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, potential future outbreaks, the distribution of available vaccines, and people's willingness to take the vaccine.
Revenues and Customers
During the first six months of fiscal 2021 compared to the same period in fiscal 2020, there was an increase in COVID-19 confirmed cases and hospitalizations which resulted in higher demand globally 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 physician practice restrictions. During the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , there was lower demand globally for products used in the treatment of patients diagnosed with COVID-19. The lower demand was due to declining COVID-19 confirmed cases and hospitalizations during the three months endedJune 30, 2021 and the absence of the significant one-time COVID-19 purchases made during the three months endedJune 30, 2020 . This resulted in lower demand globally for intensive care unit and med-surg beds and specialty surfaces within Patient Support Systems and respiratory health ventilators within FrontLine Care that were used in the treatment of patients diagnosed with COVID-19. As hospital access and physician practice restrictions continue to moderate in the primary markets we serve and return to more normal operating activities, we continue to experience an increase in revenue in our care communications business, Surgical Solutions business and products used within the physician practice setting. For the fourth quarter of 2021, we expect product demand to reflect hospitals and physician practices return to more normal operating activities as effective efforts to control the spread of COVID-19 continue across the world. For the nine months endedJune 30, 2021 , we estimated that approximately$80.0 million of revenue recognized related to one-time COVID-19 purchases. The impact of these sales are described within our Results of Operations.
Operations and Workforce
The COVID-19 pandemic did not significantly impact Hillrom's operations related to their workforce or supply chain. Our production facilities have remained open and employment levels have remained consistent. Many employees in our administrative functions have effectively worked 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. A workforce reintegration plan is underway to facilitate a return to the office. The reintegration plans 28 -------------------------------------------------------------------------------- Table of Contents included safety measures and procedures in compliance with local laws and regulations to ensure a safe work environment for employees that 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. 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.
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. 29 --------------------------------------------------------------------------------
Table of Contents Net Revenue (In millions) U.S. OUS Three Months Ended June 30 Change As Constant Change As Change As Constant 2021 2020 Reported Currency Reported Reported Currency Net Revenue: Product sales and service$ 635.5 $ 685.8 (7.3) % (9.8) % (1.4) % (17.6) % (24.4) % Rental revenue 82.2 81.7 0.6 % (0.5) % 0.7 % - % (9.3) % Total net revenue$ 717.7 $ 767.5 (6.5) % (8.8) % (1.1) % (16.9) % (23.9) % Net Revenue: Patient Support Systems$ 376.1 $ 447.8 (16.0) % (18.1) % (13.2) % (22.8) % (29.8) % Front Line Care 265.9 252.1 5.5 % 3.0 % 11.3 % (6.0) % (13.6) % Surgical Solutions 75.7 67.6 12.0 % 8.1 % 76.4 % (20.2) % (25.7) % Total net revenue$ 717.7 $ 767.5 (6.5) % (8.8) % (1.1) % (16.9) % (23.9) %
OUS - Outside of
Three Months Ended
Consolidated Revenue Product sales and service revenue decreased 7.3% on a reported basis, and 9.8% on a constant currency basis, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The decrease was primarily driven by lower demand globally for products used in the treatment of patients diagnosed with COVID-19. The lower demand was due to declining COVID-19 confirmed cases and hospitalizations during the three months endedJune 30, 2021 and the absence of the significant one-time COVID-19 purchases made during the three months endedJune 30, 2020 . This was offset by an increase in revenue in our care communications business, Surgical Solutions business and higher demand for products used within the physician practice setting as hospitals and physician offices restrictions continue to moderate in the primary markets we serve and return to more normal operating activities. Rental revenue increased 0.6% on a reported basis, and decreased 0.5% on a constant currency basis, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The decrease on a constant currency basis was primarily driven by a reduction in the deployment of beds on a global basis within Patient Support Systems that related to hospital needs for COVID-19.
Business Segment Revenue
Patient Support Systems revenue decreased 16.0% on a reported basis, and 18.1% on a constant currency basis, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The decrease was primarily driven by declining COVID-19 confirmed cases and hospitalizations during the three months endedJune 30, 2021 and the absence of the significant one-time COVID-19 purchases made during the three months endedJune 30, 2020 . This led to lower demand globally for the intensive care unit and med-surg beds, specialty surfaces and our rental revenue. The decrease was partially offset by increases in revenue in our care communications business as hospital access restrictions continue to moderate in the primary markets we serve and return to more normal operating activities. FrontLine Care revenue increased 5.5% on a reported basis, and 3.0% on a constant currency basis, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The increase was primarily driven by sales of patient diagnostic products, such as vision care and cardiology as physician offices continue to return to more normal operating activities. This was partially offset by the absence of significant one-time COVID-19 purchases for respiratory health ventilators made during the three months endedJune 30, 2020 . Surgical Solutions revenue increased 12.0% on a reported basis, and 8.1% on a constant currency basis, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , primarily driven by increased sales of operating room tables as hospitals continue to return to more normal operating activities. 30 -------------------------------------------------------------------------------- Table of Contents Net Revenue (In millions) U.S. OUS Nine Months Ended Change As Constant Change As Change As Constant June 30 Reported Currency Reported Reported Currency 2021 2020 Net Revenue: Product sales and service$ 1,956.5 $ 1,947.1 0.5 % (1.8) % (2.1) % 5.6 % (1.3) % Rental revenue 264.3 228.6 15.6 % 14.6 % 17.5 % 2.8 % (5.6) % Total net revenue$ 2,220.8 $ 2,175.7 2.1 % (0.1) % 0.5 % 5.5 % (1.5) % Net Revenue: Patient Support Systems$ 1,151.8 $ 1,174.0 (1.9) % (3.8) % (4.9) % 6.9 % (0.6) % Front Line Care 820.8 765.0 7.3 % 5.3 % 7.5 % 6.9 % 0.7 % Surgical Solutions 248.2 236.7 4.9 % 0.8 % 12.0 % (0.1) % (7.1) % Total net revenue$ 2,220.8 $ 2,175.7 2.1 % (0.1) % 0.5 % 5.5 % (1.5) %
OUS - Outside of
Nine Months Ended
Consolidated Revenue
Product sales and service revenue increased 0.5% on a reported basis, and decreased 1.8% on a constant currency basis, for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 . The decrease on a constant currency basis was primarily driven by the absence of the significant one-time COVID-19 purchases made during the nine months endedJune 30, 2020 . The decrease was partially offset by higher demand globally for select products within Patient Support Systems due to an increase in COVID-19 confirmed cases and hospitalizations during the first six months of fiscal 2021 compared to the same period in fiscal 2020. This decrease was further offset by an increase in revenue in our care communications business, Surgical Solutions business and higher demand for products used within the physician practice setting as hospitals and physician offices restrictions continue to moderate in the primary markets we serve and return to more normal operating activities. Rental revenue increased 15.6% on a reported basis, and 14.6% on a constant currency basis, for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 . The increase was primarily driven by an increase in the deployment of beds on a global basis within Patient Support Systems that related to hospital needs for COVID-19 patients.
Business Segment Revenue
Patient Support Systems revenue decreased 1.9% on a reported basis, and 3.8% on a constant currency basis, for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 . The decrease was primarily driven by the absence of the significant one-time COVID-19 purchases made during the nine months endedJune 30, 2020 of intensive care unit and med-surg beds and specialty surfaces. The decrease was partially offset by higher demand globally for select products, including our rental portfolio, due to an increase in COVID-19 confirmed cases and hospitalizations during the first six months of fiscal 2021 compared to the same period in fiscal 2020. The decrease was further offset by increases in revenue in our care communications business as hospital access restrictions continue to moderate in the primary markets we serve and return to more normal operating activities. FrontLine Care revenue increased 7.3% on a reported basis, and 5.3% on a constant currency basis, for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 . The increase was primarily driven by global sales of patient monitoring and diagnostic products, including vision care and cardiology. The increase was partially offset by the absence of significant one-time COVID-19 purchases of respiratory health ventilators during the nine months endedJune 30, 2020 . Surgical Solutions revenue increased 4.9% on a reported basis, and 0.8% on a constant currency basis, for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 primarily driven by increased sales of operating room tables as hospitals begin to return to more normal operating activities, partially offset by the global exit of the original equipment manufacturer business. 31
--------------------------------------------------------------------------------
Table of Contents Gross Profit (In millions) Three Months Ended Nine Months Ended June 30 June 30 2021 2020 2021 2020 Gross Profit 1 Product sales and service$ 328.9 $ 362.7 $ 1,007.6 $ 1,000.5 Percent of Related Net Revenue 51.8 % 52.9 % 51.5 %
51.4 %
Rental$ 45.6 $ 46.3 $ 153.5 $ 117.7 Percent of Related Net Revenue 55.5 % 56.7 % 58.1 %
51.5 %
Total Gross Profit$ 374.5 $ 409.0 $ 1,161.1 $ 1,118.2 Percent of Total Net Revenue 52.2 % 53.3 % 52.3 %
51.4 %
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 nine months ended
Product sales and service gross profit decreased by$33.8 million , or 9.3% for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The decrease was primarily driven by lower demand globally of higher margin products used in the treatment of patients with COVID-19, offset by improved cost efficiencies within our supply chain operations. Product sales and service gross profit increased by$7.1 million or 0.7% for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 . The increase was primarily driven by favorable product mix and improved cost efficiencies within our supply chain operations, partially offset by lower demand globally for those higher margin products used in the treatment of COVID-19 patients during the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 . Rental gross profit decreased by$0.7 million , or 1.5% for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 and remained consistent as a percentage of revenue. Rental gross profit increased by$35.8 million , or 30.4% for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 , primarily driven by higher volumes and lower costs associated with servicing the Patient Support Systems rental portfolio due to increased rental durations related to hospital needs for COVID-19 patients. Operating Expenses (In millions) Three Months Ended Nine Months Ended June 30 June 30 2021 2020 2021 2020 Research and development expenses$ 36.3 $ 34.4 $ 105.6 $ 100.3 Percent of Total Net Revenue 5.1 % 4.5 % 4.8 % 4.6 % Selling and administrative expenses$ 215.9 $ 202.3 $ 648.6 $ 609.0 Percent of Total Net Revenue 30.1 % 26.4 % 29.2 % 28.0 % Acquisition-related intangible asset amortization$ 27.0 $ 27.5 $ 80.7 $ 81.3 Percent of Total Net Revenue 3.8 % 3.6 % 3.6 % 3.7 %
Three and nine months ended
Research and development expenses increased by
32 -------------------------------------------------------------------------------- Table of Contents Research and development expenses increased by$5.3 million or 5.3% for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 and remained consistent as a percentage of revenue. Selling and administrative expenses increased by$13.6 million or 6.7% for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily due to litigation expenses incurred related to the merger agreement with Bardy, increased headcount due to business growth, as well as higher spending related to business travel and marketing. Selling and administrative expenses increased by$39.6 million or 6.5% for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 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 a decrease in spending related business travel and marketing. See Note 3. Business Combinations for further information on the litigation. Acquisition-related intangible asset amortization remained relatively consistent declining by$0.5 million and$0.6 million , or 1.8% and 0.7% for the three and nine months endedJune 30, 2021 compared to the three and nine months endedJune 30, 2020 . See Note 3. Business Combinations for further information on acquired intangible assets. Special Charges and Other (In millions) Three Months Ended Nine Months Ended June 30 June 30 2021 2020 2021 2020 Special charges$ 5.9 $ 9.5 $ 40.1 $ 26.1 Interest expense (15.7) (17.3) (50.6) (55.8) Loss on extinguishment of debt (9.8) - (9.8) (15.6) Investment income (expense) and other, net (3.4) 2.2 12.7 (10.5)
Three and nine months ended
In connection with various transformative initiatives, exit activities, and organizational changes to improve our business alignment and cost structure, we recognized Special charges of$5.9 million and$40.1 million for the three and nine months endedJune 30, 2021 compared to$9.5 million and$26.1 million for the three and nine months endedJune 30, 2020 . For the nine months endedJune 30, 2021 , we incurred$24.0 million related to the Workforce Reduction Plan. These charges related to the initiatives described in Note 8. Special Charges. Interest expense decreased$1.6 million , or 9.2% for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 due to lower borrowings outstanding. Interest expense decreased$5.2 million , or 9.3% for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 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 three and nine months endedJune 30, 2021 related to the redemption of our senior unsecured 5.00% notes of$300 million inMay 2021 , which was comprised of a$7.5 million prepayment premium and$2.3 million of debt issuance costs previously capitalized. Loss on extinguishment of debt for the nine months endedJune 30, 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 endedJune 30, 2021 was expense of$3.4 million comprised primarily of losses from foreign exchange of$2.6 million due to unfavorable movements in foreign exchange rates. Investment income (expense) and other, net for the three months endedJune 30, 2020 was income of$2.2 million comprised primarily of government aid received under programs related to COVID-19 and a litigation settlement award. 33 -------------------------------------------------------------------------------- Table of Contents Investment income (expense) and other, net for the nine months endedJune 30, 2021 was income of$12.7 million comprised primarily of settlement awards of$8.8 million and an insurance settlement of$5.3 million related to covered losses in prior periods offset by losses from foreign exchange of$1.5 million due to unfavorable movements in foreign exchange rates. Investment income (expense) and other, net for the nine months endedJune 30, 2020 was expense of$10.5 million comprised primarily of a non-cash pension plan settlement loss of$8.4 million , investment losses of$2.0 million and unfavorable movements in foreign exchange rates. These balances were partially offset by government aid received under programs related to COVID-19 and a litigation settlement award.
Income Tax Expense
Three months ended
The effective tax rate for the three months endedJune 30, 2021 was 18.7% compared to 21.9% for the three months endedJune 30, 2020 . The rate was lower for the three months endedJune 30, 2021 primarily due to lower foreign income subject to taxes inthe United States compared to the three months endedJune 30, 2020 . The adjusted effective tax rate for the three months endedJune 30, 2021 was 21.0% compared to 20.5% for the three months endedJune 30, 2020 . The adjusted effective tax rate for the three months endedJune 30, 2021 increased compared to the three months endedJune 30, 2020 primarily due to differences in period items, including differences between our prior year tax provision and our filed returns.
Nine Months Ended
The effective tax rate for the nine months endedJune 30, 2021 was 18.2% compared to 17.8% for the nine months endedJune 30, 2020 . The rate was lower for the nine months endedJune 30, 2020 primarily due to the favorable impact of excess tax benefits on deductible stock compensation compared to the nine months endedJune 30, 2021 . The effective tax rate for the nine months endedJune 30, 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 nine months endedJune 30, 2021 was 20.5% compared to 19.7% for the nine months endedJune 30, 2020 . The adjusted effective tax rate increased primarily due to the prior year favorable impact of excess tax benefits on deductible stock compensation. 34
--------------------------------------------------------------------------------
Table of Contents
Earnings per Share
Three months ended
Diluted earnings per share decreased from$1.40 to$0.74 for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily driven by lower operating profits due to lower revenue levels in theJune 2021 quarter, increase in litigation expenses incurred related to the Bardy transaction and the$9.8 million loss on extinguishment of debt.
Nine Months Ended
Diluted earnings per share increased from$2.68 to$2.92 for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 primarily driven by higher gross profits due to higher revenues, receipt of settlement awards of$8.8 million , insurance settlement of$5.3 million , and the absence of the prior year non-cash pension settlement loss of$8.4 million . The increase was partially offset by higher operating expense levels, including litigation expenses incurred related to the Bardy transaction, and higher special charges. Business Segment Divisional Income (In millions) Nine Months Ended Three Months Ended June 30 June 30 2021 2020 Change As Reported 2021 2020 Change As Reported Divisional Income: Patient Support Systems$ 74.7 $ 129.2 (42.2)%$ 258.0 $ 262.4 (1.7) % Front Line Care 83.4 81.1 2.8% 261.1 232.5 12.3 % Surgical Solutions 9.7 4.7 106.4% 38.1 31.0 22.9 %
Refer to Note 11. Segment Reporting for a description of how divisional income is determined.
Three and nine months ended
Patient Support Systems divisional income decreased
FrontLine Care divisional income increased$2.3 million and$28.6 million , or 2.8% and 12.3% for the three and nine months endedJune 30, 2021 compared to the three and nine months endedJune 30, 2020 . The increase was primarily driven by higher global sales of patient diagnostic products, including vision care and cardiology, partially offset by lower sales of respiratory health ventilators compared to the prior year due to declining demand for products used in the treatment of COVID-19 patients. Surgical Solutions divisional income increased$5.0 million and increased$7.1 million , or 106.4% and 22.9% for the three and nine months endedJune 30, 2021 compared to the three and nine months endedJune 30, 2020 , primarily driven by increased sales of operating room tables as hospitals began to return to more normal operating activities, offset by the global exit of the original equipment manufacturer business.
As Reported and Adjusted Earnings
Operating margin, income before income taxes, income tax expense and earnings attributable to common shareholders per diluted share are summarized in the tables below for the three and nine months endedJune 30, 2021 and 2020. As Reported amounts are adjusted for certain items to aid management in evaluating the performance of the business. Investors should consider these measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Income tax expense is computed by applying a blended statutory tax rate based on the jurisdictional mix of the respective before tax adjustment. 35
--------------------------------------------------------------------------------
Table of Contents
Three Months EndedJune 30, 2021
Three Months Ended
Income Income Before Before Operating Income Income Tax Operating Income Income Tax Margin Taxes Expense Diluted EPS Margin Taxes Expense Diluted EPS As Reported 12.5 %$ 60.5 $ 11.3 $ 0.74 17.6 %$ 120.2 $ 26.3 $ 1.40 Adjustments: Acquisition and integration costs and related fair value adjustments 1 1.0 % 7.2 1.6 0.08 0.2 % 1.2 0.5 0.01 Acquisition-related intangible asset amortization 2 3.8 % 27.0 6.6 0.31 3.6 % 27.5 6.6 0.31 Field corrective actions 3 - % - - - 0.1 % 0.8 0.2 0.01 Regulatory compliance costs 4 0.9 % 6.2 1.5 0.07 0.5 % 4.1 1.1 0.04 Special charges 5 0.7 % 5.9 1.2 0.07 1.2 % 9.5 2.5 0.10 Debt refinancing costs 6 - % 9.8 2.3 0.11 - % - - - Loss on disposition of business 7 - % - - - - % (0.3) (4.2) 0.06 Pension settlement expense 8 - % - - - - % (0.1) - - COVID-19 related costs and - % - - - 0.5 % 1.9 0.8 0.02 benefits, net 9 Adjusted Earnings 18.9 %$ 116.6 $ 24.5 $ 1.38 23.7 %$ 164.8 $ 33.8 $ 1.95 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 endedJune 30, 2020 , a net benefit from fair value adjustments of$0.7 million represents purchase accounting adjustments for deferred revenue and contingent consideration associated with our business combinations in Note 3. Business Combinations. 2 Acquisition-related intangible asset amortization relates to the amortization of intangible assets acquired through the transactions described in Note 3. Business Combinations. 3 Field corrective action costs relate to costs incurred to address broad-based product performance matters outside of normal warranty provisions. These costs are included in Cost of goods sold. 4 Regulatory compliance costs relate to updating existing product registrations to comply with the European Medical Device Regulations and the impacts of current period tax law changes. These costs are included in Selling and administrative expenses. 5 Special charges represent a variety of costs associated with restructuring actions, including severance and related benefits, lease termination fees, asset write-downs and temporary labor on shutdown of operations. It also includes costs related to a global information technology transformation, including rationalizing and transforming our enterprise resource planning software solutions and other complementary information technology systems. See Note 8. Special Charges for further information.
6 Debt refinancing costs are expenses related to the costs incurred for the redemption of our senior unsecured notes due 2025. For the three months ended
36
--------------------------------------------------------------------------------
Table of Contents
Nine Months EndedJune 30, 2021
Nine Months Ended
Income Income Before Before Operating Income Income Tax Operating Income Income Tax Margin Taxes Expense Diluted EPS Margin Taxes Expense Diluted EPS As Reported 12.9 %$ 238.4 $ 43.3 $ 2.92 13.9 %$ 219.6 $ 39.0 $ 2.68 Adjustments: Acquisition and integration costs and related fair value adjustments 1 0.6 % 13.9 3.2 0.16 (0.1) % (2.6) 1.4 (0.06) Acquisition-related intangible asset amortization 2 3.6 % 80.7 19.6 0.91 3.7 % 81.3 19.6 0.92 Field corrective actions 3 0.1 % 1.6 0.4 0.02 0.1 % 2.1 0.6 0.02 Regulatory compliance costs 4 0.6 % 12.5 3.1 0.14 0.5 % 12.9 3.1 0.15 Special charges 5 1.8 % 40.1 9.7 0.46 1.2 % 26.1 6.1 0.30 Debt refinancing costs 6 - % 9.8 2.3 0.11 - % 16.1 3.7 0.18 Loss on disposition of business 7 - % - - - - % 0.2 (4.1) 0.06 Pension settlement expense 8 - % - - - - % 8.4 1.9 0.10 Litigation settlements 9 - % (6.8) (1.6) (0.08) - % (1.2) (0.3) (0.01) COVID-19 related costs and benefits, net 10 - % (0.1) - - 0.2 % 1.9 0.8 0.02 Adjusted Earnings 19.6 %$ 390.1 $ 80.0 $ 4.64 19.5 %$ 364.8 $ 71.8 $ 4.36 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 nine months endedJune 30, 2021 and 2020, a net benefit from fair value adjustments of$1.5 million and$6.9 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, and the redemption of our senior unsecured notes due 2025. For the nine months endedJune 30, 2021 , debt refinancing costs include a loss on extinguishment of debt of$9.8 million related to the redemption of all of our previously outstanding senior unsecured 5.00% notes dueFebruary 2025 . For the nine months endedJune 30, 2020 , debt refinancing costs include a loss on extinguishment of debt of$15.6 million as well as$0.5 million duplicative interest costs related to the redemption of our previously outstanding senior unsecured 5.75% notes dueSeptember 2023 . Refer to Note 4. Financing Agreements within this Form 10-Q and Note 5. Financing Agreements within the 2020 Form 10-K for the fiscal year endedSeptember 30, 2020 for additional information. 7 Loss on disposition of business relates to losses recorded in Investment income (expense) and other, net and additional tax expense of$4.1 million as a result of a change in the taxable gain resulting from business dispositions, which occurred inAugust 2019 . 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 Benefit 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
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source