HILL-ROM HOLDINGS, INC. Overview
Hill-Rom Holdings, Inc. ("we," "us," or "our") is a global medical technology leader whose approximately 10,000 employees have a single purpose: enhancing outcomes for patients and their caregivers by Advancing Connected Care™. Around the world, our innovations touch over 7 million patients each day. Our products and services help enable earlier diagnosis and treatment, optimize surgical efficiency and accelerate patient recovery while simplifying clinical communication and shifting 26
-------------------------------------------------------------------------------- care closer to home. We make these outcomes possible through connected smart beds, patient lifts, patient assessment and monitoring technologies, caregiver collaboration tools, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care. Industry Trends
We believe the following global healthcare trends will accelerate in a post-pandemic market.
Clinical Communications . COVID-19 accelerated the need and greater acceptance of virtual care. Although available for some time, the adoption of virtual visits has gained wide acceptance from patients, providers and more importantly payers. We see this trend continuing and the environment is ripe for continued growth, including within the walls of the hospitals. Additionally, with shortages of physician specialties and other healthcare staff, patient engagement tools, remote patient monitoring software, and use of digital communication technology designed to increase care team efficiencies will also increase due to the desire for lower cost care (lower staff-to-patient ratios), and the opportunity to enhance patient outcomes. Intelligent Monitoring and Diagnostics. Connected care cannot only take place through virtual means, but also through the digital transformation of connected devices and decision support tools. Providers will utilize sensors, wearables, artificial intelligence and predictive analytics to generate meaningful and real-time information about patients to maximize clinical insights, improve workflow, enable earlier intervention and enhance the patient's experience, across sites of care Lower Cost Care Settings. Growing pressure on health care costs are resulting in a continued migration of care from the acute care hospital into lower cost care settings. We believe that this trend increases the demand for more solutions to care for these patients, many of whom are medically complex, in lower acuity settings such as ambulatory surgery centers, outpatient centers and the home. Opportunities include improved medical technologies, remote monitoring, communication solutions and information technologies. Provider Consolidation. The financial pressures experienced via COVID-19 place an even greater chasm between providers that can weather hardship and those that cannot. We expect economic considerations, competition and other factors will lead to ongoing consolidation of customers. Economic and Clinical Value. The overriding importance of improved quality of care metrics will maintain the focus on improving outcomes related to pressure injuries, patient falls, patient deterioration and sepsis. Hospitals may experience reduced reimbursement for hospital-acquired adverse events, creating a stronger connection between these adverse events and hospital revenue levels. Therefore, we believe that health care providers will seek to do business with partners that can demonstrate improved clinical, and consequently, economic outcomes. Demand for Health Care Services. Patient and provider demand for health care products and services is expected to continue to grow over the long-term as a result of many factors, including an aging population and an increasing number of chronic patients across all care settings, including hospitals, extended care facilities, outpatient settings and in the home. At the same time, health care providers will also be under continued pressure to improve efficiency and control costs.
Strategic Priorities
We believe we have aligned our strategic priorities to accommodate the evolving global health care landscape.
Advancing category leadership with differentiated solutions and innovation.
Health care systems today are challenged to treat the rising incidence of
complex diseases and conditions while reducing costs, increasing efficiency and
improving patient outcomes. We are well positioned to meet demand for
innovative, differentiated solutions that drive a clear value proposition for
customers. We are executing on a strong pipeline of impactful medical
technologies, communication tools and information technologies to build on our
category leadership and provide caregivers the products and solutions needed to
enhance patient care and outcomes.
Expanding internationally and penetrating emerging markets. International
markets continue to expand access to health care for their growing populations,
presenting significant opportunity to expand our presence with our
differentiated solutions. By focusing on product categories and innovations with
the highest growth potential, coupled with our 'One Hillrom' approach to enhance
our strong global channel and footprint, we will continue to enhance our
international presence, penetrate emerging markets and drive accelerated growth.
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-------------------------------------------------------------------------------- Transforming the portfolio with select merger and acquisition and optimization initiatives as permitted under the terms of the merger agreement. Business development has played an important role in our transformation in the last several years, by strengthening and diversifying the portfolio. We will continue to deploy capital on opportunities that align with our strategy and meet our financial objectives. We enhanced our growth prospects by divesting non-strategic assets and redirecting resources to advance category leadership in higher-growth, higher-margin opportunities. We will continue to evaluate and pursue opportunities that further optimize our business portfolio. Driving operational execution and strong financial performance. Investing to support future growth is key to our success, while maintaining strong financial discipline and operational performance. We are executing on a variety of initiatives to drive operating efficiencies, including consolidation of our manufacturing footprint, lowering sourcing costs, improving productivity and optimizing business processes. Savings generated from these actions will provide flexibility to reinvest in strategic priorities to drive growth, including continued innovation to drive category leadership and investments to further our international presence, particularly in emerging markets.
The Impacts of COVID-19 on Hillrom
COVID-19 has impacted global economies as travel, leisure and discretionary consumer spending has reduced significantly causing companies to make commensurate changes to their investments, human capital, and financial outlooks.The United States and countries around the world continue to take precautionary and preventive measures to reduce the spread of COVID-19. Prospects for an eventual path out of the crisis have improved as COVID-19 vaccines were authorized for use globally and governments began executing plans to distribute the vaccines to the public as supplies become available over the course of the fiscal year endedSeptember 30, 2021 . However, the timing of return to historical operating levels remains uncertain due to external factors such as policymaker decisions to remove certain restrictions, as they evaluate the continued infection rate and COVID-19 related deaths, the emergence of new variants of the virus, potential future outbreaks, the distribution of available vaccines, and people's willingness to take the vaccine.
Revenues and Customers
For the fiscal year endedSeptember 30, 2021 , we experienced increased revenue as hospital access and physician practice restrictions continue to moderate in the primary markets we serve and return to more normal operating activities. This is partially offset by lower demand globally for products used in the treatment of patients diagnosed with COVID-19. The lower demand was due to declining COVID-19 confirmed cases and hospitalizations and a reduction in significant one-time COVID-19 purchases made in comparison to the fiscal year endedSeptember 30, 2020 . For the fiscal years endedSeptember 30, 2021 and 2020, we estimated that approximately$100.0 million and$180.0 million of revenue recognized related to one-time COVID-19 purchases and rentals. In addition, we recognized revenue of$11.5 million in the fiscal year endedSeptember 30, 2021 related to a retrospective increase in the third-party reimbursement rate for certain respiratory health devices. The impact of these sales are described within our Results of Operations.
For the fiscal year ending
Operations and Workforce
The COVID-19 pandemic did not significantly impact Hillrom's operations related to our workforce or supply chain. Our productions facilities have remained open and employment levels have remained consistent. Many employees in our administrative functions have effectively worked remotely sincemid-March 2020 . In other areas of the business, we have adapted our processes and used technology to continue to effectively execute on our strategic priorities as well as daily operating activities. A workforce reintegration plan has been established to facilitate a return to the office. The reintegration plan includes safety measures and procedures in compliance with local laws and regulations to ensure a safe work environment for employees that return to the office. As disclosed in Note 1. Summary of Significant Accounting Policies, we benefited from government programs within the various jurisdictions in which we operate in the form of subsidies, incentives, cost relief and payment deferrals. Management will continue to evaluate these opportunities as well as the related requirements or restrictions to support our operations and workforce in a manner that allows us to continue to operate efficiently and effectively. For further discussion, see the risk factor within Item 1.A Risk Factors, entitled "Our business, results of operations, financial condition and prospects have been and could continue to be adversely affected by the ongoing COVID-19 pandemic and the related effects on public health." 28 --------------------------------------------------------------------------------
Use of Non-GAAP Financial Measures
The accompanying Consolidated Financial Statements and related notes are presented in accordance with accounting principles generally accepted inthe United States ("GAAP"). In addition to the results reported in accordance with GAAP, we routinely provide operating margin, income before taxes, income tax expense and earnings per diluted share results on an adjusted basis as we believe these measures contribute to the understanding of our financial performance, provide additional analytical tools to understand our results from core operations and reveal underlying operating trends. These measures exclude strategic developments, acquisition and integration costs and related fair value adjustments, gains and losses associated with disposals of businesses or significant product lines, regulatory costs related to updating existing product registrations to comply with the European Medical Device Regulations, Special charges as described in Note 10. Special Charges of this Form 10-K, the transitional impacts of theU.S. Tax Cuts and Jobs Act (the "Tax Act"), changes in tax accounting methods, and other tax law changes as described in Note 11. Income Taxes of this Form 10-K, expenses associated with these tax items, the impacts of significant litigation matters, certain impacts of the COVID-19 pandemic and other unusual events. We also exclude expenses associated with the amortization of purchased intangible assets. These adjustments are made to allow investors to evaluate and understand operating trends excluding their impact on operating income and earnings per diluted share.
Management uses these measures internally for planning, forecasting and evaluating the performance of the business. Investors should consider these non-GAAP measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP.
In addition, we present certain results on a constant currency basis, which compares results between periods as if foreign currency exchange rates had remained consistent period-over-period. We monitor sales performance on an adjusted basis that eliminates the positive or negative effects that result from translating international sales intoU.S. dollars. We calculate constant currency by applying the foreign currency exchange rate for the prior period to the local currency results for the current period. We believe that evaluating growth in net revenue on a constant currency basis provides an additional and meaningful assessment to both management and investors.
Results of Operations
Fiscal Year Ended
In this section, we provide an overview of our results of operations. We disclose segment information that is consistent with the way in which management operates and views the business.
Net Revenue
U.S. OUS
(In millions) Year Ended September 30 Change As Constant Change As Change As Constant
2021 2020 Reported Currency Reported Reported Currency
Revenue:
Product sales and service$ 2,669.6 $ 2,571.2 3.8 % 1.9 % 5.4 % 0.8 % (4.8) % Rental revenue 349.1 309.8 12.7 % 11.9 % 14.7 % (1.6) % (8.1) % Total net revenue$ 3,018.7 $ 2,881.0 4.8 % 3.0 % 6.7 % 0.7 % (4.9) % Revenue: Patient Support Systems$ 1,568.3 $ 1,539.1 1.9 % 0.3 % 2.5 % 0.2 % (5.8) % Front Line Care 1,117.0 1,025.0 9.0 % 7.3 % 11.1 % 4.3 % (1.0) % Surgical Solutions 333.4 316.9 5.2 % 1.9 % 19.6 % (4.2) % (9.7) % Total net revenue$ 3,018.7 $ 2,881.0 4.8 % 3.0 % 6.7 % 0.7 % (4.9) %
OUS - Outside of
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Consolidated Revenue
Product sales and service revenue increased 3.8% on a reported basis, and 1.9% on a constant currency basis for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 . The increase was primarily driven by higher demand in our care communications business, Surgical Solutions business and higher demand for products used within the physician practice setting as hospitals and physician offices restrictions continue to moderate in the primary markets we serve and return to more normal operating activities. The increase was further driven by the one-time revenue related to a retrospective increase in the third-party reimbursement rate for certain respiratory health devices as well as new product launches and revenue from recent acquisitions across all business segments. The increase was partially offset by a reduction in significant one-time COVID-19 purchases in comparison to the fiscal year endedSeptember 30, 2020 and the global exit of the original equipment manufacturer business with Surgical Solutions.
Rental revenue increased 12.7% on a reported basis, and 11.9% on a constant
currency basis for the fiscal year ended
Business Segment Revenue
Patient Support Systems revenue increased 1.9% on a reported basis and 0.3% on a constant currency basis for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 . The increase was driven primarily by higher demand in our care communications business due to new product launches, recent acquisitions and hospital access restrictions continuing to moderate in the primary markets we serve and return to more normal operating activities. The increase was further driven by higher rental of beds in response to COVID-19 hospitalizations. The increase was partially offset by a reduction in significant one-time COVID-19 purchases of intensive care unit and med-surg beds and specialty surfaces. FrontLine Care revenue increased 9.0% on a reported basis and 7.3% on a constant currency basis for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 . The increase was primarily driven by higher global demand for patient monitoring, physical assessment tools and diagnostic products, including vision care and cardiology. The increase was further driven by the one-time revenue recognized in the fiscal year endedSeptember 30, 2021 related to a retrospective increase in the third-party reimbursement rate for certain respiratory health devices as well as new product launches and revenue from recent acquisitions. The increase was partially offset by the absence of significant one-time COVID-19 purchases of respiratory health ventilators during the year endedSeptember 30, 2020 . Surgical Solutions revenue increased 5.2% on a reported basis and 1.9% on a constant currency basis for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 , primarily driven by higher demand for operating room tables as hospitals begin to return to more normal operating activities and revenue from recent acquisitions. The increase is partially offset by the global exit of the original equipment manufacturer business. Gross Profit Year Ended September (In millions) 30 2021 2020 Gross Profit 1 Product sales and service$ 1,387.2 $ 1,311.3 Percent of Related Net Revenue 52.0 % 51.0 % Rental$ 200.9 $ 163.8 Percent of Related Net Revenue 57.5 % 52.9 % Total Gross Profit$ 1,588.1 $ 1,475.1 Percent of Total Net Revenue 52.6 % 51.2 %
1 Gross Profit is calculated as net product sales and service revenue and rental revenue less the related cost of goods sold or rental expenses as disclosed on the Statements of Consolidated Income.
Gross Profit from Product sales and service increased$75.9 million or 5.8% for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 . The increase was primarily driven by the revenue from the retrospective 30
-------------------------------------------------------------------------------- increase in the third-party reimbursement rate for certain respiratory health devices for the fiscal year endedSeptember 30, 2021 . The increase in gross profit is also attributable to favorable product mix from new product launches and improved cost efficiencies within our supply chain operations. Gross Profit from Rental increased$37.1 million or 22.6% for the fiscal year endedSeptember 30, 2021 compared to fiscal year endedSeptember 30, 2020 . The increase in rental gross profit was driven by higher volumes and lower servicing costs associated with the Patient Support Systems rental portfolio due to higher rental of beds for COVID-19 patients. Operating Expenses Year Ended September (In millions) 30 2021 2020 Research and development expenses$ 144.9 $ 136.5 Percent of Total Net Revenue 4.8 % 4.7 % Selling and administrative expenses$ 887.0 $ 820.4 Percent of Total Net Revenue 29.4 % 28.5 % Acquisition-related intangible asset amortization$ 108.6 $ 109.0 Percent of Total Net Revenue 3.6 % 3.8 % Research and development expenses increased$8.4 million , or 6.2%, for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 due to the timing of projects. As a percentage of revenue, Research and development expenses remained relatively consistent. Selling and administrative expenses increased$66.6 million , or 8.1% for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 primarily due to litigation expenses incurred related to the acquisition of Bardy, higher variable compensation linked to performance, acquisition-related expenses related to the proposed acquisition by Baxter, and increased headcount due to growth initiatives. The increase is partially offset by lower spending on business travel. See Note 3. Business Combinations and Note 15. Commitments and Contingencies for further information. Acquisition-related intangible asset amortization decreased$0.4 million , or 0.4%, for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 and remained consistent as a percentage of revenue. See Note 3. Business Combinations for further information on acquired intangible assets. Special Charges and Other (In millions) Year Ended September 30 2021 2020 Special charges$ 47.4 $ 41.5 Interest expense (65.6) (74.0) Loss on extinguishment of debt (9.8) (15.6) Investment income (expense) and other, net
(22.0) (6.9)
In connection with various transformative initiatives, exit activities, and organizational changes to improve our business alignment and cost structure we recognized Special charges of$47.4 million for the fiscal year endedSeptember 30, 2021 , compared to$41.5 million for the fiscal year endedSeptember 30, 2020 . During the year endedSeptember 30, 2021 , we incurred$25.6 million related to the Workforce Reduction Plan. These charges related to the initiatives described in Note 10. Special Charges. Interest expense decreased$8.4 million , or 11.4%, for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 due to lower average borrowings outstanding and a decline in LIBOR impacting our variable rate debt under the Securitization and Revolving Credit Facilities. See Note 5. Financing Agreements for further information.
Loss on extinguishment of debt was
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and $2.3 million of debt issuance costs previously capitalized. Loss on
extinguishment of debt was $15.6 million for the fiscal year ended September 30,
2020 and related to the refinancing of senior unsecured notes of $425.0 million
in September 2019 , which was comprised of a $12.2 million prepayment premium and
$3.4 million of debt issuance costs previously capitalized. See Note 5.
Financing Agreements for further information.
Investment income (expense) and other, net for the fiscal year ended September
30, 2021 was expense of $22.0 million primarily related to the litigation
settlement of $32.5 million related to the acquisition of Bardy, partially
offset by the receipt of settlement awards of $8.8 million and an insurance
settlement of $5.3 million related to covered losses in prior periods.
Investment income (expense) and other, net for the fiscal year ended September
30, 2020 was expense of $6.9 million comprised primarily of a non-cash pension
plan settlement loss of $8.4 million , investment losses of $2.0 million which
was partially offset by a $3.0 million gain that represented the step up to fair
value of the historical investment of a company that was fully acquired during
fiscal year ended September 30, 2020 . See Note 3. Business Combinations and Note
8. Retirement and Postretirement Benefit Plans and Note 15. Commitments and
Contingencies for further information.
Income Tax Expense
The effective tax rate was 17.9% for the fiscal year endedSeptember 30, 2021 compared to 17.8% for the fiscal year endedSeptember 30, 2020 . The effective tax rate remained relatively flat for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 , increasing just 0.1%. See Note 11. Income Taxes for further information. The adjusted effective tax rate remained relatively flat for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 , decreasing just 0.5%, from 19.8% to 19.3%.
Earnings per Share
Diluted earnings per share increased from$3.32 to$3.72 for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 primarily driven by higher gross profits due to higher revenues and favorable product mix. The increase was partially offset by higher operating expense levels, including litigation expenses and settlement payments related to the acquisition of Bardy, acquisition-related expenses related to the proposed acquisition by Baxter and higher special charges. Business Segment Divisional Income (In millions) Year Ended September 30 Change As 2021 2020 Reported Divisional income: Patient Support Systems$ 356.1 $ 332.3 7.2 % Front Line Care 348.8 301.8 15.6 % Surgical Solutions 51.6 39.5 30.6 %
Refer to Note 14. Segment Reporting for a description of how divisional income is determined.
Patient Support Systems divisional income increased 7.2% for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 primarily due to expanded gross profits from the bed rental portfolio inthe United States due to higher rental of beds as well as favorable product mix due to new product launches. The increase was partially offset by a reduction in the significant one-time COVID-19 purchases of intensive care unit and med-surg beds and specialty surfaces. FrontLine Care divisional income increased 15.6% for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 . The increase was primarily driven by higher global sales of patient diagnostic products, including vision care and cardiology, partially offset by lower sales of respiratory health ventilators compared to the prior year due to declining demand for products used in the treatment of COVID-19 patients. Surgical Solutions divisional income increased 30.6% for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 primarily driven by increased demand for operating room tables as hospitals began to return to more normal operating activities, offset by the global exit of the original equipment manufacturer business. 32 --------------------------------------------------------------------------------
As Reported and Adjusted Earnings
Operating margin, income before income taxes, income tax expense and earnings attributable to common shareholders per diluted share are summarized in the table below for the fiscal years endedSeptember 30, 2021 and 2020. As reported amounts are adjusted for certain items to aid management in evaluating the performance of the business. Investors should consider these measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Income tax expense is computed by applying a blended statutory tax rate based on the jurisdictional mix of the respective before tax adjustment. 33
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Year Ended September 30
(In millions) 2021 2020
Income Income
Before Before
Income Income Tax Operating Income Income Tax
Operating Margin Taxes Expense Diluted EPS Margin Taxes Expense Diluted EPS
As Reported 13.3 % $ 302.8 $ 54.3 $ 3.72 12.8 % $ 271.2 $ 48.2 $ 3.32
Adjustments:
Acquisition and integration
costs and related fair value
adjustments 1 0.9 % 62.7 6.9 0.84 - % (0.6) 1.8 (0.04)
Acquisition-related intangible
asset amortization 2 3.6 % 108.6 26.3 1.23 3.7 % 109.0 26.1 1.23
Field corrective actions 3 0.1 % 1.6 0.4 0.02 0.2 % 4.9 1.2 0.05
Regulatory compliance costs 4 0.5 % 15.1 3.7 0.17 0.5 % 15.6 3.7 0.18
Special charges 5 1.6 % 47.4 11.0 0.54 1.4 % 41.5 9.2 0.48
Debt refinancing costs 6 - % 9.8 2.3 0.11 - % 16.1 3.7 0.18
Loss on disposition of business
7 - % - - - - % (2.8) (4.4) 0.02
Pension settlement expense 8 - % $ - - - - % 8.4 1.9 0.10
Litigation settlements 9 - % (6.8) (1.6) (0.08) - % (1.2) (0.3) (0.01)
COVID-19 related cost and
benefits, net 10 (0.4) % (11.6) (0.7) (0.16) 0.2 % 1.4 0.7 0.02
LIFO change11 (0.2) % (6.8) (1.5) (0.08) - % - - -
Adjusted Earnings 19.4 % 522.8 $ 101.1 $ 6.31 18.8 % $ 463.5 $ 91.8 $ 5.53
1 Acquisition and integration costs and related fair value adjustments include legal and professional fees, temporary labor, consulting and other costs related to business development
activities and the closing and integration of acquired businesses. For acquired businesses, this also includes fair value adjustments related to contingent considerations, and purchase
accounting adjustments for deferred revenue and other items. See Note 3. Business Combinations for further information.
2 Acquisition-related intangible asset amortization relates to the amortization of intangible assets acquired through the transactions described in Note 3. Business Combinations and Note 4.
Goodwill and Intangible Assets.
3 Field corrective action costs relate to costs incurred to address broad-based product performance matters outside of normal warranty provisions. These costs are included in Cost of goods
sold.
4 Regulatory compliance costs relate to updating existing product registrations to comply with the European Medical Device Regulations and the impacts of current period tax law changes..
These costs are included in Selling and administrative expenses.
5 Special charges represent a variety of costs associated with restructuring actions, including severance and related benefits, lease termination fees, asset write-downs and temporary labor
on shutdown of operations. It also includes costs related to a global information technology transformation, including rationalizing and transforming our enterprise resource planning software
solutions and other complementary information technology systems. See Note 10. Special Charges for further information.
6 Debt refinancing costs are expenses related to the costs incurred between the issuance and redemption our of our senior unsecured notes
due 2027 and 2023, and the redemption of our senior unsecured notes due 2025. For the fiscal year ended September 30, 2021 , debt refinancing costs include a loss on extinguishment of debt of
$9.8 million related to the redemption of all of our previously outstanding senior unsecured 5.00% notes due February 2025 . For the fiscal year ended September 30, 2020 , debt refinancing
costs include a loss on extinguishment of debt of $15.6 million as well as $0.5 million duplicative interest costs related to the redemption of our previously outstanding senior unsecured
5.75% notes due September 2023 . See Note 5. Financing Agreements for further information.
7 Loss on disposition of business relates to losses recorded in Investment income (expense) and other, net and additional tax expense of $4.1 million as a result of a change in the taxable
gain resulting from business dispositions, which occurred in August 2019 .
8 Pension settlement expense represents an actuarial loss totaling $8.4 million recorded as a component of Investment income (expense) and other, net. See Note 8. Retirement and
Postretirement Benefit Plans for further information.
9 Litigation settlements represent the aggregate charges, costs or recoveries associated with litigation settlements, including related expenses. These costs are recorded as a component of
Investment income (expense) and other, net.
10 COVID-19 related costs and benefits, net primarily represent incremental non-recurring costs incurred to prepare our facilities for workforce reintegration to ensure the safety of our
employees, partially offset by the recognition of funding associated with government programs created in response to COVID-19. For the fiscal year ended September 30, 2021 , COVID-19 related
benefits include revenue of $11.5 million related to a retrospective increase in the third-party reimbursement rate for certain respiratory health devices. See Note 1. Summary of Significant
Accounting Policies for further information.
11 LIFO change reflects the change in accounting principle related to the change in costing method of remaining inventory from LIFO to FIFO, which we adopted during the three months ended
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-------------------------------------------------------------------------------- Liquidity and Capital Resources (In millions) Year Ended
2021 2020
Cash Flows Provided By (Used In):
Operating activities $ 476.1 $ 481.7
Investing activities (487.2) (131.2)
Financing activities (13.4) (695.0)
Effect of exchange rate changes on cash (0.2) 7.2
(Decrease) Increase in Cash, Cash Equivalents and
Restricted Cash $ (24.7) $ (337.3)
Net cash flows from operating activities and selected borrowings represented our
primary sources of funds for growth of the business, including capital
expenditures and acquisitions. Our financing agreements contain certain
restrictions relating to dividend payments, the making of restricted payments
and the incurrence of additional secured and unsecured indebtedness. None of our
financing agreements contain any credit rating triggers that would increase or
decrease our cost of borrowings. Changes in our credit rating can, however,
impact the cost of borrowings and any potential future borrowings under any new
financing agreements.
Operating Activities
Cash provided by operating activities decreased $5.6 million for the fiscal year
ended September 30, 2021 compared to the fiscal year ended September 30, 2020
primarily due to slightly higher working capital, partially offset by higher net
income.
Investing Activities
Cash used in investing activities increased $356.0 million for the fiscal year
ended September 30, 2021 compared to the fiscal year ended September 30, 2020
primarily due to the increase in cash paid related to the acquisition activity
summarized in the table below.
Also, included in capital spending is our global information technology
transformation. During the years ended September 30, 2021 and 2020, $17.4
million and $22.0 million was capitalized as software in Other intangible assets
and software, net related to the global information technology transformation
initiative. See Note 3. Business Combinations and Note 10. Special Charges for
further information.
Company or Assets Acquired Date of Acquisition Cash Paid (In millions)
Intellectual property and technology of
EarlySense January 28. 2021 $ 30.0
Bardy August 6, 2021 369.0
Fiscal 2021 Totals $ 399.0
Excel Medical January 10, 2020 $ 13.1
Connecta May 18, 2020 7.5
Videomed July 21, 2020 7.8
Fiscal 2020 Totals $ 28.4
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Financing Activities
Cash used in financing activities was$13.4 million for the fiscal year endedSeptember 30, 2021 primarily due to net borrowings on the Revolving Credit Facility of$515.0 million offset by cash paid for the redemption of all of our previously outstanding senior unsecured 5.00% notes dueFebruary 2025 for$300.0 million and related prepayment penalty of$7.5 million , stock repurchases of$130.7 million in the open market, as well as cash dividends paid of$62.0 million . We used the increased borrowings and operating cash flows to redeem our senior unsecured 5.00% notes.
Our debt-to-capital ratio was 52.3% and 52.1% as of
For further discussion on Results of Operations and Liquidity and Capital Resources for the fiscal year endedSeptember 30, 2020 compared to the fiscal year endedSeptember 30, 2019 , see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in the fiscal year endedSeptember 2020 Annual report on Form 10-K.
Other Liquidity Matters
Our cash balances and cash flows generated from operations may be used to fund strategic investments, business acquisitions, working capital needs, investments in technology and marketing, share repurchases and payments of dividends to our shareholders. We believe that our cash balances and cash flows generated from operations, along with amounts available under our financing agreements, will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations for at least the next 12 months from the date of this filing. Our cash flows from operating activities for the fiscal year endedSeptember 30, 2021 were not materially adversely impacted by COVID-19. There have been no changes to our cost of or access to our capital and funding sources. We have not identified instability with the financial institutions with whom we maintain our financing relationships. We believe we can continue to service our outstanding borrowings or other financial obligations. As ofSeptember 30, 2021 , there were outstanding borrowings of$515.0 million on the Revolving Credit Facility and available borrowing capacity was$675.0 million after giving effect to the$9.9 million of outstanding standby letters of credit. As ofSeptember 30, 2020 , there were no outstanding borrowings on the Revolving Credit Facility, and available borrowing capacity was$1,191.0 million after giving effect to$9.0 million of outstanding standby letters of credit. Our long-term debt instruments require nominal repayments over the next 12 months, with our next significant maturity occurring inAugust 2024 . Since the beginning of the global COVID-19 pandemic inDecember 2019 , we have not experienced liquidity constraints through either the movement of cash or under our Revolving Credit Facility. Furthermore, we have successfully extended our 364-day accounts receivable securitization facilities that now expires onApril 22, 2022 . OnMay 20, 2021 , we redeemed all of our outstanding senior unsecured 5.00% notes dueFebruary 15, 2025 of$300.0 million using cash on hand and funds borrowed from both Securitization Facilities and the Revolving Credit Facility.
As of
Over the long term, we intend to continue to pursue inorganic growth in certain areas of our business, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. We have a liability of$70.1 million recorded in the Consolidated Balance Sheet related to fair value of the contingent consideration that may be payable related to recent acquisitions. Refer to Note 3. Business Combinations for further detail regarding the acquisitions completed during fiscal years endedSeptember 30, 2021 , 2020 and 2019.
On
Our primary pension plan invests in a variety of equity and debt securities.
Refer to Note 8. Retirement and Postretirement Benefit Plans for further detail
regarding our retirement plans, including our benefit obligations, plan assets
funded status and estimated future benefit payments, among others.
We intend to continue to pay quarterly cash dividends comparable to those paid
in the periods covered by these financial statements. However, the declaration
and payment of dividends will be subject to the sole discretion of our Board and
will
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-------------------------------------------------------------------------------- depend upon many factors, including our financial condition, earnings, capital requirements, covenants associated with debt obligations, legal requirements and other factors considered relevant by our Board. OnSeptember 15, 2020 , we committed to a workforce reduction plan, which includes a voluntary retirement program and involuntary severance actions. The actions under this plan resulted in cash expenditures of approximately$25.6 million and were substantially completed during fiscal year endedSeptember 30, 2021 . During fiscal year endedSeptember 30, 2021 , we repatriated$2.2 million of our cash and cash equivalents from outsidethe United States that was previously taxed, and paid no related foreign withholding tax. During fiscal year endedSeptember 30, 2020 , we repatriated$12.2 million of our cash and cash equivalents from outsidethe United States that was previously taxed and paid no related foreign withholding tax. These repatriated funds were used for working capital purposes or debt repayments. As ofSeptember 30, 2021 , approximately 54.9% of our cash and cash equivalents were held by our foreign subsidiaries. Our practice and intention were to reinvest the earnings in our non-U.S. subsidiaries outside ofthe United States to fund capital expenditures and other operating cash needs. Because the undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested, noU.S. deferred income taxes or foreign withholding taxes have been provided on earnings subsequent to the enactment of the Tax Act. Future repatriations of cash and cash equivalents, if any, held by our foreign subsidiaries will generally not be subject toU.S. Federal tax if earned prior to the enactment of the Tax Act. As we evaluate the impact of the Tax Act and the future cash needs of our global operations, we may revise the amount of foreign earnings generated prior to the enactment of the Tax Act considered to be permanently reinvested in our foreign subsidiaries. We believe that cash on hand and cash generated fromU.S. operations, along with amounts available under our financing agreements, will be sufficient to fundU.S. operations, working capital needs, capital expenditure requirements and financing obligations.The U.S. Internal Revenue Service and Treasury Department continue to release proposed guidance with respect to the Tax Act. We continue to evaluate what impact, if any, each piece of guidance may have on our related tax positions and our effective tax rate if, and when, such guidance is finalized.
Credit Ratings
During fiscal year endedSeptember 30, 2021 ,Standard and Poor's Rating Services and Moody's Investor Service issued credit ratings for Hillrom of BB+ and Ba2 with positive and stable outlooks.
Other Uses of Cash
We expect capital spending during fiscal year endingSeptember 30, 2022 to be approximately$100.0 million . Capital spending will be monitored and controlled as the year progresses. We expect to use operating cash flows to satisfy capital spending. To give a clear picture of matters potentially impacting our liquidity position, the following table outlines our contractual obligations as ofSeptember 30, 2021 : Payments Due by Period More than 1 (In millions) Total 1 Year or Less Year Contractual Obligations Debt obligations$ 2,068.9 $ 235.7 $ 1,833.2 Interest payments relating to long-term debt 1 162.0 39.5 122.5 Operating lease liabilities 79.3 24.6 54.7 Purchase obligations 2 304.6 259.9 44.7 Contingent consideration related to acquisitions 3 130.5 51.0 79.5
Other obligations, including Pension and postretirement health care benefit funding 4
66.4 5.4 61.0
Total contractual cash obligations $ 2,811.7 1 Interest payments on our long-term debt are projected based on the contractual rates of outstanding debt securities.
2 Purchase obligations represent contractual obligations under various take-or-pay arrangements executed in the normal course of business. These commitments represent future purchases in line with expected usage to obtain favorable pricing. Also
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included are obligations arising from purchase orders for which we have made
firm commitments. As a result, we believe that the purchase obligations portion
of our contractual obligations is substantially those obligations for which we
are certain to pay, regardless of future facts and circumstances. We expect to
fund purchase obligations with operating cash flows and current cash balances.
3 Contingent consideration related to acquisitions represent the maximum obligation of commercial milestones for certain acquisitions and is based upon the mid-point of commercial milestones for the acquisition of Bardy.
4 Other obligations, including Pension and postretirement health care benefit funding include deferred compensation arrangements, self-insurance reserves and other various liabilities. Pension and postretirement health care benefit funding excludes our master defined benefit retirement plan inthe United States because we are not required to make any further contributions during fiscal year endingSeptember 30, 2022 .
We also had commercial commitments related to standby letters of credit as of
In addition to the contractual obligations and commercial commitments disclosed above, we also have a variety of other agreements related to the procurement of materials and services and other commitments. Many of these agreements are long-term supply agreements, some of which are exclusive supply or complete requirements-based contracts. Also, we have an additional$2.7 million of Other long-term liabilities as ofSeptember 30, 2021 , which represent uncertain tax positions for which it is not possible to determine in which future period the tax liability might be settled. In conjunction with our acquisition and divestiture activities, we entered into certain guarantees and indemnifications of performance, as well as, non-competition agreements for varying periods of time. Potential losses under the indemnifications are generally limited to a portion of the original transaction price, or to other lesser specific dollar amounts for certain provisions. Guarantees and indemnifications with respect to acquisition and divestiture activities, if triggered, could have an adverse impact on our financial condition and results of operations. We are also subject to potential losses from adverse litigation results that are not included in our self-insurance or other reserves, because such potential losses are not quantifiable at this time and may never occur.
Critical Accounting Policies and Estimates
Our accounting policies, including those described below, often require management to make significant estimates and assumptions using information available at the time the estimates are made. Such estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenue and expenses. If future experience differs significantly from these estimates and assumptions, our results of operations and financial condition could be affected. Our most critical accounting policies are described below.
Revenue Recognition
Revenue is recognized as performance obligations are satisfied, either at a
point in time or over time, driven by the nature of the obligation that is
contracted to be provided to our customers. Revenue is measured as the amount of
consideration we expect to receive in exchange for transferring goods or
providing services. A performance obligation is a promise in a contract to
transfer a distinct good or service to the customer, and is the unit of account
in the contract. A contract's transaction price is allocated to each distinct
performance obligation and recognized as revenue when, or as, the performance
obligation is satisfied. Certain of our contracts have multiple performance
obligations. For contracts with multiple performance obligations, we allocate
the contract's transaction price to each performance obligation using our best
estimate of the standalone selling price of each distinct good or service in the
contract.
The majority of our capital equipment revenue is recognized at a point in time,
primarily based on the transfer of title, except in circumstances where we are
also required to install the equipment, for which revenue is recognized upon
customer acceptance of the installation. Performance obligations involving the
provision of services and revenue from rental usage of our products are
recognized over the time period specified in the contractual arrangement with
the customer. Shipping and handling activities are considered to be fulfillment
activities and are not considered to be a separate performance obligation.
Revenue is presented net of several types of variable consideration including
rebates, discounts and product returns, which are estimated at the time of sale
generally using the expected value method, although the most likely amount
method is also used for certain types of variable consideration. These estimates
take into consideration historical experience, current contractual and
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statutory requirements, specific known market events and trends, industry data,
and forecasted customer buying and payment patterns.
Certain costs associated with obtaining or fulfilling a contract are capitalized
until such time as the related performance obligations are completed and the
related revenue is recognized.
Contract liabilities represent deferred revenues that arise as a result of cash
received from customers at inception of contracts or where the timing of billing
for services precedes satisfaction of our performance obligations. Such
remaining performance obligations represent the portion of the contract price
for which work has not been performed and are primarily related to our
installation and service contracts.
Taxes assessed by a governmental authority that are directly imposed on a
revenue producing transaction between us and our customers, including but not
limited to sales taxes, use taxes and value added taxes, are excluded from
revenue and cost.
Revenue and Accounts Receivable Reserves
For product sales, we record reserves resulting in a reduction of revenue for contractual discounts, as well as price concessions and product returns. Likewise, rental revenue reserves, reflecting contractual and other routine billing adjustments, are recorded as a reduction of revenue. Reserves for revenue are estimated based upon historical rates for revenue adjustments.
Provisions for doubtful accounts are recorded as a component of operating expense and represent our best estimate of the amount of probable credit losses and collection risk in our existing accounts receivable. Receivables are generally reviewed for collectability based on historical collection experience for each receivable type and are also reviewed individually for collectability. Account balances are charged against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers. If circumstances change, such as higher than expected payment defaults, claims denials, changes in our business composition or processes, adverse changes in general economic conditions, instability or disruption of credit markets, or an unexpected material adverse change in a major customer's or payer's ability to meet its obligations, our estimates of the realizability of trade receivables could be reduced by a material amount.
Business Combinations,
Due to our growth strategy, recent acquisitions and the significance of our goodwill on the Consolidated Balance Sheets, this is our most critical accounting estimate. Assets acquired and liabilities assumed in a business combination are recorded at their estimated fair values on the date of acquisition. The difference between the purchase price amount and the net fair value of assets acquired and liabilities assumed is recognized as goodwill on the balance sheet if the purchase price exceeds the estimated net fair value or as a bargain purchase gain on the income statement if the purchase price is less than the estimated net fair value. The identification and determination of the fair value of assets acquired and liabilities assumed requires significant management's judgment, often utilizes independent valuation experts and involves the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items. The judgments made in the determination of the estimated fair value assigned to the assets acquired and liabilities assumed, as well as the estimated useful life of each asset and the duration of each liability, could significantly impact the financial statements in periods after acquisition, such as through depreciation and amortization expense. The allocation of the purchase price may be modified up to one year after the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed. Fair values of contingent consideration and acquired intangibles are estimated using the income approach. Management applies significant judgment in estimating the fair value of contingent consideration and intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the revenue growth rates, the obsolescence factors (specific to developed technology), the customer attrition rates (specific to customer relationships), and the discount rates. Changes in these judgments or estimates can have a material impact on the valuation of the respective assets and liabilities acquired and our results of operations. We perform an impairment assessment on goodwill and other indefinite-lived intangibles annually in the third fiscal quarter, or whenever events or changes in circumstances indicate that the fair value of a reporting unit or indefinite-lived intangible may be below its carrying value. These events or conditions include, but are not limited to, a significant adverse change in the business environment; regulatory environment or legal factors; a current period operating or cash flow loss combined with a history of such losses or a projection of continuing losses; a substantial decline in market capitalization of our stock; or a sale or disposition of a significant portion of a reporting unit.
The goodwill and indefinite-lived intangible asset impairment assessments require either evaluating qualitative factors or performing a quantitative assessment to determine if the carrying value is more likely than not in excess of its fair value.
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Examples of qualitative factors that are considered include the results and
changes to assumptions used in the most recent quantitative impairment test,
current and long-range projected financial results, changes in the strategic
outlook or organizational structure of the reporting units or business unit for
the indefinite-lived asset and industry macro-economic factors. The long-range
financial forecasts of the reporting units, which are based upon management's
long-term view of our markets and are used by senior management and the Board to
evaluate operating performance, are compared to the forecasts used in the prior
year analysis to determine if management expectations for the business have
changed. Management changes in strategic outlook or organizational structure
represent internally driven strategic or organizational changes that could have
a material impact on our results of operations or product offerings. Industry,
market changes and macroeconomic indicators represent our view on changes
outside of the Company that could have a material impact on our results of
operations, product offerings or future cash flow forecasts. In the event we
were to determine that a reporting unit's or indefinite-lived intangible's
carrying value would more likely than not exceed its fair value, quantitative
testing would be performed comparing carrying values to estimated fair values.
Changes in management intentions, market conditions, operating performance and
other similar circumstances could affect the assumptions used in this
qualitative impairment test.
Quantitative testing of the reporting units consists of a comparison of the fair value of the reporting units to their carrying value.
In determining the estimated fair value of the reporting units when performing a quantitative analysis, we consider both the market approach and the income approach. Under the market approach, we utilize the guideline company method, which involves calculating valuation multiples based on operating data from comparable publicly traded companies. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows utilizing a market-based discount rate determined separately for each reporting unit. To determine the estimated fair values of our reporting units, the Company uses assumptions and estimates including the determination of guideline companies and market multiples, projected sales, projected gross margins and discount rates. An impairment charge is recorded for the amount by which a reporting unit's carrying value exceeds the estimated fair value of the goodwill, not to exceed the carrying amount of its goodwill. Quantitative testing of indefinite-lived intangibles consists of a comparison of the fair value of the indefinite-lived intangible asset to its carrying value. We estimate the fair value of indefinite-lived intangibles using the relief-from-royalty method. The fair value derived is measured as the discounted cash flow savings realized from owning such trade names and not being required to pay a royalty for their use. Assumptions utilized in the determination of fair value include projected sales, discount rates and royalty rates. An impairment charge is recorded for the amount the carrying value exceeds the estimated fair value of the indefinite-lived intangible. There are inherent uncertainties related to each of the above listed assumptions and inputs, and our judgment in applying them. Changes in the assumptions used in our goodwill and indefinite-lived intangible assets could result in impairment charges that could be material to our Consolidated Financial Statements in any given period. Income Taxes We compute our deferred income taxes using an asset and liability approach to reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. We have a variety of deferred tax assets in numerous tax jurisdictions. These deferred tax assets are subject to periodic assessment as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recognized. In evaluating whether it is more likely than not that we would recover these deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies are considered. We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances. As ofSeptember 30, 2021 , we had$53.0 million of valuation allowances on deferred tax assets, on a tax-effected basis, primarily related to certain foreign deferred tax attributes and state tax credit carryforwards as it is more likely than not that some portion or all of these tax attributes will not be realized. We account for uncertain income tax positions using a 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. The difference between the tax benefit recognized in the financial statements for an uncertain income tax position and the tax benefit claimed in the tax return is referred to as an unrecognized tax benefit. We also have on-going audits in various stages of completion in several state and foreign jurisdictions, one or more of which may conclude within the next 12 months. Such settlements could involve some or all of the following: the payment of 40
-------------------------------------------------------------------------------- additional taxes and related penalties, the adjustment of certain deferred taxes and/or the recognition of unrecognized tax benefits. The resolution of these matters, in combination with the expiration of certain statutes of limitations in various jurisdictions, make it reasonably possible that our unrecognized tax benefits may decrease as a result of either payment or recognition by up to$2.0 million in the next 12 months, excluding interest.The U.S. Internal Revenue Service and Treasury Department continue to release proposed guidance with respect to the Tax Act. We continue to evaluate what impact, if any, each piece of guidance may have on our related tax positions and our effective tax rate if, and when, such guidance is finalized.
Recently Issued Accounting Guidance
For a summary of recently issued accounting guidance applicable to us, see Note 1. Summary of Significant Accounting Policies.
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