Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - Hill-Rom Holdings, Inc. | c15009exv31w2.htm |
EX-10.2 - EXHIBIT 10.2 - Hill-Rom Holdings, Inc. | c15009exv10w2.htm |
EX-31.1 - EXHIBIT 31.1 - Hill-Rom Holdings, Inc. | c15009exv31w1.htm |
EX-10.1 - EXHIBIT 10.1 - Hill-Rom Holdings, Inc. | c15009exv10w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - Hill-Rom Holdings, Inc. | Financial_Report.xls |
EX-99.1 - EXHIBIT 99.1 - Hill-Rom Holdings, Inc. | c15009exv99w1.htm |
EX-32.1 - EXHIBIT 32.1 - Hill-Rom Holdings, Inc. | c15009exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Hill-Rom Holdings, Inc. | c15009exv32w2.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 March 31, 2011
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
Enhancing Outcomes for
Patients and Their Caregivers.TM
HILL-ROM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Indiana | 35-1160484 | |
(State or other jurisdiction of incorporation or organization) | (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
63,167,275 shares as of April 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)
(Dollars in millions except per share data)
Quarterly Period Ended March 31 | Year To Date Period Ended March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net Revenues |
||||||||||||||||
Capital sales |
$ | 278.8 | $ | 236.2 | $ | 535.5 | $ | 467.8 | ||||||||
Rental revenues |
123.3 | 120.9 | 240.8 | 244.6 | ||||||||||||
Total revenues |
402.1 | 357.1 | 776.3 | 712.4 | ||||||||||||
Cost of Revenues |
||||||||||||||||
Cost of goods sold |
151.0 | 134.4 | 290.6 | 264.9 | ||||||||||||
Rental expenses |
52.5 | 50.9 | 102.6 | 104.9 | ||||||||||||
Total cost of revenues |
203.5 | 185.3 | 393.2 | 369.8 | ||||||||||||
Gross Profit |
198.6 | 171.8 | 383.1 | 342.6 | ||||||||||||
Research and development expenses |
16.2 | 14.4 | 31.0 | 29.3 | ||||||||||||
Selling and administrative expenses |
130.5 | 120.8 | 250.5 | 242.4 | ||||||||||||
Special charges (Note 8) |
2.6 | 5.0 | 2.6 | 5.0 | ||||||||||||
Operating Profit |
49.3 | 31.6 | 99.0 | 65.9 | ||||||||||||
Interest expense |
(2.1 | ) | (2.2 | ) | (4.2 | ) | (4.3 | ) | ||||||||
Investment income and other, net |
0.7 | 0.3 | 0.7 | 0.8 | ||||||||||||
Income Before Income Taxes |
47.9 | 29.7 | 95.5 | 62.4 | ||||||||||||
Income tax expense (Note 9) |
14.8 | 5.2 | 27.0 | 18.0 | ||||||||||||
Net Income |
33.1 | 24.5 | 68.5 | 44.4 | ||||||||||||
Less: Net income attributable to noncontrolling interest |
| 0.3 | 0.2 | 0.4 | ||||||||||||
Net Income Attributable to Common Shareholders |
$ | 33.1 | $ | 24.2 | $ | 68.3 | $ | 44.0 | ||||||||
Net Income Attributable to Common Shareholders per Common Share Basic |
$ | 0.53 | $ | 0.38 | $ | 1.08 | $ | 0.70 | ||||||||
Net Income Attributable to Common Shareholders per Common Share Diluted |
$ | 0.52 | $ | 0.38 | $ | 1.07 | $ | 0.69 | ||||||||
Dividends per Common Share |
$ | 0.1025 | $ | 0.1025 | $ | 0.2050 | $ | 0.2050 | ||||||||
Average Common Shares Outstanding Basic (thousands) (Note 10) |
63,000 | 62,887 | 62,989 | 62,768 | ||||||||||||
Average Common Shares Outstanding Diluted (thousands) (Note 10) |
63,911 | 63,500 | 64,056 | 63,324 | ||||||||||||
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)
(Dollars in millions)
March 31, 2011 | September 30, 2010 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 235.2 | $ | 184.5 | ||||
Trade accounts receivable, net of allowances (Note 2) |
366.6 | 353.1 | ||||||
Inventories (Note 2) |
115.8 | 108.5 | ||||||
Deferred income taxes (Notes 1 and 9) |
40.3 | 40.4 | ||||||
Other current assets |
37.8 | 52.7 | ||||||
Total current assets |
795.7 | 739.2 | ||||||
Property, plant and equipment, net (Note 2) |
230.2 | 243.7 | ||||||
Investments and investment securities (Notes 1 and 6) |
11.5 | 12.1 | ||||||
Goodwill |
81.1 | 81.1 | ||||||
Software and other intangible assets, net (Note 2) |
130.9 | 136.6 | ||||||
Other assets |
31.4 | 32.9 | ||||||
Total Assets |
$ | 1,280.8 | $ | 1,245.6 | ||||
LIABILITIES |
||||||||
Current Liabilities |
||||||||
Trade accounts payable |
$ | 72.5 | $ | 80.6 | ||||
Short-term borrowings (Note 4) |
104.3 | 53.1 | ||||||
Accrued compensation |
77.8 | 88.9 | ||||||
Accrued product warranties (Note 12) |
16.5 | 15.8 | ||||||
Other current liabilities |
53.8 | 50.3 | ||||||
Total current liabilities |
324.9 | 288.7 | ||||||
Long-term debt (Note 4) |
50.0 | 98.5 | ||||||
Accrued pension and postretirement benefits (Note 5) |
59.3 | 59.0 | ||||||
Deferred income taxes (Notes 1 and 9) |
28.0 | 31.3 | ||||||
Other long-term liabilities |
57.8 | 52.3 | ||||||
Total Liabilities |
520.0 | 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 |
111.3 | 119.3 | ||||||
Retained earnings |
1,258.9 | 1,203.6 | ||||||
Accumulated other comprehensive loss (Note 7) |
(52.8 | ) | (61.8 | ) | ||||
Treasury stock, at cost (Notes 2 and 11) |
(561.0 | ) | (558.0 | ) | ||||
Total Shareholders Equity |
760.8 | 707.5 | ||||||
Total Liabilities, Non-Controlling Interest and Shareholders Equity |
$ | 1,280.8 | $ | 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)
(Dollars in millions)
Year To Date Period Ended March 31 | ||||||||
2011 | 2010 | |||||||
Operating Activities |
||||||||
Net income |
$ | 68.5 | $ | 44.4 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
51.6 | 49.5 | ||||||
Provision for deferred income taxes |
(1.3 | ) | (8.4 | ) | ||||
Loss on disposal of property, equipment leased to others,
intangible assets and impairments |
1.0 | 1.8 | ||||||
Stock compensation |
6.7 | 7.2 | ||||||
Tax settlement |
| (6.5 | ) | |||||
Excess tax benefits from employee stock plans |
(4.1 | ) | | |||||
Change in
working capital excluding cash, current investments, current debt, acquisitions and dispositions: |
||||||||
Trade accounts receivable |
(12.5 | ) | 3.9 | |||||
Inventories |
(7.3 | ) | (13.4 | ) | ||||
Other current assets |
15.1 | (22.4 | ) | |||||
Trade accounts payable |
(8.1 | ) | (4.7 | ) | ||||
Accrued expenses and other liabilities |
(8.1 | ) | 1.8 | |||||
Other, net |
6.1 | (4.1 | ) | |||||
Net cash provided by operating activities |
107.6 | 49.1 | ||||||
Investing Activities |
||||||||
Capital expenditures and purchase of intangibles |
(30.9 | ) | (27.5 | ) | ||||
Proceeds on sales of property and equipment leased to others |
4.3 | 1.0 | ||||||
Acquisitions of businesses, net of cash acquired |
| (7.1 | ) | |||||
Proceeds on investment sales/maturities |
0.2 | 5.0 | ||||||
Net cash used in investing activities |
(26.4 | ) | (28.6 | ) | ||||
Financing Activities |
||||||||
Change in short-term debt |
3.2 | (0.2 | ) | |||||
Payment on revolver |
| (45.0 | ) | |||||
Purchase of noncontrolling interest |
(11.2 | ) | | |||||
Payment of cash dividends |
(12.9 | ) | (12.9 | ) | ||||
Proceeds on exercise of options |
23.1 | 2.9 | ||||||
Proceeds from stock issuance |
1.5 | 1.3 | ||||||
Excess tax benefits from employee stock plans |
4.1 | | ||||||
Treasury stock acquired |
(41.6 | ) | (1.0 | ) | ||||
Net cash used in financing activities |
(33.8 | ) | (54.9 | ) | ||||
Effect of exchange rate changes on cash |
3.3 | (1.0 | ) | |||||
Total Cash Flows |
50.7 | (35.4 | ) | |||||
Cash and Cash Equivalents: |
||||||||
At beginning of period |
184.5 | 170.6 | ||||||
At end of period |
$ | 235.2 | $ | 135.2 | ||||
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)
(Dollars in millions except per share data)
1. Summary of Significant Accounting Policies
Basis of Presentation
Unless the context otherwise requires, the terms Hill-Rom, we, our and us refer to
Hill-Rom Holdings, Inc. and our 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 our 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. The September 30, 2010 Condensed Consolidated
Balance Sheet was derived from audited Consolidated Financial Statements, but does not include all
disclosures required by accounting principles generally accepted in the United States of America.
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 Hill-Rom and its
subsidiaries. All subsidiaries are wholly-owned as of March 31, 2011. During the first quarter
of our fiscal 2011 we acquired the remaining 40 percent noncontrolling interest in our former
joint venture (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 amounts
reported in these Condensed Consolidated Financial Statements including the accompanying notes.
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 March 31, 2011, investment securities consisted primarily of $11.3 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 and we are not likely to sell before recovery, 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
We and our eligible domestic subsidiaries file a consolidated U.S. income tax return. Foreign
operations file income tax returns in a number of jurisdictions. Deferred income taxes are
computed using an asset and liability approach to reflect the net tax effects of temporary
differences between the financial reporting carrying amounts of assets and liabilities and the
corresponding income tax amounts. We have a variety of deferred tax assets in numerous tax
jurisdictions. These deferred tax assets are subject to periodic assessment as to recoverability
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 fiscal 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 Condensed Consolidated Financial Statements.
7
Table of Contents
2. Supplementary Balance Sheet Information
March 31, 2011 | September 30, 2010 | |||||||
Allowance for possible losses and discounts on trade receivables |
$ | 27.4 | $ | 29.0 | ||||
Inventories: |
||||||||
Finished products |
$ | 65.4 | $ | 64.2 | ||||
Raw materials and work in process |
50.4 | 44.3 | ||||||
Total inventory |
$ | 115.8 | $ | 108.5 | ||||
Accumulated depreciation of property, plant and equipment |
$ | 582.7 | $ | 561.3 | ||||
Accumulated amortization of software and other intangible assets |
$ | 152.6 | $ | 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 |
62,974,896 | 62,786,883 | ||||||
Treasury shares |
17,349,016 | 17,537,029 |
3. Acquisitions
On November 9, 2009, we entered into a joint venture with Encompass Group, LLC (Encompass Group),
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 $5.6
million accrued in other current liabilities and other long-term liabilities on our Condensed
Consolidated Balance Sheet at March 31, 2011 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:
March 31, 2011 | September 30, 2010 | |||||||
Outstanding finance credit lines |
$ | 11.4 | $ | 8.1 | ||||
Revolving credit facility |
45.0 | 45.0 | ||||||
Unsecured 8.50% debentures due on December 1, 2011 |
47.9 | 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 |
154.3 | 151.6 | ||||||
Less current portion of debt |
104.3 | 53.1 | ||||||
Total long-term debt |
$ | 50.0 | $ | 98.5 | ||||
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.
8
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Unsecured debentures outstanding at March 31, 2011 have fixed rates of interest. We have deferred
gains included in the preceding table from the termination of previous interest rate swap
agreements, and those deferred gains amounted to $1.6 million at March 31, 2011 and $2.1 million at
September 30, 2010. The deferred gains 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.
We have 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 us 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 March 31, 2011, 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 $50.5 and $95.7 million at March 31, 2011 and September 30, 2010.
5. Retirement and Postretirement Plans
We sponsor 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 March 31 | Year To Date Period Ended March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost |
$ | 1.3 | $ | 1.3 | $ | 2.6 | $ | 2.5 | ||||||||
Interest cost |
3.3 | 3.3 | 6.6 | 6.6 | ||||||||||||
Expected return on plan assets |
(4.2 | ) | (3.3 | ) | (8.4 | ) | (6.6 | ) | ||||||||
Amortization of unrecognized prior service cost, net |
0.1 | 0.1 | 0.3 | 0.3 | ||||||||||||
Amortization of net loss |
1.0 | 0.7 | 2.0 | 1.3 | ||||||||||||
Net pension expense |
$ | 1.5 | $ | 2.1 | $ | 3.1 | $ | 4.1 | ||||||||
We also sponsor 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.
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 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. |
9
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The following table summarizes our financial assets measured at fair value on a recurring basis
included in our Condensed Consolidated Balance Sheet, as of March 31, 2011:
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 |
$ | 235.2 | $ | 235.2 | $ | | $ | | ||||||||
Available-for-sale marketable securities |
11.3 | | | 11.3 | ||||||||||||
Other investments |
0.2 | | | 0.2 | ||||||||||||
Total assets at fair value |
$ | 246.7 | $ | 235.2 | $ | | $ | 11.5 | ||||||||
At March 31, 2011, we had $11.3 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
March 31, 2011, our 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 the first six months of fiscal 2011.
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 March 31 | Year To Date Period Ended March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 33.1 | $ | 24.5 | $ | 68.5 | $ | 44.4 | ||||||||
Net gain (loss) on available-for-sale securities and other investments |
(0.1 | ) | 0.2 | (0.1 | ) | 0.3 | ||||||||||
Foreign currency translation adjustment, net-of-tax |
9.0 | (1.2 | ) | 9.4 | (4.2 | ) | ||||||||||
Items not yet recognized as a component of net periodic pension
or postretirement benefit cost, net-of-tax |
(0.1 | ) | | (0.3 | ) | (0.1 | ) | |||||||||
Total comprehensive income |
41.9 | 23.5 | 77.5 | 40.4 | ||||||||||||
Comprehensive income attributable to the noncontrolling interest |
| (0.3 | ) | (0.2 | ) | (0.4 | ) | |||||||||
Total comprehensive income attributable to common shareholders |
$ | 41.9 | $ | 23.2 | $ | 77.3 | $ | 40.0 | ||||||||
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8. Special Charges
Over the past several years, we have placed a focus on improving our cost structure and business
processes through various means including consolidation of certain manufacturing and select back
office operations, customer rationalizations and various other organizational changes. Activity
related to these actions during fiscal 2011 was as follows:
Beginning Balance | Ending Balance | |||||||||||||||||||
September 30, 2010 | Expenses | Cash Payments | Reversals | March 31, 2011 | ||||||||||||||||
Fiscal Year 2010 Actions |
||||||||||||||||||||
Q2 - Restructuring |
$ | 1.5 | $ | | $ | 0.8 | $ | | $ | 0.7 | ||||||||||
Q4 - Restructuring |
3.7 | 2.1 | 1.0 | | 4.8 | |||||||||||||||
Total |
$ | 5.2 | $ | 2.1 | $ | 1.8 | $ | | $ | 5.5 | ||||||||||
During the second quarter of fiscal 2011, we recorded an additional special charge of $2.6
million related to our fiscal 2010 fourth quarter action. The majority of the charge related to
additional severance and other benefits provided to affected employees of that action as well as a
further write-down of assets held for sale. The above table excludes the write-down of our assets.
9. Income Taxes
The effective tax rate for the three- and six-month periods ended March 31, 2011 was 30.9 and 28.3
percent compared to 17.5 and 28.8 percent for the comparable periods in the prior year. The
effective rate for both periods in fiscal 2011 benefited from 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. The effective tax rate
for the six months ended March 31, 2011 also benefited from the first quarter recognition of period
tax benefits of $2.2 million relating principally to the one-time catch up associated with the
retroactive reinstatement of the research and development tax credit.
The comparable prior year periods included a favorable period tax benefit in the second quarter of
$6.5 million relating to the recognition of previously unrecognized tax benefits associated with
the resolution of an income tax matter with the IRS.
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 0.7 and 0.6 million for the three- and six-month periods
ended March 31, 2011, and 5.4 and 5.2 million for the comparable periods of fiscal 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 March 31 | Year To Date Period Ended March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income attributable to common shareholders |
$ | 33.1 | $ | 24.2 | $ | 68.3 | $ | 44.0 | ||||||||
Average shares outstanding Basic |
63,000 | 62,887 | 62,989 | 62,768 | ||||||||||||
Add potential effect of exercise of stock options
and other unvested equity awards |
911 | 613 | 1,067 | 556 | ||||||||||||
Average shares outstanding Diluted |
63,911 | 63,500 | 64,056 | 63,324 | ||||||||||||
Net income attributable to common shareholders per common share Basic |
$ | 0.53 | $ | 0.38 | $ | 1.08 | $ | 0.70 | ||||||||
Net income attributable to common shareholders per common share Diluted |
$ | 0.52 | $ | 0.38 | $ | 1.07 | $ | 0.69 | ||||||||
11. Common Stock
Share Repurchases
We repurchased 0.3 and 0.9 million shares of our common stock during the three- and six-month
periods ended March 31, 2011 for $12.2 and $37.4 million. 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 and as of March 31, 2011, a cumulative total of 24.6 million shares had been
repurchased by us at market trading prices. The Boards approval has no expiration date and
currently there are no plans to terminate this program in the future.
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Stock Based Compensation
The stock based compensation cost that was charged against income, net of tax, for all plans was
$2.6 and $4.3 million for the three- and six-month periods ended March 31, 2011, and $2.3 and $4.6
million for the comparable periods of fiscal 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 March 31 | Year To Date Period Ended March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Balance at beginning of period |
$ | 16.0 | $ | 15.4 | $ | 15.8 | $ | 17.1 | ||||||||
Provision for warranties during the period |
4.0 | 4.2 | 8.2 | 7.2 | ||||||||||||
Warranty claims during the period |
(3.5 | ) | (4.4 | ) | (7.5 | ) | (9.1 | ) | ||||||||
Balance at end of period |
$ | 16.5 | $ | 15.2 | $ | 16.5 | $ | 15.2 | ||||||||
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. 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.
13. Segment Reporting
We disclose segment information that is consistent with the way in which management operates and
views the business. During the first quarter of fiscal 2011, we changed our segment reporting to
reflect changes in our organizational structure and managements view of the business. 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 and our
respiratory care products in all settings. |
| International sells and rents similar products as our North America businesses to
Europe and the rest of the world. |
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Our performance under the new operating structure 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 March 31 | Year To Date Period Ended March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
North America Acute Care |
$ | 251.3 | $ | 217.7 | $ | 469.4 | $ | 423.3 | ||||||||
North America Post-Acute Care |
52.2 | 51.1 | 104.5 | 103.7 | ||||||||||||
International |
98.6 | 88.3 | 202.4 | 185.4 | ||||||||||||
Total revenues |
$ | 402.1 | $ | 357.1 | $ | 776.3 | $ | 712.4 | ||||||||
Divisional income: |
||||||||||||||||
North America Acute Care |
$ | 62.7 | $ | 39.0 | $ | 107.3 | $ | 76.4 | ||||||||
North America Post-Acute Care |
10.1 | 11.0 | 22.3 | 23.8 | ||||||||||||
International |
4.2 | 3.4 | 14.7 | 4.0 | ||||||||||||
Corporate expenses |
(25.1 | ) | (16.8 | ) | (42.7 | ) | (33.3 | ) | ||||||||
Total divisional income |
51.9 | 36.6 | 101.6 | 70.9 | ||||||||||||
Special charges |
(2.6 | ) | (5.0 | ) | (2.6 | ) | (5.0 | ) | ||||||||
Operating profit |
49.3 | 31.6 | 99.0 | 65.9 | ||||||||||||
Interest expense |
(2.1 | ) | (2.2 | ) | (4.2 | ) | (4.3 | ) | ||||||||
Investment income and other, net |
0.7 | 0.3 | 0.7 | 0.8 | ||||||||||||
Income before income taxes |
$ | 47.9 | $ | 29.7 | $ | 95.5 | $ | 62.4 | ||||||||
14. Commitments and Contingencies
Batesville Casket Antitrust Litigation
In 2005 the Funeral Consumers Alliance, Inc. and a number of individual consumer casket purchasers
filed a purported class action antitrust lawsuit on behalf of certain consumer purchasers of
Batesville® caskets against us and our 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,
the plaintiffs appealed these decisions 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 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.
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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.
Freedom Medical Antitrust Litigation
On October 19, 2009, Freedom Medical, Inc. filed a complaint against us, another manufacturer and
two group purchasing organizations in the United States District Court for the Eastern District of
Texas. The plaintiff alleges that we and the other defendants conspired to exclude it from the
biomedical equipment rental market and to maintain our 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 our 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, product guarantees and warranties as well as 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. (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 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
provide adjusted income before taxes, income tax expense and diluted earnings per share results
because we use these measures internally for planning, forecasting and evaluating the performance
of the business.
In addition, we analyze net 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 these non-GAAP measures contribute to an understanding of our financial
performance and provide 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.
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Net Revenues
Quarterly Period Ended March 31 | Percentage Change | |||||||||||||||
Constant | ||||||||||||||||
(Dollars in millions) | 2011 | 2010 | As Reported | Currency | ||||||||||||
Revenues: |
||||||||||||||||
Capital sales |
$ | 278.8 | $ | 236.2 | 18.0 | 16.7 | ||||||||||
Rental revenues |
123.3 | 120.9 | 2.0 | 1.8 | ||||||||||||
Total Revenues |
$ | 402.1 | $ | 357.1 | 12.6 | 11.7 | ||||||||||
Year To Date Period Ended March 31 | Percentage Change | |||||||||||||||
Constant | ||||||||||||||||
(Dollars in millions) | 2011 | 2010 | As Reported | Currency | ||||||||||||
Revenues: |
||||||||||||||||
Capital sales |
$ | 535.5 | $ | 467.8 | 14.5 | 14.4 | ||||||||||
Rental revenues |
240.8 | 244.6 | (1.6 | ) | (1.3 | ) | ||||||||||
Total Revenues |
$ | 776.3 | $ | 712.4 | 9.0 | 9.0 | ||||||||||
Capital sales increased for both the three- and six-month periods ended March 31, 2011
primarily as a result of North America Acute Care sales volume growth in several major product
categories led by patient support systems (increased 39.2 and 31.2 percent), favorable product mix
and second quarter volume growth in Europe. The first six months also benefited from volume
increases in the Middle East and Latin America.
Rental revenues increased in the second quarter in all segments, led by growth in Europe from a
recent bariatric product introduction and strong respiratory care revenues. Rental revenues
declined for the first six months overall due to first quarter volume declines in our therapy
rental business and our movable medical equipment fleet in each case associated with a weaker flu
season than compared to fiscal 2010.
Gross Profit
Quarterly Period Ended March 31 | Year To Date Period Ended March 31 | |||||||||||||||
(Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Gross Profit |
||||||||||||||||
Capital |
$ | 127.8 | $ | 101.8 | $ | 244.9 | $ | 202.9 | ||||||||
Percent of Related Revenues |
45.8 | % | 43.1 | % | 45.7 | % | 43.4 | % | ||||||||
Rental |
70.8 | $ | 70.0 | 138.2 | $ | 139.7 | ||||||||||
Percent of Related Revenues |
57.4 | % | 57.9 | % | 57.4 | % | 57.1 | % | ||||||||
Total Gross Profit |
$ | 198.6 | $ | 171.8 | $ | 383.1 | $ | 342.6 | ||||||||
Percent of Related Revenues |
49.4 | % | 48.1 | % | 49.3 | % | 48.1 | % |
Total gross profit increased 15.6 and 11.8 percent; and gross margin (as a percentage of
revenues) increased by 130 and 120 basis points for the three- and six-month periods ended March
31, 2011.
Capital gross profit increased 25.5 and 20.7 percent and gross margin increased 270 and 230 basis
points for the three- and six-month periods ended March 31, 2011. The gross margin increase for
both periods was primarily due to improved geographic and product mix, as well as favorable
material costs.
Rental gross profit and margins were relatively consistent for the three- and six-month periods
ended March 31, 2011. Our second quarter in fiscal 2011 included a gain of $0.8 million recognized
in connection with a vendors product recall.
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Other
Quarterly Period Ended March 31 | Year To Date Period Ended March 31 | |||||||||||||||
(Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Research and development expenses |
$ | 16.2 | $ | 14.4 | $ | 31.0 | $ | 29.3 | ||||||||
Percent of Total Revenues |
4.0 | % | 4.0 | % | 4.0 | % | 4.1 | % | ||||||||
Selling and administrative expenses |
$ | 130.5 | $ | 120.8 | $ | 250.5 | $ | 242.4 | ||||||||
Percent of Total Revenues |
32.5 | % | 33.8 | % | 32.3 | % | 34.0 | % | ||||||||
Special charges |
$ | 2.6 | $ | 5.0 | $ | 2.6 | $ | 5.0 | ||||||||
Interest expense |
$ | (2.1 | ) | $ | (2.2 | ) | $ | (4.2 | ) | $ | (4.3 | ) | ||||
Investment income |
$ | 0.5 | $ | 0.5 | $ | 1.0 | $ | 1.1 | ||||||||
Other |
$ | 0.2 | $ | (0.2 | ) | $ | (0.3 | ) | $ | (0.3 | ) |
Research and development expenses increased 12.5 and 5.8 percent for the three- and six-month
periods ended March 31, 2011 due to increased investment in the development of new products and
remained consistent as a percentage of sales. Selling and administrative expenses grew during both
periods, however, they improved as a percentage of sales by 130 and 170 basis points for the three-
and six-month periods ended. The increase in expense for both periods was the result of increases
in legal costs for litigation and patent related matters, costs associated with the upgrade of our
information technology platform, investments in sales channels and
higher variable compensation, including sales commissions. Our second
quarter selling and administrative expenses also included
approximately $3 million of costs related to community donations
and severance that we do not expect to repeat.
During the second quarter of fiscal 2011, we recorded a special charge of $2.6 million related to
our fiscal 2010 fourth quarter restructuring action for additional severance provided to affected
employees of that action as well as a further write-down of assets held for sale. Our second
quarter of fiscal 2010 included a charge of $5.0 million related to organizational changes that
included the elimination of approximately 160 employee positions.
GAAP and Adjusted Earnings
Quarterly Period Ended March 31, 2011 | Quarterly Period Ended March 31, 2010 | |||||||||||||||||||||||
Income Before | ||||||||||||||||||||||||
Income Before | Income Tax | Income Taxes | Income Tax | |||||||||||||||||||||
(Dollars in millions except per share data) | Income Taxes | Expense | Diluted EPS* | and NCI | Expense | Diluted EPS* | ||||||||||||||||||
GAAP Earnings |
$ | 47.9 | $ | 14.8 | $ | 0.52 | $ | 29.7 | $ | 5.2 | $ | 0.38 | ||||||||||||
Adjustments: |
||||||||||||||||||||||||
Vendor product recall |
(0.8 | ) | (0.3 | ) | (0.01 | ) | | | | |||||||||||||||
Special charges |
2.6 | 1.0 | 0.03 | 5.0 | 1.7 | 0.05 | ||||||||||||||||||
Tax settlement |
| | | 6.5 | (0.10 | ) | ||||||||||||||||||
Adjusted Earnings |
$ | 49.7 | $ | 15.5 | $ | 0.54 | $ | 34.7 | $ | 13.4 | $ | 0.33 | ||||||||||||
Year To Date Period Ended March 31, 2011 | Year To Date Period Ended March 31, 2010 | |||||||||||||||||||||||
Income Before | Income Before | |||||||||||||||||||||||
Income Taxes | Income Tax | Diluted | Income Taxes | Income Tax | Diluted | |||||||||||||||||||
and NCI | Expense | EPS* | and NCI | Expense | EPS* | |||||||||||||||||||
GAAP Earnings |
$ | 95.5 | $ | 27.0 | $ | 1.07 | $ | 62.4 | $ | 18.0 | $ | 0.69 | ||||||||||||
Adjustments: |
||||||||||||||||||||||||
Vendor product recall |
(0.8 | ) | (0.3 | ) | (0.01 | ) | | | | |||||||||||||||
Special charges |
2.6 | 1.0 | 0.03 | 5.0 | 1.7 | 0.05 | ||||||||||||||||||
Tax settlement |
| | | 6.5 | (0.10 | ) | ||||||||||||||||||
Adjusted Earnings |
$ | 97.3 | $ | 27.7 | $ | 1.08 | $ | 67.4 | $ | 26.2 | $ | 0.64 | ||||||||||||
* | May not add due to rounding. |
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The effective tax rate for the three- and six-month periods ended March 31, 2011 was 30.9 and 28.3
percent compared to 17.5 and 28.8 percent for the comparable periods in the prior year. The
adjusted effective rate for the three- and six-month periods ended March 31, 2011 was 31.2 and 28.5
percent compared to 38.6 and 38.9 percent for the comparable periods in the prior year. The lower
adjusted effective rate for both periods in fiscal 2011 benefited from 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. The
adjusted effective tax rate for the six months ended March 31, 2011 also benefited from the first
quarter recognition of period tax benefits of $2.2 million
relating principally to the impact of the retroactive reinstatement of the research and development tax
credit back to January 1, 2010.
The comparable prior year periods included a favorable period tax benefit in the second quarter of
$6.5 million relating to the recognition of previously unrecognized tax benefits associated with
the resolution of an income tax matter with the IRS. This amount was excluded from the adjusted
effective tax rate for fiscal 2010.
Net income attributable to common shareholders was $33.1 million for the second quarter and $68.3
million for the first six months ended March 31, 2011. On an adjusted basis, net income
attributable to common shareholders increased $13.2 and $28.6 million, representing increases of
62.9 and 70.1 percent for the three- and six-month periods ended. Diluted earnings per share
increased 36.8 percent for the second quarter and 63.6 percent on an adjusted basis. For the first
six months, diluted earnings per share increased 55.1 percent, or 68.8 percent as adjusted.
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 business. 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 March 31 | Percentage Change | |||||||||||||||
Constant | ||||||||||||||||
(Dollars in millions) | 2011 | 2010 | As Reported | Currency | ||||||||||||
Revenues: |
||||||||||||||||
North America Acute Care |
$ | 251.3 | $ | 217.7 | 15.4 | 14.7 | ||||||||||
North America Post-Acute Care |
52.2 | 51.1 | 2.2 | 2.2 | ||||||||||||
International |
98.6 | 88.3 | 11.7 | 9.9 | ||||||||||||
Total revenues |
$ | 402.1 | $ | 357.1 | 12.6 | 11.7 | ||||||||||
Divisional income: |
||||||||||||||||
North America Acute Care |
$ | 62.7 | $ | 39.0 | 60.8 | |||||||||||
North America Post-Acute Care |
10.1 | 11.0 | (8.2 | ) | ||||||||||||
International |
4.2 | 3.4 | 23.5 | |||||||||||||
Corporate Expenses |
(25.1 | ) | (16.8 | ) | (49.4 | ) | ||||||||||
Total divisional income |
$ | 51.9 | $ | 36.6 | 41.8 | |||||||||||
Year To Date Period Ended March 31 | Percentage Change | |||||||||||||||
Constant | ||||||||||||||||
(Dollars in millions) | 2011 | 2010 | As Reported | Currency | ||||||||||||
Revenues: |
||||||||||||||||
North America Acute Care |
$ | 469.4 | $ | 423.3 | 10.9 | 10.4 | ||||||||||
North America Post-Acute Care |
104.5 | 103.7 | 0.8 | 0.8 | ||||||||||||
International |
202.4 | 185.4 | 9.2 | 10.5 | ||||||||||||
Total revenues |
$ | 776.3 | $ | 712.4 | 9.0 | 9.0 | ||||||||||
Divisional income: |
||||||||||||||||
North America Acute Care |
$ | 107.3 | $ | 76.4 | 40.4 | |||||||||||
North America Post-Acute Care |
22.3 | 23.8 | (6.3 | ) | ||||||||||||
International |
14.7 | 4.0 | 267.5 | |||||||||||||
Corporate Expenses |
(42.7 | ) | (33.3 | ) | (28.2 | ) | ||||||||||
Total divisional income |
$ | 101.6 | $ | 70.9 | 43.3 | |||||||||||
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North America Acute Care
North America Acute Care capital sales increased 22.3 and 17.5 percent for the three- and six-month
periods ended March 31, 2011 mainly due to higher volumes in several of our major product
categories led by our patient support systems, which increased 39.2 and 31.2 percent. In addition,
product mix was modestly favorable for both periods. Rental revenues were flat for the second
quarter and decreased by 2.9 percent for the six-month period. The decline in the first six months
was 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.
North America Acute Care divisional income increased significantly during both periods due to an
increase in capital gross profit and capital margin improvements driven by higher volumes,
favorable product mix and improved material costs. Our rental margins also benefited during the
second quarter from a $0.8 million gain recognized in connection with a vendors product recall.
Operating expenses were relatively flat during both periods as new product investments and
increased variable compensation were offset by reduced costs from previous restructuring
activities.
North America Post-Acute Care
North America Post-Acute Care capital sales were flat for the three-month period ended March 31,
2011 and slightly down for the six-month period. Capital sales for both periods were impacted by a
decline in sales within our extended care business offset by growth in the respiratory care
business. Rental revenues increased 2.8 and 1.4 percent related to increased rentals of The Vest®
respiratory care system for both periods.
North America Post-Acute Care divisional income declined for the three- and six-month periods due
to higher operating expenses primarily related to investments in our sales channels, marketing and
new products. Total gross profit was essentially flat year over year for both periods.
International
International capital sales increased 12.6 and 11.4 percent for the three- and six-month periods
ended March 31, 2011, and 10.4 and 12.4 percent on a constant currency basis for the same periods.
On a constant currency basis, the increase during the second quarter was driven primarily by volume
growth in Europe while for the first six months the growth was also attributed to volume increases
in the Middle East and Latin America. Rental revenues increased 6.6 percent
for the second quarter, however declined 3.1 percent for the first six months. On a constant
currency basis rental revenues increased 6.6 percent and were flat for the three- and six-month
periods ended. The second quarter increase in rental revenue was a result of growth from a recent
bariatric product introduction in Europe, which was offset during the first six months by the
rationalization of unprofitable business.
International divisional income increased during both the second quarter and first six months due
mainly to an increase in gross profit from volume growth, with gross margin somewhat improved over
the first six months. During the second quarter, the volume growth was partially offset by
slightly lower margins and increased operating expenses from investments in our marketing and sales
channels and severance costs. For the first six months operating expenses were generally
flat.
Liquidity and Capital Resources
Year To Date Period Ended March 31 | ||||||||
(Dollars in millions) | 2011 | 2010 | ||||||
Cash Flows Provided By (Used In): |
||||||||
Operating activities |
$ | 107.6 | $ | 49.1 | ||||
Investing activities |
(26.4 | ) | (28.6 | ) | ||||
Financing activities |
(33.8 | ) | (54.9 | ) | ||||
Effect of exchange rate changes on cash |
3.3 | (1.0 | ) | |||||
Increase (Decrease) in Cash and Cash Equivalents |
$ | 50.7 | $ | (35.4 | ) | |||
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Operating Activities
Cash provided by operating activities was driven primarily by net income, adjusted by non-cash
expenses related to depreciation and amortization and the timing of income tax payments. We also
realized improvements in our days sales outstanding over our first six months. These sources of
cash were offset by the payout of our performance-based compensation and restructuring accruals
related to our 2010 fiscal year, the timing of payments on our trade payables and investments in
inventory to meet increasing demand. The increase over the first six months of fiscal 2010 was due
to higher income and the timing of tax payments, offset by higher payouts of performance-based
compensation in fiscal 2011 related to fiscal 2010 performance.
Investing Activities
Cash used for investing activities consists mainly of capital expenditures. During the first six
months of fiscal 2011 cash used for investing activities decreased over the first six months of
fiscal 2010 due to a payment in the prior year period to acquire a 60 percent interest in the
Encompass joint venture.
Financing Activities
Cash used for financing activities during the first six months 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 six months 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.
We have a $500.0 million five-year senior revolving credit facility with a syndicate of banks,
which expires on March 25, 2013 (subject to extension upon satisfaction of certain conditions set
forth in the credit facility). 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 March 31, 2011, 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 have $97.4 million of senior notes outstanding at various fixed interest rates as of March 31,
2011. Of the total amount, $49.5 million are classified as long-term and $47.9 million short-term
in the Condensed Consolidated Balance Sheet.
Our most recent credit ratings from Standard and Poors Rating Services and Moodys Investor
Service were credit ratings of BBB- and Baa3 with stable outlook.
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 (the Distribution Agreement) between us and
Hillenbrand, Inc. This agreement has certain limitations on indebtedness, dividends and share
repurchases and acquisitions.
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.
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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 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 are not currently permitted to
increase our dividend, absent a waiver from Hillenbrand, Inc. pursuant to the Distribution
Agreement.
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. The Distribution Agreement 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.
As of March 31, 2011, we had authorization remaining to repurchase 1.1 million additional shares
of our common stock. 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, 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, 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 March 31,
2011, the notional amount of open foreign exchange contracts was $7.5 million. The maximum length
of time over which we hedge 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 and pension plan
assets, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2010 Form
10-K.
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. Except as described in the following paragraph, there have been no changes in our
internal control over financial reporting during the three-month period ended March 31, 2011 that
have materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.
We utilize a company-wide information technology (IT) platform. This IT platform is integrated
into substantially all of our company-wide operations and materially impacts our manufacturing,
sales, accounting and other back-office functionality. In the second quarter of fiscal 2011, we
completed the first phase of a multi-year initiative to upgrade this platform. This upgrade
includes changes to the design and operation of controls over financial reporting as well as
monitoring controls surrounding the implementation of these changes. We are testing controls for
design effectiveness prior to implementation of each phase, and operating effectiveness during and
after implementation.
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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 | |||||||||||||||
Part of Publicly | Shares that May Yet Be | |||||||||||||||
Total Number of | Average Price Paid per | Announced Plans or | Purchased Under Plans | |||||||||||||
Period | Shares Purchased (1) | Share | Programs | or Programs (2) | ||||||||||||
January 1, 2011 - January 31, 2011 |
5,098 | $ | 39.64 | | 1,385,000 | |||||||||||
February 1, 2011 - Feburary 28, 2011 |
305,488 | 39.85 | 305,000 | 1,080,000 | ||||||||||||
March 1, 2011 - March 31, 2011 |
9,334 | 37.45 | | 1,080,000 | ||||||||||||
Total |
319,920 | $ | 39.78 | 305,000 | 1,080,000 | |||||||||||
(1) | All shares purchased in the three months ended March 31, 2011 were in connection with
employee payroll tax withholding for restricted and deferred stock distributions and the
share repurchase program discussed below. |
|
(2) | The Board has authorized the repurchase of up to 25.7 million shares. 24.6 million shares
have been repurchased under this authorization, which does not have an expiration date and
currently there are no plans to terminate this program in the future. |
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Table of Contents
Item 6. | EXHIBITS |
A. | Exhibits |
10.1 | * | Employment Agreement between Hill-Rom Holdings, Inc. and Michael O. Oliver,
dated March 14, 2011 |
||
10.2 | * | Limited Recapture Agreement between Hill-Rom Holdings, Inc. and Michael O.
Oliver, dated March 14, 2011 |
||
10.3 | * | Hill-Rom Holdings, Inc. Short-Term Incentive Plan (Incorporated by reference
to Appendix 1 to the Hill-Rom Holdings, Inc. Definitive Proxy Statement on Schedule
14A dated January 18, 2011) |
||
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 |
|||
99.1 | Schedules
showing the effect of changes in reportable segments for quarterly
periods in fiscal year 2009 and 2010. |
|||
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. (Registrant) |
||||
DATE: April 28, 2011 | By: | /s/ Mark J. Guinan | ||
Name: | Mark J. Guinan | |||
Title: | Senior Vice President and
Chief Financial Officer (duly authorized officer and principal financial officer) |
25