Common Stock, without par value – ~~65,464,951~~65,354,742 shares as of ~~July 27, 2016.~~

January 23, 2017.

HILL-ROM HOLDINGS, INC.

INDEX TO FORM 10-Q



				Page
PART I - FINANCIAL INFORMATION


	Item 1 -	Financial Statements

		Condensed Consolidated Statements of Income (Unaudited)		3

		Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)		4

		Condensed Consolidated Balance Sheets (Unaudited)		5

		Condensed Consolidated Statements of Cash Flows (Unaudited)		6

		~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~Note 1. Summary of Significant Accounting Policies		7

		Note 2. Supplementary Balance Sheet Information	9

		Note 3. Acquisitions	9

		Note 4. Goodwill	10

		Note 5. Financing Agreements	10

		Note 6. Retirement and Postretirement Plans	12

		Note 7. Other Comprehensive Income (Loss)	13

		Note 8. Special Charges	13

		Note 9. Income Taxes	14

		Note 10. Earnings per Common Share	15

		Note 11. Common Stock	15

		Note 12. Guarantees	15

		Note 13. Segment Reporting	16

		Note 14. Commitments and Contingencies	17

		Note 15. Subsequent Events	18

	Item 2 -	Management's Discussion and Analysis of Financial Condition and Results of Operations		20 19

	Item 3 -	Quantitative and Qualitative Disclosures About Market Risks		29 28

	Item 4 -	Controls and Procedures		29 28

PART II - OTHER INFORMATION

	Item 1 -	Legal Proceedings		30 29

	Item 1A -	Risk Factors		30 29

	Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		30 29

	Item 6 -	Exhibits		31 30

SIGNATURES				32 31

~~Table of Contents~~

PART I – FINANCIAL INFORMATION


Item 1.	FINANCIAL STATEMENTS

~~Item 1. FINANCIAL STATEMENTS~~

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(In millions, except per share data)

Quarter Ended June 30 Year to Date Ended June 30
2016 2015 2016 2015
Net Revenue
Product sales and service $ 556.0 $ 376.8 $ 1,650.4 $ 1,125.9
Rental revenue 99.4 97.7 298.8 288.4
Total revenue 655.4 474.5 1,949.2 1,414.3

Cost of Revenue
Cost of goods sold 293.6 217.9 896.0 652.3
Rental expenses 46.4 47.1 142.9 138.4
Total cost of revenue 340.0 265.0 1,038.9 790.7

Gross Profit 315.4 209.5 910.3 623.6

Research and development expenses 33.6 23.3 101.5 67.3
Selling and administrative expenses 209.9 150.5 640.5 455.5
Special charges (Note 8) 13.7 4.4 31.5 11.9

Operating Profit 58.2 31.3 136.8 88.9

Interest expense (23.0 ) (3.3 ) (68.2 ) (9.5 )
Investment income and other, net 0.1 - 0.6 2.2

Income Before Income Taxes 35.3 28.0 69.2 81.6

Income tax (benefit) expense (Note 9) (9.7 ) 9.3 (2.2 ) 24.7

Net Income 45.0 18.7 71.4 56.9

Less: Net loss attributable to noncontrolling interests (0.3 ) (0.4 ) (1.0 ) (0.4 )

Net Income Attributable to Common Shareholders $ 45.3 $ 19.1 $ 72.4 $ 57.3

Net Income Attributable to Common Shareholders
per Common Share - Basic $ 0.69 $ 0.34 $ 1.11 $ 1.01

Net Income Attributable to Common Shareholders
per Common Share - Diluted $ 0.68 $ 0.33 $ 1.09 $ 0.99

Dividends per Common Share $ 0.1700 $ 0.1600 $ 0.5000 $ 0.4725

Average Common Shares Outstanding - Basic (thousands) (Note 10) 65,406 56,670 65,300 56,777

Average Common Shares Outstanding - Diluted (thousands) (Note 10) 66,552 57,899 66,402 57,943



	Quarter Ended December 31
	2016			2015
Net Revenue
Product sales and service	$	541.9		$	565.1
Rental revenue	95.5			96.1
Total revenue	637.4			661.2

Cost of Revenue
Cost of goods sold	288.4			323.1
Rental expenses	46.4			47.4
Total cost of revenue	334.8			370.5

Gross Profit	302.6			290.7

Research and development expenses	32.0			33.6
Selling and administrative expenses	208.8			221.2
Special charges (Note 8)	5.8			7.1

Operating Profit	56.0			28.8

Interest expense	(19.5		)	(22.5		)
Investment income and other, net	(1.2		)	(0.5		)

Income Before Income Taxes	35.3			5.8

Income tax expense (Note 9)	11.8			1.5

Net Income	23.5			4.3

Less: Net loss attributable to noncontrolling interests	(0.3		)	(0.5		)

Net Income Attributable to Common Shareholders	$	23.8		$	4.8

Net Income Attributable to Common Shareholders per Common Share - Basic	$	0.36		$	0.07

Net Income Attributable to Common Shareholders per Common Share - Diluted	$	0.36		$	0.07

Dividends per Common Share	$	0.17		$	0.16

Average Common Shares Outstanding - Basic (thousands) (Note 10)	65,504			65,217

Average Common Shares Outstanding - Diluted (thousands) (Note 10)	66,860			66,274

See Notes to Condensed Consolidated Financial Statements

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In millions)



	Quarter Ended December 31
	2016			2015
Net Income	$	23.5		$	4.3

Other Comprehensive Income (Loss), net of tax (Note 7):

Available-for-sale securities and hedges	10.2			0.1
Foreign currency translation adjustment	(39.5		)	(10.2		)
Change in pension and postretirement defined benefit plans	1.3			0.7
Total Other Comprehensive Loss, net of tax	(28.0		)	(9.4		)

Total Comprehensive Loss	(4.5		)	(5.1		)

Less: Comprehensive loss attributable to noncontrolling interests	(0.3		)	(0.5		)

Total Comprehensive Loss Attributable to Common Shareholders	$	(4.2	)	$	(4.6	)

~~Table of Contents~~

~~Hill-Rom Holdings, Inc. and Subsidiaries~~

~~Condensed Consolidated Statements of Comprehensive Income (Unaudited)~~

~~(In millions)~~

Quarter Ended June 30 Year to Date Ended June 30
2016 2015 2016 2015
Net Income $ 45.0 $ 18.7 $ 71.4 $ 56.9

Other Comprehensive (Loss) Income, net of tax (Note 7):

Available-for-sale securities and hedges (3.3 ) 0.1 (5.0 ) (0.5 )
Foreign currency translation adjustment (20.1 ) 19.4 (17.7 ) (51.2 )
Change in pension and postretirement defined benefit plans 0.9 0.8 2.2 2.6
Total Other Comprehensive (Loss) Income, net of tax (22.5 ) 20.3 (20.5 ) (49.1 )

Total Comprehensive Income 22.5 39.0 50.9 7.8

Less: Comprehensive loss attributable to noncontrolling interests (0.3 ) (0.4 ) (1.0 ) (0.4 )

Total Comprehensive Income Attributable to Common Shareholders $ 22.8 $ 39.4 $ 51.9 $ 8.2

See Notes to Condensed Consolidated Financial Statements

~~Table of Contents~~

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In millions)

June 30, 2016 September 30, 2015
ASSETS
Current Assets
Cash and cash equivalents $ 199.6 $ 192.8
Trade accounts receivable, net of allowances (Note 2) 459.0 494.7
Inventories (Note 2) 254.4 267.4
Deferred income taxes (Notes 1 and 9) - 77.0
Other current assets 92.7 109.1
Total current assets 1,005.7 1,141.0

Property, plant and equipment, net (Note 2) 356.3 378.4
Goodwill (Note 4) 1,606.7 1,610.5
Software and other intangible assets, net (Note 2) 1,173.0 1,247.7
Deferred income taxes (Notes 1 and 9) 47.2 21.6
Other assets 47.6 58.4
Total Assets $ 4,236.5 $ 4,457.6

LIABILITIES
Current Liabilities
Trade accounts payable $ 117.8 $ 136.3
Short-term borrowings (Note 5) 76.8 58.0
Accrued compensation 109.3 171.8
Accrued product warranties (Note 12) 27.0 32.1
Accrued rebates 35.9 33.7
Other current liabilities 137.4 146.9
Total current liabilities 504.2 578.8

Long-term debt (Note 5) 2,054.6 2,175.2
Accrued pension and postretirement benefits (Note 6) 119.4 118.8
Deferred income taxes (Notes 1 and 9) 320.6 380.6
Other long-term liabilities 40.0 47.3
Total Liabilities 3,038.8 3,300.7

Commitments and Contingencies (Note 14)

SHAREHOLDERS' EQUITY
Common Stock (Note 2) 4.4 4.4
Additional paid-in-capital 575.9 562.0
Retained earnings 1,549.3 1,509.9
Accumulated other comprehensive loss (Note 7) (161.3 ) (140.8 )
Treasury stock, at cost (Note 2) (779.6 ) (788.6 )
Total Shareholders' Equity Attributable to Common Shareholders 1,188.7 1,146.9
Noncontrolling interests 9.0 10.0
Total Shareholders' Equity 1,197.7 1,156.9
Total Liabilities and Shareholders' Equity $ 4,236.5 $ 4,457.6



	December 31, 2016			September 30, 2016
ASSETS
Current Assets
Cash and cash equivalents	$	231.7		$	232.2
Trade accounts receivable, net of allowances (Note 2)	471.9			515.1
Inventories (Note 2)	245.6			252.0
Other current assets	78.2			82.8
Total current assets	1,027.4			1,082.1

Property, plant and equipment, net (Note 2)	343.6			350.0
Goodwill (Note 4)	1,570.0			1,584.4
Other intangible assets and software, net (Note 2)	1,111.0			1,143.3
Deferred income taxes (Notes 1 and 9)	38.4			43.1
Other assets	54.0			59.5
Total Assets	$	4,144.4		$	4,262.4

LIABILITIES
Current Liabilities
Trade accounts payable	$	125.8		$	136.0
Short-term borrowings (Note 5)	228.5			210.1
Accrued compensation	81.6			127.0
Accrued product warranties (Note 12)	26.3			27.5
Accrued rebates	46.2			40.8
Other current liabilities	106.9			120.9
Total current liabilities	615.3			662.3

Long-term debt (Note 5)	1,912.2			1,938.4
Accrued pension and postretirement benefits (Note 6)	97.8			99.0
Deferred income taxes (Notes 1 and 9)	285.0			287.8
Other long-term liabilities	38.7			39.0
Total Liabilities	2,949.0			3,026.5

Commitments and Contingencies (Note 14)

SHAREHOLDERS' EQUITY
Common Stock (Note 2)	4.4			4.4
Additional paid-in-capital	576.2			575.9
Retained earnings	1,602.3			1,589.7
Accumulated other comprehensive loss (Note 7)	(197.1		)	(169.1		)
Treasury stock, at cost (Note 2)	(798.8		)	(773.7		)
Total Shareholders' Equity Attributable to Common Shareholders	1,187.0			1,227.2
Noncontrolling interests	8.4			8.7
Total Shareholders' Equity	1,195.4			1,235.9
Total Liabilities and Shareholders' Equity	$	4,144.4		$	4,262.4

See Notes to Condensed Consolidated Financial Statements

~~Table of Contents~~

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

    Year to Date Ended June 30
2016 2015
Operating Activities
Net income $ 71.4 $ 56.9
Adjustments to reconcile net income to net cash provided by
   operating activities:
Depreciation 71.9 53.1
Amortization 12.9 8.3
Acquisition-related intangible asset amortization 72.1 23.4
Provision for deferred income taxes (7.9 ) (12.3 )
Loss on disposal of property, equipment leased to others,
       intangible assets, and impairments 1.4 -
Stock compensation 18.1 14.0
Excess tax benefits from employee stock plans (1.3 ) (1.7 )
Change in working capital excluding cash, current debt,
acquisitions and dispositions:
Trade accounts receivable 33.5 4.7
Inventories 11.8 (3.4 )
Other current assets 16.5 (5.1 )
Trade accounts payable (15.3 ) (18.1 )
Accrued expenses and other liabilities (79.0 ) 0.3
Other, net (0.7 ) 4.3
Net cash provided by operating activities 205.4 124.4

Investing Activities
Capital expenditures and purchases of intangible assets (60.7 ) (102.6 )
Proceeds on sale of property and equipment leased to others 1.5 1.2
Payment for acquisition of businesses, net of cash acquired 0.5 (5.1 )
Other (1.6 ) 2.1
Net cash used in investing activities (60.3 ) (104.4 )

Financing Activities
Net change in short-term debt - (0.7 )
Proceeds from borrowing on long-term debt 2.5 -
Borrowings on revolving credit facility 20.0 95.0
Payments on revolver (20.0 ) -
Payment of long-term debt (109.9 ) (11.5 )
Debt issuance costs - (1.6 )
Purchase of noncontrolling interest of former joint venture (0.4 ) (1.6 )
Payment of cash dividends (32.6 ) (26.7 )
Proceeds on exercise of stock options 3.8 10.2
Proceeds from stock issuance 2.7 2.1
Excess tax benefits from employee stock plans 1.3 1.7
Treasury stock acquired (3.5 ) (57.4 )
Net cash (used in) provided by financing activities (136.1 ) 9.5

Effect of exchange rate changes on cash (2.2 ) (5.4 )

Net Cash Flows 6.8 24.1

Cash and Cash Equivalents:
At beginning of period 192.8 99.3
At end of period $ 199.6 $ 123.4



	Quarter Ended December 31
	2016			2015
Operating Activities
Net income	$	23.5		$	4.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	20.8			23.6
Amortization	5.0			4.3
Acquisition-related intangible asset amortization	25.5			24.2
Provision for deferred income taxes	(6.1		)	22.3
Loss on disposal of property, equipment leased to others, intangible assets, and impairments	0.4			0.7
Gain on sale of businesses	(1.0		)	—
Stock compensation	5.1			5.0
Excess tax benefits from employee stock plans	—			(1.0		)
Change in working capital excluding cash, current debt, acquisitions and dispositions:
Trade accounts receivable	35.5			31.6
Inventories	(1.0		)	17.4
Other current assets	14.9			3.5
Trade accounts payable	(7.6		)	(23.8		)
Accrued expenses and other liabilities	(46.2		)	(66.1		)
Other, net	2.2			0.2
Net cash provided by operating activities	71.0			46.2

Investing Activities
Capital expenditures and purchases of intangible assets	(22.4		)	(17.7		)
Proceeds on sale of property and equipment leased to others	4.1			0.3
Proceeds on sale of businesses	4.5			—
Other	(0.3		)	—
Net cash used in investing activities	(14.1		)	(17.4		)

Financing Activities
Borrowings on revolving credit facility	45.0			—
Payments on revolving credit facility	(35.8		)	—
Payment of long-term debt	(18.3		)	(34.5		)
Purchase of noncontrolling interest of former joint venture	—			(0.4		)
Payment of cash dividends	(11.1		)	(10.4		)
Proceeds on exercise of stock options	2.5			0.7
Proceeds from stock issuance	1.0			0.8
Excess tax benefits from employee stock plans	—			1.0
Treasury stock acquired	(33.5		)	(2.8		)
Net cash used in financing activities	(50.2		)	(45.6		)

Effect of exchange rate changes on cash	(7.2		)	(1.6		)

Net Cash Flows	(0.5		)	(18.4		)

Cash and Cash Equivalents:
At beginning of period	232.2			192.8
At end of period	$	231.7		$	174.4

See Notes to Condensed Consolidated Financial ~~Statement~~Statements

~~Table of Contents~~

Hill-Rom Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in millions except per share data)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

Unless the context otherwise requires, the terms “Hill-Rom,” “the Company,” “we,” “our,” and “us” refer to Hill-Rom Holdings, Inc. and its wholly-owned subsidiaries. The unaudited Condensed Consolidated Financial Statements appearing in this Quarterly Report on Form 10-Q should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in Hill-Rom’s latest Annual Report on Form 10-K for the fiscal year ended September 30, ~~2015~~2016 (“~~2015~~2016 Form 10-K”) as filed with the United States (“U.S.”) Securities and Exchange Commission. The September 30, ~~2015~~2016 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 U.S. In the opinion of management, the Condensed Consolidated Financial Statements herein include all adjustments, consisting only of normal recurring 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 Hill-Rom and its wholly-owned subsidiaries. In addition, we also consolidate variable interest entities ~~(VIEs)~~("VIEs") where Hill-Rom is deemed to have a controlling financial interest. Intercompany accounts and transactions have been eliminated in consolidation, including the intercompany transactions with consolidated VIEs. Where our ownership interest is less than ~~100 percent,~~100%, the noncontrolling interests are reported in our Condensed Consolidated Financial Statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the period. Actual results could differ from those ~~estimates.~~estimates and such differences could be material. Examples of such estimates include, but are not limited to, income taxes (Notes 1 and 9), accounts receivable reserves (Note 2), accrued warranties (Note 12), the impairment of intangibles and goodwill (Note 4), ~~use of the spot yield curve approach for~~ pension expense (Note 6), and commitments and contingencies (Note 14)~~, among others.~~.

Fair Value Measurements

Fair value measurements are classified and disclosed in one of the following three categories:

~~Level 1: Financial instruments with unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities.~~

Level 1: Financial instruments with unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities.

Level 2: Financial instruments with observable inputs other than those included in Level 1 such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Financial instruments with unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Unobservable inputs reflect our own assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs shall be developed based on the best information available in the circumstances, which might include our own data.

We record cash and cash equivalents, as disclosed on our Condensed Consolidated Balance Sheets, as Level 1 instruments and certain other derivatives and investments as either Level 2 or 3 instruments. There have not been significant changes in our classification among assets and liabilities during the fiscal quarter. Refer to Note 5 for disclosure of our debt instrument and interest rate swap fair values.

~~Table of Contents~~

Taxes Collected from Customers and Remitted to Governmental Units

Taxes assessed by a governmental authority that are directly imposed on a revenue producing transaction between us and our customers, including but not limited to sales taxes, use taxes and value added taxes, are accounted for on a net (excluded from revenue and costs) basis.

Income Taxes

Hill-Rom and its eligible domestic subsidiaries file a consolidated U.S. income tax return. Foreign operations file income tax returns in a number of jurisdictions. Deferred income taxes are computed using an asset and liability approach to reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. We have a variety of deferred tax assets in numerous tax jurisdictions. These deferred tax assets are subject to periodic assessment as to recoverability. If it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recognized. In evaluating whether it is more likely than not that we would recover these deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies are considered.

As of ~~June 30,~~December 31, 2016, we had ~~$21.0~~$27.1 million of valuation allowances on deferred tax assets, on a tax-effected basis, primarily related to state tax credit carryforwards that are not expected to be utilized. The valuation allowances decreased by $19.7 million in the year to date period ended June 30, 2016 due primarily to the release of the valuation allowance on the net deferred tax assets in France. The release of the valuation allowance was due mainly to changes in our operating structure which impacted our projection of future taxable incomeutilized and ~~our expectation as to the utilization of net~~foreign operating loss ~~carryforwards.~~carryforwards and other tax attributes. We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances.

We account for uncertain income tax positions using a threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The difference between the tax benefit recognized in the financial statements for an uncertain income tax position and the tax benefit claimed in the tax return is referred to as an unrecognized tax benefit.

Dispositions

During the first quarter of fiscal 2017, we sold our Architectural Products business for $4.5 million in cash proceeds and recorded an immaterial gain in Investment income and other, net during the first quarter of 2017.

Recently Issued Accounting Standards

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation – Stock Compensation (Topic 718), “Improvements to Employee Share-Based Payment Accounting.” During the first quarter of fiscal 2017, we elected to early adopt ASU 2016-09, as permitted. Under ASU 2016-09, the tax effects of stock compensation will be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. Amendments related to accounting for excess tax benefits have been adopted prospectively, resulting in recognition of excess tax benefits against income tax expense rather than additional paid in capital of $0.5 million in the three months ended December 31, 2016. As a result of the adoption, we did not record an adjustment to retained earnings as we did not have net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to additional paid in capital. Excess tax benefits for share-based payments are now included as net operating activities rather than net financing activities. The changes have been applied prospectively in accordance with the ASU and prior periods have not been adjusted. Cash paid by an employer when directly withholding shares for tax withholding purposes will continue to be classified as financing activities. We elected not to change our accounting policy for forfeitures. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions.

In May 2014, the FASB issued ~~Accounting Standards Update (“ASU”)~~ASU 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which delayed the effective date of the new revenue guidance by one ~~year.~~year, while permitting companies to early adopt the new standard as of the original effective date. As a result, the provisions of ASU 2014-09 and subsequent amendments, are effective for us in the first quarter of fiscal ~~2019, ending December 31, 2018. Early adoption is permitted as of~~2019. We plan to adopt the ~~original~~new standard effective ~~date, but not earlier.~~ WeOctober 1, 2018 and are ~~currently in the process of evaluating~~continuing to evaluate the impact of adoption ~~of this ASU on our Condensed Consolidated Financial Statements.~~

~~In November 2015,~~and the FASB issued ASU 2015-17, Income Taxes (Topic 740), “Balance Sheet Classification of Deferred Taxes.” The amendments in this update simplify the presentation of deferred income taxes by requiring deferred tax assets and liabilitiesimplementation approach to be classified as noncurrent in a classified balance sheet. As permitted, we elected to early-adopt this standard in the first quarter of fiscal 2016 on a prospective basis. Prior period amounts were not retrospectively adjusted for the impacts of this ASU.used.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). From the lessee’s perspective, the new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor’s perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor does not convey risks and rewards or control, an operating lease results. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative

period presented in the financial statements, with certain practical expedients available. ~~We are currently in the process of evaluating the impact of the amended guidance on our Condensed Consolidated Financial Statements.~~

~~Table of Contents~~

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting. Under ASU 2016-09, the tax effects of stock compensation will be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. Along with other income tax cash flows, excess tax benefits will be classified as operating activities, and cash paid by an employer when directly withholding shares for tax withholding purposes will be classified as financing activities. Entities may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. For public companies, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted, however, an entity that elects early adoption must adopt all amendments under the new standard in the same period. We are currently in the process of evaluating the impact of the amended guidance on our Condensed Consolidated Financial Statements.

Except as noted above, there have been no significant changes to our assessment of the impact of recently issued accounting standards included in Note 1 of Notes to Consolidated Financial Statements in our ~~Fiscal 2015~~2016 Form 10-K.

Note 2. Supplementary Balance Sheet Information

June 30, 2016 September 30, 2015

Allowance for possible losses and discounts on trade receivables $ 25.7 $ 26.0

Inventories:
Finished products $ 126.7 $ 133.2
Raw materials and work in process 127.7 134.2
Total inventory $ 254.4 $ 267.4

Accumulated depreciation of property, plant and equipment $ 621.5 $ 598.0

Accumulated amortization of software and other intangible assets $ 376.2 $ 304.4

Preferred stock, without par value:
Shares authorized 1,000,000 1,000,000
Shares issued None None

Common stock, without par value:
Shares authorized 199,000,000 199,000,000
Shares issued 88,457,634 88,457,634
Shares outstanding 65,464,242 65,165,896

Treasury shares 22,993,392 23,291,738



	December 31, 2016		September 30, 2016
Allowance for possible losses and discounts on trade receivables	$	26.9	$	26.8

Inventories:
Finished products	$	116.7	$	124.2
Raw materials and work in process	128.9		127.8
Total inventory	$	245.6	$	252.0

Accumulated depreciation of property, plant and equipment	$	616.2	$	611.8

Accumulated amortization of software and other intangible assets	$	422.4	$	398.3

Preferred stock, without par value:
Shares authorized	1,000,000		1,000,000
Shares issued	None		None

Common stock, without par value:
Shares authorized	199,000,000		199,000,000
Shares issued	88,457,634		88,457,634
Shares outstanding	65,336,428		65,705,253

Treasury shares	23,121,206		22,752,381

Note 3. Acquisitions

~~Welch Allyn~~Tridien Medical

On September ~~8, 2015,~~21, 2016, we ~~completed~~acquired all of the ~~acquisition~~outstanding shares of ~~Welch Allyn Holdings,~~Anodyne Medical Device, Inc. ~~and its subsidiaries (collectively, “Welch Allyn”~~, known as Tridien Medical (“Tridien”) for a ~~consideration~~purchase price of ~~$1,686.8 million in cash ($1,633.1~~$26.0 million, net of cash ~~acquired)~~acquired. Tridien develops, manufactures and ~~8,133,722 shares of Hill-Rom common stock for~~markets support surfaces and patient positioning devices. This acquisition allows us to insource a ~~total combined purchase price of approximately $2.1 billion. Welch Allyn~~significant supply chain function, and is ~~a leading manufacturer of medical diagnostic equipment~~expected to result in reduced costs and ~~offers a diversified portfolio of devices that assess, diagnose, treat, and manage a wide variety of illnesses and diseases.~~

improved margins. We funded the transaction primarily with borrowings under our Senior Secured Revolving Credit Facility (“Revolving Credit Facility”). The transaction was funded with new borrowings, including $1.8 billion in term loans and $425.0 million of senior notes issued in a private placement debt offering. Funds from this new financing were also used to retire pre-existing debt. Refer to Note 5 for additional information regarding our debt obligations.

~~Table of Contents~~

~~The following summarizes the~~preliminary fair value of assets acquired included $10.6 million of working capital consisting primarily of inventories and ~~liabilities assumed at~~accounts receivable, $6.7 million of goodwill and $6.3 million of acquisition-related intangible assets. The results of Tridien are included in the Condensed Consolidated Financial Statements since the date of acquisition. Goodwill was allocated entirely to our Patient Support Systems segment and is not deductible for tax purposes. The impact of the ~~acquisition.~~ Tridien acquisition to our total revenue and net income on an unaudited proforma basis for the period ended December 31, 2015 is not material.

During the first ~~second, and third quarters~~quarter of ~~2016,~~fiscal 2017, we made certain adjustments to the opening balance sheet as of the acquisition date ~~the most significant of~~ which ~~related to a fair value adjustment recorded in the second quarter to decrease the estimated fair value of an investment acquired.~~were insignificant. These ~~amounts are~~results remain preliminary and are subject to normal true-up provisions in the purchase agreement and other fair value adjustments.

Amount

Trade receivables $ 63.2
Inventory 110.5
Other current assets 52.7
Current deferred income taxes 27.3
Property, plant, and equipment 93.2
Goodwill 1,206.8
Trade name (indefinite life) 434.0
Customer relationships (12-year useful life) 516.8
Developed technology (7-year weighted average useful life) 54.0
Other intangibles 19.9
Other noncurrent assets 26.5
Current liabilities (161.5 )
Noncurrent deferred income taxes (368.9 )
Other noncurrent liabilities (25.1 )
Total purchase price, net of cash acquired $ 2,049.4

Fair value of common stock issued $ 416.3
Cash payment, net of cash acquired 1,633.1
Total consideration $ 2,049.4

Goodwill from the Welch Allyn acquisition, which is not deductible for tax purposes, is primarily due to enhanced customer relevance and a stronger competitive position resulting from the business combination, including a complementary commercial position, product portfolio, and enhanced synergies. Welch Allyn is included in the Front Line Care reportable segment.

Our total revenue on an unaudited pro forma basis, as if the Welch Allyn acquisition had been consummated at the beginning of our 2014 fiscal year, would have been higher by approximately $169 million and $508 million for the quarter and year to date periods ended June 30, 2015. On the same unaudited pro forma basis, our net income would have been lower by approximately $25 million and $55 million for the quarter and year to date periods ended June 30, 2015. Pro forma net income is adversely impacted by significant costs related to the transaction including financing costs and purchase price accounting, including the effects of amortization of acquisition-related intangibles.

The unaudited pro forma results are based on our historical financial statements and those of the Welch Allyn business and do not necessarily indicate the results of operations that would have resulted had the acquisition been completed at or prior to the beginning of the comparable period presented and are not indicative of the results of operations in future periods.

Note 4. Goodwill ~~and Indefinite-Lived Intangible Assets~~

The following summarizes goodwill activity by reportable segment:

North America Surgical Solutions International Front Line Care Total
Balances at September 30, 2015:
Goodwill $ 390.6 $ 343.8 $ 145.4 $ 1,203.5 $ 2,083.3
Accumulated impairment losses (358.1 ) - (114.7 ) - (472.8 )
Goodwill, net at September 30, 2015 32.5 343.8 30.7 1,203.5 1,610.5

Changes in Goodwill during the period:
Goodwill related to acquisitions - 1.1 - 3.3 4.4
Currency translation effect - (8.0 ) (0.2 ) - (8.2 )

Balances at June 30, 2016:
Goodwill 390.6 336.9 145.2 1,206.8 2,079.5
Accumulated impairment losses (358.1 ) - (114.7 ) - (472.8 )
Goodwill, net at June 30, 2016 $ 32.5 $ 336.9 $ 30.5 $ 1,206.8 $ 1,606.7

~~Table of Contents~~



	Patient Support Systems			Front Line Care			Surgical Solutions			Total
Balances at September 30, 2016
Goodwill	$	544.1		$	1,205.5		$	307.6		$	2,057.2
Accumulated impairment losses	(472.8		)	—			—			(472.8		)
Goodwill, net at September 30, 2016	71.3			1,205.5			307.6			1,584.4

Changes in Goodwill during the period:
Goodwill related to acquisitions	(1.2		)	—			—			(1.2		)
Currency translation effect	(1.8		)	(5.9		)	(5.5		)	(13.2		)

Balances at December 31, 2016
Goodwill	541.1			1,199.6			302.1			2,042.8
Accumulated impairment losses	(472.8		)	—			—			(472.8		)
Goodwill, net at December 31, 2016	$	68.3		$	1,199.6		$	302.1		$	1,570.0

The goodwill assigned to the reporting units was not impacted by the segment changes discussed in Note 13.

~~As discussed in~~

Note 13, we operate in four reportable business segments. Goodwill impairment testing is performed at the reporting unit level, which is one level below our reportable business segment. We have determined that we have eleven reporting units. Goodwill is assigned to reporting units at the date the goodwill is initially recorded and has been reallocated as necessary based on the restructuring of reporting units over time. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.

Testing for impairment must be performed annually, or on an interim basis upon the occurrence of a triggering event or change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The annual evaluation of goodwill performed during the third quarter of fiscal 2016 and 2015 did not result in any impairments.

~~Indefinite-lived intangible assets~~

We have various indefinite-lived intangible assets representing trade names with a carrying value of $466.9 million as of June 30, 2016 and September 30, 2015. Testing for impairment must be performed annually, or on an interim basis upon the occurrence of a triggering event or change in circumstances that would more likely than not reduce the fair value of an indefinite-lived intangible asset below its carrying amount. The annual evaluation of indefinite-lived intangible assets performed during the third quarter of fiscal 2016 and 2015 did not result in impairment.

5. Financing Agreements

Total debt consists of the following:

June 30, 2016 September 30, 2015
Current portion of long-term debt $ 76.8 $ 58.0
Senior secured Term Loan A, long-term portion 878.8 931.7
Senior secured Term Loan B, long-term portion 708.8 778.3
Senior unsecured 5.75% notes due on September 1, 2023 418.9 418.2
Unsecured 7.00% debentures due on February 15, 2024 13.8 13.8
Unsecured 6.75% debentures due on December 15, 2027 29.8 29.6
Other 4.5 3.6
Total debt 2,131.4 2,233.2
Less current portion of debt 76.8 58.0
Total long-term debt $ 2,054.6 $ 2,175.2



	December 31, 2016		September 30, 2016
Revolving credit facilities	$	245.0	$	235.8
Current portion of long-term debt	82.4		73.2
Senior secured Term Loan A, long-term portion	1,345.9		1,372.3
Senior unsecured 5.75% notes due on September 1, 2023	419.3		419.1
Unsecured 7.00% debentures due on February 15, 2024	13.7		13.7
Unsecured 6.75% debentures due on December 15, 2027	29.6		29.6
Other	4.8		4.8
Total debt	2,140.7		2,148.5
Less current portion of debt	228.5		210.1
Total long-term debt	$	1,912.2	$	1,938.4

In September ~~2015, we~~2016, the Company entered into ~~four new~~an amended and restated senior credit ~~facilities~~agreement for purposes of ~~financing~~refinancing our credit facilities (originally entered into as part of the Welch Allyn ~~acquisition as well as refinancing~~acquisition) and funding the payoff of our ~~previously~~then outstanding ~~revolving~~senior secured Term Loan B facility. The amended and restated senior credit ~~facility. These new facilities~~agreement consisted of ~~the following:~~two facilities as follows:

~~$1.0 billion senior secured Term Loan A facility (“TLA Facility”), maturing in September 2020~~

$1,462.5 million senior secured Term Loan A facility (“TLA Facility”), maturing in September 2021

~~$800.0 million senior secured Term Loan B facility (“TLB Facility”), maturing in September 2022~~

Revolving Credit Facility, providing borrowing capacity of up to $700.0 million, maturing in September 2021

~~Senior secured revolving credit facility (“Revolving Credit Facility”), providing borrowing capacity of up to $500.0 million, maturing in September 2020~~

~~$425.0 million of senior unsecured notes (“Senior Notes”), maturing in September 2023~~

The TLA ~~Facility, TLB~~ Facility and Revolving Credit Facility (collectively, the “Senior Secured Credit Facilities”) ~~all~~ bear interest at variable rates which are currently less than ~~4.0 percent.~~3.0%. These interest rates are based primarily on the London Interbank Offered Rate ~~(LIBOR)~~("LIBOR"), but under certain conditions could also be based on the U.S. Federal Funds Rate or the U.S. Prime Rate, at our option. The TLA Facility ~~and TLB Facility have required principal payments. The TLA Facility~~ requires minimum principal payments of ~~$50.0 million in fiscal 2016, $75.0~~$73.1 million in fiscal 2017, $109.7 million in fiscal 2018, and ~~$100.0~~$146.3 million annually thereafter, with the remaining unpaid principal balance due at maturity. ~~The TLB Facility requires annual principal payments of $8.0 million with the remaining unpaid principal balance due at maturity.~~ We ~~will be~~are able to voluntarily prepay outstanding loans under the TLA Facility ~~and the TLB Facility~~ at any time. During the ~~year~~quarter to date period ended ~~June 30,~~December 31, 2016, we made ~~voluntary prepayments~~required minimum payments of ~~$65.0~~$18.3 million on the ~~TLB~~TLA Facility.

~~Table of Contents~~

At ~~June 30,~~December 31, 2016, there were no$245.0 million borrowings on the Revolving Credit Facility, and available borrowing capacity was ~~$491.7~~$447.4 million after giving effect to ~~$8.3~~$7.6 million of outstanding standby letters of credit. The availability of borrowings under our Revolving Credit Facility is subject to our ability at the time of borrowing to meet certain specified conditions, including compliance with covenants contained in the governing credit agreement.

The Senior Secured Credit Facilities are held with a syndicate of banks, which includes over 2030 institutions. Our general corporate assets, including those of our subsidiaries, collateralize these obligations. The amended and restated credit agreement governing these facilities contains financial covenants which specify a maximum secured net leverage ratio and a minimum interest coverage ratio, as such terms are defined in the amended and restated credit agreement. These financial covenants are measured at the end of each fiscal ~~quarter, with the first measurement date on December 31, 2015.~~quarter. The required ratios vary ~~through December 31, 2019~~ providing a gradually decreasing maximum secured net leverage ratio and a gradually increasing minimum interest coverage ratio, as set forth in the table below:



Fiscal Quarter Ended	Maximum Secured Net Leverage Ratio	Minimum Interest Coverage Ratio
~~December 31, 2015~~	~~4.75x~~	~~3.25x~~
December 31, 2016	4.50x	3.25x
December 31, 2017	4.00x	3.50x
December 31, 2018	3.50x	3.75x
December 31, 2019 and thereafter	3.00x	4.00x

~~The~~ Senior ~~Notes~~unsecured notes of $425.0 million, maturing in September 2023 ("Senior Notes") bear interest at a fixed rate of ~~5.75 percent~~5.75% annually. These notes were issued at par in a private placement offering and are not registered securities on any public market. All of the Senior Notes ~~are~~were outstanding as of ~~June 30,~~December 31, 2016. We are not required to make any mandatory redemption or sinking fund payments with respect to the ~~notes,~~Senior Notes, other than in certain circumstances such as a change in control or material sale of assets. We may redeem the notes prior to maturity, but doing so prior to September 1, 2021 would require payment of a premium on any amounts redeemed, the amount of which varies based on the timing of the redemption. The indenture governing the Senior Notes contains certain covenants which impose limitations on the amount of dividends we may pay and the amount of common shares we may repurchase in the open market, but we do not expect these covenants to affect our current dividend policy or open share repurchase program. The terms of this indenture also impose certain restrictions on the amount and type of additional indebtedness we may obtain in the future, as well as the types of liens and guarantees we may provide.

We ~~are~~were in compliance with all financial covenants under our Senior Secured Credit Facilities and our amended and restated credit agreement as of ~~June 30,~~December 31, 2016.

As of ~~June 30,~~December 31, 2016, unamortized TLA Facility and Senior Notes debt issuance costs of ~~$33.5~~$16.0 million ~~have been~~and $5.7 million were recorded as a reduction of the carrying value of the related debt, compared to ~~$39.1~~$17.1 million and $5.9 million at September 30, ~~2015.~~2016. In addition, ~~$8.0~~$9.1 million of costs attributable to the Revolving Credit Facility ~~are~~were recorded as a component of other long-term assets on the Condensed Consolidated Balance Sheets as of ~~June 30,~~December 31, 2016, compared with ~~$9.4~~$9.6 million as of September 30, ~~2015.~~2016. These costs will amortize into interest expense over the terms of the related ~~credit~~ facilities.

We are exposed to market risk from fluctuations in interest rates. We sometimes manage our exposure to interest rate fluctuations through the use of interest rate swaps (cash flow hedges). As of ~~June 30,~~December 31, 2016, we had ~~five~~nine interest rate swap agreements, with notional amounts of ~~$600.0~~$750.0 million, in aggregate, to hedge the variability of cash flows associated with a portion of the variable interest rate payments for the period ~~April~~December 2016 to September ~~2020~~2021 on the Senior Secured Credit Facilities. The interest rate swaps have effective dates ranging between ~~April 1,~~December 31, 2016 and ~~December 31, 2019~~September 8, 2020 and were designated as cash flow hedges. At ~~June 30,~~December 31, 2016, these swaps were in a ~~liability~~net asset position with an aggregate fair value of ~~$8.4~~$10.6 million. We classify fair value measurements on our interest rate swaps as Level 2, as described in Note 1.

Unsecured debentures outstanding at ~~June 30,~~December 31, 2016 and September 30, ~~2015~~2016 have fixed rates of interest. We have deferred gains included inas an inverse to the ~~amounts above~~carrying value of the related debt from the termination of previous interest rate swap agreements, and those deferred gains amounted to less than $1.0 million at both ~~June 30,~~December 31, 2016 and September 30, ~~2015.~~2016. The deferred gains on the termination of the swaps are being amortized and recognized as a reduction of interest expense over the remaining term of the related debt, and as a result, the effective interest rates on that debt have been and will continue to be lower than the stated interest rates on the debt.

From August 2012 through April 2015, we had a credit facility that provided for revolving loans of up to $500.0 million, plus a term loan in the aggregate amount of $200.0 million. A portion of the proceeds from the issuance of the Senior Secured Credit Facility and the Senior Notes in September 2015 was used to fully repay the previously outstanding credit facility, which is now terminated.

~~Table of Contents~~

The fair value of our debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. The book values of our short-term debt instruments approximate fair value.

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



	December 31, 2016		September 30, 2016
Senior secured Term Loan A	$	1,369.8	$	1,441.0
Senior unsecured 5.75% notes due on September 1, 2023	438.8		454.0
Unsecured debentures	44.0		45.8
Total debt	$	1,852.6	$	1,940.8

June 30, 2016 September 30, 2015
Senior secured Term Loan A $ 921.4 $ 990.7
Senior secured Term Loan B 715.6 780.7
Senior unsecured 5.75% notes due on September 1, 2023 438.3 428.4
Unsecured debentures 44.4 43.4
Total debt $ 2,119.7 $ 2,243.2

The estimated fair values of our long-term unsecured debentures were based on observable inputs such as quoted prices in markets that are not active. The estimated fair values of our term loans and the Senior Notes were based on quoted prices for similar liabilities. These fair value measurements are classified as Level 2, as described in Note 1.

Note 6. Retirement and Postretirement Plans

We sponsor five defined benefit retirement plans. Those plans include: a master defined benefit retirement plan, a nonqualified supplemental executive defined benefit retirement plan, and three defined benefit retirement plans covering employees in Germany and France. Benefits for such plans are based primarily on years of service and the employee’s level of compensation during specific periods of employment. We contribute funds to trusts as necessary to provide for current service and for any unfunded projected future benefit obligation over a reasonable period of time. All of our plans have a September 30 measurement date. The following table details the components of net pension expense for our defined benefit retirement plans.

Quarter Ended June 30 Year to Date Ended June 30
2016 2015 2016 2015
Service cost $ 1.3 $ 1.4 $ 3.8 $ 4.1
Interest cost 2.8 3.7 8.2 11.1
Expected return on plan assets (3.3 ) (4.3 ) (9.8 ) (12.8 )
Amortization of unrecognized prior service cost, net 0.1 0.2 0.2 0.5
Amortization of net loss 1.1 1.3 3.4 4.0
Net pension expense $ 2.0 $ 2.3 $ 5.8 $ 6.9

Beginning in the first quarter of fiscal 2016, we elected to change the method we use to estimate the service and interest cost components of net periodic benefit cost for our defined benefit pension plans to a spot yield curve approach. Previously, we estimated the service and interest cost components of pension expense using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Under the new approach, we apply discounting using individual spot rates from a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date. These spot rates align to each of the projected benefit obligations and service cost cash flows. The service cost component relates to the active participants in the plan, so the relevant cash flows on which to apply the yield curve are considerably longer in duration on average than the total projected benefit obligation cash flows, which also include benefit payments to retirees. Interest cost is computed by multiplying each spot rate by the corresponding discounted projected benefit obligation cash flows. The spot yield curve approach reduces any actuarial gains and losses based upon interest rate expectations (e.g., built-in gains in interest cost in an upward sloping yield curve scenario), or gains and losses merely resulting from the timing and magnitude of cash outflows associated with our benefit obligations. The change does not affect the measurement of the total benefit obligations as the change in service and interest costs offsets in the actuarial gains and losses recorded in other comprehensive income.

~~We made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a better measurement of service and interest costs.~~ ~~This change is considered a change in estimate and is accounted for on a prospective basis starting in fiscal year 2016.~~



	Quarter Ended December 31
	2016			2015
Service cost	$	1.4		$	1.3
Interest cost	2.5			2.7
Expected return on plan assets	(3.7		)	(3.3		)
Amortization of unrecognized prior service cost, net	0.1			0.1
Amortization of net loss	1.5			1.1
Net pension expense	$	1.8		$	1.9

In addition to defined benefit retirement plans, we also offer two domestic postretirement health care plans, one of which was assumed in the acquisition of Welch Allyn, that provide health care benefits to qualified retirees and their dependents. The plans are closed to new participants and include retiree cost sharing provisions. Annual costs related to these plans are not significant.

~~Table of Contents~~

We have defined contribution savings plans that cover substantially all U.S. employees and certain non-U.S. employees. The general purpose of these plans is to provide additional financial security during retirement by providing employees with an incentive to make regular savings. Our contributions to the plans are based on eligibility and employee contributions. Expense under these plans was ~~$6.8~~$6.0 million and ~~$4.6~~$6.1 million in each of the quarterly periods ended ~~June 30, 2016 and 2015, and $20.1 million and $12.6 million in the year to date periods ended June 30,~~December 31, 2016 and 2015.

Note 7. Other Comprehensive Income (Loss)

The following table represents the changes in accumulated other comprehensive loss by component:

Quarter Ended June 30, 2016
Other comprehensive income (loss) Accumulated other comprehensive loss

Prior to
reclassification

Reclassification
from
Pre-tax Tax effect Net of tax
Beginning
balance
Net activity
Ending
balance

Available-for-sale securities
and hedges
$ (5.5 ) $ 0.4 $ (5.1 ) $ 1.8 $ (3.3 ) $ (1.7 ) $ (3.3 ) $ (5.0 )
Foreign currency translation
adjustment
(20.1 ) - (20.1 ) - (20.1 ) (90.4 ) (20.1 ) (110.5 )
Change in pension and postretirement
defined benefit plans
- 1.1 1.1 (0.2 ) 0.9 (46.7 ) 0.9 (45.8 )
Total $ (25.6 ) $ 1.5 $ (24.1 ) $ 1.6 $ (22.5 ) $ (138.8 ) $ (22.5 ) $ (161.3 )

Quarter Ended June 30, 2015
Other comprehensive income (loss) Accumulated other comprehensive loss

Prior to
reclassification

Reclassification
from
Pre-tax Tax effect Net of tax
Beginning
balance
Net activity
Ending
balance

Available-for-sale securities
and hedges
$ 0.2 $ - $ 0.2 $ (0.1 ) $ 0.1 $ (0.6 ) $ 0.1 $ (0.5 )
Foreign currency translation
adjustment
19.4 - 19.4 - 19.4 (104.8 ) 19.4 (85.4 )
Change in pension and postretirement
defined benefit plans
- 1.4 1.4 (0.6 ) 0.8 (38.1 ) 0.8 (37.3 )
Total $ 19.6 $ 1.4 $ 21.0 $ (0.7 ) $ 20.3 $ (143.5 ) $ 20.3 $ (123.2 )

Year to Date Ended June 30, 2016
Other comprehensive income (loss) Accumulated other comprehensive loss

Prior to
reclassification

Reclassification
from
Pre-tax Tax effect Net of tax
Beginning
balance
Net activity
Ending
balance

Available-for-sale securities
and hedges
$ (8.1 ) $ 0.4 $ (7.7 ) $ 2.7 $ (5.0 ) $ - $ (5.0 ) $ (5.0 )
Foreign currency translation
adjustment
(17.7 ) - (17.7 ) - (17.7 ) (92.8 ) (17.7 ) (110.5 )
Change in pension and postretirement
defined benefit plans
- 3.2 3.2 (1.0 ) 2.2 (48.0 ) 2.2 (45.8 )
Total $ (25.8 ) $ 3.6 $ (22.2 ) $ 1.7 $ (20.5 ) $ (140.8 ) $ (20.5 ) $ (161.3 )

Year to Date Ended June 30, 2015
Other comprehensive income (loss) Accumulated other comprehensive loss

Prior to
reclassification

Reclassification
from
Pre-tax Tax effect Net of tax
Beginning
balance
Net activity
Ending
balance

Available-for-sale securities
and hedges
$ (0.8 ) $ - $ (0.8 ) $ 0.3 $ (0.5 ) $ - $ (0.5 ) $ (0.5 )
Foreign currency translation
adjustment
(51.2 ) - (51.2 ) - (51.2 ) (34.2 ) (51.2 ) (85.4 )
Change in pension and postretirement
defined benefit plans
0.1 4.1 4.2 (1.6 ) 2.6 (39.9 ) 2.6 (37.3 )
Total $ (51.9 ) $ 4.1 $ (47.8 ) $ (1.3 ) $ (49.1 ) $ (74.1 ) $ (49.1 ) $ (123.2 )



	Quarter Ended December 31, 2016
	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
Available-for-sale securities and hedges	$	16.2		$	(0.2	)	$	16.0		$	(5.8	)	$	10.2		$	(3.1	)	$	10.2		$	7.1
Foreign currency translation adjustment	(39.5		)	—			(39.5		)	—			(39.5		)	(115.2		)	(39.5		)	(154.7		)
Change in pension and postretirement defined benefit plans	0.4			1.5			1.9			(0.6		)	1.3			(50.8		)	1.3			(49.5		)
Total	$	(22.9	)	$	1.3		$	(21.6	)	$	(6.4	)	$	(28.0	)	$	(169.1	)	$	(28.0	)	$	(197.1	)



	Quarter Ended December 31, 2015
	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
Available-for-sale securities and hedges	$	0.2		$	—	$	0.2		$	(0.1	)	$	0.1		$	—		$	0.1		$	0.1
Foreign currency translation adjustment	(10.2		)	—		(10.2		)	—			(10.2		)	(92.8		)	(10.2		)	(103.0		)
Change in pension and postretirement defined benefit plans	—			1.1		1.1			(0.4		)	0.7			(48.0		)	0.7			(47.3		)
Total	$	(10.0	)	$	1.1	$	(8.9	)	$	(0.5	)	$	(9.4	)	$	(140.8	)	$	(9.4	)	$	(150.2	)

~~Table of Contents~~

The following table represents the items reclassified out of accumulated other comprehensive loss and the related tax effects:

Quarter Ended June 30
2016 2015

Amount
reclassified
Tax effect Net of tax
Amount
reclassified
Tax effect Net of tax
Available-for-sale securities
and hedges (a)
$ 0.4 $ (0.2 ) $ 0.2 $ - $ - $ -

Change in pension and postretirement
defined benefit plans (b)
$ 1.1 $ (0.2 ) $ 0.9 $ 1.4 $ (0.6 ) $ 0.8



	Quarter Ended December 31,
	2016									2015
	Amount reclassified			Tax effect			Net of tax			Amount reclassified		Tax effect			Net of tax
Available-for-sale securities and hedges (a)	$	(0.2	)	$	0.1		$	(0.1	)	$	—	$	—		$	—

Change in pension and postretirement defined benefit plans (b)	$	1.5		$	(0.5	)	$	1.0		$	1.1	$	(0.4	)	$	0.7

Year to Date Ended June 30
2016 2015

Amount
reclassified
Tax effect Net of tax
Amount
reclassified
Tax effect Net of tax
Available-for-sale securities
and hedges (a)
$ 0.4 $ (0.2 ) $ 0.2 $ - $ - $ -

Change in pension and postretirement
defined benefit plans (b)
$ 3.2 $ (1.0 ) $ 2.2 $ 4.1 $ (1.6 ) $ 2.5

(a) Reclassified from accumulated other comprehensive loss into ~~other~~Investment income ~~(expense),~~and other, net.

(b) Reclassified from accumulated other comprehensive loss into ~~cost~~Cost of goods sold and ~~selling~~Selling and administrative expenses. These components are included in the computation of net periodic pension expense.

Note 8. Special Charges

In connection with various organizational changes implemented to improve our business alignment and cost structure, we recognized special charges of ~~$13.7~~$5.8 million and ~~$4.4~~$7.1 million for the quarters ended ~~June 30, 2016 and 2015, and $31.5 million and $11.9 million for the year to date periods ended June 30,~~December 31, 2016 and 2015. These charges are summarized ~~below.~~as follows:

Dispositions

During the first quarter of fiscal 2017, we sold our Architectural Products business and recorded special charges of $1.1 million, primarily related to severance.

Welch Allyn Integration and Business Realignment

In conjunction with the acquisition of Welch Allyn in September 2015, we initiated plans to realign our business structure to facilitate the integration, take full advantage of available synergies, and position our existing businesses to capitalize on opportunities for growth. Immediately after the acquisition was completed, we eliminated approximately 100 positions in Welch Allyn’s corporate support and administrative functions. We recorded special charges of $14.4 million in the fourth quarter of fiscal 2015 related to this action and, as many of the affected employees were required to continue service for a specified period of time, additional amounts associated with this initial action were incurred through the second quarter of fiscal 2016. In addition, during fiscal 2016, we ~~have~~ incurred costs, including severance and benefit costs, associated with other business realignment and integration activities. During the quarter ~~and year to date periods~~ ended ~~June 30,~~December 31, 2016, we incurred ~~total~~ integration and business realignment charges of approximately ~~$4.4~~$0.2 million. These amounts compare to charges of $4.5 million in the prior year first quarter. Since the inception of the Welch Allyn Integration and ~~$15.2 million,~~Business Realignment program through December 31, 2016, we have recognized aggregate special charges of ~~which $2.5 million and $11.7 million were severance and benefit costs.~~$33.6 million. We ~~are continuing~~continue to evaluate additional actions related to integration and business realignment and expect additional special charges to be ~~incurred, however,~~incurred. However, it is not ~~practical~~practicable to estimate the amount of these future expected ~~costs.~~costs until such time as the evaluations are complete.

Site Consolidation

In the third quarter of fiscal 2015, we initiated a plan to streamline our operations and simplify our supply chain by consolidating certain manufacturing and distribution operations. As part of this action, we announced the closure of sites in Redditch, England and Charleston, South Carolina. During fiscal 2015, we recorded severance and benefit charges of $2.7 million for approximately 160 employees to be displaced by the closures, as well as $1.8 million of other related costs. In the third quarter of fiscal 2016, we announced the closure of sites inCarolina, Vuollerim, Sweden and Montpellier, France. During the quarter ~~and year to date periods~~ ended ~~June 30,~~December 31, 2016, we recorded total charges ~~related to the combined activities~~ of ~~$8.1 million and $12.0~~$3.6 million related to ~~these actions, including $6.0~~our site consolidation efforts. These amounts compare to charges of $1.5 million ~~of severance and benefit costs~~ in the ~~third quarter~~prior year first quarter. Since the inception of ~~2016.~~the Site Consolidation program through December 31, 2016, we have recognized aggregate special charges of $24.0 million. We ~~expect to incur $4 million to $6 million of additional charges in fiscal 2016 and fiscal 2017 for personnel costs and site closure expenses related to these actions. We are continuing~~continue to evaluate our facilities footprint and expect to incur additional costs ~~are expected to be incurred~~ with respect to other actions in the future, however, it is not ~~practical~~practicable to estimate the amount of these future expected costs until such time as the evaluations are complete.

~~Table of Contents~~

2014 Global Transformation

During the second quarter of fiscal 2014, we announced a global transformation program focused on improving our cost structure. The domestic portion of this action was completed in fiscal 2015. Part of this program included reducing our European manufacturing capacity and streamlining our global operations by, among other things, executing a back office process transformation program in Europe. The restructuring in Europe is in process and, for the quarter ~~and year to date periods~~ ended ~~June 30,~~December 31, 2016, resulted in charges of ~~$1.2 million and $4.3~~$0.9 million for severance and benefit costs, legal and professional fees, temporary labor, project management, and other administrative functions. These amounts compare to charges of ~~$2.2~~$1.1 million ~~and $9.7 million (net of reversals)~~ in the prior year ~~quarter and year to date periods.~~first quarter. Since the inception of the 2014 global transformation program through ~~June 30,~~December 31, 2016, we have recognized aggregate special charges of ~~$41.9~~$43.6 million. We do not expect to incur ~~$2 million~~further material costs related to ~~$4 million of additional costs through the completion of the program.~~this action.

For all accrued severance and other benefit charges described above, we record restructuring reserves within other current liabilities. The reserve activity for severance and other benefits during the year to date period ended ~~June 30,~~December 31, 2016 was as follows:

Balance at September 30, 2015 $ 24.3
Expenses 19.3
Cash Payments (27.3 )
Reversals (0.3 )
Balance at June 30, 2016 $ 16.0



Balance at September 30, 2016	$	14.7
Expenses	2.5
Cash Payments	(5.2		)
Reversals	(0.1		)
Balance at December 31, 2016	$	11.9

Note 9. Income Taxes

The effective tax rate for the quarter ~~and year~~ to date ~~periods~~period ended ~~June 30,~~December 31, 2016 was ~~(27.5) and (3.2) percent~~33.4% compared to ~~33.2 and 30.3 percent~~25.9% for the ~~quarter and year to date periods~~comparable period in the prior year. The ~~lower~~higher effective tax ~~rates~~rate in the current period is due primarily to the difference in discrete tax items recognized in each period. The current period included $1.7 million of period tax expenses related principally to the revaluation of France deferred tax assets due to a France tax law change that reduced the future corporate income tax rate in France, partially offset by the impact of excess tax benefits due to the adoption of ASU 2016-09 discussed in Note 1. The comparable period in the prior year ~~were~~included period tax benefits of $1.7 million primarily due to the release of the valuation allowance on our deferred tax assets discussed in Note 1 along with lower tax expense related to the impact of changes in our operating structure impacting the geographic distribution of income and expenses and theretroactive reinstatement of the research tax ~~credit further discussed below.~~credit. Absent the period tax items, the current year rate would have been lower compared to prior year due primarily to the geographic mix of income, along with prior year losses incurred in select foreign jurisdictions for which no tax benefit could be recognized.

In December 2016, the French parliament approved the Finance Act for 2017 and the Amended Finance Act for 2016 (the Finance Acts). The tax portion of the bill progressively reduces the corporate income tax rate from 33.3% to 28.0%. The Finance Acts were effective December 30, 2016.

On December 18, 2015, ~~the~~ President Obama signed into law a combined tax and government funding bill (H.R. 2029). The tax portion of the bill, the Protecting Americans from Tax Hikes Act (the PATH Act), extended and made permanent several lapsed business incentives that impact our business, including the extension of bonus depreciation as well as the retroactive and permanent extension of the research tax credit. The research credit had previously expired effective December 31, 2014.

We expect the tax incentives extended as part of the PATH Act, primarily the reinstatement of the research tax credit, to favorably impact income tax expense for fiscal 2016 by approximately $4.0 million through a combination of a one-time catch-up adjustment from the reinstatement of the credit recorded in our first quarter of fiscal 2016 and the inclusion of the full-year research credit into the fiscal 2016 effective tax rate.

Note 10. Earnings per Common Share

Basic earnings per share is calculated based upon the weighted average number of outstanding common shares for the period, plus the effect of deferred vested shares. Diluted earnings per share is calculated consistent with the basic earnings per share calculation plus the effect of dilutive unissued common shares related to stock-based employee compensation programs. For all 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.

~~Table of Contents~~

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

Quarter Ended June 30 Year to Date Ended June 30
2016 2015 2016 2015

Net income attributable to common shareholders $ 45.3 $ 19.1 $ 72.4 $ 57.3

Average shares outstanding - Basic 65,406 56,670 65,300 56,777
Add potential effect of exercise of stock options
and other unvested equity awards 1,146 1,229 1,102 1,166
Average shares outstanding - Diluted 66,552 57,899 66,402 57,943

Net income attributable to common shareholders per common share - Basic $ 0.69 $ 0.34 $ 1.11 $ 1.01

Net income attributable to common shareholders per common share - Diluted $ 0.68 $ 0.33 $ 1.09 $ 0.99

Shares with anti-dilutive effect excluded from the computation of Diluted EPS 557 239 502 457



	Quarter Ended December 31
	2016		2015
Net income attributable to common shareholders	$	23.8	$	4.8

Average shares outstanding - Basic	65,504		65,217
Add potential effect of exercise of stock options and other unvested equity awards	1,356		1,057
Average shares outstanding - Diluted	66,860		66,274

Net income attributable to common shareholders per common share - Basic	$	0.36	$	0.07

Net income attributable to common shareholders per common share - Diluted	$	0.36	$	0.07

Shares with anti-dilutive effect excluded from the computation of Diluted EPS	500		453

Note 11. Common Stock

The stock-based compensation cost that was charged against income, net of tax, for all plans was ~~$3.8 million and $2.5~~$3.2 million in ~~each~~both of the quarterly periods ended ~~June 30, 2016 and 2015, and $11.5 million and $8.9 million in the year to date periods ended June 30,~~December 31, 2016 and 2015.

During the first quarter of fiscal 2017, we purchased 0.6 million shares of our common stock for $30.0 million in the open market, leaving $34.7 million of shares available for purchase under a $190 million share repurchase program approved by the Board of Directors in September 2013, which does not have an expiration date.

Note 12. Guarantees

We routinely grant limited warranties on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year, however, certain components and products have substantially longer warranty periods. We recognize a reserve with respect to these obligations at the time of product sale, with subsequent warranty claims recorded directly against the reserve. The amount of the warranty reserve is determined based on historical trend experience for the covered products. For more significant warranty-related matters which might require a broad-based correction, separate reserves are established when such events are identified and the cost of correction can be reasonably estimated.

A reconciliation of changes in the warranty reserve for the periods covered in this report is as follows:

Quarter Ended June 30 Year to Date Ended June 30
2016 2015 2016 2015

Balance at beginning of period $ 28.8 $ 27.2 $ 32.1 $ 28.4
Provision for warranties during the period 3.5 5.8 11.3 12.3
Warranty reserves acquired - 1.1 - 2.2
Warranty claims during the period (5.3 ) (4.7 ) (16.4 ) (13.5 )
Balance at end of period $ 27.0 $ 29.4 $ 27.0 $ 29.4



	Quarter Ended December 31
	2016			2015
Balance at beginning of period	$	27.5		$	32.1
Provision for warranties during the period	2.6			6.0
Warranty claims during the period	(3.8		)	(5.4		)
Balance at end of period	$	26.3		$	32.7

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, nor do we expect them to have, a material impact on our financial condition or results of operations, although indemnifications associated with our actions generally have no dollar limitations.

In conjunction with our acquisition and divestiture activities, we have entered into select guarantees and indemnifications of performance with respect to the fulfillment of 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.

~~Table of Contents~~

Note 13. Segment Reporting

We disclose segment information that is consistent with the way in which management operates and views the business. During our ~~second~~first quarter of ~~2016,~~fiscal 2017, we changed our segment reporting to reflect changes in our organizational structure and management’s operation and view of the ~~business~~. business. We combined the ~~global Respiratory Care business~~prior year North America Patient Support Systems segment and ~~the Welch Allyn operations~~International Patient Support Systems segment into a new segment called ~~Front Line Care.~~Patient Support Systems. Our ~~Surgical Solutions~~new Patient Support Systems segment ~~now represents the surgical~~also includes an additional component of ~~what~~global marketing spend that was previously ~~included in our Surgical and Respiratory Care segment.~~unallocated. The prior year segment information included in this ~~Note~~Form 10-Q has been updated to reflect these changes. Our revised operating structure contains the following reporting segments:

~~North America –~~ ~~sells and rents our patient support and near-patient technologies and services, as well as our clinical workflow solutions, in the U.S. and Canada.~~

~~Front Line Care –~~ globally sells and rents respiratory care products, and sells medical diagnostic equipment and a diversified portfolio of devices that assess, diagnose, treat, and manage a wide variety of illnesses and diseases.

~~Surgical Solutions –~~ ~~sells our surgical products globally.~~

~~International –~~ ~~sells and rents similar products as our North America segment in regions outside of the U.S. and Canada.~~

Patient Support Systems – globally sells and rents our specialty frames and surfaces and mobility solutions, as well as our clinical workflow solutions.

Front Line Care – globally sells and rents respiratory care products, and sells medical diagnostic equipment and a diversified portfolio of devices that assess, diagnose, treat, and manage a wide variety of illnesses and diseases.

Surgical Solutions – globally sells our surgical products.

Under our revised segments, our performance within each reportable segment continues to be measured on a divisional income basis before non-allocated operating and administrative costs, ~~impairment of other intangibles,~~ litigation, special charges, acquisition and integration costs, acquisition-related intangible asset amortization, and other unusual events. Divisional income generally represents the division’s gross profit less its direct operating costs along with an allocation of manufacturing and distribution costs, research and development and certain corporate functional expenses.

Non-allocated operating ~~and~~costs, administrative costs, ~~include~~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.

   Quarter Ended June 30 Year to Date Ended June 30
2016 2015 2016 2015
Revenue:
North America $ 267.8 $ 252.4 $ 786.5 $ 724.5
Front Line Care 192.7 22.1 598.2 66.6
Surgical Solutions 101.7 98.6 296.1 303.0
International 93.2 101.4 268.4 320.2
     Total revenue $ 655.4 $ 474.5 $ 1,949.2 $ 1,414.3

Divisional income (loss):
North America $ 68.0 $ 51.3 $ 186.6 $ 142.1
Front Line Care 47.5 6.7 143.2 21.3
Surgical Solutions 10.6 12.2 30.9 37.2
International (1.0 ) 1.2 (13.2 ) 6.5

Other operating costs:
Non-allocated operating costs, administrative costs, and other 53.2 35.7 179.2 106.3
Special charges 13.7 4.4 31.5 11.9
     Operating profit 58.2 31.3 136.8 88.9

Interest expense (23.0 ) (3.3 ) (68.2 ) (9.5 )
Investment income and other, net 0.1 - 0.6 2.2
  Income before income taxes $ 35.3 $ 28.0 $ 69.2 $ 81.6

The chief operating decision maker does not receive any asset information by operating segment and, accordingly, we do not report asset information by operating segment.



	Quarter Ended December 31
	2016			2015
Revenue:
Patient Support Systems	$	335.2		$	341.7
Front Line Care	201.8			220.2
Surgical Solutions	100.4			99.3
Total revenue	$	637.4		$	661.2

Divisional income:
Patient Support Systems	$	48.0		$	44.1
Front Line Care	52.6			52.8
Surgical Solutions	8.0			9.9

Other operating costs:
Non-allocated operating costs, administrative costs, and other	46.8			70.9
Special charges	5.8			7.1
Operating profit	56.0			28.8

Interest expense	(19.5		)	(22.5		)
Investment income and other, net	(1.2		)	(0.5		)
Income before income taxes	$	35.3		$	5.8

~~Table of Contents~~

Note 14. Commitments and Contingencies

General

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 material adverse effect on our financial condition, results of operations, and cash flows.

Self Insurance

We are also involved in other possible claims, including product and general liability, workers’ compensation, auto liability and employment related matters. Such claims in the United States have deductibles and self-insured retentions ranging from $25 thousand to $1.0 million per occurrence or per claim, depending upon the type of coverage and policy period. International deductibles and self-insured retentions are lower. We are also generally self-insured up to certain stop-loss limits for certain employee health benefits, including medical, drug and dental. Our policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but not reported claims and outside actuarial analysis, which are based on historical information along with certain assumptions about future events. Such estimated reserves are classified as Other Current Liabilities and Other Long-Term Liabilities within the Condensed Consolidated Balance Sheets.

Universal Hospital Services, Inc. Litigation

On January 13, 2015, Universal Hospital Services, Inc. filed a complaint against us in the United States District Court for the Western District of Texas. The plaintiff alleges, among other things, that we engaged in certain customer contracting practices in violation of state and federal antitrust laws. The plaintiff also has asserted claims for tortious interference with business relationships. The plaintiff seeks injunctive relief and money damages in an unspecified amount. No trial date has been set. We believe that the allegations are without merit and intend to defend this matter vigorously.

Note 15. Subsequent Events

Subsequent to December 31, 2016, we signed a definitive agreement to acquire Mortara Instrument, Inc., a privately held leader in diagnostic cardiology and patient monitoring solutions, technologies and devices, for $330 million in cash. The acquisition will expand Hill-Rom’s diagnostic cardiology franchise, complement and enhance the Company’s presence in vital signs monitoring, and is expected to accelerate revenue growth and be immediately accretive to earnings. The acquisition is expected to close in Hill-Rom’s second quarter of fiscal 2017 and the Company intends to fund the acquisition with its existing credit facility and the issuance of new debt instruments.

Subsequent to December 31, 2016, we announced our intent to close our Puchheim, Germany facility as part of our Site Consolidation program. We expect to incur costs with respect to this action, however, it is not practicable to estimate the amount of expected costs at this time.

~~Table of Contents~~


Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 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 those contained in forward-looking statements, see the discussions under the heading “Risk Factors” in our previously filed most recent Annual Report on Form 10-K for the fiscal year ended September 30, ~~2015~~2016 (“~~2015~~2016 Form 10-K”) as well as the discussions in this “Management’s Discussion and Analysis”. We assume no obligation to update or revise any forward-looking statements.

Overview

The following discussion and analysis should be read in conjunction with the accompanying interim financial statements and our ~~2015~~2016 Form 10-K.

Hill-Rom Holdings, Inc. (“we,” “us,” or “our”) is a leading global medical technology company with more than 10,000 employees worldwide. We partner with health care providers in more than 100 countries by focusing on patient care solutions that improve clinical and economic ~~outcomes in five core areas: Advancing Mobility, Wound Care and Prevention, Clinical Workflow, Surgical Safety and Efficiency, and Respiratory Health.~~outcomes. Around the world, Hill-Rom's people, products, and programs work towards one mission: Enhancing outcomes for patients and their caregivers.

Use of Non-GAAP Financial Measures

The accompanying Condensed Consolidated Financial Statements, including the related notes, are presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”). We routinely provide ~~non-GAAP measures, including adjusted income before taxes, income tax expense,~~gross margin, operating margin and ~~diluted~~ earnings per share results on an adjusted basis because ~~we use~~the Company’s management believes these measures contribute to an understanding of our financial performance, provide additional analytical tools to understand our results from core operations and reveal underlying trends. These measures exclude strategic developments, acquisition and integration costs, special charges or other unusual events. The Company also excludes expenses associated with the amortization of intangible assets associated with prior business acquisitions. These adjustments are made to allow investors to evaluate and understand operating trends excluding the non-cash impact of acquired intangible amortization on operating income and earnings per share.

Management uses these measures internally for planning, forecasting and evaluating the performance of the business. Investors should consider 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 ~~analyze net revenue~~present certain results on a constant currency basis. Constant currency information compares results between periods as if foreign currency exchange rates had remained consistent period-over-period. We monitor sales performance on a constant currency 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 ~~better measure~~ the ~~comparability of~~local currency results ~~between periods.~~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.

We believe use of these non-GAAP measures contributes to an understanding of our financial performance and provides an additional analytical tool to understand our results from core operations and to reveal underlying trends. These measures should not, however, be considered in isolation, as a substitute for, or as superior to measures of financial performance prepared in accordance with GAAP.

Consolidated Results of Operations

In this section, we provide a high-level overview of our consolidated results of operations. Immediately following this section is a discussion of our results of operations by reportable segment.

We disclose segment information that is consistent with the way in which management operates and views the business.

During our ~~second~~first quarter of ~~2016,~~fiscal 2017, we changed our segment reporting to reflect changes in our organizational structure and management’s operation and view of the ~~business~~. business. We combined the ~~global Respiratory Care business~~prior year North America Patient Support Systems segment and ~~the Welch Allyn operations~~International Patient Support Systems segment into a new segment called ~~Front Line Care.~~Patient Support Systems. Our ~~Surgical Solutions~~new Patient Support Systems segment ~~now represents the surgical~~also includes an additional component of ~~what~~global marketing spend that was previously ~~included in our Surgical and Respiratory Care segment.~~unallocated. The prior year segment information included in this Form 10-Q has been updated to reflect these changes. Our revised operating structure contains the following reporting segments:

Patient Support Systems – globally sells and rents our specialty frames and surfaces and mobility solutions, as well as our clinical workflow solutions.

~~North America –~~ ~~sells and rents our patient support and near-patient technologies and services, as well as our clinical workflow solutions, in the U.S. and Canada.~~

20Surgical Solutions –

~~Table of Contents~~

globally sells our surgical products.

~~Surgical Solutions –~~ ~~sells our surgical products globally.~~

~~International –~~ ~~sells and rents similar products as our North America segment in regions outside of the U.S. and Canada.~~

Net Revenue

											U.S.			OUS
	Quarter Ended June 30				Change As			Constant			Change As			Change As			Constant
	2016		2015		Reported			Currency			Reported			Reported			Currency

Product sales and service	$	556.0	$	376.8		47.6	%		48.1	%		63.4	%		24.8	%		26.1	%

Rental revenue		99.4		97.7		1.7	%		1.9	%		2.7	%		(4.8	%)		(3.2	%)

Total revenue	$	655.4	$	474.5		38.1	%		38.6	%		46.6	%		22.5	%		23.9	%


											U.S.			OUS															U.S.			OUS
	Year to Date Ended June 30				Change As			Constant			Change As			Change As			Constant			Quarter Ended December 31,				Change As Reported		Constant Currency			Change As Reported			Change As Reported			Constant Currency
		2016		2015	Reported			Currency			Reported			Reported			Currency			2016		2015							Change As Reported			Change As Reported			Constant Currency

Revenue																								Change As Reported
Product sales and service	$	1,650.4	$	1,125.9		46.6	%		49.2	%		67.0	%		19.7	%		25.9	%	$	541.9	$	565.1	(4.1	)%	Constant Currency	(3.2	)%		1.1	%		(13.2	)%		(10.7	)%

Rental revenue		298.8		288.4		3.6	%		4.3	%		6.0	%		(11.1	%)		(6.0	%)	95.5		96.1		(0.6	)%	—	%		0.4	%		(7.9	)%		(2.6	)%

Total revenue	$	1,949.2	$	1,414.3		37.8	%		40.1	%		49.9	%		17.4	%		23.4	%
Total Revenue																				$	637.4	$	661.2	(3.6	)%	(2.7	)%		1.0	%		(12.9	)%		(10.3	)%

OUS - Outside of the U.S.



Indiana	35-1160484
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Two Prudential Plaza, Suite 4100 Chicago, IL	60601
(Address of principal executive offices)	(Zip Code)



	Quarter Ended December 31,
	2016			2015			Change
Gross Profit
Product sales and service	$	253.5		$	242.0		4.8%
Percent of Related Revenue	46.8		%	42.8		%	400 bps

Rental	49.1			48.7			0.8%
Percent of Related Revenue	51.4		%	50.7		%	70 bps

Total Gross Profit	$	302.6		$	290.7		4.1%
Percent of Total Revenue	47.5		%	44.0		%	350 bps

	Quarter Ended June 30				Change
	2016		2015
Gross Profit
Product sales and service	$	262.4	$	158.9		65.1%
Percent of Related Revenue		47.2%		42.2%	500 bps

Rental		53.0		50.6		4.7%
Percent of Related Revenue		53.3%		51.8%	150 bps

Total Gross Profit	$	315.4	$	209.5		50.5%
Percent of Total Revenue		48.1%		44.2%	390 bps

	Year to Date Ended June 30				Change
		2016		2015
Gross Profit
Product sales and service	$	754.4	$	473.6		59.3%
Percent of Related Revenue		45.7%		42.1%	360 bps

Rental		155.9		150.0		3.9%
Percent of Related Revenue		52.2%		52.0%	20 bps

Total Gross Profit	$	910.3	$	623.6		46.0%
Percent of Total Revenue		46.7%		44.1%	260 bps

	Quarter Ended June 30, 2016									Quarter Ended June 30, 2015
	Operating Margin	Income Before Income Taxes		Income Tax Expense			Diluted EPS			Operating Margin¹	Income Before Income Taxes		Income Tax Expense		Diluted EPS

GAAP Basis	8.9%	$	35.3	$	(9.7	)	$	0.68		6.6%	$	28.0	$	9.3	$	0.33
Adjustments:
Acquisition and integration costs	0.5%		3.5		0.7			0.04		1.4%		6.8		2.3		0.08
Acquisition-related intangible asset amortization	3.7%		24.1		8.2			0.24		1.6%		7.7		2.1		0.10
FDA remediation expenses	-		-		-			-		0.3%		1.3		0.4		0.02
Field corrective actions	-		-		-			-		0.5%		2.6		0.8		0.03
Litigation settlements and expenses	-		-		-			-		0.1%		0.3		0.1		-
Special charges	2.1%		13.7		4.7			0.13		0.9%		4.4		0.9		0.06
Foreign valuation allowance and acquisition dividends	-		-		18.8			(0.28	)	-		-		-		-
Adjusted Basis	15.2%	$	76.6	$	22.7		$	0.81		11.5%	$	51.1	$	15.9	$	0.62

	Year to Date Ended June 30, 2016									Year To Date Ended June 30, 2015
	Operating Margin¹	Income Before Income Taxes		Income Tax Expense			Diluted EPS			Operating Margin	Income Before Income Taxes			Income Tax Expense			Diluted EPS¹

GAAP Basis	7.0%	$	69.2	$	(2.2	)	$	1.09		6.3%	$	81.6		$	24.7		$	0.99
Adjustments:
Acquisition and integration costs	1.7%		33.7		9.7			0.36		1.4%		19.5			6.3			0.23
Acquisition-related intangible asset amortization	3.7%		72.1		24.7			0.71		1.7%		23.4			6.5			0.29
FDA remediation expenses	-		-		-			-		0.2%		3.0			1.0			0.03
Field corrective actions	-		0.1		(0.1	)		-		0.3%		4.9			1.5			0.06
Litigation settlements and expenses	-		-		-			-		-		(0.6	)		(0.2	)		(0.01	)
Special charges	1.6%		31.5		10.5			0.32		0.8%		11.9			1.2			0.18
Foreign valuation allowance and acquisition dividends	-		-		18.8			(0.28	)	-		-			1.9			(0.03	)
Adjusted Basis	14.1%	$	206.6	$	61.4		$	2.20		10.7%	$	143.7		$	42.9		$	1.75

	June 30, 2016			September 30, 2015
ASSETS
Current Assets
Cash and cash equivalents	$	199.6		$	192.8
Trade accounts receivable, net of allowances (Note 2)		459.0			494.7
Inventories (Note 2)		254.4			267.4
Deferred income taxes (Notes 1 and 9)		-			77.0
Other current assets		92.7			109.1
Total current assets		1,005.7			1,141.0

Property, plant and equipment, net (Note 2)		356.3			378.4
Goodwill (Note 4)		1,606.7			1,610.5
Software and other intangible assets, net (Note 2)		1,173.0			1,247.7
Deferred income taxes (Notes 1 and 9)		47.2			21.6
Other assets		47.6			58.4
Total Assets	$	4,236.5		$	4,457.6

LIABILITIES
Current Liabilities
Trade accounts payable	$	117.8		$	136.3
Short-term borrowings (Note 5)		76.8			58.0
Accrued compensation		109.3			171.8
Accrued product warranties (Note 12)		27.0			32.1
Accrued rebates		35.9			33.7
Other current liabilities		137.4			146.9
Total current liabilities		504.2			578.8

Long-term debt (Note 5)		2,054.6			2,175.2
Accrued pension and postretirement benefits (Note 6)		119.4			118.8
Deferred income taxes (Notes 1 and 9)		320.6			380.6
Other long-term liabilities		40.0			47.3
Total Liabilities		3,038.8			3,300.7

Commitments and Contingencies (Note 14)

SHAREHOLDERS' EQUITY
Common Stock (Note 2)		4.4			4.4
Additional paid-in-capital		575.9			562.0
Retained earnings		1,549.3			1,509.9
Accumulated other comprehensive loss (Note 7)		(161.3	)		(140.8	)
Treasury stock, at cost (Note 2)		(779.6	)		(788.6	)
Total Shareholders' Equity Attributable to Common Shareholders		1,188.7			1,146.9
Noncontrolling interests		9.0			10.0
Total Shareholders' Equity		1,197.7			1,156.9
Total Liabilities and Shareholders' Equity	$	4,236.5		$	4,457.6

	Amount

Trade receivables	$	63.2
Inventory		110.5
Other current assets		52.7
Current deferred income taxes		27.3
Property, plant, and equipment		93.2
Goodwill		1,206.8
Trade name (indefinite life)		434.0
Customer relationships (12-year useful life)		516.8
Developed technology (7-year weighted average useful life)		54.0
Other intangibles		19.9
Other noncurrent assets		26.5
Current liabilities		(161.5	)
Noncurrent deferred income taxes		(368.9	)
Other noncurrent liabilities		(25.1	)
Total purchase price, net of cash acquired	$	2,049.4

Fair value of common stock issued	$	416.3
Cash payment, net of cash acquired		1,633.1
Total consideration	$	2,049.4

	North America			Surgical Solutions			International			Front Line Care		Total
Balances at September 30, 2015:
Goodwill	$	390.6		$	343.8		$	145.4		$	1,203.5	$	2,083.3
Accumulated impairment losses		(358.1	)		-			(114.7	)		-		(472.8	)
Goodwill, net at September 30, 2015		32.5			343.8			30.7			1,203.5		1,610.5

Changes in Goodwill during the period:
Goodwill related to acquisitions		-			1.1			-			3.3		4.4
Currency translation effect		-			(8.0	)		(0.2	)		-		(8.2	)

Balances at June 30, 2016:
Goodwill		390.6			336.9			145.2			1,206.8		2,079.5
Accumulated impairment losses		(358.1	)		-			(114.7	)		-		(472.8	)
Goodwill, net at June 30, 2016	$	32.5		$	336.9		$	30.5		$	1,206.8	$	1,606.7

	Quarter Ended June 30, 2016
	Other comprehensive income (loss)														Accumulated other comprehensive loss
	Prior to reclassification			Reclassification from		Pre-tax			Tax effect			Net of tax			Beginning balance			Net activity			Ending balance
Available-for-sale securities and hedges	$	(5.5	)	$	0.4	$	(5.1	)	$	1.8		$	(3.3	)	$	(1.7	)	$	(3.3	)	$	(5.0	)
Foreign currency translation adjustment		(20.1	)		-		(20.1	)		-			(20.1	)		(90.4	)		(20.1	)		(110.5	)
Change in pension and postretirement defined benefit plans		-			1.1		1.1			(0.2	)		0.9			(46.7	)		0.9			(45.8	)
Total	$	(25.6	)	$	1.5	$	(24.1	)	$	1.6		$	(22.5	)	$	(138.8	)	$	(22.5	)	$	(161.3	)

	Quarter Ended June 30, 2015
	Other comprehensive income (loss)														Accumulated other comprehensive loss
	Prior to reclassification			Reclassification from		Pre-tax			Tax effect			Net of tax			Beginning balance			Net activity			Ending balance
Available-for-sale securities and hedges	$	0.2		$	-	$	0.2		$	(0.1	)	$	0.1		$	(0.6	)	$	0.1		$	(0.5	)
Foreign currency translation adjustment		19.4			-		19.4			-			19.4			(104.8	)		19.4			(85.4	)
Change in pension and postretirement defined benefit plans		-			1.4		1.4			(0.6	)		0.8			(38.1	)		0.8			(37.3	)
Total	$	19.6		$	1.4	$	21.0		$	(0.7	)	$	20.3		$	(143.5	)	$	20.3		$	(123.2	)

Balance at September 30, 2015	$	24.3
Expenses		19.3
Cash Payments		(27.3	)
Reversals		(0.3	)
Balance at June 30, 2016	$	16.0



Fiscal Quarter Ended	Maximum Secured Net Leverage Ratio	Minimum Interest Coverage ~~Coverage~~ Ratio
~~December 31, 2015~~	~~4.75x~~	~~3.25x~~
December 31, 2016	4.50x	3.25x
December 31, 2017	4.00x	3.50x
December 31, 2018	3.50x	3.75x
December 31, 2019 and thereafter	3.00x	4.00x


Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

					Total Number		Approximate
					of Shares		Dollar Value
	Total				Purchased as		of Shares That
	Number		Average		Part of Publicly		May Yet Be
	of Shares		Price Paid		Announced Plans or		Purchased Under
Period	Purchased (1)		per Share		Programs (2)		the Programs (2)

April 1, 2016 - April 30, 2016		1,039	$	53.15		-	$	64.7
May 1, 2016 - May 31, 2016		1,150	$	48.45		-	$	64.7
June 1, 2016 - June 30, 2016		1,348	$	50.16		-	$	64.7
Total		3,537	$	50.48		-	$	64.7



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, 2016 - October 31, 2016	367	$	55.48	—	$	64.7
November 1, 2016 - November 30, 2016	602,658	$	54.38	552,645	$	34.7
December 1, 2016 - December 31, 2016	12,455	$	56.55	—	$	34.7
Total	615,480			552,645


(1)	Shares purchased during the quarter ended ~~June 30,~~December 31, 2016 were in connection with the share repurchase program discussed below as well as employee payroll tax withholding for restricted and deferred stock distributions.



Yes þ	No o



Yes þ	No o



Yes o	No þ

~~10.1~~		First Amendment to the Credit Agreement dated as of June 30, 2016 among Hill-Rom Holdings, Inc., the guarantors party thereto, the lenders party thereto, Goldman Sachs Bank USA, as Term Loan B Administrative Agent and JPMorgan Chase Bank, N.A., as Term Loan A/Revolver Administrative Agent (Incorporated by reference to Exhibit 10.1 to the Form 8-K dated June 30, 2016)

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



DATE: ~~August 4, 2016~~January 27, 2017	By:	/s/ Steven J. Strobel
	Name: Title:	Steven J. Strobel Senior Vice President and Chief Financial Officer (duly authorized officer and principal financial officer)