| Accounting Policies | Note 1. Accounting Policies
Background and Basis of Presentation
Halyard Health, Inc. is a global business which seeks to advance
health and healthcare by preventing infection, eliminating pain and
speeding recovery. Our products and solutions are designed to
address some of today’s most important healthcare needs,
namely, preventing infections and reducing the use of narcotics
while helping patients move from surgery to recovery. We market and
support the efficacy, safety and economic benefit of our products
with a significant body of clinical evidence. We operate in two
business segments: Surgical and Infection Prevention
(“S&IP”) and Medical Devices.
References to “Halyard,” “we,”
“our” and “us” refer to Halyard Health,
Inc. References to “Kimberly-Clark” mean Kimberly-Clark
Corporation, a Delaware corporation, and its subsidiaries, other
than Halyard, unless the context otherwise requires.
In November 2013, Kimberly-Clark announced its intention to
evaluate a potential tax-free spin-off of its health care business
(the “Spin-off”). Halyard Health, Inc. was incorporated
in Delaware in February 2014 for the purpose of holding the
health care business following the separation. The Spin-off was
completed on October 31, 2014 and Kimberly-Clark’s
health care business became Halyard Health, Inc.
The condensed consolidated financial statements for the three
months ended March 31, 2015 represent our financial position,
results of operations and cash flows as an independent
publicly-traded company. The condensed combined financial
statements for the three months ended March 31, 2014 represent
the results of operations and cash flows of Kimberly-Clark’s
health care business.
Interim Financial Statements
We prepared the accompanying condensed consolidated financial
statements according to accounting principles generally accepted in
the United States (“GAAP”) for interim financial
information and the instructions to the Quarterly Report on Form
10-Q and Rule 10-01
Use of Estimates
Preparation of our condensed consolidated financial statements in
accordance with GAAP requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of net
sales and expenses during the reporting periods. Estimates are used
in accounting for, among other things, distributor rebate accruals,
future cash flows associated with impairment testing for goodwill
and long-lived assets, loss contingencies, and deferred tax assets
and potential income tax assessments. Actual results could differ
from these estimates, and the effect of the change could be
material to our financial statements. Changes in these estimates
are recorded when known.
As described in our Annual Report on Form 10-K, we completed the
required annual testing of goodwill for impairment for all
reporting units using the beginning of the third quarter of 2014 as
the measurement date and our analysis indicated that we had no
impairment of goodwill. During the three months ended
March 31, 2015, we determined that there were no conditions or
changes that would indicate that our goodwill may be impaired.
New Accounting Standards
In April 2015, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2015-03, Simplifying the
Presentation of Debt Issuance Costs. Interest -
Imputation of Interest Elements of
Financial Statements
In January 2015, the FASB issued ASU No. 2015-01,
Simplifying Income Statement Presentation by Eliminating the
Concept of Extraordinary Items. Income Statement - Extraordinary and
Unusual Items
In August 2014, the FASB issued ASU 2014-15, Disclosure of
Uncertainties About an Entity’s Ability to Continue as a
Going Concern,
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers | Note 1. Accounting Policies
Background and Basis of Presentation
Halyard Health, Inc. is a global business which seeks to advance
health and healthcare by preventing infection, eliminating pain and
speeding recovery. We have two business segments: Surgical and
Infection Prevention (“S&IP”) and Medical Devices.
Our products and solutions are designed to address some of
today’s most important healthcare needs, namely, preventing
infections and reducing the use of narcotics while helping patients
move from surgery to recovery. We market and support the efficacy,
safety and economic benefit of our products with a significant body
of clinical evidence.
References to “Halyard,” “we,”
“our” and “us” refer to Halyard Health,
Inc. and its consolidated subsidiaries, and references to
“Kimberly-Clark” mean Kimberly-Clark Corporation, a
Delaware corporation, and its subsidiaries, unless the context
otherwise requires.
In November 2013, Kimberly-Clark announced its intention to
evaluate a potential tax-free spin-off of its health care business
(the “Spin-off”). Halyard Health, Inc. was incorporated
in Delaware on February 25, 2014 for the purpose of holding
the health care business following the separation. The Spin-off was
completed on October 31, 2014 and Kimberly-Clark’s
health care business became Halyard Health, Inc. See Note 2,
“Separation from Kimberly-Clark” for further
discussion.
The consolidated and combined financial statements represent the
global operations of Halyard and its subsidiaries as an independent
publicly-traded company beginning on November 1, 2014, and a
combined reporting entity comprising the financial position,
results of operations and cash flows of Kimberly-Clark’s
health care business prior to November 1, 2014. The
consolidated and combined financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America (“GAAP”). Certain prior period
amounts have been conformed to current presentation.
Our consolidated and combined financial statements include certain
expenses prior to the Spin-off which Kimberly-Clark allocated to
us. These expenses were charged to us on the basis of direct usage
when identifiable, with the remainder allocated on the relative
percentage of net sales or headcount. We consider the expense
allocation methodology and results to be reasonable for all periods
presented. However, these allocations may not be indicative of the
actual expenses we would have incurred as a separate, stand-alone
public company or of the costs we will incur in the future. The
total amount of these allocations from Kimberly-Clark was
approximately $74 million through the Spin-off date in 2014 and $95
million in 2013 and 2012. See Note 18, “Related Party
Transactions,” for additional information. Following the
Spin-off, we expect Kimberly-Clark will continue to provide many of
these services on a transitional basis for a fee. See Note 2,
“Separation from Kimberly-Clark.”
Kimberly-Clark maintains a number of benefit and stock-based
compensation programs at a corporate level. Our employees
participated in those programs prior to the Spin-off, and as such,
we were charged a portion of the expenses associated with these
programs. However, our consolidated and combined balance sheet does
not include any Kimberly-Clark net benefit plan obligations or
Kimberly-Clark equity related to the stock-based compensation
programs. Any benefit plan net liabilities that are our direct
obligation, such as certain pension and post-retirement plans, are
reflected in our consolidated and combined balance sheet as well as
within our operating expenses. See Note 13, “Stock-Based
Compensation,” and Note 11, “Employee Defined Benefit
Plans,” for further description of these stock-based
compensation and defined benefit programs.
Kimberly-Clark’s net investment balance represents the
cumulative net investment in us by Kimberly-Clark through the
Spin-off date, including any prior net income or loss and
allocations or other transactions with Kimberly-Clark. Prior to the
Spin-off, current domestic income tax liabilities were deemed to be
remitted in cash to Kimberly-Clark in the period the related income
tax expense was recorded.
Prior to the Spin-off, Kimberly-Clark provided financing, cash
management and other treasury services to us. In North America, our
cash balances were swept daily by Kimberly-Clark, and we received
funding from Kimberly-Clark
Principles of Combination
The consolidated and combined financial statements include our net
assets and results of our operations as described above. All
intercompany transactions and accounts after the Spin-off within
our consolidated and combined businesses have been eliminated.
Prior to the Spin-off, the consolidated and combined financial
statements were prepared on a stand-alone basis derived from
Kimberly-Clark’s consolidated financial statements and
accounting records.
Prior to the Spin-off, all intercompany transactions between
Kimberly-Clark and us have been included in the combined financial
statements prior to the Spin-off. Intercompany transactions with
Kimberly-Clark or its affiliates are reflected in the combined
statement of cash flow as the change in Kimberly-Clark’s net
investment within financing activities and in the consolidated
combined balance sheet within Kimberly-Clark’s net investment
prior to the Spin-off.
Use of Estimates
We prepare our consolidated and combined financial statements in
accordance with GAAP, which requires that we make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of net sales and expenses during the reporting
periods. Estimates are used in accounting for, among other things,
distributor rebate accruals, future cash flows associated with
impairment testing for goodwill and long-lived assets, loss
contingencies, and deferred tax assets and potential income tax
assessments. Actual results could differ from these estimates, and
the effect of the change could be material to our financial
statements. Changes in these estimates are recorded when known.
Cash Equivalents
Cash equivalents are short-term investments with an original
maturity date of three months or less.
Inventories and Distribution Costs
For financial reporting purposes, most U.S. inventories are valued
at the lower of cost, using the Last-In, First-Out
(“LIFO”) method, or market. The balance of the U.S. and
non-U.S. inventories are valued at the lower of cost (determined on
the First-In, First-Out (“FIFO”) or weighted-average
cost methods) or market. Distribution costs are classified as cost
of products sold.
Property, Plant and Equipment and Depreciation
For financial reporting purposes, property, plant and equipment are
stated at cost and depreciated on the straight-line method.
Buildings are depreciated over their estimated useful lives,
primarily 40 years. Machinery and equipment are depreciated over
their estimated useful lives, primarily ranging from 16 to 20
years. Leasehold improvements are depreciated over the
assets’ estimated useful lives, or the remaining lease term,
whichever is shorter. Purchases of computer software, including
external costs and certain internal costs (including payroll and
payroll-related costs of employees) directly associated with
developing significant computer software applications for internal
use, are capitalized. Computer software costs are amortized on the
straight-line method over the estimated useful life of the
software, which is generally three to five years. Depreciation
expense is recorded in cost of products sold, research and
development and selling and general expenses.
Estimated useful lives are periodically reviewed, and when
warranted, changes are made to them. Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. An impairment
loss would be indicated when estimated undiscounted future cash
flows from the use and eventual disposition of an asset group,
which are identifiable and largely independent of the cash flows of
other asset groups, are less than the carrying amount of the asset
group. Measurement of an impairment loss would be based on the
excess of the carrying amount of the asset group over its fair
value. Fair value is measured using discounted cash flows or
independent appraisals, as appropriate. When property is sold or
retired, the cost of the property and the related accumulated
depreciation are removed from the consolidated and combined balance
sheet and any gain or loss on the transaction is included in
income.
Goodwill and Other Intangible Assets
Goodwill is tested for impairment annually and whenever events and
circumstances indicate that impairment may have occurred. For 2014,
we completed the required annual testing of goodwill for impairment
for all reporting units using the beginning of the third quarter of
2014 as the measurement date. The fair value for all reporting
units was in excess of the book value. The fair value of our
Medical Devices unit exceeded the carrying value of its net assets
by 76%; the fair value of our S&IP unit exceeded the carrying
value of its net assets by 6% primarily because of the incremental
corporate and ongoing costs that we will incur as a stand-alone
public company.
The evaluation of goodwill involves comparing the current fair
value of each reporting unit to its carrying value, including
goodwill. We considered the market approach and used a discounted
cash flow model to estimate the current fair value of our reporting
units. The fair value determination utilized key assumptions
regarding the growth of the business and stand-alone public company
corporate and ongoing costs, each of which required significant
management judgment, including estimated future sales volumes,
selling prices and costs, changes in working capital and
investments in property and equipment. These assumptions and
estimates were based upon our historical experience and projections
of future activity. In addition, the selection of the discount rate
used to determine fair value was based upon current market rates
and our current cost of financing. There can be no assurance that
the assumptions and estimates made for purposes of the annual
goodwill impairment test will prove to be accurate. Volatility in
the equity and debt markets, or increases in interest rates, could
result in a higher discount rate. Changes in sales volumes, selling
prices and costs of goods sold, additional stand-alone public
company costs, and increases in interest rates could cause changes
in our forecasted cash flows. Unfavorable changes in any of the
factors described above could result in a goodwill impairment
charge in the future.
Intangible assets with finite lives are amortized over their
estimated useful lives and reviewed for impairment whenever events
or changes in circumstances indicate that their carrying amount may
not be recoverable. Estimated useful lives range from 7 to 30 years
for trademarks, 7 to 17 years for patents and acquired
technologies, and 2 to 16 years for other intangible assets. An
impairment loss would be indicated when estimated undiscounted
future cash flows from the use of the asset are less than its
carrying amount. An impairment loss would be measured as the
difference between the fair value (based on discounted future cash
flows) and the carrying amount of the asset.
Acquired in-process research and development
(“IPR&D”) is an indefinite-lived intangible asset
until the research and development project is complete. IPR&D
is measured at fair value upon acquisition and reviewed for
impairment annually, or whenever events or circumstances indicate
that impairment may have occurred. IPR&D is written off
entirely if the project is abandoned. Upon project completion,
IPR&D costs are amortized over an estimated useful life, which
is generally 10 to 15 years. For 2014 we have completed the
required annual testing for impairment and found no indications of
impairment.
Revenue Recognition and Accounts Receivable
Sales revenue is recognized at the time of product shipment or
delivery, depending on when title passes, to unaffiliated
customers, and when all of the following have occurred: a firm
sales agreement is in place, pricing is fixed or determinable, and
collection is reasonably assured. Sales are reported net of
returns, rebates and freight allowed. Distributor rebates are
estimated based on the historical cost difference between list
prices and average end user contract prices and the quantity of
products expected to be sold to specific end users. We maintain
liabilities at the end of each period for the estimated rebate
costs incurred but unpaid for these programs. Differences between
estimated and actual rebate costs are normally not material and are
recognized in earnings in the period such differences are
determined. Taxes imposed by governmental authorities on our
revenue-producing activities with customers, such as sales taxes
and value-added taxes, are excluded from net sales.
Net sales to one customer accounted for 19%, 19% and 21%,
respectively, of net sales in 2014, 2013 and 2012. No other
customer accounted for more than 10% of net sales in any of the
periods presented herein. As of December 31, 2014 and 2013, we
had three and two customers, respectively, who individually
accounted for more than 10% of our consolidated and combined
accounts receivable balance.
Upon the Spin-off, Kimberly-Clark retained outstanding accounts
receivable (See Note 2, “Separation from
Kimberly-Clark”). The allowances for doubtful accounts and
sales discounts was $1 million as of each year ended
December 31, 2014 and 2013, respectively. The provision for
doubtful accounts was not material for the years ended
December 31, 2014, 2013 and 2012.
Related Party Sales
Prior to the Spin-off, sales to other Kimberly-Clark subsidiaries
and affiliates of supplies and other finished products have been
reflected as related party sales in our combined financial
statements. These sales have historically been transacted under
cost-plus pricing arrangements, which is consistent with
Kimberly-Clark’s global transfer pricing policies. We entered
into manufacturing and supply agreements with Kimberly-Clark prior
to the Spin-off pursuant to which we or Kimberly-Clark, as the case
may be, manufacture, label and package products for the other
party. The manufacturing and supply agreements replaced our
historical intercompany arrangements and reflect new pricing.
Following the Spin-off, such sales are reflected as third party
sales.
Foreign Currency Translation
The income statements of foreign operations are translated into
U.S. dollars at rates of exchange in effect each month. Prior to
the Spin-off, the balance sheets of these operations are translated
at period-end exchange rates, and the differences from historical
exchange rates are reflected in invested equity as unrealized
translation adjustments. Following the Spin-off, the differences
from historical exchange rates are reflected as unrealized
translation adjustments in other comprehensive income.
Derivative Instruments and Hedging
All derivative instruments are recorded as assets or liabilities on
the balance sheet at fair value. Changes in the fair value of
derivatives are either recorded in the income statement or other
comprehensive income, as appropriate. The effective portion of the
gain or loss on derivatives designated as cash flow hedges is
included in other comprehensive income in the period that changes
in fair value occur, and is reclassified to income in the same
period that the hedged item affects income. Any ineffective portion
of cash flow hedges is immediately recognized in income. Certain
foreign-currency derivative instruments not designated as hedging
instruments have been entered into to manage a portion of our
foreign currency transactional exposures. The gain or loss on these
derivatives is included in income in the period that changes in
their fair values occur. Our policies allow the use of derivatives
for risk management purposes and prohibit their use for
speculation. Our policies also prohibit the use of any leveraged
derivative instrument. Consistent with our policies, foreign
currency derivative instruments are entered into with major
financial institutions. At inception we formally designate certain
derivatives as cash flow hedges and establish how the effectiveness
of these hedges will be assessed and measured. This process links
the derivatives to the transactions they are hedging. See Note 15,
“Objectives and Strategies for Using Derivatives,” for
disclosures about derivative instruments and hedging
activities.
Research and Development
Research and development expenses are expensed as incurred.
Research and development expenses include any impairment for
acquired IPR&D.
Stock-Based Compensation
Prior to the Spin-off, our employees participated in
Kimberly-Clark’s stock-based compensation plans. Stock-based
compensation expense was charged to us based on the awards and
terms previously granted to our employees. Subsequent to the
Spin-off, we have a stock-based Equity Participation Plan and an
Outside Directors’ Compensation Plan, under which we can
grant stock options, restricted shares and restricted share units
to employees and outside directors. Stock-based compensation is
initially measured at the fair value of the awards on the grant
date and is recognized in the financial statements over the period
the employees are required to provide services in exchange for the
awards. The fair value of option awards is measured on the grant
date using a Black-Scholes option-pricing model. The fair value of
performance-based restricted share awards is based on the
Kimberly-Clark or Halyard stock price at the grant date and the
assessed probability of meeting future performance targets. See
Note 13, “Stock-Based Compensation.”
Income Taxes
Prior to the Spin-off, our income taxes were calculated on a
separate tax return basis, although operations have been included
in Kimberly-Clark’s U.S. federal, state and foreign tax
returns. Our income tax results as presented were not necessarily
indicative of future performance and did not necessarily reflect
the results that we would have generated as an independent publicly
traded company for the periods presented.
Following the Spin-off, we account for income taxes under the asset
and liability method of accounting, which requires the recognition
of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. Under this method,
changes in tax rates and laws are recognized in income in the
period such changes are enacted. The provision for federal, state,
and foreign income taxes is calculated on income before income
taxes based on current tax law and includes the cumulative effect
of any changes in tax rates from those used previously in
determining deferred tax assets and liabilities. Such provision
differs from the amounts currently payable because certain items of
income and expense are recognized in different reporting periods
for financial reporting purposes than for income tax purposes.
Recording the provision for income taxes requires management to
make significant judgments and estimates for matters whose ultimate
resolution may not become known until the final resolution of an
examination by the Internal Revenue Service (IRS) or state and
foreign agencies. If it is more likely than not that some portion,
or all, of a deferred tax asset will not be realized, a valuation
allowance is recognized.
Recording liabilities for uncertain tax positions involves
significant judgment in evaluating our tax positions and developing
the best estimate of the taxes ultimately expected to be paid. We
include any related tax penalties and interest in income tax
expense.
Employee Defined Benefit Plans
We recognize the funded status of our defined benefit and
post-retirement plans as an asset or a liability on our balance
sheet. Actuarial gains or losses are a component of our other
comprehensive income, which is then included in our accumulated
other comprehensive income. Pension and post-retirement benefit
expenses are recognized over the period in which the employee
renders service and becomes eligible to receive benefits. We make
significant assumptions (including the discount rate, expected rate
of return on plan assets and health care trend rates) in computing
the pension and post-retirement benefits expense and
obligations.
Recent Pronouncements
In August 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2014-15, Disclosure of Uncertainties About
an Entity’s Ability to Continue as a Going Concern,
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers |
