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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019
OR
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to ____
Commission File No. 1-6651
HILL-ROM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
|
| |
Indiana | 35-1160484 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
130 E. Randolph St., Suite 1000 Chicago, IL | 60601 |
(Address of principal executive offices) | (Zip Code) |
(312) 819-7200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, without par value – 66,772,747 shares as of April 22, 2019.
HILL-ROM HOLDINGS, INC.
INDEX TO FORM 10-Q
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PART I - FINANCIAL INFORMATION | |
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PART II - OTHER INFORMATION | |
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PART I – FINANCIAL INFORMATION
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Item 1. | FINANCIAL STATEMENTS |
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In millions, except per share data)
|
| | | | | | | | | | | | | | | |
| Quarter Ended March 31 | | Year to Date Ended March 31 |
| 2019 | | 2018 | | 2019 | | 2018 |
Net Revenue | | | | | | | |
Product sales and service | $ | 636.5 |
| | $ | 610.7 |
| | $ | 1,248.1 |
| | $ | 1,185.9 |
|
Rental revenue | 77.7 |
| | 99.8 |
| | 149.6 |
| | 194.3 |
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Total net revenue | 714.2 |
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| 710.5 |
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| 1,397.7 |
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| 1,380.2 |
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Cost of Net Revenue | |
| | |
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Cost of goods sold | 322.7 |
| | 313.7 |
| | 639.0 |
| | 617.8 |
|
Rental expenses | 38.9 |
| | 46.4 |
| | 76.1 |
| | 92.4 |
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Total cost of net revenue | 361.6 |
|
| 360.1 |
|
| 715.1 |
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| 710.2 |
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| | | | | | | |
Gross Profit | 352.6 |
| | 350.4 |
| | 682.6 |
| | 670.0 |
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| | | | | | | |
Research and development expenses | 36.6 |
| | 34.7 |
| | 69.8 |
| | 67.0 |
|
Selling and administrative expenses | 231.2 |
| | 232.7 |
| | 449.2 |
| | 454.4 |
|
Special charges | 3.5 |
| | 36.9 |
| | 11.5 |
| | 50.4 |
|
Operating Profit | 81.3 |
|
| 46.1 |
|
| 152.1 |
|
| 98.2 |
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| | | | | | | |
Interest expense | (21.8 | ) | | (24.2 | ) | | (43.1 | ) | | (47.3 | ) |
Investment income and other, net | 1.2 |
| | (0.4 | ) | | 1.3 |
| | 1.4 |
|
| | | | | | | |
Income Before Income Taxes | 60.7 |
|
| 21.5 |
|
| 110.3 |
|
| 52.3 |
|
| | | | | | | |
Income tax expense (benefit) | 11.2 |
| | (7.0 | ) | | 18.6 |
| | (64.5 | ) |
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Net Income | $ | 49.5 |
|
| $ | 28.5 |
|
| $ | 91.7 |
|
| $ | 116.8 |
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Net Income per Basic Common Share | $ | 0.74 |
| | $ | 0.43 |
| | $ | 1.37 |
| | $ | 1.77 |
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Net Income per Diluted Common Share | $ | 0.74 |
| | $ | 0.42 |
| | $ | 1.36 |
| | $ | 1.73 |
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Average Basic Common Shares Outstanding (in thousands) | 66,696 |
| | 66,192 |
| | 66,866 |
| | 66,040 |
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| | | | | | | |
Average Diluted Common Shares Outstanding (in thousands) | 67,344 |
| | 67,597 |
| | 67,525 |
| | 67,508 |
|
See Notes to Condensed Consolidated Financial Statements (unaudited)
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In millions)
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| | | | | | | | | | | | | | | |
| Quarter Ended March 31 | | Year to Date Ended March 31 |
| 2019 | | 2018 | | 2019 | | 2018 |
Net Income | $ | 49.5 |
| | $ | 28.5 |
| | $ | 91.7 |
| | $ | 116.8 |
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Other Comprehensive Income (Loss), net of tax (Note 8): | |
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| | |
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Derivative instruments designated as hedges | (1.9 | ) | | 7.9 |
| | (5.6 | ) | | 11.3 |
|
Foreign currency translation adjustment | (3.6 | ) | | 16.5 |
| | (17.2 | ) | | 22.6 |
|
Change in pension and postretirement defined benefit plans | 0.5 |
| | 0.8 |
| | 0.9 |
| | 1.6 |
|
Total Other Comprehensive Income (Loss), net of tax | (5.0 | ) | | 25.2 |
| | (21.9 | ) | | 35.5 |
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Total Comprehensive Income | $ | 44.5 |
| | $ | 53.7 |
| | $ | 69.8 |
| | $ | 152.3 |
|
See Notes to Condensed Consolidated Financial Statements (unaudited)
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In millions)
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| March 31, 2019 | | September 30, 2018 |
ASSETS | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 187.0 |
| | $ | 183.0 |
|
Trade accounts receivable, net of allowances (Note 3) | 581.8 |
| | 580.7 |
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Inventories, net of reserves (Note 3) | 293.8 |
| | 291.7 |
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Other current assets | 118.4 |
| | 100.2 |
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Total current assets | 1,181.0 |
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| 1,155.6 |
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Property, plant and equipment, net (Note 3) | 313.3 |
| | 328.3 |
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Goodwill (Note 5) | 1,732.9 |
| | 1,738.3 |
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Other intangible assets and software, net (Note 3) | 1,012.0 |
| | 1,027.7 |
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Deferred income taxes (Notes 1 and 10) | 34.0 |
| | 35.0 |
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Other assets | 94.4 |
| | 75.1 |
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Total Assets | $ | 4,367.6 |
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| $ | 4,360.0 |
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LIABILITIES | |
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Current Liabilities | |
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Trade accounts payable | $ | 169.9 |
| | $ | 177.3 |
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Short-term borrowings (Note 6) | 224.7 |
| | 182.5 |
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Accrued compensation | 88.8 |
| | 132.5 |
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Accrued product warranties (Note 13) | 24.5 |
| | 20.5 |
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Accrued rebates | 42.3 |
| | 42.5 |
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Deferred revenue (Note 2) | 81.7 |
| | 40.0 |
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Other current liabilities | 65.4 |
| | 67.1 |
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Total current liabilities | 697.3 |
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| 662.4 |
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Long-term debt (Note 6) | 1,764.4 |
| | 1,790.4 |
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Accrued pension and postretirement benefits (Note 7) | 68.2 |
| | 69.3 |
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Deferred income taxes (Notes 1 and 10) | 165.7 |
| | 181.3 |
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Other long-term liabilities | 73.2 |
| | 40.4 |
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Total Liabilities | 2,768.8 |
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| 2,743.8 |
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Commitments and Contingencies (Note 15) |
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SHAREHOLDERS’ EQUITY | |
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Common stock (Notes 3 and 12) | 4.4 |
| | 4.4 |
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Additional paid-in capital | 619.9 |
| | 602.9 |
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Retained earnings | 1,935.2 |
| | 1,876.2 |
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Accumulated other comprehensive loss (Note 8) | (140.3 | ) | | (113.0 | ) |
Treasury stock, at cost (Note 3) | (820.4 | ) | | (754.3 | ) |
Total Shareholders’ Equity | 1,598.8 |
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| 1,616.2 |
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Total Liabilities and Shareholders’ Equity | $ | 4,367.6 |
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| $ | 4,360.0 |
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See Notes to Condensed Consolidated Financial Statements (unaudited)
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
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| Year to Date March 31 |
| 2019 | | 2018 |
Operating Activities | | | |
Net income | $ | 91.7 |
| | $ | 116.8 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
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Depreciation and amortization of property, plant, equipment and software | 36.4 |
| | 45.1 |
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Acquisition-related intangible asset amortization | 53.0 |
| | 53.7 |
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Amortization of debt discounts and issuance costs | 3.2 |
| | 3.7 |
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Benefit for deferred income taxes | (8.2 | ) | | (89.2 | ) |
(Gain) loss on disposal of property, equipment leased to others, intangible assets, and impairments | (0.2 | ) | | (0.6 | ) |
Loss on disposition of businesses | — |
| | 22.4 |
|
Stock compensation | 16.9 |
| | 15.8 |
|
Change in working capital excluding cash, current debt, acquisitions and dispositions: | |
| | |
|
Trade accounts receivable | 24.0 |
| | 45.7 |
|
Inventories | (1.5 | ) | | (29.0 | ) |
Other current assets | 3.7 |
| | (37.9 | ) |
Trade accounts payable | (6.6 | ) | | (8.7 | ) |
Accrued expenses and other liabilities | (53.9 | ) | | (35.8 | ) |
Other, net | (0.3 | ) | | 23.6 |
|
Net cash provided by operating activities | 158.2 |
|
| 125.6 |
|
Investing Activities | |
| | |
|
Purchases of property, plant, equipment and software | (31.4 | ) | | (51.4 | ) |
Proceeds on sale of property and equipment leased to others | 3.1 |
| | 3.7 |
|
Payment for acquisition of intangible assets | (17.1 | ) | | — |
|
Payments for acquisitions of investments | (26.6 | ) | | — |
|
Proceeds on sale of business | — |
| | 1.0 |
|
Other, net | 0.2 |
| | (1.0 | ) |
Net cash used in investing activities | (71.8 | ) |
| (47.7 | ) |
Financing Activities | |
| | |
|
Payments of long-term debt | (0.1 | ) | | (54.9 | ) |
Borrowings on Revolving Credit Facility | 110.0 |
| | 75.0 |
|
Payments on Revolving Credit Facility | (105.0 | ) | | (95.0 | ) |
Borrowings on Securitization Program | 4.9 |
| | 51.4 |
|
Payments on Securitization Program | (4.9 | ) | | (37.3 | ) |
Borrowings on Note Securitization Facility | 37.5 |
| | — |
|
Payments on Note Securitization Facility | (28.4 | ) | | — |
|
Payments of cash dividends | (27.4 | ) | | (25.1 | ) |
Proceeds on exercise of stock options | 8.6 |
| | 10.5 |
|
Stock repurchases for stock award withholding obligations | (4.0 | ) | | (4.4 | ) |
Stock repurchases in the open market | (75.0 | ) | | — |
|
Other, net | 3.7 |
| | 4.0 |
|
Net cash used in financing activities | (80.1 | ) |
| (75.8 | ) |
Effect of exchange rate changes on cash and cash equivalents | (2.3 | ) | | 5.1 |
|
Net Cash Flows | 4.0 |
| | 7.2 |
|
Cash and Cash Equivalents: | |
| | |
|
At beginning of period | 183.0 |
| | 231.8 |
|
At end of period | $ | 187.0 |
|
| $ | 239.0 |
|
See Notes to Condensed Consolidated Financial Statements (unaudited)
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(In millions, except share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Common Stock in Treasury | | Total Shareholders’ Equity |
| Shares Outstanding | | Amount | | | | | |
| | | | | Shares | | Amount | |
Balance as of December 31, 2018 | 66,657,887 |
| | $ | 4.4 |
| | $ | 606.9 |
| | $ | 1,899.9 |
| | $ | (135.3 | ) | | 21,799,747 |
| | $ | (824.4 | ) | | $ | 1,551.5 |
|
Net income | — |
| | — |
| | — |
| | 49.5 |
| | — |
| | — |
| | — |
| | 49.5 |
|
Other comprehensive income (loss), net of tax of $1.4 million | — |
| | — |
| | — |
| | — |
| | (5.0 | ) | | — |
| | — |
| | (5.0 | ) |
Dividends ($0.21 per common share) | — |
| | — |
| | 0.1 |
| | (14.2 | ) | | — |
| | — |
| | — |
| | (14.1 | ) |
Stock repurchases for stock award withholding obligations | (5,690 | ) | | — |
| | — |
| | — |
| | — |
| | 5,690 |
| | (0.5 | ) | | (0.5 | ) |
Stock compensation on equity-classified awards | — |
| | — |
| | 11.1 |
| | — |
| | — |
| | — |
| | — |
| | 11.1 |
|
Stock option exercises | 80,628 |
| | — |
| | 1.0 |
| | — |
| | — |
| | (80,628 | ) | | 3.0 |
| | 4.0 |
|
Vesting of stock awards | 18,103 |
| | — |
| | (0.7 | ) | | — |
| | — |
| | (18,103 | ) | | 0.7 |
| | — |
|
Shares issued under employee stock purchase plan | 20,799 |
| | — |
| | 1.5 |
| | — |
| | — |
| | (20,799 | ) | | 0.8 |
| | 2.3 |
|
Balance as of March 31, 2019 | 66,771,727 |
| | $ | 4.4 |
| | $ | 619.9 |
| | $ | 1,935.2 |
| | $ | (140.3 | ) | | 21,685,907 |
| | $ | (820.4 | ) | | $ | 1,598.8 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Common Stock in Treasury | | Total Shareholders’ Equity |
| Shares Outstanding | | Amount | | | | | |
| | | | | Shares | | Amount | |
Balance as of September 30, 2018 | 67,256,112 |
| | $ | 4.4 |
| | $ | 602.9 |
| | $ | 1,876.2 |
| | $ | (113.0 | ) | | 21,201,522 |
| | $ | (754.3 | ) | | $ | 1,616.2 |
|
Cumulative effect of ASC 606 adoption, net of tax of $4.8 million | — |
| | — |
| | — |
| | (4.9 | ) | | — |
| | — |
| | — |
| | (4.9 | ) |
Cumulative effect of ASU 2016-16 adoption, net of tax of $0.2 million | — |
| | — |
| | — |
| | (5.6 | ) | | | | — |
| | — |
| | (5.6 | ) |
Reclassification due to ASU 2018-02 adoption | — |
| | — |
| | — |
| | 5.4 |
| | (5.4 | ) | | — |
| | — |
| | — |
|
Net income | — |
| | — |
| | — |
| | 91.7 |
| | — |
| | — |
| | — |
| | 91.7 |
|
Other comprehensive income (loss), net of tax of $1.5 million | — |
| | — |
| | — |
| | — |
| | (21.9 | ) | | — |
| | — |
| | (21.9 | ) |
Dividends ($0.41 per common share) | — |
| | — |
| | 0.2 |
| | (27.6 | ) | | — |
| | — |
| | — |
| | (27.4 | ) |
Stock repurchases for stock award withholding obligations | (43,135 | ) | | — |
| | — |
| | — |
| | — |
| | 43,135 |
| | (4.0 | ) | | (4.0 | ) |
Stock repurchases in the open market | (792,264 | ) | | — |
| | — |
| | — |
| | — |
| | 792,264 |
| | (75.0 | ) | | (75.0 | ) |
Stock compensation on equity-classified awards | — |
| | — |
| | 16.9 |
| | — |
| | — |
| | — |
| | — |
| | 16.9 |
|
Stock option exercises | 178,203 |
| | — |
| | 2.0 |
| | — |
| | — |
| | (178,203 | ) | | 6.6 |
| | 8.6 |
|
Vesting of stock awards | 130,567 |
| | — |
| | (4.7 | ) | | — |
| | — |
| | (130,567 | ) | | 4.7 |
| | — |
|
Shares issued under employee stock purchase plan | 42,244 |
| | — |
| | 2.6 |
| | — |
| | — |
| | (42,244 | ) | | 1.6 |
| | 4.2 |
|
Balance as of March 31, 2019 | 66,771,727 |
| | $ | 4.4 |
| | $ | 619.9 |
| | $ | 1,935.2 |
| | $ | (140.3 | ) | | 21,685,907 |
| | $ | (820.4 | ) | | $ | 1,598.8 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Common Stock in Treasury | | Total Equity Attributable to Common Shareholders | | Noncontrolling Interests | | Total Shareholders’ Equity |
| Shares Outstanding | | Amount | | | | | | | |
| | | | | Shares | | Amount | | | |
Balance as of December 31, 2017 | 66,139,823 |
| | $ | 4.4 |
| | $ | 587.2 |
| | $ | 1,752.5 |
| | $ | (99.7 | ) | | 22,317,811 |
| | $ | (787.3 | ) | | $ | 1,457.1 |
| | $ | 7.0 |
| | $ | 1,464.1 |
|
Net income attributable to common shareholders | — |
| | — |
| | — |
| | 28.5 |
| | — |
| | — |
| | — |
| | 28.5 |
| | — |
| | 28.5 |
|
VIE activity | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7.0 | ) | | (7.0 | ) |
Other comprehensive income (loss), net of tax of ($1.4) million | — |
| | — |
| | — |
| | — |
| | 25.2 |
| | — |
| | — |
| | 25.2 |
| | — |
| | 25.2 |
|
Dividends ($0.20 per common share) | — |
| | — |
| | 0.2 |
| | (13.4 | ) | | — |
| | — |
| | — |
| | (13.2 | ) | | — |
| | (13.2 | ) |
Stock repurchases for stock award withholding obligations | (10,437 | ) | | — |
| | — |
| | — |
| | — |
| | 10,437 |
| | (0.9 | ) | | (0.9 | ) | | — |
| | (0.9 | ) |
Stock compensation on equity-classified awards | — |
| | — |
| | 9.4 |
| | — |
| | — |
| | — |
| | — |
| | 9.4 |
| | — |
| | 9.4 |
|
Stock option exercises | 73,906 |
| | — |
| | (0.2 | ) | | — |
| | — |
| | (73,906 | ) | | 2.6 |
| | 2.4 |
| | — |
| | 2.4 |
|
Vesting of stock awards | 27,679 |
| | — |
| | (1.0 | ) | | — |
| | — |
| | (27,679 | ) | | 1.0 |
| | — |
| | — |
| | — |
|
Shares issued under employee stock purchase plan | 21,092 |
| | — |
| | 1.1 |
| | — |
| | — |
| | (21,092 | ) | | 0.8 |
| | 1.9 |
| | — |
| | 1.9 |
|
Balance as of March 31, 2018 | 66,252,063 |
| | $ | 4.4 |
| | $ | 596.7 |
| | $ | 1,767.6 |
| | $ | (74.5 | ) | | 22,205,571 |
| | $ | (783.8 | ) | | $ | 1,510.4 |
| | $ | — |
| | $ | 1,510.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Common Stock in Treasury | | Total Equity Attributable to Common Shareholders | | Noncontrolling Interests | | Total Shareholders’ Equity |
| Shares Outstanding | | Amount | | | | | | | |
| | | | | Shares | | Amount | | | |
Balance as of September 30, 2017 | 65,813,794 |
| | $ | 4.4 |
| | $ | 584.4 |
| | $ | 1,676.2 |
| | $ | (110.0 | ) | | 22,643,840 |
| | $ | (796.8 | ) | | $ | 1,358.2 |
| | $ | 7.4 |
| | $ | 1,365.6 |
|
Net income attributable to common shareholders | — |
| | — |
| | — |
| | 116.8 |
| | — |
| | — |
| | — |
| | 116.8 |
| | — |
| | 116.8 |
|
VIE activity | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7.4 | ) | | (7.4 | ) |
Other comprehensive income (loss), net of tax of ($3.7) million | — |
| | — |
| | — |
| | — |
| | 35.5 |
| | — |
| | — |
| | 35.5 |
| | | | 35.5 |
|
Dividends ($0.38 per common share) | — |
| | — |
| | 0.3 |
| | (25.4 | ) | | — |
| | — |
| | — |
| | (25.1 | ) | | — |
| | (25.1 | ) |
Stock repurchases for stock award withholding obligations | (53,811 | ) | | — |
| | — |
| | — |
| | — |
| | 53,811 |
| | (4.4 | ) | | (4.4 | ) | | — |
| | (4.4 | ) |
Stock compensation on equity-classified awards | — |
| | — |
| | 15.5 |
| | — |
| | — |
| | — |
| | — |
| | 15.5 |
| | — |
| | 15.5 |
|
Stock option exercises | 314,762 |
| | — |
| | (0.6 | ) | | — |
| | — |
| | (314,762 | ) | | 11.1 |
| | 10.5 |
| | — |
| | 10.5 |
|
Vesting of stock awards | 138,546 |
| | — |
| | (4.9 | ) | | — |
| | — |
| | (138,546 | ) | | 4.9 |
| | — |
| | — |
| | — |
|
Shares issued under employee stock purchase plan | 38,772 |
| | — |
| | 2.0 |
| | — |
| | — |
| | (38,772 | ) | | 1.4 |
| | 3.4 |
| | — |
| | 3.4 |
|
Balance as of March 31, 2018 | 66,252,063 |
| | $ | 4.4 |
| | $ | 596.7 |
| | $ | 1,767.6 |
| | $ | (74.5 | ) | | 22,205,571 |
| | $ | (783.8 | ) | | $ | 1,510.4 |
| | $ | — |
| | $ | 1,510.4 |
|
See Notes to Condensed Consolidated Financial Statements (unaudited)
Hill-Rom Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions, except per share data)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
Unless the context otherwise requires, the terms “Hill-Rom,” “the Company,” “we,” “our” and “us” refer to Hill-Rom Holdings, Inc. and its wholly-owned subsidiaries. The unaudited Condensed Consolidated Financial Statements appearing in this Quarterly Report on Form 10-Q should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in Hill-Rom’s latest Annual Report on Form 10-K for the fiscal year ended September 30, 2018 (“2018 Form 10-K”) as filed with the United States (“U.S.”) Securities and Exchange Commission. The September 30, 2018 Condensed Consolidated Balance Sheet was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States. In the opinion of management, the Condensed Consolidated Financial Statements herein include all adjustments necessary to state fairly the financial position, results of operations and cash flows for the interim periods presented. Quarterly results are not necessarily indicative of annual results.
The Condensed Consolidated Financial Statements include the accounts of Hill-Rom and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense in the period. Actual results could differ from those estimates. Examples of such estimates include, but are not limited to, income taxes (Notes 1 and 10), accounts receivable reserves (Note 3), accrued warranties (Note 13), goodwill (Note 5), pension expense (Note 7), and commitments and contingencies (Note 15).
Revenue Recognition
Revenue is recognized as performance obligations are satisfied, either at a point in time or over time, driven by the nature of the obligation that is contracted to be provided to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Certain of our contracts have multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.
The majority of our capital equipment revenue is recognized at a point in time, primarily based on the transfer of title, except in circumstances where we are also required to install the equipment, for which revenue is recognized upon customer acceptance of the installation. Performance obligations involving the provision of services and revenue from rental usage of our products are recognized over the time period specified in the contractual arrangement with the customer. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation.
Revenue is presented net of several types of variable consideration including rebates, discounts and product returns, which are estimated at the time of sale generally using the expected value method, although the most likely amount method is also used for certain types of variable consideration. These estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns.
Certain costs associated with obtaining a contract, which primarily comprise sales commissions earned by Company personnel, are capitalized until such time as the related performance obligations are completed and the related revenue is recognized.
Contract liabilities arise as a result of cash received from customers at inception of contracts or where the timing of billing for services precedes satisfaction of our performance obligations. Remaining performance obligations represent the portion of the contract price for which work has not been performed, primarily related to installation and service contracts.
Taxes assessed by a governmental authority that are directly imposed on a revenue producing transaction between us and our customers, including but not limited to sales taxes, use taxes and value added taxes, are excluded from revenue and cost.
See Note 2 for additional information about revenue recognition.
Fair Value Measurements
Fair value measurements of our financial assets and liabilities are classified and disclosed in one of the following three categories:
| |
• | Level 1: Financial instruments with unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. |
| |
• | Level 2: Financial instruments with observable inputs other than those included in Level 1 such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
• | Level 3: Financial instruments with unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Unobservable inputs reflect our own assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs are developed based on the best information available in the circumstances, which might include our own data. |
We record cash and cash equivalents, as disclosed on our Condensed Consolidated Balance Sheets, as Level 1 instruments and certain other derivatives and investments as either Level 2 or 3 instruments. Investments measured at Net Asset Value as a practical expedient are not categorized in the fair value hierarchy. Refer to Note 6 for disclosure of our debt instrument and interest rate swap fair values. There have not been significant changes in our classification of assets and liabilities in the fiscal quarter.
Income Taxes
Hill-Rom and its eligible subsidiaries file a consolidated U.S. income tax return. We file income tax returns in a number of jurisdictions for our foreign operations. We have a variety of deferred tax assets in numerous tax jurisdictions which are computed using an asset and liability approach to reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. These deferred tax assets are subject to periodic assessment as to recoverability. If it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recognized. In evaluating whether it is more likely than not that we would recover these deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies are considered.
As of March 31, 2019, we had $78.3 million of valuation allowances on deferred tax assets, on a tax-effected basis, primarily related to certain foreign deferred tax attributes that are not expected to be utilized. The valuation allowance was not materially impacted by the Tax Cuts and Jobs Act (the “Tax Act”) enacted in the United States in December 2017. We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances.
We account for uncertain income tax positions using a threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The difference between the tax benefit recognized in the financial statements for an uncertain income tax position and the tax benefit claimed in the tax return is referred to as an unrecognized tax benefit. See Note 10 for further details.
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASC 606”), which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We adopted the new standard in the first quarter of fiscal 2019 using the modified retrospective approach. See Note 2 for additional information on the impacts of ASC 606 on our Condensed Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Topic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. This standard requires equity securities to be measured at fair value with changes in fair value recognized through net income and eliminated the cost method for equity securities without readily determinable fair values. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This standard issued six technical corrections and improvements to clarify guidance in ASU 2016-01, which primarily impacted the accounting for equity
investments, financial liabilities under fair value option, and the presentation and disclosure requirements of financial instruments. We adopted ASU 2016-01 and ASU 2018-03 prospectively in the first quarter of fiscal 2019 and the new updates did not have a material impact on our Condensed Consolidated Financial Statements. We applied the practicability election within this standard under which our investments in equities that are not accounted for under the consolidation or equity method of accounting guidance are valued at cost, less impairment, plus or minus observable price changes (in orderly transactions) of an identical or similar investment of the same issuer.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The purpose of the standard is to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The standard addresses specific issues including debt prepayment and extinguishment costs, settlement of zero-coupon debt, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and certain life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and the application of the predominance principle in separately identifiable cash flows. We adopted ASU 2016-15 in the first quarter of fiscal 2019 using a retrospective transition method and elected to continue to use the nature of distribution approach for distributions received from equity method investees. The adoption of ASU 2016-15 did not have a material impact on our Condensed Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). This standard requires immediate recognition of the income tax consequences of intercompany asset transfers other than inventory. We adopted ASU 2016-16 in the first quarter of fiscal 2019 using the modified retrospective approach with a cumulative effect adjustment directly to retained earnings. The cumulative effect of applying ASU 2016-16 was an adjustment to decrease prepaid taxes by $5.8 million and increase deferred tax assets by $0.2 million with a corresponding decrease to the opening balance of Retained earnings of $5.6 million.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This standard requires that companies include amounts generally described as restricted cash and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. We retrospectively adopted ASU 2016-18 in the first quarter of fiscal 2019. ASU 2016-18 did not have a material impact on our Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This standard provides clarification on the definition of a business and provides guidance on whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We adopted ASU 2017-01 in the first quarter of fiscal 2019. ASU 2017-01 did not have a material impact on our Condensed Consolidated Financial Statements.
In February 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires employers to include only the service cost component of net periodic pension cost in operating expenses, together with other employee compensation costs. The other components of net periodic pension cost, including interest cost, expected return on plan assets, amortization of prior service cost and settlement and curtailment effects, are to be included in non-operating expenses. The amendment allows a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. We adopted ASU 2017-07 in the first quarter of fiscal 2019 and applied the practical expedient upon adoption. ASU 2017-07 did not have a material impact on our Condensed Consolidated Financial Statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). The standard allows entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. We adopted ASU 2018-02 in the first quarter of fiscal 2019. As a result of the adoption of ASU 2018-02, we reclassified $5.4 million from Accumulated other comprehensive income (loss) to Retained earnings. We applied the individual item approach for releasing income tax effects from Accumulated other comprehensive income (loss).
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and has subsequently issued related amendments, collectively referred to as “ASC 842”. ASC 842 is effective for our first quarter of fiscal 2020. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Early adoption of the new lease standard is permitted. From the lessee’s perspective, the new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating,
with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor’s perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a finance lease. If the lessor does not convey risks and rewards or control, an operating lease results. We are currently in the process of evaluating the impact of ASC 842 on our Condensed Consolidated Financial Statements. Most of our operating lease commitments relate to manufacturing facilities, warehouse distribution centers, service centers and sales offices and are expected to continue to be classified as operating leases upon our adoption of ASC 842.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) - Measurement of Credit Losses of Financial Instruments. This standard requires entities to measure credit losses for financial assets measured at amortized cost based on expected losses rather than incurred losses. For available-for-sale debt securities with unrealized losses, entities will be required to recognize credit losses through an allowance for credit losses. ASU 2016-03 is effective for our first quarter of fiscal 2021 and requires a prospective transition method. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard eliminates Step 2 of the goodwill impairment test and requires a goodwill impairment to be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. ASU 2017-04 is effective for our first quarter of fiscal 2021 and requires a prospective transition method. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The purpose of the standard is to improve the overall usefulness of fair value disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. ASU 2018-13 is effective for our first quarter of fiscal 2021 and requires the application of the prospective method of transition (for only the most recent interim or annual period presented in the initial fiscal year of adoption) to the new disclosure requirements for (1) changes in unrealized gains and losses included in other comprehensive income and (2) the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 also requires prospective application to any modifications to disclosures made because of the change to the requirements for the narrative description of measurement uncertainty. The effects of all other amendments made by ASU 2018-13 must be applied retrospectively to all periods presented. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The purpose of the standard is to improve the overall usefulness of defined benefit pension and other postretirement plan disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. ASU 2018-14 is effective for our fourth quarter of fiscal 2021 and requires a retrospective transition method. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for our first quarter of fiscal 2021 and allows a retrospective or a prospective transition method to all implementation costs incurred after the date of adoption. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The purpose of the standard is to allow the use of the OIS rate based on the SOFR for hedge accounting purposes, which allows entities to designate changes in the fair values of fixed-rate financial assets or liabilities attributable to the OIS rate as the hedged risk. ASU 2018-16 is effective for our first quarter of fiscal 2020 and requires a prospective application. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. The purpose of the standard is to (1) clarify that transactions between participants in a collaborative agreement should be accounted for under Topic 606 and (2) add unit-of-account guidance in Topic 808 to align with Topic 606. ASU 2018-18 is effective for our first quarter of fiscal 2020 and must be applied retrospectively to the first quarter of fiscal 2019,
the date of initial application of Topic 606. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.
Except as noted above, there have been no significant changes to our assessment of the impact of recently issued accounting standards included in Note 1 of our Consolidated Financial Statements in our 2018 Form 10-K.
Note 2. Revenue Recognition
On October 1, 2018, we adopted ASC 606 using the modified retrospective method for contracts that were not completed as of the adoption date. The cumulative effect of initially applying ASC 606 was an adjustment to decrease the opening balance of Retained earnings by $4.9 million, which is net of a $4.8 million tax effect, as of October 1, 2018. Prior period amounts are not adjusted and continue to be reported in accordance with our historical revenue recognition policies.
Consistent with prior practice, revenue is presented in the Condensed Consolidated Statements of Income net of sales discounts and allowances, GPO fees, price concessions, rebates and customer returns for product sales and rental revenue reserves.
Prior to our adoption of ASC 606, we recognized revenue when the following criteria were met: evidence of an arrangement existed; delivery had occurred; the selling price was fixed or determinable and collection was considered probable. Following our adoption of ASC 606, we recognize revenue when we satisfy a performance obligation by transferring a promised good or service to a customer, as defined by the customer contract.
We elected to use the significant financing practical expedient under which the impacts of financing are considered immaterial if the duration of the financing is one year or less.
Customer payments are due at various times up to 90 days from the date of invoice, though in some countries and for certain customer types, credit terms are longer based on local industry practices.
Revenue related to certain products within our Patient Support Systems segment is required to be recognized later under ASC 606 than it was historically due to the determination that the performance obligation was a fully installed system. Historically, this obligation was accounted for as a multiple element arrangement and revenue was recognized upon delivery of hardware and software and the remainder when installation was complete. As a result of the deferral of the recognition of revenue, adoption date adjustments were required to be recorded related to deferred contract costs and equipment and other costs, which is reported in Other current assets and Other assets. Additionally, cash received from customers at inception of open contracts or billing that preceded satisfaction of remaining performance obligations is recorded as Deferred revenue in Other current liabilities and Other long-term liabilities.
Revenue related to certain products within our Front Line Care segment is required to be accelerated under ASC 606 compared to historical practice. This outcome is attributable to the conclusion that we have no on-going performance obligation after delivery of the product to the customer, whereas previously this revenue w