Edgar Filing: Hill-Rom Holdings, Inc.

h111715010k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended September 30, 2015

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

For the transition period from ____ to ____

Commission File No. 1-6651

HILL-ROM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes R No £

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes £ No R

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 R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes R No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R

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 R Accelerated filer £ Non-accelerated filer £ Smaller reporting company £

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

Yes £ No R

The aggregate market value of the registrant’s voting common equity, held by non-affiliates of the registrant, was approximately $2.8 billion, based on the closing sales price of $49.00 per share as of March 31, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter). There is no non-voting common equity held by non-affiliates.

The registrant had 65,169,068 shares of its common stock, without par value, outstanding as of November 12, 2015.

Documents incorporated by reference.

Certain portions of the registrant’s definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on March 15, 2016 are incorporated by reference into Part III of this Annual Report on Form 10-K.

HILL-ROM HOLDINGS, INC.

Annual Report on Form 10-K

For the Fiscal Year Ended September 30, 2015

TABLE OF CONTENTS

		Page
	PART I
	Disclosure Regarding Forward Looking Statements	3
Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	14
Item 2.	Properties	15
Item 3.	Legal Proceedings	16
Item 4.	Mine Safety Disclosures (not applicable)	16


	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
Item 6.	Selected Financial Data	19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 8.	Financial Statements and Supplementary Data	41
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	80
Item 9A.	Controls and Procedures	80
Item 9B.	Other Information	80
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	81
Item 11.	Executive Compensation	81
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	81
Item 13.	Certain Relationships and Related Transactions and Director Independence	81
Item 14.	Principal Accounting Fees and Services	81

	PART IV
Item 15.	Exhibits and Financial Statement Schedules	82
	SIGNATURES	84

PART I

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 regarding our future plans, objectives, beliefs, expectations, representations and projections.

Forward-looking statements are not guarantees of future performance, and our actual results could differ materially from those set forth in any forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include, but are not limited to, the factors discussed under the heading “Risk Factors” in this Annual Report on Form 10-K. We assume no obligation to update or revise any forward-looking statements.

Item 1. BUSINESS

General

Hill-Rom Holdings, Inc. (the “Company,” “Hill-Rom,” “we,” “us,” or “our”) was incorporated on August 7, 1969 in the State of Indiana and is headquartered in Chicago, Illinois. We are a leading global medical technology company with approximately 10,000 employees worldwide. We partner with health care providers in more than 100 countries by focusing on patient care solutions that improve clinical and economic outcomes in five core areas: Advancing Mobility, Wound Care and Prevention, Clinical Workflow, Surgical Safety and Efficiency, and Respiratory Health. Around the world, Hill-Rom's people, products, and programs work towards one mission: Enhancing outcomes for patients and their caregivers.

Segment Information

We operate and manage our business within three reportable segments, each of which is generally aligned by region or product type. The segments are as follows:

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

Surgical and Respiratory Care - sells and rents our surgical and respiratory care products globally.

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

Net revenue, segment profitability and other measures of segment reporting for each reporting segment are set forth in Note 11 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K. No single customer accounts for more than ten percent of our revenue.

In September 2015, we acquired Welch Allyn Holdings, Inc. (“Welch Allyn”). The results of Welch Allyn’s operations for the 22 days under our ownership are reported as a reconciling item in our segment disclosures for the year ended September 30, 2015.

Products and Services

We have extensive distribution capabilities and broad reach across all health care settings. We primarily operate in the following channels: (1) sales and rentals of products to acute and extended care facilities worldwide through both a direct sales force and distributors; (2) sales and rentals of products directly to patients in the home; and (3) sales into primary care facilities (primarily Welch Allyn products). Through our network of approximately 160 North American and 50 international service centers, and approximately 1,500 service professionals, we are able to provide technical support and services and rapidly deliver our products to customers on an as-needed basis, providing our customers flexibility to purchase or rent select products. This extensive network is critical to serving our customers and securing contracts with Group Purchasing Organizations (“GPOs”) and integrated delivery networks (“IDNs”).

Our products and services are outlined below. Except where noted, all of our business segments generally sell products and services and rent products from each of our product categories.

Advancing Mobility. Our innovative patient care systems include a variety of bed systems, such as Medical Surgical (“MedSurg”) beds, Intensive Care Unit (“ICU”) beds, and Bariatric patient beds, as well as mobility solutions (such as lifts and other devices used to safely move patients). These patient care systems can be designed for use in high, mid, and low acuity settings, depending on the specific design options, and are built to reduce patient falls and caregiver injuries and improve caregiver efficiency. Our advanced patient care systems can also provide patient data reporting, patient safety alarms and caregiver alerts concerning such things as bed exit, bed height, patient positioning, point of care controls, patient turn assist and upright positioning. Supporting solutions within the patient/resident room include architectural products (such as headwalls) and health care furniture. These products are sold by our North America and International segments, primarily to acute and extended care facilities worldwide. Approximately 57, 67 and 70 percent of our revenue during fiscal 2015, 2014 and 2013, were derived from advancing mobility products and services.

Wound Care and Prevention. We rent and sell non-invasive therapeutic products and surfaces designed for the prevention and treatment of a variety of acute and chronic medical conditions, including pulmonary, wound and bariatric conditions. These products are rented and sold by our North America and International segments, primarily in the U.S., Canada and Europe. Medical Equipment Management and Contract Services provide rentals and health care provider asset management services for a wide variety of moveable medical equipment (“MME”), such as ventilators, defibrillators, intravenous pumps and patient monitoring equipment in our North America segment. In addition, we also sell equipment service contracts for our capital equipment, primarily in the U.S. Approximately 9, 10 and 11 percent of our revenue during fiscal 2015, 2014 and 2013, were derived from wound care and prevention products and services.

Clinical Workflow. We also develop and market a variety of communications technologies and software solutions. These are designed to improve patient safety and efficiency at the point of care by, among other things, enabling patient-to-staff and staff-to-staff communications, aggregating and delivering patient data, tracking staff and assets, and monitoring hand hygiene compliance. The NaviCare® Platform is the infrastructure Hill-Rom uses to support multiple clinical solutions and applications, including nurse call, asset tracking, staff and patient locating and hand-hygiene monitoring. We believe that our ability to integrate multiple applications using one primary infrastructure is a significant advantage for us versus our competitors in the clinical workflow product category today. These products are sold mainly to our North America customers. This product category also includes our Welch Allyn products, which help caregivers assess their patients quickly, easily, safely, and accurately. We also see exciting opportunities to integrate even more of Welch Allyn’s technologies and patient data in the care environment to further enhance our Clinical Workflow product offerings. Welch Allyn products are sold globally.

Surgical Safety and Efficiency. We offer surgical tables, lights, and pendants utilized within the operating room setting. We also offer a range of positioning devices for use in shoulder, hip, spinal and lithotomy surgeries as well as platform-neutral positioning accessories for nearly every model of operating room table. In addition, we offer operating room surgical safety and accessory products such as scalpel and blade, light handle systems, skin markers and other disposable products. The products offered within this category are primarily recurring, consumable revenue streams. These products are sold by our Surgical and Respiratory Care segment. In 2014, we acquired Trumpf Medical, a worldwide leader in medical products technology distinguished by high-quality German engineering, a history of innovation, and a dedication to total customer satisfaction. Trumpf offers surgical tables, surgical and examination lights, surgical pendants and video solutions. Approximately 21, 13 and 10 percent of our revenue during fiscal 2015, 2014 and 2013, were derived from surgical safety and efficiency products.

Respiratory Health. We offer therapeutic products that provide bronchial hygiene (airway clearance) for acute and home care patients. Some of the key products include: The Vest® Airway Clearance System, designed to assist patients in the mobilization of retained blockages that, if not removed, may lead to increased rates of respiratory infection, hospitalization, and reduced lung function; the VitalCough® System, a non-invasive therapy that stimulates a cough to remove secretions in patients with compromised peak cough flow; and the MetaNeb® Systems, a triple-therapy system indicated for the mobilization of secretions, lung expansion therapy and aerosol delivery. These products are sold by our Surgical and Respiratory Care segment.

Raw Materials

Principal materials used in our products for each business segment include carbon steel, aluminum, stainless steel, wood and laminates, petroleum based products, such as foams and plastics, and other materials, substantially all of which are available from several sources. Motors and electronic controls for electrically operated beds and certain other components are purchased from one or more manufacturers.

Prices fluctuate for raw materials and sub-assemblies used in our products based on a number of factors beyond our control. Specifically, over the past several years, the fluctuating prices of certain raw materials, including metals, fuel, plastics and other petroleum-based products in particular, and fuel related delivery costs, had a direct effect on our profitability. Although we generally have not engaged in hedging transactions with respect to raw material purchases, we have entered into fixed price supply contracts at times.

Most of our extended contracts with hospital GPOs and other customers for the sale of products in North America permit us to institute annual list price increases, although we may not be able to raise prices sufficiently to offset all raw material cost inflation.

Competition

In all our business segments, we compete on the basis of clinical expertise and resulting product clinical utility and ability to produce favorable outcomes, as well as value, quality, customer service, innovation and breadth of product offerings. As our business segments generally sell products and services across our product categories, we evaluate our competition based on our product categories, rather than our business segments.

The following table displays our significant competitors with respect to each product category:

Product Categories	Competitors
Advancing Mobility	ArjoHuntleigh (Division of Getinge AB) Guldmann Invacare Joerns Healthcare	Linet Stiegelmeyer Stryker Corporation

Wound Care and Prevention	ArjoHuntleigh (Division of Getinge AB) Freedom Medical, Inc. RecoverCare, LLC/Joerns Healthcare	SIZEWise Rentals, LLC Universal Hospital Services, Inc.

Clinical Workflow	Ascom Holding Covidien, Ltd. Exergen Corporation GE Healthcare Heine Optotechnik	Omron Healthcare Philips Rauland-Borg Corporation Riester

Surgical Safety and Efficiency	Action Medical DeRoyal Draeger Maquet (Division of Getinge AB) MizuhoOSI	Skytron Steris Stryker Corporation Swann-Morton

Respiratory Health	Electromed, Inc. Respironics (Division of Philips) Respirtech

Additionally, we compete with a large number of smaller and regional manufacturers.

Regulatory Matters

FDA Regulation. We design, manufacture, install and distribute medical devices that are regulated by the Food and Drug Administration (“FDA”) in the U.S. and similar agencies in other countries. The regulations and standards of these agencies evolve over time and require us to make changes in our manufacturing processes and quality systems to remain in compliance. The FDA’s Quality System regulations and the regulatory equivalents under the Medical Device Directive in the European Union set forth standards for our product design and manufacturing processes, require the maintenance of certain records and provide for inspections of our facilities. From time to time, the FDA performs routine inspections of our facilities and may inform us of certain deficiencies in our processes or facilities. In 2012, we received an FDA warning letter with respect to our Batesville facility. After making the necessary improvements in our quality systems and processes, the warning letter was lifted in 2015. See Item 1A. “Risk Factors” for additional information. In addition, there are also certain state and local government requirements that must be complied with in the manufacturing and marketing of our products.

Environmental. We are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to environmental and health and safety concerns, including the handling, storage, discharge and disposal of hazardous materials used in or derived from our manufacturing processes. When necessary, we provide for reserves in our financial statements for environmental matters. We do not expect the remediation costs for any environmental issues in which we are currently involved to exceed $3 million.

Health Care Regulations. In March 2010, comprehensive health care reform legislation was signed into law through the passage of the Patient Protection and Affordable Health Care Act and the Health Care and Education Reconciliation Act. The health care industry continues to undergo significant change as the law is implemented. In addition to health care reform, Medicare, Medicaid and managed care organizations, such as health maintenance organizations and preferred provider organizations, traditional indemnity insurers and third-party administrators are under increasing pressure to control costs and limit utilization, while improving quality and health care outcomes. These objectives are being advanced through a variety of reform initiatives including: accountable care organizations, value based purchasing, bundling initiatives, competitive bidding programs, etc. We are also subject to a number of other regulations related to the sale and distribution of health care products. The potential impact of these regulations to our business is discussed further in Item 1A. Risk Factors and Part II, Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this Annual Report on Form 10-K.

Product Development

Most of our products and product improvements have been developed internally. We maintain close working relationships with various medical professionals who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to place emphasis on the development of proprietary products and product improvements to complement and expand our existing product lines. Our significant research and development activities are located in Acton, Massachusetts; Batesville, Indiana; Beaverton, Oregon; Cary, North Carolina; Skaneateles Falls, New York; Lulea, Sweden; Montpelier and Pluvigner, France; Singapore; and Saalfeld and Witten, Germany.

Research and development is expensed as incurred. Research and development expense for the fiscal years ended September 30, 2015, 2014 and 2013, was $91.8 million, $71.9 million and $70.2 million.

In addition, certain software development technology costs are capitalized as intangibles and are amortized over a period of three to five years once the software is ready for its intended use. The amounts capitalized during fiscal years 2015, 2014 and 2013 were approximately $2.6 million, $2.6 million and $2.4 million.

Patents and Trademarks

We own, and from time-to-time license, a number of patents on our products and manufacturing processes, but we do not believe any single patent or related group of patents is of material significance to any business segment or our business as a whole. We also own a number of trademarks and service marks relating to our products and product services. Except for the marks “Hill-Rom®”, “Bard-Parker®”, and “Welch Allyn®”, we do not believe any single trademark or service mark is of material significance to any business segment or our business as a whole.

Foreign Operations and Export Sales

Information about our foreign operations is set forth in tables relating to geographic information in Note 11 of Notes to Consolidated Financial Statements, included herein under Part II, Item 8 of this Form 10-K.

Employees

At September 30, 2015, we had approximately 10,000 employees worldwide. Approximately 7 percent of our employees work in our logistics and manufacturing operations in the U.S. under collective bargaining agreements. We are also subject to various collective bargaining arrangements or national agreements outside the U.S. The collective bargaining agreement at our primary U.S. manufacturing facility expires in January 2016. We have not experienced a work stoppage in the U.S. in over 40 years, and we believe that our employee relations are satisfactory.

Executive Officers

The following sets forth certain information regarding our executive officers. The term of office for each executive officer expires on the date his or her successor is chosen and qualified. No director or executive officer has a “family relationship” with any other director or executive officer of the Company, as that term is defined for purposes of this disclosure requirement. There is no understanding between any executive officer and any other person pursuant to which the executive officer was selected.

John J. Greisch, 60, was elected President and Chief Executive Officer of Hill-Rom in January 2010. Mr. Greisch was most recently President, International Operations for Baxter International, Inc., a position he held since 2006. Prior to this, he held several other positions with Baxter, serving as Baxter's Chief Financial Officer and as President of Baxter's BioScience division.

Carlos Alonso, 56, was elected Senior Vice President and President, Hill-Rom International in April 2015. Before joining Hill-Rom, Mr. Alonso served as the President and CEO of the Esaote Group, a medical imaging leader based in Genova, Italy. Prior to the Esaote Group, Mr. Alonso served as the CEO of Esteve Pharmaceuticals based in Barcelona, Spain, and held various leadership roles of increasing responsibility with Baxter International, Inc. over the course of 15 years, including serving as Global President of the Renal Division.

Andreas Frank, 39, was elected as Senior Vice President Corporate Development and Strategy in October 2011. Before joining Hill-Rom, Mr. Frank was Director Corporate Development at Danaher Corporation. Previously he worked in the Corporate Finance and Strategy practice at the consulting firm McKinsey & Company.

Richard G. Keller, 54, was elected Vice President, Controller and Chief Accounting Officer of the Company effective August 2005. He had served as Executive Director - Controller of Hill-Rom since March 2004.

Susan R. Lichtenstein, 58, was elected Senior Vice President, Corporate Affairs, Chief Legal Officer and Secretary for Hill-Rom effective May 2010. Previously she was Corporate Vice President and General Counsel at Baxter International, where she was responsible for global legal matters, corporate communications and government affairs. Ms. Lichtenstein has informed the Company that she will be leaving the Company by the end of calendar year 2015.

Kenneth Meyers, 53, was elected Senior Vice President and Chief Human Resources Officer effective September 2015. Before joining Hill-Rom he was Senior Vice President and Chief Human Resources Officer at Hospira, Inc. Previously, he was a partner at Mercer / Oliver Wyman Consulting. Prior to Mercer / Oliver Wyman, he served as Senior Vice President, Human Resources, for Starbucks International.

Alton Shader, 42, was elected Senior Vice President and President, Front Line Care in September 2015. He had served as Senior Vice President and President, North America since July 2012 and previously as Senior Vice President and President, Post-Acute Care with Hill-Rom since July 2011. Before joining Hill-Rom, Mr. Shader was General Manager of Renal at Baxter International, Inc. Previously, he served as General Manager for Baxter Ireland and held senior marketing positions in Baxter's operations in Zurich and in California.

Taylor Smith, 55, was elected as Senior Vice President and President, Surgical and Respiratory Care in November 2013. Before joining Hill-Rom, Mr. Smith served as Senior Vice President and General Manager for Cardinal Health’s Orthopedic Products and Services group. Previously he held numerous leadership positions of increasing responsibility at Cardinal Health over the past 13 years.

Carlyn D. Solomon, 53, was elected Chief Operating Officer of Hill-Rom in November, 2014. Mr. Solomon was most recently the Corporate Vice President, Critical Care & Vascular Business Units of Edwards Lifesciences since 2006, and was VP of Corporate Strategy and GM of Cardiac Surgery Systems Business of Edwards Lifesciences from 2005 to 2006.

Steven J. Strobel, 57, was elected Senior Vice President in November 2014 and Chief Financial Officer in December, 2014. Before joining Hill-Rom, Mr. Strobel was President of McGough Road Advisors, a corporate finance consulting firm, from 2012 to 2014 and previously Chief Financial Officer of BlueStar Energy, an independent retail energy services company, from 2009 to 2012. Prior to BlueStar, he served as Treasurer and Corporate Controller at Motorola, and in the same positions at Owens Corning. Mr. Strobel serves on the Board of Directors of Newell Rubbermaid Inc., where he chairs the Audit Committee.

Availability of Reports and Other Information

Our website is www.Hill-Rom.com. We make available on this website, free of charge, access to our annual, quarterly and current reports and other documents we file with, or furnish to, the Securities and Exchange Commission (“SEC”) as soon as practicable after such reports or documents are filed or furnished. We also make available on our website position specifications for the Chairman, members of the Board of Directors and the Chief Executive Officer, our Code of Ethical Business Conduct (and any amendments or waivers), the Corporate Governance Standards of our Board of Directors and the charters of each of the standing committees of the Board of Directors. All of these documents are also available to shareholders in print upon request.

All reports filed with the SEC are also available via the SEC website, www.sec.gov, or may be read and copied at the SEC Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Item 1A. RISK FACTORS

Our business involves risks. The following information about these risks should be considered carefully together with the other information contained herein. The risks described below are not the only risks we face. Additional risks not currently known or deemed immaterial also may result in adverse effects on our business.

We face significant uncertainty in the industry due to government health care reform, changes in Medicare, Medicaid and other governmental medical program reimbursements, and we cannot predict how these reforms will impact our operating results.

In March 2010, the U.S. Congress adopted and President Obama signed into law comprehensive health care reform legislation through the passage of the Patient Protection and Affordable Health Care Act (H.R. 3590) and the Health Care and Education Reconciliation Act (H.R. 4872). We cannot predict with certainty what additional healthcare initiatives, if any, will be implemented at the federal or state level, or what the ultimate effect of federal health care reform or any future legislation or regulation will have on us. In addition, Medicare, Medicaid, managed care organizations and foreign governments are increasing pressure to both control health care utilization and to limit reimbursement. Changes in reimbursement programs or their regulations, including retroactive and prospective rate and coverage criteria changes, competitive bidding for certain products and services, and other changes intended to reduce expenditures (domestically or internationally), could adversely affect the portions of our businesses that are dependent on third-party reimbursement or direct governmental payments. Moreover, to the extent that our customers experience reimbursement pressure resulting in lower revenue for them, their demand for our products and services may decrease. The impact of the above mentioned items could have a material adverse impact on our business, results of operations and cash flows.

Failure by us or our suppliers to comply with the FDA regulations and similar foreign regulations applicable to the products we manufacture or distribute could expose us to enforcement actions or other adverse consequences.

We design, manufacture, install and distribute medical devices that are regulated by the FDA in the U.S. and similar agencies in other countries. Failure to comply with applicable regulations could result in future product recalls, injunctions preventing the shipment of products or other enforcement actions that could have a material adverse effect on our revenue and profitability. In March 2012, we received a warning letter from the FDA following an inspection by the FDA at our Batesville, Indiana production facilities. Upon the successful completion of our remediation efforts, the warning letter was lifted in September 2015. Additionally, certain of our suppliers are subject to FDA regulations, and the failure of these suppliers to comply with regulations could adversely affect us; as regulatory actions taken by the FDA against those manufacturers can result in product shortages, recalls or modifications.

We could be subject to substantial fines or damages and possible exclusion from participation in federal health care programs if we fail to comply with the laws and regulations applicable to our business.

We are subject to stringent laws and regulations at both the federal and state levels governing the participation of durable medical equipment suppliers in federal and state health care programs. In addition, in 2011 we entered into a five-year Corporate Integrity Agreement with the U.S. Federal government, which imposes on us additional contractual obligations.

From time to time, the government seeks additional information related to our claims submissions, and in some instances government contractors perform audits of payments made to us under Medicare, Medicaid, and other federal health care programs. On occasion, these reviews identify overpayments for which we submit refunds. At other times, our own internal audits identify the need to refund payments. The frequency and intensity of government audits and review processes has intensified and we expect this will continue in the future, due to increased resources allocated to these activities at both the federal and state Medicaid level, and greater sophistication in data review techniques.

If we are deemed to have violated these laws and regulations, or are found to have violated our Corporate Integrity Agreement, we could be subject to substantial fines, damages, possible exclusion from participation in federal health care programs such as Medicare and Medicaid and possible recoupment of overpayments. While we believe that our practices materially comply with applicable state and federal requirements, the requirements may be interpreted in a manner inconsistent with our interpretation. Failure to comply with applicable laws and regulations, even if inadvertent, could have a material adverse impact on our business.

We participate in a highly competitive industry that is subject to the risk of declining demand and pricing pressures, which could adversely affect our operating results.

Demand for our products and services depend in large part on overall demand in the health care market. Additionally, with the health care market’s increased focus on hospital asset and resource efficiency as well as reimbursement constraints, spending for many of our products is on a long-term declining trend. Further, the competitive pressures in our industry could cause us to lose market share unless we increase our expenditures or reduce our prices, which would adversely impact our operating results. The nature of this highly competitive marketplace demands that we successfully introduce new products into the market in a cost effective manner (more fully detailed below). These factors, along with others, may result in significant shifts in market share among the industry's major participants, including us. Accordingly, if we are unable to effectively differentiate ourselves from our competitors in terms of both new products and diversification of our product portfolio through business acquisitions, then our market share, sales and profitability could be adversely impacted through lower volume or decreased prices.

Our future financial performance will depend in part on the successful introduction of new products into the marketplace on a cost-effective basis.

Our future financial performance will depend in part on our ability to influence, anticipate, identify and respond to changing consumer preferences and needs. We can provide no assurances that our new products will achieve the same degree of success as in the past. We may not correctly anticipate or identify trends in consumer preferences or needs, or may identify them later than competitors do. In addition, difficulties in manufacturing or in obtaining regulatory approvals may delay or prohibit introduction of new products into the marketplace. Further, we may not be able to develop and produce new products at a cost that allows us to meet our goals for profitability. Warranty claims and service costs relating to our products may be greater than anticipated, and we may be required to devote significant resources to address any quality issues associated with our new products, which could reduce the resources available for further new product development and other matters. In addition, the introduction of new products may also cause customers to defer purchases of existing products.

Failure to successfully introduce new products on a cost-effective basis, or delays in customer purchasing decisions related to the evaluation of new products, could cause us to lose market share and could materially adversely affect our business, financial condition, results of operations and cash flow.

Adverse developments in general domestic and worldwide economic conditions and instability and disruption of credit markets could have an adverse effect on our operating results, financial condition, or liquidity.

We are subject to risks arising from adverse changes in general domestic and global economic conditions, including recession or economic slowdown and disruption of domestic and international credit markets. The credit and capital markets experienced extreme volatility and disruption over the past several years, leading to periods of recessionary conditions and depressed levels of consumer and commercial spending. These recessionary conditions caused customers to reduce, modify, delay or cancel plans to purchase our products and services. If our customers reduce investments in capital expenditures or utilize their limited capital funds to invest in products that we do not offer or that do not comprise a large percentage of our product portfolio, it could negatively impact our operating results. Moreover, even if our revenue remains constant, our profitability could decline if there is a shift to sales of product mix or geographic locations with less favorable margins. If worldwide economic conditions worsen, we would expect our customers to scrutinize costs resulting from pressures on operating margin due to rising supply costs, reduced investment income and philanthropic giving, increased interest expense, reimbursement pressure, reduced elective healthcare spending and uncompensated care.

We may not be able to grow if we are unable to successfully acquire and integrate, or form business relationships with, other companies.

We have in the past, and expect in the future, to grow our business through mergers, acquisitions and other similar business arrangements. We may not be able to identify suitable acquisition candidates or business relationships, negotiate acceptable terms for such acquisitions or relationships or receive necessary financing on acceptable terms. Additionally, we may become responsible for liabilities associated with businesses that we acquire to the extent they are not covered by indemnification from the sellers or by insurance. Even if we are able to consummate acquisitions, such acquisitions could be dilutive to earnings, and we could overpay for such acquisitions. Additionally, we may not be fully successful in our integration efforts or fully realize expected benefits from the integration. Our integration efforts may divert management and other resources from other important matters, and we could experience delays or unusual expenses in the integration process, including intangible asset impairments which could result in significant charges in our Statements of Consolidated Income. Moreover, the margins for these companies may differ from our historical gross and operating margins resulting in a material adverse effect on our results of operations.

The assets in our pension plans are subject to market disruptions. In addition, our pension plans are underfunded.

Our primary pension plan invests in a variety of equity and debt securities subject to market risks. Our pension plans were underfunded at September 30, 2015 by approximately $96.4 million. Market volatility and disruption could cause further declines in asset values or fluctuations in assumptions used to value our liability and expenses. If this occurs, we may need to make additional pension plan contributions and our pension expense in future years may increase.

Our business is significantly dependent on major contracts with GPOs, IDNs, and certain other distributors and purchasers.

A majority of our North American hospital sales and rentals are made pursuant to contracts with hospital GPOs. At any given time, we are typically at various stages of responding to bids and negotiating and renewing expiring GPO agreements. Failure to be included in certain of these agreements could have a material adverse effect on our business, including capital and rental revenue.

Participation by us in such programs often requires increased discounting or restrictions on our ability to raise prices, and failure to participate or to be selected for participation in such programs may result in a reduction of sales to the member hospitals. In addition, the industry is showing an increased focus on contracting directly with health systems or IDNs (which typically represents influential members and owners of GPOs). IDNs and health systems often make key purchasing decisions and have influence over the GPO’s contract decisions, and often request additional discounts or other enhancements. In addition, certain other distributors and purchasers have similar processes to the GPOs and IDNs and failure to be included in agreements with these other purchasers could have a material adverse effect on our business.

Increased prices for, or unavailability of, raw materials or sub-assemblies used in our products could adversely affect profitability or revenue. In particular, our results of operations could be adversely affected by high prices for metals, fuel, plastics and other petroleum based products. We also procure several raw materials and sub-assemblies from single suppliers.

Our profitability is affected by the prices of the raw materials and sub-assemblies used in the manufacture of our products. These prices may fluctuate based on a number of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, fuel related delivery costs, competition, import duties, tariffs, currency exchange rates, and government regulation. Significant increases in the prices of raw materials or sub-assemblies that cannot be recovered through increases in the prices of our products could adversely affect our results of operations. There can be no assurance that the marketplace will support higher prices or that such prices and productivity gains will fully offset any commodity price increases in the future. We generally have not engaged in hedging transactions with respect to raw material purchases, but do enter into fixed price supply contracts at times. Future decisions not to engage in hedging transactions or ineffective hedging transactions may result in increased price volatility, potentially adversely impacting our profitability.

Our dependency upon regular deliveries of supplies from particular suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. Several of the raw materials and sub-assemblies used in the manufacture of our products currently are procured only from a single source. If any of these sole-source suppliers were unable or unwilling to deliver these materials for an extended period of time we may not be able to manufacture one or more products for a period of time, and our business could suffer. We may not be able to find acceptable alternatives, and any such alternatives could result in increased costs. Difficulties in the credit markets could adversely affect our suppliers’ access to capital and therefore their ability to continue to provide an adequate supply of the materials we use in our products.

The majority of our products are manufactured at a single facility or location, and the loss of one or more of these facilities or locations could prevent us from manufacturing all the various products we sell.

We manufacture the majority of our products in only a single facility or location. If an event occurred that resulted in material damage to one or more of these manufacturing facilities or we lacked sufficient labor to fully operate the facility, we may be unable to transfer the manufacture of the relevant products to another facility or location in a cost-effective or timely manner, if at all. This potential inability to transfer production could occur for a number of reasons, including but not limited to a lack of necessary relevant manufacturing capability at another facility, or the regulatory requirements of the FDA or other governmental regulatory bodies. Such an event would materially negatively impact our financial condition, results of operations and cash flows.

Our international sales and operations are subject to risks and uncertainties that vary by country which could have a material adverse effect on our business and/or results of operations.

International sales accounted for approximately 36 percent of our net sales in fiscal 2015. We anticipate that international sales will continue to represent a significant portion of our total sales in the future. In addition, we have multiple manufacturing facilities and third-party suppliers that are located outside of the U.S. As a result, our international sales, as well as our sales in the U.S. of products produced or sourced internationally, are subject to risks and uncertainties that can vary by country, such as political instability, economic conditions, foreign currency exchange rate fluctuations, changes in tax laws, regulatory and reimbursement programs and policies, and the protection of intellectual property rights. In addition, our collections of international receivables are subject to economic pressures and the actions of some governmental authorities who have initiated various austerity measures to control healthcare and other governmental spending.

Unfavorable outcomes related to uncertain tax positions could result in significant tax liabilities.

We have recorded tax benefits related to various uncertain tax positions taken or expected to be taken in a tax return. While we believe our positions are appropriate, the Internal Revenue Service (“IRS”), state or foreign tax authorities could disagree with our positions, resulting in a significant tax payment.

We are involved on an ongoing basis in claims, lawsuits and governmental proceedings relating to our operations, as well as product liability or other liability claims that could expose us to adverse judgments or could affect the sales of our products.

We are involved in the design, manufacture and sale of health care products, which face an inherent risk of exposure to product liability claims if our products are alleged to have caused injury or are found to be unsuitable for their intended use. Amongst other claims, we are, from time to time, a party to claims and lawsuits alleging that our products have caused injury or death or are otherwise unsuitable. It is possible that we will receive adverse judgments in such lawsuits, and any such adverse judgments could be material. Although we do carry insurance with respect to such matters, this insurance is subject to varying deductibles and self-insured retentions and may not be adequate to cover the full amount of any particular claim. In addition, any such claims could negatively impact the sales of products that are the subject of such claims or other products.

We may not be able to attract, retain and develop key personnel.

Our future performance depends in significant part upon the continued service of our executive officers and other key personnel. The loss of the services of one or more of our executive officers or other key employees could have a material adverse effect on our business, prospects, financial condition and results of operations. Our success also depends on our continuing ability to attract, retain and develop highly qualified personnel, and as competition for such personnel is intense, there can be no assurance that we can do so in the future.

The combined company’s business may suffer if it does not retain its senior management.

After the Welch Allyn acquisition, the combined company’s future success requires it to continue to attract and retain competent personnel. In particular, the combined company’s future success will depend on its senior management. As a result of the merger, Hill-Rom’s and Welch Allyn’s current and prospective employees could experience uncertainty about their future roles and the integration process. The loss of services of members of the combined company’s senior management team could adversely affect its business until suitable replacements can be found. There may be a limited number of persons with the requisite skills to serve in these positions, and the combined company may be unable to locate or employ qualified personnel on acceptable terms.

A portion of our workforce is unionized, and we could face labor disruptions that would interfere with our operations.

Approximately 7 percent of our employees as part of our logistics and manufacturing operations in the U.S. work under collective bargaining agreements. We are also subject to various collective bargaining arrangements or national agreements outside the U.S. covering approximately 18 percent of our employees. Although we have not recently experienced any significant work stoppages as a result of labor disagreements, we cannot ensure that such a stoppage will not occur in the future. Our primary labor contract expires in January 2016. Inability to negotiate satisfactory new agreements or a labor disturbance at one of our principal facilities could have a material adverse effect on our operations.

We may be adversely affected by new regulations relating to conflict minerals.

In August 2012, the SEC adopted new disclosures and reporting requirements for companies whose products contain certain minerals and their derivatives, namely tin, tantalum, tungsten or gold, known as conflict minerals. As of May 2014, companies are required to report annually whether or not such minerals originate from the Democratic Republic of the Congo (DRC) and/or adjoining countries and in some cases to perform extensive due diligence on their supply chains for such minerals. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of materials used in the manufacturing of our products. In addition, we will incur additional costs to comply with the disclosure requirements, including cost related to determining the source of any of the relevant minerals used in our products. Since our supply chain is complex and multilayered, we may be unable to ascertain with sufficient certainty the origins for these minerals or make a determination that that these minerals are DRC conflict free despite our due diligence procedures, which in turn may harm our reputation. We may also face difficulties in satisfying customers who may require that our products be certified as DRC conflict free, which could harm our relationships with these customers and/or lead to a loss of revenue. These requirements also could have the effect of limiting the pool of suppliers from which we source these minerals, and we may be unable to obtain conflict-free minerals at prices similar to the past, which could increase our costs and adversely affect our manufacturing operations and our profitability.

We may not be successful in achieving expected operating efficiencies and sustaining or improving operating expense reductions, and may experience business disruptions and adverse tax consequences associated with restructuring, realignment and cost reduction activities.

Over the past few years we have initiated several restructuring, realignment and cost reduction initiatives. In the third quarter of 2015, we announced plans to close two facilities in a continuing effort to rationalize our global footprint. Also, in the second quarter of fiscal 2014, we initiated a restructuring program to improve our cost structure by reducing our European manufacturing capacity and streamlining our global operations by, among other things, executing a back office process transformation program in Europe. While we expect to realize efficiencies from these actions, these activities may not produce the full efficiency and cost reduction benefits we expect. Further, such benefits may be realized later than expected, and the ongoing costs of implementing these measures may be greater than anticipated. If these measures are not successful or sustainable, we may undertake additional realignment and cost reduction efforts, which could result in future charges. Moreover, our ability to achieve our other strategic goals and business plans may be adversely affected and we could experience business disruptions with customers and elsewhere if our restructuring and realignment efforts prove ineffective.

These actions, the resulting costs, and delays or lower than anticipated benefits will also impact our foreign tax positions and may require us to record tax reserves against certain deferred tax assets in our international business, similar to the provision we recognized during the second quarter of fiscal 2014 with respect to France.

We are increasingly dependent on consistent functioning of our information technology systems and if we are exposed to any intrusions or if we fail to maintain the integrity of our data, our business could be materially affected.

We are increasingly dependent on consistent functioning of our information technology systems for our infrastructure and products. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards, integration of acquisitions, and the increasing need to protect patient and customer information. In addition, third parties may attempt to hack into our products or systems and may obtain proprietary information. If we fail to maintain or protect our information systems and data integrity effectively, we could lose existing customers or suppliers, have difficulty attracting new customers or suppliers, have problems that adversely impact internal controls, have difficulty preventing, detecting, and controlling fraud, have disputes with customers and suppliers, have regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach, or suffer other adverse consequences. Any significant breakdown, intrusion, interruption, corruption, or destruction of these systems, as well as any data breaches, could have a material adverse effect on our business.

We expect to incur substantial expenses related to the integration of Welch Allyn.

We expect to incur substantial expenses in connection with the integration of Welch Allyn. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated, including purchasing, accounting and finance, sales, billing, payroll, manufacturing, marketing and employee benefits. While we expect to incur integration and restructuring costs and other costs incurred to execute the transaction following completion of the merger in 2015 that are estimated to range between $35 million and $40 million, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from elimination of duplicative expenses and the realization of economies of scale and cost savings. Although we expect that the realization of efficiencies related to the integration of the businesses will offset incremental transaction, merger-related and restructuring costs over time, we cannot give any assurance that this net benefit will be achieved in the near term, or at all.

Successful integration of Welch Allyn with Hill-Rom and successful operation of the combined company are not assured. Also, integrating Hill-Rom’s business with that of Welch Allyn may divert the attention of management away from operations.

Welch Allyn is now a wholly-owned subsidiary of Hill-Rom but will, at least initially, continue its operations on a basis that is largely separate from Hill-Rom’s previously existing operations. There can be no assurance that Welch Allyn will be able to maintain and grow its business and operations. In addition, the market segments in which Welch Allyn operates may experience declines in demand and/or new competitors. Integrating and coordinating certain aspects of the operations and personnel of Welch Allyn with Hill-Rom will involve complex operational, technological and personnel-related challenges. This process will be time-consuming and expensive, may disrupt the businesses of either or both of the companies and may not result in the full benefits expected from the merger, including cost synergies expected to arise from supply chain efficiencies and overlapping general and administrative functions. The potential difficulties, and resulting costs and delays, include:

managing a larger combined company;

consolidating corporate and administrative infrastructures;

issues in integrating manufacturing, warehouse and distribution facilities, research and development and sales forces;

difficulties attracting and retaining key personnel;

loss of customers and suppliers and inability to attract new customers and suppliers;

unanticipated issues in integrating information technology, communications and other systems;

incompatibility of purchasing, logistics, marketing, administration and other systems and processes; and

unforeseen and unexpected liabilities related to the merger or Welch Allyn’s business.

Additionally, the integration of Welch Allyn’s operations, products and personnel may place a significant burden on management and other internal resources. The diversion of management’s attention, and any difficulties encountered in the transition and integration process, could harm the Company’s business, financial condition and operating results.

We have incurred substantial additional indebtedness in connection with the Welch Allyn acquisition, and may not be able to meet all of our debt obligations.

As stated in our Notes to Consolidated Financial Statements, we have entered into several new credit facilities which have resulted in a substantially higher level of leverage compared with prior periods. Based on assumed interest rates, leverage ratios and credit ratings, we expect our debt service obligations, comprised of principal and interest (excluding capital leases), during the 12 months following the completion of the merger to be approximately $150 million. As a result of this increase in debt, demands on our cash resources have increased. The increased level of debt could, among other things:

require us to dedicate a large portion of its cash flow from operations to the servicing and repayment of its debt, thereby reducing funds available for working capital, capital expenditures, research and development expenditures and other general corporate requirements;

limit our ability to obtain additional financing to fund future working capital, capital expenditures, research and development expenditures and other general corporate requirements;

limit our flexibility in planning for, or reacting to, changes in its business and the industry in which we operate;

restrict our ability to make strategic acquisitions or dispositions or to exploit business opportunities;

place us at a competitive disadvantage compared to competitors that have less debt;

adversely affect our credit rating, with the result that the cost of servicing our indebtedness might increase;

adversely affect the market price of Hill-Rom common stock; and

limit our ability to apply proceeds from an offering or asset sale to purposes other than the servicing and repayment of debt.

Item 1B. UNRESOLVED STAFF COMMENTS

We have not received any comments from the staff of the SEC regarding our periodic or current reports that remain unresolved.

Item 2. PROPERTIES

The principal properties used in our operations are listed below. All facilities are suitable for their intended purpose, are being efficiently utilized and are believed to provide adequate capacity to meet demand for the next several years.

Location	Description and Primary Use	Owned/Leased
Acton, MA	Light manufacturing, development and distribution of health care equipment; Office administration	Leased
Batesville, IN	Manufacturing, development and distribution of health care equipment; Office administration	Owned
Beaverton, OR	Development of heath care equipment; Office administration	Leased
Caledonia, MI	Manufacturing, development and distribution of surgical products; Office administration	Leased
Carol Stream, IL	Manufacturing, development and distribution of health care equipment; Office administration	Leased
Cary, NC	Development of health care equipment; Office administration	Leased
Charleston, SC	Light manufacturing and distribution of health care equipment; Office administration	Owned/Leased
Chicago, IL	Office administration	Leased
St. Paul, MN	Office administration	Leased
Skaneateles Falls, NY	Manufacturing, development and distribution of health care equipment; Office administration	Owned
Jiangsu, China	Manufacturing of health care equipment	Leased
Taicang, China	Light manufacturing and distribution of health care equipment	Leased
Montpellier, France	Manufacturing and development of health care equipment	Owned
Pluvigner, France	Manufacturing, development and distribution of health care equipment; Office administration	Owned
Hainichen, Germany*	Manufacturing and distribution of health care equipment	Owned
Puchheim, Germany	Manufacturing and distribution of health care equipment	Owned
Saalfeld, Germany	Manufacturing, development and distribution of health care equipment; Office administration	Owned
Witten, Germany	Manufacturing, development and distribution of health care equipment; Office administration	Owned
Navan, County Meath, Ireland	Office administration	Owned
Kawagawa, Japan	Office administration	Leased
Tijuana, Mexico	Manufacturing and distribution of health care equipment; Office administration	Leased
Monterrey, Mexico	Manufacturing of health care equipment	Owned
Las Piedras, Puerto Rico	Manufacturing of surgical products	Owned
Singapore	Manufacturing and development of health care equipment; Office administration	Leased
Lulea, Sweden	Manufacturing, development and distribution of health care equipment; Office administration	Owned
Redditch, UK*	Manufacturing of surgical products; Office administration	Leased

* denotes properties where plans are in process to close, consolidate, or repurpose the facility

In addition to the foregoing, we lease or own a number of other facilities, warehouse distribution centers, service centers and sales offices throughout the U.S., Canada, Western Europe, Mexico, Australia, Middle East, the Far East, and Latin America.

Item 3. LEGAL PROCEEDINGS

See Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K for information regarding legal proceedings in which we are involved.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on the New York Stock Exchange under the ticker symbol “HRC”. The closing price of our common stock on the New York Stock Exchange on November 12, 2015 was $51.21 per share. The following table reflects the range of high and low selling prices of our common stock and cash dividends declared by quarter for each of the last two fiscal years.

	Years Ended September 30
	2015						2014
Quarter Ended:	High		Low		Cash Dividends Declared		High		Low		Cash Dividends Declared
December 31	$	47.32	$	39.58	$	0.1525	$	42.56	$	35.64	$	0.1375
March 31	$	49.35	$	44.69	$	0.1600	$	44.64	$	34.94	$	0.1525
June 30	$	57.95	$	48.16	$	0.1600	$	41.66	$	35.45	$	0.1525
September 30	$	58.73	$	49.30	$	0.1600	$	44.46	$	38.85	$	0.1525

Holders

As of November 12, 2015, there were approximately 20,800 shareholders of record.

Dividends

The declaration and payment of cash dividends is at the sole discretion of our Board of Directors (“Board”) and depends upon many factors, including our financial condition, earnings potential, capital requirements, alternative uses of cash, covenants associated with debt obligations, legal requirements, and other factors deemed relevant by our Board. We have paid cash dividends on our common stock every quarter since our initial public offering in 1971. We intend to continue to pay quarterly cash dividends comparable to those paid in the periods covered by these financial statements.

Issuer Purchases of Equity Securities

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

July 1, 2015 - July 31, 2015		426	$	54.21		-	$	64.7
August 1, 2015 - August 31, 2015		728	$	53.43		-	$	64.7
September 1, 2015 - September 30, 2015		113,222	$	51.91		-	$	64.7
Total		114,376	$	51.93		-	$	64.7

(1)	Shares purchased during the quarter ended September 30, 2015 were in connection with employee payroll tax withholding for restricted and deferred stock distributions.

(2)

In September 2013, the Board approved an expansion of its previously announced share repurchase authorization to a total of $190.0 million. As of September 30, 2015, a cumulative total of $125.3 million has been used under this existing authorization. The plan does not have an expiration date and currently there are no plans to terminate this program in the future.

Stock Performance Graph

The following graph compares the return on our common stock with that of Standard & Poor’s 500 Stock Index (“S&P 500 Index”), and our Peer Group* for the five years ended September 30, 2015. The graph assumes that the value of the investment in our common stock, the S&P 500 Index, and our Peer Group was $100 on October 1, 2010 and that all dividends were reinvested.

	2010	2011	2012	2013	2014	2015
HRC	$100	$ 83	$ 82	$103	$121	$153
S & P 500	$100	$ 99	$126	$147	$172	$168
Peer Group	$100	$104	$135	$141	$166	$196

For purposes of the Stock Performance Graph above, our Peer Group is comprised of: Alere Inc.; CR Bard Inc.; Chemed Corp.; CONMED Corporation; DENTSPLY International Inc.; Edwards Lifesciences Corp.; Hologic Inc.; IDEXX Laboratories, Inc.; Integra Lifesciences Holdings Corporation; Intuitive Surgical, Inc.; Invacare Corporation; MEDNAX, Inc.; PerkinElmer Inc.; ResMed Inc.; Sirona Dental Systems Labs Inc.; Steris Corp.; Teleflex Incorporated.; The Cooper Companies Inc.; Varian Medical Systems, Inc.; and West Pharmaceutical Services, Inc.

Certain other information required by this item will be contained under the caption “Equity Compensation Plan Information” in our definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on March 15, 2016, and such information is incorporated herein by reference.

Item 6. SELECTED FINANCIAL DATA

The following table presents our selected consolidated financial data for each of the last five fiscal years ended September 30. Refer to Note 2 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K for disclosure of business combinations for each of the last three fiscal years. Also see Note 12 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K for selected unaudited quarterly financial information for each of the last two fiscal years.

	2015			2014			2013			2012			2011

Net revenue	$	1,988.2		$	1,686.1		$	1,716.2		$	1,634.3		$	1,591.7
Net income	$	46.8		$	60.6		$	105.0		$	120.8		$	133.5
Net income attributable to common shareholders	$	47.7		$	60.6		$	105.0		$	120.8		$	133.3
Net income attributable to common shareholders per share - Basic	$	0.83		$	1.05		$	1.75		$	1.94		$	2.11
Net income attributable to common shareholders per share - Diluted	$	0.82		$	1.04		$	1.74		$	1.94		$	2.09
Total assets	$	4,457.6		$	1,751.3		$	1,586.8		$	1,627.6		$	1,299.1
Long-term obligations	$	2,175.2		$	364.1		$	225.8		$	237.5		$	50.8
Cash flows from operating activities	$	213.8		$	210.3		$	263.2		$	261.7		$	222.5
Capital expenditures	$	121.3		$	62.7		$	65.3		$	77.8		$	68.9
Cash flows from investing activities	$	(1,756.4	)	$	(294.5	)	$	(58.6	)	$	(539.5	)	$	(78.0	)
Cash flows from financing activities	$	1,642.7		$	63.8		$	(161.5	)	$	135.6		$	(101.9	)
Cash dividends per share	$	0.6325		$	0.5950		$	0.5250		$	0.4875		$	0.4300

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

Key Factors Impacting Our Business

Industry-wide Demand and Cost Pressures. We believe that over the long term, overall patient and provider demand for health care products and services will continue to grow as a result of a number of factors, including an aging population, longer life expectancies, and an increasing number of sicker patients across all care settings, including hospitals, extended care facilities and in the home. In contrast, however, health care providers across the care continuum are under continued pressure to improve efficiency and control costs, possibly reducing demand for our products and services. These pressures may occur for a number of reasons, including declining commercial third-party payer reimbursement rates, government regulation, and hospital consolidation. In addition, an increasing number of our customers are purchasing through GPO agreements or other large contracts, where they may be able to purchase at lower prices than they would be able to individually. Moreover, general economic pressures have caused some governmental authorities to initiate various austerity measures to control healthcare spending, reducing direct spending in addition to governmental reimbursement rates. We believe these factors may decrease demand for our products, decrease payments to us, or both; however, we may be able to offset some or all of this decreased demand through effective research and development leading to new product introductions, as well as providing demonstrable clinical and economic value to our customers.

Customer Consolidation. Economic considerations, competition and other factors have led to on-going consolidation of customers and the centralization of purchasing decision making. We believe this has influenced the criteria customers use to evaluate the value proposition offered by Hill-Rom for various product and service offerings. Economic decision-makers partner with clinical decision-makers to determine product selection. This has caused Hill-Rom to adjust the way we go to market and the structure of our sales and distribution channels, particularly in North America. Among other measures, Hill-Rom established Strategic Partnership Teams as an adjunct to our traditional sales representatives to better address customer needs for products and services that deliver solutions for more cost-effective patient care. With the acquisition of Welch Allyn, we also added a significant distributor component serving primary care. The extent to which Hill-Rom effectively addresses evolving needs brought about by customer consolidation could significantly impact the success of our revenue and profitability.

Mergers and Acquisitions. We have made several recent acquisitions, most notably the acquisitions of Welch Allyn Holdings, Inc. (“Welch Allyn”), Trumpf Medical (“Trumpf”), and Virtus, Inc. (“Virtus”), and we plan to make additional acquisitions in the future. Our past and future acquisitions (to the extent that we make them) may materially impact our results of operations, by increasing our revenue and revenue growth rates, increasing our ongoing operational selling and administrative expenses, adding incremental acquisition and integration related costs, and creating additional non-cash charges associated with the amortization of tangible and intangible assets resulting from purchase accounting. Moreover, to the extent that we acquire businesses that have financial drivers different than our current businesses, our future results of operations will be subject to additional or different factors impacting our financial performance.

Growing Desire Among Developing Countries to Invest in Health Care. While industry growth rates in more mature geographic regions such as western and northern Europe and Japan have moderated, in many other geographic markets, where the relative spending on health care is increasing, we expect long-term increasing demand for medical technologies. New hospital construction and hospital refurbishments are expected in regions such as Latin America, the Middle East and many parts of Asia. This could increase overall demand for our products and services.

Changing Acuities and Technological Impact. As a result of the growing population of the elderly and obese, health care systems are challenged to treat rising incidences of complex diseases and conditions such as diabetes, congestive heart failure and respiratory disease. However, at the same time, patients are being moved through the hospital faster and generally desire to rapidly move to lower acuity settings as quickly as possible. We believe that this trend increases the demand for more solutions to care for these patients in lower acuity settings, such as improved medical technologies, communication tools and information technologies. The increasing utilization of these technologies and our ability to meet changing demand with new differentiated products will impact our ability to increase revenue and improve margins in the future.

Increasing Operational Efficiency. We have and will continue to undertake initiatives to improve our operating efficiency, including business realignments, employee reductions in force, product rationalizations, lower sourcing costs and continuous improvement activities in our manufacturing facilities and back office functions. We believe our operating expenses and margins will be positively impacted by these actions, but it is possible these activities may not produce the full efficiency and cost reduction benefits we expect, in a timely fashion, or at all. Further, we may utilize savings produced to reinvest in (or fund) other business priorities.

Patient and Caregiver Safety, Quality, and Economic Outcomes. We believe an increasing emphasis is being placed within hospitals to assure quality of care through increased accountability and public disclosure. At the same time, we believe caregiver shortages, worker related injuries, the aging workforce, and other staffing requirements have led to increasing emphasis on caregiver injury prevention. Several pieces of legislation have been enacted over the past few years to address these areas including the "pay for performance" initiative by the Centers for Medicare and Medicaid Services ("CMS") which aims to better align reimbursement with improved patient outcomes and the reduction of adverse events including bedsores (or pressure ulcers), ventilator associated pneumonia, patient falls, deep vein thrombosis and patient entrapment. Hospitals may experience reduced reimbursement for hospital acquired adverse events, making a stronger connection with these adverse events and revenue levels. Therefore, we believe that healthcare providers will seek to do business with partners that can demonstrate improved clinical, and consequently, economic, outcomes. A number of the top adverse events and preventable medical errors in U.S. hospitals, including those listed above, can be mitigated in part by our technologies, processes and services. We believe we are well positioned to benefit from the emphasis being placed on patient safety due to our products and technologies that are designed to assist providers in materially improving outcomes associated with patients across all care settings, and we believe that an effective program of new product innovation focusing on these trends will ultimately benefit our revenue growth. Overall increasing emphasis on patient and caregiver safety and quality could increase demand for our products and services.

Use of Non-GAAP Financial Measures

The accompanying consolidated financial statements, including the related notes, set forth in Part II, Item 8 of this Form 10-K are presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”). We provide non-GAAP measures, including adjusted income before taxes, income tax expense and diluted earnings per share results, because we use these measures internally for planning, forecasting, and evaluating the performance of the business.

In addition, we analyze net revenue on a constant currency basis to better measure the comparability of results between periods. We believe that evaluating growth in net revenue on a constant currency basis provides an additional and meaningful assessment to both management and investors.

We use these measures internally for planning, forecasting, and evaluating the performance of the business. These measures should not, however, be considered in isolation, as a substitute for, or as superior to measures of financial performance prepared in accordance with GAAP.

RESULTS OF OPERATIONS

The following table presents comparative operating results for the years discussed within Management’s Discussion and Analysis:

	Years Ended September 30
				% of Related						% of Related						% of Related
(Dollars in millions except per share data)	2015			Revenue			2014			Revenue			2013			Revenue
Net Revenue
Capital sales	$	1,604.5			80.7	%	$	1,301.4			77.2	%	$	1,308.3			76.2	%
Rental revenue		383.7			19.3	%		384.7			22.8	%		407.9			23.8	%
Total Revenue		1,988.2			100.0	%		1,686.1			100.0	%		1,716.2			100.0	%
Gross Profit
Capital sales		683.3			42.6	%		571.2			43.9	%		560.5			42.8	%
Rental revenue		197.0			51.3	%		208.7			54.3	%		219.8			53.9	%
Total Gross Profit		880.3			44.3	%		779.9			46.3	%		780.3			45.5	%
Research and development expenses		91.8			4.6	%		71.9			4.3	%		70.2			4.1	%
Selling and administrative expenses		664.2			33.4	%		548.3			32.5	%		549.5			32.0	%
Special charges		41.2			2.1	%		37.1			2.2	%		5.7			0.3	%
Operating Profit		83.1			4.2	%		122.6			7.3	%		154.9			9.0	%
Other income (expense), net		(18.0	)		-0.9	%		(7.4	)		-0.4	%		(10.9	)		-0.6	%
Income Before Income Taxes		65.1			3.3	%		115.2			6.8	%		144.0			8.4	%
Income tax expense		18.3			0.9	%		54.6			3.2	%		39.0			2.3	%
Net Income		46.8			2.4	%		60.6			3.6	%		105.0			6.1	%
Less: Net income attributable to noncontrolling interest		(0.9	)		-			-			-			-			-
Net Income Attributable to Common Shareholders	$	47.7			2.4	%	$	60.6			3.6	%	$	105.0			6.1	%

Net Income Attributable to Common Shareholders
per Common Share - Diluted	$	0.82					$	1.04					$	1.74

Note: Certain percentage amounts may not add due to rounding.

Fiscal Year Ended September 30, 2015 Compared to Fiscal Year Ended September 30, 2014

Consolidated Results of Operations

In this section, we provide a high-level overview of our consolidated results of operations. Immediately following this section is a discussion of our results of operations by reportable segment. We disclose segment information that is consistent with the way in which management operates and views the business.

Our performance under each reportable segment is measured on a divisional income basis before non-allocated operating and administrative costs, acquisition-related intangible asset amortization, impairments, litigation, special charges, acquisition and integration costs, and other unusual events. Divisional income generally represents the division’s gross profit less its direct operating costs along with an allocation of manufacturing and distribution costs, research and development, and certain corporate functional expenses.

Non-allocated operating and administrative costs include functional expenses that support the entire organization such as administration, finance, legal, and human resources, expenses associated with strategic developments, acquisition-related intangible asset amortization, and other events that are not indicative of operating trends. We exclude such amounts from divisional income to allow management to evaluate and understand divisional operating trends without the effects of such items.

Net Revenue

	Years Ended September 30				Percentage Change
								Constant
(Dollars in millions)	2015		2014		As Reported			Currency
Revenue:
Capital sales	$	1,604.5	$	1,301.4		23.3			29.9
Rental revenue		383.7		384.7		(0.3	)		1.7
Total Revenue	$	1,988.2	$	1,686.1		17.9			23.5

Capital sales increased, due primarily to the impact of the Trumpf and Welch Allyn acquisitions which added over $225 million in sales. Higher patient support systems and clinical workflow solutions sales in our North America segment and organic sales increases in our Surgical and Respiratory Care segment also contributed to the increase, partially offset by lower sales in our International segment. Order trends in our North America segment show significant growth compared to prior periods, while orders in our International segment continue to be volatile due to a higher dependency on large tenders and the effects of significant economic uncertainty in Europe and the Middle East. Excluding the impact of the Trumpf and Welch Allyn acquisitions, sales increased 4.5 percent on a reported basis and 8.9 percent on a constant currency basis.

Rental revenue decreased slightly from the prior year as lower revenue in the International segment was offset by increases in the North America and Surgical and Respiratory Care segments. The North America increase was driven by improving volumes in the last half of the year due to recent contract wins, which more than offset the decline from the discontinuance of third-party payer therapy product rentals. International rental revenue was down sharply on a reported basis as a result of foreign currency fluctuations, and down on a constant currency basis by 4.3 percent.

Gross Profit

	Years Ended September 30
							Percentage
(Dollars in millions)	2015			2014			Change
Gross Profit
Capital sales	$	683.3		$	571.2			19.6
Percent of Related Revenue		42.6	%		43.9	%

Rental revenue	$	197.0		$	208.7			(5.6	)
Percent of Related Revenue		51.3	%		54.3	%

Total Gross Profit	$	880.3		$	779.9			12.9
Percent of Related Revenue		44.3	%		46.3	%

Capital gross profit increased by $112.1 million on higher revenue while gross margin decreased 130 basis points. The gross margin decrease is primarily driven by the impact of dilutive Trumpf margins, incremental field corrective action charges of $6.2 million, and the prior year recognition of a $2.8 million benefit from a change in our employee benefits program. Margins were also negatively impacted by the inventory step-up associated with purchase accounting for acquisitions, which was $16.2 million in 2015, compared with $6.0 million in 2014. Excluding the aforementioned items, organic capital margins increased 60 basis points as the impacts of pricing pressure were more than offset by portfolio mix.

Rental gross profit decreased $11.7 million and gross margin decreased 300 basis points. The margin decrease is partially due to the prior year recognition of a $2.8 million benefit from the employee benefit program change referenced earlier, in addition to continued pricing pressure and higher field service costs and depreciation on the incremental capital expenditures necessary to serve recent contract wins in North America.

Other

	Years Ended September 30
							Percentage
(Dollars in millions)	2015			2014			Change

Research and development expenses	$	91.8		$	71.9			27.7
Percent of Total Revenue		4.6	%		4.3	%

Selling and administrative expenses	$	664.2		$	548.3			21.1
Percent of Total Revenue		33.4	%		32.5	%

Special charges	$	41.2		$	37.1			11.1

Interest expense	$	(18.4	)	$	(9.8	)		87.8
Investment income and other, net	$	0.4		$	2.4			(83.3	)

Research and development expenses increased 27.7 percent primarily due to the addition of Trumpf and Welch Allyn spending, accompanied by additional investment in organic product development initiatives, as well as the prior year benefit of $1.2 million associated with the aforementioned employee benefit program change.

Selling and administrative expenses as a percent of total revenue increased 90 basis points. Selling and administrative expenses include acquisition and integration costs, acquisition-related intangible asset amortization, FDA remediation expenses, a supplemental stock compensation charge, and litigation settlements and expenses that totaled $90.0 million in 2015, compared with $43.6 in the prior year. Excluding these items, as well as the favorable impact of the employee benefit program change of $6.6 million recorded in 2014, selling and administrative expenses decreased 140 basis points as a percentage of revenue. The improvements were due to operating leverage associated with higher revenue and ongoing cost control initiatives.

Welch Allyn Integration

In conjunction with the acquisition of Welch Allyn in September 2015, we eliminated approximately 80 positions, primarily in Welch Allyn’s corporate support and administrative functions, which became redundant as a result of merging into Hill-Rom. We recorded $14.4 million of special charges in conjunction with this action in fiscal 2015 for severance and employee benefits provided to affected employees. Many of the affected employees must continue service for a specified period of time after completion of the merger in order to receive the severance benefits offered. As a result, additional charges related to this action of approximately $3 million will be recorded in fiscal 2016 until those service obligations are fulfilled. Cash payments related to this action will continue throughout fiscal 2016.

Pension Settlement Charge

As disclosed in Note 6, we offered lump sum settlements to all terminated vested participants in our domestic master defined benefit retirement plan, which resulted in a settlement charge of $9.6 million. This charge was recorded as a component of special charges in fiscal 2015.

Site Consolidation

In the third quarter of fiscal 2015, we initiated a plan to streamline our operations and simplify our supply chain by consolidating certain manufacturing and distribution operations. As part of this action, we announced the closure of sites in Redditch, England and Charleston, South Carolina. Upon closure, each site’s operations will either be relocated to other existing Company facilities or outsourced to third-party suppliers. For the year ended September 30, 2015, we recorded severance and benefit charges of $2.7 million for approximately 160 employees to be displaced by the closures, as well as $1.8 million of other related costs. We expect to incur approximately $3 million of additional charges in the first half of fiscal 2016 for personnel costs and site closure expenses related to this action until the closures are complete. Cash payments related to these actions will continue throughout fiscal 2016.

Global Restructuring Program

During the second quarter of fiscal 2014, we announced a global restructuring program focused on improving our cost structure. This action included early retirement and reduction in force programs that eliminated over 200 net positions, primarily in the U.S., where the action was substantially completed in fiscal 2014 with cash expenditures continuing during fiscal 2015. The program also included a reduction of our European manufacturing capacity and a streamlining of global operations by, among other things, executing a back office process transformation program in Europe. The restructuring in Europe is in process and has resulted in severance and benefit charges of $6.0 million for the year ended September 30, 2015, as well as other costs of $7.2 million related to legal and professional fees, temporary labor, project management, and other administrative functions. In the second quarter of fiscal 2015, we also reversed $0.5 million of previously recorded severance and benefit charges due to certain plan participants declining continuing healthcare coverage.

Since the inception of the global restructuring program through September 30, 2015, we have recognized aggregate special charges of $37.6 million, which are recorded in both fiscal 2014 and 2015. Charges of $24.9 million were recorded in the year ended September 30, 2014, net of reversals. We expect to incur $5 to $10 million of additional European restructuring costs through the completion of the program.

Discontinuance of Third-Party Payer Rentals

Also during the second quarter of fiscal 2014, we initiated a plan to discontinue third-party payer rentals of therapy products occurring primarily in home care settings. Special charges recorded for this action included a $7.7 million non-cash tangible asset impairment charge, a $2.0 million charge for severance and other benefits for approximately 70 eliminated positions, and $1.6 million in other related costs, net of a reversal of $0.2 million which was recorded in the third quarter of fiscal 2014. This action is substantially complete.

Batesville Manufacturing Early Retirement Program

During the first quarter of fiscal 2014, we initiated a plan to improve our cost structure and streamline our organization by offering an early retirement program to certain manufacturing employees in our Batesville, Indiana plant, meeting specific eligibility requirements, and other minor reduction in force actions. These programs resulted in the elimination of approximately 35 positions and required recognition of a special charge of approximately $1 million for lump sum payments under the program and severance and other benefits provided to other affected employees. This action was substantially complete by the end of the second quarter of fiscal 2014.

Interest expense was higher compared with the prior year due to incremental borrowings made in connection with the Trumpf and Welch Allyn acquisitions.

GAAP and Adjusted Earnings

Income before income taxes, income tax expense, and earnings attributable to common shareholders per diluted share are summarized in the table below. GAAP amounts are adjusted for certain items to aid management in evaluating the performance of the business.

	Years Ended September 30
	2015												2014
(Dollars in millions, except for per share amounts)	Income Before Income Taxes			Income Tax Expense			NCI			Diluted EPS			Income Before Income Taxes			Income Tax Expense			Diluted EPS1

GAAP Earnings	$	65.1		$	18.3		$	(0.9	)	$	0.82		$	115.2		$	54.6		$	1.04
Adjustments:
Acquisition and integration costs		62.8			18.0			-			0.76			16.3			5.0			0.19
Acquisition-related intangible asset amortization		34.1			9.8			-			0.42			28.8			8.7			0.34
Employee benefits change		-			-			-			-			(13.4	)		(5.1	)		(0.14	)
FDA remediation expenses		3.8			1.2			-			0.04			4.5			1.7			0.05
Field corrective actions		4.5			1.4			-			0.05			(1.7	)		(0.6	)		(0.02	)
Litigation settlements and expenses		(0.6	)		(0.2	)		-			(0.01	)		-			-			-
Special charges		41.2			10.7			-			0.52			37.1			10.9			0.45
Supplemental stock compensation charge		6.1			2.2			-			0.07			-			-			-
Foreign valuation allowance and acquisition dividend tax		-			1.9			-			(0.03	)		-			(20.3	)		0.35

Adjusted Earnings	$	217.0		$	63.3		$	(0.9	)	$	2.64		$	186.8		$	54.9		$	2.25

1 Total does not add due to rounding

NCI = Net loss attributable to noncontrolling interests

The effective tax rate for fiscal 2015 was 28.1 percent compared to 47.4 percent in the prior year. The effective tax rate for fiscal 2015 is lower than fiscal 2014 due primarily to the $19.6 million of tax expense recognized in the prior year to establish a valuation allowance on the net deferred tax assets in France, primarily net operating losses. This compares to $3.3 million of tax benefits in the current year primarily related to the reversal of previously recorded valuation allowances in Australia and the one-time catch-up tax benefit from the reinstatement of the research and development tax credit.

On December 19, 2014, the Tax Increase Prevention Act of 2014 (the Tax Act) was signed into law. The Tax Act retroactively extended the research and development tax credit for one year beginning January 1, 2014 through December 31, 2014. This credit had previously expired effective December 31, 2013. The reinstatement of the research and development tax credit favorably impacted the effective tax rate for fiscal 2015 by approximately $2 million through a combination of a one-time catch-up adjustment from the reinstatement of the credit recorded in our first quarter of fiscal 2015 and the inclusion of the limited current year research credit into the fiscal 2015 effective tax rate.

The adjusted effective tax rates were 29.2 and 29.4 percent for fiscal years 2015 and 2014.

Net income attributable to common shareholders was $47.7 million in fiscal 2015 compared to $60.6 million in the prior year. On an adjusted basis, net income attributable to common shareholders increased $22.7 million, or 17.2 percent compared with the prior year. Diluted earnings per share decreased 21.2 percent on a reported basis and increased 17.3 percent on an adjusted basis over the same period.

Business Segment Results of Operations

	Years Ended September 30				Percentage Change
								Constant
(Dollars in millions)	2015		2014		As Reported			Currency
Revenue:
North America	$	1,002.0	$	888.9		12.7			13.4
Surgical and Respiratory Care		506.6		301.6		68.0			78.3
International		429.4		495.6		(13.4	)		(2.1	)
Welch Allyn1		50.2		-		N/M			N/M
Total revenue	$	1,988.2	$	1,686.1		17.9			23.5

Divisional income:
North America	$	204.1	$	165.0		23.7
Surgical and Respiratory Care		80.5		68.6		17.3
International		12.8		24.9		(48.6	)

1 Welch Allyn is not considered a reportable segment but is presented as a reconciling item to total consolidated revenue.

N/M = Not meaningful

North America

North America revenue increased 12.7 percent. Capital sales were up 17.2 percent due to higher sales of patient support systems and clinical workflow solutions products. Rental revenue increased by 2.4 percent as improved volumes from recent contract wins were partially offset by the discontinuance of third-party payer therapy product rentals in the second half of fiscal 2014, along with continued pricing pressure. Excluding the effects of the discontinuance of third-party payer therapy product rentals, rental revenue increased 7.6 percent compared with the prior year.

North America divisional income increased 23.7 percent due primarily to increased revenue and the resulting increase in gross profit. Capital margins increased 60 basis points compared with the prior year primarily due to favorable changes in product mix. Rental margins declined as a result of continued pricing pressure, along with our increased investment in additional capacity to meet the higher volumes in fiscal 2015 from recent contract wins. Divisional income also benefited from improved leverage of operating expenses on higher revenue.

Surgical and Respiratory Care

Surgical and Respiratory Care revenue increased 68.0 percent on a reported basis, and 78.3 percent on a constant currency basis. Excluding the impact of the Trumpf acquisition, revenue increased 3.2 percent on a reported basis driven by higher respiratory and surgical sales. Capital sales increased 84.8 percent primarily due to Trumpf, while rental revenue in respiratory care was relatively flat year over year.

Surgical and Respiratory Care divisional income increased 17.3 percent due to the incremental gross profit from Trumpf, but at a lower rate given the lower Trumpf margins. Divisional income excluding acquisitions was impacted by increased investments in research and development and sales channel to support growth initiatives.

International

International revenue decreased 13.4 percent on a reported basis, and 2.1 percent on a constant currency basis. International capital sales decreased 12.9 percent, or 1.8 percent on a constant currency basis due primarily to weaker sales in Europe, the Middle East, and Latin America. Sales in this segment continue to face significant volatility as result of continued economic uncertainty in various regions around the world. International rental revenue decreased 16.8 percent on a reported basis and 4.3 percent on a constant currency basis due to continued volume and pricing pressures.

International divisional income decreased 48.6 percent due primarily to lower revenue and the resulting decline in gross profit, partially offset by lower selling and administrative expenses, along with some unfavorable foreign currency impact. Capital margins declined 70 basis points from the prior year. Rental margins decreased due to reduced leverage of fleet and field service infrastructure as revenue has declined more quickly than our field service costs, along with continued pricing pressure.

Fiscal Year Ended September 30, 2014 Compared to Fiscal Year Ended September 30, 2013

Consolidated Results of Operations

Net Revenue

	Years Ended September 30				Percentage Change
								Constant
(Dollars in millions)	2014		2013		As Reported			Currency
Revenue:
Capital sales	$	1,301.4	$	1,308.3		(0.5	)		(1.1	)
Rental revenue		384.7		407.9		(5.7	)		(6.0	)
Total Revenue	$	1,686.1	$	1,716.2		(1.8	)		(2.2	)

Capital sales decreased, due primarily to lower patient support system sales in our North America and International segments, which were partially offset by sales increases within the Surgical and Respiratory Care segment. Surgical and Respiratory Care sales increased due to strong organic growth and the acquisition of Trumpf in the fourth quarter of fiscal 2014. In both our North America and International segments, capital order trends continue to be volatile as our customers continue to closely watch their expenditures, looking for clarity in the evolving healthcare marketplace.

Rental revenue declined in the North America segment primarily due to lower volumes, continued pricing pressure, and our discontinuance of third-party payer therapy product rentals. Surgical and Respiratory Care rental revenue was flat for fiscal 2014, with international rental revenue also flat on a constant currency basis.

Gross Profit

	Years Ended September 30
							Percentage
(Dollars in millions)	2014			2013			Change
Gross Profit
Capital sales	$	571.2		$	560.5			1.9
Percent of Related Revenue		43.9	%		42.8	%

Rental revenue	$	208.7		$	219.8			(5.1	)
Percent of Related Revenue		54.3	%		53.9	%

Total Gross Profit	$	779.9		$	780.3			(0.1	)
Percent of Related Revenue		46.3	%		45.5	%

Capital gross profit and gross margin increased by $10.7 million and 110 basis points during fiscal 2014. The gross profit increase, despite somewhat lower revenue, comes from improved gross margin rates, driven by the effects of the items outlined below. Gross margin was favorably impacted by reversals of $1.7 million associated with previously recorded field corrective actions compared to charges of $12.2 million in the prior year. The recognition of a $2.8 million benefit from a change in our employee benefit program also favorably impacted gross margin in fiscal 2014. Further, the margin increase was partially offset by $6.0 million of inventory step-up associated with fiscal 2014 acquisitions compared to $2.5 million of inventory step-up recognized in fiscal 2013 resulting from the Aspen Surgical acquisition. In addition, we experienced improved margins in our International segment and in certain Surgical and Respiratory Care product lines, but these were offset by weaker margins in our North America segment and the impact of the Trumpf acquisition.

Rental gross profit decreased $11.1 million, but gross margin increased 40 basis points for fiscal 2014. The margin increase is due to the recognition of a $2.8 million benefit from an employee benefit program change, coupled with lower depreciation expense and field service costs.

Other

	Years Ended September 30
							Percentage
(Dollars in millions)	2014			2013			Change

Research and development expenses	$	71.9		$	70.2			2.4
Percent of Total Revenue		4.3	%		4.1	%

Selling and administrative expenses	$	548.3		$	549.5			(0.2	)
Percent of Total Revenue		32.5	%		32.0	%

Special charges	$	37.1		$	5.7			550.9

Interest expense	$	(9.8	)	$	(9.5	)		3.2
Investment income and other, net	$	2.4		$	(1.4	)		(27.4	)

Research and development expenses increased 2.4 percent, net of a $1.2 million benefit associated with the employee benefit program change. The increase in expenses is due to higher spending on new product development initiatives and incremental spend related to the recent Trumpf acquisition. Selling and administrative expenses decreased $1.2 million. Selling and administrative expenses were favorably impacted by various cost control initiatives previously implemented, lower variable compensation expenses, and an employee benefit adjustment of $6.6 million referenced earlier. This decrease was partially offset by $10.3 million of acquisition and integration costs compared to $6.3 million in fiscal 2013 and an incremental $8.3 million of Trumpf-related selling and administrative expenses, along with higher medical device tax of $1.6 million. Despite the lower overall spend, selling and administrative expenses were up slightly as a percentage of revenue on the lower revenue.

During the second quarter of fiscal 2014, we announced a global restructuring program to improve our cost structure. As part of this program, we offered an early retirement program to certain U.S. employees. Through this program, other reduction in force actions, and the elimination of certain contractor and open positions, we eliminated over 200 net positions primarily in the U.S. This portion of the program resulted in a special charge of $11.0 million related to severance and other benefits to be provided to affected employees. We also recorded a $3.2 million charge related to special pension and postretirement healthcare plan benefits granted to employees eligible for the early retirement program. The severance and other benefits and postretirement benefit charge balances reflect a $1.3 million reclassification compared to the original charge recorded in the second quarter of 2014. Subsequently during the fiscal year, we reversed $0.7 million of the severance and other benefits accrual due to certain plan participants declining continuing healthcare coverage, as well as other changes in circumstances affecting the estimated future payments to be made. This portion of the restructuring program is substantially complete, but cash expenditures will continue into fiscal year 2015. The global restructuring program is also reducing our European manufacturing capacity and streamlining our global operations by, among other things, executing a back office process transformation program in Europe. The restructuring in Europe is in process and has resulted in year to date severance and benefit charges of $6.8 million. We have also incurred other costs associated with the global restructuring program of $4.6 million related to legal and professional fees, temporary labor, project management, and other administrative functions. All these actions are anticipated to yield annual cost savings of approximately $30 million after full implementation.

Also during the second quarter of fiscal 2014, we initiated a plan to discontinue third-party payer rentals of therapy products occurring primarily in home care settings. We intend to continue renting these products to facilities and customers who are billed directly for the product. Due to this action, we recorded a non-cash impairment charge of $7.7 million for certain tangible assets for which the carrying values could not be fully recovered as a result of this strategic decision. We also eliminated approximately 70 positions and recognized a special charge of $2.0 million related to severance and other benefits for affected employees and $1.8 million in other related costs. Over the remainder of the fiscal year, we reversed $0.2 million of the other related costs as original estimates charged were excessive. The exit of this business was substantially complete by the first quarter of fiscal 2015, but certain cash expenditures extended through fiscal 2015.

During the second quarter of fiscal 2013, we announced a plan to improve our cost structure and streamline our organization by eliminating in excess of 100 positions across the Company, roughly half of which were contract and open positions. This resulted in a special charge of $1.7 million related to severance and other benefits to be provided to affected employees. We also incurred a contract termination charge of $0.6 million, a non-cash asset impairment charge of $0.2 million related to a product discontinuance action and $1.0 million in other related costs. We reversed $0.6 million of a fiscal 2012 severance and other benefits charge that was determined to be excessive during the second quarter of fiscal 2013. During the third and fourth quarters of fiscal 2013, we continued actions under the previously announced plan and incurred charges of $0.8 million and $2.0 million, respectively. These actions and the related cash expenditures are complete.

Interest expense was higher for fiscal 2014 due to incremental borrowings made in connection with acquisitions.

GAAP and Adjusted Earnings

	Years Ended September 30
	2014									2013
(Dollars in millions, except for per share amounts)	Income Before Income Taxes			Income Tax Expense			Diluted EPS1			Income Before Income Taxes		Income Tax Expense		Diluted EPS

GAAP Earnings	$	115.2		$	54.6		$	1.04		$	144.0	$	39.0	$	1.74
Adjustments:
Acquisition and integration costs		16.3			5.0			0.19			8.8		2.9		0.10
Acquisition-related intangible asset amortization		28.8			8.7			0.34			27.7		10.1		0.29
Field corrective actions		(1.7	)		(0.6	)		(0.02	)		12.2		4.0		0.14
Employee benefits change		(13.4	)		(5.1	)		(0.14	)		-		-		-
FDA remediation expenses		4.5			1.7			0.05			6.1		2.3		0.06
Litigation charge		-			-			-			0.5		0.5		-
Special charges		37.1			10.9			0.45			5.7		1.8		0.06
Foreign valuation allowance and acquisition dividend tax		-			(20.3	)		0.35			-		-		-
International tax reorganization		-			-			-			-		0.8		(0.01	)

Adjusted Earnings	$	186.8		$	54.9		$	2.25		$	205.0	$	61.4	$	2.38

1 Total does not add due to rounding

The tax rate for fiscal 2014 was 47.4 percent compared to 27.1 percent in the prior year. The effective tax rate for fiscal 2014 is higher than fiscal 2013 due primarily to the tax expense recognized in the second quarter of this year to establish a full valuation allowance in France of $19.6 million related to its net deferred tax assets, primarily net operating losses. The effective rate for 2013 was favorably impacted by $5.4 million of period tax benefits consisting primarily of the one-time “catch-up” for the reinstatement of the research and development tax credit, the release of various tax reserves upon statute expiration and the favorable impact of tax law changes in select countries.

The adjusted effective tax rates were 29.4 and 30.0 percent for fiscal years 2014 and 2013.

Net income was $60.6 million in fiscal 2014 compared to $105.0 million in the prior year period, a decrease of 42.3 percent. On an adjusted basis, net income decreased $11.7 million, or 8.1 percent in 2014 compared to 2013. Diluted earnings per share decreased 40.2 percent on a reported basis and 5.5 percent on an adjusted basis over the same period.

Business Segment Results of Operations

	Years Ended September 30				Percentage Change
								Constant
(Dollars in millions)	2014		2013		As Reported			Currency
Revenue:
North America	$	888.9	$	958.3		(7.2	)		(6.9	)
Surgical and Respiratory Care		301.6		245.8		22.7			22.0
International		495.6		512.1		(3.2	)		(5.1	)
Total revenue	$	1,686.1	$	1,716.2		(1.8	)		(2.2	)

Divisional income:
North America	$	165.0	$	201.7		(18.2	)
Surgical and Respiratory Care		68.6		56.8		20.8
International		24.9		33.5		(25.7	)

North America

North America revenue decreased 7.2 percent. Capital sales were down 6.6 percent related primarily to volume declines in our patient support systems sales, which were down in a challenging and uncertain North American healthcare environment where there is continued pressure on capital spending. Rental revenue declined by 8.6 percent primarily due to lower volumes, continued pricing pressure, and our discontinuance of third-party payer therapy product rentals.

North America divisional income decreased due primarily to lower revenue and the resulting decline in gross profit. The lower gross profit and somewhat higher research and development expenses were only partially offset by lower operating expenses, most notably lower selling and variable compensation costs, along with benefits from previously implemented restructuring programs. Capital margins were down primarily on lower volumes and unfavorable product mix. Rental margins were down as the impact of the lower revenue could not be fully offset by lower depreciation expense and reduced field service costs.

Surgical and Respiratory Care

Surgical and Respiratory Care revenue increased 22.7 percent. Capital sales increased 30.1 percent related to higher sales volumes primarily in our surgical businesses and the impact of the Trumpf acquisition. Excluding the Trumpf acquisition, capital sales increased 8.9 percent. Rental revenue increased slightly on improved volumes, offsetting continued pricing pressure.

Surgical and Respiratory Care divisional income increased on the higher sales volumes and the resulting higher gross profit, despite somewhat lower gross margins due to the dilutive impact of the Trumpf acquisition. The higher gross profit was partially offset by increased research and development and other operating expense spending, generally driven by the Trumpf acquisition and higher corporate expense allocations of $2.8 million. Overall, Trumpf contributed favorably to the improvement in divisional income.

International

International revenue decreased 3.2 percent. International capital sales decreased 4 percent, or 5.7 percent on a constant currency basis. These declines are due primarily to weaker sales in the Middle East and Europe. Sales in the Middle East region tend to fluctuate based on the timing of large tender deals, while Europe’s healthcare environment continues to face pressure on capital spending similar to that in North America. Rental revenue increased 3.9 percent and was flat on a constant currency basis.

International divisional income decreased 25.7 percent. Despite lower revenue, overall gross profit was only down slightly as higher margins on improved product mix offset most of the impacts of lower volumes. However, higher operating expenses were driven by increased research and development spending and higher operating costs associated with the employee related investments in developing markets and higher corporate allocations of $1.5 million.

LIQUIDITY AND CAPITAL RESOURCES

	Years Ended September 30
(Dollars in millions)	2015			2014			2013
Cash Flows Provided By (Used In):
Operating activities	$	213.8		$	210.3		$	263.2
Investing activities		(1,756.4	)		(294.5	)		(58.6	)
Financing activities		1,642.7			63.8			(161.5	)
Effect of exchange rate changes on cash		(6.6	)		(7.7	)		-
Increase (Decrease) in Cash and Cash Equivalents	$	93.5		$	(28.1	)	$	43.1

Net cash flows from operating activities and selected borrowings have represented our primary sources of funds for growth of the business, including capital expenditures and acquisitions. Our financing agreements contain certain restrictions relating to dividend payments, working capital or additional unsecured indebtedness, and stronger limitations with respect to secured indebtedness. Our debt agreements also contain no credit rating triggers. Credit rating changes can, however, impact the cost of borrowings under our credit facility described below and any potential future borrowings.

Operating Activities

Cash provided by operating activities during fiscal 2015 was driven by net income, adjusted up for non-cash expenses including depreciation, amortization, stock compensation, and a pension settlement charge, offset by the provision for deferred income taxes and by changes in working capital. Cash provided by operating activities increased 1.7 percent from fiscal 2014, driven by improved working capital management, which more than offset lower net income, as adjusted for non-cash transactions.

Cash provided by operating activities during fiscal 2014 was driven primarily by net income, adjusted for the non-cash effects of depreciation and amortization, stock compensation, an impairment loss, and the provision for deferred taxes. The collection of receivables outstanding as of our previous year end and subsequent to the Trumpf acquisition date also contributed to operating cash flow. These sources of cash were only partially offset by other working capital activities. Cash provided by operating activities was down compared to the prior year on lower net income and lower net cash provided by working capital activities, primarily associated with lower receivable collections. These reductions were partially offset by lower tax payments in fiscal 2014.

Cash provided by operating activities during fiscal 2013 was driven by net income and improved working capital, including strong collections on receivables, adjusted by non-cash expenses related to depreciation and amortization, stock compensation, and deferred taxes.

Investing Activities

Cash used for investing activities during 2015 consisted mainly of capital expenditures and payments for acquisitions. Capital expenditures increased from the prior year due to investments in our rental fleet to support volume increases from recent contract wins. Payments for acquisitions increased due to the acquisition of Welch Allyn in September 2015.

Cash used for investing activities during 2014 consisted mainly of capital expenditures and payments for acquisitions. Capital expenditures decreased compared to the prior year, but payments for acquisitions increased primarily due to the purchases of Virtus and Trumpf.

Cash used for investing activities during fiscal 2013 was driven by capital expenditures.

Financing Activities

Cash provided by financing activities during fiscal 2015 consisted mainly of new borrowings which were used to fund the Welch Allyn acquisition. Borrowings under our prior credit facility were also used to fund the higher rental fleet investment previously discussed. This was offset by treasury stock acquired, dividend payments, and payments to retire previously outstanding debt as this was replaced with the financing obtained in conjunction with the Welch Allyn acquisition. During the year ended September 30, 2015, we increased our dividends paid by $0.0375 per share compared to the prior year. This higher utilization of cash compared to the prior year period was more than offset by lower purchases of treasury stock and our borrowing activity.

Cash provided by financing activities during fiscal 2014 consisted mainly of borrowings on our existing credit facility which were used to fund acquisition activity. This was offset by treasury stock acquired of $71.8 million, payments on outstanding debt of $95.2 million, and dividend payments of $34.2 million. During the year ended September 30, 2014, we increased our dividends paid by $0.07 per share compared to the prior year. This higher utilization of cash was more than offset by our borrowing activity, lower purchases of treasury stock, and higher proceeds on the exercise of stock options.

Cash used in financing activities in fiscal 2013 primarily related to treasury stock acquired of $94.0 million, revolving and long-term debt payments of $45.1 million, and dividend payments to our shareholders of $31.2 million. These uses of cash were partially offset by cash proceeds from stock option exercises and other stock issuances under our employee stock purchase plan.

The treasury stock acquired balances referenced above refer to purchases in the open market and the repurchases of shares associated with employee payroll tax withholdings for restricted and deferred stock distributions.

Our debt-to-capital ratio was 65.9, 37.8, and 26.3 percent at September 30, 2015, 2014 and 2013. The increase in fiscal 2015 was attributable to the funding of the Welch Allyn acquisition, including the new borrowings obtained. Shareholders’ equity was also negatively impacted by treasury stock acquired and the other comprehensive losses associated with foreign currency translation. The increase in fiscal 2014 was attributable to increased borrowings used to fund the Trumpf acquisition and a decrease in shareholders’ equity due to treasury stock acquired and other comprehensive losses recognized associated with foreign currency translation and an increase in our net pension obligation.

Other Liquidity Matters

In September 2015, the Company entered into four new credit facilities for purposes of financing the Welch Allyn acquisition as well as refinancing our previously outstanding revolving credit facility. These new facilities consisted of the following:

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

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

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

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

The TLA Facility, TLB Facility, and Revolving Credit Facility (collectively, the “Senior Secured Credit Facilities”) all bear interest at variable rates which are currently less than 4.0 percent. These interest rates are based primarily on the London Interbank Offered Rate (LIBOR), but under certain conditions could also be based on the U.S. Federal Funds Rate or the U.S. Prime Rate, at the Company’s option. The TLA Facility and TLB Facility have required principal payments. The TLA Facility requires minimum principal payments of $50.0 million in fiscal 2016, $75.0 million in fiscal 2017, and $100.0 million annually thereafter, with the remaining unpaid principal balance due at maturity. The TLB Facility requires annual principal payments of $8.0 million with the remaining unpaid principal balance due at maturity. We will be able to voluntarily prepay outstanding loans under the TLA Facility and the TLB Facility at any time.

At September 30, 2015, there were no borrowings on the Revolving Credit Facility, but available borrowing capacity was $490.9 million after giving effect to $9.1 million of outstanding standby letters of credit. At September 30, 2014, there were $42.4 million of outstanding standby letters of credit under our previous revolving credit agreements, $39.8 million of which pertained to one standby letter of credit issued in connection with the Trumpf acquisition, which expired in January 2015. The availability of borrowings under our Revolving Credit Facility is subject to our ability at the time of borrowing to meet certain specified conditions, including compliance with covenants contained in the governing credit agreement.

The Senior Secured Credit Facilities are held with a syndicate of banks, which includes over 20 institutions. The general corporate assets of the Company and its subsidiaries collateralize these obligations. The credit agreement governing these facilities contains financial covenants which specify a maximum secured net leverage ratio and a minimum interest coverage ratio, as such terms are defined in the credit agreement. These financial covenants are measured at the end of each fiscal quarter, with the first measurement date on December 31, 2015. The required ratios vary through December 31, 2019 providing a gradually decreasing maximum secured net leverage ratio and a gradually increasing minimum interest coverage ratio, as set forth in the table below:

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

The Senior Notes bear interest at a fixed rate of 5.75 percent annually. These notes were issued at par in a private placement offering and are not registered on any public market. All of the Senior Notes are outstanding as of September 30, 2015. We are not required to make any mandatory redemption or sinking fund payments with respect to the Notes, other than in certain circumstances such as a change in control or material sale of assets. We may redeem the notes prior to maturity, but doing so prior to September 1, 2021 would require payment of a premium on any amounts redeemed, the amount of which varies based on the timing of the redemption. The indenture governing the Senior Notes contains certain covenants which impose limitations on the amount of dividends we may pay and the amount of common shares we may repurchase in the open market, but we do not expect these covenants to affect our current dividend policy or open share repurchase program. The terms of this indenture also impose certain restrictions on the amount and type of additional indebtedness we may obtain in the future, as well as the types of liens and guarantees we may provide.

We are in compliance with all applicable financial covenants as of September 30, 2015 and November 12, 2015.

We also have $43.4 million of unsecured debentures outstanding at various fixed interest rates as of September 30, 2015, classified as long-term in the Consolidated Balance Sheet.

Our primary pension plan invests in a variety of equity and debt securities. At September 30, 2015, our latest measurement date, our pension plans were underfunded by approximately $96.4 million. Based on our current funded status, we currently do not anticipate any contributions to our primary pension plan in fiscal 2016.

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

On September 8, 2015, we completed the acquisition of Welch Allyn for a purchase price of $2.1 billion, including the value of 8.1 million shares of common stock which were issued to the seller as consideration for the transaction. The cash portion of the purchase price was funded with the new credit facilities previously discussed. On August 1, 2014, we completed the acquisition of Trumpf for $223.6 million (net of cash acquired). We funded this transaction with a combination of cash on hand and borrowings under our prior revolving credit facility.

Over the long term, we intend to continue to pursue inorganic growth in certain areas of our business, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted.

During fiscal 2015, we purchased 1.2 million shares of our common stock for $54.8 million in the open market, leaving 64.7 million available for purchase. The common stock was acquired under a $190 million share repurchase program approved by the Board of Directors in September 2013, which does not have an expiration date. There are no plans to terminate this program in the future, but with the acquisition of Welch Allyn and the increased borrowings obtained to finance the transaction, we will suspend our share repurchase activity temporarily to focus on deleveraging. Repurchases may be made on the open market or via private transactions, and are used for general business purposes.

We believe that cash on hand and generated from operations, along with amounts available under our credit facility, will be sufficient to fund operations, working capital needs, capital expenditure requirements, and financing obligations for at least the next twelve months. However, disruption and volatility in the credit markets could impede our access to capital. Our $500.0 million revolving credit facility is with a syndicate of banks, which we believe reduces our exposure to any one institution and would still leave us with significant borrowing capacity in the event that any one of the institutions within the group is unable to comply with the terms of our agreement.

As of September 30, 2015, approximately 49 percent of the Company’s cash and cash equivalents are held by our subsidiaries in foreign countries. Portions of this may be subject to U.S. income taxation if repatriated to the U.S. However, cash and cash equivalents held by foreign subsidiaries are largely used for operating needs outside the U.S. Therefore, we have no need to repatriate this cash for other uses. We believe that cash on hand and generated from operations, along with amounts available under our credit facility, will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations.

Credit Ratings

During fiscal 2015, Standard and Poor’s Rating Services and Moody’s Investor Service issued credit ratings for Hill-Rom of BB+ and Ba2, respectively, with stable outlooks.

Other Uses of Cash

We expect capital spending in 2016 to be approximately $110 to $120 million. Capital spending will be monitored and controlled as the year progresses.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

Contractual Obligations, Contingent Liabilities and Commitments

To give a clear picture of matters potentially impacting our liquidity position, the following table outlines our contractual obligations as of September 30, 2015:

	Payments Due by Period
			Less Than			1 - 3		3 - 5	After 5
(Dollars in millions)	Total		1 Year			Years		Years	Years
Contractual Obligations
Long-term debt obligations	$	2,272.3	$	58.0	$	194.3	$	791.2	$	1,228.8
Interest payments relating to long-term debt (1)		561.3		78.7		166.2		164.0		152.4
Operating lease obligations		73.8		28.2		30.5		9.5		5.6
Pension and postretirement
health care benefit funding (2)		31.7		2.9		6.0		6.3		16.5
Purchase obligations (3)		174.8		132.0		31.3		11.2		0.3
Other long-term liabilities (4)		38.5		-		15.4		15.2		7.9
Total contractual cash obligations	$	3,152.4	$	299.8	$	443.7	$	997.4	$	1,411.5

(1)	Interest payments on our long-term debt are projected based on the contractual rates of remaining debt securities.

(2)	Based on our funded status as of September 30, 2015, we currently do not anticipate any further contributions to our master pension plan in fiscal 2016.

(3)

Purchase obligations represent contractual obligations under various take-or-pay arrangements executed in the normal course of business. These commitments represent future purchases in line with expected usage to obtain favorable pricing. Also included are obligations arising from purchase orders for which we have made firm commitments. As a result, we believe that the purchase obligations portion of our contractual obligations is substantially those obligations for which we are certain to pay, regardless of future facts and circumstances. We expect to fund purchase obligations with operating cash flows and current cash balances.

(4)	Other long-term liabilities include deferred compensation arrangements, self-insurance reserves, and other various liabilities.

We also had commercial commitments related to standby letters of credit at September 30, 2015 of $9.1 million.

In addition to the contractual obligations and commercial commitments disclosed above, we also have a variety of other agreements related to the procurement of materials and services and other commitments. While many of these agreements are long-term supply agreements, some of which are exclusive supply or complete requirements-based contracts, we are not committed under these agreements to accept or pay for requirements which are not needed to meet production needs. Also, we have an additional $5.8 million of other liabilities as of September 30, 2015, which represent uncertain tax positions for which it is not possible to determine in which future period the tax liability might be settled.

In conjunction with our acquisition and divestiture activities, we have entered into certain guarantees and indemnifications of performance, as well as, non-competition agreements for varying periods of time. Potential losses under the indemnifications are generally limited to a portion of the original transaction price, or to other lesser specific dollar amounts for certain provisions. Guarantees and indemnifications with respect to acquisition and divestiture activities, if triggered, could have a materially adverse impact on our financial condition and results of operations.

We are also subject to potential losses from adverse litigation results that are not accounted for by a self-insurance or other reserves; however, such potential losses are not quantifiable at this time, and may never occur.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our accounting policies, including those described below, require management to make significant estimates and assumptions using information available at the time the estimates are made. Such estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenue and expenses. If future experience differs materially from these estimates and assumptions, results of operations and financial condition could be affected. Our most critical accounting policies are described below.

Revenue Recognition

Net revenue reflects gross revenue less sales discounts and allowances and customer returns for product sales and rental revenue reserves. Revenue is evaluated under the following criteria and recognized when each is met:

•	Evidence of an arrangement: An agreement with the customer reflecting the terms and conditions to deliver products or services serves as evidence of an arrangement.

•	Delivery: For products, delivery is considered to occur upon receipt by the customer and the transfer of title and risk of loss. For rental services, delivery is considered to occur when the services are rendered.

•	Fixed or determinable price: The sales price is considered fixed or determinable if it is not subject to refund or adjustment.

•

Collection is deemed probable: At or prior to the time of a transaction, credit reviews of each customer are performed to determine the creditworthiness of the customer. Collection is deemed probable if the customer is expected to be able to pay amounts under the arrangement as those amounts become due. If collection is not probable, revenue is recognized when collection becomes probable, generally upon cash collection.

As a general interpretation of the above guidelines, revenue for health care and surgical products are generally recognized upon delivery of the products to the customer and their assumption of risk of loss and other risks and rewards of ownership. Local business customs and non-standard sales terms can sometimes result in deviations to this normal practice in certain instances; however, in no case is revenue recognized prior to the transfer of risk of loss and rewards of ownership.

For non-invasive therapy products and medical equipment management services, the majority of product offerings are rental products for which revenue is recognized consistent with the rendering of the service and use of products. For The Vest® product, revenue is generally recognized at the time of receipt of authorization for billing from the applicable paying entity as this serves as evidence of the arrangement and sets a fixed or determinable price.

For health care products and services aimed at improving operational efficiency and asset utilization, various revenue recognition techniques are used, depending on the offering. Arrangements to provide services, routinely under separately sold service and maintenance contracts, result in the deferral of revenue until specified services are performed. Service contract revenue is generally recognized ratably over the contract period, if applicable, or as services are rendered. Product-related goods are generally recognized upon delivery to the customer.

Revenue and Accounts Receivable Reserves

Revenue is presented in the Statements of Consolidated Income net of certain discounts, GPO fees, and sales adjustments. For product sales, we record reserves resulting in a reduction of revenue for contractual discounts, as well as price concessions and product returns. Likewise, rental revenue reserves, reflecting contractual and other routine billing adjustments, are recorded as a reduction of revenue. Reserves for revenue are estimated based upon historical rates for revenue adjustments.

Provisions for doubtful accounts are recorded as a component of operating expenses and represent our best estimate of the amount of probable credit losses and collection risk in our existing accounts receivable. We determine such reserves based on historical write-off experience by industry. Receivables are generally reviewed on a pooled basis based on historical collection experience for each receivable type and are also reviewed individually for collectability. Account balances are charged against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers.

If circumstances change, such as higher than expected claims denials, payment defaults, changes in our business composition or processes, adverse changes in general economic conditions, instability or disruption of credit markets, or an unexpected material adverse change in a major customer’s or payer’s ability to meet its obligations, our estimates of the realizability of trade receivables could be reduced by a material amount.

Liabilities for Loss Contingencies Related to Lawsuits

We are involved on an ongoing basis in claims, investigations and lawsuits relating to our operations, including patent infringement, business practices, commercial transactions and other matters. The ultimate outcome of these actions cannot be predicted with certainty. An estimated loss from these contingencies is recognized when we believe it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. However, it is difficult to measure the actual loss that might be incurred related to claims, investigations and lawsuits. The ultimate outcome of these actions could have a material adverse effect on our financial condition, results of operations and cash flow.

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

The recorded amounts represent our best estimate of the costs we will incur in relation to such exposures, but it is possible that actual costs could differ from those estimates.

Goodwill and Intangible Assets

We account for acquired businesses using the acquisition method of accounting. This method requires that the identifiable assets acquired and liabilities assumed be measured at their fair value, with goodwill being the excess value of consideration paid less the fair value of the net identifiable assets acquired. Judgments and estimates are required in the determination of fair values, including the setting of discount rates, growth rates and forecasted business results for the acquired business and portions of the acquired business, along with estimated useful lives. Changes in these judgments or estimates can have a material impact on the valuation of the respective assets and liabilities acquired and our results of operations.

We perform an impairment assessment on goodwill and other indefinite-lived intangibles annually during the third fiscal quarter, or whenever events or changes in circumstances indicate that the carrying value of a reporting unit may not be recoverable. These events or conditions include, but are not limited to, a significant adverse change in the business environment; regulatory environment or legal factors; a current period operating or cash flow loss combined with a history of such losses or a projection of continuing losses; a substantial decline in market capitalization of our stock; or a sale or disposition of a significant portion of a reporting unit.

The goodwill impairment assessment requires either evaluating qualitative factors or performing a quantitative assessment to determine if a reporting unit’s carrying value is likely to exceed its fair value. The qualitative goodwill impairment assessment requires evaluating factors to determine that a reporting unit’s carrying value would not more likely than not exceed its fair value. As part of our goodwill qualitative testing process for each reporting unit, when utilized, we evaluate various factors that are specific to the reporting unit as well as industry and macroeconomic factors in order to determine whether it is reasonably likely to have a material impact on the fair value of our reporting units. Examples of the factors that are considered include the results of the most recent impairment test, current and long-range forecasted financial results, and changes in the strategic outlook or organizational structure of the reporting units. The long-range financial forecasts of the reporting units, which are based upon management’s long-term view of our markets and are used by senior management and the Board of Directors to evaluate operating performance, are compared to the forecasts used in the prior year analysis to determine if management expectations for the business have changed. Management changes in strategic outlook or organizational structure represent internally driven strategic or organizational changes that could have a material impact on our results of operations or product offerings. Industry, market changes and macroeconomic indicators represent our view on changes outside of the Company that could have a material impact on our results of operations, product offerings or future cash flow forecasts. In the event we were to determine that a reporting unit’s carrying value would more likely than not exceed its fair value, quantitative testing would be performed comparing carrying values to estimated fair values. Changes in management intentions, market conditions, operating performance and other similar circumstances could affect the assumptions used in this qualitative impairment test. Changes in the assumptions could result in impairment charges that could be material to our Consolidated Financial Statements in any given period.

Quantitative testing involves a two-step process. The first step, used to identify potential impairment, is a comparison of each reporting unit’s estimated fair value to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of the impairment. The second step requires us to calculate an implied fair value of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.

Measurement of the fair value of reporting units in the first step of a quantitative impairment process requires significant management judgment with respect to forecasted sales, gross margin and selling, general and administrative expenses, capital expenditures, the selection and use of an appropriate discount rate, the selection of comparable public companies and the determination of an appropriate control premium. In addition, the use of third-party appraisals of significant tangible and intangible assets as part of the second step of the impairment test also requires management judgment related to certain inputs and assumptions. There are inherent uncertainties related to each of the above listed assumptions and inputs, and our judgment in applying them. The use of different assumptions, estimates or judgments in either step of the process could trigger the need for an impairment charge, or materially increase or decrease the amount of any such impairment charge.

Retirement Benefit Plans

We sponsor retirement and postretirement benefit plans covering select employees. Expense recognized in relation to these defined benefit retirement and postretirement health care plans is based upon actuarial valuations and inherent in those valuations are key assumptions including discount and mortality rates, and where applicable, expected returns on assets, projected future salary rates and projected health care cost trends. The discount rates used in the valuation of our defined benefit pension and postretirement plans are evaluated annually based on current market conditions. In setting these rates we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, and then make adjustments to the respective indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected outflow of our obligations. Our overall expected long-term rate of return on pension assets is based on historical and expected future returns, which are inflation adjusted and weighted for the expected return for each component of the investment portfolio. Our rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments.

Changes in retirement and postretirement benefit expense and the recognized obligations may occur in the future as a result of a number of factors, including changes to any of these assumptions. Our expected rate of return on pension plan assets was 6.8 percent for fiscal 2015 and 7.0 percent for fiscal 2014 and 2013. At September 30, 2015, we had pension plan assets of $219.1 million. A 25 basis point increase in the expected rate of return on pension plan assets reduces annual pension expense by approximately $0.6 million. Differences between actual and projected investment returns, especially in periods of significant market volatility, can also impact estimates of required pension contributions. The discount rate for our retirement obligation was 4.4 percent in 2015, 4.5 percent in 2014 and 5.0 percent in 2013. The discount rate for our postretirement obligations may vary up to 200 basis points from that of our retirement obligations. For each 50 basis point change in the discount rate, the impact to annual pension expense ranges from an increase of $2.4 million to a decrease of $2.2 million, while the impact to our postretirement health care expense would be less than $0.1 million. Impacts from assumption changes could be positive or negative depending on the direction of the change in rates.

Income Taxes

We compute our income taxes using an asset and liability approach to reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. We have a variety of deferred tax assets in numerous tax jurisdictions. These deferred tax assets are subject to periodic assessment as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recognized. We have recorded valuation allowances against certain of our deferred tax assets, primarily those related to foreign tax attributes in countries with poor operating results and certain other domestic tax attributes. In evaluating whether it is more likely than not that we would recover these deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies are considered.

We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances. We currently have $40.7 million of valuation allowances on deferred tax assets, on a tax-effected basis, relating primarily to certain foreign deferred tax attributes and state tax credit carryforwards.

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

We also have on-going audits in various stages of completion with the IRS and several state and foreign jurisdictions, one or more of which may conclude within the next 12 months. Such settlements could involve some or all of the following: the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of previously unrecognized tax benefits. The resolution of these matters, in combination with the expiration of certain statutes of limitations in various jurisdictions, make it reasonably possible that our unrecognized tax benefits may decrease as a result of either payment or recognition by approximately $0.5 to $1.5 million in the next twelve months, excluding interest.

Guarantees

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

Inventory

We review the net realizable value of inventory on an ongoing basis, considering factors such as excess, obsolescence, and other items. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories will not be sold at prices in excess of current carrying costs. These estimates are based on historical experience and expected future trends. If future market conditions vary from those projected, and our estimates prove to be inaccurate, we may be required to write down inventory values and record an adjustment to cost of revenue.

Recently Issued Accounting Guidance

For a summary of recently issued accounting guidance applicable to us, see Note 1 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, including fluctuations in interest rates, the impact of economic downturns, collection risk associated with our accounts and notes receivable portfolio, including the effects of various austerity measures initiated by some governmental authorities, and variability in currency exchange rates. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.

We are subject to variability in foreign currency exchange rates in our international operations. Exposure to this variability is periodically managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the local currency. We, from time-to-time, enter into currency exchange agreements to manage our exposure arising from fluctuating exchange rates related to specific and forecasted transactions. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currencies.

Our currency risk consists primarily of foreign currency denominated firm commitments and forecasted foreign currency denominated intercompany and third-party transactions. At September 30, 2015, we had outstanding foreign exchange derivative contracts in notional amounts of $6.7 million with the fair value of these contracts approximating original contract value. The maximum length of time over which we hedge transaction exposure is 15 months. Derivative gains/ (losses), initially reported as a component of accumulated other comprehensive income (loss), are reclassified to earnings in the period when the forecasted transaction affects earnings.

We are exposed to market risk from fluctuations in interest rates. The Company sometimes manages its exposure to interest rate fluctuations through the use of interest rate swaps (cash flow hedges). As of September 30, 2015, we did not have any outstanding interest rate swaps.

Our pension plan assets, which were approximately $219.1 million at September 30, 2015, are also subject to volatility that can be caused by fluctuations in general economic conditions. Our pension plans were underfunded at September 30, 2015 by approximately $96.4 million, an increase over the prior year based upon a decrease in the discount rate and lower returns on plan assets. Continued market volatility and disruption could cause declines in asset values and low interest rates could continue to keep our pension obligation high. Should such trends continue, we may need to make additional pension plan contributions and our pension expense in future years may increase. Investment strategies and policies are set by the plan’s fiduciaries. Long-term strategic investment objectives utilize a diversified mix of equity and fixed income securities to preserve the funded status of the trusts and balance risk and return. The plan fiduciaries oversee the investment allocation process, which includes selecting investment managers, setting long-term strategic targets and monitoring asset allocations. Target allocation ranges are guidelines, not limitations, and plan fiduciaries may occasionally approve allocations above or below a target range or elect to rebalance the portfolio within the targeted range.

Trust assets are invested subject to the following policy restrictions: short-term securities must be rated A2/P2 or higher; all fixed-income securities shall have a credit quality rating “BBB” or higher; investments in equities in any one company may not exceed 10 percent of the equity portfolio.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Financial Statements:
Management’s Report on Internal Control Over Financial Reporting	42
Report of Independent Registered Public Accounting Firm	43
Statements of Consolidated Income for the fiscal years ended September 30, 2015, 2014 and 2013	44
Statements of Consolidated Comprehensive Income (Loss) for the fiscal years ended September 30, 2015, 2014 and 2013	45
Consolidated Balance Sheets at September 30, 2015 and 2014	46
Statements of Consolidated Cash Flows for the fiscal years ended September 30, 2015, 2014 and 2013	47
Statements of Consolidated Shareholders’ Equity for the fiscal years ended September 30, 2015, 2014 and 2013	48
Notes to Consolidated Financial Statements	49

Financial Statement Schedule for the fiscal years ended September 30, 2015, 2014 and 2013:
Schedule II — Valuation and Qualifying Accounts	83

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting for Hill-Rom Holdings, Inc. (“we” or “our”). Our internal control over financial reporting is a process designed, under the supervision of our principal executive, principal financial and principal accounting officers, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our Consolidated Financial Statements for external purposes in accordance with accounting principles generally accepted in the United States. Our internal control over financial reporting includes policies and procedures that:

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States and that our receipts and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our Consolidated Financial Statements.

Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Management performed an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2015 using criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on these criteria, management concluded that we maintained effective internal control over financial reporting as of September 30, 2015.

The effectiveness of our internal control over financial reporting as of September 30, 2015 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, who also audited our Consolidated Financial Statements, as stated in their report included herein.

We have excluded Welch Allyn Holdings, Inc. and its subsidiaries (collectively, “Welch Allyn”) from our assessment of internal control over financial reporting as of September 30, 2015, because Welch Allyn was acquired by us in a purchase business combination in the fourth quarter of 2015. Welch Allyn is a wholly-owned subsidiary whose total assets and total revenue represent 9 percent and 3 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended September 30, 2015.

/s/ John J. Greisch

John J. Greisch

President and Chief Executive Officer

/s/ Steven J. Strobel

Steven J. Strobel

Senior Vice President and Chief Financial Officer

/s/ Richard G. Keller

Richard G. Keller

Vice President, Controller and Chief Accounting Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

Hill-Rom Holdings, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Hill-Rom Holdings, Inc. and its subsidiaries at September 30, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management's Report on Internal Control over Financial Reporting, management has excluded Welch Allyn Holdings, Inc. and its subsidiaries (collectively, “Welch Allyn”) from its assessment of internal control over financial reporting as of September 30, 2015, because they were acquired by the Company in a purchase business combination during 2015. We have also excluded Welch Allyn from our audit of internal control over financial reporting. Welch Allyn is a wholly-owned subsidiary whose total assets and total revenue represent 9 percent and 3 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended September 30, 2015.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Indianapolis, Indiana

November 19, 2015

Hill-Rom Holdings, Inc. and Subsidiaries

STATEMENTS OF CONSOLIDATED INCOME

(In millions, except per share data)

	Years Ended September 30
	2015		2014		2013
Net Revenue
Capital sales	$	1,604.5	$	1,301.4	$	1,308.3
Rental revenue		383.7		384.7		407.9
Total revenue		1,988.2		1,686.1		1,716.2

Cost of Revenue
Cost of goods sold		921.2		730.2		747.8
Rental expenses		186.7		176.0		188.1
Total cost of revenue		1,107.9		906.2		935.9

Gross Profit		880.3		779.9		780.3