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EX-31.2 - EXHIBIT 31.2 - Hill-Rom Holdings, Inc. | c10360exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - Hill-Rom Holdings, Inc. | c10360exv32w2.htm |
EX-10.6 - EXHIBIT 10.6 - Hill-Rom Holdings, Inc. | c10360exv10w6.htm |
EX-31.1 - EXHIBIT 31.1 - Hill-Rom Holdings, Inc. | c10360exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Hill-Rom Holdings, Inc. | c10360exv32w1.htm |
EX-10.13 - EXHIBIT 10.13 - Hill-Rom Holdings, Inc. | c10360exv10w13.htm |
EX-10.12 - EXHIBIT 10.12 - Hill-Rom Holdings, Inc. | c10360exv10w12.htm |
EX-10.11 - EXHIBIT 10.11 - Hill-Rom Holdings, Inc. | c10360exv10w11.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended December 31, 2010
OR
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No. 1-6651
HILL-ROM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Indiana (State or other jurisdiction of incorporation or organization) |
35-1160484 (I.R.S. Employer Identification No.) |
|
1069 State Route 46 East | ||
Batesville, Indiana | 47006-8835 | |
(Address of principal executive offices) | (Zip Code) |
(812) 934-7777
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Common Stock, without par value 63,101,487 shares as of January 21, 2011.
HILL-ROM HOLDINGS, INC.
INDEX TO FORM 10-Q
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS |
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(Dollars in millions except per share data)
Quarterly Period Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Net Revenues |
||||||||
Capital sales |
$ | 256.7 | $ | 231.6 | ||||
Rental revenues |
117.5 | 123.7 | ||||||
Total revenues |
374.2 | 355.3 | ||||||
Cost of Revenues |
||||||||
Cost of goods sold |
139.6 | 130.5 | ||||||
Rental expenses |
50.1 | 54.0 | ||||||
Total cost of revenues |
189.7 | 184.5 | ||||||
Gross Profit |
184.5 | 170.8 | ||||||
Research and development expenses |
14.8 | 14.9 | ||||||
Selling and administrative expenses |
120.0 | 121.6 | ||||||
Operating Profit |
49.7 | 34.3 | ||||||
Interest expense |
(2.1 | ) | (2.1 | ) | ||||
Investment income and other, net |
| 0.5 | ||||||
Income Before Income Taxes |
47.6 | 32.7 | ||||||
Income tax expense (Note 9) |
12.2 | 12.8 | ||||||
Net Income |
35.4 | 19.9 | ||||||
Less: Net income attributable to noncontrolling interest |
0.2 | 0.1 | ||||||
Net Income Attributable to Common Shareholders |
$ | 35.2 | $ | 19.8 | ||||
Net Income Attributable to Common Shareholders per Common Share Basic |
$ | 0.56 | $ | 0.32 | ||||
Net Income Attributable to Common Shareholders per Common Share Diluted |
$ | 0.55 | $ | 0.31 | ||||
Dividends per Common Share |
$ | 0.1025 | $ | 0.1025 | ||||
Average Common Shares Outstanding Basic (thousands) (Note 10) |
62,995 | 62,691 | ||||||
Average Common Shares Outstanding Diluted (thousands) (Note 10) |
64,244 | 63,205 | ||||||
See Notes to Condensed Consolidated Financial Statements
3
Table of Contents
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in millions)
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 182.4 | $ | 184.5 | ||||
Trade accounts receivable, net of allowances (Note 2) |
352.1 | 353.1 | ||||||
Inventories (Note 2) |
112.9 | 108.5 | ||||||
Deferred income taxes (Notes 1 and 9) |
40.5 | 40.4 | ||||||
Other current assets |
42.7 | 52.7 | ||||||
Total current assets |
730.6 | 739.2 | ||||||
Property, plant and equipment, net (Note 2) |
233.9 | 243.7 | ||||||
Investments and investment securities (Notes 1 and 6) |
11.8 | 12.1 | ||||||
Goodwill |
81.1 | 81.1 | ||||||
Software and other intangible assets, net (Note 2) |
134.2 | 136.6 | ||||||
Other assets |
32.0 | 32.9 | ||||||
Total Assets |
$ | 1,223.6 | $ | 1,245.6 | ||||
LIABILITIES |
||||||||
Current Liabilities |
||||||||
Trade accounts payable |
$ | 67.9 | $ | 80.6 | ||||
Short-term borrowings (Note 4) |
108.3 | 53.1 | ||||||
Accrued compensation |
63.0 | 88.9 | ||||||
Accrued product warranties (Note 12) |
16.0 | 15.8 | ||||||
Other current liabilities |
47.8 | 50.3 | ||||||
Total current liabilities |
303.0 | 288.7 | ||||||
Long-term debt (Note 4) |
50.0 | 98.5 | ||||||
Accrued pension and postretirement benefits (Note 5) |
58.6 | 59.0 | ||||||
Deferred income taxes (Notes 1 and 9) |
26.0 | 31.3 | ||||||
Other long-term liabilities |
57.2 | 52.3 | ||||||
Total Liabilities |
494.8 | 529.8 | ||||||
Noncontrolling interest (Note 3) |
| 8.3 | ||||||
Commitments and Contingencies (Note 14) |
||||||||
SHAREHOLDERS EQUITY |
||||||||
Common Stock |
4.4 | 4.4 | ||||||
Additional paid-in-capital |
108.6 | 119.3 | ||||||
Retained earnings |
1,232.3 | 1,203.6 | ||||||
Accumulated other comprehensive loss (Note 7) |
(61.6 | ) | (61.8 | ) | ||||
Treasury stock, at cost (Notes 2 and 11) |
(554.9 | ) | (558.0 | ) | ||||
Total Shareholders Equity |
728.8 | 707.5 | ||||||
Total Liabilities, Non-Controlling Interest and Shareholders Equity |
$ | 1,223.6 | $ | 1,245.6 | ||||
See Notes to Condensed Consolidated Financial Statements.
4
Table of Contents
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
Quarterly Period Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Operating Activities |
||||||||
Net income |
$ | 35.4 | $ | 19.9 | ||||
Adjustments to reconcile net income to net cash flows from
operating activities: |
||||||||
Depreciation and amortization |
25.4 | 24.4 | ||||||
Provision for deferred income taxes |
(1.6 | ) | (5.4 | ) | ||||
Loss on disposal of property, equipment leased to others,
intangible assets and impairments |
(0.1 | ) | 0.8 | |||||
Stock compensation |
2.6 | 3.6 | ||||||
Excess tax benefits from employee stock plans |
(3.6 | ) | | |||||
Change in working capital excluding cash, current investments,
current debt, acquisitions and dispositions: |
||||||||
Trade accounts receivable |
1.7 | 4.2 | ||||||
Inventories |
(4.3 | ) | (2.2 | ) | ||||
Other current assets |
11.3 | (4.4 | ) | |||||
Trade accounts payable |
(12.8 | ) | (11.4 | ) | ||||
Accrued expenses and other liabilities |
(31.0 | ) | (7.4 | ) | ||||
Other, net |
0.5 | (0.5 | ) | |||||
Net cash provided by operating activities |
23.5 | 21.6 | ||||||
Investing Activities |
||||||||
Capital expenditures and purchase of intangibles |
(12.5 | ) | (11.6 | ) | ||||
Proceeds on sales of property and equipment leased to others |
2.1 | 0.1 | ||||||
Acquisitions of businesses, net of cash acquired |
| (7.1 | ) | |||||
Proceeds on investment sales/maturities |
0.2 | 0.5 | ||||||
Net cash used in investing activities |
(10.2 | ) | (18.1 | ) | ||||
Financing Activities |
||||||||
Change in short-term debt |
7.0 | 1.6 | ||||||
Payment on revolver |
| (45.0 | ) | |||||
Purchase of noncontrolling interest |
(10.6 | ) | | |||||
Payment of cash dividends |
(6.5 | ) | (6.4 | ) | ||||
Proceeds on exercise of options |
19.1 | 0.2 | ||||||
Proceeds from stock issuance |
0.8 | 0.7 | ||||||
Excess tax benefits from employee stock plans |
3.6 | | ||||||
Treasury stock acquired |
(28.8 | ) | (0.8 | ) | ||||
Net cash used in financing activities |
(15.4 | ) | (49.7 | ) | ||||
Effect of exchange rate changes on cash |
| (0.6 | ) | |||||
Total Cash Flows |
(2.1 | ) | (46.8 | ) | ||||
Cash and Cash Equivalents: |
||||||||
At beginning of period |
184.5 | 170.6 | ||||||
At end of period |
$ | 182.4 | $ | 123.8 | ||||
See Notes to Condensed Consolidated Financial Statements
5
Table of Contents
Hill-Rom Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions except per share data)
1. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited, Condensed Consolidated Financial Statements appearing in this Quarterly Report on
Form 10-Q (Form 10-Q) should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Companys latest Annual Report on Form 10-K for the
fiscal year ended September 30, 2010 (2010 Form 10-K) as filed with the U.S. Securities and
Exchange Commission (SEC). Unless the context otherwise requires, the terms Hill-Rom, the
Company, we, our and us refer to Hill-Rom Holdings, Inc. and its majority-owned
subsidiaries. The September 30, 2010 Consolidated Balance Sheet data was derived from audited
consolidated financial statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America (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.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of the Company and its
subsidiaries. All subsidiaries are wholly-owned as of December 31, 2010. During our first
quarter we acquired the remaining 40 percent noncontrolling interest in our former joint venture
(see Note 3). Intercompany accounts and transactions have been eliminated in consolidation.
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 reporting period. Actual results could differ from those estimates. Examples
of such estimates include our accounts receivable reserves (Note 2), investments (Note 6), income
taxes (Note 9), accrued warranties (Note 12) and accrued litigation and self insurance reserves
(Note 14), among others.
Investment Securities
At December 31, 2010, investment securities consisted primarily of $11.6 million in AAA rated
student loan auction rate securities (ARS). These securities are generally insured through the
U.S. governments Federal Family Education Loan Program, to the extent the borrowers meet certain
prescribed criteria in their underlying lending practices. These securities are classified as
available-for-sale and changes in their fair value are recorded in Accumulated Other Comprehensive
Loss (AOCL).
We regularly evaluate all investments classified as available-for-sale for possible impairment
based on current economic conditions, credit loss experience and other criteria. The evaluation of
investments for impairment requires significant judgments to be made including (i) the
identification of potentially impaired securities; (ii) the determination of their estimated fair
value; (iii) the assessment of whether any decline in estimated fair value is other-than-temporary;
and (iv) the likelihood of selling before recovery. If there is a decline in a securitys net
realizable value that is other-than-temporary, the decline is separated into the amount of
impairment related to credit loss and the amount of impairment related to all other factors. The
decline related to the credit loss is recognized in earnings, while the decline related to all
other factors is recognized in AOCL.
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 revenues and costs) basis.
6
Table of Contents
Income Taxes
The Company 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
and if it is determined that it is more likely than not that the benefits will not be realized,
valuation allowances are recognized. In evaluating whether it is more likely than not that we
would recover these deferred tax assets, future taxable income, the reversal of existing temporary
differences and tax planning strategies are considered.
We believe that our estimates for the valuation allowances recorded against deferred tax assets are
appropriate based on current facts and circumstances. Entering the year we had $28.5 million of
valuation allowances on deferred tax assets, on a tax-effected basis, primarily related to foreign
operating loss carryforwards and other tax attributes. It is possible that sustainable
improvements in foreign earnings could result in a reconsideration of the need for these valuation
allowances, resulting in the accelerated recognition of all or some portion of the previously
unrecognized tax benefits.
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.
Recently Issued Accounting Standards
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 2010
Form 10-K except as noted below:
On October 1, 2010 we adopted the Financial Accounting Standard Boards (FASB) revised
authoritative guidance requiring entities to provide more information about sales of securitized
financial assets and similar transactions, particularly if the seller retains some risk with
respect to the assets. Our adoption of this guidance was prospective and did not have a material
impact on our condensed consolidated financial statements.
On October 1, 2010, we adopted the FASBs revised authoritative guidance to improve financial
reporting for companies involved with variable interest entities to provide more relevant and
reliable information to users of financial statements. Our adoption of this guidance was
prospective and did not have a material impact on our consolidated financial statements.
7
Table of Contents
2. Supplementary Balance Sheet Information
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
Allowance for possible losses and discounts on trade receivables |
$ | 28.3 | $ | 29.0 | ||||
Inventories: |
||||||||
Finished products |
$ | 66.6 | $ | 64.2 | ||||
Raw materials and work in process |
46.3 | 44.3 | ||||||
Total inventory |
$ | 112.9 | $ | 108.5 | ||||
Accumulated depreciation of property, plant and equipment |
$ | 568.2 | $ | 561.3 | ||||
Accumulated amortization of software and other intangible assets |
$ | 144.8 | $ | 137.8 | ||||
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 |
80,323,912 | 80,323,912 | ||||||
Shares outstanding |
63,087,835 | 62,786,883 | ||||||
Treasury shares |
17,236,077 | 17,537,029 |
3. Acquisitions
On November 9, 2009, the Company entered into a joint venture with Encompass Group, LLC (Encompass
Group), a leader in health care textiles and therapeutic and prevention surfaces, to form
Encompass TSS, LLC (Encompass), of which we ultimately owned 60 percent. For our 60 percent
ownership interest we paid $7.5 million to Encompass Group, contributed cash and entered into
license and distribution agreements with Encompass. On November 30, 2010, we purchased the
remaining 40 percent of Encompass for $10.6 million, plus a variable earn-out with a minimum of
$1.2 million and a maximum of $1.6 million per year over five years. We have a total of $6.0
million accrued in other current liabilities and other long-term liabilities on our Condensed
Consolidated Balance Sheet at December 31, 2010 related to the earn-out.
If the Encompass joint venture had been consummated at the beginning of our 2010 fiscal year or
wholly-owned, the impact to revenues and net income on an unaudited pro forma basis would not have
been significant to our financial results in any of the periods presented.
4. Financing Agreements
Total debt consists of the following:
December 31, 2010 | September 30, 2010 | |||||||
Outstanding finance credit lines |
$ | 15.1 | $ | 8.1 | ||||
Revolving credit facility |
45.0 | 45.0 | ||||||
Unsecured 8.50% debentures due on December 1, 2011 |
48.2 | 48.4 | ||||||
Unsecured 7.00% debentures due on February 15, 2024 |
19.7 | 19.7 | ||||||
Unsecured 6.75% debentures due on December 15, 2027 |
29.8 | 29.8 | ||||||
Other |
0.5 | 0.6 | ||||||
Total debt |
158.3 | 151.6 | ||||||
Less current portion of debt |
108.3 | 53.1 | ||||||
Total long-term debt |
$ | 50.0 | $ | 98.5 | ||||
8
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We have trade finance credit lines and uncommitted letter of credit facilities. These lines are
associated with the normal course of business and are not currently, nor have they historically,
been of material size to the overall business.
Unsecured debentures outstanding at December 31, 2010 have fixed rates of interest. We have
deferred gains included in the amounts above from the termination of previous interest rate swap
agreements, and those deferred gains amounted to $1.8 million at December 31, 2010 and $2.1 million
at September 30, 2010. 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 through
2011 and 2024, 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.
The Company has a $500.0 million senior revolving credit facility, which expires on March 28, 2013
(subject to extension upon satisfaction of certain conditions set forth in the credit facility).
Borrowings under the credit facility bear interest at variable rates, and the availability of
borrowings is subject to our ability at the time of borrowing to meet certain specified conditions,
including compliance with covenants contained in the credit agreement governing the facility. The
credit agreement contains covenants that, among other matters, require the Company to maintain a
ratio of consolidated indebtedness to consolidated EBITDA (each as defined in the credit agreement)
of not more than 3.5:1.0 and a ratio of consolidated EBITDA to interest expense of not less than
3.5:1.0. The proceeds of the five-year facility shall be used, as needed: (i) for working capital,
capital expenditures, and other lawful corporate purposes; and (ii) to finance acquisitions.
As of December 31, 2010, we had outstanding borrowings of $45.0 million and undrawn letters of
credit of $5.8 million under the five-year facility, leaving $449.2 million of borrowing capacity
available under the facility.
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 were $53.8 and $95.7 million at December 31, 2010 and September 30,
2010.
5. Retirement and Postretirement Plans
The Company sponsors four defined benefit plans: a master defined benefit retirement plan, a
nonqualified supplemental executive defined benefit retirement plan and two defined benefit
retirement plans covering employees in Germany and France. Benefits for such plans are based
primarily on years of service and the employees 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 30th measurement date. The following table includes the components of net pension
expense for our defined benefit plans.
Quarterly Period Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Service cost |
$ | 1.3 | $ | 1.3 | ||||
Interest cost |
3.3 | 3.3 | ||||||
Expected return on plan assets |
(4.2 | ) | (3.3 | ) | ||||
Amortization of unrecognized prior service cost, net |
0.2 | 0.1 | ||||||
Amortization of net loss |
1.0 | 0.7 | ||||||
Net pension expense |
$ | 1.6 | $ | 2.1 | ||||
The Company also sponsors a domestic postretirement health care plan that provides health care
benefits to qualified retirees and dependents until eligible for Medicare. Annual costs related to
the domestic postretirement health care plan are not significant.
9
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6. Fair Value Measurements
Fair value measurements are classified and disclosed in one of the following three categories:
| Level 1: Financial instruments with unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted assets and
liabilities. |
| Level 2: Financial instruments with observable inputs other than those included in
Level 1 such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities. |
| Level 3: Financial instruments with unobservable inputs that are supported by
little or no market activity and that are significant to the fair value of the assets
or liabilities. Unobservable inputs reflect the Companys 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 the Companys own data. |
The following table summarizes the Companys financial assets measured at fair value on a recurring
basis included in our Condensed Consolidated Balance Sheet, as of December 31, 2010:
Fair Value Measurements | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 182.4 | $ | 182.4 | $ | | $ | | ||||||||
Available-for-sale
marketable securities |
11.6 | | | 11.6 | ||||||||||||
Other investments |
0.2 | | | 0.2 | ||||||||||||
Total assets at fair value |
$ | 194.2 | $ | 182.4 | $ | | $ | 11.8 | ||||||||
At December 31, 2010, we had $11.6 million of AAA rated student loan ARS. While we continue to
earn interest on the ARS at the contractual rate, these investments are not currently being bought
and sold in an active market and therefore do not have readily determinable market values. At
December 31, 2010, the Companys investment advisors provided a valuation based on unobservable
inputs for the ARS. The investment advisors utilized a discounted cash flow approach (an income
approach) to arrive at this valuation, which was corroborated by separate and comparable
discounted cash flow analysis prepared by us. The assumptions used in preparing the discounted
cash flow model include estimates of interest rates, timing and amount of cash flows, credit
spread related yield and illiquidity premiums and expected holding periods of the ARS. These
assumptions are volatile and subject to change as the underlying sources of these assumptions and
market conditions change. Activity related to our ARS was not significant during our first
quarter.
7. Comprehensive Income
The net-of-tax effect of unrealized gains or losses on: our available-for-sale securities, foreign
currency translation adjustments, pension (or other defined benefit postretirement plans)
actuarial gains or losses, prior service costs or credits are required to be included in
comprehensive income.
The composition of comprehensive income is as follows:
Quarterly Period Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Net income |
$ | 35.4 | $ | 19.9 | ||||
Net gain on available-for-sale securities and other investments |
| 0.1 | ||||||
Foreign currency translation adjustment, net-of-tax |
0.4 | (3.0 | ) | |||||
Items not yet recognized as a component of net periodic pension
or postretirement benefit cost, net-of-tax |
(0.2 | ) | (0.1 | ) | ||||
Total comprehensive income |
35.6 | 16.9 | ||||||
Comprehensive income attributable to the noncontrolling interest |
(0.2 | ) | (0.1 | ) | ||||
Total comprehensive income attributable to common shareholders |
$ | 35.4 | $ | 16.8 | ||||
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8. Special Charges
Over the past several years, the Company has placed a focus on improving our cost structure and
business processes through various means including consolidation of certain manufacturing and
select back office operations, customer rationalizations and various other organizational changes.
Activity related to these actions during the first quarter of fiscal 2011 was as follows:
Beginning | Ending | |||||||||||||||||||
Balance | Balance | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
2010 | Expenses | Cash Payments | Reversals | 2010 | ||||||||||||||||
Fiscal Year 2010 |
||||||||||||||||||||
Q2 Action Restructuring |
$ | 1.5 | $ | | $ | (0.7 | ) | $ | | $ | 0.8 | |||||||||
Q4 Action Restructuring |
3.7 | | (0.8 | ) | | 2.9 | ||||||||||||||
Total Fiscal Year 2010 |
$ | 5.2 | $ | | $ | (1.5 | ) | $ | | $ | 3.7 | |||||||||
9. Income Taxes
The effective tax rate for the first quarter of fiscal 2011 was 25.6 percent compared to 39.2
percent for the first quarter of 2010. The effective tax rate for the three months ended December
31, 2010 was favorably impacted by the recognition of current period tax benefits of $2.1 million
relating primarily to the one-time catch up associated with the retroactive reinstatement of the
research and development tax credit. Also favorably impacting the rate were increased earnings in
lower-rate jurisdictions, including improved European income, some of which was not subject to tax
as a result of the utilization of previously unrecognized operating loss carryforwards. We
currently carry full valuation allowances on these loss carryforwards, thus the recognition of
income and the release of valuation allowance results in no tax expense on the earnings. It is
possible that sustainable improvements in foreign earnings could result in a reconsideration of the
need for these valuation allowances, resulting in the accelerated recognition of all or some portion
of the previously unrecognized tax benefits.
10. Earnings per Common Share
Basic earnings per share are 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 are 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. Excluded shares were 0.5 million for the period ended December 31, 2010, and
4.4 million for the comparable period of fiscal year 2010. Cumulative treasury stock acquired,
less cumulative shares reissued, have been excluded in determining the average number of shares
outstanding.
Earnings per share is calculated as follows (share information in thousands):
Quarterly Period Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Net income attributable to common shareholders |
$ | 35.2 | $ | 19.8 | ||||
Average shares outstanding Basic |
62,995 | 62,691 | ||||||
Add potential effect of exercise of stock options
and other unvested equity awards |
1,249 | 514 | ||||||
Average shares outstanding Diluted |
64,244 | 63,205 | ||||||
Net income attributable to common shareholders per common
share Basic |
$ | 0.56 | $ | 0.32 | ||||
Net income attributable to common shareholders per common
share Diluted |
$ | 0.55 | $ | 0.31 | ||||
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11. Common Stock
Share Repurchases
Our Board of Directors has approved the repurchase of a total of 25.7 million shares of our common
stock through the open market or private transactions. During the quarter ended December 31, 2010,
we repurchased 0.6 million shares of our common stock for $25.2 million. As of December 31, 2010,
a cumulative total of 24.3 million shares had been repurchased by us at market trading prices,
leaving approximately 1.4 million shares still available for repurchase. The Boards approval has
no expiration date and currently there are no plans to terminate this program in the future.
Stock Based Compensation
The stock based compensation cost that was charged against income, net of tax, for all plans was
$1.6 million for the quarterly period ended December 31, 2010 and $2.2 million for the comparable
period of fiscal year 2010.
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:
Quarterly Period Ended | ||||||||
December 31, | December, 31 | |||||||
2010 | 2009 | |||||||
Balance at beginning of period |
$ | 15.8 | $ | 17.1 | ||||
Provision for warranties during the period |
4.2 | 3.0 | ||||||
Warranty claims during the period |
(4.0 | ) | (4.7 | ) | ||||
Balance at end of period |
$ | 16.0 | $ | 15.4 | ||||
In the normal course of business we enter into various other guarantees and indemnities in our
relationships with suppliers, service providers, customers, business partners and others.
Examples of these arrangements would include guarantees of product performance, indemnifications
to service providers and indemnifications of our actions to business partners. These guarantees
and indemnifications have not historically nor do we expect them to have a material impact on our
financial condition or results of operations, although indemnifications associated with our
actions generally have no dollar limitations.
In conjunction with our acquisition and divestiture activities, we have entered into select
guarantees and indemnifications of performance with respect to the fulfillment of 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. For those representations and warranties that survive closing,
they generally survive for periods up to five years or the expiration of the applicable statutes
of limitations. Potential losses under the indemnifications are generally limited to a portion of
the original transaction price, or to other lesser specific dollar amounts for select provisions.
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.
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13. Segment Reporting
We disclose segment information that is consistent with the way in which management operates and
views the Company. During the first quarter of fiscal 2011, we changed our segment reporting to
reflect changes in our organizational structure and managements view of the Company. We moved
our surgical reporting unit from the International and Surgical segment (now referred to as the
International segment) to the North America Acute Care segment. In addition, manufacturing and
research and development costs were further allocated to the segments such that all manufacturing
and research and development costs are now included in divisional income. We have also assigned
additional direct functional costs to the segments as well as an allocation of certain corporate
functional expenses that can be attributed to the segments. The prior year segment information
included in this Note has been updated to reflect these changes. Our new operating structure
contains the following reporting segments:
| North America Acute Care sells and rents our hospital patient support and near-patient
technologies, as well as our health information technology solutions and surgical
accessories, to acute care facilities. |
| North America Post-Acute Care sells and rents a variety of products outside of the
hospital setting including long-term acute care, extended care and home care, offering
patient support systems and respiratory care products. |
| International sells and rents similar products as our North America businesses to
Europe and the rest of the world. |
Under our new segments the Companys performance under each reportable segment continues to be
measured on a divisional income basis before special items. Divisional income generally
represents the divisions standard gross profit less its direct operating costs along with an
allocation of manufacturing and distribution costs, research and development and corporate
functional expenses.
Corporate expenses, while not considered a segment, are presented separately to aid in the
reconciliation of segment information to consolidated financial information. These costs include
corporate costs that support the entire organization such as administration, finance, legal and
human resources.
Quarterly Period Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Revenues: |
||||||||
North America Acute Care |
$ | 218.1 | $ | 205.6 | ||||
North America Post-Acute Care |
52.3 | 52.6 | ||||||
International |
103.8 | 97.1 | ||||||
Total revenues |
$ | 374.2 | $ | 355.3 | ||||
Divisional income: |
||||||||
North America Acute Care |
$ | 44.6 | $ | 37.4 | ||||
North America Post-Acute Care |
12.2 | 12.8 | ||||||
International |
10.5 | 0.6 | ||||||
Corporate expenses |
(17.6 | ) | (16.5 | ) | ||||
Total divisional income |
49.7 | 34.3 | ||||||
Interest expense |
(2.1 | ) | (2.1 | ) | ||||
Investment income and other,
net |
| 0.5 | ||||||
Income before income taxes |
$ | 47.6 | $ | 32.7 | ||||
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14. Commitments and Contingencies
Batesville Casket Antitrust Litigation
In 2005 the Funeral Consumers Alliance, Inc. and a number of individual consumer casket purchasers
(FCA Action) filed a purported class action antitrust lawsuit on behalf of certain consumer purchasers of
Batesville® caskets against the Company and its former Batesville Casket Company, Inc. subsidiary
(now wholly-owned by Hillenbrand, Inc.), and three national funeral home businesses.
The district court has dismissed the claims and denied class certification, but in October 2010,
these decisions were appealed to the United States Court of Appeals for the Fifth Circuit. If the
plaintiffs were to succeed in reversing the district courts dismissal of the claims, but not the
denial of class certification, then the plaintiffs would be able to pursue individual damages
claims: the alleged overcharges on the plaintiffs individual casket purchases, which would be
trebled as a matter of law, plus reasonable attorneys fees and costs.
If the plaintiffs were to (1) succeed in reversing the district courts dismissal of the claims,
(2) succeed in reversing the district court order denying class certification and certify a class,
and (3) prevail at trial, then the damages awarded to the plaintiffs, which would be trebled as a
matter of law, could have a significant material adverse effect on our results of operations,
financial condition and/or liquidity. The plaintiffs in the FCA Action filed a report indicating
that they are seeking damages ranging from approximately $947.0 million to approximately $1.46
billion before trebling on behalf of the purported class of consumers they seek to represent, based
on claims of approximately one million casket purchases by the purported class members.
We and Hillenbrand, Inc. have entered into a Judgment Sharing Agreement that apportions the costs
and any potential liabilities associated with this litigation between us and Hillenbrand, Inc.
We believe that we have committed no wrongdoing as alleged by the plaintiffs and that we have
meritorious defenses to class certification and to plaintiffs underlying allegations and damage
theories.
Office of Inspector General Investigation
On February 8, 2008, we were served with an Administrative Investigative Demand subpoena by the
United States Attorneys Office for the Eastern District of Tennessee pursuant to a Health and
Human Services Office of Inspector General investigation. On September 18, 2008, we were informed
that the investigation was precipitated by the filing in 2005 of a qui tam (whistleblower)
complaint under the False Claims Act in the United States District Court for the Eastern District
of Tennessee. Once the complaint is filed with the court under seal, the Department of Justice
investigates the allegations and has the right to intervene and in effect take over the prosecution
of the lawsuit if it believes the allegations warrant. At this point, the government has not yet
reached a final intervention decision and is continuing its investigation.
Although the complaint has been only partially unsealed at this point and we have not been formally
served, we know that the plaintiffs seek recovery of significant damages and civil penalties
relating to the alleged submission of false and fraudulent claims to Medicare and/or Medicaid for
the provision of durable medical equipment. In the event that this matter were to proceed to
litigation, if it were found that we had failed to comply with applicable laws and regulations, we
could be subject to substantial fines or penalties and possible exclusion from participation in
federal health care programs. At this time, we are continuing to cooperate with the governments
investigation. We cannot provide any assurances as to when the government will finish its
investigation, or when, if ever, it will determine to formally intervene.
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Freedom Medical Antitrust Litigation
On October 19, 2009, Freedom Medical, Inc. filed a complaint against the Company, another
manufacturer and two group purchasing organizations in the United States District Court for the
Eastern District of Texas. The plaintiff alleges that the Company and the other defendants
conspired to exclude it from the biomedical equipment rental market and to maintain the Companys
market share by engaging in a variety of conduct in violation of state and federal antitrust laws.
The plaintiff also has asserted claims for business disparagement, common law conspiracy and
tortuous interference with business relationships. The plaintiff seeks injunctive relief and money
damages in an unspecified amount. We intend to defend this matter vigorously. Because the
litigation is in a preliminary stage, we cannot assess the likelihood of an adverse outcome or
determine an estimate, or a range of estimates, of potential damages, nor can we give any
assurances that this matter will not have a material adverse impact on the Companys financial
condition, results of operations or cash flows.
General
We are subject to various other claims and contingencies arising out of the normal course of
business, including those relating to governmental investigations and proceedings, commercial
transactions, product liability, employee related matters, antitrust, safety, health, taxes,
environmental and other matters. Litigation is subject to many uncertainties and the outcome of
individual litigated matters is not predictable with assurance. It is possible that some
litigation matters for which reserves have not been established could be decided unfavorably to us,
and that any such unfavorable decisions could have a material adverse effect on our financial
condition, results of operations and cash flows.
We are involved in possible claims and are generally self-insured up to certain limits for
product/general liability, workers compensation, auto liability and professional liability
insurance programs. These policies have deductibles and self-insured retentions ranging from $150
thousand to $1.5 million per occurrence, depending upon the type of coverage and policy period. 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.
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Item 2. | MANAGEMENTS 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. We have tried, whenever
possible, to identify these forward-looking statements by using words such as intend,
anticipate, believe, plan, encourage, expect, may, goal, become, pursue,
estimate, strategy, will, projection, forecast, continue, accelerate, promise,
increase, higher, lower, reduce, improve, expand, progress, potential or the
negative of those terms or other variations of them or by comparable terminology. The absence of
such terms, however, does not mean that the statement is not forward-looking.
Forward-looking statements are not guarantees of future performance, and our actual results could
differ materially from those set forth in any forward-looking statements. Factors that could cause
actual results to differ from forward-looking statements include but are not limited to the factors
discussed under the heading Risk Factors in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2010 (2010 Form 10-K) as well as the discussions in this Managements
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 Managements Discussion and Analysis of Financial Conditions and Results
of Operations included in our 2010 Form 10-K.
Hill-Rom Holdings, Inc. (the Company, we, us, or our) is a leading worldwide manufacturer
and provider of medical technologies and related services for the health care industry, including
patient support systems, safe mobility and handling solutions, non-invasive therapeutic products
for a variety of acute and chronic medical conditions, medical equipment rentals and information
technology solutions. Our comprehensive product and service offerings are used by health care
providers across the health care continuum in hospitals, extended care facilities and home care
settings worldwide, to enhance the safety and quality of patient care.
Use of Non-GAAP Financial Measure
These condensed consolidated financial statements, including the related notes, are presented in
accordance with accounting principles generally accepted in the U.S. (GAAP). The Company analyzes
net revenues on a constant currency basis to better measure the comparability of results between
periods. We believe that evaluating growth in net revenues on a constant currency basis provides
an additional and meaningful assessment to both management and investors.
We believe use of this non-GAAP measure 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. It 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.
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Net Revenues
Quarterly Period Ended | Percentage Change | |||||||||||||||
December 31, | December 31, | Constant | ||||||||||||||
(Dollars in millions) | 2010 | 2009 | As Reported | Currency | ||||||||||||
Revenues: |
||||||||||||||||
Capital sales |
$ | 256.7 | $ | 231.6 | 10.8 | 12.0 | ||||||||||
Rental revenues |
117.5 | 123.7 | (5.0 | ) | (4.4 | ) | ||||||||||
Total Revenues |
$ | 374.2 | $ | 355.3 | 5.3 | 6.3 | ||||||||||
Capital sales increased as a result of North America Acute Care sales volume growth in several
major product categories led by patient support systems (increased 22.4 percent) as well as
continued volume growth internationally in the Middle East, Latin America and Asia. Volume
increases were offset by modestly unfavorable pricing.
Rental revenues declined in the first quarter due to volume declines in our therapy rental business
as well as declines in rentals of our movable medical equipment fleet associated with a weaker flu
season compared to fiscal 2010.
Gross Profit
Quarterly Period Ended | ||||||||
December 31, | December 31, | |||||||
(Dollars in millions) | 2010 | 2009 | ||||||
Gross Profit |
||||||||
Capital |
$ | 117.1 | $ | 101.1 | ||||
Percent of Related Revenues |
45.6 | % | 43.7 | % | ||||
Rental |
67.4 | $ | 69.7 | |||||
Percent of Related Revenues |
57.4 | % | 56.3 | % | ||||
Total Gross Profit |
$ | 184.5 | $ | 170.8 | ||||
Percent of Related Revenues |
49.3 | % | 48.1 | % |
Consolidated gross profit increased 8.0 percent and increased as a percentage of revenues by 120
basis points.
Capital gross profit increased 15.8 percent and gross margin (as a percentage of revenues)
increased 190 basis points. The gross margin increase was primarily due to an improved mix towards
higher margin products as well as favorable material and manufacturing costs.
Rental gross profit decreased 3.3 percent, while gross margin increased 110 basis points. The
increase in gross margin for the quarter was due to cost improvements within our field service
network.
Other
Quarterly Period Ended | ||||||||
December 31, | December 31, | |||||||
(Dollars in millions) | 2010 | 2009 | ||||||
Research and development expenses |
$ | 14.8 | $ | 14.9 | ||||
Percent of Total Revenues |
4.0 | % | 4.2 | % | ||||
Selling and administrative expenses |
$ | 120.0 | $ | 121.6 | ||||
Percent of Total Revenues |
32.1 | % | 34.2 | % | ||||
Interest expense |
$ | (2.1 | ) | $ | (2.1 | ) | ||
Investment income |
$ | 0.5 | $ | 0.6 | ||||
Other |
$ | (0.5 | ) | $ | (0.1 | ) |
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Research and development expenses were flat for the quarter and declined as a percentage of sales
due to timing of project spending and the higher revenues experienced in the first quarter of
fiscal 2011. Selling and administrative expenses were slightly favorable for the quarter and
improved as a percentage of sales by 210 basis points. The decline was a result of benefits
realized from previously announced restructuring activities and the impact of cost reduction
initiatives.
Interest expense is consistent year over year due to consistent interest rates and a consistent
total debt balance. Investment income also remained consistent year over year, the result of a
higher cash balance in fiscal 2011, offset by lower interest rates.
The effective tax rate for the first quarter of fiscal 2011 was 25.6 percent compared to 39.2
percent for the first quarter of 2010. The lower rate in the first quarter of fiscal 2011 was due
primarily to the impact of the retroactive reinstatement of the research and development tax credit
back to January 1, 2010, the impact of increased earnings in lower tax rate jurisdictions and the
effects of the research and development credit on projected fiscal 2011 earnings.
Increased earnings in lower-rate jurisdictions included improved European income, some of which was
not subject to tax as a result of the utilization of previously unrecognized operating loss
carryforwards. We currently carry full valuation allowances on these loss carryforwards, thus the
recognition of income and the release of valuation allowance results in no tax expense on the
earnings. It is possible that sustainable improvements in foreign earnings could result in a
reconsideration of the need for these valuation allowances, resulting in the
accelerated recognition of all or some portion of the previously unrecognized tax benefits. Should this occur,
the future income in the affected jurisdictions would be subject to tax at their normal statutory
tax rates, resulting in an increase in our overall effective tax rate in future periods.
Net income attributable to common shareholders was $35.2 million for the first quarter of fiscal
2011, representing an increase of 77.8 percent. Diluted earnings per share increased 77.4 percent
for the quarter to $0.55.
Business Segment Results of Operations
During the first quarter of fiscal 2011, we changed our segment reporting to reflect changes in our
organizational structure and managements view of the Company. We moved our surgical reporting
unit from the International and Surgical segment (now referred to as the International segment) to
the North America Acute Care segment. In addition, manufacturing and research and development
costs were further allocated to the segments such that all manufacturing and research and
development costs are now included in divisional income. We have also assigned additional direct
functional costs to the segments as well as an allocation of certain corporate functional expenses
that can be attributed to the segments. The prior year segment information below has been updated
to reflect these changes.
Quarterly Period Ended | Percentage Change | |||||||||||||||
December 31, | December 31, | Constant | ||||||||||||||
(Dollars in millions) | 2010 | 2009 | As Reported | Currency | ||||||||||||
Revenues: |
||||||||||||||||
North America Acute Care |
$ | 218.1 | $ | 205.6 | 6.1 | 5.8 | ||||||||||
North America Post-Acute Care |
52.3 | 52.6 | (0.6 | ) | (0.6 | ) | ||||||||||
International |
103.8 | 97.1 | 6.9 | 11.0 | ||||||||||||
Total revenues |
$ | 374.2 | $ | 355.3 | 5.3 | 6.3 | ||||||||||
Divisional income: |
||||||||||||||||
North America Acute Care |
$ | 44.6 | $ | 37.4 | 19.3 | |||||||||||
North America Post-Acute Care |
12.2 | 12.8 | (4.7 | ) | ||||||||||||
International |
10.5 | 0.6 | 1650.0 | |||||||||||||
Corporate Expenses |
(17.6 | ) | (16.5 | ) | (6.7 | ) | ||||||||||
Total divisional income |
$ | 49.7 | $ | 34.3 | 44.9 | |||||||||||
North America Acute Care
North America Acute Care capital sales increased 12.3 percent mainly due to higher volumes in
several of our major product categories led by our patient support systems, which increased 22.4
percent. The volume increases were partially offset by modestly unfavorable price and product mix.
Rental revenues decreased by 6.5 percent due primarily to a decline in therapy rentals as well as
rentals of moveable medical equipment driven by a weaker flu season compared to fiscal 2010.
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North America Acute Care divisional income increased due to an increase in total gross profit and
margin improvements driven by higher capital volumes, improved material and manufacturing costs and
cost improvements within our field service network, partially offset by lower pricing. Research
and development costs along with selling and administrative costs were relatively flat during the
first quarter.
North America Post-Acute Care
North America Post-Acute Care capital sales decreased by 2.6 percent related to a decline in sales
within our extended care business partially offset by growth in The Vest® respiratory care system
and home care direct to consumer business. Rental revenues were flat year over year.
North America Post-Acute Care divisional income decreased due to higher operating expenses,
primarily related to investments in our sales channels. Total gross profit and margins were
essentially flat year over year.
International
International capital sales increased 10.4 percent, and 14.1 percent on a constant currency basis.
On a constant currency basis, the increase was driven by growth in the Middle East, Latin America
and Asia due primarily to favorable volume, partially offset by flat revenues in Europe. Rental
revenues decreased 12.0 percent and 6.0 percent on a constant currency basis. The decline in
rental revenues can be attributed mainly to the rationalization of unprofitable business.
International divisional income increased significantly due to an increase in gross profit and
margins as well as a decrease in operating expenses. The increase in gross margin was due to
favorable product and geographic mix. Operating expenses decreased related to favorable exchange
rates on costs as well as reduced costs from previous restructuring actions.
Liquidity and Capital Resources
Quarterly Period Ended | ||||||||
December 31, | December 31, | |||||||
(Dollars in millions) | 2010 | 2009 | ||||||
Cash Flows Provided By (Used In): |
||||||||
Operating activities |
$ | 23.5 | $ | 21.6 | ||||
Investing activities |
(10.2 | ) | (18.1 | ) | ||||
Financing activities |
(15.4 | ) | (49.7 | ) | ||||
Effect of exchange rate changes on cash |
| (0.6 | ) | |||||
Decrease in Cash and Cash Equivalents |
$ | (2.1 | ) | $ | (46.8 | ) | ||
Operating Activities
Cash provided by operating activities was driven primarily by net income, adjusted by non-cash
expenses related to depreciation and amortization. The sources of cash were offset by changes in
our working capital primarily driven by the payout of our performance based compensation and
restructuring accruals related to our 2010 fiscal year and the timing of payments on our trade
payables. The increase over the first quarter of fiscal 2010 was due to higher income offset by
higher payouts of performance based compensation.
Investing Activities
Cash used for investing activities during the first quarter of fiscal 2011 decreased over the first
quarter of fiscal 2010, driven primarily by the payment in the prior year period to
acquire a 60 percent interest in our Encompass joint venture.
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Financing Activities
Cash used for financing activities during the first quarter of fiscal 2011 consisted mainly of
repurchasing shares, the purchase of the remaining 40 percent noncontrolling interest in our former
Encompass joint venture and cash dividend payments, offset by cash received from stock option
exercises. The decline in uses of cash compared to the first quarter of fiscal 2010 was due to the
$45 million payment on our revolving credit facility in the first quarter of fiscal 2010 and cash
proceeds from stock option exercises in the current year, partially offset by current year share
repurchases and the purchase of the noncontrolling interest in our former Encompass joint venture.
Other Liquidity Matters
Net cash flows from operating activities and selected borrowings have represented our primary
sources of funds for growth of the business, including capital expenditures and acquisitions.
As of December 31, 2010, we held investment securities with a fair value of $11.8 million, which
consisted primarily of AAA rated student loan auction rate securities (ARS). We have estimated
the current fair value of our ARS portfolio based upon guidance provided by our investment
advisors, including consideration of the credit quality of the underlying securities and the
provisions of the respective security agreements. At December 31, 2010, we have recorded
temporary unrealized losses totaling $1.1 million on these securities to reflect the estimated
decline in fair value associated with the current illiquidity in the auction rate market. If
current market conditions do not improve or worsen the result could be further realized or
unrealized losses or impairments, and liquidity and earnings could be adversely affected.
We have a $500.0 million five-year senior revolving credit facility with a syndicate of banks. The
syndication group consists of 11 financial institutions, which we believe reduces our exposure to
any one institution and should leave us with significant borrowing capacity in the event that any
one of the institutions within the group is unable to comply with the terms of our agreement. As
of December 31, 2010, we had outstanding borrowings of $45.0 and $5.8 million of outstanding,
undrawn letters of credit under the facility, leaving $449.2 million of borrowing capacity
available.
We also have trade finance credit lines and uncommitted letter of credit facilities. These lines
are associated with the normal course of business and do not currently, nor have they historically,
been of a material size to the overall business.
We have $95.8 million of senior notes outstanding at various fixed interest rates as of December
31, 2010. Of the total amount, $48.5 million are classified as long-term and $47.3 million
short-term in the Condensed Consolidated Balance Sheet.
Our financing agreements contain no restrictive provisions or conditions relating to dividend
payments, working capital or additional unsecured indebtedness (except to the extent that a
dividend payment or incurrence of additional unsecured indebtedness would result in a default
under our financing agreements), but there are limitations with respect to secured indebtedness.
Our debt agreements also contain no credit rating triggers. Credit rating changes can, however,
impact the cost of borrowings under our financing agreements. Additionally, we have restrictive
covenants within the Distribution Agreement between us and Hillenbrand, Inc. This agreement has certain
limitations on indebtedness, dividends and share repurchases and acquisitions. See Note 3 of
Notes to Consolidated Financial Statements in our 2010 Form 10-K for more details on the
Distribution Agreement.
Our pension plans invest in a variety of equity and debt securities. At September 30, 2010, our
latest measurement date, our pension plans were underfunded by approximately $50.8 million. Given
the significant funding contribution made during fiscal 2010, we currently do not anticipate any
further contributions to our master pension plan in fiscal 2011.
As previously disclosed, we intend to continue to pay quarterly cash dividends comparable to those
paid over the past two years. However, the declaration and payment of dividends by us will be
subject to the sole discretion of our Board of Directors and will depend upon many factors,
including financial condition, earnings, capital requirements, covenants associated with debt
obligations, legal requirements and other factors deemed relevant by the Board of Directors.
We intend to continue to pursue selective acquisition candidates in certain areas of our business,
but the timing, size or success of any acquisition effort and the related potential capital
commitments cannot be predicted. We expect to fund future acquisitions primarily with cash on
hand, cash flow from operations and borrowings, within our set limits. The Distribution Agreement
discussed above contains certain restrictions with respect to additional indebtedness we may take
on to make acquisitions. We do not anticipate, however, such restrictions will limit our ability
to execute our current growth strategy.
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As of December 31, 2010, we had authorization remaining to repurchase 1.4 million additional
shares of our common stock. During the first quarter of fiscal 2011 we repurchased 0.6 million
shares in addition to the 1.0 million shares purchased during the fourth quarter of fiscal 2010.
Repurchased shares are used for general business purposes.
We believe that cash on hand and generated from operations, along with amounts available under our
credit facility, will be sufficient to fund operations, working capital needs, capital expenditure
requirements and financing obligations. However, disruption and volatility in the credit markets
could impede our access to capital. If we need additional sources of capital, whether as a result
of reduced cash generated by operations, unavailability of borrowings under our credit facility,
adverse results in litigation matters or increased cash requirements to fund acquisitions and
pension obligations, such sources of capital may not be available to us on acceptable terms, if at
all.
Contractual Obligations and Contingent Liabilities and Commitments
There have not been any significant changes since September 30, 2010 impacting our contractual
obligations and contingent liabilities and commitments.
Critical Accounting Policies
Our accounting policies require management to make significant estimates and assumptions using
information available at the time the estimates are made. Such estimates and assumptions
significantly affect various reported amounts of assets, liabilities, revenues and expenses. If
future experience differs materially from these estimates and assumptions, our results of
operations and financial condition could be affected. A detailed description of our accounting
policies is included in Note 1 of Notes to Consolidated Financial Statements and the Critical
Accounting Policies Section of Managements Discussion and Analysis of Financial Condition and
Results of Operations included in our 2010 Form 10-K. There have been no material changes to such
policies since September 30, 2010.
For a further summary of certain accounting policies and estimates and recently issued accounting
pronouncements applicable to us, see Note 1 of Notes to Condensed Consolidated Financial
Statements in this Form 10-Q.
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Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
We are exposed to various market risks, including fluctuations in interest rates, credit
availability and the current economic downturn, liquidity issues with respect to auction rate
securities, collection risk associated with our accounts and notes receivable portfolio and
variability in currency exchange rates. We have established policies, procedures and internal
processes governing our management of market risks and the use of financial instruments to manage
our exposure to such risks.
We are subject to variability in foreign currency exchange rates in our international operations.
Exposure to this variability is periodically managed primarily through the use of natural hedges,
whereby funding obligations and assets are both managed in the local currency. We, from
time-to-time, enter into currency exchange agreements to manage our exposure arising from
fluctuating exchange rates related to specific and forecasted transactions. We operate this
program pursuant to documented corporate risk management policies and do not enter into derivative
transactions for speculative purposes. The sensitivity of earnings and cash flows to variability
in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to
our assets, obligations and projected results of operations denominated in foreign currencies.
Our currency risk consists primarily of foreign currency denominated firm commitments and
forecasted foreign currency denominated intercompany and third-party transactions. At December 31,
2010, the notional amount of open foreign exchange contracts was $12.7 million. The maximum length
of time over which the Company is hedging transaction exposures is 15 months. Derivative
gains/(losses), initially reported as a component of Accumulated Other Comprehensive Loss, are
reclassified to earnings in the period when the transaction affects earnings.
For additional information on market risks related to our auction rate securities, debt instruments
and pension plan assets, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
in our 2010 Form 10-K and Item 2, Managements Discussion and Analysis of Financial Condition and
Results of Operations in this Form 10-Q.
Item 4. | CONTROLS AND PROCEDURES |
Our management, with the participation of our President and Chief Executive Officer and our Senior
Vice President and Chief Financial Officer (the Certifying Officers), has evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)), as of the end of the period covered by this report. Based upon that evaluation, the
Certifying Officers concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report for the information required to be disclosed in the
reports we file or submit under the Exchange Act to be recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and such information is
accumulated and communicated to management as appropriate to allow timely decisions regarding
required disclosure. There were no changes in our internal control over financial reporting
during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. | LEGAL PROCEEDINGS |
No material legal proceedings developed, and no material developments to prior reported legal
proceedings occurred, during the reporting period.
Item 1A. | RISK FACTORS |
For information regarding the risks we face, see the discussion under Item 1A. Risk Factors in
our Annual Report on Form 10-K for the year ended September 30, 2010. There have been no material
changes to the risk factors described in that report.
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Total Number of | ||||||||||||||||
Shares Purchased as | Maximum Number of | |||||||||||||||
Total Number | Part of Publicly | Shares that May Yet | ||||||||||||||
of Shares | Average Price Paid | Announced Plans or | Be Purchased Under | |||||||||||||
Period | Purchased (1) | per Share | Programs (2) | Plans or Programs | ||||||||||||
October 1, 2010 - October 31, 2010 |
| $ | | | 2,000,000 | |||||||||||
November 1, 2010 - November 30,
2010 |
212,554 | 39.37 | 212,500 | 1,787,500 | ||||||||||||
December 1, 2010 - December 31,
2010 |
488,012 | 41.95 | 402,500 | 1,385,000 | ||||||||||||
Total |
700,566 | $ | 41.16 | 615,000 | 1,385,000 | |||||||||||
(1) | All shares purchased in the three months ended December 31, 2010 were in connection with
employee payroll tax withholding for restricted and deferred stock distributions and the
share repurchase program discussed below. |
|
(2) | Our Board approved the repurchase of a total of 25.7 million shares of our common stock
through purchases on the open market or in private transactions. During the quarter ended
December 31, 2010, we repurchased 615,000 shares of our common stock for $25.2 million,
leaving approximately 1.4 million shares still available for repurchase. The Boards
approval does not have an expiration date and currently there are no plans to terminate this
program in the future. |
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Item 6. | EXHIBITS |
A. | Exhibits |
10.1 | * | 2011 Non-Employee Director Compensation Policy (Incorporated by reference to
Exhibit 10.61 filed with the Companys Form 10-K on November 17, 2010) |
||
10.2 | * | Form of Non-Qualified Stock Option Agreement under Amended and Restated
Hill-Rom Holdings, Inc. Stock Incentive Plan (Incorporated by reference to Exhibit
10.62 filed with the Companys Form 10-K on November 17, 2010) |
||
10.3 | * | Form of Restricted Stock Unit Agreement under Amended and Restated Hill-Rom
Holdings, Inc. Stock Incentive Plan (Incorporated by reference to Exhibit 10.63 filed
with the Companys Form 10-K on November 17, 2010) |
||
10.4 | * | Form of Non-Qualified Stock Option Agreement (CEO version) under Amended and
Restated Hill-Rom Holdings, Inc. Stock Incentive Plan (Incorporated by reference to
Exhibit 10.64 filed with the Companys Form 10-K on November 17, 2010) |
||
10.5 | * | Form of Restricted Stock Unit Agreement (CEO version) under Amended and
Restated Hill-Rom Holdings, Inc. Stock Incentive Plan (Incorporated by reference to
Exhibit 10.65 filed with the Companys Form 10-K on November 17, 2010) |
||
10.6 | * | FY 2011 Form of Performance Based Stock Award under the Stock Incentive Plan |
||
10.7 | * | FY 2011 Form of Performance Based Stock Award under the Stock Incentive Plan (CEO version) |
||
10.8 | * | Employment Agreement between Hill-Rom Holdings, Inc. and Mark Guinan, dated
November 1, 2010 (Incorporated by reference to Exhibit 10.1 filed with the Companys
Form 8-K on November 1, 2010) |
||
10.9 | * | Limited Recapture Agreement between Hill-Rom Holdings, Inc. and Mark Guinan,
dated November 1, 2010 (Incorporated by reference to Exhibit 10.2 filed with the
Companys Form 8-K on November 1, 2010) |
||
10.10 | * | Letter Agreement between Hill-Rom Holdings, Inc. and Greg Miller, dated November 1,
2010 (Incorporated by reference to Exhibit 10.4 filed with the Companys Form 8-K on
November 1, 2010) |
||
10.11 | * | Separation and Release Agreement between Hill-Rom Holdings, Inc. and Perry Stuckey
effective December 31, 2010 |
||
10.12 | * | Employment Agreement between
Hill-Rom Holdings, Inc. and Brian Lawrence, dated December 6, 2010 |
||
10.13 | * | Limited Recapture Agreement
between Hill-Rom Holdings, Inc. and Brian Lawrence, dated December 6, 2010 |
||
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.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Management contract or compensatory plan or arrangement |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HILL-ROM HOLDINGS, INC. |
||||
DATE: January 27, 2011 | BY: | /S/ Mark J. Guinan | ||
Mark J. Guinan | ||||
Senior Vice President and Chief Financial Officer |
||||
(duly authorized officer and principal financial officer) |
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