Overview
The following discussion and analysis should be read in conjunction with the accompanying interim financial statements and our 2020 Form 10-K.
Hill-Rom Holdings, Inc. ("we," "us," or "our") is a global medical technology leader whose approximately 10,000 employees have a single purpose: enhancing outcomes for patients and their caregivers by Advancing Connected Care™. Around the world, our innovations touch over 7 million patients each day. Our products and services help enable earlier diagnosis and treatment, optimize surgical efficiency and accelerate patient recovery while simplifying clinical communication and shifting care closer to home. We make these outcomes possible through connected smart beds, patient lifts, patient assessment and monitoring technologies, caregiver collaboration tools, respiratory health devices, advanced equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.
The Impacts of COVID-19 on Hillrom
COVID-19 has impacted global economies as travel, leisure and discretionary consumer spending has reduced significantly causing companies to make commensurate changes to their investments, human capital, and financial outlooks.The United States and countries around the world continue to take precautionary and preventive measures to reduce the spread of COVID-19. Prospects for an eventual path out of the crisis have improved as COVID-19 vaccines were authorized for use globally and governments began executing plans to distribute the vaccines to the public as supplies become available over the course of fiscal 2021. However, the timing of return to historical operating levels remains uncertain due to external factors such as policymaker decisions to remove certain restrictions, as they evaluate the continued infection rate and COVID-19 related deaths, the emergence of new variants of the virus, the distribution of available vaccines, and people's willingness to take the vaccine.
Revenues and Customers
During the first six months of fiscal 2021, there was an increase in COVID-19 confirmed cases and hospitalizations which resulted in higher demand for select products within Patient Support Systems such as intensive care unit and med-surg beds and specialty surfaces, including our rental portfolio. We also experienced higher than expected recovery in portions of our remaining portfolio that had previously been limited due to hospital access and doctor office restrictions. For the three and six months endedMarch 31, 2021 , we estimated that approximately$40.0 million and$80.0 million of revenue recognized related to one-time COVID-19 purchases. For the remainder of fiscal 2021, we expect hospitals and physician practices to advance toward more normal operating activities as efforts continue across the world to control the spread of COVID-19 through improved testing and contact tracing and the availability and distribution of effective vaccines.
Operations and Workforce
We have experienced no significant supply chain constraints nor significant increases in supply costs. Our production facilities have remained open and employment levels have remained consistent. We have implemented safety measures and procedures to allow our employees to work safely and effectively in our manufacturing and services facilities. Many employees in our administrative functions have effectively continued to work remotely sincemid-March 2020 . In other areas of the business, we have adapted our processes and used technology to continue to effectively execute on our strategic priorities as well as daily operating activities. During the fiscal second quarter of 2021, plans were announced regarding the re-opening of some office locations inApril 2021 for our sales and administrative employees. The re-opening plans included safety measures and procedures to ensure a safe work environment for employees that voluntarily return to the office. As disclosed in Note 1. Summary of Significant Accounting Policies, we have benefited from government programs within the various jurisdictions in which we operate in the form of subsidies, incentives, cost relief and payment deferrals. Management will continue to evaluate these opportunities as well as the related requirements or restrictions to support our operations and workforce in a manner that allows us to continue to operate efficiently and effectively. 28 -------------------------------------------------------------------------------- Table of Contents For further discussion, see the risk factor within PART I, Item 1.A Risk Factors, entitled "Our business, results of operations, financial condition and prospects could be materially and adversely affected by the ongoing COVID-19 pandemic and the related effects on public health." within the 2020 Form 10-K.
Use of Non-GAAP Financial Measures
The accompanying Condensed Consolidated Financial Statements and related notes are presented in accordance with GAAP. In addition to the results reported in accordance with GAAP, we routinely provide operating margin, income before taxes, income tax expense and earnings per diluted share results on an adjusted basis as we believe these measures contribute to the understanding of our financial performance, provide additional analytical tools to understand our results from core operations and reveal underlying operating trends. These measures exclude strategic developments, acquisition and integration costs and related fair value adjustments, gains and losses associated with disposals of businesses or significant product lines, regulatory costs related to updating existing product registrations to comply with the European Medical Device Regulations, Special charges as described in Note 8. Special Charges of this Form 10-Q, the changes in tax accounting methods, and other tax law changes as described in Note 11. Income Taxes within the 2020 Form 10-K, expenses associated with these tax items, the impacts of significant litigation matters, certain impacts of the COVID-19 pandemic and other unusual events. We also exclude expenses associated with the amortization of purchased intangible assets. These adjustments are made to allow investors to evaluate and understand operating trends excluding their impact on operating income and earnings per diluted share. Management uses these measures internally for planning, forecasting and evaluating the performance of the business. Investors should consider these non-GAAP measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. In addition, we present certain results on a constant currency basis, which compares results between periods as if foreign currency exchange rates had remained consistent period-over-period. We monitor sales performance on an adjusted basis that eliminates the positive or negative effects that result from translating international sales intoU.S. dollars. We calculate constant currency by applying the foreign currency exchange rate for the prior period to the local currency results for the current period. We believe that evaluating growth in net revenue on a constant currency basis provides an additional and meaningful assessment to both management and investors. 29 -------------------------------------------------------------------------------- Table of Contents Results of Operations In this section, we provide an overview of our results of operations. We disclose segment information that is consistent with the way in which management operates and views the business. Our operating structure contains the following reportable segments: •Patient Support Systems - globally provides an ecosystem of our digital and connected care solutions: devices, software, communications and integration technologies that improve care and deliver actionable insights to caregivers and patients in the acute care setting. Key products include care communications and mobility solutions, connected med-surg and ICU bed systems, sensors and surfaces, safe patient handling equipment and services.
•Front
•Surgical Solutions - globally enables peak procedural performance, connectivity and video integration products that improve collaboration, workflow, safety and efficiency in the operating room, such as surgical video technologies, tables, lights, pendants, precision positioning devices and other accessories. Net Revenue (In millions) U.S. OUS Three Months Ended March 31 Change As Constant Change As Change As Constant 2021 2020 Reported Currency Reported Reported Currency Net Revenue: Product sales and service$ 668.5 $ 647.0 3.3 % 0.8 % (2.1) % 14.8 % 6.8 % Rental revenue 93.5 76.2 22.7 % 21.7 % 25.8 % 2.0 % (6.1) % Total net revenue$ 762.0 $ 723.2 5.4 % 3.0 % 1.6 % 14.2 % 6.2 % Net Revenue: Patient Support Systems$ 398.3 $ 382.1 4.2 % 2.1 % (1.2) % 21.1 % 12.4 % Front Line Care 285.0 258.2 10.4 % 8.1 % 7.8 % 16.2 % 8.6 % Surgical Solutions 78.7 82.9 (5.1) % (9.0) % (6.8) % (3.6) % (11.1) % Total net revenue$ 762.0 $ 723.2 5.4 % 3.0 % 1.6 % 14.2 % 6.2 %
OUS - Outside of
Three Months Ended
Consolidated Revenue Product sales and service revenue increased 3.3% on a reported basis, and 0.8% on a constant currency basis, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The increase was driven by international sales growth primarily related to market expansion for intensive care unit and med-surg beds as a result of COVID-19 and increased care communication revenues inthe United States in Patient Support Systems as well as global sales growth across patient monitoring and diagnostic products in FrontLine Care . The increase was partially offset by the decline in smart beds and specialty products inthe United States in Patient Support Systems and the decline in Surgical Solutions due to the exit of the original equipment manufacturer business globally.
Rental revenue increased 22.7% on a reported basis, and 21.7% on a constant
currency basis, for the three months ended
30 -------------------------------------------------------------------------------- Table of Contents Business Segment Revenue Patient Support Systems revenue increased 4.2% on a reported basis, and 2.1% on a constant currency basis, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The increase was driven primarily by higherU.S. rental revenues and international sales growth due to mainly increased demand for intensive care unit and med-surg beds as a result of COVID-19, and increased care communications revenues inthe United States . The increase was partially offset by lower demand for smart beds and specialty products inthe United States . FrontLine Care revenue increased 10.4% on a reported basis, and 8.1% on a constant currency basis, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The increase was driven by global sales of patient monitoring and patient diagnostic products, such as vision care and cardiology. Surgical Solutions revenue decreased 5.1% on a reported basis, and 9.0% on a constant currency basis, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 primarily due to the global exit of the original equipment manufacturer business, which was partially offset by increased sales inEurope . Net Revenue (In millions) U.S. OUS Six Months Ended Change As Constant Change As Change As Constant March 31 Reported Currency Reported Reported Currency 2021 2020 Net Revenue: Product sales and service$ 1,321.0 $ 1,261.3 4.7 % 2.5 % (2.4) % 20.0 % 13.1 % Rental revenue 182.1 146.9 24.0 % 22.9 % 26.9 % 4.2 % (3.7) % Total net revenue$ 1,503.1 $ 1,408.2 6.7 % 4.7 % 1.4 % 19.3 % 12.3 % Net Revenue: Patient Support Systems$ 775.7 $ 726.3 6.8 % 4.9 % (0.2) % 29.6 % 21.7 % Front Line Care 554.9 512.8 8.2 % 6.5 % 5.7 % 14.0 % 8.4 % Surgical Solutions 172.5 169.1 2.0 % (2.2) % (7.3) % 9.5 % 1.8 % Total net revenue$ 1,503.1 $ 1,408.2 6.7 % 4.7 % 1.4 % 19.3 % 12.3 %
OUS - Outside of
Six Months Ended
Consolidated Revenue
Product sales and service revenue increased 4.7% on a reported basis, and 2.5% on a constant currency basis, for the six months endedMarch 31, 2021 compared to the six months endedMarch 31, 2020 due to higher demand across all reportable segments outsidethe United States , specifically med-surg and ICU bed system market expansion inEurope for Patient Support Systems primarily as a result of COVID-19, and increased FrontLine Care revenues related to patient monitoring and diagnostic products globally. The increase was partially offset by the decline in smart beds and specialty products inthe United States in Patient Support Systems and the decline in Surgical Solutions on a constant currency basis due to the exit of the original equipment manufacturer business globally.
Rental revenue increased 24.0% on a reported basis, and 22.9% on a constant
currency basis, for the six months ended
31 -------------------------------------------------------------------------------- Table of Contents Business Segment Revenue Patient Support Systems revenue increased 6.8% on a reported basis, and 4.9% on a constant currency basis, for the six months endedMarch 31, 2021 compared to the six months endedMarch 31, 2020 . The increase was driven primarily by higherU.S. rental revenues and international sales growth due mainly to increased demand for intensive care unit and med-surg beds as a result of COVID-19, and increased care communications revenues inthe United States . The increase was partially offset by lower demand for smart beds and specialty products inthe United States .
Front
Surgical Solutions revenue increased 2.0% on a reported basis, and decreased 2.2% on a constant currency basis, for the six months endedMarch 31, 2021 compared to the six months endedMarch 31, 2020 primarily due to higher revenues inEurope , including the new acquisition, offset by the global exit of the original equipment manufacturer business. Gross Profit (In millions) Three Months Ended Six Months Ended March 31 March 31 2021 2020 2021 2020 Gross Profit 1 Product sales and service$ 350.4 $ 329.8 $ 678.7 $ 637.8 Percent of Related Net Revenue 52.4 % 51.0 % 51.4 %
50.6 %
Rental$ 57.0 $ 37.7 $ 107.9 $ 71.4 Percent of Related Net Revenue 61.0 % 49.5 % 59.3 %
48.6 %
Total Gross Profit$ 407.4 $ 367.5 $ 786.6 $ 709.2 Percent of Total Net Revenue 53.5 % 50.8 % 52.3 %
50.4 %
1 Gross Profit is calculated as net product sales and service revenue and rental revenue less the related cost of goods sold or rental expenses as disclosed on the face of the Condensed Consolidated Statements of Income.
Three and six months ended
Product sales and service gross profit increased by$20.6 million and$40.9 million , or 6.2% and 6.4% for the three and six months endedMarch 31, 2021 compared to the three and six months endedMarch 31, 2020 . The increase in gross profit was primarily driven by increased sales volume for FrontLine Care and Patient Support System products globally and favorable product mix. The increase in gross profit is also attributed to cost efficiencies within our supply chain operations. Rental gross profit increased by$19.3 million and$36.5 million , or 51.2% and 51.1% for the three and six months endedMarch 31, 2021 compared to the three and six months endedMarch 31, 2020 , primarily driven by higher volumes and lower costs associated with servicing the Patient Support Systems rental portfolio due to increased rental durations related to hospital needs for COVID-19 patients. 32 -------------------------------------------------------------------------------- Table of Contents Operating Expenses (In millions) Three Months Ended Six Months Ended March 31 March 31 2021 2020 2021 2020 Research and development expenses$ 34.5 $ 34.4 $ 69.3 $ 65.9 Percent of Total Net Revenue 4.5 % 4.8 % 4.6 % 4.7 % Selling and administrative expenses$ 223.7 $ 209.9 $ 432.7 $ 406.7 Percent of Total Net Revenue 29.4 % 29.0 % 28.8 % 28.9 % Acquisition-related intangible asset amortization$ 27.8 $ 27.1 $ 53.7 $ 53.8 Percent of Total Net Revenue 3.6 % 3.7 % 3.6 % 3.8 %
Three and six months ended
Research and development expenses increased by$0.1 million and$3.4 million , or 0.3% and 5.2%. for the three and six months endedMarch 31, 2021 compared to the three and six months endedMarch 31, 2020 and remained consistent as a percentage of revenue. Selling and administrative expenses increased$13.8 million or 6.6% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 primarily due to higher variable compensation linked to performance, investments in resources related to growth initiatives internationally and within theCare Communications business, and litigation expenses incurred related to the merger agreement with Bardy. This is partially offset by lower spending related to business travel and marketing. Selling and administrative expenses increased$26.0 million or 6.4% for the six months endedMarch 31, 2021 compared to the six months endedMarch 31, 2020 primarily due to higher variable compensation linked to performance, investments in resources related to growth initiatives internationally and within theCare Communications business, litigation expenses incurred related to the merger agreement with Bardy, and an increase in costs related to our IT transformation efforts. This is partially offset by lower spending related business travel and marketing. See Note 3. Business Combinations for further information on the litigation. Acquisition-related intangible asset amortization increased$0.7 million , or 2.6% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 mainly due to amortization of the intangible asset acquired fromEarlySense Ltd. inJanuary 2021 . Acquisition-related intangible asset amortization remained relatively flat for the six months endedMarch 31, 2021 compared to the six months endedMarch 31, 2020 . See Note 3. Business Combinations for further information on the acquired intangible asset. Special Charges and Other (In millions) Three Months Ended Six Months Ended March 31 March 31 2021 2020 2021 2020 Special charges$ 7.1 $ 8.8 $ 34.2 $ 16.6 Interest expense$ (17.1) $ (19.1) $ (34.9) $ (38.5) Loss on extinguishment of debt - - - (15.6) Investment income (expense) and other, net 9.1 (11.4) 16.1 (12.7) 33
-------------------------------------------------------------------------------- Table of Contents Three and six months endedMarch 31, 2021 Compared to the Three and six months endedMarch 31, 2020 In connection with various transformative initiatives, exit activities, and organizational changes to improve our business alignment and cost structure., we recognized Special charges of$7.1 million and$34.2 million for the three and six months endedMarch 31, 2021 compared to$8.8 million and$16.6 million for the three and six months endedMarch 31, 2020 . For the six months endedMarch 31, 2021 , we incurred$23.6 million related to the Workforce Reduction Plan. These charges related to the initiatives described in Note 8. Special Charges. Interest expense decreased$2.0 million and$3.6 million , or 10.5% and 9.4% for the three and six months endedMarch 31, 2021 compared to the three and six months endedMarch 31, 2020 due to lower borrowings outstanding and a decline in LIBOR impacting our variable rate debt under the Securitization and Revolving Credit Facilities. See Note 4. Financing Agreements for further information. Loss on extinguishment of debt for the six months endedMarch 31, 2020 related to the refinancing of senior unsecured notes of$425.0 million inSeptember 2019 , which was comprised of a$12.2 million prepayment premium and$3.4 million of debt issuance costs previously capitalized. See Note 4. Financing Agreements for further information. Investment income (expense) and other, net for the three months endedMarch 31, 2021 was income of$9.1 million comprised primarily of settlement awards of$8.8 million received during the current quarter. Investment income (expense) and other, net for the three months endedMarch 31, 2020 was expense of$11.4 million comprised primarily of a non-cash pension plan settlement loss of$8.5 million and investment losses of$2.0 million . Investment income (expense) and other, net for the six months endedMarch 31, 2021 was income of$16.1 million comprised primarily settlement awards of$8.8 million and an insurance settlement of$5.3 million related to covered losses in prior periods, and gains from foreign exchange of$1.1 million . Investment income (expense) and other, net for the six months endedMarch 31, 2020 was expense of$12.7 million comprised primarily of a non-cash pension plan settlement loss of$8.5 million and investment losses of$2.0 million .
Income Tax Expense
Three months ended
The effective tax rate for the three months endedMarch 31, 2021 was 18.1% compared to 17.4% for the three months endedMarch 31, 2020 . The rate was lower for the three months endedMarch 31, 2020 primarily due to the favorable impact of excess tax benefits on deductible stock compensation compared to the three months endedMarch 31, 2021 . The adjusted effective tax rate for the three months endedMarch 31, 2021 was 20.1% compared to 20.9% for the three months endedMarch 31, 2020 . The decrease in the adjusted effective tax rate is primarily due to adjustments to the projected earnings in foreign jurisdictions.
Six Months Ended
The effective tax rate for the six months endedMarch 31, 2021 was 18.0% compared to 12.8% for the six months endedMarch 31, 2020 . The rate was lower for the six months endedMarch 31, 2020 primarily due to the favorable impact of excess tax benefits on deductible stock compensation compared to the six months endedMarch 31, 2021 . The effective tax rate for the six months endedMarch 31, 2020 was also favorably impacted by the reduction of the contingent consideration accrual of$8.4 million , that was not subject to tax. The adjusted effective tax rate for the six months endedMarch 31, 2021 was 20.3% compared to 19.0% for the six months endedMarch 31, 2020 . The adjusted effective tax rate increased primarily due to the prior year favorable impact of excess tax benefits on deductible stock compensation. 34
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Earnings per Share
Three months ended
Diluted earnings per share increased from$0.70 to$1.30 for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 primarily driven by higher operating profits, settlement awards of$8.8 million , lower interest expense, and the absence of the prior year non-cash pension settlement loss of$8.5 million , which was partially offset by higher income tax expense due to a slightly higher tax rate in 2021.
Six Months Ended
Diluted earnings per share increased from$1.29 to$2.18 for the six months endedMarch 31, 2021 compared to the six months endedMarch 31, 2020 primarily driven by higher operating profits, settlement awards of$8.8 million , and the absence of both the prior year loss on extinguishment of debt of$15.6 million and non-cash pension settlement loss of$8.5 million . Business Segment Divisional Income (In millions) Six Months Ended Three Months Ended March 31 March 31 2021 2020 Change As Reported 2021 2020 Change As Reported Divisional Income: Patient Support Systems$ 95.9 $ 74.9 28.0%$ 183.3 $ 133.3 37.5 % Front Line Care 95.8 77.7 23.3% 177.7 151.2 17.5 % Surgical Solutions 11.0 13.7 (19.7)% 28.5 26.5 7.5 %
Refer to Note 11. Segment Reporting for a description of how divisional income is determined.
Three and six months ended
Patient Support Systems divisional income increased$21.0 million and$50.0 million , or 28.0% and 37.5% for the three and six months endedMarch 31, 2021 compared to the three and six months endedMarch 31, 2020 primarily due to expanded gross profits from the bed rental portfolio inthe United States reflecting higher demand and longer rental durations due to COVID-19 as well as increased revenue related to intensive care unit and med-surg beds sales outsidethe United States . The increase was partially offset by lower demand for smart beds and specialty products inthe United States . FrontLine Care divisional income increased$18.1 million and$26.5 million , or 23.3% and 17.5% for the three and six months endedMarch 31, 2021 compared to the three and six months endedMarch 31, 2020 primarily driven by higher global sales of patient monitoring and diagnostic products, including vision care and cardiology. Surgical Solutions divisional income decreased$2.7 million and increased$2.0 million , or 19.7% and 7.5% for the three and six months endedMarch 31, 2021 compared to the three and six months endedMarch 31, 2020 , as a result of the exit of the original equipment manufacturer business, which was partially offset by higher revenues inEurope . 35
-------------------------------------------------------------------------------- Table of Contents As Reported and Adjusted Earnings Operating margin, income before income taxes, income tax expense and earnings attributable to common shareholders per diluted share are summarized in the tables below for the three and six months endedMarch 31, 2021 and 2020. As Reported amounts are adjusted for certain items to aid management in evaluating the performance of the business. Investors should consider these measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Income tax expense is computed by applying a blended statutory tax rate based on the jurisdictional mix of the respective before tax adjustment. Three Months EndedMarch 31, 2021
Three Months Ended
Income Income Before Before Operating Income Income Tax Operating Income Income Tax Margin Taxes Expense Diluted EPS Margin Taxes Expense Diluted EPS As Reported 15.0 %$ 106.3 $ 19.2 $ 1.30 12.1 %$ 56.8 $ 9.9 $ 0.70 Adjustments: Acquisition and integration costs and related fair value adjustments 1 0.9 % 6.8 1.6 0.08 0.4 % 2.7 0.7 0.03 Acquisition-related intangible asset amortization 2 3.7 % 27.8 6.7 0.32 3.7 % 27.1 6.6 0.31 Field corrective actions 3 0.2 % 1.6 0.4 0.02 0.2 % 1.4 0.4 0.01 Regulatory compliance costs 4 0.3 % 2.2 0.6 0.02 0.7 % 4.8 1.2 0.05 Special charges 5 0.9 % 7.1 2.3 0.07 1.2 % 8.8 2.3 0.10 Pension settlement expense 6 - % - - - - % 8.5 2.0 0.09 Litigation settlements 7 0.1 % (6.8) (1.6) (0.08) - % (1.2) (0.3) (0.01) Adjusted Earnings 21.1 %$ 145.0 $ 29.2 $ 1.73 18.3 %$ 108.9 $ 22.8 $ 1.28 1 Acquisition and integration costs and related fair value adjustments include legal and professional fees, temporary labor, consulting and other costs related to business development activities and the closing and integration of acquired businesses. For acquired businesses, this also includes fair value adjustments related to contingent considerations, and purchase accounting adjustments for deferred revenue and other items. For the three months endedMarch 31, 2020 , a net benefit from fair value adjustments of$1.7 million represents purchase accounting adjustments for deferred revenue and contingent consideration associated with our business combinations in Note 3. Business Combinations. 2 Acquisition-related intangible asset amortization relates to the amortization of intangible assets acquired through the transactions described in Note 3. Business Combinations. 3 Field corrective action costs relate to costs incurred to address broad-based product performance matters outside of normal warranty provisions. These costs are included in Cost of goods sold. 4 Regulatory compliance costs relate to updating existing product registrations to comply with the European Medical Device Regulations and the impacts of current period tax law changes. These costs are included in Selling and administrative expenses. 5 Special charges represent a variety of costs associated with restructuring actions, including severance and related benefits, lease termination fees, asset write-downs and temporary labor on shutdown of operations. It also includes costs related to a global information technology transformation, including rationalizing and transforming our enterprise resource planning software solutions and other complementary information technology systems. See Note 8. Special Charges for further information.
6 Pension settlement expense represents an actuarial loss totaling
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Six Months EndedMarch 31, 2021
Six Months Ended
Income Income Before Before Operating Income Income Tax Operating Income Income Tax Margin Taxes Expense Diluted EPS Margin Taxes Expense Diluted EPS As Reported 13.1 %$ 177.9 $ 32.0 $ 2.18 11.8 %$ 99.4 $ 12.7 $ 1.29 Adjustments: Acquisition and integration costs and related fair value adjustments 1 0.5 % 6.7 1.6 0.08 (0.3) % (3.8) 1.0 (0.07) Acquisition-related intangible asset amortization 2 3.6 % 53.7 13.0 0.61 3.8 % 53.8 13.0 0.61 Field corrective actions 3 0.1 % 1.6 0.4 0.02 0.1 % 1.4 0.4 0.01 Regulatory compliance costs 4 0.3 % 6.3 1.6 0.07 0.6 % 8.7 1.8 0.10 Special charges 5 2.3 % 34.2 8.5 0.38 1.2 % 16.6 3.5 0.19 Debt refinancing costs 6 - % - - - - % 16.1 3.7 0.18 Loss on business combinations 7 - % - - - - % 0.4 0.1 0.01 Pension settlement expense 8 - % - - - - % 8.5 2.0 0.10 Litigation settlements 9 0.1 % (6.8) (1.6) (0.08) - % (1.2) (0.3) (0.01) COVID-19 related costs and benefits, net 10 - % (0.1) - - - % - - - Adjusted Earnings 20.0 %$ 273.5 $ 55.5 $ 3.26 17.2 %$ 199.9 $ 37.9 $ 2.41 1 Acquisition and integration costs and related fair value adjustments include legal and professional fees, temporary labor, consulting and other costs related to business development activities and the closing and integration of acquired businesses. For acquired businesses, this also includes fair value adjustments related to contingent considerations, and purchase accounting adjustments for deferred revenue and other items. For the six months endedMarch 31, 2021 and 2020, a net benefit from fair value adjustments of$1.4 million and$6.2 million , respectively, represents purchase accounting adjustments for deferred revenue and contingent consideration associated with our business combinations in Note 3. Business Combinations. 2 Acquisition-related intangible asset amortization relates to the amortization of intangible assets acquired through the transactions described in Note 3. Business Combinations. 3 Field corrective action costs relate to costs incurred to address broad-based product performance matters outside of normal warranty provisions. These costs are included in Cost of goods sold. 4 Regulatory compliance costs relate to updating existing product registrations to comply with the European Medical Device Regulations and the impacts of current period tax law changes. These costs are included in Selling and administrative expenses. 5 Special charges represent a variety of costs associated with restructuring actions, including severance and related benefits, lease termination fees, asset write-downs and temporary labor on shutdown of operations. It also includes costs related to a global information technology transformation, including rationalizing and transforming our enterprise resource planning software solutions and other complementary information technology systems. See Note 8. Special Charges for further information. 6 Debt refinancing costs are expenses related to the costs incurred between the issuance and redemption of our senior unsecured notes due 2027 and 2023, respectively, as discussed in Note 5. Financing Agreements within the 2020 Form 10-K for the fiscal year endedSeptember 30, 2020 as well as duplicative interest costs. 7 Loss on business combinations relates to the sale of our surgical consumable products business inAugust 2019 recorded in Investment income (expense) and other, net. 8 Pension settlement expense represents an actuarial loss totaling$8.5 million recorded as a component of Investment income (expense) and other, net. See Note 8. Retirement and Postretirement Plans within the 2020 Form 10-K for the fiscal year endedSeptember 30, 2020 for additional information. 9 Litigation settlements represent the aggregate charges, costs or recoveries associated with litigation settlements, including related expenses. 10 COVID-19 related costs and benefits, net primarily represent incremental non-recurring costs incurred to prepare our facilities for workforce reintegration to ensure the safety of our employees, partially offset by the recognition of funding associated with government programs created in response to COVID-19. See Note 1. Summary of Significant Accounting Policies for further information. 37
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