to a number of our components and products and have patent In addition, we also hold U.S. and applications pending with respect to other components and products. We also apply for additional patents in the ordinary course of our business, as we deem appropriate. However, these precautions offer only limited protection, and would not, for example, protect against our proprietary information becoming known to, or being independently developed by, competitors. A limited number of our patents will also expire during the term of our currently outstanding debt instruments and we cannot patents will allow us to maintain a competitive advantage. Additionally, we cannot assure that our assure that existing or future patents, if any, will afford us adequate protection or any competitive advantage, that any future patent applications will result in issued patents or that our patents will not be circumvented, invalidated or declared unenforceable. Additionally, our proprietary rights in intellectual property may be challenged, which could have a material adverse effect on our business, financial condition and results of operations. The wound care, ostomy care, infusion devices and continence 33 ConvaTec Healthcare B S.à r.l. and Subsidiaries care industries are highly litigious with respect to the enforcement of patents and other intellectual property rights. In some cases, intellectual property litigation may be used to gain a competitive advantage. We have in the past and may in the future become a party to lawsuits involving patents or other intellectual property. If a third party brings a legal action against us, we may incur substantial costs in defending ourselves, and we cannot assure that such an action would be resolved in our favor. If such a dispute were to be resolved against us, we may be subject to significant damages, and the testing, manufacture or sale of one or more of our technologies or products may be enjoined. Any proceedings before a national patent and/or trademark governmental authority or in a national or state court could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued or pending patents. We could also incur substantial costs in any such proceedings. In addition, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as other countries such as the U.S. or in Europe, if at all. We may also be unable to protect our rights in trade secrets, trademarks and unpatented proprietary technology in certain countries. In addition, we hold patent, trademark and other intellectual property licenses from third parties for some of our products and on technologies that are necessary in the design and manufacture of some of our products. The loss of such licenses could prevent us from manufacturing, marketing and selling these products, which in turn could harm our business, results of operations and financial condition. Our business involves large customers and if we were to lose one or more of those customers or if one or more were to default in its obligations under applicable contractual arrangements, we could be exposed to potentially significant losses. The medical device industry is concentrated, with relatively few companies accounting for a large percentage of sales in the markets that we target. No single customer accounted for more than 10% of our consolidated net sales for the years ended December 31, 2015 or 2014. However, we have large customers in each of our franchises. We are likely to experience increased customer concentration, particularly if there is further consolidation or within the medical device industry. For example, insulin pump manufacturers, our primary customers in our Infusion Devices franchise, have attempted to production of our infusion sets in the past. So far, these attempts have not been successful. However, future attempts or decisions by any of our customers to production of our products could have an adverse effect on our business, financial condition and results of operations. We also cannot assure that net sales to customers that have accounted for significant net sales in the past, either individually or as a group, will reach or exceed historical levels in any future period. The loss or a significant reduction of business from any of our major customers would adversely affect our results of operations and financial condition. Loss of our key management and other personnel, or an inability to attract such management and other personnel, could impact our business. We depend on our senior managers and other key personnel to run our business and on technical experts to develop new products and technologies. The loss of any of these senior managers or other key personnel could adversely affect our operations. Competition for qualified employees is intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the management, operation and expansion of our business could hinder our ability to expand, conduct research and development activities successfully and develop marketable products. No assurances can be made that we will retain or successfully recruit senior managers, or that their services will remain available to us. Changes to our senior management team could result in a material business interruption as a result of losing their services and material costs, including as a result of severance or other termination payments. We are subject to cost containment efforts of group purchasing organizations, which may have a material adverse effect on our business, results of operations and financial condition. Many customers of our products have joined GPOs in an effort to contain costs. GPOs conduct tender processes and/or negotiate pricing arrangements with medical supply manufacturers and distributors, and these negotiated prices are made available to a GPO’s affiliated hospitals and other members. If we are not one of the providers selected by a GPO, affiliated hospitals and other members may be less likely to purchase our products, and if the GPO has negotiated a strict compliance contract for another manufacturer’s products, we may be precluded from making sales to GPO members for the duration of efforts may cause us to lose market share to our the contractual arrangement. A failure to respond to GPOs’ competitors and could have a material adverse effect on our business, results of operations and financial condition. 34 ConvaTec Healthcare B S.à r.l. and Subsidiaries We are impacted by global economic and related credit and financial market problems that may pose additional risks and exacerbate existing risks to our business. The global economy, as well as the credit and financial markets, may have an impact on demand for our products, availability and reliability of vendors and third party contract manufacturers, our ability to timely collect our accounts receivable and the availability of financing for acquisitions and working capital requirements. We may be impacted, in part, due to customers purchasing less frequently (through extending use of each product) and/or purchasing lower cost, less advanced products. The general economic situation in Europe, the U.S. and/or in the other regions in which we sell our products could contribute to those trends remaining a problem or becoming worse. The ongoing impact from continued market volatility has impacted and could continue to impact our business in a variety of ways, including the following: • • • • customers and GPOs could continue to exert downward pressure on the prices of our products; shortage of available credit for working capital could lead customers who buy goods from us to curtail their purchases or cause them difficulty in meeting payment obligations; tightening of credit and disruption in the financial markets could disrupt or delay performance by our third party vendors and contractors and adversely affect our business; or problems in the credit and financial markets could limit the availability and size of alternative or additional financing for our working capital or other corporate needs and could make it more difficult and expensive to obtain waivers under or make changes to our existing credit arrangements. If any of these (or other similar) risks were to materialize, our business, results of operations and financial condition may be adversely affected, and the risks could become more pronounced if the problems in the global economy and the credit and financial markets continue or worsen. Consolidation in the healthcare industry could have an adverse effect on our revenues and results of operations. Many healthcare industry companies, including medical device companies, are consolidating to create larger companies. As the healthcare industry consolidates, competition to provide products and services to industry participants may become more intense. In addition, many of our distribution channels and purchasing entities are consolidating, and industry participants may try to use their purchasing power to negotiate price concessions or reductions for the products that we manufacture and market. Consolidation may have an impact on price or may enable a competitor to offer a more complete portfolio of products to customers. If we are forced to reduce our prices or suffer other competitive disadvantages because of consolidation in the healthcare industry, our revenues could decrease, and our business, financial condition and results of operations could be adversely affected. We could incur significant costs complying with environmental and health and safety requirements, or as a result of liability for contamination or other potential environmental harm caused by our operations. Our operations are subject to national, state and local environmental laws, regulations and other requirements, including regulations governing the generation, use, manufacture, handling, transport, storage, treatment and disposal of, or exposure to, hazardous materials, discharges to air and water, the cleanup of contamination and occupational health and safety matters. For example, our research and development and manufacturing processes involve the use of hazardous and other materials subject to environmental regulation. We cannot eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur liability as a result of any contamination or injury. Under some environmental laws and regulations, we could also be held responsible for costs relating to any contamination at our past or present facilities and at third party waste disposal sites where we have sent waste. These could include costs relating to contamination that did not result from any violation of law, and in some circumstances, contamination that we did not cause. We may incur significant expenses in the future relating to any failure to comply with environmental laws or regulations, including material fines and penalties. Any such future expenses or liability could have a significant negative impact on our financial condition and results of operations. The enactment of stricter laws or regulations, the stricter interpretation of existing laws and regulations or the requirement to undertake the investigation or 35 ConvaTec Healthcare B S.à r.l. and Subsidiaries remediation of currently unknown environmental contamination at our own or third party sites may require us to make additional expenditures, which could be material. We may not be able to successfully integrate businesses that we have acquired, or businesses we may acquire in the future, and we may not be able to realize the anticipated cost savings, revenue enhancements or other synergies from such acquisitions. Our ability to successfully implement our business plan and achieve targeted financial results may be dependent on our ability to successfully integrate businesses that we acquire in the future. The process of integrating such acquired businesses involves risks. These risks include, but are not limited to: • • • • • • • • • demands on management related to integration processes; diversion of management’s attention from the management of daily operations to the integration of newly acquired operations; difficulties in the assimilation of different corporate cultures, practices and sales and distribution methodologies; difficulties in conforming the acquired company’s accounting books and records, internal accounting controls, and procedures and policies to ours; retaining the loyalty and business of the customers of acquired businesses; retaining employees who may be vital to the integration of the acquired business or to the future prospects of the combined businesses; difficulties and unanticipated expenses related to the integration of departments and information technology systems, including accounting systems; difficulties integrating technologies and maintaining uniform standards, such as internal accounting controls, procedures and policies; and unanticipated costs and expenses associated with any undisclosed or potential liabilities. Failure to successfully transfer business operations and to otherwise integrate the former operations of any acquired businesses may result in reduced levels of revenue, earnings or operating efficiency than we have achieved or might have achieved if we had not acquired such businesses, and loss of customers of the acquired businesses. Furthermore, even if we are able to integrate successfully the former operations of acquired businesses, we may not be able to realize the potential cost savings, synergies and revenue enhancements that were anticipated from the integration, either in the amount or within the timeframe that we expect, and the costs of achieving these benefits may be higher than, and the timing may differ from, what we expect. Our ability to realize anticipated cost savings, synergies and revenue enhancements may be affected by a number of factors, including, but not limited to, the following: • • • • the use of more cash or other financial resources on integration and implementation activities than we expect; increases in other expenses unrelated to the acquisitions, which may offset the cost savings and other synergies from the acquisitions; our ability to eliminate duplicative back office overhead and overlapping and redundant selling, general and administrative functions, rationalize manufacturing capacity and shift production to more economical facilities; and our ability to avoid labor disruptions in connection with any integration, particularly in connection with any headcount reduction. If we fail to realize anticipated cost savings, synergies or revenue enhancements, our financial results will be adversely affected, and we may not generate the cash flow from operations that we anticipated. We have significant goodwill and other intangible assets and potential impairment of goodwill and other intangibles may significantly impact our profitability. 36 ConvaTec Healthcare B S.à r.l. and Subsidiaries Goodwill and intangible assets represent a significant portion of our total assets. Finite-lived intangible assets are subject to an impairment analysis whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. If an impairment exists, we would be required to take an impairment charge with respect to the impaired asset. Events giving rise to impairment are difficult to predict and are an inherent risk in the medical device industry. As a result of the significance of goodwill and intangible assets, our financial condition and results of operations in a future period could be negatively impacted should such an impairment of goodwill or intangible assets occur. Refer to note 10 and note 11 to the Consolidated Financial Statements for additional information. Our research and development effort for new products may be unsuccessful. We incur research and development expenses to develop new products and technologies in an effort to maintain our competitive position in a market characterized by rapid rates of technological advancement. Our research and development efforts are subject to unanticipated delays, expenses and technical problems. There can be no assurance that any of these products or technologies will be successfully developed or that, if developed, will be commercially successful. In the event that we are unable to develop commercialized products from our research and development efforts or we are unable or unwilling to allocate amounts beyond our currently anticipated research and development investment, we could lose our entire investment in these new products and technologies. Any failure to translate research and development expenditures into successful new product introduction could have an adverse effect on our business. Risks Related to our Financial Profile Our substantial leverage and debt service obligations could adversely affect our business and prevent us from fulfilling our obligations under our various debt instruments. We are considered to be highly leveraged. As of December 31, 2015, our total indebtedness, excluding capital leases, was $2,606.3 million, in the aggregate, related to the term loans outstanding under our credit facilities and senior notes due 2018. Our credit facilities consist of (i) U.S. Dollar and Euro term loans (the “Term Loan Facilities”) and (ii) a revolving credit facility (the “Revolving Credit Facility” and collectively, the “Credit Facilities”). In addition, ConvaTec Finance International S.A. (“CFI”), a subsidiary of ConvaTec Healthcare A S.à r.l. (the “Parent”) has $900.0 million of CFI payment-in-kind notes (the "PIK Notes") due 2019 (collectively with our senior notes, the "Notes"). The Credit Facilities will mature on June 15, 2020, provided that such date will be accelerated to (i) September 15, 2018 if more than 10% of the principal amount of our senior notes remain outstanding on such date or (ii) October 15, 2018 if more than 10% of the PIK Notes remain outstanding on such date. The degree to which we are leveraged could have important consequences to our lenders and noteholders, including, but not limited to: • making it difficult for us to satisfy obligations with respect to our debt instruments; • • • • • increasing our vulnerability to, and reducing flexibility to respond to, general adverse economic and industry conditions; requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal, and interest on, indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, acquisitions, joint ventures, product research and development or other general corporate purposes; limiting our flexibility in planning for, or reacting to, changes in our business and the competitive environment and the industry in which we operate; placing us at a competitive disadvantage as compared to our competitors, to the extent that they are not as highly leveraged; and limiting our ability to borrow additional funds and increasing the cost of any such borrowing. Any of these or other consequences or events could have a material adverse effect on our ability to satisfy debt obligations. We may also incur additional indebtedness, subject to the restrictions contained in our debt instruments, which may increase the risks noted above and elsewhere within this Annual Report. 37 ConvaTec Healthcare B S.à r.l. and Subsidiaries Our current corporate credit rating is Ba2 and B+ from Moody’s and Standard and Poor’s, respectively. A downgrade may increase our cost of borrowing and may negatively impact our ability to raise additional debt capital. We will require a significant amount of cash to meet our obligations under our indebtedness and to sustain our operations, which we may not be able to generate or raise. Our ability to make scheduled payments on or to refinance our debt obligations and to fund our ongoing operations, will depend on our future performance and our ability to generate cash, which, to a certain extent, is subject to prevailing global economic and market conditions and certain financial, competitive, legislative, legal, regulatory and other factors, many of which are beyond our control. Even if we were able to refinance or obtain additional financing, the costs of new indebtedness could be substantially higher than the costs of our existing indebtedness. If our cash flows and capital resources are insufficient to satisfy our debt service obligations or we are unable to refinance all or a portion of our indebtedness or obtain such refinancing on terms acceptable to us, we may be forced to sell assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the capital markets and our financial condition at such time. Our inability to generate sufficient cash flow to satisfy our debt service obligations or to refinance our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition and results of operations. We are subject to restrictive debt covenants that may limit our ability to finance our future operations and capital needs and to pursue business opportunities and activities. The agreements governing our indebtedness contain various covenants that limit our ability to finance our future operations and capital needs and our ability to pursue business opportunities and activities that may be in our interest. Among other things, these covenants restrict our ability to: • • incur or guarantee additional indebtedness and issue certain preferred stock; create or incur certain liens; • make certain payments, including dividends or other distributions, with respect to the shares of such entity; • prepay or redeem subordinated debt or equity; • make certain investments; • • • • create encumbrances or restrictions on the payment of dividends or other distributions, loans or advances to, and on the transfer of, assets to such entity; sell, lease or transfer certain assets, including stock of restricted subsidiaries; engage in certain transactions with affiliates; and consolidate or merge with other entities. All of these limitations are subject to significant exceptions and qualifications. In addition, we are subject to the affirmative and negative covenants contained in the agreement governing the Credit Facilities. In particular, we are required to maintain specified financial ratios and satisfy certain financial condition tests which become more restrictive over the life of such indebtedness. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure that we will meet them. A breach of any of these covenants, ratios, tests or restrictions could result in an event of default under one or more of our debt agreements, which could prompt the creditors to declare all amounts outstanding under the debt agreements, together with accrued interest, immediately due and payable and terminate the commitments to extend further credit. In addition, any default under the agreement governing the Credit Facilities could lead to an event of default and acceleration under other debt instruments that contain cross default or cross acceleration provisions, including our senior notes indenture, as well as the PIK Notes indenture. If we were unable to repay those amounts, the creditors could proceed against the collateral granted to 38 ConvaTec Healthcare B S.à r.l. and Subsidiaries them to secure that indebtedness. If our creditors under the debt agreements accelerate the repayment of borrowings, we may not have sufficient assets and funds to repay the borrowings under our debt agreements. The loans under our existing Credit Facilities bear interest at floating rates that could rise significantly, increasing our costs and reducing our cash flow. The loans under the Credit Facilities bear interest at floating rates of interest per annum equal to LIBOR and/or EURIBOR, or ABR (as defined in the Credit Facilities Agreement), as adjusted periodically, plus a spread. These interest rates could rise significantly in the future. For example, if interest rates were to increase by 1% from the interest rates in effect on December 31, 2015, our cash interest payments related to the term loans outstanding under the Credit Facilities would have increased by approximately $16.1 million. Additionally, if we were fully drawn against our $200.0 million Revolving Credit Facility, our cash interest payments would have increased by approximately $9.5 million for the year ended December 31, 2015. Further increase by 1% from the interest rates in effect on December 31, 2015, would increase our cash interest payments under our Revolving Credit Facility by approximately $2.0 million. To the extent that interest rates were to increase significantly, our interest expense would correspondingly increase, reducing our cash flow. We may not have the ability to raise the funds necessary to finance an offer to repurchase the Notes upon the occurrence of certain events constituting a change of control as required by the indentures. Upon the occurrence of certain events constituting a “change of control” under the indentures, we (or our parent company) would be required to offer to repurchase all outstanding Notes at a purchase price in cash equal to 101% of the principal amount thereof on the date of purchase plus accrued and unpaid interest to the date of purchase. If a change of control were to occur, we may not have sufficient funds available at such time (or we may be restricted under other existing contractual obligations) from making such required repurchases and any failure by us to make such required repurchases (without the consent of the applicable holders of the Notes) would constitute a default under the applicable indentures. The interests of our principal shareholders may conflict with the interests of the Note holders. The interests of our principal shareholders, in certain circumstances, may conflict with interests of holders of the Notes. As of the date of this annual report, each of Nordic Capital and Avista Capital Partners owns indirectly 69.85% and 30.15% of our shares, respectively. See “Principal Shareholders.” As a result, these shareholders have, and will continue to have, directly or indirectly, the power, among other things, to affect our legal and capital structure and our operations, as well as the ability to elect and change our management and to approve any other changes to our operations. For example, the shareholders could vote to cause us to incur additional indebtedness, to sell certain material assets or make dividends, in each case, so long as our indebtedness documents so permit. The incurrence of additional indebtedness would increase our debt service obligations and the sale of certain assets could reduce our ability to generate revenue, each of which could adversely affect holders of the Notes. Risks Relating to Tax Matters We may not be able to maintain a competitive worldwide effective corporate tax rate. While we believe that being incorporated in Luxembourg should help us maintain a competitive worldwide effective corporate tax rate, we cannot give any assurance as to what our effective tax rate will be because of, among other things, uncertainty regarding the tax policies of all the jurisdictions where we operate our business. Our actual effective tax rate may vary from our expectation and that variance could be material. Additionally, the tax laws of Luxembourg and other jurisdictions could change in the future, and such changes could cause a material change in our effective tax rate. In particular, legislation may be enacted by the U.S. Congress and/or regulatory guidance may be promulgated by the U.S. Department of the Treasury ("Treasury Department") and the IRS which could have a material adverse effect on our effective tax rate and/or require us to take further action, at potentially significant expense, to seek to preserve our effective tax rate. Examination and audits by tax authorities could result in additional tax payments. Our tax returns are subject to examination by various tax authorities, including the IRS in the U.S., the Denmark Tax Authority (“SKAT”), the Italian Revenue Agency (“AdE”), the New Zealand Inland Revenue, and the China Tax Authority in Shanghai. The IRS concluded examining our U.S. federal income tax return for 2012 resulting in no material change. SKAT commenced examining our Denmark corporate income tax returns for the years 2010 through 2014. New Zealand Inland Revenue concluded 39 ConvaTec Healthcare B S.à r.l. and Subsidiaries examining our New Zealand corporate income tax returns for 2009 through 2012 resulting in no material change. The AdE commenced examining our Italian corporate income tax returns for the years 2010 through 2014. The China Tax Authority in Shanghai concluded examining our China corporate income tax return for 2013 and 2014 resulting in no material change. There is no guarantee that the China examination will not expand to also include prior years. We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions. It is our intention to vigorously defend our prior tax returns. However, the calculation of our tax liabilities involves the application of complex tax regulations to our global operations in many jurisdictions. Therefore, any dispute with a tax authority may result in a payment that is significantly different from our current estimate of the tax liabilities associated with these returns. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities generally would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the amount for which we are ultimately liable, we would incur additional charges to expense and such charges could have a material adverse effect on our business, results of operations, financial condition and cash flows. Tax-related legislative and/or regulatory action in the U.S. or EU could materially and adversely affect us. Legislation may be enacted by the U.S. Congress or EU Commission, and/or regulatory guidance may be promulgated by the Treasury Department, the IRS or EU Tax Authorities which could limit the availability of tax benefits or deductions that we currently claim, override tax treaties upon which we rely, or otherwise affect the taxes imposed on our worldwide operations. Such changes could have a material adverse effect on our effective tax rate and/or require us to take further action, at potentially significant expense, to seek to preserve our effective tax rate. 40 ConvaTec Healthcare B S.à r.l. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the audited consolidated financial statements, and notes thereto, prepared in accordance with United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") as of December 31, 2015 and 2014 and each of the two years in the period ended December 31, 2015 (the "2015 Financial Statements"). The 2015 Financial Statements and related notes beginning on page F-1 of this Annual Report. Forward-looking statements This MD&A and other sections of this report contain "forward-looking statements" as defined by the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. These statements include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of financial resources. These forward-looking statements may include, without limitation, statements regarding: the impact of global and local operating economic conditions on our financial results; the anticipated effect of new tax statutes; the impact of healthcare reform and new regulations on our business and our ability to offset any related pricing pressures; anticipated seasonal fluctuations in our results of operations; the effect of pending and future lawsuits, claims, proceedings and investigations, including those relating to environmental regulations, on our results of operations, cash flows, financial condition or liquidity; expectations regarding the adequacy of our cash and cash equivalents and other sources of liquidity for ongoing operations; expectations regarding investment plans and capital expenditures; projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; management's goals and objectives; and other similar matters that are not historical facts. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and management's good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please see "Risk Factors" within this Annual Report for a discussion of some of these risks and uncertainties. Presentation of financial information CHB is a wholly owned subsidiary of the Parent. We are presenting the 2015 Financial Statements of CHB in this report. The Parent has no significant business operations other than investments in CHB. On August 12, 2013, the Parent completed a $900.0 million PIK Notes offering. As a result of the PIK Notes offering, we are required to present a summary of the primary financial statement reconciliation differences between CHB and the Parent. Please refer to “Reconciliation to the Parent’s Financial Statements” within this Annual Report for further details. 41 ConvaTec Healthcare B S.à r.l. and Subsidiaries Overview We are a global medical products and technologies company, with leading market positions in ostomy care, wound therapeutics, continence and critical care, and infusion devices. Our products provide a range of clinical and economic benefits, including infection prevention, protection of vulnerable skin, improved patient outcomes and reduced total cost of care. We operate in attractive, growing markets where underlying trends are expected to create increased demand globally. A majority of our business is derived from medical consumables tied to the management of chronic conditions, generating consistent recurring revenues. We report sales in four major franchises: Wound Therapeutics, Ostomy Care, CCC, and Infusion Devices. Wound Therapeutics. Our Wound Therapeutics franchise includes advanced wound dressings and skin care products. These dressings and products are used for the management of acute and chronic wounds, such as those resulting from traumatic injury, burns, invasive surgery, diabetes, venous disease, immobility and other factors. Ostomy Care. Our Ostomy Care franchise includes devices, accessories and services for people with an ostomy or stoma (a surgically-created opening where bodily waste is discharged), commonly resulting from colorectal cancer, inflammatory bowel disease, bladder cancer and other causes. Continence and Critical Care. Our CCC franchise includes products for people with urinary continence issues related to spinal cord injuries, multiple sclerosis, spina bifida and other causes. The franchise also includes devices and products used in intensive care units and hospital settings. Infusion Devices. Our Infusion Devices franchise, previously referred to as Infusion Devices/Industrial Sales, provides disposable infusion sets to manufacturers of insulin pumps for diabetes and similar pumps used in continuous infusion treatments for other conditions. In addition, the franchise supplies a range of products to hospitals and the home healthcare sector. Recent developments In November 2015, we announced a decision to cease operations at our HC manufacturing facility in Reynosa, Mexico by mid-2016. The decision was made as a result of our commercial strategy to rationalize our CCC portfolio, focusing on strategic products and eliminating certain non-strategic HC products with low profitability and limited growth potential (see "Our Business - Continence & Critical Care" within this Annual Report). As a result of this strategy, in January 2016 we further announced our intention to cease operations at our HC manufacturing facility in Sungai-Petani, Malaysia by the end of 2016. Following the completion of a comprehensive evaluation and analysis of our global manufacturing facilities utilization and strategy, in January 2016 we also announced a decision to cease manufacturing operations in Greensboro, U.S. by early 2017. This decision was based on the analysis of our sites that also support our Wound Therapeutics and Ostomy Care franchises, which will now focus on our sites in Deeside, U.K.; Haina, Dominican Republic; and Michalovce, Slovakia supported by our strategic materials conversion plants for Wound Therapeutics and Ostomy Care in Rhymney, U.K. and Herlev, Denmark. Our Quality Affairs, Regulatory Affairs and Clinical Global Headquarters and other global functional roles also located in Greensboro are not affected by this decision. 42 ConvaTec Healthcare B S.à r.l. and Subsidiaries Results of operations The following table sets forth our net sales and expense items for each of the last two years: ($ in millions) Net sales(1) Cost of goods sold Gross profit Selling and marketing expenses General and administrative expenses Research and development expenses Impairment of goodwill and long lived assets Operating income Interest expense, net Foreign exchange Other expense (income), net Loss on extinguishment of debt Loss before income taxes (Benefit) provision for income taxes Net loss _______________________________ Years Ended December 31, 2014 2015 $ 1,650.5 799.3 851.2 346.9 221.9 41.2 12.2 229.0 397.3 29.7 0.7 26.9 (225.6) (16.6) (209.0) $ 1,735.5 821.8 913.7 397.0 195.2 37.2 73.7 210.6 449.6 19.3 (0.1) — (258.2) 28.3 (286.5) $ $ (1) Net sales is comprised of sales of our products net of rebates and discounts. The discussion below mentions net sales and certain costs and expenses on a constant exchange rate basis. Net sales and costs and expenses on a constant exchange rate basis are a non-GAAP financial measure and should not be viewed as a replacement of GAAP results. Such a measure is presented because we believe it enables us to focus on the actual performance related changes in the results of operations from year to year without the effects of exchange rates. Net sales Net sales increased 4.2% on a constant exchange rate basis, and decreased 4.9% on a reported basis in 2015, compared with the prior year. The primary exchange rate movement that impacted net sales was the movement of the Euro compared to the U.S. Dollar. The average Euro exchange rate was $1.110 in 2015, compared to $1.329 in 2014. The changes in our net sales are further described below under “Net sales by franchise”. Net sales by franchise The following table sets forth our net sales by franchise for each of the last two years and the percentage change on a reported and constant exchange rate basis: ($ in millions) Net sales by franchise(1) Wound Therapeutics Ostomy Care Continence & Critical Care Infusion Devices Total net sales _______________________________ Years Ended December 31, 2015 2014 Change(2) At constant $ $ 536.1 515.6 348.2 250.6 1,650.5 $ $ 566.4 569.0 350.7 249.4 1,735.5 (5.3 )% (9.4 )% (0.7 )% 0.5 % (4.9)% 5.3% 1.3% 5.9% 6.2% 4.2% 43 ConvaTec Healthcare B S.à r.l. and Subsidiaries (1) (2) Net sales by franchise in 2014 contain reclassifications between franchises to conform to the current year presentation. Represents the percentage change as reported. Wound Therapeutics At a constant exchange rate, Wound Therapeutics net sales increased 5.3% in 2015, primarily due to growth across our AQUACEL® product family. On a reported basis, net sales in our Wound Therapeutics franchise decreased $30.3 million, or approximately 5.3%, to $536.1 million in 2015 from $566.4 million in 2014. Ostomy Care At a constant exchange rate, Ostomy Care net sales increased 1.3% in 2015, primarily due to demand. On a reported basis, net sales in our Ostomy Care franchise decreased $53.4 million, or approximately 9.4%, to $515.6 million in 2015 from $569.0 million in 2014. Continence & Critical Care At a constant exchange rate, CCC net sales increased 5.9% in 2015, primarily due to the organic growth from our 180 Medical business. On a reported basis, net sales in our CCC franchise decreased $2.5 million, or approximately 0.7%, to $348.2 million in 2015 from $350.7 million in 2014. Infusion Devices At a constant exchange rate, Infusion Devices net sales increased 6.2% in 2015, primarily driven by volume growth in infusion devices partially offset by volume decreases in industrial sales. On a reported basis, net sales in our Infusion Devices franchise increased $1.2 million, or approximately 0.5%, to $250.6 million in 2015 from $249.4 million in 2014. Operating costs and expenses The following is a summary of operating costs and expenses for each of the last two years and the percentage of each category compared with total net sales in the respective year. Percentages may not sum due to rounding. ($ in millions) Operating costs and expenses: Cost of goods sold Selling and marketing General and administrative Research and development Impairment of goodwill and long lived assets Total operating costs and expenses ($ in millions) Other costs and net expenses (income): Interest expense, net Foreign exchange Other expense (income), net Loss on extinguishment of debt (Benefit) provision for income taxes _______________________________ Years Ended December 31, 2015 2014 2015(1) 2014(1) $ $ 799.3 346.9 221.9 41.2 12.2 1,421.5 $ $ 821.8 397.0 195.2 37.2 73.7 1,524.9 Years Ended December 31, 2015 2014 48.4% 21.0% 13.4% 2.5% 0.7% 86.1% 47.4% 22.9% 11.2% 2.1% 4.2% 87.9% $ 397.3 29.7 0.7 26.9 (16.6) 449.6 19.3 (0.1) — 28.3 $ 44 ConvaTec Healthcare B S.à r.l. and Subsidiaries (1) Represents the percentage of net sales. Cost of goods sold Cost of goods sold are primarily comprised of manufacturing and production costs, including raw materials, labor, overhead and processing costs and any freight costs borne by us in the transport of goods to us from suppliers, depreciation of manufacturing facilities and equipment and lower of cost or market adjustments to inventories. Cost of goods sold decreased $22.5 million, to $799.3 million in 2015 from $821.8 million in 2014. As a percentage of net sales, cost of goods sold increased to 48.4% in 2015 from 47.4% in 2014. Gross profit (net sales less cost of goods sold) decreased $62.5 million, or 6.8%, and gross profit margin (gross profit as a percentage of net sales) was 51.6% and 52.6%, in 2015 and 2014, respectively. Gross profit margin excluding impacts from amortization of certain intangible assets and certain non-recurring costs in 2015 was 59.6%, as compared with 60.3% in 2014. The decrease in gross profit margin is primarily driven by price, product mix and foreign exchange impact, partially offset by manufacturing efficiency savings and a Class I recall related to our Flexi-Seal® CONTROL Fecal Management System in the prior year. Selling and marketing expenses Selling and marketing expenses consisted of advertising, promotion, marketing, sales force, and distribution costs. Selling and marketing expenses decreased $50.1 million, to $346.9 million in 2015 from $397.0 million in 2014. As a percentage of net sales, selling and marketing expenses were 21.0% and 22.9% in 2015 and 2014, respectively. At a constant exchange rate, selling and marketing expenses decreased $9.9 million (2.5%), primarily due to a reduction in compensation costs mainly in the U.S. General and administrative expenses General and administrative expenses consisted of executive management, human resources, finance, information management, legal, facilities and other costs. General and administrative expenses increased $26.7 million, or 13.7%, to $221.9 million in 2015 from $195.2 million in 2014. As a percentage of net sales, general and administrative expenses were 13.4% and 11.2% in 2015 and 2014, respectively. At a constant exchange rate, general and administrative expenses increased $37.8 million (19.5%), primarily due to (i) an increase in consulting fees, (ii) an increase in professional service fees associated with a number of remediation activities that were undertaken to enhance our compliance function and strengthen our control environment within finance, (iii) settlement of multi-year patent-related litigations, (iv) incremental compensation and benefit costs, and (v) higher share-based compensation expenses. These increases were partially offset by a decrease in severance costs associated with the closure of our operational headquarters in Skillman, New Jersey in 2014. Excluding restructuring, remediation, litigation settlement losses, share-based compensation and certain other non-recurring costs, general and administrative expenses increased by $7.7 million (4.9%) at a constant exchange rate. We anticipate that our general and administrative expenses will increase in the future with continued focus on enhancing our controls and processes within our finance function and expanded legal and compliance obligations. These increases will likely include costs related to the hiring of additional personnel, payments to outside consultants, costs for lawyers and accountants, and higher insurance costs, among other expenses. Additionally, we anticipate an increase in payroll expense as a result of enhancing our compliance function as it relates to the sales and marketing of our products. Research and development expenses R&D expenses consisted of product development and enhancement costs incurred within a centralized R&D function. R&D expenses increased $4.0 million, to $41.2 million in 2015 from $37.2 million in 2014. As a percentage of net sales, R&D expenses were 2.5% and 2.1% in 2015 and 2014, respectively. At a constant exchange rate, R&D expenses increased $6.5 million (18.6%). The increase in R&D expense is primarily driven by regulatory compliance costs and spending on certain development programs, partially offset by lower FDA remediation costs. Excluding FDA remediation and certain non-recurring costs, R&D expenses increased by $11.8 million (39.7%) at a constant exchange rate. Impairment of goodwill and long lived assets In 2015, we recorded impairment charges of $12.2 million, primarily related to the write-down of the carrying value of our trade name. 45 ConvaTec Healthcare B S.à r.l. and Subsidiaries In 2014, we recorded impairment charges of $73.7 million, primarily related to (i) goodwill ($46.4 million), (ii) our trade name ($16.6 million), (iii) the intangible assets acquired in Symbius acquisition in 2014 ($4.3 million), and (iv) the manufacturing facility located in Rhymney, U.K. ($3.2 million). Refer to note 10 and note 11 to the 2015 Financial Statements for further details related to the impairment charges on goodwill and intangible assets, respectively. Other costs and net expenses (income) Interest expense, net Interest expense, net decreased $52.3 million, to $397.3 million in 2015 from $449.6 million in 2014, primarily due to (i) lower interest expense on preferred equity certificates (“PEC” or “PECs”) denominated in Euro driven by foreign currency impact, (ii) early redemption of 7.375% senior secured notes due 2017 (the "Secured Notes") in June 2015, and (iii) lower interest expense related to our long-term debt denominated in Euro as a result of the strengthening of the U.S. Dollar. These decreases were partially offset by incremental borrowings under the Credit Facilities as a result of the June 2015 refinancing. Foreign exchange Foreign exchange is comprised of net gains and losses resulting from the re-measurement or settlement of transactions that are denominated in a currency that is not the functional currency of the transacting subsidiary. Foreign exchange loss increased $10.4 million, to $29.7 million in 2015 from $19.3 million in 2014. The increase was primarily due to a foreign exchange net loss driven by (i) intercompany transactions, including loans transacted in non-functional currencies and (ii) foreign currency impact on re-measurement of our long-term debt denominated in non-functional currency. Loss on extinguishment of debt In 2015, we recognized loss on extinguishment of debt of $26.9 million related to (i) the redemption of the Secured Notes in June 2015 and (ii) the refinancing of the Credit Facilities in June 2015. (Benefit) provision for income taxes During the year ended December 31, 2015, we recorded a benefit for income taxes of $16.6 million on a loss before income taxes of $225.6 million and for the year ended December 31, 2014, we recorded a provision for income taxes of $28.3 million on a loss before income taxes of $258.2 million. The decrease in the provision for income taxes in 2015 as compared to 2014 is primarily the result of a decrease in non-U.S. current tax provision partially offset by increase in U.S. current tax provision coupled with an increase in both non-U.S. and U.S. deferred tax benefit. Net loss As a result of the above, net loss decreased $77.5 million to a net loss of $209.0 million in 2015, compared to a net loss of $286.5 million in 2014. 46 ConvaTec Healthcare B S.à r.l. and Subsidiaries Summary of quarterly results (unaudited) The following table presents a summary of our unaudited quarterly results of operations in 2015 and 2014: ($ in millions) Net sales(1) Operating costs and expenses(2) Operating income (loss) Net loss Adjusted EBITDA _______________________________ 2015 2014 Q1 $ 394.4 333.9 $ 60.5 Q2 $ 408.1 345.9 $ 62.2 Q3 $ 412.6 341.0 $ 71.6 Q4 $ 435.4 400.7 $ 34.7 Q1 $ 429.3 373.9 $ 55.4 Q2 $ 445.0 364.0 $ 81.0 Q3 $ 453.2 359.0 $ 94.2 Q4 $ 408.0 428.0 $ (20.0) $ (74.4) $ (76.9) $ (33.5) $ (24.2) $ (70.6) $ (52.6) $ (23.4) $ (139.9) $ 111.1 $ 115.2 $ 123.0 $ 124.7 $ 113.7 $ 136.2 $ 146.5 $ 103.5 (1) (2) At a constant exchange rate, net sales increased 14.4% in the fourth quarter of 2015, reflecting an increase across all of our franchises, primarily driven by increased demand, along with the impact of a large reduction in distributor inventories in the fourth quarter of 2014. On a reported basis, net sales increased $27.4 million, or approximately 6.7%, to $435.4 million in the fourth quarter of 2015 from $408.0 million in the fourth quarter of 2014. During the fourth quarter of 2015 and 2014, we recognized impairment charges of $12.2 million and $73.7 million, in the aggregate, respectively, primarily related to goodwill and intangible assets. Refer to note 10 and note 11 to the 2015 Financial Statements for information regarding the impairment charges on goodwill and intangible assets, respectively. EBITDA and Adjusted EBITDA We believe that EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) and Adjusted EBITDA (EBITDA adjusted to exclude other income and expense items that are excluded by management in assessing the operating performance of the business) are useful indicators of our ability to incur and service our indebtedness and can assist investors and other parties to evaluate us. It should be noted that our definition of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by other companies. We believe that Adjusted EBITDA as a supplementary non-GAAP financial measure may be used to meaningfully evaluate a company’s future operating performance and cash flow. In addition, management also uses EBITDA and Adjusted EBITDA to assess and measure our operating performance. Accordingly, this information has been disclosed to permit a more complete and comprehensive analysis of our operating performance, consistent with how our business performance is evaluated by management. We define EBITDA as the net loss for the year before (benefit) provision for income taxes, loss on extinguishment of debt, other expense (income), net, foreign exchange, interest expense, net, and depreciation and amortization. Adjusted EBITDA represents EBITDA as adjusted to exclude costs or gains that are excluded by management in assessing the operating performance of the business, such as assets impairments, restructuring and remediation expenses, and other cash and non- cash items, including non-cash share-based compensation. EBITDA and Adjusted EBITDA are not measurements of financial performance under GAAP, are not audited and should not replace measures of liquidity or operating profit that are derived in accordance with GAAP. The following table reconciles net loss to EBITDA and provides a further reconciliation of EBITDA to Adjusted EBITDA, including realized foreign exchange gain/loss for 2015 and 2014: 47 ConvaTec Healthcare B S.à r.l. and Subsidiaries $ ($ in millions) Net loss (Benefit) provision for income taxes Loss on extinguishment of debt Other expense (income), net Foreign exchange Interest expense, net Depreciation and amortization EBITDA Adjustments (a): Goodwill and long lived asset impairments(b) Restructuring and other related costs(c) Remediation costs(d) Share-based compensation Other(e) Total Adjustments Adjusted EBITDA Realized foreign exchange gain (loss) Adjusted EBITDA, including realized foreign exchange gain (loss) $ _______________________________ Years Ended December 31, 2014 2015 (209.0) $ (16.6) 26.9 0.7 29.7 397.3 180.1 409.1 12.2 6.5 14.1 9.0 23.1 64.9 474.0 7.5 481.5 $ (286.5) 28.3 — (0.1) 19.3 449.6 191.2 401.8 73.7 13.6 10.3 (0.2) 0.7 98.1 499.9 (10.6) 489.3 (a) (b) (c) (d) (e) Represent transactions/items that are excluded by management in assessing the operating performance of the business. Such activity is excluded from EBITDA to derive Adjusted EBITDA. Primarily relates to impairment charges on goodwill and intangible assets. Refer to note 10 and note 11 to the 2015 Financial Statements for information regarding the impairment charges on goodwill and intangible assets, respectively. In 2015, we recorded $6.5 million of restructuring and other related costs, of which $4.5 million, $1.8 million, and $0.2 million were recorded in general and administrative expenses, cost of goods sold, and R&D expenses, respectively, within our Consolidated Statements of Operations. In 2014, restructuring and other related costs were recorded in general and administrative expenses within our Consolidated Statements of Operations. Refer to note 5 of the 2015 Financial Statements for further details related to the restructuring costs. In 2015, we recorded $14.1 million of remediation costs, of which $12.1 million and $2.0 million were recorded in general and administrative expenses and R&D expenses, respectively, within our Consolidated Statements of Operations. In 2014, we recorded $10.3 million of remediation costs, of which $7.4 million and $2.9 million were recorded in R&D expenses and general and administrative expenses, respectively, within our Consolidated Statements of Operations. Remediation costs include regulatory compliance costs related to the FDA activities and professional service fees associated with activities that were undertaken to enhance our compliance function and strengthen our control environment within finance. In 2015, we recorded $23.1 million in other costs, of which $21.0 million and $2.1 million were recorded in general and administrative expenses and cost of goods sold, respectively, within our Consolidated Statement of Operations. These costs were mainly related to a settlement of multi-year patent-related litigations and corporate development activities. Refer to note 17 to the 2015 Financial Statements for further information regarding the settlement. Liquidity and capital resources As of December 31, 2015 and 2014, our cash and cash equivalents were $269.6 million and $234.0 million, respectively. Additionally, as of December 31, 2015, we had $197.4 million of availability under our revolving credit facility. Restricted cash was $8.6 million as of December 31, 2015. Pursuant to the Fourth Amendment to the Credit Agreement dated June 15, 2015 (the "Amended Credit Facilities Agreement"), and pursuant to Section 4.06 of the indenture dated December 22, 2010 (the “Indenture”) governing the senior notes (the “U.S. 48 ConvaTec Healthcare B S.à r.l. and Subsidiaries Dollar Senior Notes” and the “Euro Senior Notes”) (collectively the “Senior Notes”), we are permitted in certain circumstances to make certain payments that would otherwise be restricted. As of December 31, 2015, we had the capacity to make such restricted payments up to an amount of $328.8 million. Our primary source of liquidity is cash flow generated from operations. Historically, the nature of our product offerings has resulted in significant recurring cash inflows. In 2015 and 2014, we generated $100.0 million and $147.3 million of cash from operating activities, respectively. Significant cash uses included (i) interest payments of $257.9 million and $270.9 million in 2015 and 2014, respectively, (ii) capital expenditures of $36.7 million and $44.7 million in 2015 and 2014, respectively, and (iii) income tax payments of $42.2 million and $40.4 million in 2015 and 2014, respectively. In addition to the above, significant cash uses in 2014 included $73.6 million of debt repayments and $42.5 million for the Symbius acquisition. Our business may not continue to generate cash flow at current levels and, if we are unable to generate sufficient cash flow from operations to service our debt, we may be required to reduce costs and expenses, sell assets, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing. We may not be able to complete these initiatives on a timely basis, on satisfactory terms, or at all. Our ability to make scheduled principal payments or to pay interest on or to refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the U.S. healthcare industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control. We believe that our business has characteristics of strong cash flow generation. Our strengths include the recurring, non- discretionary nature of our products, our diverse product offering and geographic footprint, and our strong market position of our leading brands. We believe that our existing cash on hand, combined with our operating cash flow and available borrowings under the Credit Facilities will provide sufficient liquidity to fund current obligations, working capital and capital expenditure requirements, as well as future investment opportunities. Cash flows The following table displays cash flow information for each of the last two years: ($ in millions) Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental cash flow information Income taxes paid Interest paid Cash flows from operating activities Years Ended December 31, 2015 2014 $ $ $ $ 100.0 (36.5) (8.3) (19.6) 35.6 234.0 269.6 42.2 257.9 $ $ $ $ 147.3 (88.2) (73.6) (22.9) (37.4) 271.4 234.0 40.4 270.9 Net cash provided by operating activities was $100.0 million and $147.3 million in 2015 and 2014, respectively. The following table sets forth the components of net cash provided by operating activities for each of the last two years: 49 ConvaTec Healthcare B S.à r.l. and Subsidiaries ($ in millions) Adjusted EBITDA Realized foreign exchange gain (loss) Cash interest payments Cash tax payment Other payments Working capital increase Net cash provided by operating activities Years Ended December 31, 2015 2014 $ $ 474.0 7.5 (257.9) (42.2) (46.8) (34.6) 100.0 $ $ 499.9 (10.6) (270.9) (40.4) (27.8) (2.9) 147.3 Cash interest payments decreased $13.0 million, to $257.9 million in 2015 from $270.9 million in 2014, primarily due to the redemption of the Secured Notes in June 2015 and lower interest payments on our long-term debt denominated in Euro as a result of the strengthening of the U.S. Dollar. These decreases were partially offset by higher interest payments in 2015 related to the PECs and incremental borrowings under the Credit Facilities as a result of the June 2015 refinancing. Refer to note 12 to the 2015 Financial Statements for additional information regarding the June 2015 refinancing. The other payments increased $19.0 million, to $46.8 million in 2015 from $27.8 million in 2014, primarily due to (i) payments related to Management Equity Plan (“MEP”) awards of $8.4 million in 2015, (ii) an increase in payments of $5.6 million, in the aggregate, related to remediation and compliance costs, and (iii) a settlement payment made in 2015 related to multi-year patent-related litigations (refer to note 17 to the 2015 Financial Statements for further information). These increases were partially offset by a decrease in payments of (i) $8.4 million made towards the settlement of the Medtronic related liabilities and (ii) $7.8 million related to restructuring charges. The working capital increase of $34.6 million and $2.9 million in 2015 and 2014, respectively, was primarily related to timing of receipts and payments in the ordinary course of business. Cash flows from investing activities Net cash used in investing activities decreased $51.7 million, to $36.5 million in 2015 from $88.2 million in 2014. The decrease in net cash used in investing activities was primarily related to (i) a decrease of $42.5 million related to the Symbius acquisition in January 2014 and (ii) a decrease of $8.0 million in capital expenditures primarily as a result of our investment in 180 Medical operations in 2014. Cash flows from financing activities Net cash used in financing activities decreased $65.3 million, to $8.3 million in 2015 from $73.6 million in 2014, primarily due to (i) an increase of $431.1 million of net borrowings under the Credit Facilities, primarily as a result of the refinancing in June 2015, partially offset by (ii) $338.5 million paid on the redemption of the Secured Notes in June 2015, and (iii) $27.3 million of deferred financing fees paid (including call premium of $12.5 million paid on the redemption of the Secured Notes in June 2015) in connection with refinancing of the Credit Facilities in June 2015. Refer to note 12 to the 2015 Financial Statements for additional information regarding the June 2015 refinancing. Debt Our long-term debt consists of the Senior Notes and the Credit Facilities. Our current corporate credit rating is Ba2 and B+ from Moody’s and Standard and Poor’s, respectively. A downgrade may increase our cost of borrowing and may negatively impact our ability to raise additional debt capital. As of December 31, 2015, we had total debt outstanding, excluding capital leases of $2,606.3 million, net of $1.8 million of unamortized original issue discount and $20.5 million of unamortized deferred financing fees. We were in compliance with all of our covenants related to our outstanding debt as of December 31, 2015. See note 12 to the 2015 Financial Statements for detailed information regarding our long-term debt. Contractual obligations The following table summarizes our contractual obligations as of December 31, 2015: 50 ConvaTec Healthcare B S.à r.l. and Subsidiaries ($ in millions) Long-term debt obligations, including interest(1) Lease obligations Purchase obligations(2) Total ______________________________ Total 2016 Payments Due by Period 2017 and 2018 2019 and 2020 $ 3,254.9 64.3 96.7 $ 198.5 18.3 42.7 $ 1,392.8 26.3 28.8 1,663.6 11.0 20.6 Thereafter — $ 8.7 4.6 3,415.9 $ 259.5 $ 1,447.9 $ 1,695.2 $ 13.3 $ $ (1) (2) Expected interest payments assume repayment of the principal amount of the debt obligations at maturity. Purchase obligations consist of agreements to purchase goods and services that are enforceable and legally binding which primarily include (i) capital expenditures, (ii) minimum inventory purchases, and (iii) obligations for warehouse, distribution, and freight services. The above table does not reflect obligations related to the Series 1, 2 and 3 PECs we issued to Avista Capital Partners and Nordic Capital (the "Sponsors") for an aggregate amount of €1,289.7 million ($2,026.7 million) at the time of the acquisitions. The PECs are mandatorily redeemable by us in 2047 or upon the occurrence of a liquidation event. The PECs are included within total liabilities, as presented in the 2015 Financial Statements, at an amount of $2,716.4 million (€2,500.9 million) and $2,879.1 million (€2,379.9 million), inclusive of accrued and unpaid interest of $1,315.6 million (€1,21 1.2 million) and $1,318.9 million (€1,090.2 million), for the years ended December 31, 2015 and 2014, respectively. See "Certain relationships and related party transactions - Mandatorily redeemable preferred equity certificates" and note 13 to the 2015 Financial Statements for further discussion of the PECs. In addition, the above table does not reflect (i) $32.4 million of total unrecognized tax benefit for uncertain tax positions because we cannot make a reliable estimate of the period in which the liability will be payable, if ever, and (ii) a commitment related to a service agreement entered in January 2016. See note 17 to the 2015 Financial Statement for further discussion related to the service agreement. Critical accounting policies and estimates The 2015 Financial Statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those that require application of management’s most subjective and/or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. We base our estimates on historical experience and other factors that we believe to be reasonable under the circumstances. On an ongoing basis, we review our estimates to ensure that these estimates appropriately reflect changes in our business and new information as it becomes available. If historical experience and other factors we use to make these estimates do not reasonably reflect future activity, our results of operations and financial condition could be materially impacted. The following is not intended to be comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in note 2 to the 2015 Financial Statements. The critical accounting policies described below are areas in which management's judgment in determining estimates and assumptions might produce materially different results. 51 ConvaTec Healthcare B S.à r.l. and Subsidiaries Revenue Recognition Our revenues are derived from sales of products and are recognized when substantially all the risks and rewards of ownership have transferred to the customer, there is persuasive evidence that an arrangement exists, the price is fixed and determinable, and collectability is reasonably assured. Generally, products are insured through delivery, and revenue is recognized upon the date of receipt by the customer. When all of the aforementioned revenue recognition criteria are not met, we defer revenue, until such time all of the criteria are met. Revenues are recognized net of provisions for estimated returns and chargebacks, discounts, rebates and estimated sales allowances based on historical experience and updated for changes in facts and circumstances, as appropriate. We establish these provisions concurrently with the recognition of revenue. Amounts collected from customers and remitted to government authorities, such as value-added taxes in foreign jurisdictions, are presented on a net basis in our Consolidated Statements of Operations and do not impact net product sales. We offer cash discounts for prompt payment and allowances. Provisions for cash discounts are estimated at the time of sale and recorded as direct reductions to accounts receivable and revenue. We estimate provisions for cash discounts and allowances based on contractual sales terms with customers, an analysis of unpaid invoices, and historical payment experience. Estimated cash discounts and allowances have historically been predictable and less subjective, due to the limited number of assumptions involved, the consistency of historical experience, and the fact that we generally settle these amounts shortly after incurring the liability. We continually monitor our product sales provisions and evaluate the estimates used as additional information becomes available. We make adjustments to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. We are required to make subjective judgments based primarily on our evaluation of current market conditions and trade inventory levels related to our products. This evaluation may result in an increase or decrease in the experience rate that is applied to current and future sales, or an adjustment related to past sales, or both. Share-Based Compensation Generally, compensation expense is recognized on a straight-line basis over the vesting period. Certain features of share-based awards require the awards to be accounted for as liabilities as opposed to equity. Liability awards are required to be updated to fair value at the end of each reporting period until settlement. Share-based compensation cost is measured at the grant date based on the fair value of the award. The fair value of our equity was estimated using an income approach and further substantiated with a market approach. The income approach was deemed to be the most indicative of our estimated fair value in an orderly transaction between market participants and was consistent with the methodology used for the equity valuation in prior years. Under the income approach, we determined fair value using the discounted cash flow method which was based on an analysis of our projected financial information, significant debt-free cash flow assumptions, discount rate, terminal value, and indication of value. Under the market approach, we utilized publicly-traded comparable company information to determined trailing and forward multiples that were used to value our equity for which the Black-Scholes pricing model was utilized. Inherent in the Black-Scholes model were assumptions related to expected volatility, option life, risk-free interest rate and dividend yield. The expected volatility was estimated based on historical volatilities of comparable companies. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the grant date with a term equal to the contractual term of the stock option. Contingencies In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including, among others, government investigations, product and environmental liability, and tax matters. We are required to accrue for such loss contingencies if it is probable that the outcome will be unfavorable and if the amount of the loss can be reasonably estimated. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range. Further, we do not recognize gain contingencies until realized. We evaluate our exposure to loss based on the progress of each contingency, experience in similar contingencies, and consultation with our legal counsel. We re-evaluate all contingencies as additional information becomes available. Given the uncertainties inherent in complex litigation and other contingencies, these evaluations can involve significant judgment about future events. The ultimate outcome of any litigation or other contingency may be material to our results of operations, financial condition, and cash flows. For a discussion of our current legal proceedings, see note 17 to the 2015 Financial Statements. 52 ConvaTec Healthcare B S.à r.l. and Subsidiaries Income Taxes The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax attributes are expected to be recovered or paid, and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment including the long-range forecast of future taxable income and the evaluation of tax planning strategies and ability to carry back any losses under the relevant tax law. Adjustments to the deferred tax valuation allowances are recorded in the period when such assessments are made. We apply the principles of the income tax accounting guidance that addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements as well as the determination of whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. In accordance with the aforementioned guidance, we evaluate all tax positions using a more-likely-than-not threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Differences between tax positions taken in a tax return and amounts recognized in the financial statements are recorded as adjustments to income taxes payable or receivable, or adjustments to deferred taxes, or both. Accounts Receivable Credit is extended to customers based on the evaluation of the customer’s financial condition. Creditworthiness of customers is evaluated on a regular basis. Accounts receivable consists of amounts billed and currently due from customers. An allowance for doubtful accounts is maintained for estimated losses that result from the failure or inability of customers to make required payments. In determining the allowance, consideration includes the probability of recoverability based on past experience and general economic factors. Certain accounts receivable may be fully reserved when specific collection issues are known to exist, such as pending bankruptcy. We charge off uncollectible receivables at the time it is determined the receivable is no longer collectable. We do not charge interest on past due amounts. The analysis of receivable recoverability is monitored and the bad debt allowances are adjusted accordingly. Accounts receivable are also reduced at the time of revenue recognition to reflect prompt pay discounts chargebacks. Goodwill Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. We assign goodwill recorded in connection with acquisitions to its six reporting units. The fair value of each reporting unit was estimated on the first day of the fourth quarter of 2015 and compared to its carrying value. In determining the fair value of each reporting unit, we use a weighted-average combination of both market and income approaches. The market approach to estimating fair value is based primarily on applying external market information to a historical earnings measure. The income approach to estimating fair value is based on a discounted value of estimated future cash flows of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then we will record an impairment loss for the excess of the carrying value of goodwill over its implied fair value. At October 1, 2015, we determined that none of the goodwill associated with our reporting units was impaired. Impairment of Long-Lived Assets Intangible assets with finite lives and other long-lived assets, such as property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate the recoverability of assets to be held and used by comparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the 53 ConvaTec Healthcare B S.à r.l. and Subsidiaries asset. In 2014, we recorded impairment charges of $10.1 million, in the aggregate, related to property, plant and equipment and finite-lived intangible assets. For further details, see note 9 and note 11 to the 2015 Financial Statements regarding the impairment charges on property, plant and equipment and finite-lived intangible assets, respectively. Indefinite-lived intangible assets consisting of trade names are tested for impairment annually, or more frequently if events or changes in circumstances between annual tests indicate that the asset may be impaired. Impairment losses on indefinite- lived intangible assets are recognized based solely on a comparison of their fair value to carrying value, without consideration of any recoverability test. A discounted cash flow analysis is typically used to determine fair value using estimates and assumptions that market participants would apply. Some of the estimates and assumptions inherent in a discounted cash flow model include the amount and timing of projected future cash flows, and the discount rate used to reflect the risks inherent in the future cash flows. A change in any of these estimates and assumptions could produce a different fair value, which could have a material impact on our results of operations. In 2015 and 2014, we recorded impairment charges in the aggregate of $12.2 million and $17.2 million, respectively, related to indefinite-lived trade names. Refer to note 11 to the 2015 Financial Statements for further details. New Accounting Standards Information regarding the recently issued new accounting guidance (adopted and not adopted as of December 31, 2015) is contained in note 2 to the 2015 Financial Statements. Quantitative and qualitative disclosure about market risk We are, in the normal course of business, exposed to a variety of market risks, including foreign exchange rate risk and interest rate risk. Our risk management strategy aims to minimize the adverse effects of these risks on our financial performance. We have not entered into any transactions in derivative financial instruments for trading purposes. Foreign currency risk We manufacture and sell our products in various countries around the world. As a result of the global nature of our operations, we are exposed to market risk due to changes in currency exchange rates; however our foreign currency risk is diversified. Our primary net foreign currency translation exposures are the Euro, British Pound Sterling, and Danish Krone.Where possible, we manage foreign currency risk by managing same currency revenues in relation to same currency expenses and strategically denominating our debt in certain functional currencies in order to match with the projected functional currency exposures within our operations and thereby minimizing foreign currency risk. As a result, the impact of the fluctuations in the market values of assets and liabilities and the settlement of foreign currency transactions are reduced. We currently do not utilize foreign currency forward contracts to reduce our foreign currency risk, although we continue to evaluate our foreign currency exposures in light of the current volatility in the foreign currency markets. Interest rate risk As of December 31, 2015, we had $745.0 million and €250.0 million ($271.6 million) principal amount of issued fixed rate A change in interest debt and $796.0 million and €751.2 million ($816.0 million) principal amount of variable rate debt. rates on variable rate debt impacts our pre-tax earnings, whereas a change in interest rates on fixed rate debt impacts the fair value of debt. We are subject to interest rate risk on our variable rate debt as changes in interest rates could adversely affect earnings and cash flows. A 100 basis-points increase in interest rates would have an annualized pre-tax effect of approximately $16.1 million in our Consolidated Statements of Operations and Cash Flows, based on current outstanding borrowings and effective interest rates on our variable rate debt. Our credit facility term loans are subject to a LIBOR or EURIBOR floor, therefore an increase in interest rates would only impact interest expense on those term loans to the extent LIBOR or EURIBOR exceeds the floor. Reconciliation to the Parent’s Financial Statements On August 12, 2013, ConvaTec Finance International S.A. (“CFI”), a subsidiary of the Parent and sister entity to CHB, successfully completed a $900.0 million PIK Notes offering, at an offering price of 99.0%. The net proceeds from the offering 54 ConvaTec Healthcare B S.à r.l. and Subsidiaries were used to repay PECs of the Parent in the amount of $873.1 million and to pay additional related fees and expenses. The PIK Notes mature on January 15, 2019 and are subject to cash interest payments of 8.25% every January 15 and July 15, commencing on January 15, 2014. PIK interest, if cash interest is not elected to be paid, will accrue at 9.00% per annum. All interest owed will be paid by CFI directly to the holders of the PIK Notes. The PIK Notes are recorded on the balance sheet of CFI, whose financial information is ultimately consolidated by the Parent. The PIK Notes are non-recourse to CHB and thus exclusively the obligation of CFI and the Parent. In order to fund CFI’s interest expense on the PIK Notes, it is anticipated that CHB will distribute certain accrued PEC interest to the Parent. The PECs allow for distribution of interest to the extent permitted by our restricted payment capacity, a specified leverage ratio and other provisions outlined in the Amended Credit Facilities Agreement and the Indenture governing the Senior Notes. In 2015, we made payments of $74.2 million, in the aggregate, of accrued PEC interest to the Parent. We anticipate that we will have the necessary restricted payment capacity to fund semi-annual cash interest payments to the Parent going forward. The cash interest payments are incremental to the interest due on our long-term debt and will reduce our operating cash flows going forward. The timing of our cash interest payments to the Parent will be on or around January 15 and July 15. On January 12, 2016, we made an additional payment of $37.1 million of accrued PEC interest to the Parent. As approved by the Board of Directors, the amount of the cash interest paid by CHB will reduce the equivalent amount of accrued PEC interest on CHB’s Consolidated Balance Sheet. As of December 31, 2015, the current portion of accrued PEC interest on CHB’s Consolidated Balance Sheet which approximated the amount of accrued interest on the PIK Notes on the Consolidated Balance Sheet of the Parent was $34.2 million. In connection with the PIK Notes offering, we are required to present a summary of the primary financial statement reconciliation differences between CHB and the Parent. Please refer to the “Presentation of financial information” in the beginning of the MD&A for further information regarding our financial presentation requirements. We believe that the 2015 Financial Statements of CHB, prepared in accordance with U.S. GAAP, fairly represent the operating activities of the Parent, with the exception of the differences discussed below. Prior to the PIK Notes offering, the primary differences between the consolidated financial statements of CHB and the Parent for each period were related to the management fees paid to our Sponsors, the accumulated value of the loan between CHB and the Parent resulting from the management fees paid, the amount of accrued interest on this loan. The management fee, including other related fees, results in $3.0 to $4.0 million of incremental general and administrative expenses per year on the Parent’s Consolidated Statements of Operations. Further differences resulting directly from the PIK Notes offering include incremental long-term debt on the Parent’s Consolidated Balance Sheet along with an incremental amount of capitalized deferred financing fees associated with the issuance of the PIK Notes, an incremental amount of mandatorily redeemable PECs liability on the balance sheet of CHB, differences in related interest expense and foreign currency remeasurement gains and losses generated from an on-lending arrangement of a long-term-investment nature. This on-lending arrangement was created between CFI and the Parent in the amount of $900.0 million, specifically as a result of the PIK Notes offering. Further details regarding the differences noted on each of the respective financial statements are as follows: Consolidated Balance Sheets (Unaudited) As of December 31, 2015, total assets and total liabilities combined with stockholder’s deficit differed by $100.9 million on the Parent’s Consolidated Balance Sheet (unaudited), as compared to the balance sheet of CHB. The differences are confined to the following line items: 55 ConvaTec Healthcare B S.à r.l. and Subsidiaries ($ in millions) Assets: Cash and cash equivalents Receivables, net Other assets(1) Total Assets Difference Liabilities and Stockholder's Deficit: Accounts payable, accrued expenses and other current liabilities Long-term debt Mandatorily redeemable preferred equity certificates Retained deficit Accumulated other comprehensive income (net of tax) Total Liabilities and Stockholder's Deficit Difference _______________________________ As of December 31, Parent CHB Differences $ $ $ $ 269.8 232.1 168.2 268.7 3,471.5 2,001.5 (2,798.6) 373.0 269.6 231.9 67.7 267.5 2,585.0 2,682.2 (2,866.1) 546.6 $ $ $ $ 0.2 0.2 100.5 100.9 1.2 886.5 (680.7) 67.5 (173.6) 100.9 (1) Primarily relates to the asset recognized as a result of the hedging agreement between the Parent and Cidron Healthcare Limited ("Cidron") (a related party, which is not included in the consolidated financial statements of the Parent) entered to eliminate exposure to Euro/ U.S. Dollar fluctuation associated with the re-measurement of an intercompany loan between the Parent and CFI. Consolidated Statements of Operations (Unaudited) In 2015, the total net loss for the Parent was $156.8 million, as compared to a total net loss for CHB of $209.0 million. The total difference of $52.2 million is primarily related to the foreign exchange adjustment due to the hedging agreement (as described above), which was partially offset by an incremental amount of interest expense, Sponsor fees, and foreign exchange impact on PIK interest expense payment recorded in the Parent’s unaudited Consolidated Statements of Operations. The Parent’s increased interest expense as compared to that of CHB is driven by an incremental amount of interest-bearing debt and a higher interest rate on a portion of that debt. Consolidated Statements of Cash Flows (Unaudited) As of December 31, 2015, total cash and cash equivalents on the Parent’s unaudited Consolidated Balance Sheet was $269.8 million, as compared to total cash and cash equivalents on CHB of $269.6 million. There was no significant difference in total net cash provided by or used in operating, financing or investing activities for the year ending December 31, 2015. 56 ConvaTec Healthcare B S.à r.l. and Subsidiaries Board of Directors The persons set forth below are the current members of our Board of Directors. Management Name Magnus Lundberg Paul Moraviec Toni Weitzberg Raj Shah Thomas Vetander Thompson Dean David Burgstahler Kunal Pandit Claes-Johan Geijer Els Alwyn Vincent Vigneron Position Chairman Director Director Director Director Director Director Director Director Director Director Magnus Lundberg Magnus Lundberg is the Chairman of the ConvaTec Board of Directors. Mr. Lundberg served as President and Chief Executive Officer ("CEO") of Phadia AB, a medical diagnostics company, from 1999 until 2011. Earlier, Mr. Lundberg served as Vice President of Chiron Corporation and President of Chiron Vaccine & Therapeutics, and held management positions at Pharmacia Corporation. Mr. Lundberg holds a Master of Science degree in Biology and Biochemistry from Abo Akademi in Turku, Finland. Mr. Lundberg is a member of several additional Boards of Directors, including Atos Medical AB (Chairman) and Airsonett AB (Chairman). Paul Moraviec Refer to "Leadership Team" section for further details. Toni Weitzberg Toni Weitzberg is a Partner at NC Advisory AB, advisor to the Nordic Capital funds. Mr. Weitzberg joined NC Advisory AB in 2000 from the Pharmacia group, where he held various positions including Senior Vice President of Europe at the Pharmacia & Upjohn Company. He earned a Master of Business Administration degree from the University of Wisconsin and a Bachelor of Science degree in Economics and Business Administration from the University of Uppsala. Mr. Weitzberg is also a member of the Boards of Directors of Acino and Handicare. Raj Shah Raj Shah is a Partner at NC Advisory LLP, advisor to the Nordic Capital funds. Dr. Shah joined Nordic Capital in 2015 from Goldman Sachs International, where he served since 2004 and most recently as Co-Head of EMEA Healthcare Investment Banking. Prior to that, Dr. Shah originally trained as a cardiac surgeon and is a Fellow of the Royal College of Surgeons. Thomas Vetander Thomas Vetander is a Principal at NC Advisory AB, advisor to the Nordic Capital funds. Mr. Vetander joined Nordic Capital in 2006 from McKinsey & Company in Stockholm, where he worked as a Management Consultant from 2004 to 2006. Mr. Vetander holds a Master of Science degree in Engineering Physics from the Royal Institute of Technology in Stockholm and a Bachelor of Science degree in Business Administration and Economics from the Stockholm University School of Business. Thompson Dean Thompson Dean is a Partner and at Avista Capital Partners. Mr. Dean was a of Avista Capital Partners in 2005. Prior to that, he led DLJ Merchant Banking Partners for 10 years as Partner and was Chairman of several DLJ Investment Committees. He holds a Master of Business Administration degree with high distinction from Harvard Business School where he was a Baker Scholar, and a Bachelor of Arts degree from the University of Virginia where he was an Echols Scholar. Mr. Dean is currently a member of several additional Boards including Acino Holdings, Sidewinder Drilling, Zest Anchors, Trimb Holding AB, Databank, and VWR International. David Burgstahler David Burgstahler is the President and Co-Managing Partner of Avista. He was a founding partner of Avista since 2005 and since 2009, has been President of Avista. Prior to forming Avista, he was a partner of DLJ Merchant 57 ConvaTec Healthcare B S.à r.l. and Subsidiaries Banking Partners. He was at DLJ Investment Banking from 1995 to 1997 and at DLJ Merchant Banking Partners from 1997 through 2005. Prior to that, he worked at Andersen Consulting (now known as Accenture) and McDonnell Douglas (now known as Boeing). He holds a Bachelor of Science in Aerospace Engineering from the University of Kansas and a Master of Business Administration from Harvard Business School. He currently serves as a Director of ACP Mountain Holdings, Inc., AngioDynamics Inc., INC Research Holdings, Lantheus Holdings, Inc., Strategic Partners, Inc., Osmotica Holdings Corp. and WideOpenWest, LLC. He previously served as a Director of Warner Chilcott plc and BioReliance Holdings, Inc. Kunal Pandit Kunal Pandit is a Principal at Avista Capital Partners. Mr. Pandit joined Avista Capital Partners in 2010. Prior to joining Avista, Mr. Pandit was at DLJ Merchant Banking Partners in London, and prior to that was a member of the leveraged finance group and the investment banking department at Lehman Brothers in London. Mr. Pandit received a Master of Arts degree and a Bachelor of Arts degree with honors from Cambridge University, as well as a Master of Business Administration degree with honors from the Wharton School at the University of Pennsylvania. He currently serves as a director of Acino Holdings, Trimb Holding AB and Guala Closures. Claes-Johan Geijer Claes-Johan Geijer is an independent Director and Advisor based in Luxembourg. Mr. Geijer has a background in international industrial corporations, venture capital and banking. He served in various management positions in Swedish Match, Stora and Lexmar in Sweden and abroad before moving into banking where he held various positions in Swedbank and Carnegie, most recently as Group Head of private banking in the Carnegie Group. Mr. Geijer holds a Bachelor of Science degree in Economics and Business Administration from the Stockholm School of Economics. Mr. Geijer is a member of several Boards of Directors within and outside of Luxembourg. Els Alwyn Els Alwyn is a Director of Nordic Capital Luxembourg companies. Ms. Alwyn joined Nordic Capital in May 2011. Previously, she worked at Nauta Dutilh and was admitted as an "Advocaat" to the Rotterdam Bar in 1997. Ms. Alwyn worked in the Corporate Finance teams of Norton Rose and Watson Farley Williams in Singapore, Gilbert & Tobin in Sydney and the investment funds team at Ogier in Jersey. Ms. Alwyn studied Law at the Erasmus University Rotterdam and holds a Master of Law degree. Vincent Vigneron Vincent Vigneron is the Finance Director of ConvaTec Luxembourg entities. Mr. Vigneron joined ConvaTec in 2010. Prior to that, he worked as an audit Senior Manager at PricewaterhouseCoopers in France and Luxembourg for 10 years, specializing in international structures. He earned a Master of Finance degree and a Master of Management, Audit and Accounting degree from the University of Orleans in France. 58 ConvaTec Healthcare B S.à r.l. and Subsidiaries Leadership Team The persons set forth below are the current members of our Leadership Team. Name Paul Moraviec Nigel Clerkin Ron Howell Tim Moran Antonio La Regina John Lindskog George Poole Michael Sgrignari Marc Reuss Adam Deutsch Douglas LeFort Fiona Adam Stephen Bishop Mads Haugaard Christian Hoengaard Robert Steele Position Chief Executive Officer Chief Financial Officer Chief Executive Officer, 180 Medical President Americas President EMEA President, B2B and Infusion Devices President APAC Executive Vice President, Operations Executive Vice President, Human Resources Executive Vice President and General Counsel Senior Vice President, Corporate Development Vice President and General Manager, Wound Therapeutics Vice President, Research & Development Vice President and General Manager, Continence & Critical Care Vice President and General Manager, Ostomy Care Executive Vice President, Quality and Regulatory Affairs Paul Moraviec Paul Moraviec is the CEO of ConvaTec. Mr. Moraviec joined ConvaTec in 2009 as President of EMEA, which is our largest geographic region. Mr. Moraviec has a track record of driving growth in major global healthcare companies across a number of medical device specialties including orthopedics, neurosurgery, diabetes and general surgery. Mr. Moraviec has held international leadership roles with Johnson & Johnson, Abbott Laboratories and Bausch and Lomb, as well as CEO roles with two early-stage venture capital funded companies. Mr. Moraviec holds a Master's degree in Marketing from Kingston University Business School in the U.K. Nigel Clerkin Nigel Clerkin is the Chief Financial Officer ("CFO") of ConvaTec. Mr. Clerkin was previously Executive Vice President and CFO of Elan Corporation, plc, a Dublin-based biotechnology company. He was part of a senior team that built significant shareholder value at Elan, culminating in its sale to Perrigo, a pharmaceutical manufacturer, in December 2013. Mr. Clerkin joined Elan in 1998 and held a series of roles in strategic planning and finance prior to being named CFO in 2011. Earlier in his career, Mr. Clerkin was an auditor with KPMG. He holds a Bachelor's and Master's degree in accounting from Queens University, Belfast, and is a fellow of Chartered Accountants Ireland. Ron Howell Ron Howell is CEO of 180 Medical, ConvaTec’s business partner and a leader in the home delivery of disposable, intermittent catheters and urologic medical supplies in the U.S. Mr. Howell has been part of the 180 Medical family since 2005. He was appointed CEO in 2015 after serving in various roles within the organization, most recently as Chief Operating Officer. Mr. Howell holds a Bachelor's degree in Organizational Leadership from Southern Nazarene University. Tim Moran Tim Moran is President of the Americas at ConvaTec. Mr. Moran joined ConvaTec in 2015 from Medtronic, where he was Vice President and General Manager of the Patient Care and Safety Division. Prior to Medtronic, Mr. Moran was promoted to roles of increasing responsibility in sales, marketing and general management within Tyco Healthcare and Covidien. Prior to joining Kendall, he held sales positions with a number of medical and communications technology firms in the U.S. Mr. Moran holds a Bachelor of Arts degree in Organizational Communication from the State University of New York at Geneseo. Antonio La Regina Antonio La Regina is President of ConvaTec's EMEA region. Mr. La Regina joined ConvaTec in 2006 as Managing Director for Italy. In 2011, he was appointed Vice President and General Manager of U.K./Ireland and Italy/ Greece. Most recently, he served as Vice President and General Manager for western and southern EMEA. Prior to joining ConvaTec, Mr. La Regina worked for Zambon Group and BMS in both Italy and France in a variety of commercial and 59 ConvaTec Healthcare B S.à r.l. and Subsidiaries functional roles. He holds a degree in Biology, a Ph.D in Pharmacology and completed the General Management Program at CEDEP-INSEAD Business School in Fontainebleau in France. He is a member of the Eucomed Board of Directors. John Lindskog John Lindskog is the President of Infusion Devices. Mr. Lindskog joined ConvaTec in 2008 when, as General Manager of Unomedical’s Infusion Device business unit, he helped lead the integration of Unomedical into ConvaTec. His 25 years of experience in the infusion devices industry began at Pharma-Plast, which later merged with Maersk Medical and became Unomedical. Mr. Lindskog holds a Bachelor's degree in Business Administration through the internal academy at the East Asiatic Company in Denmark, and a Graduate certificate in Business Administration from Copenhagen Business School. George Poole George Poole is President of ConvaTec's APAC region. Mr. Poole joined ConvaTec in 2015 from Medtronic, where he spent 14 years in leadership roles in commercial, marketing, operations and general management. For the last five years at Medtronic, Mr. Poole was a key member of Medtronic’s Asia Pacific management team, most recently serving as Vice President/Managing Director, Southeast Asia. Prior to Medtronic, he served in sales positions with Welch Allyn and Olympus America. Mr. Poole holds a Bachelor of Science degree in Economics from the State University of New York at Cortland. Michael Sgrignari Michael Sgrignari is Executive Vice President of Operations at ConvaTec. Mr. Sgrignari joined ConvaTec in 2015 from Medtronic's Covidien group, where he was Senior Vice President of Quality and Operations. Mr. Sgrignari joined Covidien’s predecessor company, Tyco Healthcare's U.S. Surgical Division, in 1991. He advanced through roles of increasing responsibility, and in 2007, as Vice President of Global Operations for Tyco Healthcare, he led the operations planning in the spin-off to form Covidien. Mr. Sgrignari holds a Bachelor of Science degree in Manufacturing Engineering from Boston University. Marc Reuss Marc Reuss is Executive Vice President of Human Resources at ConvaTec. Mr. Reuss joined ConvaTec in 2015 from Novartis, where he was Global Head of Human Resources at the Vaccines and Diagnostics division, and, most recently, at Sandoz, Novartis' large generics division. Previously, Mr. Reuss spent eight years with Boston Scientific, serving in senior international Human Resources roles, and began his career at a number of leading aerospace, financial services and high-technology companies. He holds a Bachelor of Arts degree in Psychology from Potsdam College in New York state and a Master's degree in Human Resources from Emmanuel College in Boston. Adam Deutsch Adam Deutsch is Executive Vice President and General Counsel of ConvaTec. Mr. Deutsch joined ConvaTec in 2014 from Biomet, Inc., a leading global medical device company. His roles included Corporate Vice President and Associate General Counsel - Litigation, Investigations & Risk Management, as well as Chief Compliance Officer. Prior to joining Biomet, Mr. Deutsch was a partner and associate with prominent law firms based in Chicago. He holds a Bachelor of Arts degree from Rutgers University and a Juris Doctor degree from New York University School of Law. Douglas LeFort Douglas LeFort is Senior Vice President of Corporate Development at ConvaTec. Mr. LeFort joined ConvaTec in 2011 from Freehand Surgical Ltd., where he was CEO from 2009 to 2011. Prior to joining Freehand Surgical Ltd., he held leadership positions with Abbott Laboratories Diabetes Care Division, Chiron Corporation and SC Johnson Inc. Mr. LeFort holds a Master of Business Administration from Henley Management College in the U.K. Fiona Adam Fiona Adam is the Vice President and General Manager of ConvaTec’s Wound Therapeutics business. Ms. Adam joined ConvaTec in 1997 in the U.K. and later moved to the U.S. to manage the global commercialization of Flexi- Seal® FMS in 2004. Prior to ConvaTec, Ms. Adam held sales and marketing roles at both Baxter Healthcare and Colgate Palmolive. Ms. Adam graduated from The Royal Veterinary College, London, and completed her business studies at The Chartered Institute of Marketing and Ashridge Business School in the U.K. Stephen Bishop Stephen Bishop is the Vice President, Research & Development at ConvaTec. Mr. Bishop joined ConvaTec in 1990. Prior to joining ConvaTec, Mr. Bishop worked in R&D at Amersham International and UniLever’s Unipath division. Mr. Bishop holds a Bachelor's degree in Biochemistry from the University of Southampton and a postgraduate diploma in Industrial Pharmaceutical Studies from the University of Brighton, and is a Member of the Society of Biology. Mads Haugaard Mads Haugaard is the Vice President and General Manager of ConvaTec’s Continence & Critical Care business. Mr. Haugaard joined ConvaTec in 2008 as Marketing Manager of Unomedical’s Infusion Device business unit and has since held several positions as Marketing Director and Sales Director in ConvaTec’s business-to-business franchise. Prior 60 ConvaTec Healthcare B S.à r.l. and Subsidiaries to joining ConvaTec, Mr. Haugaard held international marketing roles with Unomedical and Radiometer Medical. Mr. Haugaard holds a Master’s degree in International Business and Modern Languages from Odense University, Denmark. Christian Hoengaard Christian Hoengaard is Vice President and General Manager of Ostomy Care at ConvaTec. Mr. Hoengaard joined ConvaTec in 2015 from Coloplast, where he held a number of senior roles in global marketing and sales, most recently as Global Head of Consumer Marketing and Sales. Prior to joining Coloplast, Mr. Hoengaard was Global Head of Marketing at Damco International, part of global shipping conglomerate Maersk. He holds a Master of Science in Economics and Business Administration from Copenhagen Business School. He also attended Ashridge Business School and London Business School. Robert Steele Robert Steele is the Executive Vice President of Quality and Regulatory Affairs. Mr. Steele joined ConvaTec in 2014 from Stryker. His most recent role was Vice President of Regulatory Affairs, Quality Assurance and Clinical. Prior to Stryker, Mr. Steele held a variety of roles with medical technologies company KCI, including Vice President of Global Quality. Mr. Steele began his career as an engineer working at medical device manufacturing companies in the U.K. Mr. Steele holds a Bachelor of Arts degree in Electro Mechanical Engineering from Open University as well as two National Certificates in Mechanical Engineering and one in Electronic Engineering. He is a Chartered Engineer and Chartered Quality professional. 61 ConvaTec Healthcare B S.à r.l. and Subsidiaries Principal Shareholders The following table sets forth certain information concerning the significant shareholders of the Company. The Company is a wholly owned subsidiary of the Parent. The Parent is a wholly owned subsidiary of Cidron, which in turn is wholly owned by Nordic Capital and Avista Capital Partners. Name of Shareholder Nordic Capital(2) Avista Capital Partners(3) Total _______________________________ Total Percentage of Shares Beneficially Owned (%)(1) 69.85% 30.15% 100.00% (1) (2) (3) Nordic Capital and Avista Capital Partners ownership is shown pre-management dilution. Refer to note 13 to the 2015 Financial Statements in regards to management’s equity ownership in the Company. Nordic Capital Fund VI, Nordic Capital Fund VII and certain co-investors. Avista Capital Partners LP, Avista Capital Partners II LP and their affiliated funds and co-invest vehicles. The following is a brief description of each of our significant beneficial shareholders: Nordic Capital Nordic Capital private equity funds create value in their investments through committed ownership and by targeting strategic development and operational improvements. Founded in 1989, Nordic Capital was one of the private equity pioneers in northern Europe and has invested in a large number of companies operating in different sectors and regions. Nordic Capital’s core investment principles are based on a dedicated partnership with the management of its portfolio companies. Nordic Capital has significant experience in the healthcare sector, currently owning nine healthcare companies and having previously owned a further nine. Avista Capital Partners Founded in 2005, Avista Capital Partners is a leading private equity firm with offices in New York, London, and Houston. Avista Capital Partners strategy is to make controlling or influential minority investments in growth oriented healthcare, energy, media, consumer and industrial companies. Through its team of seasoned investment professionals and industry experts, Avista Capital Partners seeks to partner with exceptional management teams to invest in and add value to well- positioned businesses. Avista Capital Partners has significant experience in the healthcare sector, having completed fifteen healthcare investments since Avista Capital Partners closed on its inaugural fund. 62 ConvaTec Healthcare B S.à r.l. and Subsidiaries Certain Relationships and Related Party Transactions The following is a summary of certain provisions of the instruments evidencing our material indebtedness. This summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, the underlying documents. In addition, please note that the provisions outlined below reflect facts and information about the debt instruments as of December 31, 2015. For further information regarding our existing indebtedness, please refer to note 12 and note 13 to the 2015 Financial Statements. Management agreement In connection with the acquisition of ConvaTec from BMS, on August 1, 2008, our Parent entered into a management agreement with Nordic Capital VII Limited, a Jersey limited company (together with any investment funds managed or advised by such entity, “Nordic”), Avista Capital Holdings, LP, a Delaware limited partnership (together with any investment funds managed or advised by such entity, “Avista”), and Cidron pursuant to which Nordic and Avista provide us and our affiliates with financial advisory and strategic planning services (the “Management Agreement”). Pursuant to the Management Agreement, we pay, on behalf of our Parent, Nordic an annual fee of $2.1 million and Avista an aggregate annual fee of $0.9 million, in each case payable in equal quarterly installments. In the event that Nordic and its affiliates hold less than 10% of the outstanding ordinary shares of Cidron, the fee payable to Nordic shall be decreased to $0. In the event that Avista and its affiliates hold less than 10% of the outstanding ordinary shares of Cidron, the fee payable to Avista shall be decreased to $0. In addition, in the event of any subsequent business combination, including a sale of the business or an initial public offering of common stock (a “Subsequent Transaction”), payment will be made to each of Nordic and Avista, on a pro rata basis in proportion to their respective equity ownership immediately prior to such Subsequent Transaction, a fee which is customary in amount for such transactions, provided that such fee is approved by the Board of Directors of Cidron and that such fee shall not exceed 2% of the transaction value of such Subsequent Transaction. The Management Agreement shall renew automatically on an annual basis unless terminated because neither Nordic nor Avista continue to hold at least 10% of the outstanding ordinary shares of Cidron or Cidron initiates an initial public offering of equity of Cidron or its successor entity. In the event of a transaction which results in termination of the Management Agreement, a lump sum payment will be made to Nordic and Avista in an amount equal to the aggregate fee which in each case would otherwise be payable to them during the period from the closing of such transaction until the completion of the then-remaining initial term or renewal term of the Management Agreement. Pursuant to the Management Agreement, our Parent also agreed to pay to or on behalf of each of Nordic and Avista, promptly as billed (i) all reasonable out-of-pocket expenses incurred by Nordic and Avista in connection with the services rendered under the Management Agreement, (ii) all reasonable out-of-pocket expenses incurred by Nordic and Avista in connection with its investment in Cidron including, without limitation, its continued ownership of shares of the capital stock of Cidron, and (iii) all reasonable and documented out-of-pocket expenses incurred by each director appointed to the board of directors of a ConvaTec company in connection with attending regular and special meetings of such board of directors and any committee thereof. Also, we paid, on behalf of our Parent, certain fees to Nordic and Avista in connection with the ConvaTec Acquisition and the Unomedical Acquisition. In the event that a payment in respect of the annual fee payable to Nordic or Avista would result in a breach or event of default pursuant to an instrument of indebtedness to which any of the ConvaTec companies are a party (the “Indebtedness”) such payment shall not be paid to the extent that the payment of such amount would result in such breach or default, but instead shall be accrued on the books of the Parent and shall bear interest at 8.0% per annum. Furthermore, pursuant to the Management Agreement, the Parent shall not agree to any amendment of the terms of the Indebtedness which would specifically prohibit the payment of the annual fees under the Management Agreement or impose any higher financial test ratio or other pre- condition more onerous than any terms of the Indebtedness in effect on the date of the Management Agreement. The Parent also agreed that, in the event that any ConvaTec companies incur additional indebtedness, such company shall not grant in favor of the holders of such additional indebtedness a covenant or right specifically prohibiting the payment of the annual fees under the Management Agreement or imposing any higher financial test ratio or other pre-condition more onerous than is applicable to the Indebtedness. The Parent also agreed (i) to indemnify Nordic, Avista and their respective affiliates, partners, directors, officers, employees, agents and controlling persons for any and all losses, suits, proceedings, demands, judgments, claims, damages and liabilities 63 ConvaTec Healthcare B S.à r.l. and Subsidiaries relating to or arising out of the services contemplated by the Management Agreement and (ii) to reimburse all costs and expenses in connection with any pending or threatened claim, action or proceeding arising there from, except where such loss is found to have resulted from the indemnified party’s willful misconduct or gross negligence. Loan facility agreement Additionally, we entered into a loan agreement with Cidron. Per this agreement, money will be loaned to Cidron to enable Cidron to repurchase Management Equity Plan Units that have been issued to employees or directors. Interest on the loan accrues at 7.0% per annum. The outstanding loan and interest shall be due and payable at Cidron’s option. Mandatorily redeemable preferred equity certificates In conjunction with the ConvaTec and Unomedical acquisitions and related transactions, we issued Series 1, 2 and 3 preferred equity certificates for an aggregate amount of €1,289.7 million ($2,026.7 million) at the time of the acquisitions to the Parent. In accordance with their terms, the PECs are mandatorily redeemable by us upon the occurrence of certain events, including maturity of the Series 1 and 2 PECs on July 27, 2047 and the Series 3 PECs on August 27, 2047 or our liquidation (which includes voluntary or involuntary liquidation, insolvency, dissolution, or winding up of our affairs). Provided that a certain consolidated leverage test is met and no event of default is continuing or will arise, we may also voluntarily redeem, prepay, refinance or convert into equity any or all of the PECs in cash, shares, new PECs or property subject to a specified cap. PECs have priority over the common and preferred stock in the distribution of dividends. PECs were entitled to interest equivalent ranging from approximately 13% to 14% of the par value per annum on a cumulative basis, which was amended effective July 1, 2011 to a range of 7% to 9% of the par value per annum on a cumulative basis. PEC interest accrues monthly and compounds on an annual basis. On a redemption (whether mandatory or voluntary), the accrued but unpaid interest on the PECs shall be payable only if and to the extent that we can make any payment out of funds available net of tax, we will not be insolvent after making such payment and such payment is permitted under the agreement governing the existing Credit Facilities. The par value of the PECs shall be payable only if and to the extent that we will not be insolvent after making such payment and such payment is permitted under the agreement governing the existing Credit Facilities. With respect to payment rights, redemption and rights upon liquidation, the PECs rank in priority to our share capital but subordinate to all our other present and future obligations including the existing Credit Facilities and the Notes. The PECs are also subject to the subordination agreement described below under "Subordination agreement”. The holders of the PECs do not have voting rights in respect to us by reason of ownership of the PECs. The PECs can only be transferred to other PEC holders, shareholders or affiliates of PEC holders or shareholders, and our consent is required to each transfer. The PECs are included within total liabilities, as presented in our 2015 Financial Statements, at an amount of $2,716.4 million (€2,500.9 million) and $2,879.1 million (€2,379.9 million), inclusive of accrued and unpaid interest of $1,315.6 million (€1,21 1.2 million) and $1,318.9 million (€1,090.2 million ) for the years ended December 31, 2015 and 2014, respectively. Subordination agreement Pursuant to a Subordination Agreement between, among others, CHB, ConvaTec Healthcare C S.à r.l., ConvaTec Healthcare D S.à r.l. (collectively, the “Subordinated Obligors”), the Agent on behalf of the Lenders under the existing Credit Agreement and the agent on behalf of the holders of the Senior Notes (collectively, the “Senior Representatives”), the PECs are subordinated in right of payment to the payment in full of the obligations under the Credit Facilities and the Senior Notes (collectively, the “Senior Obligations”). The Subordinated Obligors have agreed that until the payment in full of the Senior Obligations (i) in the event of any bankruptcy proceeding involving any borrower or guarantor of the Senior Obligations, no distribution in cash, securities or other property will be made to the Subordinated Obligors on account of the PECs, (ii) subject to certain exceptions set forth in the documentation relating to the Senior Obligations, distributions in cash, securities or other property to the Subordinated Obligors on account of the PECs will be restricted, (iii) no enforcement actions will be taken with respect to the PECs, and (iv) if any payments or distributions with respect to the PECs are made in violation of the Subordination Agreement, the Subordinated Obligor receiving such distribution will pay such amounts over to the Senior Representatives. 64 ConvaTec Healthcare B S.à r.l. and Subsidiaries Description of Certain Financing Arrangements The following is a summary of certain provisions of the debt instruments evidencing our material indebtedness. This summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, the underlying documents. In addition, please note that the provisions outlined below reflect facts and information about the debt instruments as of December 31, 2015. For further information regarding our existing indebtedness, please refer to note 12 and note 13 to the 2015 Financial Statements and “Certain relationships and related party transactions—Mandatorily redeemable preferred equity certificates” within this Annual Report. The Amended Credit Facilities Agreement Our Amended Credit Facilities Agreement consists of the Credit Facilities as follows: (i) $800.0 million U.S Dollar and €755.0 million term loans, (ii) a $200.0 million Revolving Credit Facility, and (iii) incremental unfunded term facilities (the "Incremental Term Facilities"), which will be available on the terms set out below. The Revolving Credit Facility makes available $200.0 million of committed financing of which up to $40.0 million will be available for utilization by way of issuance of letters of credit and up to $25.0 million for borrowings on same-day notice, referred to as swingline loans. Borrowings under the Revolving Credit Facility are used to finance our general corporate and working capital needs and are available for drawing in U.S. Dollars, Euros, and British Pound Sterling. The Incremental Term Facilities, as amended, are unfunded commitments and may be available in one or more additional tranches of term loans or an increase to one or more tranches of existing term loans denominated in either U.S. Dollars and/ or Euros or an increase to the commitments under the Revolving Credit Facility provided that a certain leverage ratio is not exceeded and we satisfy certain requirements, including: no default or event of default, pro forma compliance with financial covenants, minimum borrowing amounts of $15.0 million and a maturity date and weighted average life-to-maturity of each individual loan within the Incremental Term Facilities that is greater than the weighted average maturity date of the Term Loan Facilities. Additionally, should the yield on the Incremental Term Facilities exceed the yield on the tranche of the Term Loan Facilities denominated in the same currency as such Incremental Term Facilities by more than 0.50%, then the yield on such tranche of the Term Loan Facilities will automatically increase such that the yield on such tranche of the Term Loan Facilities shall be 0.50% below the yield on the Incremental Term Facilities. The borrowers under the Credit Facilities are ConvaTec Inc., ConvaTec Healthcare E S.A. (the “Issuer”), ConvaTec Dominican Republic, Inc., ConvaTec Limited, and ConvaTec Holdings U.K. Limited (collectively, the "Borrowers"). The Credit Facilities are guaranteed by each of the borrowers along with certain of our remaining wholly-owned subsidiaries, which generate the majority of our consolidated Adjusted EBITDA (as defined in “EBITDA and Adjusted EBITDA” in the MD&A within this Annual Report). The Borrowers along with certain of our wholly-owned subsidiaries that guarantee the Credit Facilities are herein after referred to as the “Guarantors”, as defined in the Amended Credit Facilities Agreement. JPMorgan Chase Bank, N.A is both the collateral agent (the “Collateral Agent”) and administrative agent (the “Administrative Agent”) under the Amended Credit Facilities Agreement. As security for our obligations under the Credit Facilities, the Borrowers and certain of the other Guarantors have granted an all asset lien subject to some exceptions. Repayments and prepayments The Credit Facilities will mature on June 15, 2020, provided that such date will be accelerated to (i) September 15, 2018 if more than 10% of the principal amount of the Senior Notes remain outstanding on such date or (ii) October 15, 2018 if more than 10% of the PIK Notes remain outstanding on such date. Any amounts still outstanding under the respective facilities at such times will be immediately due and payable. Subject to certain conditions, we may voluntarily prepay our utilizations under the Credit Facilities in a minimum amount of $1.0 million (or its equivalent) for term loans or revolving loans and $100,000 (or its equivalent) for swingline loans. Amounts repaid under the Term Loan Facilities may not be reborrowed. We may also voluntarily permanently cancel all or part of the available revolving commitments under the Credit Facilities in a minimum amount of $1.0 million (or its equivalent) by giving three business days’ prior notice to the Administrative Agent under the Credit Facilities. In addition to voluntary prepayments, we are required to mandatorily prepay the Term Loan Facilities in full or in part in certain circumstances and subject to certain criteria, from the proceeds of asset sales above a specified threshold, the issuance 65 ConvaTec Healthcare B S.à r.l. and Subsidiaries or incurrence of debt and from excess cash flow. Prior to the Refinancing, during the second quarters of 2015 and 2014, we made mandatory repayments of $43.6 million and $73.5 million, respectively, for excess cash retained in the business. In addition, in May 2015, we also made principal payment of $4.1 million related to the Credit Facilities. During the six months ended December 31, 2015, we made the scheduled September and December 2015 amortization payments applicable to the Credit Facilities, resulting in an aggregate principal reduction of $8.2 million. At December 31, 2015, we estimated that we will make a mandatory prepayment of approximately $17.4 million in the second quarter of 2016. The estimated 2016 mandatory prepayment will be applied against the remaining quarterly installments due under the Term Loan Facilities and then to the remaining installments thereafter on a pro rata basis, in accordance with the terms outlined in the Amended Credit Facilities Agreement. Interest and fees Borrowings under the Credit Facilities bear interest at either a Euro (EURIBOR) or U.S. Dollar (LIBOR) base rate, or an ABR (as defined below). EURIBOR interest is associated with borrowings under the Term Loan Facility denominated in Euros while borrowings under the Term Loan Facility denominated in Dollars may, at our option, be subject to LIBOR interest or ABR. Borrowings under the Revolving Credit Facility denominated in Euros may bear interest at either ABR or EURIBOR and borrowings denominated in any currencies other than Euros (including U.S. Dollars) may bear interest at either ABR or LIBOR. ABR, as defined in the Amended Credit Facilities Agreement, is the greater of (a) the Prime Rate (as defined in the Amended Credit Facilities Agreement), (b) the Federal Funds Effective Rate (as defined in the Amended Credit Facilities Agreement) plus 0.50% and (c) the Eurodollar Rate (as defined in the Amended Credit Facilities Agreement) for a one-month interest period plus 1.00%. The applicable margins for borrowing under the Term Loan Facilities are 3.25% with respect to both EURIBOR and LIBOR borrowings and 2.25% with respect to ABR borrowings. The applicable margins for revolving borrowings are 3.75% with respect to EURIBOR and LIBOR borrowings and 2.75% with respect to ABR borrowings. LIBOR and EURIBOR are each subject to a 1.0% floor and ABR margin is subject to a floor of 2.0%, in each case, for borrowings under the Term Loan Facilities. Each margin will step down by 25 basis points upon decreasing our consolidated total net leverage ratio to 3.50 to 1.00 or less. We are required to pay a commitment fee of 0.75% per annum, quarterly in arrears, on available but unused commitments under the Revolving Credit Facility. We are also required to pay fees related to the issuance of letters of credit and certain fees to the Administrative Agent and the security agent in connection with the Credit Facilities. Covenants The Credit Facilities contain customary operating and negative covenants including but not limited to covenants limiting: • • • incurrence of indebtedness; incurrence of liens; guarantee of obligations; • mergers, consolidations, liquidations, dissolutions and other fundamental changes; • • • • • • • sales of assets; dividends and other payments in respect of capital stock subject to an available amount built by retained excess cash flow; acquisitions; prepayments of debt and modifications of debt and organizational documents in a manner material and adverse to the Lenders; transactions with affiliates; changes in fiscal year; negative pledge clauses and clauses restricting subsidiary distributions; and 66 ConvaTec Healthcare B S.à r.l. and Subsidiaries • changes in lines of business. The Credit Facilities also require the Borrowers and each guarantor to observe certain customary affirmative covenants. Each set of annual and quarterly financial statements provided by us to the Administrative Agent under the Credit Facilities include a consolidated balance sheet, income and cash flow statement. Financial covenants Our financial and operating performance are monitored by financial covenants, which require us to ensure that the ratio of Consolidated First Lien Indebtedness minus Eligible Cash to Consolidated EBITDA, each as defined in the Amended Credit Facilities Agreement, does not exceed an agreed level at the end of any fiscal quarter when there are any loans or letters of credit in excess of $10 million (unless cash collateralized at 103% of their stated value) outstanding under the Revolving Credit Facility. Events of default The Credit Facilities contain customary events of default (subject in certain cases to agreed grace periods, thresholds and other qualifications), including but not limited to the following: • • nonpayment of principal when due; nonpayment of interest, fees or other amounts; • material inaccuracy of a representation or warranty when made; • • • • violation of certain covenants; cross default to material indebtedness (including a cross default with respect to an Event of Default under, and as defined in, the Indentures); bankruptcy and related insolvency events of ConvaTec or its subsidiaries (other than immaterial subsidiaries); certain ERISA/pension obligation events; • material judgments; • • • actual or asserted invalidity of any guarantee, security document or subordination provisions or non-perfection of security interest; changes in the passive holding company activity of ConvaTec Healthcare B S.à r.l., ConvaTec Healthcare C S.à r.l. or ConvaTec Healthcare D S.à r.l.; and a change of control. The occurrence of an Event of Default (as defined in the Amended Credit Facilities Agreement) would, subject to agreed grace periods, thresholds and other qualifications, allow the lenders to accelerate all or part of the outstanding utilizations and/or terminate their commitments and/or declare all or part of their utilizations payable on demand and/or declare that cash cover in respect of letter of credit facilities is immediately due and payable. Governing law The Credit Facilities and any non-contractual obligation arising out of or in connection with it are governed by and construed and interpreted in accordance with New York law. Intercreditor Agreement The Collateral Agent, the Administrative Agent, as authorized representative for lenders under the Credit Facilities, and Deutsche Trustee Company Limited, as authorized representative for the holders of the Secured Notes, entered into an intercreditor agreement (as the same may be amended from time to time, the “Intercreditor Agreement”) on December 22, 2010. The Secured Notes were terminated and paid off simultaneously with an amendment to the Credit Facilities on June 67 ConvaTec Healthcare B S.à r.l. and Subsidiaries 15, 2015 and so the Intercreditor Agreement no longer governs the relationship between the holders of the Secured Notes and the lenders under the Credit Facilities. The Intercreditor Agreement was not terminated, however, as it may be amended from time to time in the future to add other parties (or their authorized representative) holding other indebtedness permitted to be secured on a first lien basis ( “Other First Lien Obligations”) that is permitted to be incurred under the Credit Facilities and that is permitted to be secured by first priority liens on the assets and property (such assets and property, the “Shared Collateral”) of the Issuer and the Guarantors that secure the obligations under the Credit Facilities (such obligations, including obligations under certain specified swap agreements and cash management agreements with lenders and their affiliates, the “Credit Agreement Obligations”). If additional Other First Lien Obligations are added under the Intercreditor Agreement in the future, the “Requisite Holders” will have the right to direct the Collateral Agent with respect to foreclosing upon, and taking other actions with respect to, the Shared Collateral, and the holders of each other series of First Lien Obligations will not have the right to take actions with respect to the Shared Collateral. “Requisite Holders” means (i) at any time the aggregate principal amount of the Credit Agreement Obligations is greater than 25% of the aggregate principal amount of the sum of the Credit Agreement Obligations and the Other First Lien Obligations (together, the “First Lien Obligations”), the holders of a majority of the outstanding principal amount of the Credit Agreement Obligations at such time; provided that at any time after the Other Authorized Representative Enforcement Date and during which the conditions giving rise to such Other Authorized Representative Enforcement Date are continuing and for so long as the Requisite Holders as determined pursuant to this clause (i) (without giving effect to this proviso) shall not have directed the Collateral Agent to commence any enforcement actions under the Intercreditor Agreement, the “Requisite Holders” shall be the holders of a majority in aggregate principal amount of the then outstanding Other First Lien Obligations and (ii) at any time the aggregate principal amount of the Credit Agreement Obligations is equal to or less than 25% of the aggregate principal amount of the First Lien Obligations, the holders of a majority of the outstanding principal amount of any then outstanding First Lien Obligations. “Other Authorized Representative Enforcement Date” means the date which is 150 days (throughout which 150-day period the aggregate principal amount of the Other First Lien Obligations is at least 50.1% of the aggregate principal amount of the First Lien Obligations) after the occurrence of both (i) an Event of Default (under and as defined in any agreement governing any Other First Lien Obligations) and (ii) the Collateral Agent’s and each other authorized representative’s receipt of written notice from the authorized representative with respect to the agreement referred to in clause (i) certifying that (x) the aggregate principal amount of the Other First Lien Obligations is at least 50.1% of the aggregate principal amount of the then outstanding First Lien Obligations and that an Event of Default (under and as defined in the agreement governing the Other First Lien Obligations for which it is the authorized representative) has occurred and is continuing and (y) such Other First Lien Obligations are currently due and payable in full (whether as a result of acceleration thereof or otherwise) in accordance with the terms of such agreement; provided that the Other Authorized Representative Enforcement Date shall be stayed and shall not occur and shall be deemed not to have occurred with respect to any Shared Collateral (1) at any time the Administrative Agent or the Collateral Agent (on behalf of the Administrative Agent or the other Secured Parties (as defined in the Credit Facilities)) has commenced and is diligently pursuing any enforcement action with respect to such Shared Collateral or (2) at any time the grantor that has granted the security interest in such Shared Collateral is then a debtor under or with respect to (or otherwise subject to) any insolvency or liquidation proceeding. Only the Collateral Agent shall act or refrain from acting with respect to the Shared Collateral (including with respect to any intercreditor agreement with respect to any Shared Collateral), and then only on the instructions of the Requisite Holders, (ii) the Collateral Agent shall not follow any instructions with respect to such Shared Collateral (including with respect to any intercreditor agreement with respect to any Shared Collateral) from any holder of First Lien Obligations other than the Requisite Holders and (iii) no other holder of First Lien Obligations (other than the Requisite Holders) shall or shall instruct the Collateral Agent to, commence any judicial or non-judicial foreclosure proceedings with respect to, seek to have a trustee, receiver, liquidator or similar official appointed for or over, attempt any action to take possession of, exercise any right, remedy or power with respect to, or otherwise take any action to enforce its security interest in or realize upon, or take any other action available to it in respect of, any Shared Collateral (including with respect to any intercreditor agreement with respect to any Shared Collateral), whether under any agreement governing First Lien Obligations, applicable law or otherwise. No holder of First Lien Obligations will contest, protest or object to any foreclosure proceeding or action brought by the Collateral Agent or any other exercise by the Collateral Agent of any rights and remedies relating to the Shared Collateral, or to cause the Collateral Agent to do so. 68 ConvaTec Healthcare B S.à r.l. and Subsidiaries If an Event of Default (as defined in the applicable agreement governing First Lien Obligations) has occurred and is continuing, and the Collateral Agent is taking action to enforce rights in respect of any Shared Collateral, or any distribution is made in respect of any Shared Collateral in any bankruptcy case of the Issuer or the Guarantors or any holder of First Lien Obligations receives any payment pursuant to any intercreditor agreement (other than the Intercreditor Agreement) with respect to any Shared Collateral, then the proceeds of any sale, collection or other liquidation of any such collateral and the proceeds of any such distribution (subject, in the case of any such distribution, to the immediately following paragraph) to which the First Lien Obligations are entitled under any intercreditor agreement (other than the Intercreditor Agreement) shall be applied among the First Lien Obligations on a ratable basis, after payment of all amounts owing to the Collateral Agent. Notwithstanding the foregoing, with respect to any Shared Collateral for which a third party (other than a holder of First Lien Obligations) has a lien or security interest that is junior in priority to the security interest of any series of First Lien Obligations but senior (as determined by appropriate legal proceedings in the case of any dispute) to the security interest of any other series of First Lien Obligations (such third party an “Intervening Creditor”), the value of any Shared Collateral or proceeds which are allocated to such Intervening Creditor shall be deducted on a ratable basis solely from the Shared Collateral or proceeds to be distributed in respect of the series of First Lien Obligations with respect to which such impairment exists. If the Issuer or any Guarantor becomes subject to any bankruptcy case, the Intercreditor Agreement provides that if Issuer or any Guarantor shall, as debtor(s)-in-possession, move for approval of financing (“DIP Financing”) to be provided by one or more lenders (the “DIP Lenders”) under Section 364 of the U.S. Bankruptcy Code or the use of cash collateral under Section 363 of the U.S. Bankruptcy Code, each holder of First Lien Obligations agrees that it will raise no objection to any such financing or to the liens on the Shared Collateral securing the same (“DIP Financing Liens”) or to any use of cash collateral that constitutes Shared Collateral, if the Requisite Holders support such DIP Financing or such DIP Financing Liens or use of cash collateral (and (i) to the extent that such DIP Financing Liens are senior to the liens on any such Shared Collateral for the benefit of the Requisite Holders, each other holder of First Lien Obligations will subordinate its Liens with respect to such Shared Collateral on the same terms as the liens of the Requisite Holders (other than any liens of any holders of First Lien Obligations constituting DIP Financing Liens) are subordinated thereto, and (ii) to the extent that such DIP Financing Liens rank pari passu with the liens on any such Shared Collateral granted to secure the First Lien Obligations of the Requisite Holders, each other holder of First Lien Obligations will confirm the priorities with respect to such Shared Collateral as set forth herein), in each case so long as (A) the holders of First Lien Obligations of each series retain the benefit of their liens on all such Shared Collateral pledged to the DIP Lenders, including proceeds thereof arising after the commencement of such proceeding, with the same priority vis-a-vis all the other holders of First Lien Obligations (other than any liens of the holders of First Lien Obligations constituting DIP Financing Liens) as existed prior to the commencement of the bankruptcy case, (B) the holders of First Lien Obligations of each series are granted liens on any additional collateral pledged to any holders of First Lien Obligations as adequate protection or otherwise in connection with such DIP Financing or use of cash collateral, with the same priority vis- a-vis the holders of First Lien Obligations as set forth in the Intercreditor Agreement, (C) if any amount of such DIP Financing or cash collateral is applied to repay any of the First Lien Obligations, such amount is applied pursuant to the terms of the Intercreditor Agreement and (D) if any holders of First Lien Obligations are granted adequate protection with respect to the First Lien Obligations subject to the Intercreditor Agreement, including in the form of periodic payments, in connection with such DIP Financing or use of cash collateral, the proceeds of such adequate protection are applied pursuant to the Intercreditor Agreement; provided that the holders of First Lien Obligations of each series shall have a right to object to the grant of a Lien to secure the DIP Financing over any collateral subject to Liens in favor of the holders of First Lien Obligations of such series or its authorized representative that shall not constitute Shared Collateral; and provided, further, that the holders of First Lien Obligations receiving adequate protection shall not object to any other holder of First Lien Obligations receiving adequate protection comparable to any adequate protection granted to such holders of First Lien Obligations in connection with a DIP Financing or use of cash collateral. The holders of First Lien Obligations acknowledge that the First Lien Obligations of any series may, subject to the limitations set forth in the other agreement governing First Lien Obligations, be increased, extended, renewed, replaced, restated, supplemented, restructured, repaid, refunded, refinanced or otherwise amended or modified from time to time, all without affecting the priorities set forth in the Intercreditor Agreement defining the relative rights of the holders of First Lien Obligations of any series. 69 ConvaTec Healthcare B S.à r.l. and Subsidiaries Issuer Loans ConvaTec Healthcare E S.A., as lender and Issuer, and ConvaTec Healthcare D S.à r.l., as borrower, entered into the Issuer Loan, pursuant to which the Issuer lent to ConvaTec Healthcare D S.à r.l. an amount equal to the aggregate principal amount of the proceeds from the issuance of the Senior Notes and from the Term Loan (replacing the Secured Notes refinanced in June 2015), less certain costs and expenses. The Issuer Loans constitute agreements without incorporating the terms of the Indentures. The Issuer Loans are made and are payable in Euros and/or U.S. Dollars. All amounts payable under the Issuer Loans are payable to such account or accounts as the Issuer may designate. The Issuer Loans are a term loan and a senior unsecured obligation of ConvaTec Healthcare D S.à r.l. The Issuer assigned its rights in respect of the Issuer Loans as security for its obligations in respect of the Borrowers’ obligations in respect of the Credit Facilities. 70 ConvaTec Healthcare B S.à r.l. and Subsidiaries Glossary acute fecal incontinence or AFI.......... Also known as encopresis or soiling, and refers to the temporary involuntary passage of stool in adults or children, which occurs in the critical care setting and is most prevalent in ICUs, burn units, hospices and care facilities acute wound........................................ Typically a surgical incision or traumatic wound whose causation is acute Adhesive Coupling Technology™..... ConvaTec brand of proprietary adhesive fastening technology to connect the pouch to the skin barrier in a low profile design without a raised “snap on” ring; utilized by the ESTEEM synergy T Includes dressings, pastes, and gels as well as of compression and negative pressure therapy devices that promote wound healing by a variety of methods (depending on the product) including effectively managing wound exudate, keeping environment, protecting the the wound moist in an occlusive or wound, managing infection, improving circulation and so forth advanced wound care......................... Ostomy System AQUACEL® ..................................... ConvaTec advanced wound dressing, utilizing Hydrofiber Technology AQUACEL® Ag................................ ConvaTec antimicrobial advanced wound dressing, utilizing Hydrofiber Technology CE mark.............................................. European regulatory marking to signify compliance with applicable regulatory standards chronic wound.................................... Complex wounds that are caused by repeated insults, which do not heal rapidly in the absence of interventional therapies, and, which include pressure, venous, arterial, and diabetic foot ulcers Pouches collecting fecal output typically used as patients with formed to stool disposable pouches for ConvaTec Moldable Technology™ .. ConvaTec brand for proprietary technology allowing for the skin barrier opening to be “molded” by hand (rather than cut with scissors) to customize the shape of the barrier for a patient’s unique stoma characteristics colorectal cancer................................. Also known as colon/rectal cancer or bowel cancer, the surgery for which may result in the creation of a stoma colostomy........................................... The ostomy procedure in which the colon or the rectum is brought through the abdominal wall to allow for the passage of feces conventional wound care.................... Generally involves products that provide “dry” healing if used as a primary dressing, or are supplementary to a primary moist wound healing product (serving as a secondary dressing to hold the primary dressing in place and/or absorb excess exudate). Examples include dressings such as gauze and bandages, and fixation products such as adhesive strips and tapes drainable pouches............................... Ostomy pouches possessing an opening at the bottom of the pouch for more frequent integrated draining of liquid stool or urine; closed with either a clip or a V closure called InvisiClose DuoDERM® .................................... ConvaTec brand of hydrocolloid dressing that provides a moist wound healing to the skin through ConvaTec’s proprietary environment and Durahesive Technology Durahesive® ..................................... ConvaTec brand for proprietary skin adhesion technology with optimized properties to allow for adhesion effluent ............................................. Generally refers to the feces or urine coming out of the body through an artificial opening such as a stoma ESTEEM® ......................................... ConvaTec brand for a Ostomy System, or drainable pouch, with upgraded features similar to those found on systems 71 ConvaTec Healthcare B S.à r.l. and Subsidiaries ESTEEM synergy® .......................... ConvaTec brand for a T Ostomy System employing the patented Adhesive Coupling Technology that allows for a low profile and flexibility typical of a drainable and urostomy system. This system also offers pouches exudate............................................... Fluid, cells or cellular debris that has filtered from the circulatory system into a lesion or area of inflammation and deposited in tissues or on tissue surfaces and leaking out of the wound ConvaTec brand of fecal containment device designed to safely and effectively contain and divert liquid fecal matter to protect patients’ wounds from fecal contamination and reduce risk of skin breakdown and the spread of infection ® fecal management system or FMS ............................ Foam.................................................. Typically, dressing with feel used for exuding wounds and for skin protection hydrocolloid....................................... Dressing containing a polymeric hydrocolloid material which dissolves, gels, swells (or exhibits some combination of these actions) upon interaction with exudate to provide a moist wound healing environment. Hydrocolloid dressings are typically used for wounds with light to moderate exudates Hydrofiber® Technology..................... ConvaTec proprietary technology based on the unique gelling properties of Hydrofiber materials; serves as the basis of the AQUACEL® , AQUACEL® Ag, and AQUACEL® Foam products ConvaTec proprietary integrated closure system utilized in drainable ostomy pouches InvisiClose™ ..................................... . key opinion leader.............................. A medical industry term that refers to physicians who influence their peers’ medical practice A system that combines as a single, integrated unit the skin barrier surrounding the stoma and the pouch collecting the effluent ostomy ............................................... A surgical procedure in which an opening for the passage of feces or urine is created through the abdominal wall in patients with decreased small intestine, colon, rectum or bladder function Regulatory clearance to market a medical device; usually reserved for Class III devices. The FDA will approve a PMA application if the application is found to have reasonable assurance that the device is safe and effective for its intended purpose Regulatory process requiring the device be deemed as safe and effective as, or substantially equivalent to, a legally marketed device that is not subject to approval (i.e. the “predicate” device) skin barrier (wafer)............................. The barrier connecting to the ostomy pouch in either an integrated unit ostomy system), which serves to secure the pouch to the body and surround the stoma opening, protecting the skin around the stoma from toxic effluent ostomy system) or as a separate piece Sponsors or equity sponsors ............. Refers to Nordic Capital and Avista Capital Partners stoma ................................................. The end of a shortened intestine that is surgically brought to and protrudes slightly from the abdominal surface in an ostomy procedure; the stoma lacks both sensation and sphincter control, hence preventing the patient from controlling the intestinal effluent Stomahesive ® .................................... ConvaTec brand of proprietary skin adhesion technology for adhesion properties 4 days) Natura® pouch system....... ConvaTec’s ostomy system that attaches via a plastic coupling mechanism that is snapped together, providing an audible click to let the user know it is secure. Compatible with ConvaTec Moldable Technology skin barriers, this system also offers Ostomy system which separate adhesive bodyside wafers and connecting pouches; includes both closed-end, drainable and urostomy pouches drainable and urostomy pouches 72 ConvaTec Healthcare B S.à r.l. and Subsidiaries urostomy............................................ A surgically created opening in the abdominal wall to divert urine to the exterior. This can be done by either diverting, using a part of the urinary tract or via a loop of the ileum urostomy pouches............................... Ostomy pouches collecting urine only, and which possess a special valve or spout which adapts to either a leg bag or night drain tube for overnight urine collection 73 Index to financial statements Consolidated Financial Statements of ConvaTec Healthcare B S.à r.l. and Subsidiaries (the “Company”) Independent Auditor’s Report Consolidated Balance Sheets of the Company as of December 31, 2015 and 2014 Consolidated Statements of Operations for the years ended December 31, 2015 and 2014 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015 and 2014 Consolidated Statements of Changes in Stockholder’s Deficit for the years ended December 31, 2015 and 2014 Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014 Notes to the Consolidated Financial Statements F-2 F-4 F-5 F-6 F-7 F-8 F-9 F-6FFFfsFFd2 ConvaTec Healthcare B S.à r.l. and Subsidiaries Consolidated Balance Sheets (All dollar amounts expressed in millions of U.S. dollars, except share and per share data) As of December 31, 2015 2014 Assets Current Assets: Cash and cash equivalents Receivables, net Inventories Deferred income taxes, net Prepaid expenses and other current assets Total Current Assets Property, plant and equipment, net Goodwill Intangible assets, net Deferred income taxes, net Restricted cash Other assets Total Assets Liabilities and Stockholder's Deficit Current Liabilities: Accounts payable Short-term portion of long-term debt Accrued expenses and other current liabilities Accrued compensation Deferred revenue Accrued rebates and returns Deferred income taxes Total Current Liabilities Long-term debt Mandatorily redeemable preferred equity certificates Accrued preferred equity certificates interest Deferred income taxes Other liabilities Total Liabilities Commitments and contingencies (note 17) Stockholder's Deficit: Preferred stock- €1 ($1.25) par value as of December 31, 2015 and 2014; 20,000 shares issued and outstanding at December 31, 2015 and 2014 Common stock- €1 ($1.25) par value as of December 31, 2015 and 2014; 112,157,883 shares issued and outstanding at December 31, 2015 and 2014 Retained deficit Accumulated other comprehensive income (net of tax) Total Stockholder's Deficit $ $ $ $ $ $ 269.6 231.9 229.0 14.0 39.5 784.0 255.1 838.1 1,697.2 6.0 5.7 56.0 3,642.1 95.7 21.5 100.7 43.6 4.3 18.5 4.7 289.0 2,585.0 1,400.8 1,281.4 210.7 54.0 5,820.9 — 140.7 (2,866.1) 546.6 (2,178.8) Total Liabilities and Stockholder's Deficit $ 3,642.1 $ The accompanying notes are an integral part of these consolidated financial statements. 234.0 241.9 250.1 10.7 32.7 769.4 263.7 973.2 1,893.2 8.3 7.3 47.7 3,962.8 80.3 43.7 127.5 46.5 15.2 19.0 12.7 344.9 2,653.9 1,560.2 1,284.7 244.6 49.1 6,137.4 — 140.7 (2,657.1) 341.8 (2,174.6) 3,962.8 F-6FFFfsFFd2 F-4 ConvaTec Healthcare B S.à r.l. and Subsidiaries Consolidated Statements of Operations (All dollar amounts expressed in millions of U.S. dollars) Net sales Cost of goods sold Gross profit Selling and marketing expenses General and administrative expenses Research and development expenses Impairment of goodwill and long lived assets Operating income Interest expense, net Foreign exchange Other expense (income), net Loss on extinguishment of debt Loss before income taxes (Benefit) provision for income taxes Net loss Years Ended December 31, 2014 2015 $ $ 1,650.5 799.3 851.2 346.9 221.9 41.2 12.2 229.0 397.3 29.7 0.7 26.9 (225.6) (16.6) $ (209.0) $ 1,735.5 821.8 913.7 397.0 195.2 37.2 73.7 210.6 449.6 19.3 (0.1) — (258.2) 28.3 (286.5) The accompanying notes are an integral part of these consolidated financial statements. F-5 ConvaTec Healthcare B S.à r.l. and Subsidiaries Consolidated Statements of Comprehensive Loss (All dollar amounts expressed in millions of U.S. dollars) Net loss Foreign currency translation, including a tax expense of $19.7 in 2015 and $23.3 in 2014 Other Total Comprehensive Loss $ $ Years Ended December 31, 2014 2015 (209.0) $ 205.9 (1.1) (4.2) $ (286.5) 243.8 0.6 (42.1) The accompanying notes are an integral part of these consolidated financial statements. F-6 ConvaTec Healthcare B S.à r.l. and Subsidiaries Consolidated Statements of Changes in Stockholder’s Deficit (All dollar amounts expressed in millions of U.S. dollars, except share data) Preferred Stock Common Stock Shares Amount Shares Amount Retained Deficit Accumulated Other Comprehensive Income Total January 1, 2014 20,000 — 112,157,883 $ 140.7 $ (2,367.4) $ 94.2 $ (2,132.5) (286.5) — (286.5) Net loss Foreign currency translation, including a tax expense of $23.3 million Other — — — — — — — — — — — — (3.2) — December 31, 2014 20,000 — 112,157,883 140.7 (2,657.1) Net loss Foreign currency translation, including a tax expense of $19.7 million Other — — — — — — — — — — — — (209.0) — — 247.0 0.6 341.8 — 205.9 (1.1) 243.8 0.6 (2,174.6) (209.0) 205.9 (1.1) December 31, 2015 20,000 — 112,157,883 $ 140.7 $ (2,866.1) $ 546.6 $ (2,178.8) The accompanying notes are an integral part of these consolidated financial statements. F-7 ConvaTec Healthcare B S.à r.l. and Subsidiaries Consolidated Statements of Cash Flows (All dollar amounts expressed in millions of U.S. dollars) Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization Income taxes Impairment of goodwill and long lived assets Foreign exchange loss Non-cash interest expense Amortization and write-off of deferred financing fees and original issue discount Loss on extinguishment of debt Share-based compensation Other Change in operating assets and liabilities: Receivables, net Inventories Prepaid expenses and other assets Deferred revenue Accounts payable and accrued expenses Other liabilities U.S. and foreign income taxes Other, net Net cash provided by operating activities Cash flows from investing activities: Acquisition, net of cash acquired Purchases of property, plant and equipment and capitalized software Other, net Net cash used in investing activities Cash flows from financing activities: Issuance of long-term debt, net of discount Repayments of long-term debt Payments of deferred financing fees Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year Supplemental cash flow information: Income taxes paid Interest paid Non-cash investing activities: Accrued capital expenditures included in accounts payable and accrued expenses Years Ended December 31, 2014 2015 $ (209.0) $ (286.5) 180.1 (53.3) 12.2 32.3 131.9 9.2 26.9 9.0 2.0 (11.4) (3.3) (5.2) (10.9) (2.5) 1.9 (5.4) (4.5) 100.0 — (36.7) 0.2 (36.5) 1,649.9 (1,630.9) (27.3) (8.3) (19.6) 35.6 234.0 269.6 $ 42.2 257.9 8.6 $ $ $ $ $ $ $ 191.2 (11.4) 73.7 22.8 160.6 11.9 — (0.9) (1.3) 42.3 (22.6) (7.3) (2.8) (19.8) 2.7 (0.3) (5.0) 147.3 (42.5) (44.7) (1.0) (88.2) — (73.6) — (73.6) (22.9) (37.4) 271.4 234.0 40.4 270.9 2.0 The accompanying notes are an integral part of these consolidated financial statements. F-8 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) 1. Basis of Presentation and Business Description Basis of Presentation and Initial Capitalization On August 1, 2008, ConvaTec was acquired by Cidron Healthcare Limited (“Cidron”), an entity owned by Nordic Capital and Avista Capital Partners (the “Equity Sponsors”), from Bristol-Myers Squibb (the “ConvaTec Acquisition”). In connection with the ConvaTec Acquisition, Cidron formed a wholly owned subsidiary, ConvaTec Healthcare A S.à r.l. (the “Parent”). The Parent, a Luxembourg domiciled holding company, then incorporated a wholly owned subsidiary, ConvaTec Healthcare B S.à r.l. (“CHB” or the “Company”). CHB, a Luxembourg domiciled holding company, incorporated sub-holding companies to purchase the net assets/shares of ConvaTec. Subsequent to the ConvaTec Acquisition, a wholly owned subsidiary of the Company acquired the stock of Unomedical Holdings a/s (“Unomedical”) on September 2, 2008 (the “Unomedical Acquisition”). In conjunction with the ConvaTec Acquisition and the Unomedical Acquisition, the Company issued Series 1, 2 and 3 mandatorily redeemable preferred equity certificates ("PECs"), entered into a Senior Facilities Agreement and Mezzanine Agreement and borrowed cash from the Parent, which was then converted to common stock of the Company. Subsequently, on December 22, 2010, all of the Company’s outstanding long term obligations under the Senior Facilities Agreement and Mezzanine Facilities Agreement were refinanced through the entry into credit facilities and the issuance of secured and unsecured private placement bonds. The accompanying consolidated financial statements (the "Consolidated Financial Statements") have been prepared by the Company in United States ("U.S.") dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), applied on a consistent basis. The Consolidated Financial Statements of the Company do not include the accounts of Cidron or the Parent. The Company considers the U.S. Dollar to be its functional currency. Business Description The Company develops, manufactures and markets innovative medical technologies, in particular products for ostomy management, advanced chronic and acute wound care, continence care, sterile single-use medical devices for hospitals, and infusion sets used in diabetes treatment infusion devices. Principal brands include Natura®, SUR-FIT®, Esteem®, AQUACEL®, DuoDERM®, Flexi-Seal®, and Unomedical. These products are marketed worldwide, primarily to hospitals, medical professionals, and medical suppliers. The Company relies on an internal sales force, and sales are made through various distributors around the world. The Company manufactures these products in the U.S., the United Kingdom (“U.K.”), the Dominican Republic, Denmark, Slovakia, Mexico, Belarus, and Malaysia. The Company, through its wholly owned subsidiary, 180 Medical Holdings, Inc. (“180 Medical”), also distributes disposable, intermittent urological catheters to customers in the U.S. 2. Significant Accounting Policies Basis of Consolidation The Consolidated Financial Statements include all subsidiaries controlled by the Company. All intercompany balances, intra- division balances and transactions have been eliminated. Use of Estimates In preparing the Consolidated Financial Statements, management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include: (i) annual goodwill and indefinite-lived asset impairment tests; (ii) sales allowances including chargeback and product return accruals; (iii) legal contingencies; and (iv) the determination of fair value of the Management Executive Plan ("MEP"), Annual Equity Program ("AEP"), and Management Incentive Plan ("MIP") awards. Management also makes significant estimates in recording the allowance for its doubtful accounts, inventory reserves, income tax reserves and valuation allowances. Estimates by their nature are based on judgment and available information at the time; as such, actual results may differ from estimated results. F-9 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company's business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company's results of operations, financial position, and cash flows could be materially impacted. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with maturities of three months or less when purchased. Restricted Cash In certain instances, there are requirements to set aside cash for guarantees on the payment of value added taxes, custom duties on imports, tender programs, and vehicle/office leases by financial institutions on the Company’s behalf. Total restricted balances were $8.6 million and $7.8 million at December 31, 2015 and 2014, respectively, of which $2.9 million and $0.5 million were current assets and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheets. Revenue Recognition The Company’s revenues are derived from sales of products and are recognized when substantially all the risks and rewards of ownership have transferred to the customer, there is persuasive evidence that an arrangement exists, the price is fixed and determinable, and collectability is reasonably assured. Generally, products are insured through delivery and revenue is recognized upon the date of receipt by the customer. When all of the above mentioned revenue recognition criteria are not met, the Company defers revenue, until such time all of the criteria are met. Revenues are reduced at the time of recognition to reflect expected product returns and chargebacks, discounts, rebates and estimated sales allowances based on historical experience and updated for changes in facts and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue. Amounts collected from customers and remitted to government authorities, such as value-added taxes in foreign jurisdictions, are presented on a net basis in the Company's Consolidated Statements of Operations and do not impact net product sales. Sales Rebates, Chargebacks and Product Return Accruals Accruals for sales rebates and discounts, as well as for product returns, are established in the same period the related revenue is recognized, resulting in a reduction to sales and the establishment of a liability for amounts unpaid, and are included in Accrued rebates and returns in the Consolidated Balance Sheets. An accrual is recorded based on an estimate of the proportion of recorded revenue that will result in a rebate or return. Chargebacks are also established in a similar manner and are recorded as a reduction to accounts receivable. Income Taxes The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax attributes are expected to be recovered or paid, and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment including the long-range forecast of future taxable income and the evaluation of tax planning strategies and ability to carry back any losses under the relevant tax law. Adjustments to the deferred tax valuation allowances are recorded in the period when such assessments are made. The Company applies the principles of the income tax accounting guidance that addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements as well as the determination of whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. In accordance with the aforementioned guidance, the Company evaluates all tax positions using a more-likely-than-not threshold and measurement attribute for the F-10 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Differences between tax positions taken in a tax return and amounts recognized in the financial statements are recorded as adjustments to income taxes payable or receivable, or adjustments to deferred taxes, or both. Fair Value of Financial Instruments The estimated fair values of cash and cash equivalents, receivables, prepaid expenses and other assets, accounts payable, accrued expenses and other liabilities approximate their carrying values due to their short-term maturities. The fair value of PECs approximate their carrying values due to the holders’ ability to redeem the instruments at face value at issuance. The fair values of marketable securities and long-term debt are valued based on the quoted market prices for same or similar investment characteristics and debt issuances. Accounts Receivable Credit is extended to customers based on the evaluation of the customer’s financial condition. Creditworthiness of customers is evaluated on a regular basis. Accounts receivable consists of amounts billed and currently due from customers. An allowance for doubtful accounts is maintained for estimated losses that result from the failure or inability of customers to make required payments. In determining the allowance, consideration includes the probability of recoverability based on past experience and general economic factors. Certain accounts receivable may be fully reserved when specific collection issues are known to exist, such as pending bankruptcy. The Company charges off uncollectible receivables at the time it is determined the receivable is no longer collectable. The Company does not charge interest on past due amounts. The analysis of receivable recoverability is monitored and the bad debt allowances are adjusted accordingly. Accounts receivable are also reduced at the time of revenue recognition to reflect prompt pay discounts and chargebacks. Concentration of Credit Risk Financial instruments that potentially expose the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable, which are generally not collaterized or factored. However, in some instances, the Company does have recourse and non-recourse factoring agreements, where certain accounts receivable balances are transferred to unrelated third parties. Refer to note 7 titled "Receivables, Net" for further information. The Company sells its products primarily through an internal sales force and sales are made through various distributors around the world. For the year ended December 31, 2015, no single customer generated more than 10% of our net sales. Credit risk with respect to accounts receivable is generally diversified due to the large dispersion of customers across many different industries and geographies. Exposure to credit risk is managed through credit approvals, credit limits and monitoring procedures. The Company’s business generally involves large customers and if one or more of those customers were to default in its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. However, management believes that its customers have a stable financial condition and the reserves for potential losses are adequate. Inventories Inventories are stated at the lower of cost or market with the cost principally determined using an average cost method. The cost of finished goods and work in progress comprises raw materials, direct labor, other direct costs and indirect production overhead. Production overhead comprise indirect material and labor costs, maintenance and depreciation of the machinery and production buildings used in the manufacturing process as well as costs of production administration and management. The Company evaluates the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the price the Company expects to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand. Property, Plant and Equipment Property, plant and equipment are reported at cost, less accumulated depreciation. Replacements of major units of property are capitalized and replaced properties are retired. Replacements of minor components of property and repair and maintenance costs are charged to expense as incurred. Depreciation is calculated using the straight-line method, commencing when the assets become available for productive use, based on the following estimated useful lives: F-11 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) Buildings Building equipment and depreciable land improvements Machinery, equipment and fixtures Other equipment 20 - 50 years 15 - 40 years 5 - 20 years 3 - 5 years Leasehold improvements and assets under capital lease arrangements are amortized over the lesser of the asset's estimated useful life or the term of the respective lease. Maintenance costs are expensed as incurred. Construction-in-progress reflects amounts incurred for property, plant, equipment construction or improvements that have not been placed in service. Interest is capitalized in connection with the construction of qualifying capital assets during the period in which the asset is being installed and prepared for its intended use. Interest capitalization ceases when the construction of the asset is substantially complete and the asset is available for use. Capitalized interest cost is depreciated on a straight-line method over the estimated useful lives of the related assets. Intangible Assets Intangible assets are reported at cost, less accumulated amortization. Intangible assets with finite lives are amortized over their estimated useful lives. Amortization is calculated using the straight-line method based on the following estimated useful lives: Patents, trademarks, and licenses Technology Capitalized software Contracts and customer relationships Non-compete agreements Trade names(1) _______________________________ 3 - 20 years 10 - 18 years 3 - 10 years 2 - 20 years 3 - 5 years 10 years (1) Trade names useful lives shown in the table above does not include the Company's, Unomedical, and Symbius Medical, LLC (“Symbius”) trade names, which have indefinite useful lives and are not amortizable. See note 3 titled "Business Combination" and note 11 titled "Intangible Assets, Net" for further information regarding the Symbius and the Company's trade names, respectively. Internal-use Software Costs Internal-use software, whether purchased or developed, is capitalized and amortized using the straight-line method. Generally, internal-use software is amortized over an estimated useful life of three to five years, excluding ConvaTec's legacy internal- use software, which is amortized over an estimated useful life of seven to ten years. Costs associated with internal-use software are expensed during the design phase until the point of which the project has reached the application development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent they will result in added functionality. Software maintenance and training costs are expensed in the period in which they incurred. The Company capitalized $3.3 million and $1.7 million of internal-use software in 2015 and 2014, respectively. Amortization expense for capitalized software was $5.6 million and $6.2 million in 2015 and 2014, respectively. Impairment of Long-Lived Assets Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset. If the expected cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted future cash flows. Indefinite-lived intangible assets consisting of trade names are tested for impairment annually or more frequently if events or changes in circumstances between annual tests indicate that the asset may be impaired. Impairment losses on indefinite-lived intangible assets are recognized based solely on a comparison of the fair value of the asset to its carrying value, without consideration of any recoverability test. In the evaluation of indefinite-lived intangible assets for impairment, the Company may perform a qualitative assessment to determine if it is more likely than not that an indefinite-lived intangible asset is F-12 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. If it is not, no further analysis is required. If it is determined, based on a qualitative assessment, that it is more likely than not that the indefinite- lived intangible asset is impaired it will require a quantitative impairment test. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset is its new accounting basis. Refer to note 11 titled "Intangible Assets, Net" for further details. Goodwill Goodwill represents the excess of the purchase price in acquired businesses over the fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment. An interim goodwill impairment test in advance of the annual impairment assessment may be required if events or changes in circumstances occur that indicate an impairment might be present. In the evaluation of goodwill for impairment, the Company may perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not, no further analysis is required. If it is, a prescribed two-step goodwill impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any. In the first step of the test, a fair value is calculated for each of the identified reporting units, and that fair value is compared to the carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting unit exceeds its carrying value, there is no impairment, and the second step of the test is not performed. If the carrying value of a reporting unit exceeds its fair value, then the second step of the test is required. The second step of the test compares the implied fair value of the reporting unit’s goodwill to its carrying value. If the implied fair value of the reporting unit’s goodwill is in excess of its carrying value, no impairment is recorded. If the carrying value is in excess of the implied fair value, an impairment charge equal to the excess is recorded. During the fourth quarter of 2015, the Company performed its annual goodwill impairment test and determined that none of the goodwill associated with its reporting units was impaired. Contingencies In the normal course of business, the Company is subject to loss contingencies, such as claims and assessments arising from litigation and other legal proceedings government investigations, product and environmental liability, and tax matters. Accruals for loss contingencies are recorded when the Company determines that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. If the estimate of the amount of the loss is a range and some amount within the range appears to be a better estimate than any other amount within the range, that amount is accrued as a liability. If no amount within the range is a better estimate than any other amount, the minimum amount of the range is accrued as a liability. These accruals are adjusted periodically as assessments change or additional information becomes available. If no accrual is made for a loss contingency because the amount of loss cannot be reasonably estimated, the Company will disclose contingent liabilities when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. Shipping and Handling Costs The Company typically does not charge customers for shipping and handling costs. Shipping and handling costs expensed in 2015 and 2014 were $71.9 million and $77.7 million, respectively. These costs are included in selling and marketing expenses. Advertising and Promotion Costs Advertising costs comprise product samples, print media and promotional materials. Advertising and promotion costs are expensed as incurred. Advertising and promotion costs expensed in 2015 and 2014 were $35.9 million and $39.5 million, respectively. These costs are included in selling and marketing expenses. Interest Expense F-13 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) Interest expense includes standby fees and the amortization of debt discounts and deferred financing costs. Interest costs are expensed as incurred, except to the extent such interest is related to construction in progress, in which case interest is capitalized. The capitalized interest recorded in 2015 and 2014 was not material. Research and Development Research and development expenses are comprised of costs incurred in performing research and development activities including payroll and benefits, clinical manufacturing and pre-launch clinical trial costs, manufacturing development and scale-up costs, product development and regulatory costs, contract services and other outside contractor costs, research license fees, depreciation and amortization of lab facilities, and lab supplies. Research and development costs are expensed as incurred. For milestones achieved prior to regulatory approval of the product, such payments are expensed as research and development. Milestone payments made in connection with regulatory approvals, including non-U.S. regulatory approvals, are capitalized and amortized to cost of products sold over the estimated useful life of the approved product. No milestone payments were made in connection with regulatory approvals, including non-U.S. regulatory approvals and additional indications during 2015 or 2014. Share-Based Compensation The Company’s Parent grants share-based compensation to employees under the AEP, the MEP, and the MIP. Certain features of share-based awards require the awards to be accounted for as liabilities as opposed to equity. Liability awards are required to be updated to fair value at the end of each reporting period until settlement. Share-based compensation cost is measured at the grant date based on the fair value of the award. Share-based compensation expense is recognized on a straight-line basis over the vesting period. Fair value of the Company's equity is estimated using an income approach and further substantiated with a market approach. The income approach is deemed to be the most indicative of the Company’s estimated fair value in an orderly transaction between market participants and is consistent with the methodology used for the equity valuation in prior years. Under the income approach, the Company determines fair value using the discounted cash flow method which is based on an analysis of the Company’s projected financial information, significant debt-free cash flow assumptions, discount rate, terminal value, and indication of value. Under the market approach, the Company utilizes publicly-traded comparable company information to determine trailing and forward multiples that are used to value its equity for which the Black-Scholes pricing model is utilized. Inherent in the Black-Scholes model are assumptions related to expected volatility, option life, risk- free interest rate and dividend yield. The expected volatility is estimated based on historical volatilities of comparable companies. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the grant date with a term equal to the contractual term of the stock option. Share-based compensation is recognized in general and administrative expenses. Refer to note 15 titled "Employee Stock Benefit Plans" for a further description of the plans and the relevant accounting guidance applied by the Company. Comprehensive Income Comprehensive income comprises net income and other comprehensive income. Other comprehensive income includes items such as foreign currency translation adjustments and certain pension benefit plan adjustments. Accumulated other comprehensive income is recorded as a component of stockholder's deficit. Foreign Currency Translation and Transactions The assets and liabilities of the Company’s foreign operations having a functional currency other than the U.S. Dollar are translated into U.S. Dollars at the exchange rate prevailing at the balance sheet date, and at the average exchange rate for the reporting period for revenue and expense accounts. The related equity accounts of subsidiaries are translated into U.S. Dollars at the historical rate of exchange. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive income in stockholder's deficit. Foreign currency exchange gains and losses resulting from the re-measurement or settlement of transaction balances that are denominated in a currency other than an operation's functional currency and that are not of a long-term investment nature are recognized in net income. Adoption of New Accounting Standards F-14 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) In April 2015, the Financial Accounting Standards Board ("FASB") issued guidance titled, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, consistent with the presentation of a debt discount. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016. As permitted, the Company early-adopted this guidance in the fourth quarter of 2015. The adoption of this guidance, which was applied retrospectively and impacted presentation only, resulted in a reclassification of $31.9 million as of December 31, 2014 from Other assets to Long-term debt (treated as a reduction to Long-term debt) on the Consolidated Balance Sheet. There was no impact on the Company's results of operations. In August 2015, the FASB issued guidance about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. As permitted under this guidance, the Company will continue to present debt issuance costs associated with revolving-debt arrangements as assets. Recently Issued Accounting Standards, Not Adopted as of December 31, 2015 In February 2016, the FASB issued guidance titled, Leases (Topic 842) to increase transparency and comparability among companies by requiring recognition of lease assets and liabilities on the balance sheet and disclosure of key information about leasing arrangements. The guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020, with early application permitted. The guidance is required to be adopted at the earliest period presented using a modified retrospective approach. The Company is evaluating the impact of adoption of this guidance on its Consolidated Financial Statements. In January 2016, the FASB issued guidance titled, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities which amends the guidance on the classification and measurement of financial instruments. Although it retains many current requirements, it significantly revises an entity's accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early application is permitted for annual periods beginning after December 15, 2017. Adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements. In November 2015, the FASB issued guidance titled, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position, thereby simplifying the current guidance under which an entity must separate deferred taxes into current and noncurrent amounts. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early application is permitted as of the beginning of an interim or annual reporting period. The guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. As this guidance relates to presentation only, the adoption of this guidance will not have a material impact on the Company’s Consolidated Financial Statements. In July 2015, the FASB issued guidance titled, Inventory (Topic 330): Simplifying the Measurement of Inventory which requires inventory to be measured at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The guidance defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early application is permitted and the guidance should be applied prospectively as of the beginning of an interim or annual reporting period. The Company is evaluating the impact of adoption of this guidance on its Consolidated Financial Statements. In May 2014, the FASB issued new guidance titled, Revenue from Contracts with Customers (Topic 606) and the International Standards Board (“IASB”) has issued IFRS 15, Revenue from Contracts with Customers. The issuance of these documents completes the joint effort by the FASB and the IASB to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS. The new guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This guidance will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The FASB recently voted to defer this standard’s effective date for one F-15 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) year. For nonpublic entities, the amendments are now effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted as of the following: (i) annual reporting periods beginning after December 15, 2016, including interim periods or (ii) annual reporting periods beginning after December 15, 2016, and interim periods within annual reporting periods beginning one year after the annual reporting period of initial application of the new standard. The Company continues to assess the new standard, as well as amendments to the standard that have been proposed by FASB, and has not yet determined the adoption date or the impact to the Company's Consolidated Financial Statements. 3. Business Combination In accordance with the Company’s business strategy to selectively pursue strategic and complementary acquisitions, the Company has acquired the business, as described below. The acquisition is included in the Consolidated Financial Statements from the acquisition date. On January 1, 2014, the Company through its subsidiary, 180 Medical, acquired all of the voting interest in Symbius, a national home medical supply company for a total consideration of $44.0 million. Of the consideration paid, $3.5 million was initially funded into escrow, primarily to satisfy potential future indemnity obligations, of which $0.5 million was released in 2014 and the remaining escrow balance of $3.0 million was released in 2015. Symbius provides urological and other medical supplies nationally, as well as durable medical equipment on a regional basis. The addition of Symbius extended the Company’s ability to serve customers directly. The transaction has been accounted for in accordance with the acquisition method of accounting. The purchase price allocation of the acquisition resulted in the following: Cash and cash equivalents Receivables, net(a) Inventories Prepaid expenses and other current assets Property, plant and equipment, net Intangible assets(b) Goodwill(c) Total assets acquired Current liabilities Total liabilities assumed Net assets acquired _______________________________ Amounts Recognized 1.3 4.7 1.5 0.5 1.1 17.7 21.3 48.1 (4.1) (4.1) 44.0 $ $ (a) The fair value of trade receivables acquired was $4.7 million, with the gross contractual amount being $6.8 million, of which $2.1 million is expected to be uncollectible. (b) The following table summarizes the fair values and associated useful lives assigned to intangible assets: F-16 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) Finite-lived intangible assets: Patents, trademarks, and licenses Contracts and customer relationships(1) Non-compete agreements(1) Indefinite-lived intangible assets: Trade name(1) Total Intangible Assets _______________________________ Weighted Average Useful Life Amounts Recognized 3 years 8.5 years 5 years Indefinite lived $ $ 0.4 13.0 2.7 16.1 1.6 17.7 (1) In the fourth quarter of 2015, the Company recognized an impairment charge of $0.2 million related to the trade name. In the fourth quarter of 2014, the Company recognized impairment charges of $4.3 million, in the aggregate, related to these intangible assets. See note 11 titled "Intangible Assets, Net" for further information. (c) The goodwill from the acquisition consists of $1.3 million arising from assembled workforce and the remaining $20.0 million from synergies and economies of scale which are expected from the combined operations of 180 Medical and Symbius. Goodwill of $19.7 million is deductible for tax purposes. 4. Related Parties The Parent maintains an agreement with the Equity Sponsors (the “Management Agreement”), whereby the Equity Sponsors provide certain management advisory services. For services rendered by the Equity Sponsors, an annual fee of $3.0 million is payable in equal quarterly installments. The Company also pays other specified fees on behalf of the Parent, in accordance with the Management Agreement. During the years ended December 31, 2015 and 2014, the Company paid (i) $3.0 million in contractual fees to the Equity Sponsors on behalf of the Parent for services rendered in both years and (ii) an additional $1.5 million and $2.1 million for other fees, respectively. The Consolidated Balance Sheets include a receivable from the Parent recorded in Other assets in the amount of $32.7 million and $26.1 million as of December 31, 2015 and 2014, respectively. The receivable is inclusive of accrued interest on the outstanding balance. Additionally, the Company loans money to Cidron in connection with the repurchase of MEP units. Interest on the loan accrues at 7.0% per annum. The outstanding loan and interest shall be due and payable at the option of Cidron. As of December 31, 2015 and 2014, the total outstanding loan amount of $16.9 million and $7.5 million, respectively, is recorded as equal and offsetting amounts within Stockholder’s equity. See note 15 titled "Employee Stock Benefit Plans" for further discussion regarding the MEP. In connection with the Company’s initial capitalization, the Company issued PECs for an aggregate amount of € 1,289.7 million. See note 13 titled "Mandatorily Redeemable Preferred Equity Certificates" for further discussion. The Company's net sales included $7.6 million and $9.1 million, in 2015 and 2014, respectively, of net sales to a related party. F-17 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) 5. Restructuring 2015 Initiatives In 2015, the Company incurred restructuring charges for business restructuring activities, primarily related to severance benefits for involuntary workforce reductions associated with the closure of the Company's Hospital Care ("HC") manufacturing facility in Reynosa, Mexico. The Company's Infusion Devices ("ID") franchise, which has a separate existing facility in Reynosa, Mexico, plans to expand and repurpose the HC plant to support its manufacturing operations and its customers. During the year ended December 31, 2015, the Company recorded pre-tax charges of $2.1 million associated with these activities, of which $1.2 million, $0.7 million, and $0.2 million were recorded in Cost of goods sold, General and administrative expenses, and Research and development expenses, respectively, in the Consolidated Statements of Operations. 2014 Initiatives In 2014, the Company incurred restructuring charges for business restructuring activities, primarily related to termination benefits for involuntary workforce reductions associated with closure of the Company's operational headquarters in Skillman, New Jersey and the termination of certain executive management team members. All business activities performed at the facility in Skillman, New Jersey were transferred to other ConvaTec sites around the world. During the year ended December 31, 2014, the Company recorded pre-tax charges of $13.7 million associated with these activities. These costs were recorded in General and administrative expenses in the Consolidated Statements of Operations. Restructuring charges and spending against liabilities associated with the activities described above were as follows: Employee Termination Liability 2014 Initiatives 2015 Initiatives Total Balance at January 1, 2014 Charges Spending Changes in estimate Balance at December 31, 2014 Charges Spending Changes in estimate Balance at December 31, 2015 $ $ — $ — — — — 2.1 — — 2.1 $ 2.1 13.7 (11.0) (0.1) 4.7 — (3.2) (0.2) 1.3 $ $ 2.1 13.7 (11.0) (0.1) 4.7 2.1 (3.2) (0.2) 3.4 Liabilities above are included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. 6. Income Taxes The components of loss before income taxes were: U.S. Non-U.S. Years Ended December 31, 2015 2014 $ $ $ 76.9 (302.5) (225.6) $ 54.7 (312.9) (258.2) The above amounts are categorized based on the location of the taxing authorities. The (benefit) provision for income taxes consisted of: F-18 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) Current: U.S. Federal U.S. States Non-U.S. Deferred: U.S. Federal U.S. States Non-U.S. Effective Tax Rate Years Ended December 31, 2015 2014 $ 1.4 4.0 29.8 35.2 (26.2) (0.4) (25.2) (51.8) (16.6) $ — 2.0 38.5 40.5 9.0 0.6 (21.8) (12.2) 28.3 $ $ The Company’s (benefit) provision for income taxes in 2015 and 2014 was different from the amount computed by applying the statutory U.S. Federal income tax rate to loss before income taxes, as a result of the following (percentages may not sum due to rounding): Years Ended December 31, 2015 2014 2015(1) 2014(1) Loss before income taxes U.S. statutory rate State taxes, net of federal effect Foreign/U.S. tax differential Foreign permanent items and tax credits Domestic permanent items and tax credits Valuation allowances U.S. and foreign uncertain tax positions Repatriation of foreign income Deferred impact of tax rate changes Other $ $ (225.6) $ (79.0) 2.2 35.4 12.7 5.9 28.4 (0.2) (18.1) (7.0) 3.1 (16.6) $ (258.2) (90.4) 2.4 15.7 32.5 5.0 55.5 0.2 2.8 (0.8) 5.4 28.3 35.0 % (1.0)% (15.7)% (5.6)% (2.6)% (12.6)% 0.1 % 8.0 % 3.1 % (1.4)% 7.4 % 35.0 % (0.9 )% (6.1 )% (12.6 )% (1.9 )% (21.5 )% (0.1 )% (1.1 )% 0.3 % (2.1 )% (11.0)% _______________________________ (1) Represents the percentage of loss before income taxes. Deferred Taxes and Valuation Allowance The components of current and non-current deferred income tax assets (liabilities) as of December 31, 2015 and 2014 were: F-19 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) 2015 2014 Deferred tax assets: Inventory Loss carryforward Employee benefits Other Total deferred tax assets before valuation allowance Less: valuation allowance Net deferred tax assets Deferred tax liabilities: Equity Other Fixed assets and intangibles Total deferred tax liabilities Deferred tax liabilities, net Recognized as: Deferred Income Taxes—Current Deferred Income Taxes—Non-Current Total $ $ $ $ $ 5.1 487.9 3.3 81.4 577.7 (522.7) 55.0 (38.1) (5.5) (206.8) (250.4) (195.4) $ $ 9.3 (204.7) (195.4) $ 7.7 519.7 1.0 44.7 573.1 (532.8) 40.3 (24.2) (21.5) (232.9) (278.6) (238.3) (2.0) (236.3) (238.3) The Company had U.S. federal net operating loss carryforwards of $142.5 million and $304.5 million and foreign net operating loss carryforwards of $1,575.5 million and $1,420.0 million as of December 31, 2015 and 2014, respectively. The Company has state net operating loss carryforwards of $110.8 million and $150.1 million as of December 31, 2015 and 2014, respectively. The U.S. net operating loss carryforwards will begin to expire in 2021 and fully expire in 2035. Foreign net operating loss carryforwards expire at various points in time with the most significant having an indefinite expiration date. The valuation allowance was $522.7 million and $532.8 million as of December 31, 2015 and 2014, respectively. The Company has concluded, based on the standard set forth in the FASB Codification related to income taxes that it is more likely than not that the Company will not realize any benefit from the deferred tax assets related to remaining U.S. net operating losses and Luxembourg net operating losses. The Company has decreased its valuation allowance by $10.1 million as of December 31, 2015. This decrease primarily relates to the utilization of net operating losses in the U.S. Utilization of net operating losses and tax credits may be subject to an annual limitation due to ownership change limitations provided in the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result if there is an ownership change before the utilization or expiration of unused net operating losses and credits. The Company is not indefinitely reinvested in its unremitted earnings. However, if such earnings were remitted, they would generally not be subject to income tax due to the application of favorable domestic law and tax treaties. The Company has accrued $3.4 million and $21.5 million as of December 31, 2015 and 2014, respectively, related to taxes that would be due in certain jurisdictions where a remittance of earnings would be subject to tax. The Company conducts business in various countries throughout the world and is subject to tax in numerous jurisdictions. As a result of its business activities, the Company files a significant number of tax returns that are subject to examination by various Federal, state and foreign tax authorities. Tax examinations are often complex, as tax authorities may disagree with the treatment of items reported by the Company and may require several years to resolve. The liability for unrecognized tax benefits represents a reasonable provision for taxes that could be paid if various taxing authorities did not agree with the tax positions taken by the Company. The effect of changes related to uncertain tax positions on the Company’s effective tax rate is included in the effective tax rate reconciliation above. F-20 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax positions including interest and penalties: Unrecognized tax benefits at January 1 Increases in tax positions for the current year Increases in tax positions for prior years Decrease in tax positions for prior years Decreases due to settlements with taxing authorities Lapse in statute of limitations Unrecognized tax benefits at December 31 2015 2014 35.1 0.7 2.2 (0.5) — (5.1) 32.4 $ $ 61.9 2.7 — (1.8) (27.7) — 35.1 $ $ The uncertain tax benefits are recorded against the Company’s deferred tax assets to the extent the uncertainty directly related to that asset; otherwise, they are recorded as either current or non-current liabilities, depending on whether the Company will make payments in the next twelve months. The amounts of unrecognized tax benefits that, if recognized, would impact the effective tax rate were $26.7 million and $28.0 million as of December 31, 2015 and 2014, respectively. The Company classifies interest and penalties related to unrecognized tax benefits as income tax expense. The amount of interest and penalties included in the unrecognized tax benefits at December 31, 2015 and 2014 is $5.8 million and $5.7 million, respectively, and are included in the tabular rollforward above. The Company is considered under examination by a number of tax authorities, including all of the major tax jurisdictions listed in the table below. The Company does not expect the unrecognized tax benefits as of December 31, 2015 to significantly change over the next twelve months. The Company believes that it has adequately provided for all open tax years by tax jurisdiction in compliance with the accounting guidance. The following is a summary of major tax jurisdictions for which tax authorities may assert additional taxes against the Company based upon tax years currently under audit and subsequent years that may be audited: Jurisdiction: U.S. U.K. Japan Denmark Luxembourg France Italy Germany 7. Receivables, Net Years 2012 to 2015 2014 to 2015 2009 to 2015 2010 to 2015 2010 to 2015 2009 to 2015 2010 to 2015 2012 to 2015 The components of receivables, net as of December 31, 2015 and 2014 were as follows: Trade receivables Miscellaneous receivables Less: allowances and chargebacks Receivables, net 2015 2014 268.3 8.0 276.3 (44.4) 231.9 $ $ 281.7 7.2 288.9 (47.0) 241.9 $ $ F-21 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) On December 23, 2014, the Company’s operations in Italy transferred certain accounts receivable to an unrelated third party through a non-recourse factoring agreement. The factoring agreement transfer was accounted for as a sale of receivables, as the Company did not retain any financial or legal interest in the factored receivables. Accordingly, such receivables have not been included in the Consolidated Balance Sheets. The amount of receivables factored was $6.4 million for the year ended December 31, 2014. Commission expenses incurred in connection with factoring activities amounted to $0.2 million and such amounts were included within Interest expense, net in the Consolidated Statements of Operations for the year ended December 31, 2014. Allowances and chargebacks include chargebacks, sales discounts, and allowance for uncollectible accounts. The most significant portion of allowances and chargebacks relates to chargebacks, representing $30.4 million and $32.0 million of the amount as of December 31, 2015 and 2014, respectively. 8. Inventories The components of inventories as of December 31, 2015 and 2014 were as follows: Finished goods Work in process Raw and packaging materials Inventories 9. Property, Plant and Equipment, Net 2015 2014 $ $ 151.2 25.1 52.7 229.0 $ $ The major components of property, plant and equipment, net as of December 31, 2015 and 2014 were as follows: Land Buildings and building equipment Machinery, equipment and fixtures(a) Construction in progress Less: accumulated depreciation Property, plant and equipment, net _______________________________ 2015 2014 $ $ 19.9 118.8 333.1 44.1 515.9 (260.8) 255.1 $ $ 162.2 27.3 60.6 250.1 19.8 122.5 350.5 28.0 520.8 (257.1) 263.7 (a) In the year ended December 31, 2014, the Company recorded a write-off of $3.2 million on machinery, equipment and fixtures related to the manufacturing facility located in Rhymney, U.K. Depreciation expense was $31.0 million and $35.5 million for the years ended December 31, 2015 and 2014, respectively, and is mainly included in Cost of goods sold in the Consolidated Statements of Operations. F-22 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) 10. Goodwill The changes in the carrying value of goodwill for the years ended December 31, 2015 and 2014 were as follows: Balance as of January 1, 2014 Acquisition(a) Changes in foreign exchange rates Impairment charge(b) Balance as of December 31, 2014 Changes in foreign exchange rates Balance as of December 31, 2015 _______________________________ Total 1,183.3 21.3 (185.0) (46.4) 973.2 (135.1) 838.1 $ $ (a) (b) Relates to the Symbius acquisition. Refer to note 3 titled "Business Combination" for further information. Reflects an impairment charge recognized in the fourth quarter of 2014 in Impairment of goodwill and long lived assets in the Consolidated Statements of Operations related to the Asia-Pacific ("APAC") reporting unit. Impairment in the APAC reporting unit resulted in a complete impairment of goodwill assigned due to revised estimates of revenues and profitability, based on recent and anticipated future performance trends. For further information regarding this asset impairment charge, see note 16 titled "Fair Value Measurements". During the fourth quarter of 2015, the Company performed its annual goodwill impairment test and determined that none of the goodwill associated with its reporting units was impaired. Accumulated impairment charges were $383.0 million as of December 31, 2015 and 2014. 11. Intangible Assets, Net The major components of intangible assets, net as of December 31, 2015 and 2014 were as follows: 2015 2014 Weighted Average Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Finite-lived intangible assets: Patents, trademarks, and licenses Technology Capitalized software Contracts and customer relationships(1) Non-compete agreements(1) Trade names Indefinite-lived intangible assets: Trade names(2) Total intangible assets, net 18 years 17 years 7 years 15 years 5 years 10 years NA _______________________________ $ 1,954.0 $ (803.7) $ 1,150.3 $ 2,001.6 $ (710.1) $ 1,291.5 224.3 83.0 247.4 5.7 4.8 221.3 (95.0) (58.0) (81.5) (3.5) (1.6) 129.3 25.0 165.9 2.2 3.2 238.8 79.8 246.4 5.7 4.8 (86.9) (52.6) (65.9) (2.5) (1.1) 151.9 27.2 180.5 3.2 3.7 — 221.3 235.2 — 235.2 $ 2,740.5 $ (1,043.3) $ 1,697.2 $ 2,812.3 $ (919.1) $ 1,893.2 F-23 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) (1) (2) In the fourth quarter of 2014, the Company recognized impairment charges of $3.7 million, in the aggregate, related to contracts and customer relationships and non-compete agreements acquired in connection with the Symbius acquisition in January 2014. The impairment charges were driven by the loss of patients as a result of the alleged violation of non-compete clauses by certain former employees. For further information regarding these asset impairment charges, see note 16 titled "Fair Value Measurements". In the fourth quarter of 2015, the Company recognized impairment charges of $12.2 million, in the aggregate, related to the Company's and Symbius trade name of $12.0 million and $0.2 million, respectively. In the fourth quarter of 2014, the Company recognized impairment charges of $17.2 million, in the aggregate, related to the Company's and Symbius trade name of $16.6 million and $0.6 million, respectively. For further information regarding these asset impairment charges, see note 16 titled "Fair Value Measurements". Foreign currency translation, primarily related to intangible assets denominated in British Pound Sterling, resulted in a decrease of $63.0 million and $75.4 million in the gross carrying amount of intangible assets for the years ended December 31, 2015 and 2014, respectively. Amortization expense related to intangible assets for the years ended December 31, 2015 and 2014 was recorded as follows: Cost of goods sold General and administrative expenses Total amortization expense 2015 2014 $ $ 128.3 20.8 149.1 $ $ 133.5 22.2 155.7 Expected aggregate amortization expense for each of the five succeeding years ending December 31 is as follows: Amortization expense $ 148.8 $ 148.4 $ 147.9 $ 146.9 $ 142.2 2016 2017 2018 2019 2020 12. Long – Term Debt A summary of the Company’s consolidated long-term debt as of December 31, 2015 and 2014, respectively, is outlined in the table below: Credit Facilities Agreement(1): Revolving Credit Facility U.S. Dollar Term Loans Euro Term Loans Credit Facilities Secured Notes and Senior Notes: 7.375% Secured Notes(2) 10.5% U.S. Dollar Senior Notes 10.875% Euro Senior Notes Capital Lease Obligations Less: current portion Total Long-Term Debt _______________________________ Maturity Date 2015 2014 June 2020(3) June 2020(3) June 2020(3) December 2018 December 2018 $ — $ 790.0 811.6 1,601.6 — 736.4 268.3 0.2 2,606.5 21.5 2,585.0 $ $ — 762.2 546.0 1,308.2 357.6 733.7 297.9 0.2 2,697.6 43.7 2,653.9 F-24 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) (1) (2) (3) As further described below, the Amended Credit Facilities Agreement (as defined below) consists of (i) U.S. Dollar and Euro term loans, (ii) a revolving credit facility, and (iii) incremental unfunded term facilities (collectively, the “Credit Facilities”). On June 15, 2015, the Company redeemed all of its outstanding €300.0 million ($338.5 million) aggregate principal amount of 7.375% senior secured notes due December 15, 2017 (the “Secured Notes”) for €322.1 million ($363.4 million), including a call premium of €1 1.1 million ($12.5 million), plus accrued and unpaid interest, and satisfied and discharged the Secured Notes indenture. In the year ended December 31, 2015, the Company recognized a loss on extinguishment of debt of $26.9 million, in the aggregate, of which $16.6 million was recognized in connection with the redemption of the Secured Notes. The Credit Facilities will mature on June 15, 2020, provided that such date will be accelerated to (i) September 15, 2018 if more than 10% of the principal amount of the Senior Notes (as defined below) remain outstanding on such date or (ii) October 15, 2018 if more than 10% of the Senior Payment-in-kind Notes (“PIK Notes”) remain outstanding on such date. Refer to “Management's Discussion and Analysis of Financial Condition Reconciliation to the Parent's Financial Statements” within this Annual Report for further information related to the PIK Notes. The Company's Credit Facilities and indenture related to its Senior Notes (as defined below) contain customary covenants, including, among other things, covenants that restrict the Company's and its subsidiaries abilities to: (i) incur or guarantee additional indebtedness and issue certain preferred stock; (ii) create or incur liens; (iii) make certain payments, including dividends or other distributions, prepay or redeem subordinated debt or equity; (iv) make certain investments; (v) create encumbrances or restrictions on the payment of dividends or other distributions, loans or advances to, and on the transfer of assets; (vi) sell, lease or transfer certain assets, including stock of restricted subsidiaries; (vii) engage in certain transactions with affiliates; and (viii) consolidate or merge with other entities. The Company's Credit Facilities also contain a financial covenant, various customary affirmative covenants and specified events of default. The Company's indenture related to its Senior Notes (as defined below) also contains certain customary affirmative covenants and specified events of default. As of December 31, 2015, the Company was in compliance with all financial covenants associated with the Company's outstanding debt. The aggregate maturities of debt obligations as of December 31, 2015 for each of the five succeeding years ending December 31 and thereafter are as follows: 2016 2017 2018 2019 2020 Thereafter Total gross maturities Unamortized discounts and deferred financing fees Total long-term debt Credit Facilities $ $ 21.5 0.1 1,016.6 — 1,590.6 — 2,628.8 (22.3) 2,606.5 On June 15, 2015, the Company entered into Amendment No.4 to the Credit Agreement (the "Amended Credit Facilities Agreement") to refinance the Company’s previous U.S. Dollar and Euro term loans and the revolving credit facility (the “Refinancing”). The Amended Credit Facilities Agreement provides for: (i) U.S. Dollar and Euro term loans of $800.0 million (issued at an offering price of 99.75%, after adjustment for a discount of $2.0 million) and €755.0 million, respectively, (the “Term Loan Facilities”), (ii) a $200.0 million revolving credit facility (the “Revolving Credit Facility”), and (iii) incremental unfunded term facilities (the “Incremental Term Facilities”). The Term Loan Facilities amortize quarterly at an annual rate of 1%. The Revolving Credit Facility does not amortize. The net proceeds from the Refinancing were used to: (i) repay amounts outstanding prior to the Refinancing under the U.S. Dollar term loans of $744.1 million and the Euro term loans of €436.4 million ($492.4 million), (ii) redeem all of the outstanding Secured Notes, as described above, and (iii) for general corporate purposes. In 2015, in connection with the Refinancing, the Company recognized a loss on extinguishment of debt of $26.9 million, in the aggregate, of which $10.3 million was recognized with respect to the Credit Facilities and comprised of $9.1 million of unamortized deferred financing fees and $1.2 million F-25 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) of unamortized OID. In addition, the Company incurred fees of approximately $14.9 million, which were deferred and capitalized over the term of the Credit Facilities. The outstanding principal under the Term Loan Facilities denominated in U.S. Dollars and Euros was $796.0 million and €751.2 million ($816.0 million) at December 31, 2015 and $770.5 million and €455.2 million ($550.7 million) at December 31, 2014. As of December 31, 2015 and 2014, unamortized deferred financing fees (treated as a reduction to Long-term debt) for the Term Loan Facilities were as follows: (i) U.S. Dollars term loans - $4.2 million and $7.4 million, respectively, and (ii) Euros term loans - $4.4 million and $4.1 million, respectively. In addition, as of December 31, 2015 and 2014, unamortized discounts for the U.S. Dollar term loans were $1.8 million and $0.9 million, respectively. The Euros term loans had unamortized discounts of $0.6 million as of December 31, 2014. The Revolving Credit Facility of $200.0 million is available through its termination date in certain currencies at the borrower’s option and is used to provide for ongoing working capital requirements, letters of credit, and general corporate purposes of the Company. The Revolving Credit Facility allows for up to $40.0 million of letter of credit issuances as well as $25.0 million for borrowings on same-day notice, referred to as the swingline loans. There were no borrowings outstanding under the Revolving Credit Facility as of December 31, 2015 or December 31, 2014. Availability under the Revolving Credit Facility, after deducting the outstanding letters of credit of $2.6 million totaled $197.4 million as of December 31, 2015. As of December 31, 2015 and 2014, deferred financing fees for the Revolving Credit Facility were of $4.9 million and $0.4 million, respectively, and have been included in Other assets in the Consolidated Balance Sheets. The Incremental Term Facilities, as amended, may be available in one or more additional tranches of term loans or an increase to one or more tranches of existing term loans denominated in either U.S. Dollars and/or Euros or an increase to the commitments under the Revolving Credit Facility provided that a certain leverage ratio is not exceeded and the Company satisfies certain requirements, including: no default or event of default, minimum borrowing amounts of $15.0 million and a maturity date and weighted average life-to-maturity of each individual loan within the Incremental Term Facilities that is greater than the weighted average maturity date of the Term Loan Facilities. Additionally, should the yield on the Incremental Term Facilities exceed the yield on the Term Loan Facilities by more than 0.5%, then the yield on the Term Loan Facilities will automatically increase such that the yield on the Term Loan Facilities shall be 0.5% below the yield on the Incremental Term Facilities. Borrowings and commitments under the Credit Facilities, including the Term Loan Facilities, are subject to full or partial mandatory prepayments from the proceeds of asset sales above a specified threshold, the issuance or incurrence of debt and from excess cash flow retained in the business. The amount and timing of the mandatory prepayments are subject to certain criteria. Prior to the Refinancing, during the second quarters of 2015 and 2014, the Company made mandatory prepayments of $43.6 million and $73.5 million, respectively, for excess cash retained in the business. In addition, in May 2015, the Company also made principal payment of $4.1 million related to the Credit Facilities. During the six months ended December 31, 2015, the Company made the scheduled September and December 2015 amortization payments applicable to the Credit Facilities, resulting in an aggregate principal reduction of $8.2 million. At December 31, 2015, the Company determined that it will make a mandatory prepayment of approximately $17.4 million in the second quarter of 2016, which is included in the Short- term portion of long-term debt on the Consolidated Balance Sheet. The 2016 mandatory prepayment will be applied against the remaining quarterly installments due under the Term Loan Facilities, in accordance with the terms outlined in the Amended Credit Facilities Agreement. Borrowings under the Credit Facilities bear interest at either a Euro (EURIBOR) or U.S. Dollar (LIBOR) base rate, or an ABR. EURIBOR interest is associated with Term Loan borrowings denominated in Euros while Term Loan borrowings denominated in Dollars may, at the Company's option, be subject to LIBOR interest or ABR. Borrowings under the Revolving Credit Facility denominated in Euros may bear interest at either ABR or EURIBOR and borrowings denominated in any currencies other than Euros (including U.S. Dollars) may bear interest at either ABR or LIBOR. ABR, as defined in the Amended Credit Facilities Agreement, is the greater of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.50% and (c) the Eurodollar Rate for a one-month interest period plus 1.0%. The applicable margins for borrowing under the Term Loan Facilities are 3.25% with respect to both EURIBOR and LIBOR borrowings, and 2.25% with respect to ABR borrowings. The applicable margins for revolving borrowings are 3.75% with respect to EURIBOR and LIBOR borrowings and 2.75% with respect to ABR borrowings. LIBOR and EURIBOR are each subject to a 1.0% floor and ABR margin is subject to a floor of 2.0%. Each margin will step down by 25 basis points upon decreasing the Company's consolidated total net leverage ratio to 3.50 to 1.00 or less. F-26 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) Borrowings under the Amended Credit Facilities Agreement are secured by substantially all of the Company’s assets. Pursuant to the Amended Credit Facilities Agreement, the Company pledged certain properties as collateral with an aggregate carrying amount of $45.8 million as of December 31, 2015. Any loan advances made under the Incremental Term Facilities will rank pari passu with the Term Loan Facilities and the Revolving Credit Facility. Senior Notes The Senior Notes consist of $745.0 million senior notes (the “U.S. Dollar Senior Notes”) and €250.0 million ($271.6 million at December 31, 2015 and $302.5 million at December 31, 2014) senior notes (the “Euro Senior Notes”) each due December 15, 2018 (collectively the “Senior Notes”). The U.S. Dollar Senior Notes and the Euro Senior Notes bear interest at the rate of 10.5% and 10.875% per annum, respectively, payable semi-annually on June 15 and December 15 of each year. As of December 31, 2015 and 2014, unamortized deferred financing fees (treated as a reduction to Long-term debt) for the Senior Notes were as follows: (i) the U.S. Dollar Senior Notes - $8.6 million and $11.3 million, respectively, and (ii) the Euro Senior Notes - $3.3 million and $4.6 million, respectively. The Senior Notes may be prepaid and are subject to a premium if payment is made prior to December 15, 2016. Mandatory redemption of the Senior Notes is not required prior to their stated maturity dates. The Senior Notes are unsecured obligations of the Company and are guaranteed on a senior basis by the Company. They rank pari passu in right of payment with all of the Company’s existing and future obligations that are not subordinated in right of payment to the Senior Notes. Interest Related Information Accrued interest related to the Company’s outstanding debt obligations was $5.4 million and $6.3 million as of December 31, 2015 and 2014, respectively, and is recorded in Accrued expenses and other current liabilities. Interest expense in 2015 and 2014, associated with the Credit Facilities, Secured Notes and Senior Notes, was $183.7 million and $204.3 million, respectively. The weighted average interest rate for borrowings under the Company’s outstanding debt obligations was 6.9% and 7.0% for the years ended December 31, 2015 and 2014, respectively. 13. Mandatorily Redeemable Preferred Equity Certificates In connection with the Company’s initial capitalization, the Company issued Series 1, 2 and 3 PECs for an aggregate amount of €1,289.7 million. The PECs are mandatorily redeemable by the Company in 2047 or upon liquidation (which entails voluntary or involuntary liquidation, insolvency, dissolution, or winding up of the affairs of the Company), or the Company has the option to voluntarily redeem any or all of the PECs, into cash, equity shares, new PECs or property that have an aggregate fair market value equal to the face value plus accrued unpaid dividends. The Company shall also redeem part or all of the PECs, if prior to the maturity date, part or all of the amounts that the Company lent to a subsidiary from the proceeds of these PECs are paid back by the subsidiary. If only part of the intercompany obligation is paid back by the subsidiary, then the PECs will be redeemed at an amount equal to lesser of (a) the pro rata portion of nominal principal and yield used to finance that portion of the subsidiary's obligation, or, (b) the maximum portion of these PECs that may be prepaid from the net proceeds from the subsidiary. The PECs can only be redeemed to the extent the Company will not become insolvent after making such payment. The PECs have been classified as debt as the PEC holders control a majority of the board of directors and, therefore, control the redemption rights. PECs have priority over the common and preferred stock in the distribution of dividends. PECs are entitled to interest equivalent ranging from approximately 7% to 9% of the par value per annum on a cumulative basis. PEC interest accrues monthly and compounds on an annual basis. The PECs, which include current and non-current accrued interest, were $2,716.4 million (€2,500.9 million) and $2,879.1 million (€2,379.9 million) at December 31, 2015 and 2014, respectively. The following table presents the current and non-current portion of accrued PECs interest recorded in both U.S. Dollar and Euro as of December 31, 2015 and 2014: F-27 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) Current(a) Non-current(b) Total accrued PEC interest _______________________________ 2015 34.2 1,281.4 1,315.6 € $ $ 31.5 1,179.7 1,211.2 $ $ 2014 34.2 1,284.7 1,318.9 € 28.3 1,061.9 1,090.2 (a) (b) Included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. Included in Accrued preferred equity certificates interest in the Consolidated Balance Sheets. Total interest expense during the years ended December 31, 2015 and 2014 was $206.2 million (€185.7 million) and $234.6 million (€176.5 million), respectively, which was classified as Interest expense in the Consolidated Statements of Operations. The PECs allow for distribution of interest to the extent permitted by the Company's restricted payment capacity, a specified leverage ratio and other provisions outlined in its debt agreements. During the years ended December 31, 2015 and 2014, the Company made payments of $74.2 million and $68.6 million, in the aggregate, respectively, of accrued PEC interest to the Parent. The Company anticipates that it will fund semi-annual cash interest payments to the Parent going forward. The cash interest payments are incremental to the interest due on the Company's long-term debt and will reduce its operating cash flows going forward. The timing of the Company’s cash interest payments to the Parent will be on January 15 and July 15, and commenced on January 15, 2014. On January 12, 2016, the Company made an additional payment of $37.1 million of accrued PEC interest to the Parent. The variance between the cumulative balances of accrued interest and cumulative interest expensed is due to fluctuations in the foreign currency exchange rates. PECs are subordinate to borrowings under the Credit Facilities and Senior Notes, as well as present and future obligations of the Company whether secured or unsecured. The holders of the PECs do not have voting rights in respect to the Company by reason of ownership of the PECs. The Series 3 PECs cannot be transferred without prior consent of the Company or pursuant to the Company’s third party debt agreements. 14. Stockholder’s Deficit The Company’s total share capital was € 112.2 million ($140.7 million) as of December 31, 2015 and 2014, respectively. The Company had 112,157,883 issued and outstanding shares of common stock at December 31, 2015 and 2014. The Company had five thousand issued and outstanding shares of class A preferred stock, five thousand issued and outstanding shares of class B preferred stock, five thousand issued and outstanding shares of class C preferred stock, and five thousand issued and outstanding shares of class D preferred stock at December 31, 2015 and 2014. The par value of common and preferred stock was one Euro per share ($1.25) as of December 31, 2015 and 2014. Each share has an identical voting right and each shareholder has voting rights commensurate to its shareholding. Each shareholder is entitled to equal rights to any distribution of dividends. 15. Employee Stock Benefit Plans The Company’s Parent grants share-based compensation to employees under the AEP, the MEP, and the MIP. The accounting standard relating to share-based compensation requires that the cost of all share-based payment transactions be recognized in the financial statements, establishes fair value as the measurement objective, and requires entities to apply a fair value-based measurement method in accounting for share-based payment transactions. The Company grants share- based compensation awards which vest over a specified period or upon a liquidity event, such as a change of control or an initial public offering. The fair value of share-based compensation awards issued to employees is measured on the date of grant and expense is recognized over the vesting period or upon a liquidity event, depending upon the specific terms of the individual award. Certain features of share-based awards require the awards to be accounted for as liabilities as opposed to equity. Liability awards are required to be updated to fair value at the end of each reporting period until settlement. The Company obtains a valuation report for the MEP, MIP and AEP awards on an annual basis. The valuation is utilized for calculating the current period share-based compensation expense associated with any MEP awards granted and remeasuring the liability for fully vested MEP awards. The Company believes that any difference in fair value of the awards at the interim and annual periods would not be material to the Consolidated Financial Statements. Generally, unvested awards are forfeited for no consideration upon termination of employment. No awards may be transferred other than under specified limited circumstances which generally are to family members for estate planning purposes. Fair value of the Company's equity was estimated using an income approach and further substantiated with a market approach. The income approach was deemed to be the most indicative of the Company’s estimated fair value in an orderly transaction F-28 € € ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) between market participants and is consistent with the methodology used for the equity valuation in prior years. Under the income approach, the Company determines fair value using the discounted cash flow method which is based on an analysis of the Company’s projected financial information, significant debt-free cash flow assumptions, discount rate, terminal value, and indication of value. Under the market approach, the Company utilizes publicly-traded comparable company information to determine trailing and forward multiples that are used to value its equity for which the Black-Scholes pricing model was used with the following assumptions as of December 31, 2015 and 2014: Dividend yield Expected volatility(1) Risk-free interest rate(2) Expected life of AEP awards granted during period(3) Expected life of MEP awards granted during period(3) Expected life of MIP awards granted during period(3) _______________________________ 2015 0.0% 51.0% 0.5% 1.5 years 1.5 years 1.5 years 2014 0.0% 48.5% 0.5% 1.7 years 1.7 years 1.7 years (1) (2) (3) Determined based on historical volatilities of comparable companies. Determined based on the weighted average of U.S. Treasury strip rates over the contractual term of the awards. Represents the period of time that awards are expected to be outstanding. Determining the estimated fair value is judgmental in nature and requires the use of significant estimates and assumptions, including selection of market comparables, industry trends, estimated future cash flows, and discount rates. Fair value is estimated using significant unobservable inputs that are characterized as Level 3 under the fair value hierarchy, which is described in further detail in note 16 titled "Fair Value Measurements". Annual Equity Program The AEP allows for the issuance of units (“AEP Units”) to employees for shares of common stock. The Company’s Parent is authorized to grant up to 1.0 million AEP Units to purchase common stock under the AEP, representing 2.0% of the common stock in the Company’s Parent. AEP Units are granted at the allocable fair market value of a share of stock on the date of grant and vest upon a liquidity event, as such no share-based compensation has been recognized for the AEP Units during the years ended December 31, 2015 and 2014, respectively. AEP Units that are unallocated or forfeited can be redistributed to an existing AEP participant or other employee upon the recommendation of the Chief Executive Officer ("CEO") if, and to the extent, the recipient in such transfer is acceptable to the board of directors. Any redistribution of AEP Units would be considered a new grant under the terms of the AEP. The following table summarizes activity related to the AEP during the years ended December 31, 2015 and 2014: (Units in thousands) Outstanding at January 1, 2014 Granted Forfeited/cancelled Outstanding at December 31, 2014 Granted Forfeited/cancelled Outstanding at December 31, 2015 AEP Units 708 214 (50) 872 119 (158) 833 The fair value of AEP Units outstanding at December 31, 2015 and 2014 was $10.82 and $3.81, respectively. As of December 31, 2015 and 2014, total unrecognized compensation cost related to outstanding AEP Units was $9.0 million and $3.3 million based on the fair value of the AEP Units at those respective dates. The compensation cost recognized, if any, will be based on F-29 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) the fair value of the AEP Units at the time the liquidity event occurs. Certain AEP Units forfeitures are determined upon the occurrence of a liquidity event. Given that the timing of a liquidity event cannot be predicted, the portion of vested and forfeited shares has yet to be determined. In these instances the full amount of AEP Units was included in the outstanding amount as of December 31, 2015 and 2014. Management Executive Plan The MEP allows for the issuance of units (“MEP Units”) by the Company’s Parent to employees for shares of common stock in the Parent. The Company’s Parent is authorized to grant up to 1.0 million MEP Units to purchase common stock under the MEP, representing 8.0% of the common stock in the Company’s Parent. MEP Units are granted at the allocable fair market value of a share of stock on the date of grant and vest over five years or upon a liquidity event, as described above. MEP Units that are unallocated or forfeited can be redistributed to an existing MEP participant or other employee upon the recommendation of the CEO if, and to the extent, the recipient in such transfer is acceptable to the board of directors. Any redistribution of MEP Units would be considered a new distribution under the terms of the MEP. The following table summarizes activity related to the MEP during the years ended December 31, 2015 and 2014: (Units in thousands) Outstanding at January 1, 2014 Granted Forfeited/cancelled Outstanding at December 31, 2014(1) Granted Forfeited/cancelled Repurchased Outstanding at December 31, 2015(2) _______________________________ MEP Units 755 88 (161) 682 350 (59) (222) 751 (1) (2) As of December 31, 2014, the outstanding MEP Units included 408 vested and 274 non-vested units. As of December 31, 2015, the outstanding MEP Units included 240 vested and 511 non-vested units. The fair value of MEP Units outstanding at December 31, 2015 and 2014 was $43.27 and $15.25, respectively. The MEP Units are remeasured to fair value on an annual basis. The Company accounts for MEP Units as liability awards. The Company recorded liabilities of $13.3 million and $12.6 million for its outstanding MEP Units in Other liabilities in the Consolidated Balance Sheets at December 31, 2015 and 2014, respectively. In 2015, the Company recognized total share-based compensation expense of $9.0 million in General and administrative expenses in the Consolidated Statements of Operations. In 2014, the Company recognized a reduction to share- based compensation of $0.2 million in General and administrative expenses in the Consolidated Statements of Operations. The increase in share-based compensation expense in 2015 was driven by an increase in the fair value of the MEP Units. As of December 31, 2015, the total unrecognized compensation cost related to the outstanding MEP Units was $19.2 million, which is expected to be recognized over a weighted average period of 3.8 years. There are 249 thousand MEP Units available for future grant at December 31, 2015. Management Incentive Plan The MIP allows for the issuance of units (“MIP Units”) to employees for common stock and PECs of the Company’s Parent. The Company’s Parent is authorized to grant up to 3.0 million MIP Units under the Plan, representing 0.3% of the common stock and 0.4% of the PECs in the Company’s Parent. MIP Units are granted at the allocable fair market value of a share of stock or PECs on the date of grant and vest upon a liquidity event, as such no share-based compensation has been recognized for the MIP Units during year ended December 31, 2015 and 2014, respectively. F-30 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) The following table summarizes activity related to the MIP during the years ended December 31, 2015 and 2014: (Units in thousands) Outstanding at January 1, 2014 Granted Forfeited/cancelled Outstanding at December 31, 2014 Granted Forfeited/cancelled Outstanding at December 31, 2015 MIP Units 2,132 — (15) 2,117 — (953) 1,164 The fair value of MIP Units outstanding at December 31, 2015 and 2014 was $3.13 and $2.87, respectively. As of December 31, 2015 and 2014, the total unrecognized compensation cost related to MIP Units granted was $3.6 million and $6.1 million, respectively, and is expected to be recognized when a liquidity event occurs. Certain MIP Units forfeitures are determined upon the occurrence of a liquidity event. Given that the timing of a liquidity event cannot be predicted, the portion of vested and forfeited shares has yet to be determined. In these instances the full amount of MIP Units was included in the outstanding amount as of December 31, 2015 and 2014. 16. Fair Value Measurements The Company’s financial instruments and the methods used to determine fair value consist of the following: Cash and cash equivalents, receivables, accounts payable and certain accrued expenses – Carrying amounts approximate fair value due to the short-term maturities of these assets and liabilities. Preferred equity certificates – Carrying amounts approximate fair value due to the holders’ ability to redeem the instruments at face value at issuance. Fair value measurements are estimated based on valuation techniques and inputs categorized as follows: Level 1 — Quoted market prices in active markets for identical assets or liabilities; Level 2 — Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); and Level 3 — Unobservable inputs in which there is a little or no market data and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. Assets Measured at Fair Value on a Recurring Basis The following fair value hierarchy table presents the components and classification of the Company's financial assets measured at fair value as of December 31, 2015 and 2014: 2015 2014 Carrying Value Level 1 Level 2 Level 3 Carrying Value Level 1 Level 2 Level 3 Assets: Marketable securities $ 0.2 $ 0.2 $ — $ — $ 0.9 $ 0.9 $ — $ — There were no transfers between Level 1 and Level 2 during the year ended December 31, 2015. F-31 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis As of December 31, 2015 and 2014, the Company's assets measured at fair value on a non-recurring basis subsequent to initial recognition included indefinite-lived intangible assets related to the Company's and Symbius' trade names. The Company recognized impairment charges of $12.2 million and $17.2 million, in the aggregate, in the fourth quarter of 2015 and 2014, respectively, for these assets in Impairment of goodwill and long lived assets in the Consolidated Statements of Operations. These impairment charges were driven by analysis of expected future cash flows based on recent and anticipated future performance trends. The Company utilized the relief-from-royalty method under the income approach to calculate the fair value. The adjusted carrying value of the Company's and Symbius' trade names of $206.0 million and $0.8 million as of December 31, 2015, respectively, and $218.0 million and $1.0 million as of December 31, 2014, respectively, was equal to its estimated fair value, which was determined using discounted cash flows and represents Level 3 inputs. In addition to the above, as of December 31, 2014, the Company's assets measured at fair value on a non-recurring basis subsequent to initial recognition included: (i) goodwill related to the Company's six reporting units, namely, Americas, 180 Medical, Europe, Middle East and Africa, APAC, ID, and Industrial Sales. The Company recognized an impairment charge of $46.4 million in Impairment of goodwill and long lived assets in the Consolidated Statements of Operations related to the APAC reporting unit. Impairment in the APAC reporting unit resulted in a complete impairment of goodwill assigned due to revised estimates of revenues and profitability, based on recent and anticipated future performance trends. The fair values of all reporting units were estimated using a weighted average of a market approach and an income approach as this combination was deemed to be the most indicative of the Company’s estimated fair value in an orderly transaction between market participants and was consistent with the methodology used for the goodwill impairment test in the prior years. In addition, the Company ensured that the fair values estimated under these two approaches were comparable with each other. Under the market approach, the Company utilized publicly-traded comparable company information to determined revenue and earnings multiples that were used to value its reporting units adjusted for an estimated control premium. Under the income approach, the Company determined fair value based on estimated future cash flows of each reporting unit discounted by an estimated weighted average cost of capital, reflecting the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. Determining the estimated fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including selection of market comparables, estimated future cash flows, and discount rates. The fair value measurement was categorized as Level 3 fair value based on the inputs in the valuations techniques used. (ii) certain finite-lived intangible assets acquired in connection with the Symbius acquisition in January 2014. In the fourth quarter of 2014, the Company recognized impairment charges of $3.7 million, in the aggregate, related to contracts and customer relationships and non-compete agreements in Impairment of goodwill and long lived assets in the Consolidated Statements of Operations. These impairment charges were driven by analysis of expected future cash flows based on the loss of patients as a result of the alleged violation of non-compete clauses by certain former employees. The adjusted carrying value of the assets of $12.0 million, in the aggregate, as of December 31, 2014 was equal to their estimated fair value, which was determined using discounted cash flows and represents Level 3 inputs. For further information regarding assets impairment charges, see note 10 titled "Goodwill" and note 11 titled "Intangible Assets, Net". Liabilities not Measured at Fair Value The carrying value of long-term debt is recorded at amortized cost. At December 31, 2015 and 2014, the estimated fair value of the Company's long-term debt, excluding capital leases, approximated $2,624.0 million and $2,802.8 million, in the aggregate, respectively. The fair values were estimated using the quoted market prices and current interest rates offered for similar debt issuances. Long-term debt is categorized as Level 2 under the fair value hierarchy. See note 12 titled “Long - Term Debt” for the carrying values of the individual components of the Company’s long-term debt. F-32 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) 17. Commitments and Contingencies Operating Leases Minimum future rental commitments under non-cancelable operating leases for each of the five succeeding years ending December 31 and thereafter are as follows: Lease obligations $ 64.3 $ 18.3 $ 14.9 $ 11.4 $ 7.1 $ 3.9 Total 2016 2017 2018 2019 2020 Thereafter 8.7 $ Certain lease agreements, primarily for real estate, contain renewal options and rent escalation clauses. Operating lease rental expense was $20.3 million and $25.0 million for the years ended December 31, 2015 and 2014, respectively. Other commitments The Company has commitments related to capital expenditures of approximately $27.8 million as of December 31, 2015, primarily related to new manufacturing lines to support the growth of the ostomy care business. In addition, in January 2016, the Company renewed its service agreement with HP Enterprise Services, LLC under which the Company will be required to make payments of approximately $73.0 million, in the aggregate, within the next five years. Legal Proceedings In the ordinary course of business, the Company and certain of its subsidiaries are subject to various legal proceedings and claims, including, for example, product liability matters, environmental matters, employment disputes, disputes on agreements and other commercial disputes. In addition, the Company operates in an industry susceptible to patent legal claims. At any given time, in the ordinary course of business, the Company has been in the past and may continue to be involved as either a plaintiff or defendant in patent infringement actions. If a third party’s patent infringement claim were to be determined against the Company, the Company might be required to make significant royalty or other payments or might be subject to an injunction or other limitation on its ability to manufacture or distribute one or more products. If a patent owned by or licensed to the Company were to be determined to be invalid or unenforceable, the Company might be required to reduce the value of the patent on the Company’s Consolidated Balance Sheets and to record a corresponding charge, which could be significant in amount. There are various lawsuits, claims, proceedings and investigations which are currently pending involving the Company. In accordance with the accounting guidance related to contingencies, the Company records accruals for loss contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. Legal costs related to litigation matters are expensed as incurred. FDA Regulations The Company is subject to regulation by the FDA under the Federal Food, Drug and Cosmetic Act (“FDCA”) and other laws. The FDCA requires that medical devices introduced to the U.S. market, unless otherwise exempted, be the subject of either a premarket notification, known as a 510(k) clearance, or approval of premarket approval, known as a PMA application. Some of the Company's products may require approval of a PMA to be marketed in the U.S., while others may require a 510(k) clearance. Other products may be exempt from regulatory clearance or approval, but will still subject to regulation by FDA. As a medical device manufacturer, the Company is required to register its facilities and list its products with the FDA. In addition, the Company is required to comply with the FDA’s current good manufacturing practices for medical devices, known as the Quality System Regulation (“QSR”), which requires that its devices be manufactured and records be maintained in a prescribed manner with respect to design and development, manufacturing, testing and control activities. The Company's manufacturing facilities are subject to periodic and occasional inspections by the FDA for compliance with the QSR which sometimes are unannounced. Further, the Company is required to comply with FDA requirements for labeling and promotion. For example, the FDA prohibits cleared or approved devices from being promoted for uncleared or unapproved uses, otherwise known as “off-label” promotion. There also are restrictions on the concurrent marketing of components that can be used to develop an assay. Under the FDA medical device reporting regulations, the Company is required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or F-33 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) contribute to death or serious injury if the malfunction of the device or one of a similar devices were to recur. If the Company fails to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against the Company. Any such adverse event involving the Company's products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending itself in a lawsuit, will require the dedication of the Company's time and capital, distract management from operating the business, and may harm the Company's reputation and financial results. If the FDA believes the Company is not in compliance with applicable laws or regulations, the agency can institute a wide variety of enforcement actions, ranging from issuance of warning letters or untitled letters; fines and civil penalties; unanticipated expenditures to address or defend such actions; delays in clearing or approving, or refusal to clear or approve, products; withdrawal or suspension of approval of products or those of third-party suppliers by the FDA or other regulatory bodies; product recall or seizure; orders for physician notification or device repair, replacement or refund; interruption of production; operating restrictions; injunctions; and criminal prosecution. The Company has been subject to FDA enforcement actions in the past, as discussed below. FDA Inspections and Warning Letters On October 30, 2014 the FDA issued a Form FDA-483 at the conclusion of an inspection of the Osted, Denmark facility of Unomedical A/S, a ConvaTec company. A Form 483 is a list of inspectional observations issued by the FDA. The Form 483 identified three inspectional observations covering issues related to design validation and the facility’s corrective and preventive action processes. Unomedical carefully reviewed the Form FDA-483 observations and submitted a written response to the FDA which identified the actions being taken to address the FDA’s observations. In March 2015, the Company received a letter from the FDA indicating that the Agency was satisfied with the Company’s responses to the inspectional observations and that no further regulatory action was justified. The FDA also stated it would follow up at their next scheduled inspection to ensure these observations were corrected and verified. On June 24, 2014, the FDA issued a Warning Letter to Unomedical, a ConvaTec company, resulting from an inspection of the Michalovce, Slovakia manufacturing plant in February 2014. The Warning Letter identified certain violations of FDA regulations relating to manufacturing processes and controls at the facility. Following the February 2014 inspection, the Company took prompt action to correct the violations the FDA had identified, and provided updates, including documented evidence of corrective actions, to the FDA in April and June 2014. The Company held a follow-up meeting with the Foreign Inspections office of the FDA in September 2014 during which the Foreign Inspections office confirmed that it had no further questions. The Company hosted a follow-up inspection from the FDA in January 2015, which resulted in a two-observation Form 483, to which the Company responded and which observations the Company subsequently corrected. In July 2015, the Company received a letter from the FDA indicating the FDA was satisfied with the Company’s responses to the inspectional observations and that no further regulatory action was justified. The FDA also stated that it would follow up at the next scheduled inspection to ensure that the observations had been corrected and verified. The letter also formally closed out the Warning Letter from June 24, 2014. The Company previously received a Warning Letter from the FDA dated May 24, 2013 resulting from a routine inspection at its Skillman, New Jersey facility. The Warning Letter identified certain violations of FDA regulations relating to complaint handling and other quality management system elements at this facility. While the Skillman facility has since been closed as part of office space consolidation, the Company has added resources and updated its quality system to address the FDA’s concerns. For example, the Company has employed resources at its new global quality, regulatory, and clinical affairs headquarters in Greensboro for complaint handling and at the Deeside Design Center in the U.K. for its R&D activities. The Company continues to review and improve its quality system to increase efficiency and ensure regulatory compliance. The Company agreed with the FDA to conduct a certification audit by the end of 2014, and such consultant-led certification audits were completed in December 2014 and submitted to the FDA. The Company believes these audits demonstrated significant progress in its remediation efforts. In June 2015, in a routine update to the FDA, the Company confirmed that it has completed remediation of the affected processes from the May 24, 2013 Warning Letter and considered the associated Form 483 observations closed. In September 2015, the FDA visited the Company’s Greensboro facility to conduct a follow-up inspection as a result of the May 24, 2013 Warning Letter. The inspection resulted in zero 483 observations. On January 5, 2016, the Company received an informal communication from the FDA that the Agency intends to close out the May 24, 2013 Warning Letter, and the formal close-out letter dated February 10, 2016 has been published on the FDA’s website. F-34 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) While the Company has worked with the FDA to address its concerns and remedy the violations identified in both Warning Letters and the Osted Form 483, it cannot guarantee that the FDA will agree that the corrective actions adequately address the FDA’s concerns or that the FDA or other governmental authorities will not take further action in the future. Corrections and Removals The design, development, manufacture and sale of the Company's products involve an inherent risk of product liability or other claims by consumers and other third parties. The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in certain instances. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. In addition, manufacturers may, under their own initiative, recall a product, including in situations in which a material deficiency in a device is found. A government-mandated or voluntary recall by the Company could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of the Company's products would divert managerial and financial resources and have an adverse effect on the Company's financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. The Company has been in the past, and continues to be, subject to various product liability lawsuits, product recalls and requirements to issue field corrections related to its products due to manufacturing deficiencies, labeling errors or other safety or regulatory reasons. In April 2014, the Company initiated of a voluntary global recall of its Flexi-Seal® CONTROL Fecal Management System as a result of the potential risk of harm associated with inconsistent performance of the product and certain related regulatory issues. The FDA classified this recall as a Class I recall, reflecting a determination that exposure to the device carries a reasonable probability of serious adverse health consequences, including death. In September 2015, the Company received notification from the FDA formally closing out the recall. In October 2014, the Company became aware of an issue with its NicoFix Securement device and decided to carry out a voluntary recall of affected lots which is currently underway. The Company does not expect the costs associated with this recall to be significant. In May 2015, the Company initiated a voluntary recall of certain batches of its Steel cannula infusion set devices, including the Sure-T, Sure-T Paradigm, contact detach, contact, Sub Q, neria, neria detach, neria multi and thalaset models, due to an increase in reported needle breakage. The recall is currently limited to affected devices in Germany and certain other European countries, and in some other countries, such as the U.S., a Field Safety notification has been issued. Unomedical A/S has initiated the recall based on a determination that, in rare cases, the steel needle can break during use, thereby potentially interrupting the delivery of insulin or medication. While the reported failure rate was low, Unomedical A/S commenced the recall following discussions with regulatory authorities in Germany and in other affected countries. The Company views this recall as a precautionary measure and has not received any reports of death or serious injury resulting from a breakage of the needle and/or interruption of therapy. Unomedical also initiated a voluntary recall of its Suction Catheter devices in June 2015 after an increase in reported complaints of splitting of the connector portion. The recall has been initiated in Australia and the Czech Republic and is a precaution to ensure that distributed products are of the highest quality. The Company is in the process of completing destruction of the affected devices that have been returned and anticipates closing out this recall shortly. In January 2016, Unomedical initiated a recall of a range of nebulizer products in Europe, the U.S., Canada, and China due to an increase in complaints related to the products’ failure to generate an atomized spray as intended. Following an investigation, Unomedical determined that the issue was due to variability in a molding process in manufacture. The circumstances that lead to recalls and other field actions, as well as similar occurrences in the future, may be the subject of product liability claims due to allegations that use of the Company's products resulted in adverse health consequences. For example, in June 2013, Medtronic MiniMed, Inc. (“Medtronic”), issued a recall of certain infusion sets, including the Quick- Set® and Silhouette® infusion sets, which include P-Cap connectors designed by Medtronic and manufactured for Medtronic by Unomedical A/S for use with Medtronic insulin infusion pumps in diabetes care. Medtronic issued this recall due to a potential safety issue that can occur if insulin or other fluids come in contact with the inside of the tubing/P-Cap connector. This recall has resulted in new pending or threatened litigation against various Unomedical and ConvaTec entities (the latter of which had no involvement in the manufacture or sale of infusion sets). These lawsuits allege that the infusion sets are defective and have caused injuries or death to various plaintiffs. All of these cases also include claims against Medtronic, and allegations that their insulin pumps (which Unomedical does not make or sell) are defective. To the best of the Company's F-35 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) knowledge, as of this report date, approximately 17 product liability lawsuits had been filed. The Unomedical and ConvaTec entities have been voluntarily dismissed without prejudice from four of these lawsuits. ConvaTec has sent a demand to Medtronic seeking indemnification for these lawsuits consistent with the terms of the agreements between them. To date, Medtronic has rejected this demand. The Company also carries product liability insurance, subject to a self-insured retention, and has notified the insurance carrier about these lawsuits. The lawsuits are all in their early stages, and at this point the Company is unable to predict the likelihood of an unfavorable outcome or estimate any potential loss. U.S. Department of Justice ("DOJ") Subpoena The Company and one of its subsidiaries (180 Medical, Inc.) each received a subpoena from the United States Attorney’s Office in Massachusetts (“USAO”) in March 2014. The Company understands that the subpoenas were part of a broad industry investigation into the marketing and business practices of manufacturers and suppliers in the ostomy care, wound care, and continence/urology care markets. Both companies cooperated fully with the government. 180 Medical, along with multiple manufacturers and suppliers in the ostomy care, wound care, and continence/urology care markets, also informally received a copy of an unsealed, first amended qui tam False Claims Act Complaint filed in U.S. District Court for the District of Massachusetts on November 20, 2014. A second amended complaint was filed on May 28, 2015. ConvaTec was not a named party in either Complaint. The second amended Complaint originates with a qui tam action filed by current and former Coloplast employees. The second amended Complaint generally alleges improper marketing and business practices of manufacturers and suppliers in the ostomy care, wound care, and continence/urology care markets, and seeks to recover treble damages sustained by, and civil penalties and restitution owed to, the U.S. as a result of allegedly illegal kickback schemes, illegal telephone solicitation campaigns, and deceptive sales campaigns designed to defraud Medicare to pay for medically unnecessary products and fraudulent billing schemes. On July 29, 2015, the government officially declined to intervene against 180 Medical in the matter, and the relators voluntarily dismissed 180 Medical. On February 5, 2016, the United States Attorney’s Office confirmed that its investigation is closed and the subpoenas are withdrawn. On February 8, 2016, the Court entered an Order dismissing all claims against 180 Medical, without prejudice. Theft of Patient Data Litigation / HIPAA Matters On or about September 24, 2014, a ConvaTec subsidiary, Symbius, received a request for information and documentation from the Department of Health and Human Services Office of Civil Rights (“OCR”) in connection with a breach notice filed by the Company under the Health Insurance Portability and Accountability Act (“HIPAA”) in July 2014. The letter noted potential violations of various HIPAA Privacy and Security Rule and Breach Notification Rule provisions. The breach involved the alleged February 2014 theft of protected health information of approximately 13,000 patients by five former Symbius employees, who left to work for a competitor (the “Competitor”). The Company became aware of the alleged theft in May 2014. Separately, Symbius sued the employees (“Employee Defendants”), and their employer in Arizona Superior Court for Maricopa County, Case No. CV-2014-006931. The case was subsequently removed to the United States District Court for the District of Arizona, Case No. 2:14-cv-01047-GMS. A preliminary injunction was entered prohibiting further use or disclosure of the patient data. This matter has been resolved with a Confidential Settlement Agreement. The Company posted notice on its website and sent individual notices to the affected individuals listed on the documents known to be in the possession of the Employee Defendants after the date of their separation from Symbius in July 2014. Information and documents responsive to the OCR letter were timely produced by the Company on November 10, 2014. In March 2015, the Employee Defendants turned over information and documents during the course of discovery in the lawsuit, which for the first time disclosed a related breach circumstance of which the Company was previously unaware. The documents evidence that in May 2014, a then-current Symbius employee violated law and Company policies by emailing a spreadsheet containing 14,121 rows of patient data to the Employee Defendants, after they were hired by the Competitor. Upon becoming aware of this new related breach circumstance, the Company investigated and identified 800 uniquely affected individuals (who were not affected by the original February 2014 theft), and sent notifications to these individuals as required by law. The Company formally notified OCR about this related breach on April 21, 2015. In a letter dated July 7, 2015, OCR notified the Company that it has closed the case without further action. F-36 ConvaTec Healthcare B S.à r.l. and Subsidiaries Notes to the Consolidated Financial Statements (All tabular dollar amounts expressed in millions of U.S. dollars, except per share data) Smith & Nephew / Patent Litigations and Settlement The Company and its competitor Smith & Nephew (“S&N”) have engaged in a series of multi-year litigations related to patents concerning various wound care products. In one of these matters, the defendants (including S&N) agreed to not market the product (Durafiber) during the pendency of the litigation provided that in the event the Company lost at trial it would pay for the defendants’ lost profits. The Company lost at trial and on appeal and had until recently been engaged in litigation with the defendants as to the amount of their lost profits. The parties have entered into a confidential settlement agreement in respect of this litigation. Environmental Proceedings The Company is a party to proceedings and other matters under various national, state, and local environmental laws, and from time to time incurs the costs of investigating and/or remediating contamination resulting from past industrial activity at current or former company sites, or at waste disposal or reprocessing facilities operated by third parties. With respect to environmental matters for which the Company is responsible under various national, state, and local laws, the Company typically estimates potential costs based on information obtained from the U.S. Environmental Protection Agency, or counterpart state agencies, other national environmental agencies and/or studies prepared by independent consultants, including total estimated costs for the site and the expected cost-sharing, if any, with other “potentially responsible parties”, and the Company accrues liabilities when they are probable and reasonably estimable. As of December 31, 2015, the Company does not expect to incur, and there have been no material costs for investigation and remediation for any sites for which it may be responsible, including liabilities under the U.S. Comprehensive Environmental Response, Compensation and Liability Act and for other remedial obligations. The Company has been involved in certain lawsuits, claims, proceedings and investigations that are currently pending or have been concluded in the last three years. In accordance with the accounting guidance related to contingencies, the Company records accruals for such contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. These matters involve intellectual property, commercial, or environmental, health and safety matters. There can be no assurance that there will not be an increase in the scope of the pending matter or that any future lawsuits, claims, proceedings, or investigations will not be material. The Company continues to believe that during the next few years, the aggregate impact, beyond current reserves, of these other legal matters affecting it is not expected to be material to its results of operations and cash flows, or its financial condition and liquidity. 18. Subsequent Events The Company has evaluated subsequent events through March 15, 2016, the date the financial statements were approved by the board of directors. In January 2016, the Company announced the closure of its manufacturing operations in Greensboro (U.S.) by early 2017 and HC operations in Sungai-Petani (Malaysia) by the end of 2016 with plans to consolidate manufacturing in the remaining facilities or outsource production. The Company estimates that it will incur total restructuring and other exit costs of approximately $25.7 million, in the aggregate, in connection with these initiatives. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent developments" within this Annual Report for further information. F-37 

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