UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, ~~2019~~2020

☐ 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

35-1160484

(State or other jurisdiction of ~~incorporation or organization)~~incorporation)

(I.R.S. Employer Identification No.)

130 E. Randolph St.

Suite 1000

~~Chicago~~

~~60601~~

Chicago, IL

60601

(Address of principal executive offices)

(Zip Code)

(~~312~~) ~~819-7200~~

(Registrant’s telephone number, including area ~~code)~~code: (312) 819-7200

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, without par value	HRC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ☑ No ☐



~~Yes~~	☑	No	☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, 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~~	Yes ☑ No ☐☑	No	☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, ~~(as defined~~” and "emerging growth company" in Rule12b-2 of the Exchange ~~Act)~~Act.

Large Accelerated Filer þ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



~~Yes~~	☐	No	☑

Yes ☐ No ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, without par value – ~~66,990,913~~66,362,046 shares as of ~~January 28, 2020.~~February 3, 2021.

Table of Contents

HILL-ROM HOLDINGS, INC.

INDEX TO FORM 10-Q


								Page
PART I - FINANCIAL INFORMATION

			~~Page~~
~~PART I - FINANCIAL INFORMATION~~


	Item 1 -			Financial Statements

						Condensed Consolidated Statements of Income (Unaudited)		4

						Condensed Consolidated Statements of Comprehensive Income (Unaudited)		5

						Condensed Consolidated Balance Sheets (Unaudited)		6

						Condensed Consolidated Statements of Cash Flows (Unaudited)		7

						Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)		8

						Note 1. Summary of Significant Accounting Policies		9

						Note 2. ~~Revenue from Contracts with Customers~~		11

		~~Note 3.~~ Supplementary Financial Statement Information	1213

						Note 4.3. Business Combinations		13

						Note 5.4. Financing Agreements		15

						Note 6.5. Derivative Instruments and Hedging Activity		1615

						Note ~~7. Leases~~		17

		~~Note 8.~~6. Retirement and Postretirement Benefit Plans	1817

						Note 9.7. Other Comprehensive Income (Loss)		1918

						Note ~~10.~~8. Special Charges		2120

						Note ~~11.~~9. Income Taxes		21

						Note ~~12.~~10. Earnings per Common Share		2221

						Note ~~13. Warranties and Guarantees~~11. Segment Reporting		2221

						Note ~~14. Segment Reporting~~12. Commitments and Contingencies		23

				~~Note 15. Commitments and Contingencies~~			25

	Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations			2624

			Item 3 -			Quantitative and Qualitative Disclosures About Market Risks		34

			Item 4 -			Controls and Procedures		34

PART II - OTHER INFORMATION

			Item 1 -			Legal Proceedings		35

			Item 1A -			Risk Factors		35

			Item 2 -			Unregistered Sales of Equity Securities and Use of Proceeds		35

			Item 6 -			Exhibits		36

SIGNATURES								37

Table of Contents

Forward-Looking Statements and Factors That May Affect Future Results

Certain statements in this Quarterly Report on Form 10-Q contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995, as amended, 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. For a more in-depth discussion of factors that could cause actual results to differ from forward-looking statements, see the discussions under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2019~~2020 (“~~2019~~2020 Form 10-K”) and subsequent filings with the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Our actual results also could be materially adversely impacted by the length and severity of the on-going coronavirus pandemic (“COVID-19,” “the pandemic,” or “the virus”), the effectiveness and availability of the related vaccine, and the long-term economic impacts on our business, results of operations, financial condition, and prospects. We assume no obligation to update or revise any forward-looking statements unless required by law.

Table of Contents

PART I – FINANCIAL INFORMATION


~~Item 1.~~	Item 1. FINANCIAL STATEMENTS

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(In millions, except per share data)

Quarter Ended December 31
2019 2018
Net Revenue
Product sales and service $ 614.3
$ 611.6
Rental revenue 70.7
71.9
Total net revenue 685.0

683.5

Cost of Net Revenue

Cost of goods sold 306.3
316.3
Rental expenses 37.0
37.2
Total cost of net revenue (excludes acquisition-related intangible asset amortization) 343.3

353.5

Research and development expenses 31.5
33.2
Selling and administrative expenses 196.8
192.3
Acquisition-related intangible asset amortization 26.7
25.7
Special charges 7.8
8.0
Operating Profit 78.9

70.8

Interest expense (19.4 ) (21.3 )
Loss on extinguishment of debt (15.6 ) —
Investment income (expense) and other, net (1.3 ) 0.1

Income Before Income Taxes 42.6

49.6

Income tax expense (benefit) 2.8
7.4

Net Income $ 39.8

$ 42.2

Net Income per Basic Common Share $ 0.60
$ 0.63

Net Income per Diluted Common Share $ 0.59
$ 0.62

Average Basic Common Shares Outstanding (in thousands) 66,792
67,053

Average Diluted Common Shares Outstanding (in thousands) 67,329
67,725


	Three Months Ended December 31
	2020		2019
Net Revenue
Product sales and service	$	652.5	$	614.3
Rental revenue	88.6		70.7
Total net revenue	741.1		685.0

Cost of Net Revenue
Cost of goods sold	324.2		306.3
Rental expenses	37.7		37.0
Total cost of net revenue (excludes acquisition-related intangible asset amortization)	361.9		343.3



Research and development expenses	34.8		31.5
Selling and administrative expenses	209.0		196.8
Acquisition-related intangible asset amortization	25.9		26.7
Special charges	27.1		7.8
Operating Profit	82.4		78.9

Interest expense	(17.8)		(19.4)
Loss on extinguishment of debt	0		(15.6)
Investment income (expense) and other, net	7.0		(1.3)

Income Before Income Taxes	71.6		42.6

Income tax expense	12.8		2.8





Net Income	$	58.8	$	39.8

Net Income per Basic Common Share	$	0.88	$	0.60

Net Income per Diluted Common Share	$	0.88	$	0.59

Average Basic Common Shares Outstanding (in thousands)	66,497		66,792

Average Diluted Common Shares Outstanding (in thousands)	66,925		67,329

See Notes to Condensed Consolidated Financial Statements (Unaudited)

Table of Contents

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In millions)


	Quarter Ended December 31							Three Months Ended December 31
	2019			2018				2020		2019
Net Income	$	39.8		$	42.2		Net Income	$	58.8	$	39.8

Other Comprehensive Income (Loss), net of tax:							Other Comprehensive Income (Loss), net of tax:

Derivative instruments designated as hedges	(2.6		)	(3.7		)	Derivative instruments designated as hedges	(4.9)		(2.6)
Foreign currency translation adjustment	23.1			(13.6		)	Foreign currency translation adjustment	41.3		23.1
Change in pension and postretirement defined benefit plans	0.7			0.4			Change in pension and postretirement defined benefit plans	0.5		0.7
Total Other Comprehensive Income (Loss), net of tax	21.2			(16.9		)
Total Other Comprehensive Income, net of tax							Total Other Comprehensive Income, net of tax	36.9		21.2


Total Comprehensive Income	$	61.0		$	25.3		Total Comprehensive Income	$	95.7	$	61.0

See Notes to Condensed Consolidated Financial Statements (Unaudited)

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In ~~millions)~~millions, except share amounts)

Authorized - 1,000,000 shares; none issued or outstanding

Authorized: 199,000,000

Issued: 88,457,634 shares as of December 31, 2019 and September 30, 2019; Outstanding: 66,956,366 as of December 31, 2019 and 66,625,011 as of September 30, 2019

Issued: 88,457,634 shares as of December 31, 2020 and September 30, 2020; Outstanding: 66,354,008 shares as of December 31, 2020 and 66,640,832 shares as of September 30, 2020

Total Shareholders’ Equity

Total Liabilities and Shareholders’ Equity

See Notes to Condensed Consolidated Financial Statements (Unaudited)

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

See Notes to Condensed Consolidated Financial Statements (Unaudited)

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(In millions, except share amounts)


																								Common Stock										Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholders’ Equity
	Common Stock			Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total Shareholders’ Equity				Shares Issued						Amount
	Shares Issued	Amount																					Additional Paid-in Capital										Retained Earnings				Treasury Stock
							Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock
Balance as of September 30, 2019	88,457,634	$	4.4					$	637.4					$					1,967.4							$	(182.5	)	$	(853.4	)	$									1,573.3
Balance as of September 30, 2020																					Balance as of September 30, 2020				88,457,634						$	4.4						$	667.0			$	2,132.2		$	(180.2)		$	(897.3)		$	1,726.1
Cumulative effect of ASC 2016-13 adoption, net of tax of $0.8																							Cumulative effect of ASC 2016-13 adoption, net of tax of $0.8	—						—				—					(2.2)				—			—			(2.2)
Net income	—	—			—					39.8				—				—				39.8		Net income		—						—				—				58.8				—			—			58.8
Other comprehensive income (loss), net of tax of $0.4	—	—		—				—					21.2					—				21.2
Dividends ($0.21 per common share)	—	—		—				(14.1		)		—				—				(14.1		)
Other comprehensive income (loss), net of tax of ($1.3)																							Other comprehensive income (loss), net of tax of ($1.3)	—						—				—				—				36.9			—			36.9
Dividends ($0.22 per common share)																							Dividends ($0.22 per common share)	—						—				0.1				(14.7)				—			—			(14.6)
Stock repurchases for stock award withholding obligations	—	—		—				—				—				(15.1		)		(15.1		)	Stock repurchases for stock award withholding obligations	—						—				—				—				—			(8.3)			(8.3)
Stock repurchases in the open market																							Stock repurchases in the open market	—						—				—				—				—			(47.4)			(47.4)
Stock compensation on equity-classified awards	—	—		8.3				—				—				—				8.3			Stock compensation on equity-classified awards	—						—				10.7				—				—			—			10.7
Stock option exercises	—	—		1.1				—				—				2.6				3.7			Stock option exercises	—						—				0.2				—				—			0.3			0.5
Vesting of stock awards	—	—		(15.4		)		—				—				15.4				—
Distribution of stock awards																							Distribution of stock awards	—						—				(11.0)				—				—			11.0			0
Shares issued under employee stock purchase plan	—	—		1.3				—				—				0.6				1.9			Shares issued under employee stock purchase plan	—						—				1.5				—				—			1.1			2.6
Balance as of December 31, 2019	88,457,634	$	4.4	$	632.7			$	1,993.1			$	(161.3	)		$	(849.9	)		$	1,619.0
Balance as of December 31, 2020																							Balance as of December 31, 2020	88,457,634						$	4.4			$	668.5			$	2,174.1			$	(143.3)		$	(940.6)		$	1,763.1

Common Stock Additional
Paid-in Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Treasury Stock
Total Shareholders’ Equity
Shares
Issued Amount

Balance as of September 30, 2018 88,457,634
$ 4.4
$ 602.9
$ 1,876.2
$ (113.0 ) $ (754.3 ) $ 1,616.2
Cumulative effect of ASC 606 adoption, net of tax of $4.8 —
—
—
(4.9 ) —
—
(4.9 )
Cumulative effect of ASU 2016-16 adoption, net of tax of $0.2 —
—
—
(5.6 ) —
(5.6 )
Reclassification due to ASU 2018-02 adoption —
—
—
5.4
(5.4 ) —
—
Net income —
—
—
42.2
—
—
42.2
Other comprehensive income (loss), net of tax of $0.1 —
—
—
—
(16.9 ) —
(16.9 )
Dividends ($0.20 per common share) —
—
0.1
(13.4 ) —
—
(13.3 )
Stock repurchases for stock award withholding obligations —
—
—
—
—
(3.5 ) (3.5 )
Stock repurchases in the open market —
—
—
—
—
(75.0 ) (75.0 )
Stock compensation on equity-classified awards —
—
5.8
—
—
—
5.8
Stock option exercises —
—
1.0
—
—
3.6
4.6
Vesting of stock awards —
—
(4.0 ) —
—
4.0
—
Shares issued under employee stock purchase plan —
—
1.1
—
—
0.8
1.9
Balance as of December 31, 2018 88,457,634
$ 4.4
$ 606.9
$ 1,899.9
$ (135.3 ) $ (824.4 ) $ 1,551.5


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders’ Equity
	Shares Issued	Amount

Balance as of September 30, 2019	88,457,634	$	4.4	$	637.4	$	1,967.4	$	(182.5)	$	(853.4)	$	1,573.3
Net income	—	—		—		39.8		—		—		39.8
Other comprehensive income (loss), net of tax of $0.4	—	—		—		—		21.2		—		21.2
Dividends ($0.21 per common share)	—	—		—		(14.1)		—		—		(14.1)
Stock repurchases for stock award withholding obligations	—	—		—		—		—		(15.1)		(15.1)
Stock compensation on equity-classified awards	—	—		8.3		—		—		—		8.3
Stock option exercises	—	—		1.1		—		—		2.6		3.7
Distribution of stock awards	—	—		(15.4)		—		—		15.4		0
Shares issued under employee stock purchase plan	—	—		1.3		—		—		0.6		1.9
Balance as of December 31, 2019	88,457,634	$	4.4	$	632.7	$	1,993.1	$	(161.3)	$	(849.9)	$	1,619.0

See Notes to Condensed Consolidated Financial Statements (Unaudited)

Hill-Rom Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in millions, except per share data)

Note 1. 1. Summary of Significant Accounting Policies

Nature of Operations

Hill-Rom Holdings, Inc. (the “Company,” “Hillrom,” “we,” “us,” or “our”) was incorporated on August 7, 1969, in the State of Indiana and is headquartered in Chicago, Illinois. We are a global medical technology leader whose approximately 10,000 employees have a single purpose: enhancing outcomes for patients and their caregivers by Advancing Connected Care™. Around the world, our innovations touch over 7 million patients each day. Our products and services help enable earlier diagnosis and treatment, optimize surgical efficiency and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. We make these outcomes possible through digital and connected ~~smart beds, patient lifts, patient assessment~~care solutions and ~~monitoring technologies, caregiver~~ collaboration tools, including smart bed systems, patient monitoring and diagnostic technologies, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.

Basis of Presentation and Principles of Consolidation

The unaudited Condensed Consolidated Financial Statements and related notes have been prepared in accordance with the rules and regulations of the SEC for interim unaudited Condensed Consolidated Financial Statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete Condensed Consolidated Financial Statements. In the opinion of management, all necessary adjustments, which consisted only of normal recurring items, have been included in the accompanying Condensed Consolidated Financial Statements to present fairly the results of the interim periods presented. Quarterly results are not necessarily indicative of annual results.

The unaudited Condensed Consolidated Financial Statements appearing in this Quarterly Report on Form 10-Q should be read in conjunction with the audited Condensed Consolidated Financial Statements and notes thereto included in Hillrom’s ~~latest~~ fiscal ~~2019~~2020 Form 10-K as filed with the SEC. The September 30, 2019 Condensed Consolidated Balance Sheet was derived from audited Consolidated Financial Statements but does not include all disclosures required by accounting principles generally accepted in the United States. In the opinion of management, the Condensed Consolidated Financial Statements herein include all adjustments necessary to state fairly the financial position, results of operations and cash flows for the interim periods presented. Quarterly results are not necessarily indicative of annual results.

The Condensed Consolidated Financial Statements include the accounts of Hillrom and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

The Company makes a number of significant estimates, assumptions, and judgments in the preparation of its financial statements. Additionally, the Company measures and classifies fair value measurements in accordance with the level hierarchy in conformity with ~~accounting principles generally accepted in the United States (“GAAP”).~~GAAP. As of December 31, ~~2019,~~2020, the Company's significant accounting policies and estimates and valuation techniques used to measure fair value have not changed ~~significantly~~ from September 30, ~~2019.~~2020. See Note ~~1 -~~1. Summary of Significant Accounting Policies within the ~~2019~~2020 Form 10-K for the fiscal year ended September 30, ~~2019~~2020 for further information.

~~Prior Period Reclassification~~Revenue Recognition — Sales and Rentals

~~In this Form 10-Q, we are presenting Acquisition-related intangible asset amortization~~Disaggregation of Revenue

The Company disaggregates revenue recognized from contracts with customers by geography and reportable segments consistent with the way in which management operates and views the business. See Note 11. Segment Reporting for the presentation of the Company's revenue disaggregation.

Contract liabilities represent deferred revenues that arise as a ~~separate line item~~result of cash received from customers at inception of contracts or where the timing of billing for services precedes satisfaction of our performance obligations. Such remaining performance obligations represent the portion of the contract price for which work has not been performed and are primarily related to our installation and service contracts. These contract liabilities are recorded in Deferred revenue and Other long-term liabilities. We expect to satisfy the majority of the remaining performance obligations and recognize revenue related to installation and service contracts within 12 to 24 months.

The nature of our products and services does not give rise to contract assets as we typically do not have instances where a right to payment for goods and services already transferred to a customer exists that is conditional on ~~our Condensed Consolidated Statements~~something other than the passage of Income for all periods presented. Acquisition-related intangible asset amortization was previously included in Selling and administrative expenses. Additionally, we will no longer present Gross Profit as a subtotal on our Statements of Income.time.

The following table ~~presents Acquisition-related intangible asset amortization and Selling and administrative expenses, excluding the Acquisition-related intangible asset amortization,~~summarizes contract liability activity for the ~~years~~three months ended ~~September 30, 2019, 2018~~December 31, 2020. The contract liability balance represents the transaction price allocated to the remaining performance obligations.


	Contract Liabilities
Balance as of October 1, 2020	$	138.1
New revenue deferrals	99.0
Revenue recognized upon satisfaction of performance obligations	(97.2)
Foreign currency translation adjustment	1.3
Balance as of December 31, 2020	$	141.2

We make certain products available to customers under short-term lease arrangements. Rental usage of these products is provided as an alternative to product sales and ~~2017,~~is short-term in nature. Products primarily include smart beds, including, but not limited to, bariatric, intensive care unit, maternity, and home care beds, as well as surfaces. These lease arrangements provide our customers with our products during periods of peak demand or often times for ~~each quarterly period of fiscal 2019.~~

~~Recently Adopted Accounting Standards~~

~~In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,~~ ~~Leases (Topic 842)~~ ~~and subsequently issued related amendments, collectively referred~~specialty purposes. Additionally, we provide wearable, non-invasive ventilation products to as “ASC 842”. The objective of this guidance is to increase transparency and comparability among organizations through recognizing leased assets, called right-of-use assets (“ROU”), and lease liabilities on the balance sheet and disclosing key information aboutpatients covered by monthly medical insurance reimbursements, which are considered month-to-month leasing arrangements. AsIncome arising from these lease arrangements where we are the lessor is recognized within Rental revenue. We accounted for these lease arrangements as operating leases.

Warranties and 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 ~~lessee,~~reserve with respect to these obligations at the ~~new standard requires us to recognize both~~time of product sale, with subsequent warranty claims recorded directly against the ROU assets and lease liabilities in the balance sheet for most leases, whereas under previous GAAP only finance lease liabilities (referred to as capital leases) were recognized in the balance sheet. In addition, for both lessees and lessors, the definition of a lease has been revised, which may result in changes to the classification of an arrangement as a lease. Under the new standard, an arrangement that conveys the right to control the use of an identified asset by obtaining substantially all of its economic benefits and directing how it is used is a lease, whereas the previous definition focused on the ability to control the usereserve. The amount of the ~~asset or to obtain its output. Quantitative and qualitative disclosures related to~~warranty reserve is determined based on historical trend experience for the ~~amount, timing and judgments of an entity’s accounting for leases~~covered products. For more significant warranty-related matters, which might require a field corrective action, separate reserves are established when such events are identified and the ~~related cash flows are expanded under~~cost of correction can be reasonably estimated.

In the ~~new standard. Disclosure requirements apply~~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 ~~both lessees~~service providers and ~~lessors, whereas previous disclosures related only~~indemnifications of our actions to ~~lessees. The recognition, measurement,~~business partners. These guarantees and ~~presentation of revenues, expenses and cash flows arising from a lease~~indemnifications have not ~~significantly changed from previous GAAP.~~

We adopted ASC 842 effective October 1, 2019 using the optional transition method approach. We elected the package of practical expedients, which applies to both lessees and lessors, to (1) not reassess whether existing contracts contain leases, (2) carryforward the existing lease classification and (3) not reassess initial direct costs associated with existing leases.

As a lessee, the adoption of the guidance on October 1, 2019 resulted in the recognition of ROU assets of $82.5 million and lease liabilities of $85.8 million, which all related to operating leases. The ROU assets were lower than the lease liabilities due to the derecognition of deferred rent balances of $3.3 million. As a lessor, our accounting was not impacted by the adoption of this guidance. We did not recognize any adjustment to the comparative period presented in the financial statements in accordance with our adoption method. The guidance did not havehistorically had a material impact on our ~~Condensed Consolidated Statements~~financial condition or results of ~~Income.~~

operations, nor do we expect them to although indemnifications associated with our actions generally have no dollar limitations.

~~See~~
~~Note 7~~ - ~~Leases~~

In conjunction with our acquisition and divestiture activities, we 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 ~~additional information on~~damages associated with breach of contract, inaccuracies in representations and warranties surviving the ~~impacts~~closing date and satisfaction of ~~ASC 842.~~

~~In January 2017,~~liabilities and commitments retained under the ~~FASB issued ASU 2017-04,~~ ~~Intangibles~~ – ~~Goodwill~~applicable contract. With respect to divestitures, we also routinely enter into non-competition agreements for varying periods of time. Guarantees and ~~Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard eliminates Step 2 of the goodwill impairment test~~indemnifications with respect to acquisition and requires a goodwill impairment to be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. ASU 2017-04 is effective for our first quarter of fiscal 2021 and requires a prospective transition method. Early adoption is permitted. We early adopted this standard in the first quarter of fiscal 2020 and the guidance did notdivestiture activities, if triggered, could have ~~a material~~an adverse impact on our Condensed Consolidated Financial Statements.

The following summarizes accrued product warranty activity for the three months ended December 31, 2020:

~~In October 2018,~~


	Three Months Ended December 31
	2020
Balance as of beginning of period	$	30.8
Provision for warranties in the period	5.4
Warranty claims in the period	(6.4)
Foreign currency translation adjustment	0.2
Balance as of end of period	$	30.0

Government Programs Related to COVID-19

On March 25, 2020, the ~~FASB issued ASU 2018-16,~~ ~~Derivatives~~U.S. government approved the Coronavirus Aid, Relief and ~~Hedging (Topic 815): Inclusion~~Economic Security (“CARES”) Act to provide economic stimulus to address the impact of the ~~Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes~~.pandemic. The ~~purpose~~governments in certain other non-U.S. countries have also approved legislation in their jurisdictions to address the impact of the ~~standard is to allow~~pandemic. We evaluated our eligibility and assessed the ~~use~~conditions and requirements of participation in many programs. As of December 31, 2020, we deferred the payment of the ~~OIS rate based on~~employer share of the ~~SOFR for hedge accounting purposes, which allows entities to designate changes~~U.S. Federal Insurance Contributions Act (“FICA”) tax payments totaling $21.2 million in accordance with the ~~fair values of fixed-rate financial assets or liabilities attributable to~~CARES Act within the OIS rate as the hedged risk. The amendment recognizes the OIS rate based on the SOFR as likely London Interbank Offered Rate (“LIBOR”) replacements and supports the marketplace transition by adding the new reference rate as a benchmark rate. The adoption of this ASU did not impact our financial statements as we have not yet utilized the OIS rate based on the SOFR for borrowings under our lending arrangements or as a benchmark rate for hedge accounting purposes.Consolidated Balance Sheet. We ~~will~~ continue to ~~monitor, assess and plan for~~evaluate what impact, if any, the ~~phase out~~CARES Act, or any similar legislation in other non-U.S. jurisdictions, may have on our results of ~~LIBOR.~~operations.

Recently ~~Issued~~Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial ~~Instruments~~ – ~~Credit~~Instruments-Credit Losses (Topic 326): – Measurement of Credit Losses of Financial Instruments and has subsequently issued related amendments, collectively referred to as~~“Topic~~ “Topic 326”. Topic 326 requires entities to measure credit losses for financial assets measured at amortized cost based on expected losses rather than incurred losses. ~~For available-for-sale debt securities with unrealized losses, entities will recognize~~This adoption primarily impacted our trade accounts receivables. Under the current expected credit ~~losses through~~loss model, we review receivables for collectability based on an ~~allowance~~assessment of various factors, including historical collection experience for ~~credit losses. Topic 326 is effective~~each receivable type and expectations of forward-looking loss estimates, and individual receivables are also reviewed for collectability based on unique circumstances. Any adjustments made to our historical loss experience reflect current differences in asset-specific risk characteristics, including, customer type (public or government entity versus private entity) and geographic location of the customer. We adopted ASU 2016-13 in the first quarter of fiscal 2021 using the modified retrospective transition method with a cumulative effect adjustment directly to retained earnings. The cumulative effect of applying Topic 326 were an increase to the allowance for credit losses of $3.0 million and ~~requires~~deferred tax assets of $0.8 million with a ~~prospective transition method. Early adoption is permitted. We are currently in~~corresponding decrease to the ~~process~~opening balance of ~~evaluating the impact~~Retained earnings of ~~adoption on our Condensed Consolidated Financial Statements.~~$2.2 million.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The purpose of the standard is to improve the overall usefulness of fair value disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. ASU 2018-13 ~~is effective for our first quarter of fiscal 2021 and~~ requires the application of the prospective method of transition (for only the most recent interim or annual period presented in the initial fiscal year of adoption) to the new disclosure requirements for (1) changes in unrealized gains and losses included in other comprehensive income and (2) the range and weighted average used to develop significant

unobservable inputs for Level 3 fair value measurements. ASU 2018-13 also requires prospective application to any modifications to disclosures made because of the change to the requirements for the narrative description of measurement uncertainty. The effects of all other amendments made by ASU 2018-13 must be applied retrospectively to all periods presented. ~~Early adoption is permitted.~~ We ~~are currently~~adopted ASU 2018-13 in the ~~process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.~~

~~In August 2018, the FASB issued ASU 2018-14,~~ ~~Compensation~~ – ~~Retirement Benefits~~ – ~~Defined Benefit Plans~~ – ~~General (Topic 715-20): Disclosure Framework~~ – ~~Changes to the Disclosure Requirements for Defined Benefit Plans.~~ The purpose of the standard is to improve the overall usefulness of defined benefit pension and other postretirement plan disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. ASU 2018-14 is effective for our fourthfirst quarter of fiscal ~~2021 and requires a retrospective transition method. Early~~2021. The adoption ~~is permitted. We are currently in the process~~ of ~~evaluating the~~ASU 2018-13 had no impact ~~of adoption~~ on our Condensed Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40):: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ~~The~~This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement to be consistent with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). We adopted ASU 2018-15 ~~is effective for our~~in the first quarter of fiscal 2021 ~~and allows a retrospective or a~~using the prospective transition method ~~to all implementation costs incurred after~~approach. The Company’s cloud computing hosting arrangements are primarily information technology agreements that support the ~~date~~Company’s operations and infrastructure. The adoption of ~~adoption. Early adoption is permitted. We are currently in the process of evaluating the~~ASU 2018-15 did not have a significant impact ~~of adoption~~ on our Condensed Consolidated Financial Statements.

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. The purpose of the standard is to (1) clarify that transactions between participants in a collaborative agreement should be accounted for under Topic 606 and (2) add unit-of-account guidance in Topic 808 to align with Topic 606. We retrospectively adopted ASU 2018-18 ~~is effective for our first quarter of fiscal 2021 and must be applied retrospectively to~~in the first quarter of fiscal ~~2020.~~2021. The adoption of ASU 2018-18 had no impact on our Condensed Consolidated Financial Statements.

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The purpose of the standard is to improve the overall usefulness of defined benefit pension and other postretirement plan disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. ASU 2018-14 is effective for our annual disclosures for fiscal 2021 and requires a retrospective transition method. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The purpose of the standard is to remove certain exceptions to the general principles of Topic 740: Income Taxes in order to reduce the cost and complexity of its application and to maintain or improve the usefulness of the information provided to users of financial

statements. ASU 2019-12 is effective for our first quarter of fiscal ~~2021~~2022 and will be applied either retrospectively or prospectively depending on the specific Topic 740 exception affected. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.

Except as noted above, there are no significant changes to our assessment of the impact of recently issued accounting standards included in Note ~~1 -~~1. Summary of Significant Accounting Policies of our Condensed Consolidated Financial Statements in our ~~2019~~2020 Form 10-K.

~~Note 2~~. ~~Revenuefrom Contracts with Customers~~

As of December 31, 2019, the Company's significant accounting policies for recognizing revenue have not changed from September 30, 2019. See Note 1 - Summary of Significant Accounting Policies and Note 2 - Revenue Recognition within our 2019 Form 10-K for the fiscal year ended September 30, 2019 for further information.

~~Deferred Contract Costs~~

Deferred contract costs represent commissions paid upon receipt of a purchase order for certain products in our Patient Support Systems segment. These commissions are subsequently expensed to Selling and administrative expenses commensurate with the timing of revenue recognition, which is generally 12 to 24 months. As of December 31, 2019 and September 30, 2019, we had $9.8 million and $10.0 million of total deferred contract costs, respectively, recorded within Other current assets and Other assets. For the quarters ended December 31, 2019 and 2018, we amortized $3.6 million and $3.4 million of deferred contract costs, which are classified within Selling and administrative expenses.

~~Disaggregation of Revenue~~

~~The Company disaggregates revenue recognized from contracts with customers by geography and segment categories consistent with the way in which management operates and views the business. See~~ ~~Note 14~~ - ~~Segment Reporting~~ ~~for the presentation of the Company's revenue disaggregation.~~

~~Contract Balances~~

The following summarizes contract liability activity for fiscal 2019 and during the quarter ended December 31, 2019. The contract liability balance represents the transaction price allocated to the remaining performance obligations.

Contract Liabilities
Balance as of October 1, 2018 $ 47.8
Revenue deferred due to ASC 606 initial adoption 58.4
Deferred revenue acquired 10.7
New revenue deferrals 282.1
Revenue recognized upon satisfaction of performance obligations (273.2 )
Balance as of September 30, 2019 125.8
New revenue deferrals 80.5
Revenue recognized upon satisfaction of performance obligations (85.2 )
Balance as of December 31, 2019 $ 121.1

~~These contract liabilities are recorded in Deferred revenue and Other long-term liabilities. We expect to satisfy the majority~~

Table of ~~the remaining performance obligations and recognize revenue related to installation and service contracts within 12 to 24 months.~~Contents

Note 3. 2. Supplementary Financial Statement Information


	December 31, 2020		September 30, 2020
Inventories, net of reserves:
Finished products	$	156.1	$	167.6
Work in process	51.7		48.4
Raw materials	128.1		136.0
Total inventories, net of reserves	$	335.9	$	352.0

Accumulated amortization of software and other intangible assets	$	703.6	$	667.3

Investments included in Other assets	$	50.5	$	49.0

December 31,
2019 September 30,
2019
Inventories, net of reserves:

Finished products $ 121.0
$ 120.5
Work in process 45.1
42.4
Raw materials 111.6
106.7
Total inventories, net of reserves $ 277.7

$ 269.6

Accumulated amortization of software and other intangible assets $ 632.3
$ 597.0

Investments included in Other assets $ 50.7
$ 51.1

In the first quarter of fiscal 2019, we acquired $26.6 million of non-marketable equity securities that are valued at cost. There has not been any impairment of the historical cost of our investments in non-marketable equity securities.

Supplemental Cash Flow Information


	Three Months Ended December 31
	2020		2019
Non-cash operating activities
Operating cash flows paid for amounts included in the measurement of lease liabilities	$	7.0	$	7.1


Non-cash investing activities:
Change in capital expenditures not paid	$	(4.2)	$	(1.8)



Non-cash financing activities:
Distribution of shares issued under stock-based compensation plans	$	31.7	$	25.1

Non-cash investing and financing activities:
Right of use assets obtained in exchange for new lease liabilities	$	1.8	$	6.5

Quarter Ended December 31
2019 2018
Non-cash investing activities:
Change in capital expenditures not paid $ (1.8 ) $ (1.9 )

Non-cash financing activities:

Distribution of shares issued under stock-based compensation plans $ 25.1
$ 7.5

Note 4. 3. Business Combinations

~~Breathe Technologies, Inc.~~

~~On September 3, 2019, we~~Assets acquired ~~all of the outstanding equity interests of Breathe Technologies, Inc. (“Breathe”),~~and liabilities assumed in a ~~developer and manufacturer of a patented wearable, non-invasive ventilation technology that supports improved patient mobility, for total aggregate cash consideration of $127.6 million.~~

~~The results of Breathe~~business combination are ~~included in the Front Line Care segment since~~recorded at their estimated fair values on the date of acquisition. The ~~impact~~difference between the purchase price amount and the net fair value of assets acquired and liabilities assumed is recognized as goodwill on the balance sheet if the purchase price exceeds the estimated net fair value or as a bargain purchase gain on the income statement if the purchase price is less than the estimated net fair value. The allocation of the purchase price may be modified up to ~~reported revenue and net income in~~one year after the ~~quarter ended December 31, 2019 was not significant.~~

~~The following table summarizes the preliminary estimate of~~acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed at the date of the Breathe acquisition. The fair value of assets acquired and liabilities assumed are still considered to be preliminary, however we do not expect further adjustments to be significant.assumed.

Amount
Trade accounts receivable, net of allowances $ 0.3
Inventories 6.3
Other current assets 0.1
Property, plant and equipment 2.1
Goodwill 60.2
Trade name 4.0
Customer relationships 0.4
Developed technology 56.0
Other assets 0.2
Trade accounts payable (0.5 )
Other current liabilities (1.6 )
Deferred income taxes 0.9
Other long-term liabilities (0.8 )
Total purchase price, net of cash acquired $ 127.6

~~Goodwill in connection with~~

During fiscal 2020 we acquired the ~~Breathe acquisition of $60.2 million was recognized at the acquisition date related to the excess~~following companies:


Company Name	Description of the Business	Description of the Acquisition
Excel Medical	Clinical communications software company located in the United States	Purchased all of the outstanding equity interest.
Connecta	Clinical communications software company based in Mexico.	Purchased the multiplatform medical device integration and connectivity software programs, products, and solutions of the company.
Videomed	Developer of integrated video solutions in operating rooms located in Italy.	Purchased all of the outstanding equity interest.

The purchase price ~~over~~for the ~~estimated fair value of~~acquisitions listed above includes contingent consideration for which the ~~assets acquired and~~performance periods have not yet expired. For the liabilities, reflecting the value associated with enhancing synergies and accelerating our leadership in respiratory health products. The goodwill was allocated entirely to our Front Line Care segment, which is not deductible for tax purposes in the United States.

~~The estimated useful lives of the acquired intangible assets are 2 years for trade name, 8 years for customer relationships and 11 years for developed technology.~~

~~In the quarter~~three months ended December 31, ~~2019,~~2020, we ~~recognized $0.9~~recorded a reduction in the contingent consideration obligations of $1.7 million ~~of acquisition and integration costs~~ in Selling and administrative expenses ~~and $1.7 million in Special charges~~primarily related to ~~this acquisition.~~

~~On April 1, 2019, we acquired all of the outstanding equity interests of Voalte, Inc. (“Voalte”),~~Excel Medical as a ~~clinical communications software company located in the United States, for total aggregate consideration of $181.0 million, comprised of $175.8 million cash and $5.2 million of~~certain commercial milestone was not met. The related contingent consideration ~~measured at fair value as of the acquisition date. Additionally, contingent consideration is payable up to $15 million based upon achievement of certain commercial milestones.~~

~~The results of Voalte~~liabilities are included in Other current liabilities and Other long-term liabilities.

For the ~~Patient Support Systems segment since the date of acquisition. The impact to reported revenue and net income in the quarter~~three months ended December 31, ~~2019 was~~2020, we did not ~~significant.~~close on any new acquisitions. For additional information on Acquisitions, see Note 3. Business Combinations within the 2020 Form 10-K.

The following table summarizes the preliminary estimate of the fair value of assets acquired and liabilities assumed at the date of the Voalte acquisition. The fair value of assets acquired and liabilities assumed are still considered to be preliminary, however we do not expect further adjustments to be significant.

Amount
Trade accounts receivable, net of allowances $ 5.8
Inventories 0.1
Other current assets 2.7
Property, plant and equipment 0.2
Goodwill 98.4
Non-competition agreements 2.7
Trade name 13.5
Customer relationships 29.0
Developed technology 55.0
Trade accounts payable (1.7 )
Deferred revenue (10.7 )
Other current liabilities (4.1 )
Deferred income taxes (9.9 )
Total purchase price, net of cash acquired $ 181.0

Bardy Diagnostics, Inc.

Goodwill in connection with the Voalte acquisition of $98.4 million was recognized at the acquisition date related to the excess of the purchase price over the estimated fair value of the assets acquired and the liabilities, reflecting the value associated with enhancing synergies, accelerating our leadership in care communications platform and advancing our digital and mobile communications platform and capabilities. The goodwill was allocated entirely to our Patient Support Systems segment, which is not deductible for tax purposes in the United States.

~~The estimated useful lives of the acquired intangible assets are 5 years for non-competition agreements and between 8 and 12 years for trade name, customer relationships and developed technology.~~

For the quarter ended December 31, 2019, we reduced the contingent consideration accrual by $8.4 million as the commercial milestones are not expected to be achieved. This was recorded as a component of Selling and administrative expenses.

~~Excel Medical Electronics~~

On January ~~10, 2020,~~15, 2021, we ~~closed on the acquisition of Excel Medical Electronics~~entered into a definitive merger agreement with Bardy Diagnostics, Inc. (“~~Excel”~~Bardy”), a ~~clinical communication business,~~Delaware company that develops and delivers cardiac arrhythmia monitoring devices, for initial cash consideration of ~~$15.0~~$375.0 million, subject to closing conditions and certain post-closing adjustments. Additionally, contingent consideration will be payable based on the revenue generated from the acquired cardiac monitoring product during the first two calendar years starting with the calendar year in which the transaction is closed.

The contingent consideration payable for the first calendar year in which the transaction closes will equal 50% of the revenue generated if less than $45.0 million, 100% of revenue generated if between $45.0 million and $57.0 million, and 150% of revenue generated if greater than $57.0 million during calendar year 2021.

The contingent consideration payable for the second calendar year will equal 50% of the revenue generated if less than $70.0 million, 100% of the revenue generated if between $70.0 million and $89.0 million, and 125% of the revenue generated if greater than $89.0 million during the calendar year 2022.

On January 29, 2021, the Medicare Administrative Contractor, Novitas Solutions, published newly established, Category 1 reimbursement rates applicable to the Current Procedural Terminology ("CPT") codes for the extended holter cardiac monitoring category, including CPT codes 93241, 93243, 93245 and 93247. Hillrom is currently assessing the recent reimbursement rate decision and the potential impacts of that decision on the Bardy business.

On January 28, 2021, we acquired the contact-free continuous monitoring intellectual property and technology from EarlySense Ltd. in exchange for cash of $30.0 million, a portion of our non-marketable equity investment in EarlySense Ltd. of $25.5 million and forgiveness of a prepayment of approximately $2.0 million. The investment will be transferred to EarlySense Ltd. at a future date upon the satisfaction of certain conditions outlined in the purchase agreement. Additionally, contingent consideration of up to ~~$15.0~~$10.0 million ~~based upon the achievement of certain commercial milestones. The results of Excel~~ will be ~~included~~payable if commercial milestones defined in the ~~Patient Support Systems segment from the date of acquisition. It is not practicable to disclose the preliminary~~ purchase ~~price allocation for this transaction given the short period of time between the acquisition date and the filing of this report.~~

~~Asset Acquisition~~

~~On October 1, 2018, we~~agreement are achieved through September 2023. The intangible asset acquired the right to use patented technology and certain related assets from a supplier to our Front Line Care segment. We paid $17.1 million of cash and committed to guaranteed minimum future royalty payments of $22.0 million, which arewill be presented in Other intangible assets and software, ~~net and are being amortized over the 7-year term~~net.

Table of ~~the agreement.~~Contents

~~Disposition~~

On August 2, 2019, we completed a disposition to sell certain of our surgical consumable products and related assets for a purchase price of $166.6 million, which is net of cash and working capital adjustments. The purchase price is subject to certain post-closing adjustments. In fiscal 2019, we recorded a pre-tax loss on this disposition of $15.9 million in Investment income (expense) and other, net, including transaction costs of $4.0 million. This disposition did not have a major effect on the Company's operations or financial results, and, therefore, has not been reported as a discontinued operation.

Note 5. 4. Financing Agreements

Short-Term Borrowings

Securitization Facilities

~~In May 2019, we renewed~~We have our 364-day accounts receivable securitization ~~program~~program (the ~~“Securitization Facility”)~~" Securitization Facility ") with certain financial institutions for borrowings up to $110.0 million. ~~We also renewed~~Additionally, we have our ~~additional~~ 364-day facility for borrowings up to $90.0 million (the ~~“Note~~" Note Securitization ~~Facility”~~Facility"). Both facilities mature in ~~May 2019. Under the terms~~April 2021. As of ~~each of~~December 31, 2020, outstanding borrowings were $82.2 million on the Securitization Facility and $90.0 million on the Note Securitization ~~Facility, certain of our accounts receivable secure~~Facility. See Note 5. Financing Agreements within the ~~amounts borrowed and cannot be used to pay our other debts or liabilities. The amount of permissible borrowings outstanding is determined based on~~2020 Form 10-K for the amount of qualifying accounts receivable at any point in time. Borrowings outstanding under the Securitization Facility and Note Securitization Facility bear interest at LIBOR plus the applicable margin of 0.8% and 1.0% and are included as a component of Short-term borrowings, while the accounts receivable securing these obligations remain as a component of Trade accounts receivable, net of allowances.fiscal year ended September 30, 2020 for further information.

Long-Term Debt

As of December 31, 2020 and September 30, 2020, there were no outstanding borrowings on the Revolving Credit Facility, and available borrowing capacity was $1,191.0 million after giving effect to the $9.0 million of outstanding standby letters of credit.

Long-Term Debt Redemption

~~In September~~On October 7, 2019, we ~~issued~~redeemed the senior unsecured 5.75% notes due September 2023 for $425.0 million and paid the prepayment premium of $12.2 million using the net proceeds from the senior unsecured 4.375% notes of $425.0 million maturing September 2027 that ~~bear interest at a fixed rate of 4.375% annually and capitalized debt issuance costs of $6.3 million. On October 7,~~were issued in September 2019, ~~we used the net proceeds from the offering of these notes, together~~along with funds borrowed from the Revolving Credit ~~Facility maturing in August 2024 (“2024 Revolving Credit Facility”), to redeem all of our previously outstanding senior unsecured 5.75% notes due September 2023 and to pay~~Facility. For the ~~prepayment premium of $12.2 million. We~~three months ended December 31, 2019, we recorded a loss on extinguishment of debt of $15.6 million, which was comprised of ~~the~~a $12.2 million prepayment premium and $3.4 million of debt issuance costs previously capitalized.

See Note ~~6 -~~5. Financing Agreements included within ~~the 2019~~our 2020 Form 10-K for the fiscal year ended September 30, ~~2019~~2020 for further information.

Fair Value

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 ~~variable rate short-term debt instruments, our senior secured~~Securitization Facility, Note Securitization Facility, Term Loan A facility (“TLA Facility”) maturing in August 2024, ~~(“2024 TLA Facility”)~~ and ~~our 2024~~ Revolving Credit Facility approximate fair ~~value.~~value.

The estimated fair values of our long-term debt instruments are described in the table below:


	December 31, 2020		September 30, 2020
Senior unsecured 5.00% notes due on February 15, 2025	$	309.3	$	310.1
Senior unsecured 4.375% notes due on September 15, 2027	450.0		441.2
Unsecured debentures	47.9		48.0
Total	$	807.2	$	799.3

December 31,
2019 September 30,
2019
Senior unsecured 5.00% notes due on February 14, 2025 $ 312.9
$ 312.4
Senior unsecured 4.375% notes due on September 15, 2027 437.8
435.4
Unsecured debentures 47.5
48.1
Total $ 798.2
$ 795.9

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 loan and~~ the Senior Notes were based on quoted prices for similar liabilities. These fair value measurements were classified as Level 2.

Debt Covenants

As of December 31, ~~2019,~~2020, we were in compliance with all debt covenants under our financing agreements.

Note 6. 5. Derivative Instruments and Hedging Activity

We are exposed to various market risks, including fluctuations in interest rates and variability in foreign 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 employ cash flow hedges, net investment hedges, and other ~~nondesignated~~ derivative instruments not designated for hedge accounting to manage these risks.

Table of Contents

Cash Flow Hedges

To manage our exposure to market risk from fluctuations in interest rates, we enter into interest rate swaps that are designated as cash flow hedges. As of December 31, ~~2019,~~2020 and September 30, 2020, we had interest rate swap agreements with an aggregate notional amount of $750.0 million to hedge the variability of cash flows through August 2024 associated with a portion of the variable interest rate payments on outstanding borrowings under our Senior Credit Agreement. As of December 31, 2019, these swaps were in a net liability position with an aggregate fair value of $5.1 million, of which $1.3 million were classified as Other assets and $6.4 million were classified as Other current liabilities. As of September 30, 2019, we had interest rate swap agreements, with an aggregate notional amount of $750.0 million to hedge the variability of cash flows associated with a portion of the variable interest rate payments on outstanding borrowings under our Senior Credit Agreement through September 2021. As of September 30, 2019, these swaps were in a net liability position with an aggregate fair value of $6.8 million, of which $0.9 million were classified as Other assets and $7.7 million were classified as Other current liabilities. We classify fair value measurements on our interest rate swaps as Level 2.

We are subject to variability in foreign currency exchange rates due to our international operations. We enter into currency exchange ~~agreements~~contracts that are designated as cash flow hedges to manage our exposure arising from fluctuating exchange rates related to specific and projected 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 projected foreign currency denominated intercompany and third-party transactions. As of December 31, ~~2019, no foreign exchange contracts were open. As of~~2020 and September 30, ~~2019,~~2020, the notional amount of ~~open foreign~~outstanding currency exchange contracts was ~~$6.7 million. These contracts were in a net asset position reported in Other current assets with a fair value of $0.2 million.~~$42.2 million and $64.4 million, respectively. The maximum length of time over which we hedge transaction exposures is generally 1512 months. Derivative gains and losses, initially reported as a component of Accumulated other comprehensive income (loss), are reclassified to earnings in the period when the underlying transaction affects earnings.

Net Investment Hedges

As of December 31, ~~2019,~~2020, we had cross-currency swap agreements, with an aggregate notional amount of $198.3 million, to hedge the variability of net assets due to changes in the U.S. dollar-Euro spot exchange rates through July 2023. These cross-currency swaps are designated as net investment hedges of subsidiaries using the Euro as their functional currency. As of December 31, 2019, these swaps were in a net asset position with an aggregate fair value of $13.4 million which were classified as Other assets. As of September 30, 2019, these swaps were in a net asset position with an aggregate fair value of $16.9 million which were classified as Other assets.

~~We classify fair value measurements on our cross-currency swaps as Level 2.~~ We assess hedge effectiveness under the spot-to-spot method and record changes in fair value attributable to the translation of foreign currencies through Accumulated other comprehensive income (loss). We amortize the impact of all other changes in fair value of the derivatives through Interest expense, which was an income of $1.3 million infor both the ~~quarters~~three months ended December 31, ~~2019~~2020 and ~~2018.~~2019.

Undesignated Derivative Instruments

We use forward contracts to mitigate the foreign exchange revaluation risk associated with recorded monetary assets and liabilities that are denominated in a non-functional currency. These derivative instruments are not formally designated as hedges and the terms of these instruments generally do not exceed one month. As of December 31, ~~2019,~~2020 and September 30, 2020, we had forward contracts not designated as hedges with aggregate notional amounts of ~~$91.4 million. As of September 30, 2019, we had~~$157.5 million and $169.9 million, respectively.

The following table summarizes unrealized and realized gains and losses for forward contracts not designated as hedges, ~~with aggregate notional amounts of $76.7 million. In the quarter ended December 31, 2019, we recognized unrealized gains of $0.2 million and realized gains of $0.4 million~~which are recorded in Investment income (expense) and other, ~~net related to these forward contracts not designated as hedges. In the quarter ended December 31, 2018, there were no similar forward contracts in place.~~

~~Note 7~~. ~~Leases~~

~~Hillrom as the Lessee~~

We determine if an arrangement is a lease or contains a lease at contract inception. We lease real estate, automobiles and equipment under various operating leases. A lease liability and ROU asset is recognized for operating leases with terms greater than one year at the lease commencement date. The lease liability is measured as the present value of all remaining fixed payments calculated using our incremental borrowing rate. The ROU asset is measured as the sum of the lease liability and any initial indirect costs incurred, less any lease incentives received. We use our estimated secured incremental borrowing rate as most lease agreements do not specify an interest rate. Our lease agreements include leases that have both lease and associated nonlease components. We have elected to account for lease components and the associated nonlease components as a single lease component.

Our leases have remaining lease terms of approximately 1 year to 8.8 years. Many of our real estate and equipment leases include options to renew. Renewal periods are generally not included when calculating the remaining lease term unless we are reasonably certain to exercise a renewal option based on beneficial terms or significance of the leased asset to our operations.

Expense for operating leases and leases with a term of one year or less is recognized on a straight-line basis over the lease term. Lease expense for the quarter ended December 31, 2019 was $9.6 million, of which $6.8 million related to operating leases and $2.8 million related to short-term leases and variable lease payments. Lease expense is recorded in Cost of goods sold or Selling and administrative expenses based on the purpose of the leased asset.

~~The following table summarizes the balance sheet classification of our operating leases and amounts of the ROU asset and lease liability as of December 31, 2019:~~

net.

Table of Contents

Balance Sheet Classification December 31, 2019
Right-of-use assets Other assets $ 78.5
Current lease liabilities Other current liabilities 22.8
Non-current lease liabilities Other long-term liabilities 59.9


	Three Months Ended December 31
	2020		2019
Unrealized gain	$	0.5	$	0.2
Realized gain	2.1		0.4



~~Supplemental information:~~	~~December 31, 2019~~
~~Weighted-average discount rate~~	~~3.3~~	%
~~Weighted-average remaining lease term in years~~	~~4.9~~

Fair Value

We classify fair value measurements on our derivative instruments as Level 2. The ~~following table summarizes the maturities~~estimated fair values of our ~~operating leases as of December 31, 2019:~~derivative instruments are described in the table below:

Fiscal Year Amount
Remaining 2020 $ 19.3
2021 22.0
2022 16.3
2023 11.3
2024 6.5
2025 4.4
Thereafter 10.4
Total lease payments 90.2
Less: imputed interest (7.5 )
Total lease liability $ 82.7


Derivative Instruments	December 31, 2020		Consolidated Balance Sheet Position	September 30, 2020		Consolidated Balance Sheet Position
Interest Rate Swaps	$	(41.0)	Other current liabilities	$	(46.3)	Other current liabilities
Currency Exchange Contracts	(2.6)		Other current liabilities	(0.4)		Other current liabilities
Cross-Currency Swaps	1.5		Other assets	9.7		Other assets
Undesignated Forward Contracts	0.5		Other assets	0.0		Other assets
Total	$	(41.6)		$	(37.0)

~~Disclosures Related to Periods Prior to Adopting the New Lease Guidance~~0

As disclosed in the 2019 Form 10-K, future minimum payments under non-cancellable operating leases (excluding executory costs) aggregating $94.9 million for manufacturing facilities, warehouse distribution centers, service centers, sales offices, automobiles and other equipment consisted of the following:

Fiscal Year Amount
2020 $ 25.7
2021 21.4
2022 15.7
2023 11.1
2024 6.4
2025 and beyond 14.6

~~Rental expense in fiscal 2019, 2018 and 2017 was $39.8 million, $41.3 million and $38.0 million.~~

~~Hillrom as the Lessor~~

We make certain products available to customers under short-term lease arrangements. Rental usage of these products is provided as an alternative to product sales and is short-term in nature. Products primarily include smart beds, including, but not limited to, bariatric, critical care, maternal, and home care beds, as well as other surfaces. These lease arrangements provide our customers with our products during periods of peak demand or often times for specialty purposes. Additionally, we provide wearable, non-invasive ventilation products to patients covered by monthly medical insurance reimbursements, which are considered month-to-month leasing arrangements. Income arising from these lease arrangements where we are the lessor is recognized within Rental revenue. We have accounted for these lease arrangements as operating leases.

Note 8. 6. Retirement and Postretirement Benefit Plans

We sponsor five defined benefit retirement plans. Those plans include a master defined benefit retirement plan in the United States, 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 in 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. The following table ~~details~~provides the components of net pension expense for our defined benefit retirement plans.

Quarter Ended December 31 Condensed Consolidated Statements of Income Item
2019 2018
Service cost $ 0.4
$ 0.3
Cost of goods sold
Service cost 0.8
0.8
Selling and administrative expenses
Interest cost 2.5
3.1
Investment income (expense) and other, net
Expected return on plan assets (3.7 ) (3.7 ) Investment income (expense) and other, net
Amortization of unrecognized prior service cost, net 0.1
—
Investment income (expense) and other, net
Amortization of net loss 1.5
0.6
Investment income (expense) and other, net
Net pension expense $ 1.6
$ 1.1


	Three Months Ended December 31				Consolidated Statements of Income Item
	2020		2019
Service cost	$	0.5	$	0.4		Cost of goods sold
Service cost	0.8		0.8			Selling and administrative expenses
Interest cost	1.9		2.5			Investment income (expense) and other, net
Expected return on plan assets	(3.0)		(3.7)			Investment income (expense) and other, net
Amortization of unrecognized prior service cost, net	0		0.1			Investment income (expense) and other, net
Amortization of net loss	1.5		1.5			Investment income (expense) and other, net
Net periodic benefit cost	1.7		1.6
Special termination benefits1	3.3		—			Special charges
Net pension expense	$	5.0	$	1.6
1 In September 2020, we offered certain employees in the United States the option to participate in a voluntary early retirement plan. The employees who accepted the offer received special termination benefits during the three months ended December 31, 2020, which were recorded as a component of Special charges in the Consolidated Statements of Income. See Note 8. Special Charges for further information.

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In addition to defined benefit retirement plans, we also offer two postretirement health care plans in the United States 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~~extend retiree coverage for medical and prescription benefits beyond the COBRA continuation period to the date of Medicare eligibility. Annual costs related to these plans are not significant. In connection with the voluntary early retirement plan offered in September 2020, we incurred $0.2 million of special termination benefits related to our postretirement health care plan. The amount was recorded as a recorded as a component of Special charges in the Consolidated Statements of Income. See Note 8. Special Charges for further information.

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 in retirement by providing employees with an incentive to ~~make regular savings.~~regularly save a portion of their earnings. Our contributions to the plans are based on eligibility and, in some cases, employee contributions. Expense under these plans was $7.8 million and $6.2 million ~~in both of~~for the quarterly periods ended December 31, ~~2019~~2020 and ~~2018.~~

2019.

Note 9. 7. Other Comprehensive Income (Loss)

The following tables represent the changes in Other comprehensive income (loss) and Accumulated other comprehensive income (loss) by component for the ~~quarters~~three months ended December 31, ~~2019~~2020 and ~~2018:~~2019:


	Three Months Ended December 31, 2020
	Other comprehensive income (loss)										Accumulated other comprehensive income (loss)
	Prior to reclassification		Reclassification from		Pre-tax		Tax effect		Net of tax		Beginning balance		Net activity		Ending balance 2
Derivative instruments designated as hedges 1:
Currency exchange contracts	$	(1.4)	$	(0.8)	$	(2.2)	$	0.5	$	(1.7)	$	(0.3)	$	(1.7)	$	(2.0)
Interest rate swaps	8.0		(2.6)		5.4		(1.2)		4.2		(35.7)		4.2		(31.5)
Cross-currency swaps	(9.6)		0		(9.6)		2.2		(7.4)		6.7		(7.4)		(0.7)
Derivative instruments designated as hedges total	$	(3.0)	$	(3.4)	$	(6.4)	$	1.5	$	(4.9)	$	(29.3)	$	(4.9)	$	(34.2)
Foreign currency translation adjustment	41.3		0		41.3		0		41.3		(110.7)		41.3		(69.4)
Change in pension and postretirement defined benefit plans	(0.5)		1.2		0.7		(0.2)		0.5		(40.2)		0.5		(39.7)
Total	$	37.8	$	(2.2)	$	35.6	$	1.3	$	36.9	$	(180.2)	$	36.9	$	(143.3)

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Quarter Ended December 31, 2019
Other comprehensive income (loss) Accumulated other comprehensive income (loss)
Prior to
reclassification Reclassification
from Pre-tax Tax effect Net of tax Beginning
balance Net activity
Ending
balance ²
Derivative instruments designated as hedges ¹:

Foreign exchange forward contracts $ (0.3 ) $ 0.1
$ (0.2 ) $ —
$ (0.2 ) $ 0.2
$ (0.2 ) $ —
Interest rate swaps 0.9
0.8
1.7
(0.4 ) 1.3
(5.2 ) 1.3
(3.9 )
Cross-currency swaps (4.8 ) —
(4.8 ) 1.1
(3.7 ) 12.2
(3.7 ) 8.5
Derivative instruments designated as hedges total (4.2 ) 0.9
(3.3 ) 0.7
(2.6 ) 7.2
(2.6 ) 4.6
Foreign currency translation adjustment 23.1
—
23.1
—
23.1
(145.4 ) 23.1
(122.3 )
Change in pension and postretirement defined benefit plans (0.2 ) 1.2
1.0
(0.3 ) 0.7
(44.3 ) 0.7
(43.6 )
Total $ 18.7
$ 2.1
$ 20.8
$ 0.4
$ 21.2
$ (182.5 ) $ 21.2
$ (161.3 )

Quarter Ended December 31, 2018
Other comprehensive income (loss) Accumulated other comprehensive income (loss)
Prior to
reclassification Reclassification
from Pre-tax Tax effect Net of tax Beginning
balance Impacts of ASU 2018-02 Adoption as of October 1, 2018 Net activity Ending
balance
Derivative instruments designated as hedges ¹:

Foreign exchange forward contracts $ 1.2
$ (0.1 ) $ 1.1
$ (0.4 ) $ 0.7
$ 0.2
$ —
$ 0.7
$ 0.9
Interest rate swaps (5.1 ) (2.1 ) (7.2 ) 1.9
(5.3 ) 18.3
0.8
(5.3 ) 13.8
Cross-currency swaps 2.2
—
2.2
(1.3 ) 0.9
(1.7 ) —
0.9
(0.8 )
Derivative instruments designated as hedges total (1.7 ) (2.2 ) (3.9 ) 0.2
(3.7 ) 16.8
0.8
(3.7 ) 13.9
Foreign currency translation adjustment (13.6 ) —
(13.6 ) —
(13.6 ) (105.3 ) —
(13.6 ) (118.9 )
Change in pension and postretirement defined benefit plans —
0.5
0.5
(0.1 ) 0.4
(24.5 ) (6.2 ) 0.4
(30.3 )
Total $ (15.3 ) $ (1.7 ) $ (17.0 ) $ 0.1
$ (16.9 ) $ (113.0 ) $ (5.4 ) $ (16.9 ) $ (135.3 )


	Three Months Ended December 31, 2019
	Other comprehensive income (loss)										Accumulated other comprehensive income (loss)
	Prior to reclassification		Reclassification from		Pre-tax		Tax effect		Net of tax		Beginning balance		Net activity		Ending balance
Derivative instruments designated as hedges 1:
Currency exchange contracts	$	(0.3)	$	0.1	$	(0.2)	$	0	$	(0.2)	$	0.2	$	(0.2)	$	0
Interest rate swaps	0.9		0.8		1.7		(0.4)		1.3		(5.2)		1.3		(3.9)
Cross-currency swaps	(4.8)		0		(4.8)		1.1		(3.7)		12.2		(3.7)		8.5
Derivative instruments designated as hedges total	$	(4.2)	$	0.9	$	(3.3)	$	0.7	$	(2.6)	$	7.2	$	(2.6)	$	4.6
Foreign currency translation adjustment	23.1		0		23.1		0		23.1		(145.4)		23.1		(122.3)
Change in pension and postretirement defined benefit plans	(0.2)		1.2		1.0		(0.3)		0.7		(44.3)		0.7		(43.6)
Total	$	18.7	$	2.1	$	20.8	$	0.4	$	21.2	$	(182.5)	$	21.2	$	(161.3)

1 See Note 6 - 5. Derivative Instruments and Hedging Activity for information regarding our hedging strategies.

²The estimated net amount of gains and losses ~~that are~~ reported in Accumulated other comprehensive income (loss) related to our derivative instruments designated as hedges as of December 31, ~~2019~~2020 that isare expected to be reclassified into earnings within the next 12 months is expense of ~~$0.1~~$8.8 million.

The following table represents the items reclassified out of Accumulated other comprehensive income (loss) and the related tax effects for the ~~quarters~~three months ended December 31, ~~2019~~2020 and ~~2018:~~

Quarter Ended December 31
2019 2018
Amount
reclassified Tax effect Net of tax
Amount
reclassified

Tax effect ⁴
Net of tax
Derivative instruments designated as hedges:
Foreign exchange forward contracts ¹
$ 0.1
$ (0.1 ) $ —
$ (0.1 ) $ 0.1
$ —
Interest rate swaps ²
0.8
(0.2 ) 0.6
(2.1 ) 0.6
(1.5 )
Derivative instruments designated as hedges total 0.9
(0.3 ) 0.6
(2.2 ) 0.7
(1.5 )
Change in pension and postretirement defined benefit plans ³
1.2
(0.3 ) 0.9
0.5
(6.3 ) (5.8 )

2019:


	Three Months Ended December 31
	2020						2019
	Amount reclassified		Tax effect		Net of tax		Amount reclassified		Tax effect		Net of tax
Derivative instruments designated as hedges:
Currency exchange contracts 1	$	(0.8)	$	0.2	$	(0.6)	$	0.1	$	(0.1)	$	0
Interest rate swaps 2	(2.6)		0.6		(2.0)		0.8		(0.2)		0.6
Derivative instruments designated as hedges total	$	(3.4)	$	0.8	$	(2.6)	$	0.9	$	(0.3)	$	0.6
Change in pension and postretirement defined benefit plans 3	$	1.2	$	(0.2)	$	1.0	$	1.2	$	(0.3)	$	0.9

1 Reclassified from Accumulated other comprehensive income (loss) into Investment income (expense) and other, net.

²Reclassified from Accumulated other comprehensive income (loss) into Interest expense.

³Reclassified from Accumulated other comprehensive income (loss) into Cost of goods sold and Investment income (expense) and other, net. These components are included in the computation of net periodic pension expense.

⁴

~~As a result~~

Table of ~~the adoption of ASU 2018-02, we reclassified $5.4 million from Accumulated other comprehensive income (loss) to Retained earnings.~~Contents

Note 8. Special Charges

~~Note 10~~. ~~Special Charges~~

InSpecial charges are incurred in connection with various transformative initiatives, exit activities, and organizational changes to improve our business alignment and cost ~~structure, we recognized Special charges of $7.8 million and $8.0 million for the quarters ended December 31, 2019 and 2018.~~structure. Although these charges are ~~non-recurring~~infrequent and unusual in nature, additional Special charges are expected to be ~~incurred related to restructuring and transformative initiatives in future periods.~~incurred. It is not practicable to estimate the amount of these future expected costs until such time as the evaluations are complete. The following table summarizes the Special charges recognized for the three months ended December 31, 2020 and 2019.

~~These charges are summarized as follows:~~


Special Charges	Three Months Ended December 31
	2020		2019
Global information technology transformation	$	1.3	$	4.1
Workforce reduction plan	22.7		—
Integration-related activities	3.1		3.2
Site consolidation and other cost optimization activities, including related severance cost	—		0.5
Total Special Charges	$	27.1	$	7.8

~~Business Optimization and Realignment~~Global Information Technology Transformation

~~Management pursues opportunities to align our operations to achieve synergies and position the business for growth.~~ In fiscal 2018, a global transformation program was launched that was focused on reducing complexity, increasing efficiency and improving our cost structure with targeted investments that align with our strategic priorities.

~~As part of this program,~~2019, management ~~launched an initiative related to~~initiated a global information technology transformation, including rationalizing and transforming our enterprise resource planning software solutions and other complementary information technology systems. ~~In the quarter ended December 31, 2019, the Company incurred $9.4 million related to this initiative, of which $5.3 million was capitalized and $4.1 million was expensed in Special charges.~~

The objective of this initiative is to consolidate and streamline our key workstreams that interact with customers and vendors and support our financial reporting processes while maintaining the security of our data. The solutions designed under this initiative will be implemented over the next five to seven years.

~~We acquired Breathe~~Workforce Reduction Plan

On September 15, 2020, we committed to a workforce reduction plan as part of the continued business optimization initiatives to advance our strategy and ~~Voalte in fiscal 2019~~growth platforms and ~~continue to incur integration-related costs~~improve our operations and cost structure. The workforce reduction plan includes a voluntary retirement program and involuntary severance ~~costs, which were recorded to Special charges during~~actions. For the ~~quarter~~three months ended December 31, ~~2019.~~ 2020, we incurred $22.7 million related to this initiative within Special charges.

Integration-Related Activities

We ~~also~~ incurred costs, including severance and benefit costs, associated with ~~other~~ business realignment and integration ~~activities.~~activities focused on reducing complexity, increasing efficiency, and improving our cost structure. We acquired several businesses as disclosed within Note 3. Business Combinations within the 2020 Form 10-K for the fiscal year ended September 30, 2020 for which we also continue to incur integration-related costs and severance costs.

During the quarter ended December 31, 2019, we incurred total business optimization and realignment charges of $7.3 million, of which $1.8 million were severance and benefit costs with the remainder related to professional fees and project management costs. These amounts compare to charges of $3.8 million in the quarter ended December 31, 2018, of which $2.7 million were severance and benefit costs.

Site Consolidation and Other Cost Optimization Activities, Including Related Severance Cost

We continue to streamline our operations and simplify our supply chain by transforming and consolidating certain manufacturing and distribution operations (“Site Consolidation”). During the quarter ended December 31, 2019, we recorded charges of $0.5 million related to these efforts, all of which were severance and benefit costs. These amounts compare to charges of $4.1 million related to these efforts in the quarter ended December 31, 2018, primarily comprising lease termination and facility closure costs related to three sites that were closed.operations.

For all accrued severance and other benefit charges described above, we record ~~restructuring~~ reserves within Other current liabilities. The following table summarizes the reserve activity for severance and other benefits infor the ~~quarter~~three months ended December 31, ~~2019 was as follows:~~2020.

Balance as of September 30, 2019 $ 8.5
Expenses 2.4
Cash Payments (2.9 )
Reversals (0.1 )
Balance as of December 31, 2019 $ 7.9


Balance as of September 30, 2020	$	11.3
Expenses	20.0
Cash payments	(9.7)
Reversals	(0.1)
Balance as of December 31, 2020	$	21.5

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Note 11. 9. Income Taxes

The effective tax rate for the ~~quarter~~three months ended December 31, ~~2019 was~~2020 was 17.9% compared to 6.6% ~~compared to 14.9%~~ for the comparable period in the prior year. The rate was lower in the prior year period primarily due ~~primarily~~ to the ~~difference in the discrete tax benefits realized in each period. The current period rate was favorably impacted by $4.1 million~~favorable impact of excess tax benefits on deductible stock compensation compared to ~~$1.7 million of benefit in~~ the ~~comparable prior~~current year period. The ~~current period~~effective tax rate for the three months ended December 31, 2019 was also favorably impacted by the reduction of the contingent consideration accrual of $8.4 million, ~~in the quarter ended December 31, 2019,~~ that iswas not subject to tax.

Note 12. 10. Earnings per Common Share

Basic earnings per share (“EPS”) 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 periods presented, anti-dilutive stock options were excluded from the calculation of diluted earnings per share. Cumulative treasury stock acquired, less cumulative shares reissued, have been excluded in determining the average number of shares outstanding.

Earnings per share are calculated as ~~follows (share information in thousands):~~follows:


	Three Months Ended December 31
	2020		2019
Net Income	$	58.8	$	39.8

Net Income per Basic Common Share	$	0.88	$	0.60

Net Income per Diluted Common Share	$	0.88	$	0.59

Average Basic Common Shares Outstanding (in thousands)	66,497		66,792
Add potential effect of exercise of stock options and other unvested equity awards	428		537
Average Diluted Common Shares Outstanding (in thousands)	66,925		67,329

Shares with anti-dilutive effect excluded from the computation of diluted EPS	639		291

Quarter Ended December 31
2019 2018
Net income $ 39.8
$ 42.2

Average basic shares outstanding 66,792
67,053
Add potential effect of exercise of stock options and other unvested equity awards 537
672
Average diluted shares outstanding 67,329
67,725

Net income per basic common share $ 0.60
$ 0.63

Net income per diluted common share $ 0.59
$ 0.62

Shares with anti-dilutive effect excluded from the computation of diluted EPS 291
486

~~Note 13~~. ~~Warranties and 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 rollforward of changes in the Accrued product warranties reserve for the periods covered in this report is as follows:~~

Quarter Ended December 31
2019 2018
Balance as of beginning of period $ 29.7
$ 20.5
Provision for warranties in the period 3.5
5.1
Warranty reserves assumed ¹
—
2.8
Warranty claims in the period (4.4 ) (3.5 )
Balance as of end of period $ 28.8
$ 24.9

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 had a material impact on our financial condition or results of operations, nor do we expect them to, 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 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.

Note 14. 11. Segment Reporting

We disclose segment information that is consistent with the way in which management operates and views the business. Our operating structure contains the following reportable segments:

•Patient Support Systems –globally provides an ecosystem of our digital and connected care solutions: devices, software, communications and integration technologies that improve care and deliver actionable insights to caregivers and patients in the acute care setting. Key products include care communications and mobility solutions, connected med-surg and ICU bed systems, sensors and surfaces, safe patient handling equipment and services.

•Front Line Care – globally provides integrated patient monitoring and diagnostic technologies – from hospital to home – that enable and support Hillrom’s connected care strategy. Our diverse portfolio includes secure, connected, digital assessment technologies to help diagnose, treat and manage a wide variety of illnesses and diseases, including respiratory therapy, cardiology, vision screening and physical assessment.

•Surgical Solutions – globally enables peak procedural performance, connectivity and video integration products that improve collaboration, workflow, safety and efficiency in the operating room, such as surgical video technologies, tables, lights, pendants, precision positioning devices and other accessories.

globally provides our med-surg and specialty bed systems and surfaces, safe patient handling equipment and mobility solutions, as well as our care communications platform that delivers software and information technologies to improve care and deliver actionable insight to caregivers and patients.

~~Front Line Care –~~ globally provides patient monitoring and diagnostic technologies, including a diversified portfolio of physical assessment tools that help diagnose, treat and manage a wide variety of illnesses and diseases, including a portfolio of vision care and respiratory health devices.

~~Surgical Solutions –~~ ~~globally provides products that improve safety and efficiency in the surgical space, including tables, lights, pendants, precision positioning devices and other accessories.~~

Our performance within each reportable segment continues to be measured on a divisional income basis before non-allocated

operating and administrative costs, 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, excluding acquisition-related intangible asset amortization, 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 costs, administrative costs, and other includes 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. The chief operating decision maker does not receive any asset information by ~~operating~~reportable segment and, accordingly, we do not report asset information by ~~operating~~reportable segment.

Effective for fiscal 2020, the allocation of operating costs to each segment was modified to improve the alignment to how management evaluates the performance of each segment. The fiscal 2019 segment information has been recast to conform to the current presentation. The reclassification did not impact our reported Consolidated Net Revenue or Income Before Income Taxes.

Quarter Ended
December 31
2019 2018
Net revenue - United States:
Patient Support Systems $ 266.6
$ 248.1
Front Line Care 178.1
166.5
Surgical Solutions 37.1
53.9
Total net revenue - United States $ 481.8
$ 468.5

Net revenue - Outside of the United States (“OUS”):
Patient Support Systems $ 77.6
$ 92.9
Front Line Care 76.5
66.9
Surgical Solutions 49.1
55.2
Total net revenue - OUS $ 203.2
$ 215.0

Net revenue:
Patient Support Systems $ 344.2
$ 341.0
Front Line Care 254.6
233.4
Surgical Solutions 86.2
109.1
Total net revenue $ 685.0
$ 683.5

Divisional income:

Patient Support Systems $ 58.4
$ 59.6
Front Line Care 73.5
61.9
Surgical Solutions 12.8
11.2

Other operating costs:

Non-allocated operating costs, administrative costs, and other $ 58.0
$ 53.9
Special charges 7.8
8.0
Operating profit $ 78.9
$ 70.8

Interest expense $ (19.4 ) $ (21.3 )
Loss on extinguishment of debt (15.6 ) —
Investment income (expense) and other, net (1.3 ) 0.1
Income before income taxes $ 42.6
$ 49.6


	Three Months Ended December 31
	2020		2019
Net Revenue - United States:
Patient Support Systems	$	268.9	$	266.6
Front Line Care	184.5		178.1
Surgical Solutions	34.2		37.1
Total net revenue - United States	$	487.6	$	481.8

Net Revenue - Outside of the United States (“OUS”):
Patient Support Systems	$	108.5	$	77.6
Front Line Care	85.4		76.5
Surgical Solutions	59.6		49.1
Total net revenue - OUS	$	253.5	$	203.2

Net Revenue:
Patient Support Systems	$	377.4	$	344.2
Front Line Care	269.9		254.6
Surgical Solutions	93.8		86.2
Total net revenue	$	741.1	$	685.0

Divisional Income:
Patient Support Systems	$	87.3	$	58.4
Front Line Care	81.9		73.5
Surgical Solutions	17.5		12.8

Other Operating Costs:
Non-allocated operating costs, administrative costs, and other	77.2		58.0
Special charges	27.1		7.8
Operating Profit	82.4		78.9

Interest expense	(17.8)		(19.4)
Loss on extinguishment of debt	0		(15.6)
Investment income (expense) and other, net	7.0		(1.3)
Income Before Income Taxes	$	71.6	$	42.6

Note 15. 12. Commitments and Contingencies

We are subject to various 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 materially adverse effect on our financial condition, results of operations and cash flows.

We are involved in various 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 at various limits up 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.


~~Item 2.~~	Table of Contents Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion and analysis should be read in conjunction with the accompanying interim financial statements and our ~~2019~~2020 Form 10-K.

Hill-Rom Holdings, Inc. ~~(the “Company,” “Hillrom,” “we,~~(“we,” “us,” or “our”) ~~was incorporated on August 7, 1969 in the State of Indiana and~~ is ~~headquartered in Chicago, Illinois. We are~~ a global medical technology leader whose approximately 10,000 employees have a single purpose: enhancing outcomes for patients and their caregivers by Advancing Connected ~~Care~~^TMCare™. Around the world, our innovations touch over 7 million patients each day. Our products and services help enable earlier diagnosis and treatment, optimize surgical efficiency and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. We make these outcomes possible through connected smart beds, patient lifts, patient assessment and monitoring technologies, caregiver collaboration tools, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.

The Impacts of COVID-19 on Hillrom

COVID-19 has impacted global economies as travel, leisure and discretionary consumer spending has reduced significantly causing companies to make commensurate changes to their investments, human capital, and financial outlooks. The United States and countries around the world continue to take precautionary and preventive measures to reduce the spread of COVID-19. Recently, prospects for an eventual path out of the crisis have improved as COVID-19 vaccines were authorized for use globally and governments began executing plans to distribute the vaccines to the public as supplies become available over the course of fiscal 2021. However, near-term outlook remains uncertain due to external factors such as policymaker decisions to remove certain restrictions, availability and distribution of vaccines and people's willingness to take the vaccine.

Revenues and Customers

Hillrom continues to experience fluctuations in demand across its portfolio of products as health care customers manage the treatment of patients diagnosed with COVID-19. Due to an increase in COVID-19 confirmed cases and hospitalizations that were attributed to holiday travel, we experienced higher demand for select products within Patient Support Systems such as intensive care unit and med-surg beds and specialty surfaces, including our rental portfolio.

We also experienced higher than expected recovery in portions of our remaining portfolio that had previously been limited due to hospital access and doctor office restrictions.

For the remainder of fiscal 2021, we expect hospitals and physician practices to advance toward more normal operating activities as efforts continue across the world to control the spread of COVID-19 through improved testing and contact tracing and the availability and distribution of an effective vaccine.

Operations and Workforce

We have experienced no significant supply chain constraints nor significant increases in supply costs, and we were able to secure raw materials and components for manufacturing products in high demand due to COVID-19.

Our production facilities have remained open and employment levels have remained consistent. Many employees in our administrative functions have effectively continued to work remotely since mid-March 2020. We have implemented the necessary precautions to allow our employees to work safely and effectively in our manufacturing and service facilities. In other areas of the business, we have adapted our processes and used technology to continue to effectively execute on our strategic priorities as well as daily operating activities.

We will continue to assess our workforce requirements in response to evolving customer demand related to COVID-19.

As disclosed in Note 1. Summary of Significant Accounting Policies, we have benefited from government programs within the various jurisdictions in which we operate in the form of subsidies, incentives, cost relief and payment deferrals. Management will continue to evaluate these opportunities as well as the related requirements or restrictions to support our operations and workforce in a manner that allows us to continue to operate efficiently and effectively.

Table of Contents

For further discussion, see the risk factor within PART I, Item 1.A Risk Factors, entitled “Our business, results of operations, financial condition and prospects could be materially and adversely affected by the ongoing COVID-19 pandemic and the related effects on public health.” within the 2020 Form 10-K.

Use of Non-GAAP Financial Measures

The accompanying Condensed Consolidated Financial Statements and related notes are presented in accordance with GAAP. In addition to the results reported in accordance with GAAP, we routinely provide operating margin, income before taxes, income tax expense and earnings per diluted share results on an adjusted basis as we believe these measures contribute to the understanding of our financial performance, provide additional analytical tools to understand our results from core operations and reveal underlying operating trends. These measures exclude strategic developments, acquisition and integration costs and related fair value adjustments, gains and losses associated with disposals of businesses or significant product lines, regulatory costs related to updating existing product registrations to comply with the European Medical Device Regulations, Special charges as described in Note 10 - 8. Special Charges, of this Form 10-Q, the ~~transitional impacts of the U.S. Tax Cuts and Jobs Act (the “Tax Act”),~~ changes in tax accounting methods, and other tax law changes as described in Note ~~11 -~~11. Income Taxes within the ~~2019~~2020 Form 10-K, expenses associated with these tax items, the impacts of significant litigation matters, orcertain impacts of the COVID-19 pandemic and other unusual events. We also exclude expenses associated with the amortization of purchased intangible assets. These adjustments are made to allow investors to evaluate and understand operating trends excluding their impact on operating income and earnings per diluted share.

Management uses these measures internally for planning, forecasting and evaluating the performance of the business. Investors

should consider these non-GAAP measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP.

In addition, we present certain results on a constant currency basis, which compares results between periods as if foreign currency exchange rates had remained consistent period-over-period. We monitor sales performance on an adjusted basis that eliminates the positive or negative effects that result from translating international sales into U.S. dollars. We calculate constant currency by applying the foreign currency exchange rate for the prior period to the local currency results for the current period. We believe that evaluating growth in net revenue on a constant currency basis provides an additional and meaningful assessment to both management and investors.

Table of Contents

Results of Operations

In this section, we provide an overview of our results of operations. We disclose segment information that is consistent with the way in which management operates and views the business. Our operating structure contains the following reportable segments:

•


•	~~Front Line Care –~~ globally provides patient monitoring and diagnostic technologies, including a diversified portfolio of physical assessment tools that help diagnose, treat and manage a wide variety of illnesses and diseases, including a portfolio of vision care and respiratory health devices.


•	~~Surgical Solutions –~~ ~~globally provides products that improve safety and efficiency in the surgical space, including tables, lights, pendants, precision positioning devices and other accessories.~~

Net Revenue


(In millions)									U.S.		OUS
	Three Months Ended December 31				Change As Reported		Constant Currency		Change As Reported		Change As Reported		Constant Currency
	2020		2019
Net Revenue:
Product sales and service	$	652.5	$	614.3	6.2	%	4.4	%	(2.8)	%	25.7	%	19.9	%
Rental revenue	88.6		70.7		25.3	%	24.3	%	28.1	%	6.5	%	(1.1)	%
Total net revenue	$	741.1	$	685.0	8.2	%	6.5	%	1.2	%	24.8	%	18.9	%

Net Revenue:
Patient Support Systems	$	377.4	$	344.2	9.6	%	8.0	%	0.9	%	39.8	%	32.7	%
Front Line Care	269.9		254.6		6.0	%	5.0	%	3.6	%	11.6	%	8.2	%
Surgical Solutions	93.8		86.2		8.8	%	4.4	%	(7.8)	%	21.4	%	13.6	%
Total net revenue	$	741.1	$	685.0	8.2	%	6.5	%	1.2	%	24.8	%	18.9	%

OUS - Outside of the United States

(in millions) U.S. OUS
Quarter Ended
December 31
Change As
Reported

Constant
Currency

Change As
Reported

Change As
Reported

Constant
Currency
2019 2018
Net Revenue:
Product sales and service $ 614.3
$ 611.6
0.4 % 0.9 % 3.4 % (5.5 )% (4.0 )%
Rental revenue 70.7
71.9
(1.7 )% (1.4 )% (1.0 )% (6.1 )% (4.1 )%
Total net revenue $ 685.0
$ 683.5
0.2 % 0.7 % 2.8 % (5.5 )% (4.0 )%

Net Revenue:
Patient Support Systems $ 344.2
$ 341.0
0.9 % 1.4 % 7.5 % (16.5 )% (14.6 )%
Front Line Care 254.6
233.4
9.1 % 9.3 % 7.0 % 14.3 % 15.1 %
Surgical Solutions 86.2
109.1
(21.0 )% (20.0 )% (31.2 )% (11.1 )% (9.2 )%
Total net revenue $ 685.0
$ 683.5
0.2 % 0.7 % 2.8 % (5.5 )% (4.0 )%

OUS - Outside of the United States

Three Months Ended December 31, 2020 Compared to the Three Months Ended December 31, 2019

Consolidated Revenue

Product sales and service revenue increased ~~0.4%~~6.2% on a reported basis, ~~or 0.9%~~and 4.4% on a constant currency basis, for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 ~~compared to the quarter ended December 31, 2018 primarily~~ due to ~~Voalte, which was acquired in April 2019, as well as sales growth related to new products, our care communications platform~~higher demand across all reportable segments outside the United States including market expansion of med-surg and ICU bed systems across our Front Line Care products, including significant growth internationally. These growth drivers were partially offset by declines resulting from our disposition of the surgical consumable products business in August 2019.Europe and other International markets.

Rental revenue ~~decreased 1.7%~~increased 25.3% on a reported basis, ~~or 1.4%~~and 24.3% on a constant currency basis, for the ~~quarter~~three months ended December 31, ~~2019~~2020 compared to the ~~quarter~~three months ended December 31, ~~2018.~~2019. The ~~decreases were attributable~~increase was primarily due to increased deployment of beds within the ~~exit~~Patient Support Systems rental portfolio for COVID-19 patients in the United States.

Table of ~~a rental arrangement remaining from the previously divested third-party rental business.~~Contents

Business Segment Revenue

Patient Support Systems revenue increased ~~0.9%~~9.6% on a reported basis, ~~or 1.4%~~and 8.0% on a constant currency basis, for the ~~quarter~~three months ended December 31, ~~2019~~2020 compared to the ~~quarter~~three months ended December 31, ~~2018.~~2019. The ~~increases were~~increase was driven primarily by sales growth inoutside the United States ~~from our~~due to customer demand for intensive care ~~communications platform, which includes Voalte that contributed approximately 4.0% of the total~~unit and med-surg beds as well as higher U.S. rental revenues ~~and new products.~~related to COVID-19 demand. The ~~increases were~~increase was partially offset by lower ~~sales outside of the United States. Revenue~~U.S. demand and project delays for the quarter ended December 31, 2019 does not reflect approximately $0.6 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred revenue related to the Voalte acquisition.care communications products.

Front Line Care revenue increased ~~9.1%~~6.0% on a reported basis, ~~or 9.3%~~and 5.0% on a constant currency basis, for the ~~quarter~~three months ended December 31, ~~2019~~2020 compared to the ~~quarter~~three months ended December 31, ~~2018.~~2019. The ~~increases were~~increase was driven by global sales of patient ~~diagnostic~~monitoring and ~~monitoring~~thermometry products ~~and incremental revenue from the acquisition of Breathe.~~to hospitals.

Surgical Solutions revenue ~~decreased 21.0%~~increased 8.8% on a reported basis, ~~or 20.0%~~and 4.4% on a constant currency basis, for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 ~~compared to the quarter ended December 31, 2018,~~ primarily due to higher revenues in Europe, including the ~~disposition of the surgical consumable products business in August 2019. The decreases were partially offset by strong growth from operating tables.~~new acquisition.

Gross Profit


(in millions)	Quarter Ended December 31
(In millions)							(In millions)	Three Months Ended December 31
	2019			2018				2020			2019
Gross Profit ¹							Gross Profit 1
Product sales and service	$	308.0		$	295.3		Product sales and service	$	328.3		$	308.0
Percent of Related Net Revenue	50.1		%	48.3		%	Percent of Related Net Revenue	50.3		%	50.1		%

Rental	$	33.7		$	34.7		Rental	50.9			33.7
Percent of Related Net Revenue	47.7		%	48.3		%	Percent of Related Net Revenue	57.4		%	47.7		%

Total Gross Profit	$	341.7		$	330.0		Total Gross Profit	$	379.2		$	341.7
Percent of Total Net Revenue	49.9		%	48.3		%	Percent of Total Net Revenue	51.2		%	49.9		%

¹Gross Profit is calculated as net product sales and service revenue and rental revenue less the related cost of goods sold or rental expenses as disclosed on the face of the Condensed Consolidated Statements of Income.

Product sales and service gross profit increased by ~~$12.7~~$20.3 million or ~~4.3%~~6.6% for the ~~quarter~~three months ended December 31, ~~2019~~2020 compared to the ~~quarter~~three months ended December 31, ~~2018.~~2019. The ~~growth~~increase in gross profit was primarily driven by ~~changes~~increased sales volume outside the United States and favorable product mix. The increase in ~~the product sales mix across all segments that resulted in more sales derived from higher~~ gross profit ~~products, including Voalte, as well as improved operating~~is also attributed to cost efficiencies ~~that resulted in lower operating costs. The disposition of~~within our ~~surgical consumable products business in August 2019 also contributed to the increase.~~supply chain operations.

Rental gross profit ~~decreased $1.0~~increased by $17.2 million or ~~2.9%~~51.0% for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019, ~~compared to~~primarily driven by higher volumes and lower costs associated with servicing the ~~quarter ended December 31, 2018 primarily~~Patient Support Systems rental portfolio due to ~~lower volumes.~~

increased rental durations related to hospital needs for COVID-19 patients.

Operating Expenses


(In millions)	Three Months Ended December 31
	2020			2019
Research and development expenses	$	34.8		$	31.5
Percent of Total Net Revenue	4.7		%	4.6		%

Selling and administrative expenses	$	209.0		$	196.8
Percent of Total Net Revenue	28.2		%	28.7		%

Acquisition-related intangible asset amortization	$	25.9		$	26.7
Percent of Total Net Revenue	3.5		%	3.9		%

(in millions) Quarter Ended December 31
2019 2018
Research and development expenses $ 31.5
$ 33.2
Percent of Total Net Revenue 4.6 % 4.9 %

Selling and administrative expenses $ 196.8
$ 192.3
Percent of Total Net Revenue 28.7 % 28.1 %

Acquisition-related intangible asset amortization $ 26.7
$ 25.7
Percent of Total Net Revenue 3.9 % 3.8 %

Table of Contents

Research and development expenses ~~decreased~~increased by ~~$1.7~~$3.3 million or ~~5.1%~~10.5% for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 ~~compared to the quarter ended December 31, 2018 due to the timing of projects.~~

Asand remained consistent as a percentage of ~~total net revenue,~~ revenue.

Selling and administrative expenses increased $12.2 million or 6.2% for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 primarily due to increased variable compensation linked to performance, increased marketing spend and an increase in costs related to our IT transformation efforts. These increases were partially offset by lower travel expenses and decreased compensation costs resulting from the Workforce Reduction Plan.

Acquisition-related intangible asset amortization decreased $0.8 million or 3.0% for the three months ended December 31, 2020 compared to the quarter ended December 31, 2018. Selling and administrative expenses is reduced by a net benefit of $2.7 million related to acquisition and integration costs and regulatory compliance costs for the quarter ended December 31, 2019. Selling and administrative expenses include acquisition and integration costs and regulatory compliance costs totaling $3.0 million for the

~~quarter ended December 31, 2018. Excluding these items, as a percentage of total revenue, Selling and administrative expenses increased 5.4% for the quarter~~three months ended December 31, 2019 ~~compared to the quarter ended December 31, 2018~~primarily due to ~~increased compensation costs primarily related to stock based compensation, increased information technology costs and increased investment~~a scheduled decrease in ~~emerging markets.~~

~~Acquisition-related intangible~~ asset amortization ~~increased by $1.0 million or 3.9% for the quarter ended December 31, 2019 compared to the quarter ended December 31, 2018 due to the acquisition~~ of ~~Voalte and Breathe during April and September 2019,~~customer relationships, which was partially offset by amortization of intangible assets acquired in business combinations executed in fiscal 2020.See Note 3. Business Combinations within the ~~disposition of our surgical consumable products business in August 2019.~~2020 Form 10-K for further information.

Special Charges and Other

(in millions) Quarter Ended December 31
2019 2018
Special charges $ 7.8
$ 8.0

Interest expense $ (19.4 ) $ (21.3 )
Loss on extinguishment of debt $ (15.6 ) $ —
Investment income (expense) and other, net $ (1.3 ) $ 0.1


(In millions)	Three Months Ended December 31
	2020		2019
Special charges	$	27.1	$	7.8

Interest expense	$	(17.8)	$	(19.4)
Loss on extinguishment of debt	$	—	$	(15.6)
Investment income (expense) and other, net	$	7.0	$	(1.3)

In connection with various transformative initiatives, exit activities, and organizational changes to improve our business alignment and cost ~~structure,~~structure., we recognized Special charges of ~~$7.8 million and $8.0~~$27.1 million for the ~~quarters~~three months ended December 31, ~~2019 and 2018.~~2020 compared to $7.8 million for the three months ended December 31, 2019. These charges related to the initiatives described in Note 10 - 8. Special ~~Charges~~.Charges.

Interest expense decreased $1.6 million or 8.2% for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 ~~compared~~due to lower borrowings outstanding, lower borrowing rates from the refinancing of senior unsecured notes of $425.0 million in September 2019, declines in LIBOR impacting our variable rate debt under the Securitization and Revolving Credit Facilities and a reduction of $0.5 million in fiscal 2020 as we did not incur duplicative interest costs with respect to the ~~quarter~~refinancing. See Note 4. Financing Agreements for further information.

Loss on extinguishment of debt for the three months ended December 31, ~~2018 due~~2019 related to ~~lower interest rates resulting from~~ the refinancing of senior unsecured notes of $425.0 million in September 2019. See Note 5 - 4. Financing Agreements ~~for further information.~~

~~Loss on extinguishment of debt related to the refinancing of unsecured notes of $425.0 million in September 2019. See~~ ~~Note 5~~ - ~~Financing Agreements~~for further information.

Investment income (expense) and other, net ~~decreased~~ for the ~~quarter~~three months ended December 31, ~~2019 compared to the quarter ended December 31, 2018~~2020 increased by $8.3 million primarily due to ~~incremental net pension expense~~the receipt of an insurance settlement of $5.3 million related to ~~the amortization~~covered losses in prior periods and higher investment income of ~~actuarial losses.~~$1.8 million.

Income Tax Expense

The effective tax rate for the ~~quarter~~three months ended December 31, ~~2019~~2020 was ~~6.6%~~17.9% compared to ~~14.9%~~6.6% for the ~~quarter ended December 31, 2018~~comparable period in the prior year. The rate was lower in the prior year period primarily due to the ~~difference in the discrete tax benefits realized in each period. The current period rate was favorably impacted by $4.1 million~~favorable impact of excess tax benefits on deductible stock compensation compared to ~~$1.7 million of benefit in~~ the ~~comparable prior~~current year period. The ~~current period~~effective tax rate for the three months ended December 31, 2019 was also favorably impacted by the reduction of the contingent consideration accrual of $8.4 million, ~~in the quarter ended December 31, 2019,~~ that iswas not subject to tax.

The adjusted effective tax rate for the ~~quarter~~three months ended December 31, ~~2019~~2020 was ~~16.6%~~20.5% compared to ~~19.7%~~16.6% for the ~~quarter ended December 31, 2018. The lower adjusted tax rate~~comparable period in the ~~current~~prior year. The adjusted rate was lower in the prior year isperiod primarily due to ~~a larger amount~~the favorable impact of excess tax benefits on deductible stock compensation compared to the ~~prior~~current year period.

Table of Contents

Earnings per Share

Diluted earnings per share ~~decreased~~increased from ~~$0.62~~$0.59 to ~~$0.59~~$0.88 for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 ~~compared to the quarter ended December 31, 2018~~primarily due to higher operating profits, the ~~$15.6 million~~ loss on extinguishment of debt recognized in fiscal 2020 and the increase in Investment income (expense) and other, net, which was partially offset by higher ~~gross profit and a lower~~income tax ~~rate.~~expense.

Business Segment Divisional Income

Quarter Ended
December 31 Change As Reported
2019 2018
Divisional income:

Patient Support Systems $ 58.4
$ 59.6
(2.0 )%
Front Line Care 73.5
61.9
18.7 %
Surgical Solutions 12.8
11.2
14.3 %


(In millions)	Three Months Ended December 31				Change As Reported
	2020		2019
Divisional Income:
Patient Support Systems	$	87.3	$	58.4	49.5	%
Front Line Care	81.9		73.5		11.4	%
Surgical Solutions	17.5		12.8		36.7	%

Refer to Note 14 - 11. Segment Reporting for a description of how divisional income is determined.

Patient Support Systems divisional income ~~decreased 2.0%~~increased $28.9 million or 49.5% for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 ~~compared to the quarter ended December 31, 2018~~ primarily due to increased revenue related to intensive care unit and med-surg beds sales outside the United States as well as bed rentals in the United States as a result of higher demand due to COVID-19, and expanded gross profits due to longer rental durations and operational efficiencies. These increases were partially offset by an increase in investments to support growth ~~initiatives, partially offset by revenue growth in the United States from the acquisition of Voalte, new products and care communications.~~initiatives.

Front Line Care divisional income increased ~~18.7%~~$8.4 million or 11.4% for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 ~~compared~~primarily driven by global sales growth for patient monitoring and thermometry products to ~~the quarter ended December 31, 2018 due to overall revenue growth and improved product mix resulting in higher gross profits.~~hospitals.

Surgical Solutions divisional income increased ~~14.3%~~$4.7 million or 36.7% for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 ~~compared~~primarily due to ~~the quarter ended December 31, 2018 as~~increased revenues in Europe, including a ~~result of higher gross margins and reductions in operating costs,~~recent acquisition, which was partially offset by ~~declines from the disposition of the surgical consumable products business in August 2019.~~inventory reserves for discontinued products.

~~GAAP~~As Reporting and Adjusted Earnings

Operating ~~margin,~~margin, income before income taxes, income tax expense and earnings attributable to common shareholders per diluted share are summarized in the ~~table below. GAAP~~tables below for the three months ended December 31, 2020 and 2019. As Reported amounts are adjusted for certain items to aid management in evaluating the performance of the business. Investors should consider these measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Income tax expense is computed by applying a blended statutory tax rate based on the jurisdictional mix of the respective before tax adjustment.

Table of Contents

Quarter Ended December 31, 2019 Quarter Ended December 31, 2018
Operating
Margin Income
Before
Income
Taxes Income Tax
Expense Diluted EPS Operating
Margin Income
Before
Income
Taxes Income Tax
Expense Diluted EPS
GAAP Basis 11.5 % $ 42.6
$ 2.8
$ 0.59
10.4 % $ 49.6
$ 7.4
$ 0.62
Adjustments:

Acquisition and integration costs and related fair value adjustments¹
(1.0 )% (6.6 ) 0.3
(0.10 ) — % 0.2
0.1
—
Acquisition-related intangible asset amortization ²
4.0 % 26.7
6.4
0.30
3.8 % 25.7
5.9
0.29
Regulatory compliance costs ³
0.6 % 3.9
0.6
0.05
0.3 % 2.8
0.7
0.03
Special charges⁴
1.1 % 7.8
1.2
0.10
1.2 % 8.0
1.9
0.09
Tax law and method changes ⁵
— % —
—
—
— % —
1.0
(0.01 )
Debt financing costs ⁶
— % 16.1
3.7
0.18
— % —
—
—
Loss on disposition of business ⁷
— % 0.5
0.1
0.01
— % —
—
—
Adjusted Basis 16.2 % $ 91.0
$ 15.1
$ 1.13
15.7 % $ 86.3
$ 17.0
$ 1.02
¹ Acquisition and integration costs and related fair value adjustments include legal and professional fees, temporary labor, consulting and other costs related to the closing and integration of acquired businesses, including purchase accounting adjustments for deferred revenue and other items, and contingent consideration. For the quarter ended December 31, 2019, a net benefit from fair value adjustments of $7.5 million represents purchase accounting adjustments for deferred revenue and contingent consideration associated with our business combinations in Note 4 - Business Combinations.
² Acquisition-related intangible asset amortization relates to the amortization of intangible assets associated with our business combinations.
³ Regulatory compliance costs relate to updating existing product registrations to comply with the European Medical Device Regulations. These costs are included in Selling and administrative expenses.
⁴Special charges represent a variety of costs associated with restructuring actions, including severance and related benefits, lease termination fees, asset write-downs and temporary labor on shutdown of operations. It also includes costs related to a global information technology transformation, including rationalizing and transforming our enterprise resource planning software solutions and other complementary information technology systems.
⁵ Tax law and method changes relate to tax expenses and related unrecognized tax benefits due to the Tax Cuts and Jobs Act enacted in the United States in December 2017. See Note 11 - Income Taxes within the 2019 Form 10-K for the fiscal year ended September 30, 2019 for further information
⁶ Debt refinancing costs are expenses related to the costs incurred between the issuance and redemption of our senior unsecured notes due 2027 and 2023, respectively. In the quarter ended December 31, 2019, debt refinancing costs include a loss on extinguishment of debt of $15.6 million related to the redemption of all of our previously outstanding senior unsecured 5.75% notes due September 2023 as discussed within Note 5 - Financing Agreements, as well as $0.5 million of duplicative interest costs.
⁷ Loss on disposition of business relates to losses recorded in Investment income and other, net resulting from business dispositions.


	Three Months Ended December 31, 2020								Three Months Ended December 31, 2019
	Operating Margin		Income Before Income Taxes		Income Tax Expense		Diluted EPS		Operating Margin		Income Before Income Taxes		Income Tax Expense		Diluted EPS
As Reported	11.1	%	$	71.6	$	12.8	$	0.88	11.5	%	$	42.6	$	2.8	$	0.59
Adjustments:
Acquisition and integration costs and related fair value adjustments 1	—	%	(0.1)		—		—		(1.0)	%	(6.6)		0.3		(0.10)
Acquisition-related intangible asset amortization 2	3.5	%	25.9		6.3		0.29		4.0	%	26.7		6.4		0.30


Regulatory compliance costs 3	0.5	%	4.1		1.0		0.05		0.6	%	3.9		0.6		0.05
Special charges 4	3.7	%	27.1		6.2		0.31		1.1	%	7.8		1.2		0.10


Debt refinancing costs 5	—	%	—		—		—		—	%	16.1		3.7		0.18
Loss on business combinations 6	—	%	—		—		—		—	%	0.5		0.1		0.01


COVID-19 related costs and benefits, net 7	—	%	(0.1)		—		—		—	%	—		—		—
Adjusted Basis	18.8	%	$	128.5	$	26.3	$	1.53	16.2	%	$	91.0	$	15.1	$	1.13
1 Acquisition and integration costs and related fair value adjustments include legal and professional fees, temporary labor, consulting and other costs related to the closing and integration of acquired businesses, including purchase accounting adjustments for deferred revenue and other items, and contingent consideration. For the three months ended December 31, 2020 and 2019, a net benefit from fair value adjustments of $1.6 million and $7.5 million, respectively, represents purchase accounting adjustments for deferred revenue and contingent consideration associated with our business combinations in Note 3. Business Combinations.
2 Acquisition-related intangible asset amortization relates to the amortization of intangible assets associated with our business combinations.

3 Regulatory compliance costs relate to updating existing product registrations to comply with the European Medical Device Regulations and the impacts of current period tax law changes. These costs are included in Selling and administrative expenses.
4 Special charges represent a variety of costs associated with restructuring actions, including severance and related benefits, lease termination fees, asset write-downs and temporary labor on shutdown of operations. It also includes costs related to a global information technology transformation, including rationalizing and transforming our enterprise resource planning software solutions and other complementary information technology systems. See Note 8. Special Charges for further information.

5 Debt refinancing costs are expenses related to the costs incurred between the issuance and redemption of our senior unsecured notes due 2027 and 2023, respectively, as discussed within Note 4. Financing Agreements as well as duplicative interest costs.
6 Loss on business combinations relates to the sale of our surgical consumable products business in August 2019 recorded in Investment income (expense) and other, net.
7 COVID-19 related costs and benefits, net primarily represent incremental non-recurring costs incurred to prepare our facilities for workforce reintegration to ensure the safety of our employees, partially offset by the recognition of funding associated with government programs created in response to COVID-19. See Note 1. Summary of Significant Accounting Policies for further information.

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Liquidity and Capital Resources


	Three Months Ended December 31
	2020		2019
Cash Flows (Used In) Provided By:
Operating activities	$	100.2	$	77.0
Investing activities	(29.0)		(23.8)
Financing activities	(80.0)		(487.3)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	6.9		4.7
Decrease in Cash, Cash Equivalents and Restricted Cash	$	(1.9)	$	(429.4)

Quarter Ended December 31
2019 2018
Cash Flows Provided By (Used In):
Operating activities $ 77.0
$ 116.0
Investing activities (23.8 ) (58.5 )
Financing activities (487.3 ) (54.6 )
Effect of exchange rate changes on cash 4.7
(1.7 )
(Decrease) Increase in Cash and cash equivalents $ (429.4 ) $ 1.2

Net cash flows from operating activities and selected borrowings ~~represented~~represent our primary sources of funds for growth of the

business, including capital expenditures and acquisitions. Our financing agreements contain certain restrictions relating to dividend payments, the making of restricted payments and the ~~incurrence~~occurrence of additional secured and unsecured indebtedness. None of our financing agreements contain any credit rating triggers ~~which~~that would increase or decrease our cost of borrowings. Credit rating changes can, however, impact the cost of borrowings and any potential future borrowings under any new financing agreements.

Operating Activities

Cash provided by operating activities ~~decreased $39.0~~increased $23.2 million for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 ~~compared~~primarily due to higher net income and lower inventory levels, partially offset by a reduction in liabilities due to the ~~quarter ended December 31, 2018. The primary drivers include an increase in~~timing of vendor payments and higher incentive compensation payments as ~~well as timing of payments related~~compared to ~~funding an additional payroll period and other receivables.~~the prior year.

Investing Activities

Cash used in investing activities ~~was $23.8~~increased by $5.2 million for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 primarily ~~driven by~~due to an increase in capital expenditures ~~of $24.3 million, offset by proceeds on~~predominantly related to our global information technology transformation. For the ~~disposal of property, plant and equipment and equipment leased to others of $0.5 million.~~

~~Cash used in investing activities decreased $34.7 million for the quarter~~three months ended December 31, 2020 and 2019, ~~compared to the quarter ended December 31, 2018 primarily due to our acquisitions~~we capitalized internally generated costs of ~~the right to use patented technology and certain related assets of $17.1~~$7.0 million and ~~non-marketable securities of $26.6~~$5.3 million ~~during the quarter ended December 31, 2018~~ as ~~discussed within~~ ~~Note 3~~ - ~~Supplementary Financial Statement Information~~software in Other intangible assets and ~~Note 4~~ - ~~Business Combinations, respectively.~~software, net related to this initiative.

Financing Activities

Cash used in financing activities ~~increased $432.7~~decreased $407.3 million for the ~~quarter~~three months ended December 31, 2020 compared to the three months ended December 31, 2019 ~~compared to the quarter ended December 31, 2018~~ primarily due to the prior year redemption of our previously outstanding senior unsecured 5.75% notes due September 2023 offor $425.0 million and the related ~~prepayment premium of~~ $12.2 million ~~as described within~~ ~~Note 5~~ - ~~Financing Agreements, as well as the purchase of $15.1 million of Treasury Stock in connection with employee payroll tax withholding for restricted stock distributions. Cash used in financing activities~~prepayment penalty, which was partially offset by ~~borrowings against our Note Securitization Facility and 2024 Revolving Credit Facility as described within~~ ~~Note 5~~ - ~~Financing Agreements~~.stock repurchases of $47.4 million in the open market during the three months ended December 31, 2020.

Treasury stock repurchases may be made on the open market or via private transactions, and are used to manage our capital structure, offset the dilutive impact of stock-based compensation and return cash to shareholders.

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Other Liquidity Matters

Our cash balances and cash flows generated from operations may be used to fund strategic investments, business acquisitions, working capital needs, capital expenditures, investments in technology and marketing, share repurchases and payments of dividends to our shareholders. We believe that our cash balances and cash flows generated from operations, along with amounts available under our financing agreements, will be sufficient to fund operations, working capital needs, capital expenditure requirements, and financing obligations for at least the next 12 months from the date of this filing. ~~However, disruption~~

Our cash flows from operating activities for the three months ended December 31, 2020 were not adversely impacted by COVID-19. There have been no changes to our cost of or access to our capital and ~~volatility~~funding sources. We have not identified instability with the financial institutions with whom we maintain our financing relationships. We believe we can continue to service our outstanding borrowings or other financial obligations.

We intend to continue to pursue inorganic growth in certain areas of our business. On January 15, 2021, we entered into a definitive merger agreement with Bardy Diagnostics, Inc. (“Bardy”). The Bardy business develops and delivers cardiac arrhythmia monitoring devices. The purchase price for the Bardy acquisition consists of initial cash consideration of $375.0 million, subject to closing conditions and certain post-closing adjustments, and we expect to fund the initial cash consideration through a combination of cash on hand and borrowings under our existing revolving credit facility. As noted inNote 3 to the Condensed Consolidated Financial Statements, we currently are assessing the recent reimbursement rate decision and the potential impacts of that decision on the Bardy business.

On January 28, 2021, we acquired the contact-free continuous monitoring intellectual property and technology from EarlySense Ltd. in exchange for consideration consisting of a cash payment of $30.0 million, a portion of our non-marketable equity investment in EarlySense Ltd. of $25.5 million and forgiveness of a prepayment of approximately $2.0 million.

See "Note 3. Business Combinations" in the ~~credit markets could impede~~notes to the accompanying Condensed Consolidated Financial Statements for additional information on our ~~access to capital. Our 2024~~recent business combination activity.

As of December 31, 2020 and September 30, 2020, there were no outstanding borrowings on the 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~~available borrowing capacity was $1,191.0 million after giving effect to the $9.0 million of outstanding standby letters of credit.

Our long-term debt instruments require nominal repayments over the next 12 months, with our next significant maturity occurring in ~~the event that any one~~August 2024. As of ~~the institutions within the group is unable to comply~~December 31, 2020, we were in compliance with ~~the terms of~~all debt covenants under our ~~agreement.~~financing agreements. See Note 5 - 4. Financing Agreements for additional information on our financing agreements.

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. ~~See~~ ~~Note 4~~ - ~~Business Combinations~~ ~~for information on our acquisitions and dispositions completed during fiscal 2019 and 2018.~~

We intend to continue to pay quarterly cash dividends comparable to those paid in the periods covered by these financial statements. However, the declaration and payment of dividends will be subject to the sole discretion of our Board and will depend upon many factors, including our financial condition, earnings, capital requirements, covenants associated with debt obligations, legal requirements and other factors considered relevant by our Board.

As of December 31, ~~2019,~~2020, approximately ~~75.1%~~52.8% of our cash and cash equivalents were held by our foreign subsidiaries. As of December 31, ~~2019,~~2020, our practice and intention ~~was~~were to reinvest the earnings in our non-U.S. subsidiaries outside of the United ~~States.~~

~~With regard to our non-U.S. subsidiaries, it is our practice and intention to reinvest the earnings in those businesses~~States to fund capital expenditures and other operating cash needs. Because the undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested, no U.S. deferred income taxes or foreign withholding taxes have been provided on earnings subsequent to the enactment of the U.S. Tax ~~Act.~~Cuts and Jobs Act (the "Tax Act"). Future repatriations of cash and cash equivalents, if any, held by our foreign subsidiaries will generally not be subject to U.S. Federal tax if earned prior to the enactment of the Tax Act. As we evaluate the impact of the Tax Act and the future cash needs of our global operations, we may revise the amount of foreign earnings generated prior to the enactment of the Tax Act considered to be permanently reinvested in our foreign subsidiaries. We believe that cash on hand and cash generated from U.S. operations, along with amounts available under our financing agreements, will be sufficient to fund U.S. operations, working capital needs, capital expenditure requirements and financing obligations.

The U.S. Internal Revenue Service and Treasury Department continue to release proposed guidance with respect to the Tax Act. We continue to evaluate what impact, if any, each piece of guidance may have on our related tax positions and our effective tax rate if, and when, such guidance is finalized.

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Contractual Obligations and Contingent Liabilities and Commitments

There have not been any significant changes since September 30, ~~2019~~2020 impacting our contractual obligations and contingent liabilities and commitments.

Critical Accounting Policies

Our accounting policies require management to make significant estimates and assumptions using information available at the time the estimates are made. Such estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenue, and expenses. If future experience differs significantly from these estimates and assumptions, our results of operations and financial condition could be affected. A detailed description of our accounting policies is included in Note 1 - 1. Summary of Significant Accounting Policies and the Critical Accounting Policies Section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our ~~2019~~2020 Form 10-K. There have been no significant changes to such policies since September 30, ~~2019.~~2020.

For a further summary of certain accounting policies and estimates and recently issued accounting pronouncements applicable to us, see Note 1 - 1. Summary of Significant Accounting ~~Policies~~Policies.

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~~Item 3.~~	~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS~~

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are exposed to various market risks, including fluctuations in interest rates, collection risk associated with our accounts and notes receivable portfolio 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. From time-to-time, we enter into currency exchange ~~agreements~~contracts to manage exposures 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. The maximum length of time over which we hedge transaction exposures is generally 1512 months. Derivative gains and losses, initially reported as a component of Accumulated other comprehensive income (loss), are reclassified to earnings in the period when the transaction affects earnings.

Refer to Note 6 - 5. Derivative Instruments and Hedging Activity for discussions and quantitative disclosures about our derivative agreements.

For additional information on market risks related to our pension plan assets, see Item ~~7A -~~7A. Quantitative and Qualitative Disclosures About Market Risk in our ~~2019~~2020 Form 10-K.


~~Item 4.~~	~~CONTROLS AND PROCEDURES~~

Item 4. 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 December 31, ~~2019.~~2020. 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 December 31, ~~2019.~~2020.

Beginning October 1, 2019, we adopted ASC 842, which resulted in the recognition of right-of-use assets and lease liabilities in the Condensed Consolidated Balance Sheet. We performed implementation controls, including reviews of lease contracts, to adopt the new standard, and implemented certain changes in our ongoing lease processes and control activities, which included enhancements to lease review and valuation processes, and gathering of information for disclosures.

~~With the exception of the above, there~~There have been no changes to our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred in our most recent completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION


~~Item 1.~~	Item 1. LEGAL PROCEEDINGS

Refer to Note 15 - 12. Commitments and Contingencies for further information on our legal proceedings.


~~Item 1A.~~	~~RISK FACTORS~~

Item 1A. RISK FACTORS

There have been no material changes to our risk factors as disclosed in Item 1A - Risk Factors in our ~~2019~~2020 Form ~~10-K for the year ended September 30, 2019.~~10-K.


~~Item 2.~~	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs (2)
October 1, 2020 - October 31, 2020	2,512	$	82.42	—	$	163.4
November 1, 2020 - November 30, 2020	583,673	$	94.79	500,000	$	116.0
December 1, 2020 - December 31, 2020	2,052	$	95.89	—	$	116.0
Total	588,237			500,000

(1)Shares purchased during the three months ended December 31, 2020 were in connection with employee payroll tax withholding for restricted stock distributions and shares purchased of our common stock in the open market under our share repurchase program.

(2)In September 2019, the Board approved an additional $170.0 million for share repurchases. The below table reflects the date of Board approval, the authorized dollar value of the shares to be repurchased under each approval and the availability to repurchase as of December 31, 2020. There is no expiration date for this program.


Board Approval Date	Authorized Dollar Value		Dollar Value of Shares Purchased Prior to Fiscal 2021		Dollar Value of Shares Purchased in Fiscal 2021		Availability to Purchase as of December 31, 2020
September 2019	$	170.0	$	6.6	$	47.4	$	116.0

Period
Total
Number
of Shares
Purchased ⁽¹⁾

Average
Price Paid
per Share

Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans or Programs ⁽²⁾

Approximate
Dollar Value
of Shares That
May Yet Be
Purchased Under
the Programs ⁽²⁾
October 1, 2019 - October 31, 2019 867
$ 101.60
—
$ 217.5
November 1, 2019 - November 30, 2019 142,160
$ 104.08
—
$ 217.5
December 1, 2019 - December 31, 2019 2,157
$ 101.92
—
$ 217.5
Total 145,184
—


~~(1)~~	~~Shares purchased in the quarter ended December 31, 2019 were in connection with employee payroll tax withholding for restricted stock distributions.~~

~~(2)~~

In September 2019, the Board approved an additional $170.0 million for share repurchases. The below table reflects the date of Board approval, the authorized dollar value of the shares to be repurchased under each approval and the availability to repurchase as of December 31, 2019. There were no shares repurchased in the open market in the quarter ended December 31, 2019 under these plans. There is no expiration date or plans to terminate this program in the future.

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Board Approval Date Authorized Dollar Value Dollar Value of Shares Purchased Prior to Fiscal 2020 Dollar Value of Shares Purchased in Fiscal 2020 Availability to Purchase as of December 31, 2019
November 2017 $ 150.0
$ 102.5
$ —
$ 47.5
September 2019 170.0
—
—
170.0
Totals $ 320.0
$ 102.5
$ —
$ 217.5

Item 6. EXHIBITS

A. Exhibits

Management contracts and compensatory plans or arrangements are designated with “*”.


~~Item 6.~~ *10.1			~~EXHIBITS~~


A.	~~Exhibits~~

Addendum to the Amended and Restated Employment Agreement between Kenneth F. Meyers and Hill‑Rom Holdings, Inc. dated as of November 30, 2020.



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		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

32.2		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.LAB	XBRL Extension Labels Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements 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.



	~~HILL-ROM HOLDINGS, INC.~~
	~~(Registrant)~~



			HILL-ROM HOLDINGS, INC.
			(Registrant)

Date: ~~January 29, 2020~~February 5, 2021

By:

/s/ Barbara W. Bodem

Name:

Title:

Barbara W. Bodem

Senior Vice President and Chief Financial Officer

(duly authorized officer and principal financial officer)


	December 31, 2019			September 30, 2019				December 31, 2020		September 30, 2020
ASSETS							ASSETS
Current Assets							Current Assets
Cash and cash equivalents	$	204.4		$	214.1		Cash and cash equivalents	$	294.6	$	296.5
Restricted cash	—			419.7
Trade accounts receivable, net of allowances of $20.6 as of December 31, 2019 and September 30, 2019	593.7			653.3

Trade accounts receivable, net of allowances of $27.7 and $25.9 as of December 31, 2020 and September 30, 2020							Trade accounts receivable, net of allowances of $27.7 and $25.9 as of December 31, 2020 and September 30, 2020	598.0		594.9
Inventories, net of reserves	277.7			269.6			Inventories, net of reserves	335.9		352.0

Other current assets	120.3			106.7			Other current assets	111.5		121.5
Total current assets	1,196.1			1,663.4			Total current assets	1,340.0		1,364.9
Property, plant and equipment	840.6			829.6			Property, plant and equipment	878.1		858.2
Less accumulated depreciation	(542.5		)	(532.8		)	Less accumulated depreciation	(569.6)		(552.1)
Property, plant and equipment, net	298.1			296.8			Property, plant and equipment, net	308.5		306.1
Goodwill	1,808.6			1,800.9			Goodwill	1,847.9		1,835.5
Other intangible assets and software, net	1,016.7			1,033.5			Other intangible assets and software, net	958.6		976.7
Deferred income taxes	33.7			33.1			Deferred income taxes	34.7		32.9
Other assets	165.5			91.3			Other assets	153.8		155.0
Total Assets	$	4,518.7		$	4,919.0		Total Assets	$	4,643.5	$	4,671.1
LIABILITIES							LIABILITIES
Current Liabilities							Current Liabilities
Trade accounts payable	$	196.4		$	197.6		Trade accounts payable	$	202.9	$	236.5
Short-term borrowings	230.0			660.4			Short-term borrowings	222.3		222.3
Accrued compensation	78.4			130.4			Accrued compensation	97.6		144.9
Accrued product warranties	28.8			29.7			Accrued product warranties	30.0		30.8
Accrued rebates	48.9			47.7			Accrued rebates	54.4		44.8
Deferred revenue	101.4			107.3			Deferred revenue	112.3		110.1
Other current liabilities	104.4			95.2			Other current liabilities	180.7		162.8
Total current liabilities	788.3			1,268.3			Total current liabilities	900.2		952.2

Long-term debt	1,766.3			1,783.1			Long-term debt	1,643.8		1,655.7
Accrued pension and postretirement benefits	81.3			80.8			Accrued pension and postretirement benefits	94.7		89.3
Deferred income taxes	138.5			143.0			Deferred income taxes	108.7		113.0
Other long-term liabilities	125.3			70.5			Other long-term liabilities	133.0		134.8
Total Liabilities	2,899.7			3,345.7			Total Liabilities	2,880.4		2,945.0
Commitments and Contingencies
SHAREHOLDERS’ EQUITY

SHAREHOLDERS' EQUITY							SHAREHOLDERS' EQUITY
Capital Stock:							Capital Stock:
Preferred stock - without par value:
Authorized - 1,000,000 shares; none issued or outstanding
Common stock - without par value	4.4			4.4
Authorized: 199,000,000
Issued: 88,457,634 shares as of December 31, 2019 and September 30, 2019; Outstanding: 66,956,366 as of December 31, 2019 and 66,625,011 as of September 30, 2019
Preferred stock - without par value: Authorized - 1,000,000 shares; none issued or outstanding							Preferred stock - without par value: Authorized - 1,000,000 shares; none issued or outstanding
Common stock - without par value: Authorized - 199,000,000 shares							Common stock - without par value: Authorized - 199,000,000 shares	4.4		4.4
Issued: 88,457,634 shares as of December 31, 2020 and September 30, 2020; Outstanding: 66,354,008 shares as of December 31, 2020 and 66,640,832 shares as of September 30, 2020							Issued: 88,457,634 shares as of December 31, 2020 and September 30, 2020; Outstanding: 66,354,008 shares as of December 31, 2020 and 66,640,832 shares as of September 30, 2020
Additional paid-in capital	632.7			637.4			Additional paid-in capital	668.5		667.0
Retained earnings	1,993.1			1,967.4			Retained earnings	2,174.1		2,132.2
Accumulated other comprehensive loss	(161.3		)	(182.5		)
Treasury stock, common shares at cost: 21,501,268 as of December 31, 2019 and 21,832,623 as of September 30, 2019	(849.9		)	(853.4		)
Total Shareholders’ Equity	1,619.0			1,573.3
Total Liabilities and Shareholders’ Equity	$	4,518.7		$	4,919.0
Accumulated other comprehensive income (loss)							Accumulated other comprehensive income (loss)	(143.3)		(180.2)
Treasury stock, common shares at cost: 22,103,626 as of December 31, 2020 and 21,816,802 as of September 30, 2020							Treasury stock, common shares at cost: 22,103,626 as of December 31, 2020 and 21,816,802 as of September 30, 2020	(940.6)		(897.3)
Total Shareholders’ Equity							Total Shareholders’ Equity	1,763.1		1,726.1

Total Liabilities and Shareholders' Equity							Total Liabilities and Shareholders' Equity	$	4,643.5	$	4,671.1



	Quarter Ended								Year Ended
	December 31, 2018		March 31, 2019		June 30, 2019		September 30, 2019		September 30, 2019		September 30, 2018		September 30, 2017
Selling and administrative expense, previously reported	$	218.0	$	231.2	$	246.4	$	245.4	$	941.0	$	891.6	$	874.5
Less, Acquisition-related intangible asset amortization	25.7		27.3		29.3		40.1		122.4		106.9		108.4
Selling and administrative expense, currently reported	$	192.3	$	203.9	$	217.1	$	205.3	$	818.6	$	784.7	$	766.1



	Contract Liabilities
Balance as of October 1, 2018	$	47.8
Revenue deferred due to ASC 606 initial adoption	58.4
Deferred revenue acquired	10.7
New revenue deferrals	282.1
Revenue recognized upon satisfaction of performance obligations	(273.2		)
Balance as of September 30, 2019	125.8
New revenue deferrals	80.5
Revenue recognized upon satisfaction of performance obligations	(85.2		)
Balance as of December 31, 2019	$	121.1



	Amount
Trade accounts receivable, net of allowances	$	0.3
Inventories	6.3
Other current assets	0.1
Property, plant and equipment	2.1
Goodwill	60.2
Trade name	4.0
Customer relationships	0.4
Developed technology	56.0
Other assets	0.2
Trade accounts payable	(0.5		)
Other current liabilities	(1.6		)
Deferred income taxes	0.9
Other long-term liabilities	(0.8		)
Total purchase price, net of cash acquired	$	127.6



Fiscal Year	Amount
Remaining 2020	$	19.3
2021	22.0
2022	16.3
2023	11.3
2024	6.5
2025	4.4
Thereafter	10.4
Total lease payments	90.2
Less: imputed interest	(7.5		)
Total lease liability	$	82.7



	Quarter Ended December 31, 2019
	Other comprehensive income (loss)														Accumulated other comprehensive income (loss)
	Prior to reclassification			Reclassification from		Pre-tax			Tax effect			Net of tax			Beginning balance			Net activity			Ending balance ²
Derivative instruments designated as hedges ¹:
Foreign exchange forward contracts	$	(0.3	)	$	0.1	$	(0.2	)	$	—		$	(0.2	)	$	0.2		$	(0.2	)	$	—
Interest rate swaps	0.9			0.8		1.7			(0.4		)	1.3			(5.2		)	1.3			(3.9		)
Cross-currency swaps	(4.8		)	—		(4.8		)	1.1			(3.7		)	12.2			(3.7		)	8.5
Derivative instruments designated as hedges total	(4.2		)	0.9		(3.3		)	0.7			(2.6		)	7.2			(2.6		)	4.6
Foreign currency translation adjustment	23.1			—		23.1			—			23.1			(145.4		)	23.1			(122.3		)
Change in pension and postretirement defined benefit plans	(0.2		)	1.2		1.0			(0.3		)	0.7			(44.3		)	0.7			(43.6		)
Total	$	18.7		$	2.1	$	20.8		$	0.4		$	21.2		$	(182.5	)	$	21.2		$	(161.3	)



	Quarter Ended December 31, 2018
	Other comprehensive income (loss)															Accumulated other comprehensive income (loss)
	Prior to reclassification			Reclassification from			Pre-tax			Tax effect			Net of tax			Beginning balance			Impacts of ASU 2018-02 Adoption as of October 1, 2018			Net activity			Ending balance
Derivative instruments designated as hedges ¹:
Foreign exchange forward contracts	$	1.2		$	(0.1	)	$	1.1		$	(0.4	)	$	0.7		$	0.2		$	—		$	0.7		$	0.9
Interest rate swaps	(5.1		)	(2.1		)	(7.2		)	1.9			(5.3		)	18.3			0.8			(5.3		)	13.8
Cross-currency swaps	2.2			—			2.2			(1.3		)	0.9			(1.7		)	—			0.9			(0.8		)
Derivative instruments designated as hedges total	(1.7		)	(2.2		)	(3.9		)	0.2			(3.7		)	16.8			0.8			(3.7		)	13.9
Foreign currency translation adjustment	(13.6		)	—			(13.6		)	—			(13.6		)	(105.3		)	—			(13.6		)	(118.9		)
Change in pension and postretirement defined benefit plans	—			0.5			0.5			(0.1		)	0.4			(24.5		)	(6.2		)	0.4			(30.3		)
Total	$	(15.3	)	$	(1.7	)	$	(17.0	)	$	0.1		$	(16.9	)	$	(113.0	)	$	(5.4	)	$	(16.9	)	$	(135.3	)



	Quarter Ended December 31
	2019			2018
Net revenue - United States:
Patient Support Systems	$	266.6		$	248.1
Front Line Care	178.1			166.5
Surgical Solutions	37.1			53.9
Total net revenue - United States	$	481.8		$	468.5

Net revenue - Outside of the United States (“OUS”):
Patient Support Systems	$	77.6		$	92.9
Front Line Care	76.5			66.9
Surgical Solutions	49.1			55.2
Total net revenue - OUS	$	203.2		$	215.0

Net revenue:
Patient Support Systems	$	344.2		$	341.0
Front Line Care	254.6			233.4
Surgical Solutions	86.2			109.1
Total net revenue	$	685.0		$	683.5

Divisional income:
Patient Support Systems	$	58.4		$	59.6
Front Line Care	73.5			61.9
Surgical Solutions	12.8			11.2

Other operating costs:
Non-allocated operating costs, administrative costs, and other	$	58.0		$	53.9
Special charges	7.8			8.0
Operating profit	$	78.9		$	70.8

Interest expense	$	(19.4	)	$	(21.3	)
Loss on extinguishment of debt	(15.6		)	—
Investment income (expense) and other, net	(1.3		)	0.1
Income before income taxes	$	42.6		$	49.6



Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽²⁾	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs ⁽²⁾
October 1, 2019 - October 31, 2019	867	$	101.60	—	$	217.5
November 1, 2019 - November 30, 2019	142,160	$	104.08	—	$	217.5
December 1, 2019 - December 31, 2019	2,157	$	101.92	—	$	217.5
Total	145,184			—

Balance Sheet Classification

December 31, 2019

Right-of-use assets

Other assets

Current lease liabilities

Other current liabilities

Non-current lease liabilities

Other long-term liabilities