TO OUR FELLOW
SHAREHOLDERS, EMPLOYEES
AND CUSTOMERS
2015 WAS A REMARKABLE YEAR FOR OUR COMPANY, ONE OF
THE MOST SUCCESSFUL IN OUR 86-YEAR HISTORY. We have reshaped
our business in significant ways, expanded our portfolio and increased the value we bring to our
customers. We posted record revenue and adjusted earnings due to the strength of our recently
acquired businesses and continued growth in our core businesses. We significantly expanded our
presence across a variety of health care settings with the acquisition of Welch Allyn, bringing us
into the doctor’s office for the first time.
Throughout the year we continued to improve our operations, aggressively manage our costs and enhance
our product offerings. I want to thank our 10,000 global employees for their dedicated efforts in support of our
2015 success.
FINANCIAL HIGHLIGHTS
We are proud of the financial results we achieved in 2015. Our
performance exceeded expectations as we posted record revenue
and adjusted earnings, while also improving our operating margin.
We achieved $2.0 billion in revenue for the year, an increase of 18 percent –
or 24 percent on a constant currency basis. This includes contributions
from our recent Trumpf Medical and Welch Allyn acquisitions, as well
as strong organic performance, as excluding acquisitions, we achieved
7 percent constant currency growth. Adjusted earnings per share was
$2.64, up 17.3 percent over last year.
24% revenue
increase, constant
currency
17.3% adjusted
earnings per
share increase
HILL-ROM LET TER TO SHAREHOLDERS
13.4% North
America segment
revenue increase,
constant currency
Completed the
$2 billion acquisition
of Welch Allyn
FINANCIAL HIGHLIGHTS (CONTINUED)
These results were driven by strong growth in North America
and Surgical and Respiratory Care, and were enhanced by our
acquisitions of Trumpf Medical and Welch Allyn. Performance
in our International business, which declined two percent,
at constant currency, offset this growth and was driven
largely by challenges in the Middle East and Europe. Our Asia
business had another solid year, with double-digit constant
currency growth. As we have in recent years, we continued
our efforts to aggressively manage the business, streamline
our operations and reduce costs. We announced the
closure of manufacturing facilities in Redditch, England, and
Charleston, South Carolina, as part of a multi-faceted effort to
increase the efficiency of our global supply chain.
Throughout the year we continued to build momentum, and
our fourth quarter set records for our company, a gratifying
capstone to an exciting year. Fourth quarter revenue of $574
million represented a 25 percent increase on a constant
currency basis compared to Q4 2014. This was attributable
to strong performance in our North America capital business
and the Trumpf Medical and Welch Allyn acquisitions.
Our track record of disciplined capital deployment reflects
a healthy balance between investing in the business and
returning cash to shareholders. The Welch Allyn acquisition
is the largest in our history, and as we continue the
integration of the two businesses our focus now is on
accelerating the growth of the company, improving our
profitability and responsibly managing our balance sheet. We
will continue to explore strategic transactions that strengthen
our existing platforms and continue to evolve our portfolio.
All told, the financial results we delivered this year
demonstrate our ability to successfully execute our strategy
and leave us well-positioned to continue to achieve our goals
and create value for our shareholders in 2016.
OUR PERFORMANCE EXCEEDED EXPEC TATIONS AS WE POSTED
RECORD RE VENUE AND ADJUSTED EARNINGS, WHILE ALSO
IMPROVING OUR OPER ATING MARGIN.
HILL-ROM LET TER TO SHAREHOLDERS
WELCH ALLYN
AT-A-GLANCE
2,500
Employees in 26
Countries
$700
Million in Revenue
Product Categories
> Physical Assessment
> Vital Signs Monitoring
> Diagnostic Cardiopulmonary
> Software and Services
> Thermometry
OUR EXPANDING PORTFOLIO
Welch Allyn brings to Hill-Rom an incredibly valuable
global brand with a portfolio that adds significant
depth and breadth to our company, bringing us fully
into front-line patient care. I could not be more excited
by the acquisition of Welch Allyn and how it is already
contributing significantly to the value that we bring to our
customers and patients around the world. In addition to
expanding our portfolio in ways that increase the clinical
and economic value we bring to our customers, the
acquisition provides a strong recurring revenue stream
and an opportunity to expand our offerings across both
the Hill-Rom and Welch Allyn channels.
Welch Allyn is the latest in a series of acquisitions that have
significantly changed our business. In 2009, our business
looked quite different than it does today – it was smaller
and more reliant on the often-volatile hospital bed and
equipment market. With the acquisitions of Aspen, Trumpf
Medical and Welch Allyn, we have reshaped our company.
We are larger, have a more diversified revenue stream and
have significantly improved our financial profile.
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elch Ally n
$2.6B
Acquisitions are not the only way we are expanding and improving our offerings to customers. We increased our
research and development spending over 25 percent compared to last year, which allowed us to refresh major
product lines and introduce new ones. Our R&D team has been consistently delivering new products over the last
several years and our manufacturing team has met the challenge to ensure smooth launches.
CLINICAL FOCUS AREAS
ADVANCING
MOBILITY
WOUND CARE
AND PREVENTION
CLINICAL
WORKFLOW
SURGICAL SAFETY
AND EFFICIENCY
RESPIRATORY
HEALTH
Our development efforts remain centered on our five clinical focus areas, and include important new product offerings:
• The Compella™ Bariatric Bed and the LikoGuard® Lift System. These products are aimed at providing a state-of-
the-art solution to help hospitals treat their increasing number of bariatric patients with the care and dignity
those patients deserve.
• The Trumpf Medical™ iLED7® Surgical Light is a breakthrough lighting system that uses 3D sensor technology
to continuously analyze the surgical area and adapt the lighting conditions automatically. Lighting changes
that could interfere with a surgeon’s view, such as shadows cast by the surgical staff, are automatically detected
and the lights adjust accordingly to ensure even, adequate light throughout the procedure.
Carefully designed, easy-to-use, clinically compelling and high-quality products like these are the foundation of our
relationship with our customers as a premier med tech partner. But our promise to our customers runs deeper.
Hill-Rom has made strong relationships with our customers the centerpiece of our business since our earliest days.
Our Enterprise Accounts team brings that same focus on customer needs to its work with some of the largest health
systems in the world. In the last several years, we’ve been granted a number of large, multi-year contracts due to
the team’s dedication to understanding the needs of our customers and identifying product offerings across the full
spectrum of our portfolio that meet those needs. Our work extends well beyond the contract phase, however. We work
closely and seamlessly with member hospitals to ensure a smooth transition and ongoing support. Our high-touch
approach ensures we provide more than just clinical solutions to our customers; we become a true partner in care.
I hope you will visit ir.hill-rom.com to learn more about all we accomplished in 2015. Looking ahead to 2016,
Hill-Rom now provides offerings across the continuum of care, from the clinic, throughout the hospital and
continuing through the transition back into the home.
I speak for all of us at Hill-Rom when I say that we are proud of what we’ve accomplished and humbled, honored
and energized by its impact on the patients and caregivers who rely on our products. We remain deeply committed
to our mission: Every day, around the world, we enhance outcomes for patients and their caregivers.
Thank you for supporting our work in 2015 and in the years to come.
JOHN J. GREISCH,
PRESIDENT AND CEO, HILL-ROM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2015
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to ____
Commission File No. 1-6651
HILL-ROM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Indiana
(State or other jurisdiction of incorporation or organization)
35-1160484
(I.R.S. Employer Identification No.)
Two Prudential Plaza, Suite 4100
Chicago, IL
(Address of principal executive offices)
60601
(Zip Code)
Registrant’s telephone number, including area code: (312) 819-7200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, without par value
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The aggregate market value of the registrant’s voting common equity, held by non-affiliates of the registrant, was approximately
$2.8 billion, based on the closing sales price of $49.00 per share as of March 31, 2015 (the last business day of the registrant’s most
recently completed second fiscal quarter). There is no non-voting common equity held by non-affiliates.
The registrant had 65,169,068 shares of its common stock, without par value, outstanding as of November 12, 2015.
Documents incorporated by reference.
Certain portions of the registrant’s definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held on March 15, 2016 are incorporated by reference into Part III of this Annual Report on Form 10-K.
HILL-ROM HOLDINGS, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended September 30, 2015
TABLE OF CONTENTS
PART I
Disclosure Regarding Forward Looking Statements ........................................................................................
Item 1. Business ........................................................................................................................................................
Item 1A. Risk Factors ......................................................................................................................................................
Item 1B. Unresolved Staff Comments ............................................................................................................................
Item 2. Properties .........................................................................................................................................................
Item 3. Legal Proceedings ............................................................................................................................................
Item 4. Mine Safety Disclosures (not applicable) ........................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities .........................................................................................................................................................
Item 6. Selected Financial Data ...................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ..........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .........................................................................
Item 8. Financial Statements and Supplementary Data ................................................................................................
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .........................
Item 9A. Controls and Procedures ..................................................................................................................................
Item 9B. Other Information ............................................................................................................................................
Item 10. Directors, Executive Officers and Corporate Governance ...............................................................................
Item 11. Executive Compensation ..................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .......
Item 13. Certain Relationships and Related Transactions and Director Independence ..................................................
Item 14. Principal Accounting Fees and Services ..........................................................................................................
PART III
Item 15. Exhibits and Financial Statement Schedules ...................................................................................................
SIGNATURES ................................................................................................................................................
PART IV
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PART I
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K contain forward-looking statements within the meanings of the
Private Securities Litigation Reform Act of 1995 regarding our future plans, objectives, beliefs, expectations, representations
and projections.
Forward-looking statements are not guarantees of future performance, and our actual results could differ materially from
those set forth in any forward-looking statements. Factors that could cause actual results to differ from forward-looking
statements include, but are not limited to, the factors discussed under the heading “Risk Factors” in this Annual Report on
Form 10-K. We assume no obligation to update or revise any forward-looking statements.
Item 1. BUSINESS
General
Hill-Rom Holdings, Inc. (the “Company,” “Hill-Rom,” “we,” “us,” or “our”) was incorporated on August 7, 1969 in the State
of Indiana and is headquartered in Chicago, Illinois. We are a leading global medical technology company with
approximately 10,000 employees worldwide. We partner with health care providers in more than 100 countries by focusing
on patient care solutions that improve clinical and economic outcomes in five core areas: Advancing Mobility, Wound Care
and Prevention, Clinical Workflow, Surgical Safety and Efficiency, and Respiratory Health. Around the world, Hill-Rom's
people, products, and programs work towards one mission: Enhancing outcomes for patients and their caregivers.
Segment Information
We operate and manage our business within three reportable segments, each of which is generally aligned by region or
product type. The segments are as follows:
North America - sells and rents our patient support and near-patient technologies and services, as well as our
clinical workflow solutions, in the U.S. and Canada.
Surgical and Respiratory Care - sells and rents our surgical and respiratory care products globally.
International - sells and rents similar products as our North America segment in regions outside of the U.S. and
Canada.
Net revenue, segment profitability and other measures of segment reporting for each reporting segment are set forth in Note
11 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K. No single customer
accounts for more than ten percent of our revenue.
In September 2015, we acquired Welch Allyn Holdings, Inc. (“Welch Allyn”). The results of Welch Allyn’s operations for
the 22 days under our ownership are reported as a reconciling item in our segment disclosures for the year ended September
30, 2015.
Products and Services
We have extensive distribution capabilities and broad reach across all health care settings. We primarily operate in the
following channels: (1) sales and rentals of products to acute and extended care facilities worldwide through both a direct
sales force and distributors; (2) sales and rentals of products directly to patients in the home; and (3) sales into primary care
facilities (primarily Welch Allyn products). Through our network of approximately 160 North American and 50 international
service centers, and approximately 1,500 service professionals, we are able to provide technical support and services and
rapidly deliver our products to customers on an as-needed basis, providing our customers flexibility to purchase or rent select
products. This extensive network is critical to serving our customers and securing contracts with Group Purchasing
Organizations (“GPOs”) and integrated delivery networks (“IDNs”).
3
Our products and services are outlined below. Except where noted, all of our business segments generally sell products and
services and rent products from each of our product categories.
Advancing Mobility. Our innovative patient care systems include a variety of bed systems, such as Medical Surgical
(“MedSurg”) beds, Intensive Care Unit (“ICU”) beds, and Bariatric patient beds, as well as mobility solutions (such as lifts
and other devices used to safely move patients). These patient care systems can be designed for use in high, mid, and low
acuity settings, depending on the specific design options, and are built to reduce patient falls and caregiver injuries and
improve caregiver efficiency. Our advanced patient care systems can also provide patient data reporting, patient safety alarms
and caregiver alerts concerning such things as bed exit, bed height, patient positioning, point of care controls, patient turn
assist and upright positioning. Supporting solutions within the patient/resident room include architectural products (such as
headwalls) and health care furniture. These products are sold by our North America and International segments, primarily to
acute and extended care facilities worldwide. Approximately 57, 67 and 70 percent of our revenue during fiscal 2015, 2014
and 2013, were derived from advancing mobility products and services.
Wound Care and Prevention. We rent and sell non-invasive therapeutic products and surfaces designed for the prevention
and treatment of a variety of acute and chronic medical conditions, including pulmonary, wound and bariatric conditions.
These products are rented and sold by our North America and International segments, primarily in the U.S., Canada and
Europe. Medical Equipment Management and Contract Services provide rentals and health care provider asset management
services for a wide variety of moveable medical equipment (“MME”), such as ventilators, defibrillators, intravenous pumps
and patient monitoring equipment in our North America segment. In addition, we also sell equipment service contracts for
our capital equipment, primarily in the U.S. Approximately 9, 10 and 11 percent of our revenue during fiscal 2015, 2014 and
2013, were derived from wound care and prevention products and services.
Clinical Workflow. We also develop and market a variety of communications technologies and software solutions. These are
designed to improve patient safety and efficiency at the point of care by, among other things, enabling patient-to-staff and
staff-to-staff communications, aggregating and delivering patient data, tracking staff and assets, and monitoring hand hygiene
compliance. The NaviCare® Platform is the infrastructure Hill-Rom uses to support multiple clinical solutions and
applications, including nurse call, asset tracking, staff and patient locating and hand-hygiene monitoring. We believe that our
ability to integrate multiple applications using one primary infrastructure is a significant advantage for us versus our
competitors in the clinical workflow product category today. These products are sold mainly to our North America
customers. This product category also includes our Welch Allyn products, which help caregivers assess their patients quickly,
easily, safely, and accurately. We also see exciting opportunities to integrate even more of Welch Allyn’s technologies and
patient data in the care environment to further enhance our Clinical Workflow product offerings. Welch Allyn products are
sold globally.
Surgical Safety and Efficiency. We offer surgical tables, lights, and pendants utilized within the operating room setting. We
also offer a range of positioning devices for use in shoulder, hip, spinal and lithotomy surgeries as well as platform-neutral
positioning accessories for nearly every model of operating room table. In addition, we offer operating room surgical safety
and accessory products such as scalpel and blade, light handle systems, skin markers and other disposable products. The
products offered within this category are primarily recurring, consumable revenue streams. These products are sold by our
Surgical and Respiratory Care segment. In 2014, we acquired Trumpf Medical, a worldwide leader in medical products
technology distinguished by high-quality German engineering, a history of innovation, and a dedication to total customer
satisfaction. Trumpf offers surgical tables, surgical and examination lights, surgical pendants and video solutions.
Approximately 21, 13 and 10 percent of our revenue during fiscal 2015, 2014 and 2013, were derived from surgical safety
and efficiency products.
Respiratory Health. We offer therapeutic products that provide bronchial hygiene (airway clearance) for acute and home care
patients. Some of the key products include: The Vest® Airway Clearance System, designed to assist patients in the
mobilization of retained blockages that, if not removed, may lead to increased rates of respiratory infection, hospitalization,
and reduced lung function; the VitalCough® System, a non-invasive therapy that stimulates a cough to remove secretions in
patients with compromised peak cough flow; and the MetaNeb® Systems, a triple-therapy system indicated for the
mobilization of secretions, lung expansion therapy and aerosol delivery. These products are sold by our Surgical and
Respiratory Care segment.
Raw Materials
Principal materials used in our products for each business segment include carbon steel, aluminum, stainless steel, wood and
laminates, petroleum based products, such as foams and plastics, and other materials, substantially all of which are available
from several sources. Motors and electronic controls for electrically operated beds and certain other components are
purchased from one or more manufacturers.
4
Prices fluctuate for raw materials and sub-assemblies used in our products based on a number of factors beyond our control.
Specifically, over the past several years, the fluctuating prices of certain raw materials, including metals, fuel, plastics and
other petroleum-based products in particular, and fuel related delivery costs, had a direct effect on our profitability. Although
we generally have not engaged in hedging transactions with respect to raw material purchases, we have entered into fixed
price supply contracts at times.
Most of our extended contracts with hospital GPOs and other customers for the sale of products in North America permit us
to institute annual list price increases, although we may not be able to raise prices sufficiently to offset all raw material cost
inflation.
Competition
In all our business segments, we compete on the basis of clinical expertise and resulting product clinical utility and ability to
produce favorable outcomes, as well as value, quality, customer service, innovation and breadth of product offerings. As our
business segments generally sell products and services across our product categories, we evaluate our competition based on
our product categories, rather than our business segments.
The following table displays our significant competitors with respect to each product category:
Product Categories
Advancing Mobility ....................... ArjoHuntleigh (Division of Getinge AB)
Competitors
Guldmann
Invacare
Joerns Healthcare
Linet
Stiegelmeyer
Stryker Corporation
Wound Care and Prevention ........... ArjoHuntleigh (Division of Getinge AB)
Freedom Medical, Inc.
RecoverCare, LLC/Joerns Healthcare
SIZEWise Rentals, LLC
Universal Hospital Services, Inc.
Clinical Workflow .......................... Ascom Holding
Covidien, Ltd.
Exergen Corporation
GE Healthcare
Heine Optotechnik
Surgical Safety and Efficiency ....... Action Medical
DeRoyal
Draeger
Maquet (Division of Getinge AB)
MizuhoOSI
Omron Healthcare
Philips
Rauland-Borg Corporation
Riester
Skytron
Steris
Stryker Corporation
Swann-Morton
Respiratory Health .......................... Electromed, Inc.
Respironics (Division of Philips)
Respirtech
Additionally, we compete with a large number of smaller and regional manufacturers.
Regulatory Matters
FDA Regulation. We design, manufacture, install and distribute medical devices that are regulated by the Food and Drug
Administration (“FDA”) in the U.S. and similar agencies in other countries. The regulations and standards of these agencies
evolve over time and require us to make changes in our manufacturing processes and quality systems to remain in
compliance. The FDA’s Quality System regulations and the regulatory equivalents under the Medical Device Directive in the
European Union set forth standards for our product design and manufacturing processes, require the maintenance of certain
records and provide for inspections of our facilities. From time to time, the FDA performs routine inspections of our facilities
and may inform us of certain deficiencies in our processes or facilities. In 2012, we received an FDA warning letter with
respect to our Batesville facility. After making the necessary improvements in our quality systems and processes, the warning
letter was lifted in 2015. See Item 1A. “Risk Factors” for additional information. In addition, there are also certain state and
local government requirements that must be complied with in the manufacturing and marketing of our products.
5
Environmental. We are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to
environmental and health and safety concerns, including the handling, storage, discharge and disposal of hazardous materials
used in or derived from our manufacturing processes. When necessary, we provide for reserves in our financial statements for
environmental matters. We do not expect the remediation costs for any environmental issues in which we are currently
involved to exceed $3 million.
Health Care Regulations. In March 2010, comprehensive health care reform legislation was signed into law through the
passage of the Patient Protection and Affordable Health Care Act and the Health Care and Education Reconciliation Act. The
health care industry continues to undergo significant change as the law is implemented. In addition to health care reform,
Medicare, Medicaid and managed care organizations, such as health maintenance organizations and preferred provider
organizations, traditional indemnity insurers and third-party administrators are under increasing pressure to control costs and
limit utilization, while improving quality and health care outcomes. These objectives are being advanced through a variety of
reform initiatives including: accountable care organizations, value based purchasing, bundling initiatives, competitive
bidding programs, etc. We are also subject to a number of other regulations related to the sale and distribution of health care
products. The potential impact of these regulations to our business is discussed further in Item 1A. Risk Factors and Part II,
Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this Annual
Report on Form 10-K.
Product Development
Most of our products and product improvements have been developed internally. We maintain close working relationships
with various medical professionals who assist in product research and development. New and improved products play a
critical role in our sales growth. We continue to place emphasis on the development of proprietary products and product
improvements to complement and expand our existing product lines. Our significant research and development activities are
located in Acton, Massachusetts; Batesville, Indiana; Beaverton, Oregon; Cary, North Carolina; Skaneateles Falls, New
York; Lulea, Sweden; Montpelier and Pluvigner, France; Singapore; and Saalfeld and Witten, Germany.
Research and development is expensed as incurred. Research and development expense for the fiscal years ended
September 30, 2015, 2014 and 2013, was $91.8 million, $71.9 million and $70.2 million.
In addition, certain software development technology costs are capitalized as intangibles and are amortized over a period of
three to five years once the software is ready for its intended use. The amounts capitalized during fiscal years 2015, 2014 and
2013 were approximately $2.6 million, $2.6 million and $2.4 million.
Patents and Trademarks
We own, and from time-to-time license, a number of patents on our products and manufacturing processes, but we do not
believe any single patent or related group of patents is of material significance to any business segment or our business as a
whole. We also own a number of trademarks and service marks relating to our products and product services. Except for the
marks “Hill-Rom®”, “Bard-Parker®”, and “Welch Allyn®”, we do not believe any single trademark or service mark is of
material significance to any business segment or our business as a whole.
Foreign Operations and Export Sales
Information about our foreign operations is set forth in tables relating to geographic information in Note 11 of Notes to
Consolidated Financial Statements, included herein under Part II, Item 8 of this Form 10-K.
Employees
At September 30, 2015, we had approximately 10,000 employees worldwide. Approximately 7 percent of our employees
work in our logistics and manufacturing operations in the U.S. under collective bargaining agreements. We are also subject to
various collective bargaining arrangements or national agreements outside the U.S. The collective bargaining agreement at
our primary U.S. manufacturing facility expires in January 2016. We have not experienced a work stoppage in the U.S. in
over 40 years, and we believe that our employee relations are satisfactory.
6
Executive Officers
The following sets forth certain information regarding our executive officers. The term of office for each executive officer
expires on the date his or her successor is chosen and qualified. No director or executive officer has a “family relationship”
with any other director or executive officer of the Company, as that term is defined for purposes of this disclosure
requirement. There is no understanding between any executive officer and any other person pursuant to which the executive
officer was selected.
John J. Greisch, 60, was elected President and Chief Executive Officer of Hill-Rom in January 2010. Mr. Greisch was most
recently President, International Operations for Baxter International, Inc., a position he held since 2006. Prior to this, he held
several other positions with Baxter, serving as Baxter's Chief Financial Officer and as President of Baxter's BioScience
division.
Carlos Alonso, 56, was elected Senior Vice President and President, Hill-Rom International in April 2015. Before joining
Hill-Rom, Mr. Alonso served as the President and CEO of the Esaote Group, a medical imaging leader based in Genova,
Italy. Prior to the Esaote Group, Mr. Alonso served as the CEO of Esteve Pharmaceuticals based in Barcelona, Spain, and
held various leadership roles of increasing responsibility with Baxter International, Inc. over the course of 15 years, including
serving as Global President of the Renal Division.
Andreas Frank, 39, was elected as Senior Vice President Corporate Development and Strategy in October 2011. Before
joining Hill-Rom, Mr. Frank was Director Corporate Development at Danaher Corporation. Previously he worked in the
Corporate Finance and Strategy practice at the consulting firm McKinsey & Company.
Richard G. Keller, 54, was elected Vice President, Controller and Chief Accounting Officer of the Company effective August
2005. He had served as Executive Director - Controller of Hill-Rom since March 2004.
Susan R. Lichtenstein, 58, was elected Senior Vice President, Corporate Affairs, Chief Legal Officer and Secretary for Hill-
Rom effective May 2010. Previously she was Corporate Vice President and General Counsel at Baxter International, where
she was responsible for global legal matters, corporate communications and government affairs. Ms. Lichtenstein has
informed the Company that she will be leaving the Company by the end of calendar year 2015.
Kenneth Meyers, 53, was elected Senior Vice President and Chief Human Resources Officer effective September 2015.
Before joining Hill-Rom he was Senior Vice President and Chief Human Resources Officer at Hospira, Inc. Previously, he
was a partner at Mercer / Oliver Wyman Consulting. Prior to Mercer / Oliver Wyman, he served as Senior Vice President,
Human Resources, for Starbucks International.
Alton Shader, 42, was elected Senior Vice President and President, Front Line Care in September 2015. He had served as
Senior Vice President and President, North America since July 2012 and previously as Senior Vice President and President,
Post-Acute Care with Hill-Rom since July 2011. Before joining Hill-Rom, Mr. Shader was General Manager of Renal at
Baxter International, Inc. Previously, he served as General Manager for Baxter Ireland and held senior marketing positions in
Baxter's operations in Zurich and in California.
Taylor Smith, 55, was elected as Senior Vice President and President, Surgical and Respiratory Care in November 2013.
Before joining Hill-Rom, Mr. Smith served as Senior Vice President and General Manager for Cardinal Health’s Orthopedic
Products and Services group. Previously he held numerous leadership positions of increasing responsibility at Cardinal
Health over the past 13 years.
Carlyn D. Solomon, 53, was elected Chief Operating Officer of Hill-Rom in November, 2014. Mr. Solomon was most
recently the Corporate Vice President, Critical Care & Vascular Business Units of Edwards Lifesciences since 2006, and was
VP of Corporate Strategy and GM of Cardiac Surgery Systems Business of Edwards Lifesciences from 2005 to 2006.
Steven J. Strobel, 57, was elected Senior Vice President in November 2014 and Chief Financial Officer in December, 2014.
Before joining Hill-Rom, Mr. Strobel was President of McGough Road Advisors, a corporate finance consulting firm, from
2012 to 2014 and previously Chief Financial Officer of BlueStar Energy, an independent retail energy services company,
from 2009 to 2012. Prior to BlueStar, he served as Treasurer and Corporate Controller at Motorola, and in the same positions
at Owens Corning. Mr. Strobel serves on the Board of Directors of Newell Rubbermaid Inc., where he chairs the Audit
Committee.
7
Availability of Reports and Other Information
Our website is www.Hill-Rom.com. We make available on this website, free of charge, access to our annual, quarterly and
current reports and other documents we file with, or furnish to, the Securities and Exchange Commission (“SEC”) as soon as
practicable after such reports or documents are filed or furnished. We also make available on our website position
specifications for the Chairman, members of the Board of Directors and the Chief Executive Officer, our Code of Ethical
Business Conduct (and any amendments or waivers), the Corporate Governance Standards of our Board of Directors and the
charters of each of the standing committees of the Board of Directors. All of these documents are also available to
shareholders in print upon request.
All reports filed with the SEC are also available via the SEC website, www.sec.gov, or may be read and copied at the SEC
Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-800-SEC-0330.
8
Item 1A. RISK FACTORS
Our business involves risks. The following information about these risks should be considered carefully together with the
other information contained herein. The risks described below are not the only risks we face. Additional risks not currently
known or deemed immaterial also may result in adverse effects on our business.
We face significant uncertainty in the industry due to government health care reform, changes in Medicare, Medicaid
and other governmental medical program reimbursements, and we cannot predict how these reforms will impact our
operating results.
In March 2010, the U.S. Congress adopted and President Obama signed into law comprehensive health care reform
legislation through the passage of the Patient Protection and Affordable Health Care Act (H.R. 3590) and the Health Care and
Education Reconciliation Act (H.R. 4872). We cannot predict with certainty what additional healthcare initiatives, if any, will
be implemented at the federal or state level, or what the ultimate effect of federal health care reform or any future legislation
or regulation will have on us. In addition, Medicare, Medicaid, managed care organizations and foreign governments are
increasing pressure to both control health care utilization and to limit reimbursement. Changes in reimbursement programs or
their regulations, including retroactive and prospective rate and coverage criteria changes, competitive bidding for certain
products and services, and other changes intended to reduce expenditures (domestically or internationally), could adversely
affect the portions of our businesses that are dependent on third-party reimbursement or direct governmental payments.
Moreover, to the extent that our customers experience reimbursement pressure resulting in lower revenue for them, their
demand for our products and services may decrease. The impact of the above mentioned items could have a material adverse
impact on our business, results of operations and cash flows.
Failure by us or our suppliers to comply with the FDA regulations and similar foreign regulations applicable to the
products we manufacture or distribute could expose us to enforcement actions or other adverse consequences.
We design, manufacture, install and distribute medical devices that are regulated by the FDA in the U.S. and similar agencies
in other countries. Failure to comply with applicable regulations could result in future product recalls, injunctions preventing
the shipment of products or other enforcement actions that could have a material adverse effect on our revenue and
profitability. In March 2012, we received a warning letter from the FDA following an inspection by the FDA at our
Batesville, Indiana production facilities. Upon the successful completion of our remediation efforts, the warning letter was
lifted in September 2015. Additionally, certain of our suppliers are subject to FDA regulations, and the failure of these
suppliers to comply with regulations could adversely affect us; as regulatory actions taken by the FDA against those
manufacturers can result in product shortages, recalls or modifications.
We could be subject to substantial fines or damages and possible exclusion from participation in federal health care
programs if we fail to comply with the laws and regulations applicable to our business.
We are subject to stringent laws and regulations at both the federal and state levels governing the participation of durable
medical equipment suppliers in federal and state health care programs. In addition, in 2011 we entered into a five-year
Corporate Integrity Agreement with the U.S. Federal government, which imposes on us additional contractual obligations.
From time to time, the government seeks additional information related to our claims submissions, and in some instances
government contractors perform audits of payments made to us under Medicare, Medicaid, and other federal health care
programs. On occasion, these reviews identify overpayments for which we submit refunds. At other times, our own internal
audits identify the need to refund payments. The frequency and intensity of government audits and review processes has
intensified and we expect this will continue in the future, due to increased resources allocated to these activities at both the
federal and state Medicaid level, and greater sophistication in data review techniques.
If we are deemed to have violated these laws and regulations, or are found to have violated our Corporate Integrity
Agreement, we could be subject to substantial fines, damages, possible exclusion from participation in federal health care
programs such as Medicare and Medicaid and possible recoupment of overpayments. While we believe that our practices
materially comply with applicable state and federal requirements, the requirements may be interpreted in a manner
inconsistent with our interpretation. Failure to comply with applicable laws and regulations, even if inadvertent, could have a
material adverse impact on our business.
9
We participate in a highly competitive industry that is subject to the risk of declining demand and pricing pressures,
which could adversely affect our operating results.
Demand for our products and services depend in large part on overall demand in the health care market. Additionally, with
the health care market’s increased focus on hospital asset and resource efficiency as well as reimbursement constraints,
spending for many of our products is on a long-term declining trend. Further, the competitive pressures in our industry could
cause us to lose market share unless we increase our expenditures or reduce our prices, which would adversely impact our
operating results. The nature of this highly competitive marketplace demands that we successfully introduce new products
into the market in a cost effective manner (more fully detailed below). These factors, along with others, may result in
significant shifts in market share among the industry's major participants, including us. Accordingly, if we are unable to
effectively differentiate ourselves from our competitors in terms of both new products and diversification of our product
portfolio through business acquisitions, then our market share, sales and profitability could be adversely impacted through
lower volume or decreased prices.
Our future financial performance will depend in part on the successful introduction of new products into the
marketplace on a cost-effective basis.
Our future financial performance will depend in part on our ability to influence, anticipate, identify and respond to changing
consumer preferences and needs. We can provide no assurances that our new products will achieve the same degree of
success as in the past. We may not correctly anticipate or identify trends in consumer preferences or needs, or may identify
them later than competitors do. In addition, difficulties in manufacturing or in obtaining regulatory approvals may delay or
prohibit introduction of new products into the marketplace. Further, we may not be able to develop and produce new products
at a cost that allows us to meet our goals for profitability. Warranty claims and service costs relating to our products may be
greater than anticipated, and we may be required to devote significant resources to address any quality issues associated with
our new products, which could reduce the resources available for further new product development and other matters. In
addition, the introduction of new products may also cause customers to defer purchases of existing products.
Failure to successfully introduce new products on a cost-effective basis, or delays in customer purchasing decisions related to
the evaluation of new products, could cause us to lose market share and could materially adversely affect our business,
financial condition, results of operations and cash flow.
Adverse developments in general domestic and worldwide economic conditions and instability and disruption of credit
markets could have an adverse effect on our operating results, financial condition, or liquidity.
We are subject to risks arising from adverse changes in general domestic and global economic conditions, including recession
or economic slowdown and disruption of domestic and international credit markets. The credit and capital markets
experienced extreme volatility and disruption over the past several years, leading to periods of recessionary conditions and
depressed levels of consumer and commercial spending. These recessionary conditions caused customers to reduce, modify,
delay or cancel plans to purchase our products and services. If our customers reduce investments in capital expenditures or
utilize their limited capital funds to invest in products that we do not offer or that do not comprise a large percentage of our
product portfolio, it could negatively impact our operating results. Moreover, even if our revenue remains constant, our
profitability could decline if there is a shift to sales of product mix or geographic locations with less favorable margins. If
worldwide economic conditions worsen, we would expect our customers to scrutinize costs resulting from pressures on
operating margin due to rising supply costs, reduced investment income and philanthropic giving, increased interest expense,
reimbursement pressure, reduced elective healthcare spending and uncompensated care.
We may not be able to grow if we are unable to successfully acquire and integrate, or form business relationships
with, other companies.
We have in the past, and expect in the future, to grow our business through mergers, acquisitions and other similar business
arrangements. We may not be able to identify suitable acquisition candidates or business relationships, negotiate acceptable
terms for such acquisitions or relationships or receive necessary financing on acceptable terms. Additionally, we may become
responsible for liabilities associated with businesses that we acquire to the extent they are not covered by indemnification
from the sellers or by insurance. Even if we are able to consummate acquisitions, such acquisitions could be dilutive to
earnings, and we could overpay for such acquisitions. Additionally, we may not be fully successful in our integration efforts
or fully realize expected benefits from the integration. Our integration efforts may divert management and other resources
from other important matters, and we could experience delays or unusual expenses in the integration process, including
intangible asset impairments which could result in significant charges in our Statements of Consolidated Income. Moreover,
the margins for these companies may differ from our historical gross and operating margins resulting in a material adverse
effect on our results of operations.
10
The assets in our pension plans are subject to market disruptions. In addition, our pension plans are underfunded.
Our primary pension plan invests in a variety of equity and debt securities subject to market risks. Our pension plans were
underfunded at September 30, 2015 by approximately $96.4 million. Market volatility and disruption could cause further
declines in asset values or fluctuations in assumptions used to value our liability and expenses. If this occurs, we may need to
make additional pension plan contributions and our pension expense in future years may increase.
Our business is significantly dependent on major contracts with GPOs, IDNs, and certain other distributors and
purchasers.
A majority of our North American hospital sales and rentals are made pursuant to contracts with hospital GPOs. At any given
time, we are typically at various stages of responding to bids and negotiating and renewing expiring GPO agreements. Failure
to be included in certain of these agreements could have a material adverse effect on our business, including capital and rental
revenue.
Participation by us in such programs often requires increased discounting or restrictions on our ability to raise prices, and
failure to participate or to be selected for participation in such programs may result in a reduction of sales to the member
hospitals. In addition, the industry is showing an increased focus on contracting directly with health systems or IDNs (which
typically represents influential members and owners of GPOs). IDNs and health systems often make key purchasing
decisions and have influence over the GPO’s contract decisions, and often request additional discounts or other
enhancements. In addition, certain other distributors and purchasers have similar processes to the GPOs and IDNs and failure
to be included in agreements with these other purchasers could have a material adverse effect on our business.
Increased prices for, or unavailability of, raw materials or sub-assemblies used in our products could adversely affect
profitability or revenue. In particular, our results of operations could be adversely affected by high prices for metals,
fuel, plastics and other petroleum based products. We also procure several raw materials and sub-assemblies from
single suppliers.
Our profitability is affected by the prices of the raw materials and sub-assemblies used in the manufacture of our products.
These prices may fluctuate based on a number of factors beyond our control, including changes in supply and demand,
general economic conditions, labor costs, fuel related delivery costs, competition, import duties, tariffs, currency exchange
rates, and government regulation. Significant increases in the prices of raw materials or sub-assemblies that cannot be
recovered through increases in the prices of our products could adversely affect our results of operations. There can be no
assurance that the marketplace will support higher prices or that such prices and productivity gains will fully offset any
commodity price increases in the future. We generally have not engaged in hedging transactions with respect to raw material
purchases, but do enter into fixed price supply contracts at times. Future decisions not to engage in hedging transactions or
ineffective hedging transactions may result in increased price volatility, potentially adversely impacting our profitability.
Our dependency upon regular deliveries of supplies from particular suppliers means that interruptions or stoppages in such
deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. Several of the raw
materials and sub-assemblies used in the manufacture of our products currently are procured only from a single source. If any
of these sole-source suppliers were unable or unwilling to deliver these materials for an extended period of time we may not
be able to manufacture one or more products for a period of time, and our business could suffer. We may not be able to find
acceptable alternatives, and any such alternatives could result in increased costs. Difficulties in the credit markets could
adversely affect our suppliers’ access to capital and therefore their ability to continue to provide an adequate supply of the
materials we use in our products.
The majority of our products are manufactured at a single facility or location, and the loss of one or more of these
facilities or locations could prevent us from manufacturing all the various products we sell.
We manufacture the majority of our products in only a single facility or location. If an event occurred that resulted in material
damage to one or more of these manufacturing facilities or we lacked sufficient labor to fully operate the facility, we may be
unable to transfer the manufacture of the relevant products to another facility or location in a cost-effective or timely manner,
if at all. This potential inability to transfer production could occur for a number of reasons, including but not limited to a lack
of necessary relevant manufacturing capability at another facility, or the regulatory requirements of the FDA or other
governmental regulatory bodies. Such an event would materially negatively impact our financial condition, results of
operations and cash flows.
11
Our international sales and operations are subject to risks and uncertainties that vary by country which could have a
material adverse effect on our business and/or results of operations.
International sales accounted for approximately 36 percent of our net sales in fiscal 2015. We anticipate that international
sales will continue to represent a significant portion of our total sales in the future. In addition, we have multiple
manufacturing facilities and third-party suppliers that are located outside of the U.S. As a result, our international sales, as
well as our sales in the U.S. of products produced or sourced internationally, are subject to risks and uncertainties that can
vary by country, such as political instability, economic conditions, foreign currency exchange rate fluctuations, changes in
tax laws, regulatory and reimbursement programs and policies, and the protection of intellectual property rights. In addition,
our collections of international receivables are subject to economic pressures and the actions of some governmental
authorities who have initiated various austerity measures to control healthcare and other governmental spending.
Unfavorable outcomes related to uncertain tax positions could result in significant tax liabilities.
We have recorded tax benefits related to various uncertain tax positions taken or expected to be taken in a tax return. While
we believe our positions are appropriate, the Internal Revenue Service (“IRS”), state or foreign tax authorities could disagree
with our positions, resulting in a significant tax payment.
We are involved on an ongoing basis in claims, lawsuits and governmental proceedings relating to our operations, as
well as product liability or other liability claims that could expose us to adverse judgments or could affect the sales of
our products.
We are involved in the design, manufacture and sale of health care products, which face an inherent risk of exposure to
product liability claims if our products are alleged to have caused injury or are found to be unsuitable for their intended use.
Amongst other claims, we are, from time to time, a party to claims and lawsuits alleging that our products have caused injury
or death or are otherwise unsuitable. It is possible that we will receive adverse judgments in such lawsuits, and any such
adverse judgments could be material. Although we do carry insurance with respect to such matters, this insurance is subject
to varying deductibles and self-insured retentions and may not be adequate to cover the full amount of any particular claim.
In addition, any such claims could negatively impact the sales of products that are the subject of such claims or other
products.
We may not be able to attract, retain and develop key personnel.
Our future performance depends in significant part upon the continued service of our executive officers and other key
personnel. The loss of the services of one or more of our executive officers or other key employees could have a material
adverse effect on our business, prospects, financial condition and results of operations. Our success also depends on our
continuing ability to attract, retain and develop highly qualified personnel, and as competition for such personnel is intense,
there can be no assurance that we can do so in the future.
The combined company’s business may suffer if it does not retain its senior management.
After the Welch Allyn acquisition, the combined company’s future success requires it to continue to attract and retain
competent personnel. In particular, the combined company’s future success will depend on its senior management. As a result
of the merger, Hill-Rom’s and Welch Allyn’s current and prospective employees could experience uncertainty about their
future roles and the integration process. The loss of services of members of the combined company’s senior management
team could adversely affect its business until suitable replacements can be found. There may be a limited number of persons
with the requisite skills to serve in these positions, and the combined company may be unable to locate or employ qualified
personnel on acceptable terms.
A portion of our workforce is unionized, and we could face labor disruptions that would interfere with our operations.
Approximately 7 percent of our employees as part of our logistics and manufacturing operations in the U.S. work under
collective bargaining agreements. We are also subject to various collective bargaining arrangements or national agreements
outside the U.S. covering approximately 18 percent of our employees. Although we have not recently experienced any
significant work stoppages as a result of labor disagreements, we cannot ensure that such a stoppage will not occur in the
future. Our primary labor contract expires in January 2016. Inability to negotiate satisfactory new agreements or a labor
disturbance at one of our principal facilities could have a material adverse effect on our operations.
12
We may be adversely affected by new regulations relating to conflict minerals.
In August 2012, the SEC adopted new disclosures and reporting requirements for companies whose products contain certain
minerals and their derivatives, namely tin, tantalum, tungsten or gold, known as conflict minerals. As of May 2014,
companies are required to report annually whether or not such minerals originate from the Democratic Republic of the Congo
(DRC) and/or adjoining countries and in some cases to perform extensive due diligence on their supply chains for such
minerals. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of
materials used in the manufacturing of our products. In addition, we will incur additional costs to comply with the disclosure
requirements, including cost related to determining the source of any of the relevant minerals used in our products. Since our
supply chain is complex and multilayered, we may be unable to ascertain with sufficient certainty the origins for these
minerals or make a determination that that these minerals are DRC conflict free despite our due diligence procedures, which
in turn may harm our reputation. We may also face difficulties in satisfying customers who may require that our products be
certified as DRC conflict free, which could harm our relationships with these customers and/or lead to a loss of revenue.
These requirements also could have the effect of limiting the pool of suppliers from which we source these minerals, and we
may be unable to obtain conflict-free minerals at prices similar to the past, which could increase our costs and adversely
affect our manufacturing operations and our profitability.
We may not be successful in achieving expected operating efficiencies and sustaining or improving operating expense
reductions, and may experience business disruptions and adverse tax consequences associated with restructuring,
realignment and cost reduction activities.
Over the past few years we have initiated several restructuring, realignment and cost reduction initiatives. In the third quarter
of 2015, we announced plans to close two facilities in a continuing effort to rationalize our global footprint. Also, in the
second quarter of fiscal 2014, we initiated a restructuring program to improve our cost structure by reducing our European
manufacturing capacity and streamlining our global operations by, among other things, executing a back office process
transformation program in Europe. While we expect to realize efficiencies from these actions, these activities may not
produce the full efficiency and cost reduction benefits we expect. Further, such benefits may be realized later than expected,
and the ongoing costs of implementing these measures may be greater than anticipated. If these measures are not successful
or sustainable, we may undertake additional realignment and cost reduction efforts, which could result in future charges.
Moreover, our ability to achieve our other strategic goals and business plans may be adversely affected and we could
experience business disruptions with customers and elsewhere if our restructuring and realignment efforts prove ineffective.
These actions, the resulting costs, and delays or lower than anticipated benefits will also impact our foreign tax positions and
may require us to record tax reserves against certain deferred tax assets in our international business, similar to the provision
we recognized during the second quarter of fiscal 2014 with respect to France.
We are increasingly dependent on consistent functioning of our information technology systems and if we are exposed
to any intrusions or if we fail to maintain the integrity of our data, our business could be materially affected.
We are increasingly dependent on consistent functioning of our information technology systems for our infrastructure and
products. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance
existing systems and develop new systems to keep pace with continuing changes in information processing technology,
evolving systems and regulatory standards, integration of acquisitions, and the increasing need to protect patient and
customer information. In addition, third parties may attempt to hack into our products or systems and may obtain proprietary
information. If we fail to maintain or protect our information systems and data integrity effectively, we could lose existing
customers or suppliers, have difficulty attracting new customers or suppliers, have problems that adversely impact internal
controls, have difficulty preventing, detecting, and controlling fraud, have disputes with customers and suppliers, have
regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result of
a data privacy breach, or suffer other adverse consequences. Any significant breakdown, intrusion, interruption, corruption,
or destruction of these systems, as well as any data breaches, could have a material adverse effect on our business.
13
We expect to incur substantial expenses related to the integration of Welch Allyn.
We expect to incur substantial expenses in connection with the integration of Welch Allyn. There are a large number of
processes, policies, procedures, operations, technologies and systems that must be integrated, including purchasing,
accounting and finance, sales, billing, payroll, manufacturing, marketing and employee benefits. While we expect to incur
integration and restructuring costs and other costs incurred to execute the transaction following completion of the merger in
2015 that are estimated to range between $35 million and $40 million, many of the expenses that will be incurred are, by their
nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect
to achieve from elimination of duplicative expenses and the realization of economies of scale and cost savings. Although we
expect that the realization of efficiencies related to the integration of the businesses will offset incremental transaction,
merger-related and restructuring costs over time, we cannot give any assurance that this net benefit will be achieved in the
near term, or at all.
Successful integration of Welch Allyn with Hill-Rom and successful operation of the combined company are not
assured. Also, integrating Hill-Rom’s business with that of Welch Allyn may divert the attention of management away
from operations.
Welch Allyn is now a wholly-owned subsidiary of Hill-Rom but will, at least initially, continue its operations on a basis that
is largely separate from Hill-Rom’s previously existing operations. There can be no assurance that Welch Allyn will be able
to maintain and grow its business and operations. In addition, the market segments in which Welch Allyn operates may
experience declines in demand and/or new competitors. Integrating and coordinating certain aspects of the operations and
personnel of Welch Allyn with Hill-Rom will involve complex operational, technological and personnel-related challenges.
This process will be time-consuming and expensive, may disrupt the businesses of either or both of the companies and may
not result in the full benefits expected from the merger, including cost synergies expected to arise from supply chain
efficiencies and overlapping general and administrative functions. The potential difficulties, and resulting costs and delays,
include:
managing a larger combined company;
consolidating corporate and administrative infrastructures;
issues in integrating manufacturing, warehouse and distribution facilities, research and development and sales
forces;
difficulties attracting and retaining key personnel;
loss of customers and suppliers and inability to attract new customers and suppliers;
unanticipated issues in integrating information technology, communications and other systems;
incompatibility of purchasing, logistics, marketing, administration and other systems and processes; and
unforeseen and unexpected liabilities related to the merger or Welch Allyn’s business.
Additionally, the integration of Welch Allyn’s operations, products and personnel may place a significant burden on
management and other internal resources. The diversion of management’s attention, and any difficulties encountered in the
transition and integration process, could harm the Company’s business, financial condition and operating results.
We have incurred substantial additional indebtedness in connection with the Welch Allyn acquisition, and may not be
able to meet all of our debt obligations.
As stated in our Notes to Consolidated Financial Statements, we have entered into several new credit facilities which have
resulted in a substantially higher level of leverage compared with prior periods. Based on assumed interest rates, leverage
ratios and credit ratings, we expect our debt service obligations, comprised of principal and interest (excluding capital leases),
during the 12 months following the completion of the merger to be approximately $150 million. As a result of this increase in
debt, demands on our cash resources have increased. The increased level of debt could, among other things:
require us to dedicate a large portion of its cash flow from operations to the servicing and repayment of its debt,
thereby reducing funds available for working capital, capital expenditures, research and development
expenditures and other general corporate requirements;
limit our ability to obtain additional financing to fund future working capital, capital expenditures, research and
development expenditures and other general corporate requirements;
limit our flexibility in planning for, or reacting to, changes in its business and the industry in which we operate;
restrict our ability to make strategic acquisitions or dispositions or to exploit business opportunities;
place us at a competitive disadvantage compared to competitors that have less debt;
adversely affect our credit rating, with the result that the cost of servicing our indebtedness might increase;
adversely affect the market price of Hill-Rom common stock; and
limit our ability to apply proceeds from an offering or asset sale to purposes other than the servicing and
repayment of debt.
14
Item 1B. UNRESOLVED STAFF COMMENTS
We have not received any comments from the staff of the SEC regarding our periodic or current reports that remain
unresolved.
Item 2. PROPERTIES
The principal properties used in our operations are listed below. All facilities are suitable for their intended purpose, are being
efficiently utilized and are believed to provide adequate capacity to meet demand for the next several years.
Location
Description and Primary Use
Owned/Leased
Acton, MA .................................................. Light manufacturing, development and distribution of health care
Leased
equipment;
Office administration
Batesville, IN .............................................. Manufacturing, development and distribution of health care
Owned
equipment;
Office administration
Beaverton, OR ............................................ Development of heath care equipment;
Office administration
Caledonia, MI ............................................. Manufacturing, development and distribution of surgical
products;
Office administration
Leased
Leased
Carol Stream, IL ......................................... Manufacturing, development and distribution of health care
Leased
equipment;
Office administration
Cary, NC .................................................... Development of health care equipment;
Leased
Office administration
Charleston, SC ............................................ Light manufacturing and distribution of health care equipment;
Owned/Leased
Office administration
Chicago, IL ................................................. Office administration
St. Paul, MN ............................................... Office administration
Skaneateles Falls, NY ................................. Manufacturing, development and distribution of health care
equipment;
Office administration
Jiangsu, China ............................................. Manufacturing of health care equipment
Taicang, China ............................................ Light manufacturing and distribution of health care equipment
Montpellier, France .................................... Manufacturing and development of health care equipment
Pluvigner, France ....................................... Manufacturing, development and distribution of health care
equipment;
Office administration
Hainichen, Germany* .................................. Manufacturing and distribution of health care equipment
Puchheim, Germany .................................... Manufacturing and distribution of health care equipment
Saalfeld, Germany ....................................... Manufacturing, development and distribution of health care
equipment;
Office administration
Leased
Leased
Owned
Leased
Leased
Owned
Owned
Owned
Owned
Owned
Witten, Germany ........................................ Manufacturing, development and distribution of health care
Owned
equipment;
Office administration
Navan, County Meath, Ireland ... ................ Office administration
Kawagawa, Japan ....................................... Office administration
Tijuana, Mexico ......................................... Manufacturing and distribution of health care equipment;
Office administration
Monterrey, Mexico ..................................... Manufacturing of health care equipment
Las Piedras, Puerto Rico ............................. Manufacturing of surgical products
Singapore ................................................... Manufacturing and development of health care equipment;
Office administration
Lulea, Sweden ............................................ Manufacturing, development and distribution of health care
Redditch, UK* ............................................ Manufacturing of surgical products;
Office administration
* denotes properties where plans are in process to close, consolidate, or repurpose the facility
equipment;
Office administration
Owned
Leased
Leased
Owned
Owned
Leased
Owned
Leased
15
In addition to the foregoing, we lease or own a number of other facilities, warehouse distribution centers, service centers and
sales offices throughout the U.S., Canada, Western Europe, Mexico, Australia, Middle East, the Far East, and Latin America.
Item 3. LEGAL PROCEEDINGS
See Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K for information
regarding legal proceedings in which we are involved.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
16
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the New York Stock Exchange under the ticker symbol “HRC”. The closing price of our
common stock on the New York Stock Exchange on November 12, 2015 was $51.21 per share. The following table reflects
the range of high and low selling prices of our common stock and cash dividends declared by quarter for each of the last two
fiscal years.
Years Ended September 30
2015
Low
Cash
Dividends
Declared
2014
High
Low
Cash
Dividends
Declared
0.1375
0.1525
0.1525
0.1525
High
Quarter Ended:
December 31 ................................ $
March 31 ...................................... $
June 30 ......................................... $
September 30 ............................... $
47.32 $
49.35 $
57.95 $
58.73 $
39.58 $
44.69 $
48.16 $
49.30 $
0.1525 $
0.1600 $
0.1600 $
0.1600 $
42.56 $
44.64 $
41.66 $
44.46 $
35.64 $
34.94 $
35.45 $
38.85 $
Holders
As of November 12, 2015, there were approximately 20,800 shareholders of record.
Dividends
The declaration and payment of cash dividends is at the sole discretion of our Board of Directors (“Board”) and depends
upon many factors, including our financial condition, earnings potential, capital requirements, alternative uses of cash,
covenants associated with debt obligations, legal requirements, and other factors deemed relevant by our Board. We have
paid cash dividends on our common stock every quarter since our initial public offering in 1971. We intend to continue to
pay quarterly cash dividends comparable to those paid in the periods covered by these financial statements.
Issuer Purchases of Equity Securities
Period
Total Number
of Shares
Purchased as
Part of Publicly
Maximum
Approximate
Dollar Value
of Shares That
May Yet Be
Total
Number
of Shares
Average
Price Paid Announced Plans or Purchased Under
the Programs (2)
Programs (2)
Purchased (1) per Share
July 1, 2015 - July 31, 2015 ................................................
August 1, 2015 - August 31, 2015 ......................................
September 1, 2015 - September 30, 2015 ...........................
Total ....................................................................................
426 $
728 $
113,222 $
114,376 $
54.21
53.43
51.91
51.93
- $
- $
- $
- $
64.7
64.7
64.7
64.7
(1)
(2)
Shares purchased during the quarter ended September 30, 2015 were in connection with employee payroll tax
withholding for restricted and deferred stock distributions.
In September 2013, the Board approved an expansion of its previously announced share repurchase authorization to a
total of $190.0 million. As of September 30, 2015, a cumulative total of $125.3 million has been used under this
existing authorization. The plan does not have an expiration date and currently there are no plans to terminate this
program in the future.
17
Stock Performance Graph
The following graph compares the return on our common stock with that of Standard & Poor’s 500 Stock Index (“S&P 500
Index”), and our Peer Group* for the five years ended September 30, 2015. The graph assumes that the value of the
investment in our common stock, the S&P 500 Index, and our Peer Group was $100 on October 1, 2010 and that all
dividends were reinvested.
HRC ..................
S & P 500 ..........
Peer Group ........
2010
$100
$100
$100
2011
$ 83
$ 99
$104
2012
$ 82
$126
$135
2013
$103
$147
$141
2014
$121
$172
$166
2015
$153
$168
$196
* For purposes of the Stock Performance Graph above, our Peer Group is comprised of: Alere Inc.; CR Bard Inc.; Chemed
Corp.; CONMED Corporation; DENTSPLY International Inc.; Edwards Lifesciences Corp.; Hologic Inc.; IDEXX
Laboratories, Inc.; Integra Lifesciences Holdings Corporation; Intuitive Surgical, Inc.; Invacare Corporation; MEDNAX,
Inc.; PerkinElmer Inc.; ResMed Inc.; Sirona Dental Systems Labs Inc.; Steris Corp.; Teleflex Incorporated.; The Cooper
Companies Inc.; Varian Medical Systems, Inc.; and West Pharmaceutical Services, Inc.
Certain other information required by this item will be contained under the caption “Equity Compensation Plan Information”
in our definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to
be held on March 15, 2016, and such information is incorporated herein by reference.
18
Item 6. SELECTED FINANCIAL DATA
The following table presents our selected consolidated financial data for each of the last five fiscal years ended September 30.
Refer to Note 2 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K for disclosure
of business combinations for each of the last three fiscal years. Also see Note 12 of Notes to Consolidated Financial
Statements included under Part II, Item 8 of this Form 10-K for selected unaudited quarterly financial information for each of
the last two fiscal years.
2015
2014
2013
2012
2011
Net revenue ........................................................................................ $ 1,988.2 $ 1,686.1 $ 1,716.2 $ 1,634.3 $ 1,591.7
133.5
Net income ......................................................................................... $
Net income attributable to common shareholders .............................. $
133.3
Net income attributable to common shareholders
105.0 $
105.0 $
120.8 $
120.8 $
46.8 $
47.7 $
60.6 $
60.6 $
per share – Basic ............................................................................. $
0.83 $
1.05 $
1.75 $
1.94 $
2.11
Net income attributable to common shareholders
per share – Diluted .......................................................................... $
2.09
Total assets ........................................................................................ $ 4,457.6 $ 1,751.3 $ 1,586.8 $ 1,627.6 $ 1,299.1
364.1 $
50.8
Long-term obligations ....................................................................... $ 2,175.2 $
237.5 $
210.3 $
222.5
213.8 $
Cash flows from operating activities ................................................. $
261.7 $
68.9
Capital expenditures .......................................................................... $
62.7 $
121.3 $
77.8 $
(539.5) $
Cash flows from investing activities .................................................. $ (1,756.4) $ (294.5) $
(78.0)
Cash flows from financing activities ................................................. $ 1,642.7 $
135.6 $ (101.9)
Cash dividends per share ................................................................... $ 0.6325 $ 0.5950 $ 0.5250 $ 0.4875 $ 0.4300
225.8 $
263.2 $
65.3 $
(58.6) $
63.8 $ (161.5) $
1.74 $
0.82 $
1.04 $
1.94 $
19
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a leading global medical technology company with more than 10,000 employees worldwide. We partner with health
care providers in more than 100 countries by focusing on patient care solutions that improve clinical and economic outcomes
in five core areas: Advancing Mobility, Wound Care and Prevention, Clinical Workflow, Surgical Safety and Efficiency, and
Respiratory Health. Around the world, Hill-Rom's people, products, and programs work towards one mission: Enhancing
outcomes for patients and their caregivers.
Key Factors Impacting Our Business
Industry-wide Demand and Cost Pressures. We believe that over the long term, overall patient and provider demand for
health care products and services will continue to grow as a result of a number of factors, including an aging population,
longer life expectancies, and an increasing number of sicker patients across all care settings, including hospitals, extended
care facilities and in the home. In contrast, however, health care providers across the care continuum are under continued
pressure to improve efficiency and control costs, possibly reducing demand for our products and services. These pressures
may occur for a number of reasons, including declining commercial third-party payer reimbursement rates, government
regulation, and hospital consolidation. In addition, an increasing number of our customers are purchasing through GPO
agreements or other large contracts, where they may be able to purchase at lower prices than they would be able to
individually. Moreover, general economic pressures have caused some governmental authorities to initiate various austerity
measures to control healthcare spending, reducing direct spending in addition to governmental reimbursement rates. We
believe these factors may decrease demand for our products, decrease payments to us, or both; however, we may be able to
offset some or all of this decreased demand through effective research and development leading to new product introductions,
as well as providing demonstrable clinical and economic value to our customers.
Customer Consolidation. Economic considerations, competition and other factors have led to on-going consolidation of
customers and the centralization of purchasing decision making. We believe this has influenced the criteria customers use to
evaluate the value proposition offered by Hill-Rom for various product and service offerings. Economic decision-makers
partner with clinical decision-makers to determine product selection. This has caused Hill-Rom to adjust the way we go to
market and the structure of our sales and distribution channels, particularly in North America. Among other measures, Hill-
Rom established Strategic Partnership Teams as an adjunct to our traditional sales representatives to better address customer
needs for products and services that deliver solutions for more cost-effective patient care. With the acquisition of Welch
Allyn, we also added a significant distributor component serving primary care. The extent to which Hill-Rom effectively
addresses evolving needs brought about by customer consolidation could significantly impact the success of our revenue and
profitability.
Mergers and Acquisitions. We have made several recent acquisitions, most notably the acquisitions of Welch Allyn
Holdings, Inc. (“Welch Allyn”), Trumpf Medical (“Trumpf”), and Virtus, Inc. (“Virtus”), and we plan to make additional
acquisitions in the future. Our past and future acquisitions (to the extent that we make them) may materially impact our
results of operations, by increasing our revenue and revenue growth rates, increasing our ongoing operational selling and
administrative expenses, adding incremental acquisition and integration related costs, and creating additional non-cash
charges associated with the amortization of tangible and intangible assets resulting from purchase accounting. Moreover, to
the extent that we acquire businesses that have financial drivers different than our current businesses, our future results of
operations will be subject to additional or different factors impacting our financial performance.
Growing Desire Among Developing Countries to Invest in Health Care. While industry growth rates in more mature
geographic regions such as western and northern Europe and Japan have moderated, in many other geographic markets,
where the relative spending on health care is increasing, we expect long-term increasing demand for medical technologies.
New hospital construction and hospital refurbishments are expected in regions such as Latin America, the Middle East and
many parts of Asia. This could increase overall demand for our products and services.
Changing Acuities and Technological Impact. As a result of the growing population of the elderly and obese, health care
systems are challenged to treat rising incidences of complex diseases and conditions such as diabetes, congestive heart failure
and respiratory disease. However, at the same time, patients are being moved through the hospital faster and generally desire
to rapidly move to lower acuity settings as quickly as possible. We believe that this trend increases the demand for more
solutions to care for these patients in lower acuity settings, such as improved medical technologies, communication tools and
information technologies. The increasing utilization of these technologies and our ability to meet changing demand with new
differentiated products will impact our ability to increase revenue and improve margins in the future.
20
Increasing Operational Efficiency. We have and will continue to undertake initiatives to improve our operating efficiency,
including business realignments, employee reductions in force, product rationalizations, lower sourcing costs and continuous
improvement activities in our manufacturing facilities and back office functions. We believe our operating expenses and
margins will be positively impacted by these actions, but it is possible these activities may not produce the full efficiency and
cost reduction benefits we expect, in a timely fashion, or at all. Further, we may utilize savings produced to reinvest in (or
fund) other business priorities.
Patient and Caregiver Safety, Quality, and Economic Outcomes. We believe an increasing emphasis is being placed within
hospitals to assure quality of care through increased accountability and public disclosure. At the same time, we believe
caregiver shortages, worker related injuries, the aging workforce, and other staffing requirements have led to increasing
emphasis on caregiver injury prevention. Several pieces of legislation have been enacted over the past few years to address
these areas including the "pay for performance" initiative by the Centers for Medicare and Medicaid Services ("CMS") which
aims to better align reimbursement with improved patient outcomes and the reduction of adverse events including bedsores
(or pressure ulcers), ventilator associated pneumonia, patient falls, deep vein thrombosis and patient entrapment. Hospitals
may experience reduced reimbursement for hospital acquired adverse events, making a stronger connection with these
adverse events and revenue levels. Therefore, we believe that healthcare providers will seek to do business with partners that
can demonstrate improved clinical, and consequently, economic, outcomes. A number of the top adverse events and
preventable medical errors in U.S. hospitals, including those listed above, can be mitigated in part by our technologies,
processes and services. We believe we are well positioned to benefit from the emphasis being placed on patient safety due to
our products and technologies that are designed to assist providers in materially improving outcomes associated with patients
across all care settings, and we believe that an effective program of new product innovation focusing on these trends will
ultimately benefit our revenue growth. Overall increasing emphasis on patient and caregiver safety and quality could increase
demand for our products and services.
Use of Non-GAAP Financial Measures
The accompanying consolidated financial statements, including the related notes, set forth in Part II, Item 8 of this
Form 10-K are presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”). We provide
non-GAAP measures, including adjusted income before taxes, income tax expense and diluted earnings per share results,
because we use these measures internally for planning, forecasting, and evaluating the performance of the business.
In addition, we analyze net revenue on a constant currency basis to better measure the comparability of results between
periods. We believe that evaluating growth in net revenue on a constant currency basis provides an additional and meaningful
assessment to both management and investors.
We use these measures internally for planning, forecasting, and evaluating the performance of the business. These measures
should not, however, be considered in isolation, as a substitute for, or as superior to measures of financial performance
prepared in accordance with GAAP.
21
RESULTS OF OPERATIONS
The following table presents comparative operating results for the years discussed within Management’s Discussion and
Analysis:
(Dollars in millions except per share data)
Net Revenue
Capital sales ................................................................ $
Rental revenue ............................................................
Total Revenue ......................................................................
Gross Profit
Capital sales ................................................................
Rental revenue ............................................................
Total Gross Profit ................................................................
Research and development expenses ..................................
Selling and administrative expenses ...................................
Special charges ....................................................................
Operating Profit ................................................................
Other income (expense), net ...............................................
Income Before Income Taxes ...........................................
Income tax expense .............................................................
Net Income .........................................................................
Less: Net income attributable to noncontrolling
interest ........................................................................
Net Income Attributable to Common Shareholders ...... $
2015
% of Related
Revenue
2014
% of Related
Revenue
2013
% of Related
Revenue
Years Ended September 30
1,604.5
383.7
1,988.2
80.7% $
19.3%
100.0%
1,301.4
384.7
1,686.1
77.2% $
22.8%
100.0%
1,308.3
407.9
1,716.2
683.3
197.0
880.3
91.8
664.2
41.2
83.1
(18.0)
65.1
18.3
46.8
(0.9)
47.7
42.6%
51.3%
44.3%
4.6%
33.4%
2.1%
4.2%
-0.9%
3.3%
0.9%
2.4%
571.2
208.7
779.9
71.9
548.3
37.1
122.6
(7.4)
115.2
54.6
60.6
43.9%
54.3%
46.3%
4.3%
32.5%
2.2%
7.3%
-0.4%
6.8%
3.2%
3.6%
560.5
219.8
780.3
70.2
549.5
5.7
154.9
(10.9)
144.0
39.0
105.0
-
-
2.4% $
60.6
-
3.6% $
-
105.0
76.2%
23.8%
100.0%
42.8%
53.9%
45.5%
4.1%
32.0%
0.3%
9.0%
-0.6%
8.4%
2.3%
6.1%
-
6.1%
Net Income Attributable to Common Shareholders
per Common Share - Diluted .................................. $
0.82
$
1.04
$
1.74
Note: Certain percentage amounts may not add due to rounding.
Fiscal Year Ended September 30, 2015 Compared to Fiscal Year Ended September 30, 2014
Consolidated Results of Operations
In this section, we provide a high-level overview of our consolidated results of operations. Immediately following this section
is a discussion of our results of operations by reportable segment. We disclose segment information that is consistent with the
way in which management operates and views the business.
Our performance under each reportable segment is measured on a divisional income basis before non-allocated operating and
administrative costs, acquisition-related intangible asset amortization, impairments, litigation, special charges, acquisition
and integration costs, and other unusual events. Divisional income generally represents the division’s gross profit less its
direct operating costs along with an allocation of manufacturing and distribution costs, research and development, and certain
corporate functional expenses.
Non-allocated operating and administrative costs include functional expenses that support the entire organization such as
administration, finance, legal, and human resources, expenses associated with strategic developments, acquisition-related
intangible asset amortization, and other events that are not indicative of operating trends. We exclude such amounts from
divisional income to allow management to evaluate and understand divisional operating trends without the effects of such
items.
22
Net Revenue
(Dollars in millions)
Revenue:
Years Ended September 30
Percentage Change
2015
2014
Constant
As Reported Currency
Capital sales .......................................... $
Rental revenue .....................................
Total Revenue .............................................. $
1,604.5 $
383.7
1,988.2 $
1,301.4
384.7
1,686.1
23.3
(0.3)
17.9
29.9
1.7
23.5
Capital sales increased, due primarily to the impact of the Trumpf and Welch Allyn acquisitions which added over
$225 million in sales. Higher patient support systems and clinical workflow solutions sales in our North America segment
and organic sales increases in our Surgical and Respiratory Care segment also contributed to the increase, partially offset by
lower sales in our International segment. Order trends in our North America segment show significant growth compared to
prior periods, while orders in our International segment continue to be volatile due to a higher dependency on large tenders
and the effects of significant economic uncertainty in Europe and the Middle East. Excluding the impact of the Trumpf and
Welch Allyn acquisitions, sales increased 4.5 percent on a reported basis and 8.9 percent on a constant currency basis.
Rental revenue decreased slightly from the prior year as lower revenue in the International segment was offset by increases in
the North America and Surgical and Respiratory Care segments. The North America increase was driven by improving
volumes in the last half of the year due to recent contract wins, which more than offset the decline from the discontinuance of
third-party payer therapy product rentals. International rental revenue was down sharply on a reported basis as a result of
foreign currency fluctuations, and down on a constant currency basis by 4.3 percent.
Gross Profit
(Dollars in millions)
Gross Profit
Years Ended September 30
2015
2014
Percentage
Change
Capital sales ................................................. $
Percent of Related Revenue .........................
683.3 $
42.6%
571.2
43.9%
Rental revenue ............................................. $
Percent of Related Revenue .........................
197.0 $
51.3%
208.7
54.3%
Total Gross Profit ................................................ $
Percent of Related Revenue ................................
880.3 $
44.3%
779.9
46.3%
19.6
(5.6)
12.9
Capital gross profit increased by $112.1 million on higher revenue while gross margin decreased 130 basis points. The gross
margin decrease is primarily driven by the impact of dilutive Trumpf margins, incremental field corrective action charges of
$6.2 million, and the prior year recognition of a $2.8 million benefit from a change in our employee benefits program.
Margins were also negatively impacted by the inventory step-up associated with purchase accounting for acquisitions, which
was $16.2 million in 2015, compared with $6.0 million in 2014. Excluding the aforementioned items, organic capital margins
increased 60 basis points as the impacts of pricing pressure were more than offset by portfolio mix.
Rental gross profit decreased $11.7 million and gross margin decreased 300 basis points. The margin decrease is partially due
to the prior year recognition of a $2.8 million benefit from the employee benefit program change referenced earlier, in
addition to continued pricing pressure and higher field service costs and depreciation on the incremental capital expenditures
necessary to serve recent contract wins in North America.
23
Other
(Dollars in millions)
Years Ended September 30
2015
2014
Percentage
Change
Research and development expenses ........................... $
Percent of Total Revenue ......................................
91.8 $
4.6%
71.9
4.3%
Selling and administrative expenses ............................ $
Percent of Total Revenue ......................................
664.2 $
33.4%
548.3
32.5%
27.7
21.1
Special charges ............................................................ $
41.2 $
37.1
11.1
Interest expense ........................................................... $
Investment income and other, net ................................ $
(18.4) $
0.4 $
(9.8)
2.4
87.8
(83.3)
Research and development expenses increased 27.7 percent primarily due to the addition of Trumpf and Welch Allyn
spending, accompanied by additional investment in organic product development initiatives, as well as the prior year benefit
of $1.2 million associated with the aforementioned employee benefit program change.
Selling and administrative expenses as a percent of total revenue increased 90 basis points. Selling and administrative
expenses include acquisition and integration costs, acquisition-related intangible asset amortization, FDA remediation
expenses, a supplemental stock compensation charge, and litigation settlements and expenses that totaled $90.0 million in
2015, compared with $43.6 in the prior year. Excluding these items, as well as the favorable impact of the employee benefit
program change of $6.6 million recorded in 2014, selling and administrative expenses decreased 140 basis points as a
percentage of revenue. The improvements were due to operating leverage associated with higher revenue and ongoing cost
control initiatives.
Welch Allyn Integration
In conjunction with the acquisition of Welch Allyn in September 2015, we eliminated approximately 80 positions, primarily
in Welch Allyn’s corporate support and administrative functions, which became redundant as a result of merging into Hill-
Rom. We recorded $14.4 million of special charges in conjunction with this action in fiscal 2015 for severance and employee
benefits provided to affected employees. Many of the affected employees must continue service for a specified period of time
after completion of the merger in order to receive the severance benefits offered. As a result, additional charges related to this
action of approximately $3 million will be recorded in fiscal 2016 until those service obligations are fulfilled. Cash payments
related to this action will continue throughout fiscal 2016.
Pension Settlement Charge
As disclosed in Note 6, we offered lump sum settlements to all terminated vested participants in our domestic master defined
benefit retirement plan, which resulted in a settlement charge of $9.6 million. This charge was recorded as a component of
special charges in fiscal 2015.
Site Consolidation
In the third quarter of fiscal 2015, we initiated a plan to streamline our operations and simplify our supply chain by
consolidating certain manufacturing and distribution operations. As part of this action, we announced the closure of sites in
Redditch, England and Charleston, South Carolina. Upon closure, each site’s operations will either be relocated to other
existing Company facilities or outsourced to third-party suppliers. For the year ended September 30, 2015, we recorded
severance and benefit charges of $2.7 million for approximately 160 employees to be displaced by the closures, as well as
$1.8 million of other related costs. We expect to incur approximately $3 million of additional charges in the first half of fiscal
2016 for personnel costs and site closure expenses related to this action until the closures are complete. Cash payments
related to these actions will continue throughout fiscal 2016.
Global Restructuring Program
During the second quarter of fiscal 2014, we announced a global restructuring program focused on improving our cost
structure. This action included early retirement and reduction in force programs that eliminated over 200 net positions,
primarily in the U.S., where the action was substantially completed in fiscal 2014 with cash expenditures continuing during
fiscal 2015. The program also included a reduction of our European manufacturing capacity and a streamlining of global
operations by, among other things, executing a back office process transformation program in Europe. The restructuring in
24
Europe is in process and has resulted in severance and benefit charges of $6.0 million for the year ended September 30, 2015,
as well as other costs of $7.2 million related to legal and professional fees, temporary labor, project management, and other
administrative functions. In the second quarter of fiscal 2015, we also reversed $0.5 million of previously recorded severance
and benefit charges due to certain plan participants declining continuing healthcare coverage.
Since the inception of the global restructuring program through September 30, 2015, we have recognized aggregate special
charges of $37.6 million, which are recorded in both fiscal 2014 and 2015. Charges of $24.9 million were recorded in the
year ended September 30, 2014, net of reversals. We expect to incur $5 to $10 million of additional European restructuring
costs through the completion of the program.
Discontinuance of Third-Party Payer Rentals
Also during the second quarter of fiscal 2014, we initiated a plan to discontinue third-party payer rentals of therapy products
occurring primarily in home care settings. Special charges recorded for this action included a $7.7 million non-cash tangible
asset impairment charge, a $2.0 million charge for severance and other benefits for approximately 70 eliminated positions,
and $1.6 million in other related costs, net of a reversal of $0.2 million which was recorded in the third quarter of fiscal 2014.
This action is substantially complete.
Batesville Manufacturing Early Retirement Program
During the first quarter of fiscal 2014, we initiated a plan to improve our cost structure and streamline our organization by
offering an early retirement program to certain manufacturing employees in our Batesville, Indiana plant, meeting specific
eligibility requirements, and other minor reduction in force actions. These programs resulted in the elimination of
approximately 35 positions and required recognition of a special charge of approximately $1 million for lump sum payments
under the program and severance and other benefits provided to other affected employees. This action was substantially
complete by the end of the second quarter of fiscal 2014.
Interest expense was higher compared with the prior year due to incremental borrowings made in connection with the Trumpf
and Welch Allyn acquisitions.
GAAP and Adjusted Earnings
Income before income taxes, income tax expense, and earnings attributable to common shareholders per diluted share are
summarized in the table below. GAAP amounts are adjusted for certain items to aid management in evaluating the
performance of the business.
(Dollars in millions, except for per share amounts)
Income Before
Income Taxes
Income Tax
Expense
2015
NCI
Diluted EPS
Income Before
Income Taxes
2014
Income Tax
Expense
Diluted EPS1
Years Ended September 30
65.1 $
18.3 $
(0.9) $
0.82 $
115.2 $
54.6 $
0.76
16.3
5.0
GAAP Earnings .............................................. $
Adjustments:
Acquisition and integration costs ............
Acquisition-related intangible asset
amortization ..........................................
Employee benefits change .......................
FDA remediation expenses .....................
Field corrective actions............................
Litigation settlements and expenses ........
Special charges ........................................
Supplemental stock compensation
charge ....................................................
Foreign valuation allowance and
62.8
18.0
34.1
-
3.8
4.5
(0.6)
41.2
9.8
-
1.2
1.4
(0.2)
10.7
6.1
2.2
acquisition dividend tax ........................
-
1.9
-
-
-
-
-
-
-
-
-
0.42
-
0.04
0.05
(0.01)
0.52
0.07
(0.03)
28.8
(13.4 )
4.5
(1.7 )
-
37.1
-
-
1.04
0.19
0.34
(0.14)
0.05
(0.02)
-
0.45
8.7
(5.1)
1.7
(0.6)
-
10.9
-
-
(20.3)
0.35
Adjusted Earnings .......................................... $
217.0 $
63.3 $
(0.9) $
2.64 $
186.8 $
54.9 $
2.25
1 Total does not add due to rounding
NCI = Net loss attributable to noncontrolling interests
25
The effective tax rate for fiscal 2015 was 28.1 percent compared to 47.4 percent in the prior year. The effective tax rate for
fiscal 2015 is lower than fiscal 2014 due primarily to the $19.6 million of tax expense recognized in the prior year to
establish a valuation allowance on the net deferred tax assets in France, primarily net operating losses. This compares to
$3.3 million of tax benefits in the current year primarily related to the reversal of previously recorded valuation allowances in
Australia and the one-time catch-up tax benefit from the reinstatement of the research and development tax credit.
On December 19, 2014, the Tax Increase Prevention Act of 2014 (the Tax Act) was signed into law. The Tax Act
retroactively extended the research and development tax credit for one year beginning January 1, 2014 through December 31,
2014. This credit had previously expired effective December 31, 2013. The reinstatement of the research and development
tax credit favorably impacted the effective tax rate for fiscal 2015 by approximately $2 million through a combination of a
one-time catch-up adjustment from the reinstatement of the credit recorded in our first quarter of fiscal 2015 and the inclusion
of the limited current year research credit into the fiscal 2015 effective tax rate.
The adjusted effective tax rates were 29.2 and 29.4 percent for fiscal years 2015 and 2014.
Net income attributable to common shareholders was $47.7 million in fiscal 2015 compared to $60.6 million in the prior
year. On an adjusted basis, net income attributable to common shareholders increased $22.7 million, or 17.2 percent
compared with the prior year. Diluted earnings per share decreased 21.2 percent on a reported basis and increased
17.3 percent on an adjusted basis over the same period.
Business Segment Results of Operations
(Dollars in millions)
Revenue:
Years Ended September 30 Percentage Change
Constant
As Reported Currency
2014
2015
North America ............................................................. $
Surgical and Respiratory Care .....................................
International ................................................................
Welch Allyn1 ...............................................................
Total revenue ......................................................... $
1,002.0 $
506.6
429.4
50.2
1,988.2 $
888.9
301.6
495.6
-
1,686.1
12.7
13.4
68.0
78.3
(2.1)
(13.4)
N/M N/M
23.5
17.9
Divisional income:
North America ............................................................. $
Surgical and Respiratory Care .....................................
International ................................................................
204.1 $
80.5
12.8
165.0
68.6
24.9
23.7
17.3
(48.6)
1 Welch Allyn is not considered a reportable segment but is presented as a reconciling item to total consolidated revenue.
N/M = Not meaningful
North America
North America revenue increased 12.7 percent. Capital sales were up 17.2 percent due to higher sales of patient support
systems and clinical workflow solutions products. Rental revenue increased by 2.4 percent as improved volumes from recent
contract wins were partially offset by the discontinuance of third-party payer therapy product rentals in the second half of
fiscal 2014, along with continued pricing pressure. Excluding the effects of the discontinuance of third-party payer therapy
product rentals, rental revenue increased 7.6 percent compared with the prior year.
North America divisional income increased 23.7 percent due primarily to increased revenue and the resulting increase in
gross profit. Capital margins increased 60 basis points compared with the prior year primarily due to favorable changes in
product mix. Rental margins declined as a result of continued pricing pressure, along with our increased investment in
additional capacity to meet the higher volumes in fiscal 2015 from recent contract wins. Divisional income also benefited
from improved leverage of operating expenses on higher revenue.
26
Surgical and Respiratory Care
Surgical and Respiratory Care revenue increased 68.0 percent on a reported basis, and 78.3 percent on a constant currency
basis. Excluding the impact of the Trumpf acquisition, revenue increased 3.2 percent on a reported basis driven by higher
respiratory and surgical sales. Capital sales increased 84.8 percent primarily due to Trumpf, while rental revenue in
respiratory care was relatively flat year over year.
Surgical and Respiratory Care divisional income increased 17.3 percent due to the incremental gross profit from Trumpf, but
at a lower rate given the lower Trumpf margins. Divisional income excluding acquisitions was impacted by increased
investments in research and development and sales channel to support growth initiatives.
International
International revenue decreased 13.4 percent on a reported basis, and 2.1 percent on a constant currency basis. International
capital sales decreased 12.9 percent, or 1.8 percent on a constant currency basis due primarily to weaker sales in Europe, the
Middle East, and Latin America. Sales in this segment continue to face significant volatility as result of continued economic
uncertainty in various regions around the world. International rental revenue decreased 16.8 percent on a reported basis and
4.3 percent on a constant currency basis due to continued volume and pricing pressures.
International divisional income decreased 48.6 percent due primarily to lower revenue and the resulting decline in gross
profit, partially offset by lower selling and administrative expenses, along with some unfavorable foreign currency impact.
Capital margins declined 70 basis points from the prior year. Rental margins decreased due to reduced leverage of fleet and
field service infrastructure as revenue has declined more quickly than our field service costs, along with continued pricing
pressure.
Fiscal Year Ended September 30, 2014 Compared to Fiscal Year Ended September 30, 2013
Consolidated Results of Operations
In this section, we provide a high-level overview of our consolidated results of operations. Immediately following this section
is a discussion of our results of operations by reportable segment. We disclose segment information that is consistent with the
way in which management operates and views the business.
Net Revenue
(Dollars in millions)
Revenue:
Years Ended September 30 Percentage Change
2014
2013
Constant
As Reported Currency
Capital sales ...................................................................... $
Rental revenue ..................................................................
Total Revenue ........................................................................ $
1,301.4 $
384.7
1,686.1 $
1,308.3
407.9
1,716.2
(0.5)
(5.7)
(1.8)
(1.1)
(6.0)
(2.2)
Capital sales decreased, due primarily to lower patient support system sales in our North America and International segments,
which were partially offset by sales increases within the Surgical and Respiratory Care segment. Surgical and Respiratory
Care sales increased due to strong organic growth and the acquisition of Trumpf in the fourth quarter of fiscal 2014. In both
our North America and International segments, capital order trends continue to be volatile as our customers continue to
closely watch their expenditures, looking for clarity in the evolving healthcare marketplace.
Rental revenue declined in the North America segment primarily due to lower volumes, continued pricing pressure, and our
discontinuance of third-party payer therapy product rentals. Surgical and Respiratory Care rental revenue was flat for fiscal
2014, with international rental revenue also flat on a constant currency basis.
27
Gross Profit
(Dollars in millions)
Gross Profit
Years Ended September 30
2014
2013
Percentage
Change
Capital sales ................................................................. $
Percent of Related Revenue ..........................................
571.2 $
43.9%
560.5
42.8%
Rental revenue .............................................................. $
Percent of Related Revenue ..........................................
208.7 $
54.3%
219.8
53.9%
Total Gross Profit ............................................................ $
Percent of Related Revenue .............................................
779.9 $
46.3%
780.3
45.5%
1.9
(5.1)
(0.1)
Capital gross profit and gross margin increased by $10.7 million and 110 basis points during fiscal 2014. The gross profit
increase, despite somewhat lower revenue, comes from improved gross margin rates, driven by the effects of the items
outlined below. Gross margin was favorably impacted by reversals of $1.7 million associated with previously recorded field
corrective actions compared to charges of $12.2 million in the prior year. The recognition of a $2.8 million benefit from a
change in our employee benefit program also favorably impacted gross margin in fiscal 2014. Further, the margin increase
was partially offset by $6.0 million of inventory step-up associated with fiscal 2014 acquisitions compared to $2.5 million of
inventory step-up recognized in fiscal 2013 resulting from the Aspen Surgical acquisition. In addition, we experienced
improved margins in our International segment and in certain Surgical and Respiratory Care product lines, but these were
offset by weaker margins in our North America segment and the impact of the Trumpf acquisition.
Rental gross profit decreased $11.1 million, but gross margin increased 40 basis points for fiscal 2014. The margin increase is
due to the recognition of a $2.8 million benefit from an employee benefit program change, coupled with lower depreciation
expense and field service costs.
Other
(Dollars in millions)
Years Ended September 30
2014
2013
Percentage
Change
Research and development expenses ............................... $
Percent of Total Revenue............................................
71.9 $
4.3%
70.2
4.1%
Selling and administrative expenses ................................ $
Percent of Total Revenue............................................
548.3 $
32.5%
549.5
32.0%
2.4
(0.2)
Special charges ................................................................ $
37.1 $
5.7
550.9
Interest expense ............................................................... $
Investment income and other, net .................................... $
(9.8) $
2.4 $
(9.5)
(1.4)
3.2
(27.4)
Research and development expenses increased 2.4 percent, net of a $1.2 million benefit associated with the employee benefit
program change. The increase in expenses is due to higher spending on new product development initiatives and incremental
spend related to the recent Trumpf acquisition. Selling and administrative expenses decreased $1.2 million. Selling and
administrative expenses were favorably impacted by various cost control initiatives previously implemented, lower variable
compensation expenses, and an employee benefit adjustment of $6.6 million referenced earlier. This decrease was partially
offset by $10.3 million of acquisition and integration costs compared to $6.3 million in fiscal 2013 and an incremental
$8.3 million of Trumpf-related selling and administrative expenses, along with higher medical device tax of $1.6 million.
Despite the lower overall spend, selling and administrative expenses were up slightly as a percentage of revenue on the lower
revenue.
28
During the second quarter of fiscal 2014, we announced a global restructuring program to improve our cost structure. As part
of this program, we offered an early retirement program to certain U.S. employees. Through this program, other reduction in
force actions, and the elimination of certain contractor and open positions, we eliminated over 200 net positions primarily in
the U.S. This portion of the program resulted in a special charge of $11.0 million related to severance and other benefits to be
provided to affected employees. We also recorded a $3.2 million charge related to special pension and postretirement
healthcare plan benefits granted to employees eligible for the early retirement program. The severance and other benefits and
postretirement benefit charge balances reflect a $1.3 million reclassification compared to the original charge recorded in the
second quarter of 2014. Subsequently during the fiscal year, we reversed $0.7 million of the severance and other benefits
accrual due to certain plan participants declining continuing healthcare coverage, as well as other changes in circumstances
affecting the estimated future payments to be made. This portion of the restructuring program is substantially complete, but
cash expenditures will continue into fiscal year 2015. The global restructuring program is also reducing our European
manufacturing capacity and streamlining our global operations by, among other things, executing a back office process
transformation program in Europe. The restructuring in Europe is in process and has resulted in year to date severance and
benefit charges of $6.8 million. We have also incurred other costs associated with the global restructuring program of
$4.6 million related to legal and professional fees, temporary labor, project management, and other administrative functions.
All these actions are anticipated to yield annual cost savings of approximately $30 million after full implementation.
Also during the second quarter of fiscal 2014, we initiated a plan to discontinue third-party payer rentals of therapy products
occurring primarily in home care settings. We intend to continue renting these products to facilities and customers who are
billed directly for the product. Due to this action, we recorded a non-cash impairment charge of $7.7 million for certain
tangible assets for which the carrying values could not be fully recovered as a result of this strategic decision. We also
eliminated approximately 70 positions and recognized a special charge of $2.0 million related to severance and other benefits
for affected employees and $1.8 million in other related costs. Over the remainder of the fiscal year, we reversed $0.2 million
of the other related costs as original estimates charged were excessive. The exit of this business was substantially complete
by the first quarter of fiscal 2015, but certain cash expenditures extended through fiscal 2015.
During the first quarter of fiscal 2014, we initiated a plan to improve our cost structure and streamline our organization by
offering an early retirement program to certain manufacturing employees in our Batesville, Indiana plant, meeting specific
eligibility requirements, and other minor reduction in force actions. These programs resulted in the elimination of
approximately 35 positions and required recognition of a special charge of approximately $1 million for lump sum payments
under the program and severance and other benefits provided to other affected employees. This action was substantially
complete by the end of the second quarter of fiscal 2014.
During the second quarter of fiscal 2013, we announced a plan to improve our cost structure and streamline our organization
by eliminating in excess of 100 positions across the Company, roughly half of which were contract and open positions. This
resulted in a special charge of $1.7 million related to severance and other benefits to be provided to affected employees. We
also incurred a contract termination charge of $0.6 million, a non-cash asset impairment charge of $0.2 million related to a
product discontinuance action and $1.0 million in other related costs. We reversed $0.6 million of a fiscal 2012 severance and
other benefits charge that was determined to be excessive during the second quarter of fiscal 2013. During the third and
fourth quarters of fiscal 2013, we continued actions under the previously announced plan and incurred charges of
$0.8 million and $2.0 million, respectively. These actions and the related cash expenditures are complete.
Interest expense was higher for fiscal 2014 due to incremental borrowings made in connection with acquisitions.
29
GAAP and Adjusted Earnings
Income before income taxes, income tax expense, and earnings attributable to common shareholders per diluted share are
summarized in the table below. GAAP amounts are adjusted for certain items to aid management in evaluating the
performance of the business.
(Dollars in millions, except for per share amounts)
GAAP Earnings ............................................................... $
Adjustments:
Acquisition and integration costs ...............................
Acquisition-related intangible asset amortization ......
Field corrective actions ..............................................
Employee benefits change .........................................
FDA remediation expenses ........................................
Litigation charge ........................................................
Special charges ..........................................................
Foreign valuation allowance and acquisition
dividend tax .............................................................
International tax reorganization .................................
Years Ended September 30
Income
Before
Income
Taxes
2014
Income
Tax
Expense
Diluted
EPS1
Income
Before
Income
Taxes
2013
Income
Tax
Expense
Diluted
EPS
115.2 $
54.6 $
1.04 $
144.0 $
39.0 $
1.74
16.3
28.8
(1.7)
(13.4)
4.5
-
37.1
5.0
8.7
(0.6)
(5.1)
1.7
-
10.9
-
-
(20.3)
-
0.19
0.34
(0.02)
(0.14)
0.05
-
0.45
0.35
-
8.8
27.7
12.2
-
6.1
0.5
5.7
2.9
10.1
4.0
-
2.3
0.5
1.8
0.10
0.29
0.14
-
0.06
-
0.06
-
-
-
0.8
-
(0.01)
Adjusted Earnings ............................................................ $
186.8 $
54.9 $
2.25 $
205.0 $
61.4 $
2.38
1 Total does not add due to rounding
The tax rate for fiscal 2014 was 47.4 percent compared to 27.1 percent in the prior year. The effective tax rate for fiscal 2014
is higher than fiscal 2013 due primarily to the tax expense recognized in the second quarter of this year to establish a full
valuation allowance in France of $19.6 million related to its net deferred tax assets, primarily net operating losses. The
effective rate for 2013 was favorably impacted by $5.4 million of period tax benefits consisting primarily of the one-time
“catch-up” for the reinstatement of the research and development tax credit, the release of various tax reserves upon statute
expiration and the favorable impact of tax law changes in select countries.
The adjusted effective tax rates were 29.4 and 30.0 percent for fiscal years 2014 and 2013.
Net income was $60.6 million in fiscal 2014 compared to $105.0 million in the prior year period, a decrease of 42.3 percent.
On an adjusted basis, net income decreased $11.7 million, or 8.1 percent in 2014 compared to 2013. Diluted earnings per
share decreased 40.2 percent on a reported basis and 5.5 percent on an adjusted basis over the same period.
Business Segment Results of Operations
(Dollars in millions)
Revenue:
Years Ended September 30 Percentage Change
Constant
As Reported Currency
2013
2014
North America ............................................................. $
Surgical and Respiratory Care .....................................
International ................................................................
Total revenue ......................................................... $
888.9 $
301.6
495.6
1,686.1 $
958.3
245.8
512.1
1,716.2
(7.2)
22.7
(3.2)
(1.8)
(6.9)
22.0
(5.1)
(2.2)
Divisional income:
North America ............................................................. $
Surgical and Respiratory Care .....................................
International ................................................................
165.0 $
68.6
24.9
201.7
56.8
33.5
(18.2)
20.8
(25.7)
30
North America
North America revenue decreased 7.2 percent. Capital sales were down 6.6 percent related primarily to volume declines in
our patient support systems sales, which were down in a challenging and uncertain North American healthcare environment
where there is continued pressure on capital spending. Rental revenue declined by 8.6 percent primarily due to lower
volumes, continued pricing pressure, and our discontinuance of third-party payer therapy product rentals.
North America divisional income decreased due primarily to lower revenue and the resulting decline in gross profit. The
lower gross profit and somewhat higher research and development expenses were only partially offset by lower operating
expenses, most notably lower selling and variable compensation costs, along with benefits from previously implemented
restructuring programs. Capital margins were down primarily on lower volumes and unfavorable product mix. Rental
margins were down as the impact of the lower revenue could not be fully offset by lower depreciation expense and reduced
field service costs.
Surgical and Respiratory Care
Surgical and Respiratory Care revenue increased 22.7 percent. Capital sales increased 30.1 percent related to higher sales
volumes primarily in our surgical businesses and the impact of the Trumpf acquisition. Excluding the Trumpf acquisition,
capital sales increased 8.9 percent. Rental revenue increased slightly on improved volumes, offsetting continued pricing
pressure.
Surgical and Respiratory Care divisional income increased on the higher sales volumes and the resulting higher gross profit,
despite somewhat lower gross margins due to the dilutive impact of the Trumpf acquisition. The higher gross profit was
partially offset by increased research and development and other operating expense spending, generally driven by the Trumpf
acquisition and higher corporate expense allocations of $2.8 million. Overall, Trumpf contributed favorably to the
improvement in divisional income
.
International
International revenue decreased 3.2 percent. International capital sales decreased 4 percent, or 5.7 percent on a constant
currency basis. These declines are due primarily to weaker sales in the Middle East and Europe. Sales in the Middle East
region tend to fluctuate based on the timing of large tender deals, while Europe’s healthcare environment continues to face
pressure on capital spending similar to that in North America. Rental revenue increased 3.9 percent and was flat on a constant
currency basis.
International divisional income decreased 25.7 percent. Despite lower revenue, overall gross profit was only down slightly as
higher margins on improved product mix offset most of the impacts of lower volumes. However, higher operating expenses
were driven by increased research and development spending and higher operating costs associated with the employee related
investments in developing markets and higher corporate allocations of $1.5 million.
LIQUIDITY AND CAPITAL RESOURCES
(Dollars in millions)
Cash Flows Provided By (Used In):
Operating activities ................................................................................ $
Investing activities .................................................................................
Financing activities ................................................................................
Effect of exchange rate changes on cash ...............................................
Increase (Decrease) in Cash and Cash Equivalents ............................... $
Years Ended September 30
2014
2013
2015
213.8 $
(1,756.4)
1,642.7
(6.6)
93.5 $
210.3 $
(294.5)
63.8
(7.7)
(28.1) $
263.2
(58.6)
(161.5)
-
43.1
Net cash flows from operating activities and selected borrowings have 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, working capital or additional unsecured indebtedness, and stronger limitations with respect to secured
indebtedness. Our debt agreements also contain no credit rating triggers. Credit rating changes can, however, impact the cost
of borrowings under our credit facility described below and any potential future borrowings.
31
Operating Activities
Cash provided by operating activities during fiscal 2015 was driven by net income, adjusted up for non-cash expenses
including depreciation, amortization, stock compensation, and a pension settlement charge, offset by the provision for
deferred income taxes and by changes in working capital. Cash provided by operating activities increased 1.7 percent from
fiscal 2014, driven by improved working capital management, which more than offset lower net income, as adjusted for non-
cash transactions.
Cash provided by operating activities during fiscal 2014 was driven primarily by net income, adjusted for the non-cash
effects of depreciation and amortization, stock compensation, an impairment loss, and the provision for deferred taxes. The
collection of receivables outstanding as of our previous year end and subsequent to the Trumpf acquisition date also
contributed to operating cash flow. These sources of cash were only partially offset by other working capital activities. Cash
provided by operating activities was down compared to the prior year on lower net income and lower net cash provided by
working capital activities, primarily associated with lower receivable collections. These reductions were partially offset by
lower tax payments in fiscal 2014.
Cash provided by operating activities during fiscal 2013 was driven by net income and improved working capital, including
strong collections on receivables, adjusted by non-cash expenses related to depreciation and amortization, stock
compensation, and deferred taxes.
Investing Activities
Cash used for investing activities during 2015 consisted mainly of capital expenditures and payments for acquisitions. Capital
expenditures increased from the prior year due to investments in our rental fleet to support volume increases from recent
contract wins. Payments for acquisitions increased due to the acquisition of Welch Allyn in September 2015.
Cash used for investing activities during 2014 consisted mainly of capital expenditures and payments for acquisitions. Capital
expenditures decreased compared to the prior year, but payments for acquisitions increased primarily due to the purchases of
Virtus and Trumpf.
Cash used for investing activities during fiscal 2013 was driven by capital expenditures.
Financing Activities
Cash provided by financing activities during fiscal 2015 consisted mainly of new borrowings which were used to fund the
Welch Allyn acquisition. Borrowings under our prior credit facility were also used to fund the higher rental fleet investment
previously discussed. This was offset by treasury stock acquired, dividend payments, and payments to retire previously
outstanding debt as this was replaced with the financing obtained in conjunction with the Welch Allyn acquisition. During
the year ended September 30, 2015, we increased our dividends paid by $0.0375 per share compared to the prior year. This
higher utilization of cash compared to the prior year period was more than offset by lower purchases of treasury stock and our
borrowing activity.
Cash provided by financing activities during fiscal 2014 consisted mainly of borrowings on our existing credit facility which
were used to fund acquisition activity. This was offset by treasury stock acquired of $71.8 million, payments on outstanding
debt of $95.2 million, and dividend payments of $34.2 million. During the year ended September 30, 2014, we increased our
dividends paid by $0.07 per share compared to the prior year. This higher utilization of cash was more than offset by our
borrowing activity, lower purchases of treasury stock, and higher proceeds on the exercise of stock options.
Cash used in financing activities in fiscal 2013 primarily related to treasury stock acquired of $94.0 million, revolving and
long-term debt payments of $45.1 million, and dividend payments to our shareholders of $31.2 million. These uses of cash
were partially offset by cash proceeds from stock option exercises and other stock issuances under our employee stock
purchase plan.
The treasury stock acquired balances referenced above refer to purchases in the open market and the repurchases of shares
associated with employee payroll tax withholdings for restricted and deferred stock distributions.
Our debt-to-capital ratio was 65.9, 37.8, and 26.3 percent at September 30, 2015, 2014 and 2013. The increase in fiscal 2015
was attributable to the funding of the Welch Allyn acquisition, including the new borrowings obtained. Shareholders’ equity
was also negatively impacted by treasury stock acquired and the other comprehensive losses associated with foreign currency
32
translation. The increase in fiscal 2014 was attributable to increased borrowings used to fund the Trumpf acquisition and a
decrease in shareholders’ equity due to treasury stock acquired and other comprehensive losses recognized associated with
foreign currency translation and an increase in our net pension obligation.
Other Liquidity Matters
In September 2015, the Company entered into four new credit facilities for purposes of financing the Welch Allyn acquisition
as well as refinancing our previously outstanding revolving credit facility. These new facilities consisted of the following:
$1.0 billion senior secured Term Loan A facility (“TLA Facility”), maturing in September 2020
$800.0 million senior secured Term Loan B facility (“TLB Facility”), maturing in September 2022
Senior secured revolving credit facility (“Revolving Credit Facility”), providing borrowing capacity of up to
$500.0 million, maturing in September 2020
$425.0 million of senior unsecured notes (“Senior Notes”), maturing in September 2023
The TLA Facility, TLB Facility, and Revolving Credit Facility (collectively, the “Senior Secured Credit Facilities”) all bear
interest at variable rates which are currently less than 4.0 percent. These interest rates are based primarily on the London
Interbank Offered Rate (LIBOR), but under certain conditions could also be based on the U.S. Federal Funds Rate or the U.S.
Prime Rate, at the Company’s option. The TLA Facility and TLB Facility have required principal payments. The TLA
Facility requires minimum principal payments of $50.0 million in fiscal 2016, $75.0 million in fiscal 2017, and $100.0
million annually thereafter, with the remaining unpaid principal balance due at maturity. The TLB Facility requires annual
principal payments of $8.0 million with the remaining unpaid principal balance due at maturity. We will be able to
voluntarily prepay outstanding loans under the TLA Facility and the TLB Facility at any time.
At September 30, 2015, there were no borrowings on the Revolving Credit Facility, but available borrowing capacity was
$490.9 million after giving effect to $9.1 million of outstanding standby letters of credit. At September 30, 2014, there were
$42.4 million of outstanding standby letters of credit under our previous revolving credit agreements, $39.8 million of which
pertained to one standby letter of credit issued in connection with the Trumpf acquisition, which expired in January 2015.
The availability of borrowings under our Revolving Credit Facility is subject to our ability at the time of borrowing to meet
certain specified conditions, including compliance with covenants contained in the governing credit agreement.
The Senior Secured Credit Facilities are held with a syndicate of banks, which includes over 20 institutions. The general
corporate assets of the Company and its subsidiaries collateralize these obligations. The credit agreement governing these
facilities contains financial covenants which specify a maximum secured net leverage ratio and a minimum interest coverage
ratio, as such terms are defined in the credit agreement. These financial covenants are measured at the end of each fiscal
quarter, with the first measurement date on December 31, 2015. The required ratios vary through December 31, 2019
providing a gradually decreasing maximum secured net leverage ratio and a gradually increasing minimum interest coverage
ratio, as set forth in the table below:
Fiscal Quarter Ended
December 31, 2015 .............................
December 31, 2016 .............................
December 31, 2017 .............................
December 31, 2018 .............................
December 31, 2019 and thereafter ......
Maximum
Secured Net
Leverage Ratio
4.75x
4.50x
4.00x
3.50x
3.00x
Minimum
Interest Coverage
Ratio
3.25x
3.25x
3.50x
3.75x
4.00x
The Senior Notes bear interest at a fixed rate of 5.75 percent annually. These notes were issued at par in a private placement
offering and are not registered on any public market. All of the Senior Notes are outstanding as of September 30, 2015. We
are not required to make any mandatory redemption or sinking fund payments with respect to the Notes, other than in certain
circumstances such as a change in control or material sale of assets. We may redeem the notes prior to maturity, but doing so
prior to September 1, 2021 would require payment of a premium on any amounts redeemed, the amount of which varies
based on the timing of the redemption. The indenture governing the Senior Notes contains certain covenants which impose
limitations on the amount of dividends we may pay and the amount of common shares we may repurchase in the open
market, but we do not expect these covenants to affect our current dividend policy or open share repurchase program. The
terms of this indenture also impose certain restrictions on the amount and type of additional indebtedness we may obtain in
the future, as well as the types of liens and guarantees we may provide.
33
We are in compliance with all applicable financial covenants as of September 30, 2015 and November 12, 2015.
We also have $43.4 million of unsecured debentures outstanding at various fixed interest rates as of September 30, 2015,
classified as long-term in the Consolidated Balance Sheet.
Our primary pension plan invests in a variety of equity and debt securities. At September 30, 2015, our latest measurement
date, our pension plans were underfunded by approximately $96.4 million. Based on our current funded status, we currently
do not anticipate any contributions to our primary pension plan in fiscal 2016.
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 by us will be subject to the sole discretion of our Board and
will depend upon many factors, including our financial condition, earnings, capital requirements, covenants associated with
debt obligations, legal requirements and other factors deemed relevant by our Board.
On September 8, 2015, we completed the acquisition of Welch Allyn for a purchase price of $2.1 billion, including the value
of 8.1 million shares of common stock which were issued to the seller as consideration for the transaction. The cash portion
of the purchase price was funded with the new credit facilities previously discussed. On August 1, 2014, we completed the
acquisition of Trumpf for $223.6 million (net of cash acquired). We funded this transaction with a combination of cash on
hand and borrowings under our prior revolving credit facility.
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.
During fiscal 2015, we purchased 1.2 million shares of our common stock for $54.8 million in the open market, leaving
64.7 million available for purchase. The common stock was acquired under a $190 million share repurchase program
approved by the Board of Directors in September 2013, which does not have an expiration date. There are no plans to
terminate this program in the future, but with the acquisition of Welch Allyn and the increased borrowings obtained to
finance the transaction, we will suspend our share repurchase activity temporarily to focus on deleveraging. Repurchases may
be made on the open market or via private transactions, and are used for general business purposes.
We believe that cash on hand and generated from operations, along with amounts available under our credit facility, will be
sufficient to fund operations, working capital needs, capital expenditure requirements, and financing obligations for at least
the next twelve months. However, disruption and volatility in the credit markets could impede our access to capital. Our
$500.0 million revolving credit facility is with a syndicate of banks, which we believe reduces our exposure to any one
institution and would still leave us with significant borrowing capacity in the event that any one of the institutions within the
group is unable to comply with the terms of our agreement.
As of September 30, 2015, approximately 49 percent of the Company’s cash and cash equivalents are held by our
subsidiaries in foreign countries. Portions of this may be subject to U.S. income taxation if repatriated to the U.S. However,
cash and cash equivalents held by foreign subsidiaries are largely used for operating needs outside the U.S. Therefore, we
have no need to repatriate this cash for other uses. We believe that cash on hand and generated from operations, along with
amounts available under our credit facility, will be sufficient to fund operations, working capital needs, capital expenditure
requirements and financing obligations.
Credit Ratings
During fiscal 2015, Standard and Poor’s Rating Services and Moody’s Investor Service issued credit ratings for Hill-Rom of
BB+ and Ba2, respectively, with stable outlooks.
Other Uses of Cash
We expect capital spending in 2016 to be approximately $110 to $120 million. Capital spending will be monitored and
controlled as the year progresses.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
34
Contractual Obligations, Contingent Liabilities and Commitments
To give a clear picture of matters potentially impacting our liquidity position, the following table outlines our contractual
obligations as of September 30, 2015:
(Dollars in millions)
Contractual Obligations
Long-term debt obligations ................................... $
Interest payments relating to long-term debt (1) ...
Operating lease obligations ...................................
Pension and postretirement ...................................
health care benefit funding (2) ..........................
Purchase obligations (3)........................................
Other long-term liabilities (4) ...............................
Total contractual cash obligations ........................ $
Less Than
1 Year
Payments Due by Period
1 - 3
Years
3 - 5
Years
After 5
Years
Total
2,272.3 $
561.3
73.8
31.7
174.8
38.5
3,152.4 $
58.0 $
78.7
28.2
2.9
132.0
-
299.8 $
194.3 $
166.2
30.5
6.0
31.3
15.4
443.7 $
791.2 $
164.0
9.5
6.3
11.2
15.2
997.4 $
1,228.8
152.4
5.6
16.5
0.3
7.9
1,411.5
(1)
Interest payments on our long-term debt are projected based on the contractual rates of remaining debt securities.
(2) Based on our funded status as of September 30, 2015, we currently do not anticipate any further contributions to our
master pension plan in fiscal 2016.
(3)
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 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.
(4) Other long-term liabilities include deferred compensation arrangements, self-insurance reserves, and other various
liabilities.
We also had commercial commitments related to standby letters of credit at September 30, 2015 of $9.1 million.
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. While many of these agreements are
long-term supply agreements, some of which are exclusive supply or complete requirements-based contracts, we are not
committed under these agreements to accept or pay for requirements which are not needed to meet production needs. Also,
we have an additional $5.8 million of other liabilities as of September 30, 2015, 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 have 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 a
materially adverse impact on our financial condition and results of operations.
We are also subject to potential losses from adverse litigation results that are not accounted for by a self-insurance or other
reserves; however, 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, 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 materially from these
estimates and assumptions, results of operations and financial condition could be affected. Our most critical accounting
policies are described below.
35
Revenue Recognition
Net revenue reflects gross revenue less sales discounts and allowances and customer returns for product sales and rental
revenue reserves. Revenue is evaluated under the following criteria and recognized when each is met:
Evidence of an arrangement: An agreement with the customer reflecting the terms and conditions to deliver products or
services serves as evidence of an arrangement.
Delivery: For products, delivery is considered to occur upon receipt by the customer and the transfer of title and risk of
loss. For rental services, delivery is considered to occur when the services are rendered.
Fixed or determinable price: The sales price is considered fixed or determinable if it is not subject to refund or
adjustment.
Collection is deemed probable: At or prior to the time of a transaction, credit reviews of each customer are performed to
determine the creditworthiness of the customer. Collection is deemed probable if the customer is expected to be able to
pay amounts under the arrangement as those amounts become due. If collection is not probable, revenue is recognized
when collection becomes probable, generally upon cash collection.
As a general interpretation of the above guidelines, revenue for health care and surgical products are generally recognized
upon delivery of the products to the customer and their assumption of risk of loss and other risks and rewards of ownership.
Local business customs and non-standard sales terms can sometimes result in deviations to this normal practice in certain
instances; however, in no case is revenue recognized prior to the transfer of risk of loss and rewards of ownership.
For non-invasive therapy products and medical equipment management services, the majority of product offerings are rental
products for which revenue is recognized consistent with the rendering of the service and use of products. For The Vest®
product, revenue is generally recognized at the time of receipt of authorization for billing from the applicable paying entity as
this serves as evidence of the arrangement and sets a fixed or determinable price.
For health care products and services aimed at improving operational efficiency and asset utilization, various revenue
recognition techniques are used, depending on the offering. Arrangements to provide services, routinely under separately sold
service and maintenance contracts, result in the deferral of revenue until specified services are performed. Service contract
revenue is generally recognized ratably over the contract period, if applicable, or as services are rendered. Product-related
goods are generally recognized upon delivery to the customer.
Revenue and Accounts Receivable Reserves
Revenue is presented in the Statements of Consolidated Income net of certain discounts, GPO fees, and sales adjustments.
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 expenses and represent our best estimate of the
amount of probable credit losses and collection risk in our existing accounts receivable. We determine such reserves based on
historical write-off experience by industry. Receivables are generally reviewed on a pooled basis 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 claims denials, payment defaults, 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.
Liabilities for Loss Contingencies Related to Lawsuits
We are involved on an ongoing basis in claims, investigations and lawsuits relating to our operations, including patent
infringement, business practices, commercial transactions and other matters. The ultimate outcome of these actions cannot be
36
predicted with certainty. An estimated loss from these contingencies is recognized when we believe it is probable that a loss
has been incurred and the amount of the loss can be reasonably estimated. However, it is difficult to measure the actual loss
that might be incurred related to claims, investigations and lawsuits. The ultimate outcome of these actions could have a
material adverse effect on our financial condition, results of operations and cash flow.
We are also involved in other possible claims, including product and general liability, workers’ compensation, auto liability
and employment related matters. Such claims in the United States have deductibles and self-insured retentions ranging from
$25 thousand to $1.0 million per occurrence or per claim, depending upon the type of coverage and policy period.
International deductibles and self-insured retentions are lower. We are also generally self-insured up to certain stop-loss
limits for certain employee health benefits, including medical, drug and dental. Our policy is to estimate reserves based upon
a number of factors including known claims, estimated incurred but not reported claims and outside actuarial analysis, which
are based on historical information along with certain assumptions about future events. Such estimated reserves are classified
as Other Current Liabilities and Other Long-Term Liabilities within the Consolidated Balance Sheets.
The recorded amounts represent our best estimate of the costs we will incur in relation to such exposures, but it is possible
that actual costs could differ from those estimates.
Goodwill and Intangible Assets
We account for acquired businesses using the acquisition method of accounting. This method requires that the identifiable
assets acquired and liabilities assumed be measured at their fair value, with goodwill being the excess value of consideration
paid less the fair value of the net identifiable assets acquired. Judgments and estimates are required in the determination of
fair values, including the setting of discount rates, growth rates and forecasted business results for the acquired business and
portions of the acquired business, along with estimated useful lives. 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 during the third fiscal
quarter, or whenever events or changes in circumstances indicate that the carrying value of a reporting unit may not be
recoverable. 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 impairment assessment requires either evaluating qualitative factors or performing a quantitative assessment to
determine if a reporting unit’s carrying value is likely to exceed its fair value. The qualitative goodwill impairment
assessment requires evaluating factors to determine that a reporting unit’s carrying value would not more likely than not
exceed its fair value. As part of our goodwill qualitative testing process for each reporting unit, when utilized, we evaluate
various factors that are specific to the reporting unit as well as industry and macroeconomic factors in order to determine
whether it is reasonably likely to have a material impact on the fair value of our reporting units. Examples of the factors that
are considered include the results of the most recent impairment test, current and long-range forecasted financial results, and
changes in the strategic outlook or organizational structure of the reporting units. 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 of Directors 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 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. Changes in the assumptions could result in impairment charges that
could be material to our Consolidated Financial Statements in any given period.
Quantitative testing involves a two-step process. The first step, used to identify potential impairment, is a comparison of each
reporting unit’s estimated fair value to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its
carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an
indication of impairment and the second step is performed to measure the amount of the impairment. The second step
requires us to calculate an implied fair value of goodwill. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting
37
unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable
intangibles as if the reporting unit was being acquired in a business combination. If the goodwill assigned to a reporting unit
exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.
Measurement of the fair value of reporting units in the first step of a quantitative impairment process requires significant
management judgment with respect to forecasted sales, gross margin and selling, general and administrative expenses, capital
expenditures, the selection and use of an appropriate discount rate, the selection of comparable public companies and the
determination of an appropriate control premium. In addition, the use of third-party appraisals of significant tangible and
intangible assets as part of the second step of the impairment test also requires management judgment related to certain inputs
and assumptions. There are inherent uncertainties related to each of the above listed assumptions and inputs, and our
judgment in applying them. The use of different assumptions, estimates or judgments in either step of the process could
trigger the need for an impairment charge, or materially increase or decrease the amount of any such impairment charge.
Retirement Benefit Plans
We sponsor retirement and postretirement benefit plans covering select employees. Expense recognized in relation to these
defined benefit retirement and postretirement health care plans is based upon actuarial valuations and inherent in those
valuations are key assumptions including discount and mortality rates, and where applicable, expected returns on assets,
projected future salary rates and projected health care cost trends. The discount rates used in the valuation of our defined
benefit pension and postretirement plans are evaluated annually based on current market conditions. In setting these rates we
utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, and then make
adjustments to the respective indices to reflect differences in the terms of the bonds covered under the indices in comparison
to the projected outflow of our obligations. Our overall expected long-term rate of return on pension assets is based on
historical and expected future returns, which are inflation adjusted and weighted for the expected return for each component
of the investment portfolio. Our rate of assumed compensation increase is also based on our specific historical trends of past
wage adjustments.
Changes in retirement and postretirement benefit expense and the recognized obligations may occur in the future as a result
of a number of factors, including changes to any of these assumptions. Our expected rate of return on pension plan assets was
6.8 percent for fiscal 2015 and 7.0 percent for fiscal 2014 and 2013. At September 30, 2015, we had pension plan assets of
$219.1 million. A 25 basis point increase in the expected rate of return on pension plan assets reduces annual pension
expense by approximately $0.6 million. Differences between actual and projected investment returns, especially in periods of
significant market volatility, can also impact estimates of required pension contributions. The discount rate for our retirement
obligation was 4.4 percent in 2015, 4.5 percent in 2014 and 5.0 percent in 2013. The discount rate for our postretirement
obligations may vary up to 200 basis points from that of our retirement obligations. For each 50 basis point change in the
discount rate, the impact to annual pension expense ranges from an increase of $2.4 million to a decrease of $2.2 million,
while the impact to our postretirement health care expense would be less than $0.1 million. Impacts from assumption changes
could be positive or negative depending on the direction of the change in rates.
Income Taxes
We compute our 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. We have recorded valuation allowances against certain of our deferred tax assets,
primarily those related to foreign tax attributes in countries with poor operating results and certain other domestic tax
attributes. 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. We currently have $40.7 million of valuation allowances on deferred tax assets, on a tax-
effected basis, relating primarily to certain foreign deferred tax attributes and state tax credit carryforwards.
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.
38
We also have on-going audits in various stages of completion with the IRS and 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 additional taxes, the adjustment of certain deferred taxes and/or the recognition of previously 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 approximately $0.5 to $1.5 million in the next twelve months, excluding interest.
Guarantees
We routinely grant limited warranties on our products with respect to defects in material and workmanship. The terms of
these warranties are generally one year, however, certain components and products have substantially longer warranty
periods. We recognize a reserve with respect to these obligations at the time of product sale, with subsequent warranty claims
recorded directly against the reserve. The amount of the warranty reserve is determined based on historical trend experience
for the covered products. For more significant warranty-related matters which might require a broad-based correction,
separate reserves are established when such events are identified and the cost of correction can be reasonably estimated.
Inventory
We review the net realizable value of inventory on an ongoing basis, considering factors such as excess, obsolescence, and
other items. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories
will not be sold at prices in excess of current carrying costs. These estimates are based on historical experience and expected
future trends. If future market conditions vary from those projected, and our estimates prove to be inaccurate, we may be
required to write down inventory values and record an adjustment to cost of revenue.
Recently Issued Accounting Guidance
For a summary of recently issued accounting guidance applicable to us, see Note 1 of Notes to Consolidated Financial
Statements included under Part II, Item 8 of this Form 10-K.
39
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including fluctuations in interest rates, the impact of economic downturns, collection
risk associated with our accounts and notes receivable portfolio, including the effects of various austerity measures initiated
by some governmental authorities, and variability in currency exchange rates. We have established policies, procedures and
internal processes governing our management of market risks and the use of financial instruments to manage our exposure to
such risks.
We are subject to variability in foreign currency exchange rates in our international operations. Exposure to this variability is
periodically managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed
in the local currency. We, from time-to-time, enter into currency exchange agreements to manage our exposure arising from
fluctuating exchange rates related to specific and forecasted transactions. We operate this program pursuant to documented
corporate risk management policies and do not enter into derivative transactions for speculative purposes. The sensitivity of
earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate
fluctuations to our assets, obligations and projected results of operations denominated in foreign currencies.
Our currency risk consists primarily of foreign currency denominated firm commitments and forecasted foreign currency
denominated intercompany and third-party transactions. At September 30, 2015, we had outstanding foreign exchange
derivative contracts in notional amounts of $6.7 million with the fair value of these contracts approximating original contract
value. The maximum length of time over which we hedge transaction exposure is 15 months. Derivative gains/ (losses),
initially reported as a component of accumulated other comprehensive income (loss), are reclassified to earnings in the period
when the forecasted transaction affects earnings.
We are exposed to market risk from fluctuations in interest rates. The Company sometimes manages its exposure to interest
rate fluctuations through the use of interest rate swaps (cash flow hedges). As of September 30, 2015, we did not have any
outstanding interest rate swaps.
Our pension plan assets, which were approximately $219.1 million at September 30, 2015, are also subject to volatility that
can be caused by fluctuations in general economic conditions. Our pension plans were underfunded at September 30, 2015 by
approximately $96.4 million, an increase over the prior year based upon a decrease in the discount rate and lower returns on
plan assets. Continued market volatility and disruption could cause declines in asset values and low interest rates could
continue to keep our pension obligation high. Should such trends continue, we may need to make additional pension plan
contributions and our pension expense in future years may increase. Investment strategies and policies are set by the plan’s
fiduciaries. Long-term strategic investment objectives utilize a diversified mix of equity and fixed income securities to
preserve the funded status of the trusts and balance risk and return. The plan fiduciaries oversee the investment allocation
process, which includes selecting investment managers, setting long-term strategic targets and monitoring asset allocations.
Target allocation ranges are guidelines, not limitations, and plan fiduciaries may occasionally approve allocations above or
below a target range or elect to rebalance the portfolio within the targeted range.
Trust assets are invested subject to the following policy restrictions: short-term securities must be rated A2/P2 or higher; all
fixed-income securities shall have a credit quality rating “BBB” or higher; investments in equities in any one company may
not exceed 10 percent of the equity portfolio.
40
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Management’s Report on Internal Control Over Financial Reporting ...........................................................................
Report of Independent Registered Public Accounting Firm ..........................................................................................
Statements of Consolidated Income for the fiscal years ended September 30, 2015, 2014 and 2013 ...........................
Statements of Consolidated Comprehensive Income (Loss) for the fiscal years ended
September 30, 2015, 2014 and 2013 ..........................................................................................................................
Consolidated Balance Sheets at September 30, 2015 and 2014 .....................................................................................
Statements of Consolidated Cash Flows for the fiscal years ended September 30, 2015, 2014 and 2013 ....................
Statements of Consolidated Shareholders’ Equity for the fiscal years ended September 30, 2015, 2014 and 2013 .....
Notes to Consolidated Financial Statements..................................................................................................................
42
43
44
45
46
47
48
49
Page
Financial Statement Schedule for the fiscal years ended September 30, 2015, 2014 and 2013:
Schedule II — Valuation and Qualifying Accounts ......................................................................................................
83
All other schedules are omitted because they are not applicable or the required information is shown in the financial
statements or the notes thereto.
41
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for Hill-Rom
Holdings, Inc. (“we” or “our”). Our internal control over financial reporting is a process designed, under the supervision of
our principal executive, principal financial and principal accounting officers, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of our Consolidated Financial Statements for external purposes in accordance with accounting principles
generally accepted in the United States. Our internal control over financial reporting includes policies and procedures that:
1)
2)
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of our
Consolidated Financial Statements in accordance with accounting principles generally accepted in the United
States and that our receipts and expenditures are being made only in accordance with authorizations of our
management and our Board of Directors; and
3)
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our Consolidated Financial Statements.
Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may
deteriorate.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of September
30, 2015 using criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on these criteria, management concluded that we
maintained effective internal control over financial reporting as of September 30, 2015.
The effectiveness of our internal control over financial reporting as of September 30, 2015 has been audited by
PricewaterhouseCoopers LLP, our independent registered public accounting firm, who also audited our Consolidated
Financial Statements, as stated in their report included herein.
We have excluded Welch Allyn Holdings, Inc. and its subsidiaries (collectively, “Welch Allyn”) from our assessment of
internal control over financial reporting as of September 30, 2015, because Welch Allyn was acquired by us in a purchase
business combination in the fourth quarter of 2015. Welch Allyn is a wholly-owned subsidiary whose total assets and total
revenue represent 9 percent and 3 percent, respectively, of the related consolidated financial statement amounts as of and for
the year ended September 30, 2015.
/s/ John J. Greisch
John J. Greisch
President and Chief Executive Officer
/s/ Steven J. Strobel
Steven J. Strobel
Senior Vice President and Chief Financial Officer
/s/ Richard G. Keller
Richard G. Keller
Vice President, Controller and Chief Accounting Officer
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Hill-Rom Holdings, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects,
the financial position of Hill-Rom Holdings, Inc. and its subsidiaries at September 30, 2015 and 2014, and the results of their
operations and their cash flows for each of the three years in the period ended September 30, 2015 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of September 30, 2015, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for these financial statements and financial statement
schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting. Our
responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's
internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement
and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control over Financial Reporting, management has excluded Welch Allyn
Holdings, Inc. and its subsidiaries (collectively, “Welch Allyn”) from its assessment of internal control over financial
reporting as of September 30, 2015, because they were acquired by the Company in a purchase business combination during
2015. We have also excluded Welch Allyn from our audit of internal control over financial reporting. Welch Allyn is a
wholly-owned subsidiary whose total assets and total revenue represent 9 percent and 3 percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended September 30, 2015.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
November 19, 2015
43
Hill-Rom Holdings, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share data)
Years Ended September 30
2014
2013
2015
Net Revenue
Capital sales ..................................................................................................... $
Rental revenue .................................................................................................
Total revenue ........................................................................................................
1,604.5 $
383.7
1,988.2
1,301.4 $
384.7
1,686.1
1,308.3
407.9
1,716.2
Cost of Revenue
Cost of goods sold ...........................................................................................
Rental expenses ...............................................................................................
Total cost of revenue ............................................................................................
921.2
186.7
1,107.9
730.2
176.0
906.2
747.8
188.1
935.9
Gross Profit .........................................................................................................
880.3
779.9
780.3
Research and development expenses ....................................................................
Selling and administrative expenses .....................................................................
Special charges (Note 8) .......................................................................................
Operating Profit ..................................................................................................
Interest expense ....................................................................................................
Investment income and other, net .........................................................................
91.8
664.2
41.2
83.1
(18.4)
0.4
71.9
548.3
37.1
122.6
(9.8)
2.4
70.2
549.5
5.7
154.9
(9.5)
(1.4)
Income Before Income Taxes .............................................................................
65.1
115.2
144.0
Income tax expense (Note 9) ................................................................................
18.3
54.6
39.0
Net Income ...........................................................................................................
46.8
60.6
105.0
Less: Net loss attributable to noncontrolling interests .........................................
(0.9)
-
-
Net Income Attributable to Common Shareholders ........................................ $
Net Income Attributable to Common Shareholders
47.7 $
60.6 $
105.0
per Common Share - Basic ........................................................................... $
0.83 $
1.05 $
1.75
Net Income Attributable to Common Shareholders
per Common Share - Diluted ........................................................................ $
0.82 $
1.04 $
1.74
Dividends per Common Share ........................................................................... $
0.6325 $
0.5950 $
0.5250
Average Common Shares Outstanding - Basic (thousands) (Note 10) ...........
57,249
57,555
59,910
Average Common Shares Outstanding - Diluted (thousands) (Note 10) .......
58,536
58,523
60,250
See Notes to Consolidated Financial Statements.
44
Hill-Rom Holdings, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In millions)
Years Ended September 30
2014
2013
2015
Net Income ............................................................................................................ $
46.8 $
60.6 $
105.0
Other Comprehensive Income (Loss), Net of Tax:
Available-for-sale securities and currency hedges .................................................
Foreign currency translation adjustment ................................................................
Change in pension and postretirement defined benefit plans .................................
Total Other Comprehensive Income (Loss), Net of Tax...................................
-
(58.6)
(8.1)
(66.7)
0.3
(29.6)
(9.1)
(38.4)
0.1
12.6
29.6
42.3
Total Comprehensive Income (Loss) ..................................................................
(19.9)
22.2
147.3
Less: Comprehensive loss attributable to noncontrolling interests .......................
(0.9)
-
-
Total Comprehensive Income (Loss) Attributable to Common Shareholders $
(19.0) $
22.2 $
147.3
See Notes to Consolidated Financial Statements.
45
Hill-Rom Holdings, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
September 30
2015
2014
ASSETS
Current Assets
Cash and cash equivalents .................................................................................................................... $
Trade accounts receivable, less allowances of $26.0 in 2015 and $31.4 in 2014 (Note 1) ...................
Inventories (Note 1) ..............................................................................................................................
Deferred income taxes (Notes 1 and 9) .................................................................................................
Other current assets ...............................................................................................................................
Total current assets ...............................................................................................................................
192.8 $
494.7
267.4
77.0
109.1
1,141.0
Property, plant, and equipment (Note 1) ...............................................................................................
Less accumulated depreciation .........................................................................................................
Property, plant, and equipment, net ......................................................................................................
976.4
(598.0)
378.4
99.3
411.0
176.2
40.9
51.9
779.3
849.6
(588.1)
261.5
Intangible assets:
Goodwill (Notes 1, 2 and 3) ..............................................................................................................
Software and other, net (Notes 1 and 2) ............................................................................................
Deferred income taxes (Notes 1 and 9) .................................................................................................
Other assets ...........................................................................................................................................
Total Assets ......................................................................................................................................... $
1,610.5
1,247.7
21.6
58.4
4,457.6 $
399.8
261.1
23.0
26.6
1,751.3
LIABILITIES
Current Liabilities
Trade accounts payable ......................................................................................................................... $
Short-term borrowings (Note 4) ............................................................................................................
Accrued compensation ..........................................................................................................................
Accrued product warranties (Note 1) ....................................................................................................
Accrued rebates ....................................................................................................................................
Other current liabilities .........................................................................................................................
Total current liabilities ..........................................................................................................................
136.3 $
58.0
171.8
32.1
33.7
146.9
578.8
Long-term debt (Note 4) .......................................................................................................................
Accrued pension and postretirement benefits (Note 6) .........................................................................
Deferred income taxes (Notes 1 and 9) .................................................................................................
Other long-term liabilities .....................................................................................................................
Total Liabilities ...................................................................................................................................
2,175.2
118.8
380.6
47.3
3,300.7
112.7
126.9
89.2
28.4
7.1
78.0
442.3
364.1
76.9
31.0
30.5
944.8
Commitments and Contingencies (Note 13)
SHAREHOLDERS' EQUITY (Note 7)
Capital Stock:
Preferred stock - without par value:
Authorized - 1,000,000 shares; none issued or outstanding ..............................................................
-
-
Common stock - without par value:
Authorized - 199,000,000
Issued - 88,457,634 shares in 2015 and 80,323,912 shares in 2014 ..................................................
Additional paid-in-capital .....................................................................................................................
Retained earnings ..................................................................................................................................
Accumulated other comprehensive loss (Note 1) ................................................................................
Treasury stock, common shares at cost: 2015 - 23,291,738 and 2014 - 22,884,001 ............................
Total Shareholders' Equity Attributable to Common Shareholders ......................................................
Noncontrolling interests ........................................................................................................................
Total Shareholders' Equity ................................................................................................................
Total Liabilities and Shareholders' Equity ....................................................................................... $
4.4
562.0
1,509.9
(140.8)
(788.6)
1,146.9
10.0
1,156.9
4,457.6 $
4.4
134.1
1,499.8
(74.1)
(757.7)
806.5
-
806.5
1,751.3
See Notes to Consolidated Financial Statements.
46
Hill-Rom Holdings, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
Operating Activities
Net income ............................................................................................................................. $
Adjustments to reconcile net income to net cash provided by operating activities:
46.8 $
60.6 $
105.0
Years Ended September 30
2014
2013
2015
Depreciation...............................................................................................................
Amortization ..............................................................................................................
Acquisition-related intangible asset amortization ......................................................
Provision for deferred income taxes ..........................................................................
Loss on disposal of property, equipment leased to others,
intangible assets and impairments ..........................................................................
Pension settlement charge ..........................................................................................
Stock compensation ...................................................................................................
Excess tax benefits from employee stock plans .........................................................
Change in working capital excluding cash, current debt,
acquisitions and dispositions:
Trade accounts receivable ......................................................................................
Inventories .............................................................................................................
Other current assets ...............................................................................................
Trade accounts payable..........................................................................................
Accrued expenses and other liabilities ...................................................................
Other, net ...................................................................................................................
Net cash provided by operating activities ...................................................................................
Investing Activities
Capital expenditures and purchases of intangible assets .........................................................
Proceeds on sale of property and equipment leased to others .................................................
Payment for acquisition of businesses, net of cash acquired ..................................................
Refund on acquisition of businesses .......................................................................................
Other ......................................................................................................................................
Net cash used in investing activities ...........................................................................................
Financing Activities
Net change in short-term debt ................................................................................................
Borrowings on revolving credit facility ..................................................................................
Payments on revolving credit facility .....................................................................................
Proceeds from long-term debt ................................................................................................
Payment of long-term debt .....................................................................................................
Payment of acquired debt .......................................................................................................
Repurchase of registered debentures ......................................................................................
Debt issuance costs .................................................................................................................
Purchase of noncontrolling interest of former joint venture ...................................................
Payment of cash dividends .....................................................................................................
Proceeds from exercise of stock options.................................................................................
Proceeds from stock issuance .................................................................................................
Excess tax benefits from employee stock plans ......................................................................
Treasury stock acquired ..........................................................................................................
Net cash provided by (used in) financing activities ....................................................................
Effect of exchange rate changes on cash ....................................................................................
Net Cash Flows .........................................................................................................................
Cash and Cash Equivalents
73.6
10.5
34.1
(22.3)
0.5
9.6
25.0
(3.6)
(39.7)
11.0
(7.7)
0.7
53.8
21.5
213.8
(121.3)
1.5
(1,638.7)
-
2.1
(1,756.4)
(0.7)
95.0
(135.0)
2,225.0
(401.6)
-
(5.9)
(50.3)
(1.9)
(37.1)
12.1
2.8
3.6
(63.3)
1,642.7
(6.6)
93.5
65.4
12.2
28.8
3.9
7.2
-
18.0
0.3
17.1
9.1
(2.6)
7.0
(12.5)
(4.2)
210.3
(62.7)
2.4
(239.5)
4.6
0.7
(294.5)
(0.2)
252.0
(57.0)
0.8
(11.4)
(26.8)
-
-
(1.3)
(34.2)
11.5
2.5
(0.3)
(71.8)
63.8
(7.7)
(28.1)
At beginning of period ...........................................................................................................
At end of period ..................................................................................................................... $
99.3
192.8 $
127.4
99.3 $
Supplemental cash flow information:
Cash paid for income taxes ......................................................................................................... $
Cash paid for interest .................................................................................................................. $
49.1 $
6.3 $
44.4 $
7.8 $
Non-cash investing and financing activities:
Treasury stock issued under stock compensation plans .......................................................... $
Common stock issued for acquisition of businesses ............................................................... $
32.4 $
416.3 $
20.6 $
- $
71.2
17.9
27.7
(14.8)
1.5
-
13.5
(0.3)
30.8
8.4
(6.5)
0.1
(0.2)
8.9
263.2
(65.3)
5.9
-
0.8
-
(58.6)
-
-
(35.0)
-
(10.1)
-
-
-
(1.6)
(31.2)
7.6
2.5
0.3
(94.0)
(161.5)
-
43.1
84.3
127.4
68.1
7.5
18.4
-
See Notes to Consolidated Financial Statements.
47
Hill-Rom Holdings, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(In millions, except share amounts)
Common Stock
Shares
Outstanding Amount
Additional
Paid-in-
Capital
Accumulated
Other
Retained Comprehensive
Income (Loss)
Earnings
Common Stock
in Treasury
Shares
Amount
Total Equity
Attributable
to Common Noncontrolling
Shareholders
Interests
Total
Balance at September 30, 2012 ............ 60,796,923 $
4.4 $
116.8 $
1,400.3 $
(78.0) 19,526,989 $
(630.9) $
812.6 $
- $
812.6
Net income ..............................................
Other comprehensive income, net of tax
-
-
of ($18.1) .............................................
Dividends ................................................
-
Treasury shares acquired ........................ (2,844,765)
Stock awards and option exercises .........
571,234
Balance at September 30, 2013 ............ 58,523,392
Net income ..............................................
Other comprehensive loss, net of tax
-
-
of $4.9 ..................................................
Dividends ................................................
-
Treasury shares acquired ........................ (1,709,523)
Stock awards and option exercises .........
626,042
Balance at September 30, 2014 ............ 57,439,911
Net income ..............................................
Consolidation of noncontrolling interest
Other comprehensive loss, net of tax
-
-
-
of $5.1 ..................................................
Dividends ................................................
-
Issuance of common stock ...................... 8,133,722
Treasury shares acquired ........................ (1,373,321)
Stock awards and option exercises .........
965,584
Balance at September 30, 2015 ............ 65,165,896 $
-
-
-
-
-
4.4
-
-
-
-
-
4.4
-
-
-
-
-
-
-
4.4 $
-
105.0
-
-
-
105.0
-
0.3
-
5.6
122.7
-
(31.5)
-
-
1,473.8
-
42.3
-
-
- 2,844,765
(571,234)
-
(35.7) 21,800,520
-
-
(94.0)
18.4
(706.5)
42.3
(31.2)
(94.0)
24.0
858.7
-
60.6
-
-
-
60.6
-
0.4
-
11.0
134.1
-
(34.6)
-
-
1,499.8
-
(38.4)
-
-
- 1,709,523
(626,042)
-
(74.1) 22,884,001
-
-
(71.8)
20.6
(757.7)
-
-
47.7
-
-
-
-
-
-
-
(38.4)
(34.2)
(71.8)
31.6
806.5
47.7
-
-
0.5
416.3
-
11.1
562.0 $
-
(37.6)
-
-
-
1,509.9 $
(66.7)
-
-
-
-
-
- 1,373,321
(965,584)
-
(140.8) 23,291,738 $
-
-
-
(63.3)
32.4
(788.6) $
(66.7)
(37.1)
416.3
(63.3)
43.5
1,146.9 $
-
-
-
-
-
-
-
-
-
-
(0.9)
10.9
-
-
-
-
-
10.0 $
105.0
42.3
(31.2)
(94.0)
24.0
858.7
60.6
(38.4)
(34.2)
(71.8)
31.6
806.5
46.8
10.9
(66.7)
(37.1)
416.3
(63.3)
43.5
1,156.9
See Notes to Consolidated Financial Statements.
48
Hill-Rom Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per share data)
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Hill-Rom Holdings, Inc. (the “Company,” “Hill-Rom,” “we,” “us,” or “our”) was incorporated on August 7, 1969 in the State
of Indiana and is headquartered in Chicago, Illinois. We are a leading global medical technology company with more than
10,000 employees worldwide. We partner with health care providers in more than 100 countries by focusing on patient care
solutions that improve clinical and economic outcomes in five core areas: Advancing Mobility, Wound Care and Prevention,
Clinical Workflow, Surgical Safety and Efficiency, and Respiratory Health. Around the world, Hill-Rom's people, products,
and programs work towards one mission: Enhancing outcomes for patients and their caregivers.
Basis of Presentation and Principles of Consolidation
The Consolidated Financial Statements include the accounts of Hill-Rom and its wholly-owned subsidiaries. In addition, we
also consolidate variable
to have a controlling financial
interest. Intercompany accounts and transactions have been eliminated in consolidation, including the intercompany
transactions with consolidated VIEs. Where our ownership interest is less than 100 percent, the noncontrolling interests are
reported in our Consolidated Financial Statements. Certain prior year amounts have been reclassified to conform to current
year presentation.
interest entities (VIEs) where Hill-Rom
is deemed
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires our management to make estimates and assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ from those estimates. Examples of such
estimates include our accounts receivable reserves (Note 1), accrued warranties (Note 1), the impairment of intangibles and
goodwill (Note 3), income taxes (Notes 1 and 9) and commitments and contingencies (Note 13), among others.
Cash and Cash Equivalents
We consider investments in marketable securities and other highly liquid instruments with a maturity of three months or less
at date of purchase to be cash equivalents. Investments which have no stated maturity are also considered cash equivalents.
All of our marketable securities may be freely traded.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest, unless the transaction is an
installment sale with payment terms exceeding one year. Reserves for uncollectible accounts represent our best estimate of
the amount of probable credit losses and collection risk in our existing accounts receivable. We determine such reserves
based on historical write-off experience by industry and reimbursement platform. Receivables are generally reviewed on a
pooled basis based on historical collection experience for each reimbursement and receivable type. Receivables for sales
transactions 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 claims denials, payment defaults, changes in our
business composition or processes, adverse changes in general economic conditions, unfavorable impacts of austerity
measures initiated by some governmental authorities, 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.
Within rental revenue, the domestic third-party payers’ reimbursement process requires extensive documentation, which has
had the effect of slowing both the billing and cash collection cycles relative to the rest of the business, and therefore,
increasing total accounts receivable. Because of the extensive documentation required and the requirement to settle a claim
with the primary payer prior to billing the secondary and/or patient portion of the claim, the collection period for a claim in a
portion of our business may, in some cases, be extended.
49
We generally hold our trade accounts receivable until they are paid. Certain long-term receivables are occasionally sold to
third parties; however, any recognized gain or loss on such sales has historically not been material.
Inventories
Inventories are valued at the lower of cost or market. Inventory costs are determined by the last-in, first-out (“LIFO”) method
for approximately 21 and 29 percent of our inventories at September 30, 2015 and 2014. Costs for other inventories have
been determined principally by the first-in, first-out (“FIFO”) method. Inventories consist of the following:
September 30
2015
2014
Finished products .................................................................... $
Work in process ......................................................................
Raw materials .........................................................................
Total ........................................................................................ $
133.2 $
46.1
88.1
267.4 $
93.5
17.3
65.4
176.2
If the FIFO method of inventory accounting, which approximates current cost, had been used for all inventories, they would
have been approximately $3.2 million and $4.0 million higher than reported at September 30, 2015 and 2014.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and depreciated over the estimated useful life of the assets using principally
the straight-line method. Ranges of estimated useful lives are as follows:
Useful Life
Land improvements ..............................
6 - 15 years
Buildings and building equipment ........ 10 - 40 years
3 - 10 years
Machinery and equipment ....................
2 -10 years
Equipment leased to others ...................
When property, plant and equipment is retired from service or otherwise disposed of, the cost and related amount of
depreciation or amortization are eliminated from the asset and accumulated depreciation accounts. The difference, if any,
between the net asset value and the proceeds on sale are charged or credited to income. Total depreciation expense for fiscal
years 2015, 2014 and 2013 was $73.6 million, $65.4 million and $71.2 million. The major components of property and the
related accumulated depreciation were as follows:
September 30
2015
Accumulated
Depreciation
2014
Accumulated
Depreciation
Cost
Cost
Land and land improvements ......................................................... $
Buildings and building equipment .................................................
Machinery and equipment .............................................................
Equipment leased to others ............................................................
Total ............................................................................................... $
23.3 $
196.2
369.5
387.4
976.4 $
2.8 $
90.3
226.5
278.4
598.0 $
19.4 $
158.3
321.3
350.6
849.6 $
2.3
88.6
213.7
283.5
588.1
Intangible Assets
Intangible assets are stated at cost and consist predominantly of goodwill, software, patents, acquired technology, trademarks,
and acquired customer relationship assets. With the exception of goodwill and certain trademarks, our intangible assets are
amortized on a straight-line basis over periods generally ranging from 3 to 20 years.
We assess the carrying value of goodwill and non-amortizable intangibles annually, during the third quarter of each fiscal
year, or more often if events or changes in circumstances indicate there may be impairment. Goodwill is allocated among the
reporting units based on the relative fair value of those units.
50
The majority of our goodwill and many of our intangible assets are not deductible for income tax purposes. A summary of
intangible assets and the related accumulated amortization and impairment losses follows:
September 30
2015
2014
Cost
Amortization
and Impairment
Cost
Amortization
and Impairment
Goodwill ............................................................. $
Software ..............................................................
Patents and Trademarks ......................................
Other ...................................................................
Total .................................................................... $
2,083.3 $
181.7
497.6
872.8
3,635.4 $
472.8 $
139.2
16.9
148.3
777.2 $
872.6 $
170.5
67.1
306.8
1,417.0 $
472.8
146.6
16.0
120.7
756.1
Amortization expense for fiscal years 2015, 2014 and 2013 was $44.6 million, $41.0 million and $45.6 million. As further
discussed in Note 3, we have various indefinite-lived intangible assets representing trade names with a carrying value of
$466.9 million at September 30, 2015 and $32.9 million at September 30, 2014. Amortization expense for all other
intangibles is expected to approximate the following for each of the next five fiscal years and thereafter:
2016 ........................................................... $
2017 ........................................................... $
2018 ........................................................... $
2019 ........................................................... $
2020 ........................................................... $
2021 and beyond ........................................ $
Amount
92.9
85.8
81.6
78.0
74.4
368.1
Software consists mainly of capitalized costs associated with internal use software, including applicable costs associated with
the implementation/upgrade of our Enterprise Resource Planning systems. In addition, software includes capitalized
development costs for software products to be sold. The net book value of computer software costs, included within
intangible assets, was $42.5 million and $23.9 million at September 30, 2015 and 2014. Capitalized software costs are
amortized on a straight-line basis over periods ranging from three to ten years. Software amortization expense approximated
$9.8 million, $11.5 million and $17.8 million for fiscal years 2015, 2014 and 2013, and is included in the total intangibles
amortization presented earlier.
Fair Value Measurements
Fair value measurements are classified and disclosed in one of the following three categories:
Level 1: Financial instruments with unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets and liabilities.
Level 2: Financial instruments with observable inputs other than those included in Level 1 such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Financial instruments with unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. Unobservable inputs reflect our own assumptions that
market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable
inputs shall be developed based on the best information available in the circumstances, which might include our
own data.
We record cash and cash equivalents, as disclosed on our Consolidated Balance Sheets, as Level 1 instruments and certain
other investments and insignificant derivatives as either Level 2 or 3 instruments. Refer to Note 4 for disclosure of our debt
instrument fair values.
51
Guarantees
We routinely grant limited warranties on our products with respect to defects in material and workmanship. The terms of
these warranties are generally one year, however, certain components and products have substantially longer warranty
periods. We recognize a reserve with respect to these obligations at the time of product sale, with subsequent warranty claims
recorded directly against the reserve. The amount of the warranty reserve is determined based on historical trend experience
for the covered products. For more significant warranty-related matters which might require a broad-based correction,
separate reserves are established when such events are identified and the cost of correction can be reasonably estimated.
A reconciliation of changes in our warranty reserve is as follows:
2015
2014
2013
Balance at October 1 ................................................................. $
Provision for warranties during the period ...............................
Warranty reserves acquired ......................................................
Warranty claims incurred during the period .............................
Balance at September 30 ........................................................... $
28.4 $
14.7
7.1
(18.1)
32.1 $
38.1 $
9.8
3.0
(22.5)
28.4 $
42.2
29.2
(2.6)
(30.7)
38.1
In the normal course of business we enter into various other guarantees and indemnities in our relationships with suppliers,
service providers, customers, business partners and others. Examples of these arrangements would include guarantees of
product performance, indemnifications to service providers and indemnifications of our actions to business partners. These
guarantees and indemnifications have not historically nor do we expect them to have a material impact on our financial
condition or results of operations, although indemnifications associated with our actions generally have no dollar limitations.
In conjunction with our acquisition and divestiture activities, we have entered into select guarantees and indemnifications of
performance with respect to the fulfillment of our commitments under applicable purchase and sale agreements. The
arrangements generally indemnify the buyer or seller for damages associated with breach of contract, inaccuracies in
representations and warranties surviving the closing date and satisfaction of liabilities and commitments retained under the
applicable contract. With respect to sale transactions, we also routinely enter into non-competition agreements for varying
periods of time. Guarantees and indemnifications with respect to acquisition and divestiture activities, if triggered, could have
a materially adverse impact on our financial condition and results of operations.
Accrued Rebates
We provide rebates and sales incentives to certain customer groups and distributors. Provisions for rebates are recorded as a
reduction in net revenue when revenue is recognized. In some cases, rebates may be payable directly to the customer or
distributor. We also have arrangements where we provide rebates to certain distributors that sell to end-user customers at
prices determined under a contract between us and the end-user customer.
Employee Benefits Change
During the second quarter of fiscal 2014, we implemented a new paid time off policy as part of our employee benefits
programs, replacing certain previously existing vacation and sick time policies. In conjunction with these changes in policies,
the vesting provisions with respect to the accumulation of paid time off were delayed resulting in the recognition and
utilization of paid time off in the same benefits year. As a result of this change, significant portions of our existing accrued
vacation balance were no longer necessary and we reversed $12.2 million in the second quarter of fiscal 2014 and an
additional $1.2 million in the third quarter of fiscal 2014 to reflect the change in vesting provisions. All accounting with
respect to this change in policy is complete.
Retirement Plans
We sponsor retirement and postretirement plans covering select employees. Expense recognized in relation to these defined
benefit retirement plans and postretirement health care plans in the U.S. is based upon actuarial valuations and inherent in
those valuations are key assumptions including discount rates, and where applicable, expected returns on assets, projected
future salary rates and projected health care cost trends. The discount rates used in the valuation of our defined benefit
pension and postretirement plans are evaluated annually based on current market conditions. In setting these rates we utilize
long-term bond indices and yield curves as a preliminary indication of interest rate movements, and then make adjustments to
the respective indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected
52
outflow of our obligations. Our overall expected long-term rate of return on pension assets is based on historical and expected
future returns, which are inflation adjusted and weighted for the expected return for each component of the investment
portfolio. Our rate of assumed compensation increase is also based on our specific historical trends of wage adjustments.
We account for our defined benefit pension and other postretirement plans by recognizing the funded status of a benefit plan
in the statement of financial position. We also recognize in accumulated other comprehensive income (loss) certain gains and
losses that arose during the period. See Note 6 for key assumptions and further discussion related to our pension and
postretirement plans.
Environmental Liabilities
Expenditures that relate to an existing condition caused by past operations, and which do not contribute to future revenue
generation, are expensed. A reserve is established when it is probable that a liability has been incurred and the amount of the
loss can be reasonably estimated. These reserves are determined without consideration of possible loss recoveries from third
parties.
Specific costs included in environmental expense and reserves include site assessment, development of a remediation plan,
clean-up costs, post-remediation expenditures, monitoring, fines, penalties and legal fees. Reserve amounts represent the
expected undiscounted future cash outflows associated with such plans and actions.
Self Insurance
We are also involved in other possible claims, including product and general liability, workers’ compensation, auto liability
and employment related matters. Such claims in the United States have deductibles and self-insured retentions ranging from
$25 thousand to $1.0 million per occurrence or per claim, depending upon the type of coverage and policy period.
International deductibles and self-insured retentions are lower. We are also generally self-insured up to certain stop-loss
limits for certain employee health benefits, including medical, drug and dental. Our policy is to estimate reserves based upon
a number of factors including known claims, estimated incurred but not reported claims and outside actuarial analysis, which
are based on historical information along with certain assumptions about future events. Such estimated reserves are classified
as Other Current Liabilities and Other Long-Term Liabilities within the Consolidated Balance Sheets.
Treasury Stock
Treasury stock consists of our common shares that have been issued, but subsequently reacquired. We account for treasury
stock purchases under the cost method. When these shares are reissued, we use an average-cost method to determine cost.
Proceeds in excess of cost are credited to additional paid-in capital.
Revenue Recognition — Sales and Rentals
Net revenue reflects gross revenue less sales discounts and allowances and customer returns for product sales and rental
revenue reserves. Revenue is evaluated under the following criteria and recognized when each is met:
•
•
•
•
Evidence of an arrangement: An agreement with the customer reflecting the terms and conditions to deliver
products or services serves as evidence of an arrangement.
Delivery: For products, delivery is considered to occur upon transfer of title and risk of loss per the respective
sales terms. For rental services, delivery is considered to occur when the services are rendered.
Fixed or determinable price: The sales price is considered fixed or determinable if it is not subject to refund or
measurable adjustment.
Collection is deemed probable: At or prior to the time of a transaction, credit reviews of each customer are
performed to determine the creditworthiness of the customer. Collection is deemed probable if the customer is
expected to be able to pay amounts under the arrangement as those amounts become due. If collection is not
probable, revenue is recognized when collection becomes probable, generally upon cash collection.
53
As a general interpretation of the above guidelines, revenue for health care and surgical products is generally recognized
upon the assumption of risk of loss and other risks and rewards of ownership by the customer. Local business customs and
non-standard sales terms can sometimes result in deviations to this normal practice in certain instances; however, in no case
is revenue recognized prior to the transfer of risk of loss and rewards of ownership.
For non-invasive therapy products and medical equipment management services, the majority of product offerings are rental
products for which revenue is recognized consistent with the rendering of the service and use of products. For The Vest®
product, revenue is generally recognized at the time of receipt of authorization for billing from the applicable paying entity as
this serves as evidence of the arrangement and sets a fixed or determinable price.
For health care products and services in the information technology space, various revenue recognition techniques are used,
depending on the offering. Arrangements to provide services, routinely under separately sold service and maintenance
contracts, result in the deferral of revenue until specified services are performed. Service contract revenue is generally
recognized ratably over the contract period, if applicable, or as services are rendered. Product-related goods are generally
recognized upon delivery to the customer.
Revenue is presented in the Statements of Consolidated Income net of certain discounts, GPO fees, and sales adjustments.
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.
Taxes Collected from Customers and Remitted to Governmental Units
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 accounted for on a net (excluded
from revenue and cost) basis.
Cost of Revenue
Cost of goods sold for product sales consists primarily of purchased material costs, fixed manufacturing expense, variable
direct labor, overhead costs and costs associated with the distribution and delivery of products to our customers. Rental
expenses consist of costs associated directly with rental revenue, including depreciation, maintenance, logistics and service
center facility and personnel costs.
Research and Development Costs
Research and development costs are expensed as incurred. Costs were $91.8 million, $71.9 million and $70.2 million for
fiscal years 2015, 2014 and 2013.
In addition, certain costs for software development technology held for sale are capitalized as intangibles and are amortized
over a period of three to five years once the software is ready for its intended use. The amount capitalized during fiscal years
2015, 2014 and 2013 was approximately $2.6 million, $2.6 million and $2.4 million.
Advertising Costs
Advertising costs are expensed as incurred. Costs were $6.8 million, $7.3 million and $7.4 million for fiscal years 2015, 2014
and 2013.
Comprehensive Income
We include the net-of-tax effect of unrealized gains or losses on our available-for-sale securities, foreign currency translation
adjustments and pension or other defined benefit postretirement plans’ actuarial gains or losses and prior service costs or
credits in comprehensive income. See Note 5 for further details.
Foreign Currency Translation
The functional currency of foreign operations is generally the local currency in the country of domicile. Assets and liabilities
of foreign operations are primarily translated into U.S. dollars at year-end rates of exchange and the income statements are
translated at the average rates of exchange prevailing during the year. Adjustments resulting from translation of the financial
statements of foreign operations into U.S. dollars are excluded from the determination of net income, but included as a
54
component of accumulated other comprehensive income (loss). Foreign currency gains and losses resulting from foreign
currency transactions are included in our results of operations and are not material.
Stock-Based Compensation
We account for stock-based compensation under fair value provisions. Stock-based compensation cost is measured at the
grant date based on the value of the award and is recognized as expense over the vesting period. In order to determine the fair
value of stock options and other performance-based stock awards on the date of grant, we utilize a Binomial model. Inherent
in this model are assumptions related to a volatility factor, expected life, risk-free interest rate, dividend yield and expected
forfeitures. The risk-free interest rate is based on factual data derived from public sources. The volatility factor, expected life,
dividend yield and expected forfeiture assumptions require judgment utilizing historical information, peer data and future
expectations. Deferred stock (also known as restricted stock units (“RSUs”)) is measured based on the fair market price of
our common stock on the date of grant, as reported by the New York Stock Exchange, multiplied by the number of units
granted. See Note 7 for further details.
Income Taxes
The Company and our eligible domestic subsidiaries file a consolidated U.S. income tax return. Foreign operations file
income tax returns in a number of jurisdictions. Deferred income taxes are computed 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. 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 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. See Note 9 for further details.
Derivative Instruments and Hedging Activity
We use derivative financial instruments to manage the economic impact of fluctuations in currency exchange and interest
rates. Derivative financial instruments related to currency exchange rates include forward purchase and sale agreements
which generally have terms no greater than 15 months. Additionally, interest rate swaps are sometimes used to convert some
or all of our long-term debt to either a fixed or variable rate.
Derivative financial instruments are recognized on the Consolidated Balance Sheets as either assets or liabilities and are
measured at fair value. Changes in the fair value of derivatives are recorded each period in the Statement of Consolidated
Income or the Statement of Consolidated Comprehensive Income, depending on whether a derivative is designated and
considered effective as part of a hedge transaction, and if it is, the type of hedge transaction. Gains and losses on derivative
instruments reported in accumulated other comprehensive income (loss) are subsequently included in the Statement of
Consolidated Income in the periods in which earnings are affected by the hedged item. These activities have not had a
material effect on our financial position or results of operations for the periods presented herein.
Recently Issued Accounting Guidance
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”,
which provides guidance for revenue recognition. The standard’s core principle, as further amended, is that a company will
recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU
2015-14 which delayed the effective date of the new revenue guidance by one year. As a result, the provisions of ASU 2014-
09 will be effective for us in the first quarter of fiscal 2019, ending December 31, 2018. Early adoption is permitted as of the
original effective date, but not earlier. We are currently in the process of evaluating the impact of adoption of this ASU on
our Consolidated Financial Statements.
55
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” The amendments in
this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB
issued ASU No. 2015-15, “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of
Debt Issuance Costs Associated with Line-of-Credit Arrangements.” This standard permits an entity to defer and present debt
issuance costs related to line-of-credit arrangements as an asset and to subsequently amortize the deferred debt issuance costs
ratably over the term of the line-of-credit arrangement. These new standards do not affect the recognition and measurement
of debt issuance costs. As permitted, the Company has elected to early-adopt these standards in the fourth quarter of fiscal
2015. This guidance is effective on a retrospective basis, as a change in accounting principle. The impact of the early
adoption on our Consolidated Balance Sheet as of September 30, 2014 was a decrease to other assets and a decrease to long-
term debt of $0.8 million.
In September 2015, the Company adopted ASU 2015-16, "Simplifying the Accounting for Measurement Period
Adjustments." This update eliminates the need to retrospectively adjust prior period information in the financial statements
for acquisition adjustments to goodwill during the measurement period. The impact of ASU 2015-16 will be dependent on
any future measurement period adjustments for acquisitions.
In February 2013, an accounting standards update was issued that amends the reporting of amounts reclassified out of
accumulated other comprehensive income (loss). This standard does not change the current requirements for reporting net
income or other comprehensive income (loss) in the financial statements. However, the guidance requires an entity to provide
information about the amounts reclassified out of accumulated other comprehensive income (loss) by component, either on
the face of the financial statement where net income is presented or in the notes to the financial statements. The company
adopted this standard in fiscal 2014, and the disclosures of reclassifications out of accumulated other comprehensive loss are
included in Note 5.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not
require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial
statements upon adoption.
NOTE 2. ACQUISITIONS
Welch Allyn
On September 8, 2015, we completed the acquisition of Welch Allyn Holdings, Inc. and its subsidiaries (collectively, “Welch
Allyn”) for a consideration of $1,687.3 million in cash ($1,633.6 million, net of cash acquired) and 8,133,722 shares of Hill-
Rom common stock for a total combined purchase price of approximately $2.1 billion. Welch Allyn is a leading
manufacturer of medical diagnostic equipment and offers a diversified portfolio of devices that assess, diagnose, treat, and
manage a wide variety of illnesses and diseases.
The cash portion of the consideration is preliminary and subject to adjustment for various true-up provisions as described in
the terms of the merger agreement. The transaction was funded with new borrowings, including $1.8 billion in term loans and
$425.0 million of senior notes issued in a private placement debt offering. Funds from this new financing were also used to
retire pre-existing debt. Refer to Note 4 for additional information regarding our debt obligations.
56
The following summarizes the fair value of assets acquired and liabilities assumed at the date of the acquisition. These results
are preliminary and subject to normal true-up provisions in the purchase agreement and other fair value adjustments.
Amount
Trade receivables ..................................................................................... $
Inventory ..................................................................................................
Other current assets ..................................................................................
Current deferred income taxes .................................................................
Property, plant, and equipment ................................................................
Goodwill ..................................................................................................
Trade name (indefinite life) .....................................................................
Customer relationships (12-year useful life) ............................................
Developed technology (7-year weighted average useful life) ..................
Other intangibles ......................................................................................
Other noncurrent assets ............................................................................
Current liabilities .....................................................................................
Noncurrent deferred income taxes ...........................................................
Other noncurrent liabilities ......................................................................
Total purchase price, net of cash acquired ............................................. $
Fair value of common stock issued .......................................................... $
Cash payment, net of cash acquired .........................................................
Total consideration ................................................................................ $
63.2
110.5
52.7
27.3
93.2
1,203.5
434.0
516.8
54.0
19.9
30.6
(161.5)
(368.7)
(25.6)
2,049.9
416.3
1,633.6
2,049.9
Goodwill from the Welch Allyn acquisition, which is not deductible for tax purposes, is primarily due to enhanced customer
relevance and a stronger competitive position resulting from the business combination, including a complementary
commercial position, product portfolio, and enhanced synergies. As stated in Note 11, Welch Allyn is reported as a
reconciling item in our segment disclosures for the year ended September 30, 2015. Accordingly, the goodwill from the
Welch Allyn acquisition has not yet been allocated to a reportable segment.
Our total revenue on an unaudited pro forma basis, as if the Welch Allyn acquisition had been consummated at the beginning
of our 2014 fiscal year, would have been higher by approximately $638 million and $677 million for the years ended
September 30, 2015 and 2014, respectively. On the same unaudited pro forma basis, our net income would have been lower
by approximately $59 million and $61 million for the years ended September 30, 2015 and 2014, respectively. The pro forma
net income in each year has been adversely impacted by significant costs related to the transaction including deal costs,
financing costs, restructuring costs incurred in relation to our synergy initiatives, costs associated with triggering the change-
in-control provisions of certain equity-based compensation programs at Welch Allyn, and purchase price accounting,
including the nonrecurring effects of the inventory step-up. These results are not indicative of expected future performance.
The unaudited pro forma results are based on the Company’s historical financial statements and those of the Welch Allyn
business and do not necessarily indicate the results of operations that would have resulted had the acquisition been completed
at the beginning of the comparable period presented and are not indicative of the results of operations in future periods.
Trumpf Medical
On August 1, 2014, we completed the acquisition of Trumpf Medical (“Trumpf”) and funded the transaction with a
combination of cash on hand and borrowings. Trumpf Medical provides a portfolio of well-established operating room (OR)
infrastructure products such as surgical tables, surgical lighting, and supply units and expands our product offerings in the
surgical suite.
The purchase price was $232.9 million ($226.6 million net of cash acquired). The results of Trumpf are included in the
Consolidated Financial Statements since the date of acquisition. Our reported revenue included $39.0 million for the year
ended September 30, 2014 related to Trumpf products and the impact to net income was not significant.
57
The following summarizes the fair value of assets acquired and liabilities assumed at the date of the acquisition. These results
are now considered final.
Amount
Trade receivables ..................................................................................... $
Inventory ..................................................................................................
Other current assets ..................................................................................
Property, plant, and equipment ................................................................
Goodwill ..................................................................................................
Trade name (5-year useful life)................................................................
Customer relationships (10-year weighted average useful life) ...............
Developed technology (8-year weighted average useful life) ..................
Other intangibles ......................................................................................
Other noncurrent assets ............................................................................
Deferred tax asset ....................................................................................
Current liabilities .....................................................................................
Long term debt .........................................................................................
Noncurrent liabilities ...............................................................................
Total purchase price ............................................................................... $
67.6
63.6
23.4
42.1
66.0
6.7
15.8
17.8
4.8
0.7
12.9
(74.4)
(6.0)
(8.1)
232.9
Goodwill was allocated entirely to our Surgical and Respiratory Care segment. The goodwill related to the acquired German
operations will be tax deductible while the remaining goodwill will not be deductible for tax purposes.
Our total revenue on an unaudited pro forma basis, as if the Trumpf acquisition had been consummated at the beginning of
our 2013 fiscal year, would have been higher by approximately $218 million and $235 million for the years ended
September 30, 2014 and 2013. The impact to net income on an unaudited pro forma basis would not have been significant to
our financial results for those years. The unaudited pro forma results are based on the Company’s historical financial
statements and those of the Trumpf business and do not necessarily indicate the results of operations that would have resulted
had the acquisition been completed at the beginning of the comparable period presented and are not indicative of the results
of operations in future periods.
Virtus, Inc.
On March 31, 2014 we completed a stock purchase agreement with the stockholders of Virtus, Inc. (“Virtus”) to acquire the
entire equity interest in Virtus: a supplier of finished surfaces and components for our bed and stretcher products. The
acquisition of Virtus insources a component of our supply chain.
The purchase price was $17.6 million ($13.0 million net of cash acquired). We funded the transaction primarily with
borrowings. The results of Virtus are included in the Consolidated Financial Statements since the date of acquisition.
The following summarizes the fair value of assets acquired and liabilities assumed at the date of the acquisition. During the
third quarter of fiscal 2014, the remaining provisions of the stock purchase agreement were settled and the purchase price is
now final.
Inventory .................................................................................. $
Other current assets ..................................................................
Property, plant, and equipment ................................................
Goodwill ..................................................................................
Current liabilities .....................................................................
Deferred tax liability ................................................................
Total purchase price .............................................................. $
Amount
2.6
5.4
1.9
9.4
(1.6)
(0.1)
17.6
Goodwill is not deductible for tax purposes and was allocated to both our North America and International segments.
58
The impact to our total revenue and net income on an unaudited proforma basis, as if the Virtus acquisition had been
consummated at the beginning of our 2013 fiscal year, would not have been significant for the fiscal years ended September
30, 2014 and 2013.
Other
We have used cash on hand for other business acquisitions and equity investments which we do not consider individually
material to the Company’s financial position or results of operations. These included one equity investment in which the
investee was determined to be a VIE and Hill-Rom was determined to have a controlling financial interest, resulting in
consolidation of the investee. The portion of this investee’s assets, liabilities, and operating results which are not attributable
to Hill-Rom’s equity investment are recognized in our Consolidated Financial Statements as attributable to noncontrolling
interests.
NOTE 3. GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS
The following summarizes goodwill activity by reportable segment:
North America
Respiratory Care International Welch Allyn Total
Surgical and
Balances at September 30, 2013:
Goodwill ............................................ $
Accumulated impairment losses ........
Goodwill, net at September 30, 2013 ...............
Changes in Goodwill during the period:
383.0 $
(358.1)
24.9
279.0 $
-
279.0
153.6 $
(114.7)
38.9
Goodwill related to acquisitions ........
Currency translation effect ................
7.6
-
57.3
(2.8)
(2.8)
(2.3)
Balances at September 30, 2014:
Goodwill ............................................
Accumulated impairment losses ........
Goodwill, net at September 30, 2014 ...............
390.6
(358.1)
32.5
Changes in Goodwill during the period:
Goodwill related to acquisitions ........
Currency translation effect ................
-
-
333.5
-
333.5
22.1
(11.8)
148.5
(114.7)
33.8
- $
-
-
815.6
(472.8)
342.8
-
-
-
-
-
62.1
(5.1)
872.6
(472.8)
399.8
-
(3.1)
1,203.5
-
1,225.6
(14.9)
Balances at September 30, 2015:
Goodwill ............................................
Accumulated impairment losses ........
Goodwill, net at September 30, 2015 ............ $
390.6
(358.1)
32.5 $
343.8
-
343.8 $
145.4
(114.7)
30.7 $
1,203.5
-
2,083.3
(472.8)
1,203.5 $ 1,610.5
We acquired Welch Allyn on September 8, 2015 and Trumpf on August 1, 2014. All goodwill associated with the Welch
Allyn acquisition is presented as a reconciling item in the table above, as it has not yet been assigned to a reportable segment.
All goodwill related to the Trumpf acquisition was assigned to the Surgical and Respiratory Care segment. During fiscal
2015, we recorded adjustments to goodwill related to the Trumpf acquisition completed during the fourth quarter of fiscal
2014. We also consolidated an investment made in fiscal 2015 that was determined to be a VIE in which we have a
controlling financial interest. The consolidation resulted in $12.1 million of goodwill being recorded within our Surgical and
Respiratory Care segment. We acquired Virtus on March 31, 2014 and recorded goodwill of $9.4 million. This goodwill was
allocated between our North America and International segments based on the expected benefits resulting from the
acquisition. Refer to Note 2 for additional information regarding these acquisitions.
As discussed in Note 11, we operate in three reportable business segments. Goodwill impairment testing is performed at the
reporting unit level, which is one level below a reportable business segment. We have determined that we have ten reporting
units, with the Welch Allyn reporting units yet to be defined. Goodwill is assigned to reporting units at the date the goodwill
is initially recorded and has been reallocated as necessary based on the restructuring of reporting units over time. Once
goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the
activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
59
Testing for impairment must be performed annually, or on an interim basis upon the occurrence of a triggering event or
change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The annual evaluation of goodwill performed during the third quarter of fiscal 2015 and 2014 did not result in any
impairments.
A 10 percent reduction in the fair value of any of our reporting units would not result in an impairment charge.
Indefinite-lived intangible assets
We have various indefinite-lived intangible assets representing trade names with a carrying value of $466.9 million at
September 30, 2015 and $32.9 million at September 30, 2014. Testing for impairment must be performed annually, or on an
interim basis upon the occurrence of a triggering event or change in circumstances that would more likely than not reduce the
fair value of an indefinite-lived intangible asset below its carrying amount. The annual evaluation of indefinite-lived
intangible assets performed during the third quarter of fiscal 2015 and 2014 did not result in impairment.
NOTE 4. FINANCING AGREEMENTS
Total debt consists of the following:
September 30
2015
2014
Revolving credit facilities ............................................................................................................. $
Current portion of long-term debt .................................................................................................
Senior secured Term Loan A, long-term portion ..........................................................................
Senior secured Term Loan B, long-term portion ..........................................................................
Senior unsecured 5.75% notes due on September 1, 2023 ...........................................................
Term loan under August 2012 credit facility, long-term portion ..................................................
Unsecured 7.00% debentures due on February 15, 2024 ..............................................................
Unsecured 6.75% debentures due on December 15, 2027 ............................................................
Other .............................................................................................................................................
Total debt ......................................................................................................................................
Less current portion of debt ..........................................................................................................
Total long-term debt ..................................................................................................................... $
- $
58.0
931.7
778.3
418.2
-
13.8
29.6
3.6
2,233.2
58.0
2,175.2 $
265.0
16.2
-
-
-
159.6
19.2
29.6
1.4
491.0
126.9
364.1
The following table summarizes the scheduled maturities of long-term debt for fiscal years 2016 through 2020:
Term Loan A Term Loan B
Total
2016 ....................................................... $
2017 ....................................................... $
2018 ....................................................... $
2019 ....................................................... $
2020 ....................................................... $
50.0 $
75.0 $
100.0 $
100.0 $
675.0 $
8.0 $
8.0 $
8.0 $
8.0 $
8.0 $
58.0
83.0
108.0
108.0
683.0
In September 2015, the Company entered into four new credit facilities for purposes of financing the Welch Allyn acquisition
as well as refinancing our previously outstanding revolving credit facility. These new facilities consisted of the following:
$1.0 billion senior secured Term Loan A facility (“TLA Facility”), maturing in September 2020
$800.0 million senior secured Term Loan B facility (“TLB Facility”), maturing in September 2022
Senior secured revolving credit facility (“Revolving Credit Facility”), providing borrowing capacity of up to
$500.0 million, maturing in September 2020
$425.0 million of senior unsecured notes (“Senior Notes”), maturing in September 2023
The TLA Facility, TLB Facility, and Revolving Credit Facility (collectively, the “Senior Secured Credit Facilities”) all bear
interest at variable rates which are currently less than 4.0 percent. These interest rates are based primarily on the London
Interbank Offered Rate (LIBOR), but under certain conditions could also be based on the U.S. Federal Funds Rate or the U.S.
Prime Rate, at the Company’s option. The TLA Facility and TLB Facility have required principal payments. The TLA
Facility requires minimum principal payments of $50.0 million in fiscal 2016, $75.0 million in fiscal 2017, and
$100.0 million annually thereafter, with the remaining unpaid principal balance due at maturity. The TLB Facility requires
annual principal payments of $8.0 million with the remaining unpaid principal balance due at maturity. We will be able to
voluntarily prepay outstanding loans under the TLA Facility and the TLB Facility at any time.
60
At September 30, 2015, there were no borrowings on the Revolving Credit Facility, but available borrowing capacity was
$490.9 million after giving effect to $9.1 million of outstanding standby letters of credit. At September 30, 2014, there were
$42.4 million of outstanding standby letters of credit under our previous revolving credit agreements, $39.8 million of which
pertained to one standby letter of credit issued in connection with the Trumpf acquisition, which expired in January 2015.
The availability of borrowings under our Revolving Credit Facility is subject to our ability at the time of borrowing to meet
certain specified conditions, including compliance with covenants contained in the governing credit agreement.
The Senior Secured Credit Facilities are held with a syndicate of banks, which includes over 20 institutions. The general
corporate assets of the Company and its subsidiaries collateralize these obligations. The credit agreement governing these
facilities contains financial covenants which specify a maximum secured net leverage ratio and a minimum interest coverage
ratio, as such terms are defined in the credit agreement. These financial covenants are measured at the end of each fiscal
quarter, with the first measurement date on December 31, 2015. The required ratios vary through December 31, 2019
providing a gradually decreasing maximum secured net leverage ratio and a gradually increasing minimum interest coverage
ratio, as set forth in the table below:
Fiscal Quarter Ended
December 31, 2015 .......................................
December 31, 2016 .......................................
December 31, 2017 .......................................
December 31, 2018 .......................................
December 31, 2019 and thereafter ................
Maximum
Secured Net
Leverage Ratio
4.75x
4.50x
4.00x
3.50x
3.00x
Minimum
Interest Coverage
Ratio
3.25x
3.25x
3.50x
3.75x
4.00x
The Senior Notes bear interest at a fixed rate of 5.75 percent annually. These notes were issued at par in a private placement
offering and are not registered securities on any public market. All of the Senior Notes are outstanding as of September 30,
2015. We are not required to make any mandatory redemption or sinking fund payments with respect to the Notes, other than
in certain circumstances such as a change in control or material sale of assets. We may redeem the notes prior to maturity, but
doing so prior to September 1, 2021 would require payment of a premium on any amounts redeemed, the amount of which
varies based on the timing of the redemption. The indenture governing the Senior Notes contains certain covenants which
impose limitations on the amount of dividends we may pay and the amount of common shares we may repurchase in the open
market, but we do not expect these covenants to affect our current dividend policy or open share repurchase program. The
terms of this indenture also impose certain restrictions on the amount and type of additional indebtedness we may obtain in
the future, as well as the types of liens and guarantees we may provide.
We are in compliance with all applicable financial covenants as of September 30, 2015.
In conjunction with the issuance of the Senior Secured Credit Facilities and the Senior Notes, the Company incurred
$48.7 million of debt issuance costs. As stated in Note 1, the Company has elected to early-adopt ASU 2015-03,
“Simplifying the Presentation of Debt Issuance Costs.” Following this guidance, as of September 30, 2015, unamortized debt
issuance costs of $39.1 million have been recorded as a reduction of the carrying value of the related debt, in addition to
$9.4 million attributable to the Revolving Credit Facility, which are recorded as a component of other long-term assets on the
Consolidated Balance Sheet. These costs will amortize into interest expense over the terms of the related credit facilities.
Unsecured debentures outstanding at September 30, 2015 and September 30, 2014 have fixed rates of interest. We have
deferred gains included in the amounts above from the termination of previous interest rate swap agreements, and those
deferred gains amounted to less than $1.0 million at both September 30, 2015 and September 30, 2014. The deferred gains on
the termination of the swaps are being amortized and recognized as a reduction of interest expense over the remaining term of
the related debt, and as a result, the effective interest rates on that debt have been and will continue to be lower than the stated
interest rates on the debt.
From August 2012 through April 2015, we had a credit facility that provided for revolving loans of up to $500.0 million, plus
a term loan in the aggregate amount of $200.0 million. In May 2015, we entered into an Amended and Restated Credit
Agreement which provided for revolving loans of up to $900.0 million and a term loan of $165.0 million, which replaced the
remaining unpaid principal balance of the term loan from the August 2012 credit facility. A portion of the proceeds from the
issuance of the Senior Secured Credit Facility and the Senior Notes in September 2015 were used to fully repay these
previously outstanding credit facilities, which are now terminated. The termination of these facilities resulted in a charge of
$2.6 million due to acceleration of debt issuance costs which were unamortized as of September 2015.
61
We are exposed to market risk from fluctuations in interest rates. The Company sometimes manages its exposure to interest
rate fluctuations through the use of interest rate swaps (cash flow hedges). As of September 30, 2014, we had one interest rate
swap agreement to hedge the variability of cash flows associated with a portion of the variable interest rate payments on then-
outstanding term loans. The interest rate swap was designated as a cash flow hedge and was an asset with a fair value of less
than $1.0 million as of September 30, 2014. We classify fair value measurements on our interest rate swaps as Level 2, as
described in Note 1. Effective with the issuance of the Senior Secured Credit Facilities, the interest rate swap was terminated
at an immaterial loss.
The fair value of our debt is estimated based on the quoted market prices for the same or similar issues or on the current rates
offered to us for debt of the same remaining maturities. The book values of our short-term debt instruments approximate fair
value. The estimated fair values of our long-term debt instruments are described in the table below:
Senior secured Term Loan A .............................................................................. $
Senior secured Term Loan B ..............................................................................
Senior unsecured 5.75% notes due on September 1, 2023 .................................
Term loan under August 2012 credit facility ......................................................
Unsecured debentures .........................................................................................
Total debt ............................................................................................................ $
990.7 $
780.7
428.4
-
43.4
2,243.2 $
-
-
-
175.2
55.5
230.7
September 30
2015
2014
The estimated fair values of our long-term unsecured debentures were based on observable inputs such as quoted prices in
markets that are not active. The estimated fair values of our term loans and the Senior Notes were based on quoted prices for
similar liabilities. These fair value measurements were classified as Level 2, as described in Note 1.
NOTE 5. OTHER COMPREHENSIVE INCOME
The following tables represent the changes in accumulated other comprehensive loss by component for the year to date
periods ended September 30, 2015 and 2014:
Other comprehensive income (loss)
Accumulated other comprehensive loss
Prior to
reclassification
Reclassification
from
Pre-tax Tax effect Net of tax
balance Net activity
Beginning
Ending
balance
Year Ended September 30, 2015
Available-for-sale securities
and currency hedges ..................... $
Foreign currency translation
adjustment ...................................
Change in pension and postretirement
defined benefit plans ....................
Total ................................................. $
(0.6) $
(58.6)
(28.7)
(87.9) $
0.6 $
- $
- $
- $
- $
- $
-
-
(58.6)
-
(58.6)
(34.2)
(58.6)
(92.8)
15.5
(13.2)
16.1 $ (71.8) $
5.1
5.1 $
(8.1)
(66.7)$
(39.9)
(74.1) $
(8.1)
(66.7) $
(48.0)
(140.8)
Year Ended September 30, 2014
Prior to
reclassification
Other comprehensive income (loss)
Reclassification
from
Pre-tax Tax effect Net of tax
Accumulated other comprehensive loss
Beginning
balance Net activity
Ending
balance
Available-for-sale securities
and currency hedges ..................... $
Foreign currency translation
adjustment ...................................
Change in pension and postretirement
defined benefit plans ....................
Total ................................................. $
0.3 $
0.1 $
0.4 $
(0.1) $
0.3 $
(0.3) $
0.3 $
-
(29.6)
(16.8)
(46.1) $
-
(29.6)
-
(29.6)
(4.6)
(29.6)
(34.2)
2.7
2.8 $
(14.1)
(43.3) $
5.0
4.9 $
(9.1)
(38.4) $
(30.8)
(35.7) $
(9.1)
(38.4) $
(39.9)
(74.1)
62
The following table represents the items reclassified out of accumulated other comprehensive loss and the related tax effects
during fiscal 2015 and 2014:
Years Ended September 30
2015
Amount
2014
Amount
reclassified Tax effect Net of tax
reclassified Tax effect Net of tax
Change in pension and
postretirement defined benefit
plans (1) .................................. $
Available-for-sale securities
15.5 $
(5.6) $
9.9 $
2.7 $
(1.0) $
and currency hedges (2).......... $
0.6 $
(0.2) $
0.4 $
0.1 $
- $
1.7
0.1
(1) Reclassified from accumulated other comprehensive loss into cost of goods sold and selling and administrative expenses.
These components are included in the computation of net periodic pension and postretirement benefit expense.
(2) Reclassified from accumulated other comprehensive loss into other income (expense), net.
NOTE 6. RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
Our retirement plans consist of defined benefit plans, postretirement healthcare plans, and defined contribution savings plans.
Plans cover certain employees both in and outside of the U.S.
Retirement Plans
We sponsor five defined benefit plans. Those plans include a master defined benefit retirement plan, a nonqualified
supplemental executive defined benefit retirement plan, and three defined benefit retirement plans covering employees in
Germany and France. Benefits for such plans are based primarily on years of service and the employee’s level of
compensation during specific periods of employment. We contribute funds to trusts as necessary to provide for current
service and for any unfunded projected future benefit obligation over a reasonable period of time. All of our plans have a
September 30 measurement date.
Effect on Operations
The components of net periodic benefit cost for our defined benefit retirement plans were as follows:
Years Ended September 30
2014
2013
2015
Service cost .............................................................................. $
Interest cost ..............................................................................
Expected return on plan assets .................................................
Amortization of unrecognized prior service cost, net ..............
Amortization of net loss ...........................................................
Net periodic benefit cost ..........................................................
Settlement charge .....................................................................
Special termination benefits .....................................................
Net pension expense ................................................................ $
5.4 $
14.6
(16.7)
0.6
5.2
9.1
9.6
-
18.7 $
5.0 $
14.4
(16.7)
0.6
3.2
6.5
-
2.4
8.9 $
6.1
13.2
(15.9)
0.6
7.8
11.8
-
-
11.8
In April, 2015, we offered all terminated vested participants of our domestic master defined benefit retirement plan an option
to receive a lump sum cash payout in lieu of their right to future periodic benefit payments under the plan upon their
retirement. Lump sums of $42.3 million were paid to participants in September 2015, triggering a plan settlement charge of
$9.6 million, which is recorded as a component of Special charges on the Statements of Consolidated Income.
During the second quarter of fiscal 2014, we initiated a domestic early retirement program, which offered certain special
termination benefits relating to our pension and postretirement health care plans. This program and the related special
termination benefits resulted in a non-cash charge of $3.2 million, of which $2.4 million related to our master defined benefit
retirement plan and $0.8 million for our postretirement health care plan. The $0.8 million postretirement healthcare charge
also reflects a $1.3 million reversal recorded as certain participants elected alternative coverage separate from the
63
postretirement health care plan. The employee elections were not known until the third and fourth quarters of fiscal 2014. The
reversal was recorded to the special charges caption and is offset by charges recorded to reflect our incremental cost
associated with the alternative coverage. Refer to Note 8 for more details.
Obligations and Funded Status
The change in benefit obligations, plan assets and funded status, along with amounts recognized in the Consolidated Balance
Sheets for our defined benefit retirement plans were as follows:
Years Ended September 30
2015
2014
Change in benefit obligation:
Benefit obligation at beginning of year ........................................................... $
Service cost .....................................................................................................
Interest cost .....................................................................................................
Actuarial loss ...................................................................................................
Benefits paid ...................................................................................................
Acquisitions ....................................................................................................
Special termination benefits ............................................................................
Plan settlement ................................................................................................
Exchange rate gain ..........................................................................................
Benefit obligation at end of year .....................................................................
Change in plan assets:
Fair value of plan assets at beginning of year .................................................
Actual return on plan assets ............................................................................
Employer contributions ...................................................................................
Benefits paid ...................................................................................................
Fair value of plan assets at end of year ...........................................................
Funded status and net amounts recognized ......................................................... $
Amounts recorded in the Consolidated Balance Sheets:
Accrued pension benefits, current portion ...................................................... $
Accrued pension benefits, long-term ...............................................................
Net amount recognized ................................................................................... $
343.8 $
5.4
14.6
12.5
(54.0)
-
-
(4.4)
(2.4)
315.5
276.1
(3.9)
0.9
(54.0)
219.1
(96.4) $
(1.0) $
(95.4)
(96.4) $
297.9
5.0
14.4
31.4
(10.2)
4.3
2.4
-
(1.4)
343.8
254.4
30.9
1.0
(10.2)
276.1
(67.7)
(1.0)
(66.7)
(67.7)
In addition to the amounts above, net actuarial losses of $79.3 million and prior service costs of $1.0 million, less an
applicable aggregate tax effect of $30.0 million are included as components of accumulated other comprehensive loss at
September 30, 2015. In addition to the amounts above, net actuarial losses of $65.0 million and prior service costs of
$1.7 million, less an applicable aggregate tax effect of $24.8 million are included as components of accumulated other
comprehensive loss at September 30, 2014
The estimated net actuarial loss and prior service cost for our defined benefit retirement plans that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $4.5 million and
$0.3 million, respectively.
64
Accumulated Benefit Obligation
The accumulated benefit obligation for all defined benefit pension plans was $296.7 million and $325.9 million at
September 30, 2015 and 2014. Selected information for our plans, including plans with accumulated benefit obligations
exceeding plan assets, was as follows:
PBO
2015
ABO
Plan Assets
PBO
2014
ABO
Plan Assets
September 30
Master plan ................................... $
International plans ........................
Supplemental executive plan ........
Total .............................................. $
292.5 $
17.9
5.1
315.5 $
275.3 $
16.3
5.1
296.7 $
218.9 $
0.2
-
219.1 $
319.1 $
20.3
4.4
343.8 $
303.2 $
18.5
4.2
325.9 $
275.8
0.3
-
276.1
Actuarial Assumptions
The weighted average assumptions used in accounting for our domestic pension plans were as follows:
2015
2014
2013
Weighted average assumptions to determine benefit
obligations at the measurement date:
Discount rate for obligation .......................................................
Rate of compensation increase ..................................................
4.4%
3.0%
Weighted average assumptions to determine benefit
cost for the year:
Discount rate for expense ..........................................................
Expected rate of return on plan assets ........................................
Rate of compensation increase ..................................................
4.5%
6.8%
3.0%
4.5%
3.0%
5.0%
7.0%
3.3%
5.0%
3.3%
4.1%
7.0%
3.3%
The discount rates used in the valuation of our defined benefit pension plans are evaluated annually based on current market
conditions. In setting these rates we utilize long-term bond indices and yield curves as a preliminary indication of interest rate
movements, and then make adjustments to the respective indices to reflect differences in the terms of the bonds covered
under the indices in comparison to the projected outflow of our pension obligations. The overall expected long-term rate of
return is based on historical and expected future returns, which are inflation adjusted and weighted for the expected return for
each component of the investment portfolio, as well as taking into consideration economic and capital market conditions. The
rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments. The weighted
average discount rate assumptions used for our international plans are lower than our domestic plan assumptions and do not
significantly affect the consolidated net benefit obligation or net periodic benefit cost balances.
Plan Assets
The weighted average asset allocations of our master defined benefit retirement plan at September 30, 2015 and 2014, by
asset category, along with target allocations, are as follows:
2015
Target
Allocation
2014
Target
Allocation
2015
Actual
Allocation
2014
Actual
Allocation
Equity securities..........................................................
Fixed income securities ..............................................
Total ......................................................................................................................................
39 - 49%
51 - 61%
40 - 60%
40 - 60%
42%
58%
100%
52%
48%
100%
65
We have a Plan Committee that sets investment guidelines with the assistance of an external consultant. These guidelines are
established based on market conditions, risk tolerance, funding requirements and expected benefit payments. The Plan
Committee also oversees the investment allocation process and monitors asset performance. As pension liabilities are long-
term in nature, we employ a long-term total return approach to maximize the long-term rate of return on plan assets for a
prudent level of risk. Target allocations are guidelines, not limitations, and plan fiduciaries may occasionally approve
allocations above or below a target range or elect to rebalance the portfolio within the targeted range.
The investment portfolio contains a diversified portfolio of primarily equities and fixed income securities. Securities are also
diversified in terms of domestic and international securities, short- and long-term securities, growth and value styles, large
cap and small cap stocks. The primary investment strategy is a dynamic target allocation method that periodically rebalances
among various investment categories depending on the current funded positions. This program is designed to actively move
from return-seeking investments (such as equities) toward liability-hedging investments (such as long-duration fixed income)
as funding levels improve.
Trust assets are invested subject to the following policy restrictions: short-term securities must be rated A2/P2 or higher; all
fixed-income securities shall have a credit quality rating “BBB” or higher; investments in equities in any one company may
not exceed 10 percent of the equity portfolio.
Fair Value Measurements of Plan Assets
The following table summarizes the valuation of our pension plan assets by pricing categories:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Balance at
September 30, 2015
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash ................................................ $
Equities
U.S. companies ...........................
International companies ..............
Fixed income securities ..................
Total plan assets at fair value ...... $
3.5 $
47.1
44.8
123.7
219.1 $
3.5 $
-
-
-
3.5 $
- $
47.1
44.8
123.7
215.6 $
Quoted Prices in
Active Markets
Balance at
September 30, 2014
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash ............................................... $
Equities
U.S. companies ..........................
International companies .............
Fixed income securities .................
Other ..............................................
Total plan assets at fair value ......... $
2.1 $
2.1 $
101.7
38.7
133.2
0.4
276.1 $
101.7
38.7
66.8
0.4
209.7 $
- $
-
-
66.4
-
66.4 $
-
-
-
-
-
-
-
-
-
-
-
The Level 2 investments are commingled funds and/or collective trusts valued using the net asset value (“NAV”) unit price
provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund. For further
descriptions of the asset Levels used in the above chart, refer to Note 1.
66
Cash Flows
Our U.S. qualified defined benefit plan is funded in excess of 80 percent, as measured under the requirements of the Pension
Protection Act of 2006, and therefore we expect that the plan will not be subject to the “at risk” funding requirements of this
legislation.
During 2015 and 2014, we contributed cash of $0.9 million and $1.0 million to our defined benefit retirement plans. We will
not be required to contribute to our master defined benefit retirement plan in fiscal year 2016 due to the current funding level;
however, minimal contributions will be required for our unfunded plans.
Estimated Future Benefit Payments
The benefit payments, which are expected to be funded through plan assets and company contributions and reflect expected
future service, are expected to be paid as follows:
2016 .............................................................. $
2017 .............................................................. $
2018 .............................................................. $
2019 .............................................................. $
2020 .............................................................. $
2021-2025 ..................................................... $
Pension Benefits
12.3
12.8
13.3
14.0
14.8
86.5
Defined Contribution Savings Plans
We have defined contribution savings plans that cover substantially all U.S. employees and certain non-U.S. employees. The
general purpose of these plans is to provide additional financial security during retirement by providing employees with an
incentive to make regular savings. Company contributions to the plans are based on eligibility and employee contributions.
Expense under these plans was $17.4 million, $15.0 million and $15.8 million in fiscal years 2015, 2014 and 2013.
Postretirement Health Care Plans
In addition to defined benefit retirement plans, we also offer two domestic postretirement health care plans, one of which was
assumed in the acquisition of Welch Allyn, that provide health care benefits to qualified retirees and their dependents. The
plans are closed to new participants and include retiree cost sharing provisions and generally extends retiree coverage for
medical and prescription benefits beyond the COBRA continuation period to the date of Medicare eligibility. We use a
measurement date of September 30 for these plans.
67
The postretirement health care plans, including the Welch Allyn plan on a post-acquisition basis, reflected a credit during
fiscal 2015, 2014 and 2013 of ($0.2) million, ($0.2) million and ($0.1) million. The change in the accumulated postretirement
benefit obligation was as follows:
Years Ended September 30
2015
2014
Change in benefit obligation:
Benefit obligation at beginning of year ............................................ $
Service cost ......................................................................................
Interest cost ......................................................................................
Acquired obligation ..........................................................................
Actuarial gain ...................................................................................
Benefits paid ....................................................................................
Retiree contributions ........................................................................
Special termination benefits .............................................................
Benefit obligation at end of year .......................................................... $
Amounts recorded in the Consolidated Balance Sheets:
Accrued benefits obligation, current portion .................................... $
Accrued benefits obligation, long-term ............................................
Net amount recognized ........................................................................ $
11.2 $
0.4
0.4
14.1
(0.9)
(0.2)
0.1
-
25.1 $
1.8 $
23.3
25.1 $
9.8
0.4
0.4
-
(0.2)
(0.2)
0.2
0.8
11.2
1.1
10.1
11.2
We contributed less than $0.2 million to the plans in fiscal 2015, including the post-acquisition period for the Welch Allyn
plan, compared with $0.1 million contributed in fiscal 2014.
In addition to the amounts above, net actuarial gains of $2.4 million and prior service credits of $1.4 million, less an
applicable aggregate tax effect of $1.5 million are included as components of accumulated other comprehensive loss at
September 30, 2015. In addition to the amounts above, net actuarial gains of $1.7 million and prior service credits of
$2.3 million, less an applicable aggregate tax effect of ($1.6) million are included as components of accumulated other
comprehensive loss at September 30, 2014.
The estimated net actuarial gain and prior service benefit for our postretirement health care plans that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are ($0.1) million and
($0.9) million.
The discount rate used to determine the net periodic benefit cost for the postretirement health care plans during the fiscal year
ended September 30, 2015, 2014 and 2013 was 3.7, 4.1 and 3.3 percent. The discount rate used to determine the benefit
obligation as of September 30, 2015, 2014 and 2013 was 3.5, 3.7 and 4.1 percent. As of September 30, the health care-cost
trend rates for the plans were generally assumed to be in the ranges of 5.25 to 7.0 percent, trending down to a rate between
4 and 5 percent over the long-term.
A one-percentage-point increase/decrease in the assumed health care cost trend rates as of September 30, 2015 would cause
an increase/decrease in service and interest costs of less than $0.1 million, along with an increase/decrease in the benefit
obligation of $1.9 million and $1.7 million, respectively.
We fund the postretirement health care plans as benefits are paid, and current plan benefits are expected to require net
company contributions of approximately $1.8 million in fiscal 2016 and $2 million per year thereafter.
NOTE 7. COMMON STOCK
Share Repurchases
We repurchased 1.2 million, 1.7 million and 2.8 million shares of our common stock during fiscal years 2015, 2014 and 2013
for $54.8 million, $70.5 million and $92.7 million, respectively, in the open market. The common stock was acquired under a
$190 million share repurchase program approved by the Board of Directors in September 2013, which does not have an
expiration date. There are no plans to terminate this program in the future, but repurchases will be suspended temporarily as
we allocate free cash flow to debt service following the Welch Allyn acquisition. Repurchases may be made on the open
market or via private transactions, and are used for general business purposes.
68
Stock-Based Compensation
We have stock-based compensation plans under which employees and non-employee directors may be granted options to
purchase shares of Company common stock at the fair market value at the time of grant. In addition to stock options, we
grant performance share units (“PSUs”) and RSUs to certain management level employees and vested deferred stock to non-
employee directors. We also offer eligible employees the opportunity to buy shares of our common stock at a discount via an
Employee Stock Purchase Plan (“ESPP”).
Our primary stock-based compensation program is the Stock Incentive Plan, which has been approved by our shareholders.
Under the Stock Incentive Plan, we have a total of 15.3 million authorized shares. At September 30, 2015, 4.3 million shares
were available for future grants under our stock-based compensation plans. We generally settle our stock-based awards with
treasury shares. As of September 30, 2015, we had 23.3 million treasury shares available for use to settle stock-based awards.
The following table sets forth a summary of the annual stock-based compensation cost that was charged against income for
all types of awards:
Years Ended September 30
2014
2013
2015
Total stock-based compensation cost (pre-tax) ..................................................... $
Total income tax benefit .......................................................................................
Total stock-based compensation cost, net of tax ................................................... $
25.0 $
(7.5)
17.5 $
18.0 $
(6.5)
11.5 $
13.5
(4.9)
8.6
Stock Options
Stock options granted by our Compensation Committee under the Stock Incentive Plan are non-qualified stock options. These
awards are generally granted with exercise prices equal to the average of the high and low prices of our common stock on the
date of grant. They vest in equal annual installments over a three or four year period and the maximum contractual term is ten
years. We use a Binomial option-pricing model to estimate the fair value of stock options, and compensation cost is
recognized on a straight-line basis over the requisite service period.
The following table sets forth the weighted average fair value per share of stock options and the related valuation
assumptions used in the determination of those fair values:
Weighted average fair value per share .......................... $
Valuation assumptions:
Years Ended September 30
2014
11.91
2015
12.83
$
$
2013
7.91
Risk-free interest rate .....................................
Expected dividend yield .................................
Expected volatility ..........................................
Weighted average expected life ...................... 4.9 years 4.9 years 4.9 years
1.6%
1.4%
35.0%
1.3%
1.4%
36.1%
0.6%
1.9%
40.2%
The risk-free interest rate is based upon observed U.S. Treasury interest rates appropriate for the term of our employee stock
options. Expected dividend yield is based on the history and our expectation of dividend payouts. Expected volatility was
based on our historical stock price volatility. Expected life represents the weighted average period the stock options are
expected to remain outstanding and is a derived output of the Binomial model. The expected life of employee stock options is
impacted by the above assumptions as well as the post-vesting forfeiture rate and the exercise factor used in the Binomial
model. These two variables are based on the history of exercises and forfeitures for previous stock options granted by us.
69
The following table summarizes transactions under our stock option plans for fiscal year 2015:
Weighted
Average
Number of Average Remaining
Weighted
Weighted Average
Aggregate
Intrinsic
Exercise Contractual Value (1)
(in millions)
Term
(in thousands) Price
Shares
Balance Outstanding at October 1, 2014 ...........................................
Granted ...........................................................................................
Exercised ........................................................................................
Cancelled/Forfeited ........................................................................
Balance Outstanding at September 30, 2015 .................................
Exercisable at September 30, 2015 .................................................
Options Expected to Vest ................................................................
1,992 $
381
(371)
(101)
1,901 $
1,060 $
773 $
31.99
45.01
31.83
36.63
34.38 6.6 years $
30.98 5.3 years $
38.34 8.0 years $
33.5
22.3
10.6
(1)
The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $51.99, as
reported by the New York Stock Exchange on September 30, 2015. This amount, which changes continuously based
on the fair value of our common stock, would have been received by the option holders had all option holders
exercised their options as of the balance sheet date.
The total intrinsic value of options exercised during fiscal years 2015, 2014 and 2013 was $6.3 million, $4.6 million and
$1.6 million.
As of September 30, 2015, there was $4.1 million of unrecognized compensation expense related to stock options granted
under the Plan. This unrecognized compensation expense does not reflect a reduction for our estimate of potential forfeitures,
and is expected to be recognized over a weighted average period of 2.4 years.
Restricted Stock Units
RSUs are granted to certain employees with fair values equal to the average of the high and low prices of our common stock
on the date of grant, multiplied by the number of units granted. RSU grants are contingent upon continued employment and
vest over periods ranging from one to four years. Dividends, payable in common stock equivalents, accrue on the grants and
are subject to the same specified terms as the original grants, including the risk of forfeiture.
The following table summarizes transactions for our nonvested RSUs for fiscal year 2015:
Weighted
Number of Average
Share Units Grant Date
(in thousands) Fair Value
Nonvested RSUs at October 1, 2014 ....................................................
Granted ..............................................................................................
Vested ...............................................................................................
Forfeited ............................................................................................
Nonvested RSUs at September 30, 2015............................................
431 $
351
(93)
(55)
634 $
34.92
47.85
37.76
35.90
41.35
As of September 30, 2015, there was $13.4 million of total unrecognized compensation expense related to nonvested RSUs
granted under the Stock Incentive Plan. This unrecognized compensation expense does not reflect a reduction for our
estimate of potential forfeitures, and is expected to be recognized over a weighted average period of 2 years. The total vest
date fair value of shares that vested during fiscal years 2015, 2014 and 2013 was $4.3 million, $5.3 million and $5.4 million.
70
Performance Share Units
Our Compensation Committee grants PSUs to certain employees and these awards are subject to any stock dividends, stock
splits, and other similar rights inuring to common stock, but unlike our RSUs are not entitled to dividend reinvestment.
Vesting of the grants is contingent upon achievement of performance targets and corresponding service requirements.
The fair value of the PSUs is equal to the average of the high and low prices of our common stock on the date of grant,
multiplied by the number of units granted. For PSUs with a market condition such as total shareholder return, the Monte-
Carlo simulation method is used to determine fair value. The Monte-Carlo simulation is a generally accepted statistical
technique used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our
and the Peer Group’s future expected stock prices.
The following table sets forth the weighted average fair value per share for PSUs and the related valuation assumptions used
in the determination of those fair values. PSUs granted in both fiscal 2015 and 2014 are based on company-specific
performance targets, with a total shareholder return collar, while grants in fiscal 2013 are based entirely on shareholder return
targets.
Weighted average fair value per share ....................
Valuation assumptions: ...........................................
Risk-free interest rate ..........................................
Expected dividend yield ......................................
Expected volatility ..............................................
2015
$47.82
0.9%
0.0%
23.5%
Years Ended September 30
2014
$47.91
0.5%
0.0%
30.1%
2013
$19.77
0.3%
0.0%
32.6%
The basis for the assumptions listed above is similar to the valuation assumptions used for stock options, as discussed
previously.
The following table summarizes transactions for our nonvested PSUs for fiscal 2015:
Weighted
Number of Average
Share Units Grant Date
(in thousands) Fair Value
Nonvested PSUs as of October 1, 2014 ................................................
Granted ..............................................................................................
Vested ...............................................................................................
Cancelled ...........................................................................................
Forfeited ............................................................................................
Nonvested PSUs at September 30, 2015 ............................................
586 $
331
(414)
(76)
(73)
354 $
29.98
49.27
30.11
24.57
41.15
42.16
As of September 30, 2015, there was $10.2 million of unrecognized compensation expense related to PSUs granted under the
Stock Incentive Plan based on the expected achievement of certain performance targets or market conditions. This
unrecognized compensation expense does not reflect a reduction for our estimate of potential forfeitures, and is expected to
be recognized by the end of fiscal 2017. The total vest date fair value of shares that vested during fiscal 2015 was
$20.5 million.
NOTE 8. SPECIAL CHARGES
Over the past several years, we have placed a focus on improving our cost structure and business processes through various
means including consolidation of certain manufacturing and select back office operations, customer rationalizations and
various other organizational changes. As a result of these actions, we recognized special charges of $41.2 million,
$37.1 million, and $5.7 million for the fiscal years ended September 30, 2015, 2014, and 2013, respectively. These charges
are summarized below.
71
Welch Allyn Integration
In conjunction with the acquisition of Welch Allyn in September 2015, we eliminated approximately 80 positions, primarily
in Welch Allyn’s corporate support and administrative functions, which became redundant as a result of merging into
Hill-Rom. We recorded $14.4 million of special charges in conjunction with this action in fiscal 2015 for severance and
employee benefits provided to affected employees. Many of the affected employees must continue service for a specified
period of time after completion of the merger in order to receive the severance benefits offered. As a result, additional
charges related to this action of approximately $3 million will be recorded in fiscal 2016 until those service obligations are
fulfilled.
Pension Settlement Charge
As disclosed in Note 6, we offered lump sum settlements to all terminated vested participants in our domestic master defined
benefit retirement plan, which resulted in a settlement charge of $9.6 million. This charge was recorded as a component of
special charges in fiscal 2015.
Site Consolidation
In the third quarter of fiscal 2015, we initiated a plan to streamline our operations and simplify our supply chain by
consolidating certain manufacturing and distribution operations. As part of this action, we announced the closure of sites in
Redditch, England and Charleston, South Carolina. Upon closure, each site’s operations will either be relocated to other
existing Company facilities or outsourced to third-party suppliers. For the year ended September 30, 2015, we recorded
severance and benefit charges of $2.7 million for approximately 160 employees to be displaced by the closures, as well as
$1.8 million of other related costs. We expect to incur approximately $3 million of additional charges in the first half of fiscal
2016 for personnel costs and site closure expenses related to this action until the closures are complete.
Global Restructuring Program
During the second quarter of fiscal 2014, we announced a global restructuring program focused on improving our cost
structure. This action included early retirement and reduction in force programs that eliminated over 200 net positions,
primarily in the U.S., where the action was substantially completed in fiscal 2014 with cash expenditures continuing during
fiscal 2015. The program also included a reduction of our European manufacturing capacity and a streamlining of global
operations by, among other things, executing a back office process transformation program in Europe. The restructuring in
Europe is in process and has resulted in severance and benefit charges of $6.0 million for the year ended September 30, 2015,
as well as other costs of $7.2 million related to legal and professional fees, temporary labor, project management, and other
administrative functions. In the second quarter of fiscal 2015, we also reversed $0.5 million of previously recorded severance
and benefit charges due to certain plan participants declining continuing healthcare coverage.
Since the inception of the global restructuring program through September 30, 2015, we have recognized aggregate special
charges of $37.6 million, which are recorded in both fiscal 2014 and 2015. Charges of $24.9 million were recorded in the
year ended September 30, 2014, net of reversals. We expect to incur $5 to $10 million of additional European restructuring
costs through the completion of the program.
Discontinuance of Third-Party Payer Rentals
Also during the second quarter of fiscal 2014, we initiated a plan to discontinue third-party payer rentals of therapy products
occurring primarily in home care settings. Special charges recorded for this action included a $7.7 million non-cash tangible
asset impairment charge, a $2.0 million charge for severance and other benefits for approximately 70 eliminated positions,
and $1.6 million in other related costs, net of a reversal of $0.2 million which was recorded in the third quarter of fiscal 2014.
This action is substantially complete.
Batesville Manufacturing Early Retirement Program
During the first quarter of fiscal 2014, we initiated a plan to improve our cost structure and streamline our organization by
offering an early retirement program to certain manufacturing employees in our Batesville, Indiana plant, meeting specific
eligibility requirements, and other minor reduction in force actions. These programs resulted in the elimination of
approximately 35 positions and required recognition of a special charge of approximately $1 million for lump sum payments
under the program and severance and other benefits provided to other affected employees. This action was substantially
complete by the end of the second quarter of fiscal 2014.
Fiscal 2013 Restructuring Program
During the second quarter of fiscal 2013, we announced a plan to improve our cost structure and streamline our organization
by eliminating in excess of 100 positions across the Company, roughly half of which were contract and open positions. This
resulted in a special charge of $1.7 million related to severance and other benefits to be provided to affected employees. We
also incurred a contract termination charge of $0.6 million, a non-cash asset impairment charge of $0.2 million related to a
product discontinuance action and $1.0 million in other related costs. We reversed $0.6 million of a fiscal 2012 severance and
other benefits charge that was determined to be excessive during the second quarter of fiscal 2013. During the third and
72
fourth quarters of fiscal 2013, we continued actions under the previously announced plan and incurred charges of
$0.8 million and $2.0 million, respectively. These actions and the related cash expenditures are substantially complete.
For all accrued severance and other benefit charges described above, we record restructuring reserves within other current
liabilities and other long-term liabilities. The reserve activity for severance and other benefits during fiscal 2015 was as
follows:
Balance at September 30, 2014 ......................... $
Expenses ...........................................................
Cash Payments ..................................................
Reversals ...........................................................
Balance at September 30, 2015 ...................... $
11.7
23.1
(10.0)
(0.5)
24.3
NOTE 9. INCOME TAXES
The significant components of income before income taxes and the consolidated income tax provision were as follows:
Years Ended September 30
2013
2015
2014
Income before income taxes:
Domestic ............................................ $
Foreign ...............................................
Total ....................................................... $
49.2 $
15.9
65.1 $
87.0 $ 120.0
28.2
24.0
115.2 $ 144.0
Income tax expense:
Current provision
Federal ................................................ $
State ....................................................
Foreign ...............................................
Total current provision...........................
Deferred provision:
Federal ................................................
State ....................................................
Foreign ...............................................
Total deferred provision.........................
Income tax expense ................................ $
35.3 $
3.6
1.7
40.6
(18.1)
(1.3)
(2.9)
(22.3)
18.3 $
40.2 $
3.1
7.4
50.7
(12.2)
(1.0)
17.1
3.9
54.6 $
45.0
1.8
7.0
53.8
(9.9)
1.1
(6.0)
(14.8)
39.0
Differences between income tax expense reported for financial reporting purposes and that computed based upon the
application of the statutory U.S. Federal tax rate to the reported income before income taxes were as follows:
2015
% of
Pretax
Income
Amount
Years Ended September 30
2014
% of
Pretax
Income
Amount
Amount
2013
% of
Pretax
Income
Federal income tax (a) ........................ $
State income tax (b) ............................
Foreign income tax (c) ........................
Application of federal tax credits ........
Adjustment of estimated income tax
accruals ...............................................
Valuation of tax attributes...................
Domestic manufacturer's deduction ....
Capitalized transaction costs ...............
Other, net ............................................
Income tax expense ............................ $
(a)
At statutory rate.
(b) Net of Federal benefit.
(c)
Federal tax rate differential.
22.8
1.6
(10.2)
(2.2)
(1.6)
4.0
(1.5)
2.5
2.9
18.3
35.0 $
2.4
(15.7)
(3.4)
(2.4)
6.2
(2.3)
3.8
4.5
28.1 $
73
40.3
2.0
(7.7)
(0.6)
(0.6)
21.3
(1.8)
0.3
1.4
54.6
35.0 $
1.7
(6.7)
(0.5)
(0.5)
18.5
(1.5)
0.2
1.2
47.4 $
50.4
2.5
(5.7)
(3.5)
(1.5)
0.6
(2.2)
-
(1.6)
39.0
35.0
1.7
(4.0)
(2.4)
(1.0)
0.4
(1.5)
-
(1.1)
27.1
The tax effect of temporary differences that gave rise to the deferred tax balance sheet accounts were as follows:
Years Ended September 30
2015
2014
Deferred tax assets:
Employee benefit accruals ....................... $
Inventory ..................................................
Reserve for bad debts ...............................
Net operating loss carryforwards .............
Tax credit carryforwards ..........................
Other, net ..................................................
Less: Valuation allowance ......................
Total deferred tax assets .......................
Deferred tax liabilities:
Depreciation .............................................
Amortization ............................................
Other, net ..................................................
Total deferred tax liabilities .....................
Deferred tax asset (liability) - net ................ $
106.4 $
6.2
8.4
45.8
11.7
39.6
218.1
(40.7)
177.4
(35.3)
(409.1)
(16.4)
(460.8)
(283.4) $
49.3
13.9
10.0
40.3
2.5
25.7
141.7
(28.3)
113.4
(13.9)
(62.8)
(4.9)
(81.6)
31.8
At September 30, 2015, we had $43.2 million of deferred tax assets related to operating loss carryforwards in foreign
jurisdictions that are subject to various carryforward periods with the majority eligible to be carried forward for an unlimited
period. Additionally, we had $2.2 million of deferred tax assets related to federal net operating loss carryforwards which will
expire between 2019 and 2033 and $0.4 million of deferred tax assets related to state net operating loss carryforwards, which
expire between 2016 and 2033. We had $11.7 million of deferred tax assets related to state tax credits, some of which will be
carried forward for an unlimited period and some of which will expire between 2016 and 2026.
The gross deferred tax assets as of September 30, 2015 were reduced by valuation allowances of $40.7 million 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. In evaluating whether it is more likely than not that we would
recover our deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning
strategies were considered. We believe that our estimates for the valuation allowances recorded against deferred tax assets are
appropriate based on current facts and circumstances.
We operate under tax holidays in both Singapore and Puerto Rico. The Singapore tax holiday is effective through 2016 with
potential to extend through 2018 while the Puerto Rico tax holiday is effective through 2025. Both incentives are conditional
on meeting certain employment and/or investment thresholds. The impact of these tax holidays decreased foreign taxes by
$4.3 million in fiscal 2015, $4.0 million for fiscal 2014 and $2.9 million for fiscal 2013. The benefit of the tax holidays on
net income per share (diluted) was $0.07, $0.07 and $0.05 for fiscal 2015, 2014 and 2013, respectively.
With respect to the undistributed earnings of Welch Allyn’s foreign subsidiaries, given the timing of the acquisition, we are
still evaluating the investment of such foreign earnings. As for the undistributed earnings of Hill-Rom’s foreign subsidiaries,
including Welch Allyn for the post-acquisition period, foreign earnings are considered to be indefinitely reinvested for use in
meeting working capital, business expansion and development, and other general needs. Accordingly, no provision has been
made for deferred taxes related to the future repatriation of such earnings. If such earnings were repatriated, additional tax
expense may result. It is not practicable to estimate the amount of tax that may be payable upon any such distribution.
We file a consolidated federal income tax return as well as multiple state, local and foreign jurisdiction tax returns. In the
normal course of business, we are subject to examination by the taxing authorities in each of the jurisdictions where we file
tax returns. During fiscal 2015, the Internal Revenue Service (“IRS”) concluded its audit for fiscal year 2013 and initiated its
post-filing examination of the fiscal 2014 consolidated federal return. We continue to participate in the IRS Compliance
Assurance Program (“CAP”) for fiscal year 2015 and have submitted the application to remain in the CAP for fiscal years
2016 and 2017. The CAP provides the opportunity for the IRS to review certain tax matters prior to us filing our tax return
for the year, thereby reducing the time it takes to complete the post-filing examination. We are also subject to state and local
or foreign income tax examinations by taxing authorities for years back to fiscal 2009.
74
Welch Allyn also filed a consolidated federal income tax return as well as multiple state, local and foreign jurisdiction tax
returns. In the normal course of business, Welch Allyn is subject to examination by the taxing authorities in each of the
jurisdictions where it files tax returns. During calendar year 2015, the Internal Revenue Service (“IRS”) concluded its post-
filing audit for calendar year 2013 (subject to certain exceptions), and initiated its post-filing examination of the calendar year
2014 consolidated federal return. Welch Allyn continues to participate in the IRS Compliance Assurance Program (“CAP”)
for 2015 to include the period up through the date of the acquisition by Hill-Rom on September 8, 2015. Thereafter, Welch
Allyn will be integrated into Hill-Rom’s CAP going forward. Welch Allyn has received Partial Acceptance Letters from the
IRS under CAP for calendar years 2011 through 2014 primarily for an issue that’s before Competent Authority.
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
additional taxes, 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
approximately $0.5 to $1.5 million in the next twelve months, excluding interest.
The total amount of gross unrecognized tax benefits as of September 30, 2015, 2014 and 2013 was $5.8 million, $4.1 million
and $4.6 million, which includes $3.3 million, $2.7 million and $3.9 million that, if recognized, would impact the effective
tax rate in future periods. The remaining amount relates to items which, if recognized, would not impact our effective tax
rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Years Ended September 30
2014
2013
2015
Balance at October 1 ...................................................... $
Increases in tax position of prior years ..........................
Decreases in tax position of prior years .........................
Increases in tax positions related to the current year .....
Settlements with taxing authorities ................................
Lapse of applicable statute of limitations ......................
Increase in positions due to acquisitions ........................
Foreign currency adjustments ........................................
Total change ..................................................................
Balance at September 30 ................................................ $
4.1 $
0.4
(1.3)
-
(1.2)
(1.3)
5.5
(0.4)
1.7
5.8 $
4.6 $
2.1
(0.9)
-
(0.1)
(1.5)
-
(0.1)
(0.5)
4.1 $
9.8
-
(0.5)
0.1
(3.2)
(1.7)
-
0.1
(5.2)
4.6
We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Accrued interest and penalties, which are not presented in the reconciliation table above, were $3.0 million, $0.4 million and
$0.6 million at September 30, 2015, 2014 and 2013. Related to interest and penalties, we recognized an income tax benefit
(expense) of $0.2 million in 2015, $0.2 million in 2014 and $0.1 million in 2013.
NOTE 10. EARNINGS PER COMMON SHARE
Basic earnings per share is calculated based upon the weighted average number of outstanding common shares for the period,
plus the effect of deferred vested shares. Diluted earnings per share is calculated consistent with the basic earnings per share
calculation plus the effect of dilutive unissued common shares related to stock-based employee compensation programs. For
all years presented, anti-dilutive stock options were excluded from the calculation of dilutive earnings per share. Excluded
shares were 0.2 million, 0.3 million and 1.4 million for fiscal years 2015, 2014 and 2013. Cumulative treasury stock acquired,
less cumulative shares reissued, have been excluded in determining the average number of shares outstanding.
75
Earnings per share is calculated as follows:
Years Ended September 30
2014
2013
2015
Net income attributable to common shareholders ................................................. $
47.7 $
60.6 $
105.0
Average shares outstanding - Basic (thousands) ...................................................
Add potential effect of exercise of stock options
57,249
57,555
59,910
and other unvested equity awards (thousands) .......................................
Average shares outstanding - Diluted (thousands)................................................
1,287
58,536
968
58,523
340
60,250
Net income attributable to common shareholders per common share - Basic ...... $
0.83 $
1.05 $
1.75
Net income attributable to common shareholders per common share - Diluted ... $
0.82 $
1.04 $
1.74
NOTE 11. SEGMENT REPORTING
We disclose segment information that is consistent with the way in which management operates and views the business.
Beginning in fiscal 2014, we changed our definition of divisional income within our internal reporting to management to
exclude the impacts of acquisition-related intangible asset amortization. All segment information included below has been
updated to reflect this change.
Our operating structure consists of the following three reporting segments:
North America - sells and rents our patient support and near-patient technologies and services, as well as our health
information technology solutions, in the U.S. and Canada.
Surgical and Respiratory Care - sells and rents our surgical and respiratory care products globally.
International - sells and rents similar products as our North America segment in regions outside of the U.S. and
Canada.
Our performance under each reportable segment is measured on a divisional income basis before non-allocated operating and
administrative costs, impairment of other intangibles, litigation, special charges, acquisition and integration costs,
acquisition-related intangible asset amortization, and other unusual events. Divisional income generally represents the
division’s gross profit less its direct operating costs along with an allocation of manufacturing and distribution costs, research
and development and certain corporate functional expenses.
Non-allocated operating and administrative costs include functional expenses that support the entire organization such as
administration, finance, legal and human resources, expenses associated with strategic developments, acquisition-related
intangible asset amortization, and other events that are not indicative of operating trends. We exclude such amounts from
divisional income to allow management to evaluate and understand divisional operating trends without the effects of such
items.
76
In September 2015, we acquired Welch Allyn Holdings, Inc. (“Welch Allyn”). The results of Welch Allyn’s operations for
the 22 days under our ownership are reported as a reconciling item in our segment disclosures for the year ended
September 30, 2015.
Years Ended September 30
2014
2013
2015
Revenue:
North America ................................................................................................... $
Surgical and Respiratory Care ...........................................................................
International ......................................................................................................
Welch Allyn1 .....................................................................................................
Total revenue ............................................................................................... $
1,002.0 $
506.6
429.4
50.2
1,988.2 $
888.9 $
301.6
495.6
-
1,686.1 $
958.3
245.8
512.1
-
1,716.2
Divisional income:
North America ................................................................................................... $
Surgical and Respiratory Care ...........................................................................
International ......................................................................................................
204.1 $
80.5
12.8
165.0 $
68.6
24.9
Other:
Non-allocated operating costs, administrative costs, and other .........................
Special charges ..................................................................................................
Operating profit ...........................................................................................
Interest expense .................................................................................................
Investment income and other, net......................................................................
Income before income taxes ........................................................................ $
173.1
41.2
83.1
(18.4)
0.4
65.1 $
98.8
37.1
122.6
(9.8)
2.4
115.2 $
201.7
56.8
33.5
131.4
5.7
154.9
(9.5)
(1.4)
144.0
1 Welch Allyn is not considered a separate reportable segment but is presented as a reconciling item to total consolidated
revenue.
Geographic Information
Geographic data for net revenue and long-lived assets (which consist mainly of property and equipment leased to others)
were as follows:
Years Ended September 30
2014
2013
2015
Net revenue to unaffiliated customers: (a)
United States .............................................................................................. $
Foreign .......................................................................................................
Total revenue ................................................................................................. $
Long-lived assets: (b) ....................................................................................
United States .............................................................................................. $
Foreign .......................................................................................................
Total long-lived assets ................................................................................... $
1,273.0 $
715.2
1,988.2 $
1,070.8 $
615.3
1,686.1 $
1,116.4
599.8
1,716.2
263.9 $
114.5
378.4 $
151.7 $
109.8
261.5 $
158.0
76.3
234.3
(a) Net revenue is attributed to geographic areas based on the location of the customer.
(b)
Includes property and equipment leased to others.
77
NOTE 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents selected consolidated financial data by quarter for each of the last two fiscal years.
2015 Quarter Ended
December 31,
2014
March 31,
2015
June 30,
2015
September 30,
2015
Net revenue ................................................................................... $
Gross profit ................................................................................... $
Net income (loss) attributable to common shareholders ............... $
Basic net income (loss) attributable to common
shareholders per common share ............................................... $
Diluted net income (loss) attributable to common
shareholders per common share ............................................... $
465.0 $
199.9 $
12.1 $
474.8 $
214.2 $
26.1 $
474.5 $
209.5 $
19.1 $
0.21 $
0.46 $
0.34 $
0.21 $
0.45 $
0.33 $
573.9
256.7
(9.6)
(0.16)
(0.16)
2014 Quarter Ended
December 31,
2013
March 31,
2014
June 30,
2014
September 30,
2014
Net revenue ................................................................................... $
Gross profit ................................................................................... $
Net income (loss) attributable to common shareholders ............... $
Basic net income (loss) attributable to common
shareholders per common share ............................................... $
Diluted net income (loss) attributable to common
shareholders per common share ............................................... $
393.4 $
176.8 $
13.2 $
415.3 $
202.7 $
(3.3) $
397.6 $
187.1 $
26.1 $
0.23 $
(0.06) $
0.46 $
0.22 $
(0.06) $
0.45 $
479.8
213.3
24.6
0.43
0.42
NOTE 13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
Rental expense for fiscal years 2015, 2014 and 2013 was $25.2 million, $24.7 million and $21.5 million. The table below
indicates the minimum annual rental commitments (excluding renewable periods) aggregating $73.8 million, for
manufacturing facilities, warehouse distribution centers, service centers and sales offices, under non-cancelable operating
leases.
2016 ................................................................ $
2017 ................................................................ $
2018 ................................................................ $
2019 ................................................................ $
2020 ................................................................ $
2021 and beyond ............................................. $
Amount
28.2
18.4
12.1
6.3
3.2
5.6
Self Insurance
We are involved with various possible claims, including product and general liability, workers’ compensation, auto liability
and employment related matters. Such claims in the United States have deductibles and self-insured retentions ranging from
$25 thousand to $1.0 million per occurrence or per claim, depending upon the type of coverage and policy period.
International deductibles and self-insured retentions are lower. We are also generally self-insured up to certain stop-loss
limits for certain employee health benefits, including medical, drug and dental. Our policy is to estimate reserves based upon
a number of factors including known claims, estimated incurred but not reported claims and outside actuarial analysis, which
are based on historical information along with certain assumptions about future events. Such estimated reserves are classified
as Other Current Liabilities and Other Long-Term Liabilities within the Consolidated Balance Sheets.
78
Legal Proceedings
Universal Hospital Services, Inc. Litigation
On January 13, 2015, Universal Hospital Services, Inc. filed a complaint against us in the United States District Court for the
Western District of Texas. The plaintiff alleges, among other things, that we engaged in certain customer contracting
practices in violation of state and federal antitrust laws. The plaintiff also has asserted claims for tortious interference with
business relationships. The plaintiff seeks injunctive relief and money damages in an unspecified amount. We believe that the
allegations are without merit and intend to defend this matter vigorously.
Stryker Litigation
On April 4, 2011, we filed two separate actions against Stryker Corporation alleging infringement of certain Hill-Rom
patents covering proprietary communications networks, status information systems and powered wheels used in our beds or
stretchers. Both suits sought monetary damages and injunctions against Stryker for selling or distributing any beds, stretchers
or ancillary products that infringe on Hill-Rom’s patents. On August 14, 2012, we entered into a confidential favorable
settlement agreement with Stryker Corporation to resolve our claims about our powered wheel patents, and on March 26,
2015, we entered into a confidential favorable settlement agreement with Stryker Corporation to resolve our claims about our
status information systems. No trial date for the remaining claims covering proprietary communications networks has been
set, and accordingly we cannot, at this time, assess the likelihood of any potential outcome or damages or other relief.
General
We are subject to various other claims and contingencies arising out of the normal course of business, including those
relating to governmental investigations and proceedings, commercial transactions, product liability, employee related matters,
antitrust, safety, health, taxes, environmental and other matters. Litigation is subject to many uncertainties and the outcome
of individual litigated matters is not predictable with assurance. It is possible that some litigation matters for which reserves
have not been established could be decided unfavorably to us, and that any such unfavorable decisions could have a material
adverse effect on our financial condition, results of operations and cash flows.
79
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision and participation of our President and Chief Executive Officer and our Senior Vice
President and Chief Financial Officer (the “Certifying Officers”), has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of September 30, 2015. Our disclosure controls and procedures are designed to
ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms
and such information is accumulated and communicated to management, including our Certifying Officers and our Board of
Directors, as appropriate to allow timely decisions regarding required disclosure.
Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective as of
September 30, 2015.
Management’s Report on Internal Control Over Financial Reporting
The report of management’s assessment of the effectiveness of our internal control over financial reporting as of September
30, 2015 and the related report of our independent registered public accounting firm, are included under Part II, Item 8 of this
Form 10-K.
Changes in Internal Control Over Financial Reporting
We have excluded Welch Allyn from our assessment of internal control over financial reporting as of September 30, 2015,
because Welch Allyn was acquired by us in a purchase business combination in the fourth quarter of 2015. Welch Allyn is a
wholly-owned subsidiary whose total assets and total revenue represent 9 percent and 3 percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended September 30, 2015. We are currently in the process of
evaluating and integrating Welch Allyn’s historical internal control over financial reporting structure with ours. We expect to
complete this integration in fiscal 2016.
Other than the changes noted above, there have been no other changes to our internal controls over financial reporting.
Management’s report on our internal control over financial reporting is included under Item 8 above.
Item 9B. OTHER INFORMATION
None.
80
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC in
January 2016 relating to our 2016 Annual Meeting of Shareholders (the “2016 Proxy Statement”), under the headings
“Election of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Corporate Governance.”
Information relating to our executive officers is included in this report in Part I, Item 1 under the caption “Executive Officers
of the Registrant.”
Item 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the 2016 Proxy Statement, under the heading
“Executive Compensation.”
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the 2016 Proxy Statement, under the headings
“Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated herein by reference to the 2016 Proxy Statement, where such
information is included under the heading “Corporate Governance.”
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the 2016 Proxy Statement, where such
information is included under the heading “Proposals Requiring Your Vote - Ratification of Appointment of Independent
Registered Public Accounting Firm.”
81
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
The following documents have been filed as a part of this Form 10-K or, where noted, incorporated by reference:
(1)
Financial Statements
The financial statements of the Company and its consolidated subsidiaries are listed under Part II, Item 8 on the
Index to Consolidated Financial Statements on page 41.
(2)
Financial Statement Schedules
The financial statement schedule filed in response to Part II, Item 8 and Part IV, Item 15(c) of Form 10-K is
listed under Part II, Item 8 on the Index to Consolidated Financial Statements on page 41.
(3)
Exhibits (See changes to Exhibit Index below):
“The Exhibit Index, which follows the signature page to this Form 10-K and is hereby incorporated herein by
reference, sets forth a list of those exhibits filed herewith, and includes and identifies management contracts or
compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601 (b)(10)(iii) of
Regulation S-K.”
The agreements included as exhibits to this Form 10-K are intended to provide information regarding their terms
and not to provide any other factual or disclosure information about us or the other parties to the agreements. The
agreements may contain representations and warranties by the parties to the agreements, including us, solely for
the benefit of the other parties to the applicable agreement. Such representation and warranties:
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating
the risk to one of the parties if those statements prove to be inaccurate;
may have been qualified by disclosures that were made to the other party in connection with the
negotiation of the applicable agreement, which disclosures are not necessarily reflected in the
agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to
certain investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be
specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they
were made or at any other time.
82
HILL-ROM HOLDINGS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
For The Fiscal Years Ended September 30, 2015, 2014 and 2013
SCHEDULE II
DESCRIPTION
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND
OF PERIOD EXPENSES
OTHER
ACCOUNTS
DEDUCTIONS
NET OF
RECOVERIES
BALANCE
AT END
OF PERIOD
(Dollars in millions)
ADDITIONS
Reserves deducted from assets to which they apply:
Allowance for possible losses and sales returns -
accounts receivable:
Period Ended:
September 30, 2015 ........................................ $
September 30, 2014 ......................................... $
September 30, 2013 ......................................... $
Allowance for inventory valuation:
Period Ended:
September 30, 2015 ........................................ $
September 30, 2014 ......................................... $
September 30, 2013 ......................................... $
Valuation allowance against deferred tax assets:
Period Ended:
September 30, 2015 ........................................ $
September 30, 2014 ......................................... $
September 30, 2013 ......................................... $
31.4 $
30.1 $
38.5 $
42.9 $
22.0 $
22.0 $
28.3 $
8.9 $
8.6 $
1.8 $
1.5 $
2.7 $
0.9 $
4.0 $
1.8 $
0.1 (a) $
8.6 (a) $
(0.1) (a) $
(7.3 ) (b) $
(8.8 ) (b) $
(11.0 ) (b) $
5.7 (c) $
19.8 (c) $
-
$
(4.0 ) (d) $
(2.9 ) (d) $
(1.8 ) (d) $
4.0 $
21.3 $
0.6 $
11.1 (c) $
-
-
$
$
(2.7 ) (e) $
(1.9 ) (e) $
(0.3 ) (e) $
26.0
31.4
30.1
45.5
42.9
22.0
40.7
28.3
8.9
(a) Reduction of gross revenue for uncollectible health care rental reimbursements, cash discounts and other adjustments in
determining net revenue. Also includes the effect of acquired businesses, if any.
(b) Generally reflects the write-off of specific receivables against recorded reserves.
(c) Generally reflects the effect of acquired businesses, if any.
(d) Generally reflects the write-off of specific inventory against recorded reserves.
(e) Primarily reflects write-offs of deferred tax assets against the valuation allowance and other movement of the valuation
allowance offset by an opposing change in deferred tax assets.
83
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
HILL-ROM HOLDINGS, INC.
By: /s/ John J. Greisch
John J. Greisch
President and Chief Executive Officer
Date: November 19, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ Rolf A. Classon
Rolf A. Classon
Chairman of the Board
/s/ John J. Greisch
John J. Greisch
President and Chief Executive Officer and Director
(Principal Executive Officer)
/s/ James R. Giertz
James R. Giertz
Director
/s/ Charles E. Golden
Charles E. Golden
Director
/s/ Steven J. Strobel
Steven J. Strobel
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ William H. Kucheman
William H. Kucheman
Director
/s/ Richard G. Keller
Richard G. Keller
Vice President — Controller and
Chief Accounting Officer
(Principal Accounting Officer)
/s/ William G. Dempsey.
William G. Dempsey
Director
Date: November 19, 2015
/s/ Ronald A. Malone
Ronald A. Malone
Director
/s/ Eduardo R. Menascé
Eduardo R. Menascé
Director
Stacy Enxing Seng
Director
84
HILL-ROM HOLDINGS, INC.
INDEX TO EXHIBITS
Management contracts and compensatory plans or arrangements are designated with “*”.
2.1
2.2
3.1
3.2
4.1
4.2
Agreement and Plan of Merger dated June 16, 2015 by and among Hill-Rom Holdings, Inc., Empire Merger Sub
Corp., and Welch Allyn Holdings, Inc. (Incorporated herein by reference to Exhibit 2.1 filed with the Form 8-K
dated June 17, 2015)
Share Purchase and Transfer Agreement dated as of June 13, 2014 by and among TRUMPF International
Beteiligungs-GmbH, Hill-Rom Holdings Netherlands B.V., HR Europe B.V. and Hill-Rom Holdings, Inc.
(Incorporated herein by reference to Exhibit 1.1 filed with Form 8-K dated June 16, 2014)
Restated and Amended Articles of Incorporation of Hill-Rom Holdings, Inc., as currently in effect (Incorporated
herein by reference to Exhibit 3.1 filed with Form 8-K dated March 10, 2010)
Amended and Restated Code of By-Laws of Hill-Rom Holdings, Inc., as currently in effect (Incorporated herein by
reference to Exhibit 3.2 filed with Form 8-K dated March 10, 2010)
Indenture dated as of December 1, 1991, between Hill-Rom Holdings, Inc. and Union Bank, N.A. (as successor to
LaSalle Bank National Association and Harris Trust and Savings Bank) as Trustee (Incorporated herein by
reference to Exhibit (4) (a) to Registration Statement on Form S-3, Registration No. 33-44086)
Indenture dated as of September 1, 2015, between Hill-Rom Holdings, Inc. and MUFG Union Bank, N.A., as
Trustee (Incorporated herein by reference to Exhibit 10.1 to the Form 8-K dated September 8, 2015)
*10.1 Hill-Rom Holdings, Inc. Amended and Restated Short Term Incentive Compensation Program (Incorporated herein
by reference to Exhibit 10.1 filed with Form 10-K dated November 24, 2009)
*10.2
Form of Director Indemnity Agreement (Incorporated herein by reference to Exhibit 10.6 filed with Form 10-K
dated December 23, 2003)
*10.3
Form of Indemnity Agreement between Hill-Rom Holdings, Inc. and certain executive officers (Incorporated
herein by reference to Exhibit 10.6 filed with Form 10-K dated November 16, 2011)
*10.4 Hill-Rom Holdings, Inc. Board of Directors’ Deferred Compensation Plan (Incorporated herein by reference to
Exhibit 10.10 filed with Form 10-Q dated July 13, 2001)
*10.5 Hill-Rom Holdings, Inc. Director Phantom Stock Plan and form of award (Incorporated herein by reference to
Exhibit 10.11 filed with Form 10-Q dated July 13, 2001)
*10.6
Form of Non-Qualified Stock Option Agreement under Amended and Restated Hill-Rom Holdings, Inc. Stock
Incentive Plan (Incorporated herein by reference to Exhibit 10.11 filed with Form 10-K dated November 16, 2011)
*10.7
Form of Non-Qualified Stock Option Agreement (CEO version) under Amended and Restated Hill-Rom Holdings,
Inc. Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.12 filed with Form 10-K dated November
16, 2011)
*10.8 Amended and Restated Hill-Rom Holdings, Inc. Stock Incentive Plan, as currently in effect (Incorporated herein by
reference to Exhibit 10.30 filed with Form 10-K dated November 24, 2009)
*10.9
Employment Agreement dated as of March 31, 2008 between Hill-Rom Company, Inc. and Richard G. Keller
(Incorporated herein by reference to Exhibit 10.12 filed with Form 10-Q dated May 14, 2008)
*10.10 Hill-Rom Holdings, Inc. Employee Stock Purchase Plan (Incorporated by reference to Appendix I to the Company’s
definitive Proxy Statement on Schedule 14A dated January 7, 2009)
85
*10.11 Employment Agreement dated January 6, 2010 between Hill-Rom Holdings, Inc. and John J. Greisch (Incorporated
herein by reference to Exhibit 10.1 filed with Form 8-K dated January 7, 2010)
*10.12 Employment Agreement between Hill-Rom Holdings, Inc. and Susan R. Lichtenstein dated May 10, 2010
(Incorporated herein by reference to Exhibit 10.7 filed with Form 10-Q dated May 6, 2010)
*10.13 Form of Change in Control Agreement between Hill-Rom Holdings, Inc. and certain of its officers, including
Named Executive Officers (other than the CEO) (Incorporated by reference to Exhibit 10.58 filed with the
Company’s Form 10-K dated November 17, 2010)
*10.14 Amended Change in Control Agreement between Hill-Rom Holdings, Inc. and John J. Greisch dated September 30,
2010 (Incorporated by reference to Exhibit 10.59 filed with the Company’s Form 10-K dated November 17, 2010)
*10.15 2014 Non-Employee Director Compensation Policy
*10.16 Form of Restricted Stock Unit Agreement under Amended and Restated Hill-Rom Holdings, Inc. Stock Incentive
Plan (Incorporated by reference to Exhibit 10.63 filed with the Company’s Form 10-K dated November 17, 2010)
*10.17 Form of Restricted Stock Unit Agreement (CEO version) under Amended and Restated Hill-Rom Holdings, Inc.
Stock Incentive Plan (Incorporated by reference to Exhibit 10.65 filed with the Company’s Form 10-K dated
November 17, 2010)
*10.18 FY 2011 Form of Performance Based Stock Award under the Stock Incentive Plan (Incorporated by reference to
Exhibit 10.61 filed with the Company’s Form 10-K dated November 16, 2011)
*10.19 FY 2011 Form of Performance Based Stock Award under the Stock Incentive Plan (CEO version) (Incorporated by
reference to Exhibit 10.62 filed with the Company’s Form 10-K dated November 16, 2011)
*10.20 Hill-Rom Holdings, Inc. Short-Term Incentive Plan (Incorporated by reference to Appendix 1 to the Hill-Rom
Holdings, Inc. Definitive Proxy Statement on Schedule 14A dated January 18, 2011)
*10.21 Hill-Rom Holdings, Inc. Amended and Restated Supplemental Executive Retirement Plan (Incorporated by
reference to Exhibit 10.69 filed with the Company’s Form 10-K dated November 16, 2011)
*10.22 Employment Agreement between Hill-Rom Holdings, Inc. and Alton Shader, dated July 11, 2011 (Incorporated by
reference to Exhibit 10.2 filed with the Company’s Form 10-Q dated July 28, 2011)
*10.23 Employment Agreement between Hill-Rom Holdings, Inc. and Andreas Frank, dated October 3, 2011 (Incorporated
by reference to Exhibit 10.72 filed with the Company’s Form 10-K dated November 16, 2011)
*10.24 Employment Agreement between Hill-Rom Holdings, Inc. and Carlyn Solomon, dated October 3, 2014
(Incorporated by reference to Exhibit 10.1 filed with the Company’s Form 8-K dated October 9, 2014)
*10.25 Employment Agreement between Hill-Rom Holdings, Inc. and Steven Strobel, dated October 23, 2014
(Incorporated by reference to Exhibit 10.1 filed with the Company’s Form 8-K dated October 27, 2014)
10.26
Credit Agreement dated as of September 8, 2015 among Hill-Rom Holdings, Inc., the lenders named therein, and
JPMorgan Chase Bank N.A. as Term Loan A agent for the lenders and Goldman Sachs Bank USA as Term Loan B
agent for the lenders (Incorporated herein by reference to Exhibit 10.1 to the Form 8-K dated September 8, 2015)
*10.27 Form of Limited Recapture Agreement between Hill-Rom Holdings, Inc. and certain of its officers, including
Named Executive Officers (Incorporated by reference to Exhibit 10.34 filed with the Company’s Form 10-K dated
November 20, 2013)
*10.28 Employment Agreement between Hill-Rom Holdings, Inc. and Carlos Alonso-Marum dated March 19, 2015
(Incorporated herein by reference to Exhibit 10.2 to the Form 10-Q dated August 7, 2015)
86
*10.29
Employment Agreement between Hill-Rom Holdings, Inc. and Kenneth Meyers dated September 23, 2015
*10.30
Employment Agreement between Hill-Rom Holdings, Inc. and Taylor Smith dated November 11, 2013
10.31
FY 2016 Non-Employee Director Compensation Policy
21
23
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
32.2
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Extension Labels Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
87
HILL-ROM HOLDINGS, INC.
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
All subsidiaries of the Company as of November 19, 2015 are wholly-owned Indiana corporations, unless otherwise noted.
Subsidiaries of Hill-Rom Holdings, Inc.
Hill-Rom, Inc.
Eagle Acquisition Sub B.V, a Netherlands corporation
Huntersville Insurance Company, Inc., a Utah corporation
Welch Allyn Holdings, Inc., a New York corporation
Subsidiaries of Hill-Rom, Inc.
Advanced Respiratory, Inc., a Minnesota corporation
Allen Medical Systems, Inc.
Hill-Rom Services, Inc.
Aspen Surgical Products Holding, Inc., a Delaware corporation
Trumpf Medical Systems, Inc.
Subsidiary of Allen Medical Systems, Inc.
AMATECH Corporation
Subsidiary of Aspen Surgical Products Holding, Inc.
Aspen Surgical Products, Inc., a Michigan corporation
Subsidiary of Aspen Surgical Products, Inc.
Aspen Surgical Puerto Rico Corp., a Puerto Rico corporation
Jointly owned subsidiary of Hill-Rom, Inc. and Advanced Respiratory, Inc.
Hill-Rom Company, Inc.
Subsidiaries of Hill-Rom Company, Inc.
Hill-Rom International, Inc.
MEDIQ/PRN Life Support Systems, LLC
Hill-Rom Logistics, LLC
Hill-Rom Company Real Estate Holdings, LLC, a Delaware Limited Liability Company
Subsidiary of Hill-Rom Services, Inc.
Hill-Rom Manufacturing, Inc.
Subsidiary of Hill-Rom Manufacturing, Inc.
Hill-Rom Finance Limited Partner, Inc.
Hill-Rom Manufacturing Real Estate Holdings, LLC, a Delaware Limited Liability Company
Subsidiaries of Hill-Rom International, Inc.
Hill-Rom Pty, Ltd, an Australia corporation
Hill-Rom Asia Limited, a Hong Kong corporation
Hill-Rom Japan KK, a Japan corporation
Jointly owned subsidiary of Hill-Rom Pty, Ltd and Trumpf Medizin Systeme GmbH & Co KG
Trumpf Med (Aust) Pty Limited, an Australia corporation
Subsidiaries of Hill-Rom Asia Limited
Hill-Rom Business Services Co., Ltd, a China corporation
Hill-Rom Shanghai Ltd., a China corporation
Jointly owned subsidiary of Hill-Rom Finance Limited Partner, Inc., Hill-Rom, Inc. and Aspen Surgical Products, Inc.
Hill-Rom EU C.V., a Netherlands partnership
Subsidiary of Hill-Rom EU C.V
Hill-Rom (Gibraltar) General Partner Limited, a Gibraltar Corporation
Subsidiary of Hill-Rom (Gibraltar) General Partner Limited
Hill-Rom Holding (Gibraltar) Limited, a Gibraltar Corporation
Jointly owned subsidiary of Hill-Rom Holding (Gibraltar) Limited and Hill-Rom (Gibraltar) General Partner Limited
HR Finance C.V., a Netherlands partnership
Subsidiary of Hill-Rom Holding (Gibraltar) Limited
Hill-Rom International S.á r.l./B.V., a Luxembourg corporation
Subsidiaries of HR Finance C.V.
HR Europe B.V. a Netherlands corporation
Hill-Rom Global Holdings, B.V., a Netherlands corporation
Hill-Rom Receivables, LLC, a Delaware limited liability company
Subsidiaries of Hill-Rom Global Holdings, B.V.
Hill-Rom Holdings Netherlands, B.V., a Netherlands corporation
Hill-Rom Singapore Holdings S.á r.l., a Luxembourg corporation
Jointly owned subsidiary of Hill-Rom Global Holdings B.V. and Hill-Rom International S.á r.l./B.V.
Hill-Rom SPRL, a Belgium corporation
Jointly owned subsidiary of Hill-Rom Holding Netherlands, B.V. and Hill-Rom Holding (Gibraltar) Limited
Hill-Rom HB, a Sweden partnership
Subsidiary of Hill-Rom Singapore Holdings S.á r.l.
Hill-Rom Services Pte, Ltd., a Singapore corporation
Subsidiary of Hill-Rom Services Pte, Ltd., a Singapore corporation
Hill-Rom Canada Respiratory, Ltd., a Canada corporation
Subsidiaries of Hill-Rom Holdings Netherlands, B.V.,
Hill-Rom UK (Holdings) Ltd., a United Kingdom corporation
Trumpf Medizin Systeme Beteiligungs GmbH, a Germany corporation
Subsidiary of Hill-Rom Holdings Netherlands BV and HR Europe BV
Trumpf Medizin Systeme GmbH & Co KG, a Germany partnership
Subsidiaries of Trumpf Medizin Systeme GmbH & Co KG
Trumpf Medical Systems Ltd. (UK), a United Kingdom corporation
Trumpf Medical Systems (Taicang) Co., Limited, a China corporation
Subsidiaries of Hill-Rom UK (Holdings) Ltd.
Aspen Medical Europe Limited (UK), a United Kingdom corporation
Hill-Rom Ltd., a United Kingdom corporation
Subsidiary of Hill-Rom Ltd.
Hill-Rom (UK), Ltd., a United Kingdom corporation
Subsidiaries of Hill-Rom International S.á r.l./B.V.
Hill-Rom B.V., a Netherlands corporation
Hill-Rom S.A., a Switzerland corporation
Hill-Rom Austria GmbH, an Austria corporation
Hill-Rom Sociedade Unipessoal, LDA a Portugal corporation
Hill-Rom Poland sp. z o.o., a Poland corporation
Hill-Rom Canada, Ltd., a Canada Corporation
Hill-Rom SARL, a France corporation
Jointly owned subsidiaries of Hill-Rom International S.á r.l./B.V. and Hill-Rom Services, Inc.
Hill-Rom India Private Ltd., an India corporation
Hill-Rom Rus, LLC, a Russia Limited Liability Company
Hill-Rom de Mexico S de RL de CV, a Mexico corporation
Hill-Rom Servicios S de RL de CV, a Mexico corporation
Hill-Rom Comercializador a de Mexico S de RL de CV, a Mexico corporation
Hill-Rom Importacao e Comercio de Equipamentos Medicos Ltda, a Brazil corporation
Hill-Rom Turkey Medikal Urunler Dagitim ve Ticaret Limited Sirketi, a Turkey corporation
Subsidiary of Hill-Rom Austria GmbH
Trumpf Medizinsystems Osterreich GmbH, an Austria corporation
Subsidiaries of Hill-Rom SARL
Hill-Rom Industries SA, a France corporation
Hill-Rom, S.p.A, an Italy corporation
Hill-Rom SAS, a France corporation
Hill-Rom Iberia S.L., a Spain corporation
Hill-Rom AB, a Sweden corporation
Trumpf Systemes Medicaux SAS, a France corporation
Jointly owned subsidiary of Hill-Rom SARL and Hill-Rom SAS
Hill-Rom sro, a Czech Republic corporation
Subsidiaries of Hill-Rom AB
Liko R&D AB, a Sweden corporation
Liko AB, a Sweden corporation
Hill-Rom Norway, a Norway corporation
Subsidiary of Liko AB
Völker Verwaltung GmbH, a Germany corporation
Jointly owned subsidiary of Liko AB and Eagle Acquisition Sub B.V.
Völker Holdings GmbH & Co KG, a Germany partnership
Subsidiaries of Völker Holdings GmbH & Co KG
Völker GmbH, a Germany corporation
Hill-Rom GmbH, a Germany corporation
Subsidiary of Völker GmbH
Völker BVBA, a Belgium corporation
Subsidiaries of Welch Allyn Holdings, Inc.
Welch Allyn, Inc. a New York corporation
Welch Allyn ATR, LLC, a Delaware Limited Liability Company
Subsidiaries of Welch Allyn, Inc.
Welch Allyn International Ventures, Inc. a Delaware corporation
Welch Allyn Protocol, Inc., an Oregon corporation
Hubble Telemedical, Inc., a Delaware corporation
Welch Allyn International Holdings, Inc., a Delaware corporation
Welch Allyn Real Estate Holdings, LLC, a Delaware Limited Liability Company
Subsidiaries of Welch Allyn International Holdings, Inc.
Welch Allyn South Africa Pty, Ltd., a South Africa corporation
Welch Allyn UK Ltd., a United Kingdom corporation
Welch Allyn B.V., a Netherlands corporation
Welch Allyn France, Sarl, a France corporation
Welch Allyn Malaysia SDN, Bhd, a Malaysia corporation
Welch Allyn Italia S.R.L., an Italy corporation
Welch Allyn Singapore Pte, Ltd., a Singapore corporation
Welch Allyn Japan K.K., a Japan corporation
Welch Allyn GmbH, a German corporation
Welch Allyn CV Holdings, LLC, a Delaware Limited Liability Company
Subsidiaries of Welch Allyn International Ventures, Inc. and Welch Allyn International Holdings, Inc.
Welch Allyn Columbia Ltda, a Columbia corporation
Welch Allyn do Brasil Comercia de Equipmentos Medicos, Ltda, a Brazil corporation
Subsidiary of Welch Allyn CV Holdings, LLC and Welch Allyn International Holdings, Inc.
WA Holdings, C.V. a Netherlands partnership
Subsidiary of WA Holdings, C.V.
Welch Allyn Coop Holdings, LLC, a Delaware Limited Liability Company
Subsidiary of WA Holdings, C.V. and Welch Allyn Coop Holdings, LLC
Welch Allyn International Holdings Cooperatief, U.A. a Netherlands cooperative
Subsidiaries of Welch Allyn International Holdings Cooperatief, U.A.
Welch Allyn Canada Limited, a Canada corporation
Welch Allyn EME B.V. a Netherlands corporation
Welch Allyn Limited, an Ireland corporation
Welch Allyn Australia Pty Limited, an Australia corporation
Welch Allyn Maquila Holdings, LLC, a Delaware Limited Liability Company
Subsidiary of Welch Allyn Maquila Holdings, LLC and WA Holdings, C.V.
Welch Allyn de Mexico s. de R.L. de C.V., a Mexico corporation
Subsidiary of Welch Allyn Si Subsidiary of Welch Allyn International Holdings Cooperatief, U.A.
and Welch Allyn Coop Holdings, Limited Liability Company
Welch Allyn Productos Medicos s. de R.L. de C.V., a Mexico corporation
Subsidiary of Welch Allyn Singapore Pte, Ltd.
Welch Allyn Medical Equipment (Suzhou) Co. Ltd., a China corporation
Subsidiary of Welch Allyn B.V.
Welch Allyn Sverige, AB, a Sweden corporation
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-157341,
333-157338, 333-88354, 333-49669, and 333-88328) of Hill-Rom Holdings, Inc. of our report dated November 19, 2015,
relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial
reporting, which appears in this Form 10-K.
EXHIBIT 23
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
November 19, 2015
CERTIFICATIONS
EXHIBIT 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John J. Greisch, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Hill-Rom Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or
persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: November 19, 2015
/s/ John J. Greisch
John J. Greisch
President and Chief Executive Officer
CERTIFICATIONS
EXHIBIT 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Steven J. Strobel, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Hill-Rom Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or
persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: November 19, 2015
/s/ Steven J. Strobel
Steven J. Strobel
Senior Vice President and Chief Financial Officer
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of Hill-Rom Holdings, Inc. (the “Company”) for the year ended
September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John J.
Greisch, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ John J. Greisch
John J. Greisch
President and Chief Executive Officer
November 19, 2015
A signed original of this written statement required by Section 906 has been provided to Hill-Rom Holdings, Inc. and
will be retained by Hill-Rom Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff
upon request.
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.2
In connection with the Annual Report on Form 10-K of Hill-Rom Holdings, Inc. (the “Company”) for the year ended
September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven J.
Strobel, Senior Vice President and Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ Steven J. Strobel
Steven J. Strobel
Senior Vice President and Chief Financial Officer
November 19, 2015
A signed original of this written statement required by Section 906 has been provided to Hill-Rom Holdings, Inc. and
will be retained by Hill-Rom Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff
upon request.
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