UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019March 31, 2020
OR
☐ 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
hrc-20200331_g1.jpg
HILL-ROM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Indiana35-1160484
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
Indiana35-1160484
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
130 E. Randolph St.Suite 1000ChicagoIL60601
(Address of principal executive offices)(Zip Code)
(312) (312) 819-7200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, without par valueHRCNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☑No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
 ☑
No ☐
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 ☐    Non-accelerated filer ☐    Smaller reporting company ☐ Emerging growth company ☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes☐No☑
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 – 66,815,34366,555,501 shares as of JulyApril 29, 2019.
2020.



Table of Contents
HILL-ROM HOLDINGS, INC.

INDEX TO FORM 10-Q
 
Page
PART I - FINANCIAL INFORMATION
Page
PART I - FINANCIAL INFORMATION
34
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
45
56
67
78
910
13
1714
1714
1918
2019
20
2221
2322
2625
2726
2826
28
Note 13. Warranties and Guarantees
2827
2928
30
31
4144
4144
PART II - OTHER INFORMATION
4245
4245
4246
4347
4448


2
Table of Contents
Forward-Looking Statements and Factors That May Affect Future Results

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

Forward-looking statements are not guarantees of future performance, and our actual results could differ materially from those set forth in any forward-looking statements. For a more in-depth discussion of factors that could cause actual results to differ from forward-looking statements, see the discussions under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (“2019 Form 10-K”) and subsequent filings with the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Our actual results also could be materially adversely impacted by the length and severity of the recent coronavirus pandemic (“COVID-19,” “the pandemic,” or “the virus”) and related impacts on our business, results of operations, financial condition and prospects. We assume no obligation to update or revise any forward-looking statements unless required by law.

3
Table of Contents
PART I – FINANCIAL INFORMATION

Item 1.
Item 1. FINANCIAL STATEMENTS


Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In millions, except per share data)
 Quarter Ended June 30 Year to Date Ended June 30
 2019 2018 2019 2018
Net Revenue       
Product sales and service$653.0
 $617.6
 $1,901.1
 $1,803.5
Rental revenue73.8
 91.0
 223.4
 285.3
Total net revenue726.8

708.6

2,124.5

2,088.8
        
Cost of Net Revenue 
  
  
  
Cost of goods sold332.3
 317.5
 971.3
 935.3
Rental expenses37.9
 43.1
 114.0
 135.5
Total cost of net revenue370.2

360.6

1,085.3

1,070.8
        
Gross Profit356.6
 348.0
 1,039.2
 1,018.0
        
Research and development expenses34.1
 33.6
 103.9
 100.6
Selling and administrative expenses246.4
 221.9
 695.6
 676.3
Special charges6.2
 14.0
 17.7
 64.4
Operating Profit69.9

78.5

222.0

176.7
        
Interest expense(23.1) (24.2) (66.2) (71.5)
Investment income (expense) and other, net(1.1) 1.2
 0.2
 2.6
        
Income Before Income Taxes45.7

55.5

156.0

107.8
        
Income tax expense (benefit)13.1
 10.3
 31.7
 (54.2)
        
Net Income$32.6

$45.2

$124.3

$162.0
  
  
  
  
Net Income per Basic Common Share$0.49
 $0.68
 $1.86
 $2.45
        
Net Income per Diluted Common Share$0.48
 $0.67
 $1.84
 $2.40
        
Average Basic Common Shares Outstanding
    (in thousands)
66,777
 66,299
 66,822
 66,121
        
Average Diluted Common Shares Outstanding (in thousands)67,446
 67,646
 67,484
 67,550

 Three Months Ended March 31Six Months Ended March 31
 2020201920202019
Net Revenue    
Product sales and service$647.0  $636.5  $1,261.3  $1,248.1  
Rental revenue76.2  77.7  146.9  149.6  
Total net revenue723.2  714.2  1,408.2  1,397.7  
Cost of Net Revenue    
Cost of goods sold317.2  322.7  623.5  639.0  
Rental expenses38.5  38.9  75.5  76.1  
Total cost of net revenue (excludes acquisition-related intangible asset amortization)355.7  361.6  699.0  715.1  
Research and development expenses34.4  36.6  65.9  69.8  
Selling and administrative expenses209.9  203.9  406.7  396.2  
Acquisition-related intangible asset amortization27.1  27.3  53.8  53.0  
Special charges8.8  3.5  16.6  11.5  
Operating Profit87.3  81.3  166.2  152.1  
Interest expense(19.1) (21.8) (38.5) (43.1) 
Loss on extinguishment of debt—  —  (15.6) —  
Investment income (expense) and other, net(11.4) 1.2  (12.7) 1.3  
Income Before Income Taxes56.8  60.7  99.4  110.3  
Income tax expense9.9  11.2  12.7  18.6  
Net Income$46.9  $49.5  $86.7  $91.7  
    
Net Income per Basic Common Share$0.70  $0.74  $1.30  $1.37  
Net Income per Diluted Common Share$0.70  $0.74  $1.29  $1.36  
Average Basic Common Shares Outstanding (in thousands)66,685  66,696  66,731  66,866  
Average Diluted Common Shares Outstanding (in thousands)67,218  67,344  67,309  67,525  
See Notes to Condensed Consolidated Financial Statements (unaudited)(Unaudited)

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Table of Contents
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In millions)
Quarter Ended
June 30		 Year to Date Ended June 30 Three Months Ended March 31Six Months Ended March 31
2019 2018 2019 2018 2020201920202019
Net Income$32.6
 $45.2
 $124.3
 $162.0
Net Income$46.9  $49.5  $86.7  $91.7  
       
Other Comprehensive Loss, net of tax: 
  
  
  
Other Comprehensive Income (Loss), net of tax:Other Comprehensive Income (Loss), net of tax:    
       
Derivative instruments designated as hedges(9.4) 2.2
 (15.0) 13.5
Derivative instruments designated as hedges(23.1) (1.9) (25.7) (5.6) 
Foreign currency translation adjustment4.1
 (43.9) (13.1) (21.3)Foreign currency translation adjustment(31.6) (3.6) (8.5) (17.2) 
Change in pension and postretirement defined benefit plans0.4
 1.0
 1.3
 2.6
Change in pension and postretirement defined benefit plans(7.6) 0.5  (6.9) 0.9  
Total Other Comprehensive Loss, net of tax(4.9) (40.7) (26.8) (5.2)
Total Other Comprehensive Income (Loss), net of taxTotal Other Comprehensive Income (Loss), net of tax(62.3) (5.0) (41.1) (21.9) 
       
Total Comprehensive Income$27.7
 $4.5
 $97.5
 $156.8
Total Comprehensive Income (Loss)Total Comprehensive Income (Loss)$(15.4) $44.5  $45.6  $69.8  
See Notes to Condensed Consolidated Financial Statements (unaudited)(Unaudited)

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Table of Contents
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In millions)
June 30,
2019		 September 30,
2018		 March 31,
2020		September 30, 2019
ASSETS   ASSETS
Current Assets   Current Assets
Cash and cash equivalents$202.6
 $183.0
Cash and cash equivalents$290.5  $214.1  
Trade accounts receivable, net of allowances597.9
 580.7
Restricted cashRestricted cash—  419.7  
Trade accounts receivable, net of allowances of $20.8 and $20.6 as of March 31, 2020 and September 30, 2019Trade accounts receivable, net of allowances of $20.8 and $20.6 as of March 31, 2020 and September 30, 2019655.4  653.3  
Inventories, net of reserves297.8
 291.7
Inventories, net of reserves265.5  269.6  
Other current assets128.0
 100.2
Other current assets130.3  106.7  
Total current assets1,226.3

1,155.6
Total current assets1,341.7  1,663.4  
   
Property, plant and equipmentProperty, plant and equipment841.2  829.6  
Less accumulated depreciationLess accumulated depreciation(546.8) (532.8) 
Property, plant and equipment, net311.1
 328.3
Property, plant and equipment, net294.4  296.8  
Goodwill1,830.8
 1,738.3
Goodwill1,805.7  1,800.9  
Other intangible assets and software, net1,083.7
 1,027.7
Other intangible assets and software, net1,006.5  1,033.5  
Deferred income taxes35.5
 35.0
Deferred income taxes32.6  33.1  
Other assets87.9
 75.1
Other assets166.2  91.3  
Total Assets$4,575.3

$4,360.0
Total Assets$4,647.1  $4,919.0  
   
LIABILITIES 
  
LIABILITIES  
Current Liabilities 
  
Current Liabilities  
Trade accounts payable$171.5
 $177.3
Trade accounts payable$224.7  $197.6  
Short-term borrowings246.2
 182.5
Short-term borrowings245.6  660.4  
Accrued compensation123.6
 132.5
Accrued compensation98.5  130.4  
Accrued product warranties29.9
 20.5
Accrued product warranties29.0  29.7  
Accrued rebates45.6
 42.5
Accrued rebates47.5  47.7  
Deferred revenue101.8
 40.0
Deferred revenue105.7  107.3  
Other current liabilities95.6
 67.1
Other current liabilities134.4  95.2  
Total current liabilities814.2

662.4
Total current liabilities885.4  1,268.3  
   
Long-term debt1,824.0
 1,790.4
Long-term debt1,864.4  1,783.1  
Accrued pension and postretirement benefits68.4
 69.3
Accrued pension and postretirement benefits100.8  80.8  
Deferred income taxes169.3
 181.3
Deferred income taxes123.7  143.0  
Other long-term liabilities74.7
 40.4
Other long-term liabilities123.9  70.5  
Total Liabilities2,950.6

2,743.8
Total Liabilities3,098.2  3,345.7  
   
Commitments and Contingencies


 


Commitments and Contingencies
   
SHAREHOLDERS’ EQUITY 
  
Common stock4.4
 4.4
SHAREHOLDERS' EQUITYSHAREHOLDERS' EQUITY  
Capital Stock:Capital Stock:
Preferred stock - without par value: Authorized - 1,000,000; none issued or outstandingPreferred stock - without par value: Authorized - 1,000,000; none issued or outstanding
Common stock - without par value: Authorized - 199,000,000Common stock - without par value: Authorized - 199,000,0004.4  4.4  
Issued: 88,457,634 shares as of March 31, 2020 and September 30, 2019; Outstanding: 66,527,730 as of March 31, 2020 and 66,625,011 as of September 30, 2019

Issued: 88,457,634 shares as of March 31, 2020 and September 30, 2019; Outstanding: 66,527,730 as of March 31, 2020 and 66,625,011 as of September 30, 2019

Additional paid-in capital631.0
 602.9
Additional paid-in capital644.4  637.4  
Retained earnings1,953.7
 1,876.2
Retained earnings2,025.2  1,967.4  
Accumulated other comprehensive loss(145.2) (113.0)Accumulated other comprehensive loss(223.6) (182.5) 
Treasury stock, at cost(819.2) (754.3)
Total Shareholders’ Equity
1,624.7

1,616.2
Total Liabilities and Shareholders’ Equity
$4,575.3

$4,360.0
Treasury stock, common shares at cost: 21,929,904 as of March 31, 2020 and 21,832,623 as of September 30, 2019Treasury stock, common shares at cost: 21,929,904 as of March 31, 2020 and 21,832,623 as of September 30, 2019(901.5) (853.4) 
Total Shareholders’ EquityTotal Shareholders’ Equity1,548.9  1,573.3  
Total Liabilities and Shareholders' EquityTotal Liabilities and Shareholders' Equity$4,647.1  $4,919.0  
See Notes to Condensed Consolidated Financial Statements (unaudited)(Unaudited)

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Table of Contents
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
Year to Date June 30Six Months Ended March 31
2019 201820202019
Operating Activities   Operating Activities  
Net income$124.3
 $162.0
Net income$86.7  $91.7  
Adjustments to reconcile net income to net cash provided by operating activities: 
  
Adjustments to reconcile net income to net cash, cash equivalents and restricted cash provided by operating activities:Adjustments to reconcile net income to net cash, cash equivalents and restricted cash provided by operating activities:  
Depreciation and amortization of property, plant, equipment and software54.7
 67.0
Depreciation and amortization of property, plant, equipment and software34.1  36.4  
Acquisition-related intangible asset amortization82.3
 80.5
Acquisition-related intangible asset amortization53.8  53.0  
Amortization of debt discounts and issuance costs4.8
 5.2
Amortization of debt discounts and issuance costs2.1  3.2  
Loss on extinguishment of debtLoss on extinguishment of debt15.6  —  
Benefit for deferred income taxes(12.2) (89.4)Benefit for deferred income taxes(8.4) (8.2) 
Loss on disposal of property, equipment leased to others, intangible assets, and impairments3.3
 1.1
Loss on disposition of businesses—
 22.4
Loss (Gain) on disposal of property, equipment, intangible assets, and impairmentsLoss (Gain) on disposal of property, equipment, intangible assets, and impairments1.2  (0.2) 
Stock compensation26.9
 21.6
Stock compensation19.0  16.9  
Other operating activitiesOther operating activities12.4  (4.1) 
Change in working capital excluding cash, current debt, acquisitions and dispositions: 
  
Change in working capital excluding cash, current debt, acquisitions and dispositions:  
Trade accounts receivable15.3
 20.5
Trade accounts receivable12.2  24.0  
Inventories(4.9) (27.4)Inventories(1.7) (1.5) 
Other current assets(3.4) (38.5)Other current assets(23.6) 3.7  
Trade accounts payable(9.0) (2.6)Trade accounts payable6.3  (6.6) 
Accrued expenses and other liabilities14.6
 1.0
Accrued expenses and other liabilities(55.2) (54.3) 
Other, net4.4
 26.4
Net cash provided by operating activities301.1

249.8
Other assets and liabilitiesOther assets and liabilities2.2  4.2  
Net cash, cash equivalents and restricted cash provided by operating activitiesNet cash, cash equivalents and restricted cash provided by operating activities156.7  158.2  
Investing Activities 
  
Investing Activities  
Purchases of property, plant, equipment and software(50.9) (71.9)Purchases of property, plant, equipment and software(46.1) (31.4) 
Proceeds on sale of property and equipment leased to others2.5
 4.0
Proceeds on sale of property and equipmentProceeds on sale of property and equipment1.4  3.1  
Payment for acquisition of business, net of cash acquired(175.8) —
Payment for acquisition of business, net of cash acquired(13.1) —  
Payment for acquisition of intangible assets(17.1) —
Payment for acquisition of intangible assets—  (17.1) 
Payments for acquisitions of investments(26.6) —
Proceeds on sale of business—
 1.0
Other, net—
 2.2
Net cash used in investing activities(267.9)
(64.7)
Payments for acquisition of investmentsPayments for acquisition of investments—  (26.6) 
Other investing activitiesOther investing activities(0.1) 0.2  
Net cash, cash equivalents and restricted cash used in investing activitiesNet cash, cash equivalents and restricted cash used in investing activities(57.9) (71.8) 
Financing Activities 
  
Financing Activities  
Payments of long-term debt(0.1) (137.4)
Payment of long-term debtPayment of long-term debt(25.1) (0.1) 
Borrowings on Revolving Credit Facility330.0
 75.0
Borrowings on Revolving Credit Facility190.0  110.0  
Payments on Revolving Credit Facility(230.0) (165.0)Payments on Revolving Credit Facility(85.0) (105.0) 
Borrowings on Securitization Program4.9
 68.2
Payments on Securitization Program(5.5) (40.7)
Borrowings on Securitization Facility
Borrowings on Securitization Facility
13.2  4.9  
Payments on Securitization FacilityPayments on Securitization Facility(17.7) (4.9) 
Borrowings on Note Securitization Facility46.0
 61.0
Borrowings on Note Securitization Facility32.6  37.5  
Payments on Note Securitization Facility(51.3) —
Payments on Note Securitization Facility(21.2) (28.4) 
Payments of cash dividends(41.4) (38.4)
Prepayment premium on extinguishment of 5.75% NotesPrepayment premium on extinguishment of 5.75% Notes(12.2) —  
Redemption of 5.75% NotesRedemption of 5.75% Notes(425.0) —  
Cash dividendsCash dividends(28.7) (27.4) 
Proceeds on exercise of stock options9.2
 13.6
Proceeds on exercise of stock options5.7  8.6  
Stock repurchases for stock award withholding obligations(4.2) (7.4)Stock repurchases for stock award withholding obligations(15.8) (4.0) 
Stock repurchases in the open market(75.0) —
Stock repurchases in the open market(54.1) (75.0) 
Other, net5.5
 5.1
Net cash used in financing activities(11.9)
(166.0)
Effect of exchange rate changes on cash and cash equivalents(1.7) (4.4)
Other financing activitiesOther financing activities3.9  3.7  
Net cash, cash equivalents and restricted cash used in financing activitiesNet cash, cash equivalents and restricted cash used in financing activities(439.4) (80.1) 
Effect of exchange rate changes on cash, cash equivalents and restricted cashEffect of exchange rate changes on cash, cash equivalents and restricted cash(2.7) (2.3) 
Net Cash Flows19.6
 14.7
Net Cash Flows(343.3) 4.0  
Cash and Cash Equivalents: 
  
Cash, Cash Equivalents and Restricted Cash:Cash, Cash Equivalents and Restricted Cash:  
At beginning of period183.0
 231.8
At beginning of period633.8  183.0  
At end of period$202.6

$246.5
At end of period$290.5  $187.0  
See Notes to Condensed Consolidated Financial Statements (unaudited)(Unaudited)

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Table of Contents
Hill-Rom Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(In millions, except share amounts)
Common StockAdditional
Paid-in Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury StockTotal Shareholders’ Equity
Common Stock Additional
Paid-in Capital		 Retained
Earnings		 Accumulated
Other
Comprehensive
Income (Loss)		 Common Stock
in Treasury		 Total Shareholders’ EquityShares
Issued		Amount
Shares
Outstanding		 Amount  Additional
Paid-in Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury StockTotal Shareholders’ Equity
 SharesAdditional
Paid-in Capital		Retained
Earnings		AmountAccumulated
Other
Comprehensive
Income (Loss)		Amount 
Balance as of March 31, 201966,771,727
 $4.4
 $619.9
 $1,935.2
$(140.3)
) $1,598.8
Balance as of December 31, 2019Balance as of December 31, 201988,457,634  $4.4  $632.7  $1,993.1  $(161.3) $(849.9) $1,619.0  
Net income—
 —
 —
 32.6
 —
 —
 —
 32.6
Net income—  —  —  46.9  —  —  46.9  
Other comprehensive income (loss), net of tax of $2.5 million—
 —
 —
 —
 (4.9) —
 —
 (4.9)
Dividends ($0.21 per common share)—
 —
 0.1
 (14.1) —
 —
 —
 (14.0)
Other comprehensive income (loss), net of tax of $9.4Other comprehensive income (loss), net of tax of $9.4—  —  —  —  (62.3) —  (62.3) 
Dividends ($0.22 per common share)Dividends ($0.22 per common share)—  —  0.2  (14.8) —  —  (14.6) 
Stock repurchases for stock award withholding obligations(1,512) —
 —
 —
 —
 1,512
 (0.2) (0.2)Stock repurchases for stock award withholding obligations—  —  —  —  —  (0.7) (0.7) 
Stock repurchases in open marketStock repurchases in open market—  —  —  —  —  (54.1) (54.1) 
Stock compensation on equity-classified awards—
 —
 9.8
 —
 —
 —
 —
 9.8
Stock compensation on equity-classified awards—  —  10.2  —  —  —  10.2  
Stock option exercises12,007
 —
 0.1
 —
 —
 (12,007) 0.5
 0.6
Stock option exercises—  —  0.6  —  —  1.4  2.0  
Vesting of stock awards4,982
 —
 (0.2) —
 —
 (4,982) 0.2
 —
Vesting of stock awards—  —  (0.7) —  —  0.8  0.1  
Shares issued under employee stock purchase plan19,245
 —
 1.3
 —
 —
 (19,245) 0.7
 2.0
Shares issued under employee stock purchase plan—  —  1.4  —  —  1.0  2.4  
Balance as of June 30, 201966,806,449
 $4.4
 $631.0
 $1,953.7
 $(145.2) 21,651,185
 $(819.2) $1,624.7
Balance as of March 31, 2020Balance as of March 31, 202088,457,634  $4.4  $644.4  $2,025.2  $(223.6) $(901.5) $1,548.9  
 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, 201867,256,112
 $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—
 —
 —
 124.3
 —
 —
 —
 124.3
Other comprehensive income (loss), net of tax of $4.0 million—
 —
 —
 —
 (26.8) —
 —
 (26.8)
Dividends ($0.62 per common share)—
 —
 0.3
 (41.7) —
 —
 —
 (41.4)
Stock repurchases for stock award withholding obligations(44,647) —
 —
 —
 —
 44,647
 (4.2) (4.2)
Stock repurchases in the open market(792,264) —
 —
 —
 —
 792,264
 (75.0) (75.0)
Stock compensation on equity-classified awards—
 —
 26.7
 —
 —
 —
 —
 26.7
Stock option exercises190,210
 —
 2.1
 —
 —
 (190,210) 7.1
 9.2
Vesting of stock awards135,549
 —
 (4.9) —
 —
 (135,549) 4.9
 —
Shares issued under employee stock purchase plan61,489
 —
 3.9
 —
 —
 (61,489) 2.3
 6.2
Balance as of June 30, 201966,806,449
 $4.4
 $631.0
 $1,953.7
 $(145.2) 21,651,185
 $(819.2) $1,624.7



Common StockAdditional
Paid-in Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury Stock
Total Shareholders’ Equity
Shares
Issued		Amount
Balance as of September 30, 201988,457,634  $4.4  $637.4  $1,967.4  $(182.5) $(853.4) $1,573.3  
Net income—  —  —  86.7  —  —  86.7  
Other comprehensive income (loss), net of tax of $9.8—  —  —  —  (41.1) —  (41.1) 
Dividends ($0.43 per common share)—  —  0.2  (28.9) —  —  (28.7) 
Stock repurchases for stock award withholding obligations—  —  —  —  —  (15.8) (15.8) 
Stock repurchases in the open market—  —  —  —  —  (54.1) (54.1) 
Stock compensation on equity-classified awards—  —  18.5  —  —  —  18.5  
Stock option exercises—  —  1.7  —  —  4.0  5.7  
Vesting of stock awards—  —  (16.1) —  —  16.2  0.1  
Shares issued under employee stock purchase plan—  —  2.7  —  —  1.6  4.3  
Balance as of March 31, 202088,457,634  $4.4  $644.4  $2,025.2  $(223.6) $(901.5) $1,548.9  


8
Table of Contents

Common StockAdditional
Paid-in Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury StockTotal Shareholders’ Equity
Shares
Issued		Amount
Balance as of December 31, 201888,457,634  $4.4  $606.9  $1,899.9  $(135.3) $(824.4) $1,551.5  
Net Income—  —  —  49.5  —  —  49.5  
Other comprehensive income (loss), net of tax of $1.4—  —  —  —  (5.0) —  (5.0) 
Dividends ($0.21 per common share)—  —  0.1  (14.2) —  —  (14.1) 
Stock repurchases for stock award withholding obligations—  —  —  —  —  (0.5) (0.5) 
Stock compensation on equity-classified awards—  —  11.1  —  —  —  11.1  
Stock option exercises—  —  1.0  —  —  3.0  4.0  
Vesting of stock awards—  —  (0.7) —  —  0.7  —  
Shares issued under employee stock purchase plan—  —  1.5  —  —  0.8  2.3  
Balance as of March 31, 201988,457,634  $4.4  $619.9  $1,935.2  $(140.3) $(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 March 31, 201866,252,063
 $4.4
 $596.7
 $1,767.6
 $(74.5) 22,205,571
 $(783.8) $1,510.4
 $—
 $1,510.4
Net income attributable to common shareholders—
 —
 —
 45.2
 —
 —
 —
 45.2
 —
 45.2
Other comprehensive income (loss), net of tax of ($1.1) million—
 —
 —
 —
 (40.7) —
 —
 (40.7) —
 (40.7)
Dividends ($0.20 per common share)—
 —
 0.1
 (13.4) —
 —
 —
 (13.3) —
 (13.3)
Stock repurchases for stock award withholding obligations(33,938) —
 —
 —
 —
 33,938
 (3.0) (3.0) —
 (3.0)
Stock compensation on equity-classified awards—
 —
 5.6
 —
 —
 —
 —
 5.6
 —
 5.6
Stock option exercises83,297
 —
 0.1
 —
 —
 (83,297) 2.9
 3.0
 —
 3.0
Vesting of stock awards82,126
 —
 (2.9) —
 —
 (82,126) 2.9
 —
 —
 —
Shares issued under employee stock purchase plan19,265
 —
 1.0
 —
 —
 (19,265) 0.7
 1.7
 —
 1.7
Balance as of June 30, 201866,402,813
 $4.4
 $600.6
 $1,799.4
 $(115.2) 22,054,821
 $(780.3) $1,508.9
 $—
 $1,508.9


Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal Shareholders’ Equity
Shares IssuedAmount
Balance as of September 30, 201888,457,634  $4.4  $602.9  $1,876.2  $(113.0) $(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—  —  —  —  —  (4.0) (4.0) 
Stock repurchases in the open market—  —  —  —  —  (75.0) (75.0) 
Stock compensation on equity-classified awards—  —  16.9  —  —  —  16.9  
Stock option exercises—  —  2.0  —  —  6.6  8.6  
Vesting of stock awards—  —  (4.7) —  —  4.7  —  
Shares issued under employee stock purchase plan—  —  2.6  —  —  1.6  4.2  
Balance as of March 31, 201988,457,634  $4.4  $619.9  $1,935.2  $(140.3) $(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 September 30, 201765,813,794
 $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—
 —
 —
 162.0
 —
 —
 —
 162.0
 —
 162.0
VIE activity—
 —
 —
 —
 —
 —
 —
 —
 (7.4) (7.4)
Other comprehensive income (loss), net of tax of ($4.8) million—
 —
 —
 —
 (5.2) —
 —
 (5.2)   (5.2)
Dividends ($0.58 per common share)—
 —
 0.4
 (38.8) —
 —
 —
 (38.4) —
 (38.4)
Stock repurchases for stock award withholding obligations(87,749) —
 —
 —
 —
 87,749
 (7.4) (7.4) —
 (7.4)
Stock compensation on equity-classified awards—
 —
 21.1
 —
 —
 —
 —
 21.1
 —
 21.1
Stock option exercises398,059
 —
 (0.4) —
 —
 (398,059) 14.0
 13.6
 —
 13.6
Vesting of stock awards220,672
 —
 (7.8) —
 —
 (220,672) 7.8
 —
 —
 —
Shares issued under employee stock purchase plan58,037
 —
 2.9
 —
 —
 (58,037) 2.1
 5.0
 —
 5.0
Balance as of June 30, 201866,402,813
 $4.4
 $600.6
 $1,799.4
 $(115.2) 22,054,821
 $(780.3) $1,508.9
 $—
 $1,508.9

See Notes to Condensed Consolidated Financial Statements (unaudited)(Unaudited)

9
Table of Contents
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

Nature of Operations

Hill-Rom Holdings, Inc. (the “Company,” “Hillrom,” “we,” “us,” or “our”) was incorporated on August 7, 1969 in the State of Indiana and is headquartered in Chicago, Illinois. We are 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.

Basis of Presentation and Principles of Consolidation

Unless the context otherwise requires, the terms “Hillrom,” “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 Hillrom’s latest Annual Report onfiscal 2019 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 (“SEC”).SEC. The September 30, 20182019 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 Hillrom and its wholly-owned subsidiaries. Intercompany accountsbalances and transactions have been eliminated in consolidation.

Use of Estimates

The Company makes a number of significant estimates, assumptions and judgments in the preparation of its financial statementsstatements. Additionally, the Company measures and classifies fair value measurements in accordance with the level hierarchy in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make. As of March 31, 2020, the Company's significant accounting policies and estimates and assumptions that affectvaluation techniques used to measure fair value have not changed from September 30, 2019. See Note 1. Summary of Significant Accounting Policies within the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at2019 Form 10-K for the date of the financial statements and the reported amounts of revenue and expensefiscal year ended September 30, 2019 for further information.

Prior Period Reclassification

Beginning 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 and indefinite-lived intangible assets (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 wherefiscal year 2020, 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 bepresenting Acquisition-related intangible asset amortization as 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. Such remaining performance obligations represent the portion of the contract price for which work has not been performed and are primarily related to our 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 disclosedline item on our Condensed Consolidated Balance Sheets, as Level 1 instrumentsStatements of Income for all periods presented. Acquisition-related intangible asset amortization was previously included in Selling and certain other derivatives and investments as either Level 2 or 3 instruments. Investments measured at Net Asset Valueadministrative expenses. Additionally, we will no longer present Gross Profit as a practical expedient are not categorized insubtotal on our Statements of Income.

The following table presents Acquisition-related intangible asset amortization and Selling and administrative expenses, excluding the fair value hierarchy. Refer to Note 6Acquisition-related intangible asset amortization, for disclosurethe years ended September 30, 2019, 2018 and 2017, and for each quarterly period of our debt instrument and interest rate swap fair values. There have not been significant changes in our classificationfiscal 2019.

Quarter EndedYear Ended
December 31,
2018		March 31,
2019		June 30,
2019		September 30,
2019		September 30,
2019		September 30,
2018		September 30,
2017
Selling and administrative expense, previously reported$218.0  $231.2  $246.4  $245.4  $941.0  $891.6  $874.5  
Less, Acquisition-related intangible asset amortization25.7  27.3  29.3  40.1  122.4  106.9  108.4  
Selling and administrative expense, currently reported$192.3  $203.9  $217.1  $205.3  $818.6  $784.7  $766.1  

10
Table of assets and liabilities in the fiscal quarter.Contents

Income TaxesGoodwill

Hillrom 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 June 30, 2019,March 31, 2020, we had $83.1 millionevaluated goodwill for impairment in response to the impacts of valuation allowancesthe COVID-19 pandemic on deferred tax assets,the global economy and the results of this evaluation did not result in any impairments.

For the Surgical Solutions segment, we expect near-term lower demand for operating room infrastructure due to project delays as customers are currently focusing on the demands of the pandemic.

Slower recovery resulting from extended project delays, an increase in discount rates, unfavorable changes in earnings multiples or a tax-effected basis, primarily related to certain foreign deferred tax attributesdecline in future cash flow projections, among other factors, may cause a change in circumstances indicating that arethe carrying value of our goodwill may not expected to be utilized. The valuation allowance was not materially impacted by the Tax Cuts and Jobs Act (the “Tax Act”) enactedrecoverable. If future financial assumptions significantly differ from those evaluated in the United States in December 2017. We believeassessment noted above due to duration or magnitude of the impact of COVID-19, we can provide no assurance that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances.a future goodwill impairment charge would not be incurred.

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,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,2016-02, Revenue from Contracts with Customers Leases (Topic 842)(“ASC 606” and subsequently issued related amendments, collectively referred to as “ASC 842”. The objective of this guidance is to increase transparency and comparability among organizations through recognizing leased assets, called right-of-use assets (“ROU”), which provides guidance for revenue recognition. The standard’s core principle is thatand lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  As 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 adoptedlessee, the new standard requires us to recognize both the ROU assets and lease liabilities in the first quarterbalance sheet for most leases, whereas under previous GAAP only finance lease liabilities (referred to as capital leases) were recognized in the balance sheet. In addition, for both lessees and lessors, the definition of fiscala lease has been revised, which may result in changes to the classification of an arrangement as a lease. Under the new standard, an arrangement that conveys the right to control the use of an identified asset by obtaining substantially all of its economic benefits and directing how it is used is a lease, whereas the previous definition focused on the ability to control the use of the asset or to obtain its output. Quantitative and qualitative disclosures related to the amount, timing and judgments of an entity’s accounting for leases and the related cash flows are expanded under the new standard. Disclosure requirements apply to both lessees and lessors, whereas previous disclosures related only to lessees. The recognition, measurement, and presentation of revenues, expenses and cash flows arising from a lease have not significantly changed from previous GAAP.

We adopted ASC 842 effective October 1, 2019 using the modified retrospectiveoptional transition method approach. See Note 2 for additional informationWe elected the package of practical expedients, which applies to both lessees and lessors, to (1) not reassess whether existing contracts contain leases, (2) carryforward the existing lease classification and (3) not reassess initial direct costs associated with existing leases.

As a lessee, the adoption of the guidance 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 prospectivelyOctober 1, 2019 resulted in the first quarterrecognition of fiscal 2019ROU assets of $82.5 million and lease liabilities of $85.8 million, which all related to operating leases. The ROU assets were lower than the new updateslease liabilities due to the derecognition of deferred rent balances of $3.3 million. As a lessor, our accounting was not impacted by the adoption of this guidance. We did not recognize any adjustment to the comparative period presented in the financial statements in accordance with our adoption method. The guidance 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 methodStatements 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.

Income.
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. See Note 77. Leases for additional information on our retirement and postretirement plans.

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 adoptionimpacts 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 and has subsequently issued related amendments, collectively referred to as“Topic 326”. Topic 326 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. Topic 326 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 early adopted this standard in the first quarter of fiscal 2020 and the guidance did not have a material impact on our Condensed Consolidated Financial Statements.

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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.  The amendment recognizes the OIS rate based on the SOFR as likely London Interbank Offered Rate (“LIBOR”) replacements and supports the marketplace transition by adding the new reference rate as a benchmark rate.  The adoption of this ASU did not impact our financial statements as we have not yet utilized the OIS rate based on the SOFR for borrowings under our lending arrangements or as a benchmark rate for hedge accounting purposes. We will continue to monitor, assess and plan for the phase out of LIBOR.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments and subsequently issued related amendments, collectively referred to as“Topic 326”. Topic 326 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 recognize credit losses through an allowance for credit losses. Topic 326 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. TheThis update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement to be consistent with the requirements 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 20202021 and must be applied retrospectively to the first quarter of fiscal 2019, the date of initial application of Topic 606.2020. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.

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In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The purpose of the standard is to remove certain exceptions to the general principles of Topic 740: Income Taxes in order to reduce the cost and complexity of its application and to maintain or improve the usefulness of the information provided to users of financial statements. ASU 2019-12 is effective for our first quarter of fiscal 2021 and will be applied either retrospectively or prospectively depending on the specific Topic 740 exception affected. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption on our Condensed Consolidated Financial Statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The purpose of the standard is to provide guidance for the effects of the marketplace transition from LIBOR to a new reference rate as a benchmark rate.  ASU 2020-04 is optional and is effective for a limited period of time from March 12,2020 through December 31, 2022. We are continuing to monitor, assess and plan for the phase out of LIBOR and will evaluating the impact of adoption on our Condensed Consolidated Financial Statements.

Except as noted above, there have beenare no significant changes to our assessment of the impact of recently issued accounting standards included in Note 11. Summary of Significant Accounting Policies of our Consolidated Financial Statements in our 20182019 Form 10-K.

Note 2. Revenue Recognitionfrom Contracts with Customers

On October 1, 2018, we adopted ASC 606 usingAs of March 31, 2020, the modified retrospective methodCompany's significant accounting policies for contracts that wererecognizing revenue have not completed aschanged from September 30, 2019. See Note 1. Summary 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 adjustedSignificant Accounting Policies 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.

Note 2. Revenue related to certain productsRecognition 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 was recognized over the period the Company was reimbursed by third parties. As a result of the accelerated recognition of revenue, adoption date adjustments were required to be recorded to Trade accounts receivable, net of allowances and to derecognize assets previously recorded.
The cumulative effect of the changes made on the Condensed Consolidated Balance Sheets at October 1, 20182019 Form 10-K for the adoption of ASC 606, is as follows:

Impacted Condensed Consolidated Balance Sheet Items September 30, 2018 As Reported Impacts of ASC 606 Adoption October 1, 2018 After 606 Adoption
ASSETS      
Trade accounts receivable, net of allowances $580.7
 $29.1
 $609.8
Other current assets 100.2
 21.8
 122.0
Property, plant and equipment, net 328.3
 (5.6) 322.7
Deferred income taxes 35.0
 5.6
 40.6
Other assets 75.1
 3.4
 78.5
LIABILITIES     
Deferred revenue 40.0
 47.5
 87.5
Other current liabilities 67.1
 0.8
 67.9
Other long-term liabilities 40.4
 10.9
 51.3
SHAREHOLDERS’ EQUITY
      
Retained earnings 1,876.2
 (4.9) 1,871.3

The impacts of ASC 606 in the quarter andfiscal year to date periods ended JuneSeptember 30, 2019 on our Condensed Consolidated Statement of Income are shown below.
  Quarter Ended June 30, 2019 Year to Date Ended June 30, 2019
Impacted Condensed Consolidated Statement of Income Items As Reported Impacts of ASC 606 Balances without ASC 606 As Reported Impacts of ASC 606 Balances without ASC 606
Product sales and service net revenue1
 $653.0
 $27.2
 $625.8
 $1,901.1
 $79.3
 $1,821.8
Rental net revenue1
 73.8
 (23.7) 97.5
 223.4
 (72.8) 296.2
Cost of goods sold2
 332.3
 7.0
 325.3
 971.3
 18.1
 953.2
Rental expenses2
 37.9
 (5.4) 43.3
 114.0
 (16.3) 130.3
Income tax expense (benefit) 13.1
 0.4
 12.7
 31.7
 0.8
 30.9
Net income 32.6
 1.5
 31.1
 124.3
 3.8
 120.5
for further information.
1 Includes $23.5 million and $71.0 million related to revenue previously classified as Rental revenue that has been reclassified to Product sales and service revenue as a result of the adoption of ASC 606 for the quarter and year to date periods ended June 30, 2019.

2 Includes $5.2 million and $15.7 million related to cost of goods sold previously classified as Rental expenses that has been reclassified to Cost of goods sold as a result of the adoption of ASC 606 for the quarter and year to date periods ended June 30, 2019.

Within our Patient Support Systems segment, the adoption of ASC 606 impacted equipment and other costs which is reported in Other current assets, Other assets, and deferred revenue, which is reported in Deferred revenue and Other long-term liabilities.  

Within our Front Line Care segment, the adoption of ASC 606 impacted the reported amount in Trade accounts receivable, net of allowances, resulting in the derecognition of assets previously recorded.

The impacts of the adoption of ASC 606 as of June 30, 2019, including the cumulative effects of the change, on our Condensed Consolidated Balance Sheet are shown below.


  June 30, 2019
Impacted Condensed Consolidated Balance Sheet Items As Reported Impacts of ASC 606 Balances without ASC 606
ASSETS      
Trade accounts receivable, net of allowances $597.9
 $30.9
 $567.0
Other current assets1
 128.0
 15.9
 112.1
Property, plant and equipment, net 311.1
 (6.1) 317.2
Deferred income taxes 35.5
 5.6
 29.9
Other assets1
 87.9
 3.1
 84.8
LIABILITIES     
Deferred revenue 101.8
 38.9
 62.9
Other current liabilities 95.6
 0.7
 94.9
Other long-term liabilities 74.7
 10.2
 64.5
SHAREHOLDERS’ EQUITY
      
Retained earnings 1,953.7
 (1.1) 1,954.8


1 Includes $14.2 million and $3.1 million of equipment and other costs in Other current assets and Other assets directly related to certain contract performance obligations not completed in our Patient Support Systems segment. These costs are subsequently expensed to Cost of goods sold commensurate with the timing of revenue recognition, which is generally 12 to 24 months.

Deferred Contract Costs

Consistent with prior practice, deferred contract costs represent commissions paid upon receipt of a purchase order for certain products in our Patient Support Systems segment.  These commissions are subsequently expensed to Selling and administrative expenses commensurate with the timing of revenue recognition, which is generally 12 to 24 months. As of June 30, 2019, we had $9.9 million of deferred contract costs recorded within Other current assets and Other assets. For the quarter and year to date periods ended June 30, 2019, we amortized $3.5 million and $10.1 million of deferred contract costs, which are classified within Selling and administrative expenses in the Condensed Consolidated Statements of Income.

Disaggregation of Revenue

The impact of the adoption of ASC 606 on the quarter and year to date periods ended June 30, 2019 is provided below.

Recognition of revenue related to certain products within our Patient Support Systems segment has been deferred under ASC 606 due to the determination that the performance obligation is not fulfilled until the system is fully installed.

Recognition of revenue related to certain products within our Front Line Care segment has been accelerated under ASC 606 due to the determination that the performance obligation is satisfied upon product delivery to the customer.  Previously, this revenue was recognized over the period that the Company was reimbursed by third parties.



  Quarter Ended June 30, 2019 Year to Date Ended June 30, 2019
 As Reported Impacts of ASC 606 Balances without ASC 606 As Reported Impacts of ASC 606 Balances without ASC 606
Net revenue - United States:           
Patient Support Systems$290.8
 $3.2
 $287.6
 $806.1
 $4.2
 $801.9
Front Line Care178.4
 0.2
 178.2
 515.1
 1.8
 513.3
Surgical Solutions60.2
 —
 60.2
 169.7
 —
 169.7
Total net revenue - United States$529.4
 $3.4
 $526.0
 $1,490.9
 $6.0
 $1,484.9
            
Net revenue - Outside of the United States (“OUS”):           
Patient Support Systems$83.7
 $0.1
 $83.6
 $269.0
 $0.5
 $268.5
Front Line Care66.0
 —
 66.0
 205.8
 —
 205.8
Surgical Solutions47.7
 —
 47.7
 158.8
 —
 158.8
Total net revenue - OUS$197.4
 $0.1
 $197.3
 $633.6
 $0.5
 $633.1
            
Net revenue:           
Patient Support Systems$374.5
 $3.3
 $371.2
 $1,075.1
 $4.7
 $1,070.4
Front Line Care244.4
 0.2
 244.2
 720.9
 1.8
 719.1
Surgical Solutions107.9
 —
 107.9
 328.5
 —
 328.5
Total net revenue$726.8
 $3.5
 $723.3
 $2,124.5
 $6.5
 $2,118.0

The Company disaggregates revenue recognized from contracts with customers by geography and reportable segments consistent with the way in which management operates and views the business. See Note 14. Segment Reporting for the presentation of the Company's revenue disaggregation.

Contract Balances

The nature of our products and services does not give rise to contract assets as we typically do not have instances where a right to payment for goods and services already transferred to a customer exists that is conditional on something other than the passage of time.

The following summarizes contract liability activity duringfor fiscal 2019 and the year to date periodsix months ended June 30, 2019.March 31, 2020. The contract liability balance as of June 30, 2019 represents the transaction price allocated to the remaining performance obligations.
Contract Liabilities
Balance as of October 1, 2018$47.8 
Revenue deferred due to ASC 606 initial adoption58.4 
Deferred revenue acquired10.7 
New revenue deferrals282.1 
Revenue recognized upon satisfaction of performance obligations(273.2)
Balance as of September 30, 2019125.8 
Deferred revenue acquired2.7 
New revenue deferrals168.4 
Revenue recognized upon satisfaction of performance obligations(166.2)
Balance as of March 31, 2020$130.7 
  Contract Liabilities
Balance as of September 30, 2018 $47.8
Revenue deferred due to ASC 606 initial adoption 58.4
Deferred revenue acquired 10.3
New revenue deferrals 194.4
Revenue recognized upon satisfaction of performance obligations (189.4)
Balance as of June 30, 2019 $121.5

These contract liabilities are recorded in Deferred revenue and Other long-term liabilities. We expect to satisfy the majority of the remaining performance obligations and recognize revenue related to installation and service contracts within 12 to 24 months.


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Note 3. Supplementary Balance SheetFinancial Statement Information
 March 31,
2020		September 30, 2019
Inventories, net of reserves:  
Finished products$114.3  $120.5  
Work in process42.7  42.4  
Raw materials108.5  106.7  
Total inventories, net of reserves$265.5  $269.6  
Accumulated amortization of software and other intangible assets$602.2  $597.0  
Investments included in Other assets$47.7  $51.1  
 June 30,
2019		 September 30,
2018
Allowance for possible losses and discounts on trade receivables$21.9
 $21.8
    
Inventories, net of reserves: 
  
Finished products$136.7
 $139.7
Raw materials and work in process161.1
 152.0
Total inventories, net of reserves$297.8

$291.7
    
Accumulated depreciation of property, plant and equipment$561.4
 $586.7
    
Accumulated amortization of software and other intangible assets$618.7
 $532.8
    
Investments included in Other assets$50.6
 $24.6
    
Preferred stock, without par value: 
  
Shares authorized1,000,000
 1,000,000
Shares issuedNone
 None
    
Common stock, without par value: 
  
Shares authorized199,000,000
 199,000,000
Shares issued88,457,634
 88,457,634
Shares outstanding66,806,449
 67,256,112
    
Treasury shares21,651,185
 21,201,522


Investments

In the first quarter of fiscal 2019, we acquired $26.6 million of non-marketable equity securities that are valued at cost. There has not been any

During the six months ended March 31, 2020, we sold an equity investment with a carrying value of $3.1 million and recognized a loss of $0.3 million, which is recorded as a component of Investment income (expense) and other, net. Additionally, we recognized an impairment loss of the historical$1.7 million on a cost method investment. The loss was recorded as a component of our investments in non-marketable equity securities.Investment income (expense) and other, net.

Supplemental Cash Flow Information
Six Months Ended March 31
20202019
Non-cash investing activities:
Change in capital expenditures not paid$4.0  $0.3  
Sale of equity method investment2.8  —  
Total non-cash investing activities:$6.8  $0.3  
Non-cash financing activities:  
Distribution of shares issued under stock-based compensation plans$27.1  $9.9  

Note 4. Business Combinations

Acquisitions

Excel Medical Electronics

On January 10, 2020, we acquired all of the outstanding equity interest of Excel Medical Electronics (“Excel Medical”), a clinical communications software company located in the United States, for total aggregate consideration of $19.2 million, comprised of $13.1 million cash and $6.1 million of contingent consideration measured at fair value as of the acquisition date. The purchase price is subject to certain post-closing adjustments. Contingent consideration is comprised of $1.6 million, which was withheld at the close of the transaction and is payable upon completion of contract stipulation, and estimated consideration measured at a fair value of $4.5 million, which is payable of up to $15.0 million based upon the achievement of certain commercial milestones over the next two years.

The results of Excel Medical are included in the Patient Support Systems segment since the date of acquisition. The impact to reported revenue and net income for the three and six months ended March 31, 2020 was not significant.
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The following table summarizes the preliminary estimate of the fair value of assets acquired and liabilities assumed at the date of the Excel Medical acquisition. The fair value of assets acquired and liabilities assumed are still considered to be preliminary, however we do not expect further adjustments to be significant.

Amount
Trade accounts receivable$0.6 
Inventories0.9 
Other current assets0.1 
Property, plant and equipment0.1 
Goodwill9.8 
Developed technology10.9 
Deferred revenue(2.7)
Other current liabilities(0.5)
 Total purchase price, net of cash acquired$19.2 

Goodwill in connection with the Excel Medical acquisition of $9.8 million was recognized at the acquisition date related to the excess of the purchase price over the estimated fair value of the assets acquired and the liabilities assumed, reflecting the value associated with enhancing synergies, accelerating our leadership in care communications platform and advancing our digital and mobile communications platform and capabilities. The goodwill was allocated entirely to our Patient Support Systems segment and is deductible for tax purposes in the United States.

The estimated useful life of the acquired intangible assets is 5 years for developed technology.

For the three and six months ended March 31, 2020, we recognized $0.7 million and $0.8 million of acquisition and integration costs in Selling and administrative expenses.

Breathe Technologies, Inc.

On September 3, 2019, we acquired all of the outstanding equity interests of Breathe Technologies, Inc. (“Breathe”), a developer and manufacturer of a patented wearable, non-invasive ventilation technology that supports improved patient mobility, for total aggregate cash consideration of $127.6 million.

The results of Breathe are included in the Front Line Care segment since the date of acquisition.

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The following table summarizes the preliminary estimate of the fair value of assets acquired and liabilities assumed at the date of the Breathe acquisition. The fair value of assets acquired and liabilities assumed are still considered to be preliminary, however we do not expect further adjustments to be significant.
Amount
Trade accounts receivable$0.3 
Inventories6.3 
Other current assets0.1 
Property, plant and equipment2.1 
Goodwill60.2 
Trade name4.0 
Customer relationships0.4 
Developed technology56.0 
Other assets0.2 
Trade accounts payable(0.5)
Other current liabilities(1.6)
Deferred income taxes0.9 
Other long-term liabilities(0.8)
 Total purchase price, net of cash acquired$127.6 

Goodwill in connection with the Breathe acquisition of $60.2 million was recognized at the acquisition date related to the excess of the purchase price over the estimated fair value of the assets acquired and the liabilities assumed, reflecting the value associated with enhancing synergies and accelerating our leadership in respiratory health products. The goodwill was allocated entirely to our Front Line Care segment, which is not deductible for tax purposes in the United States.

The estimated useful lives of the acquired intangible assets are 2 years for trade name, 8 years for customer relationships and 11 years for developed technology.

For the three and six months ended March 31, 2020, we recognized $0.6 million and $1.5 million of acquisition and integration costs in Selling and administrative expenses and $0.5 million and $2.2 million in Special charges related to this acquisition.

Voalte, Inc.

On April 1, 2019, we acquired all of the outstanding equity interests of Voalte, Inc. (“Voalte”), a clinical communications software company located in the United States, for total aggregate consideration of $181.0 million, comprised of $175.8 million cash and $5.2 million of contingent consideration measured at fair value as of the acquisition date. The purchase price is subject to certain post-closing adjustments. Contingent consideration iswas payable of up to $15.0 million based upon the achievement of certain commercial milestones. The transactionmilestones by March 31, 2020. No milestones were met and therefore no contingent consideration was financed through borrowings on our revolving credit facility (Note 6).paid.

The results of Voalte are included in the Patient Support Systems segment of our Condensed Consolidated Financial Statements since the date of acquisition. The impact to reported revenue and net income for the fiscal quarter was not significant. The revenue and net income

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Table of Voalte on a pro forma basis would not be significant to any of the periods presented in our consolidated financial statements.Contents


The following table summarizes the preliminary estimate of the fair value of assets acquired and liabilities assumed at the date of the Voalte acquisition. The fair value of assets acquired and liabilities assumedresults are still considered to be preliminary, however we do not expect further adjustments to be significant.final.
 Amount
Trade accounts receivable, net of allowances$5.8
Inventories0.1
Other current assets2.7
Property, plant and equipment0.2
Goodwill98.1
Non-competition agreements1
2.7
Trade name1
13.5
Customer relationships1
29.5
Developed technology1
56.0
Trade accounts payable(1.7)
Deferred revenue(10.3)
Other current liabilities(5.6)
Deferred income taxes(10.0)
 Total purchase price, net of cash acquired$181.0
Amount
Trade accounts receivable$5.8 
Inventories0.1 
Other current assets2.7 
Property, plant and equipment0.2 
Goodwill98.5 
Non-competition agreements2.7 
Trade name13.5 
Customer relationships29.0 
Developed technology55.0 
Trade accounts payable(1.7)
Deferred revenue(10.7)
Other current liabilities(4.3)
Deferred income taxes(9.8)
 Total purchase price, net of cash acquired$181.0 
1 The estimated useful lives of the acquired intangible assets are 5 years for non-competition agreements and between 8 and 12 years for trade name, customer relationships and developed technology.

Goodwill in connection with the Voalte acquisition of $98.5 million was recognized at the acquisition date related to the excess of the purchase price over the estimated fair value of the assets acquired and the liabilities assumed, reflecting the value associated with enhancing synergies, accelerating our leadership in care communications platform and advancing our digital and mobile communications platform and capabilities. The goodwill was allocated entirely to our Patient Support Systems segment, which is not deductible for tax purposes in the United States.

The excess
The estimated useful lives of the purchase price overacquired intangible assets are 5 years for non-competition agreements and between 8 and 10 years for trade name, customer relationships and developed technology.

In the estimated fair valuefirst quarter of fiscal 2020, we reduced the assets acquired and the liabilities assumed totaled $98.1 million, which was recognized as goodwill at the acquisition date, reflecting the value associated with enhancing synergies, accelerating our leadership in care communications and advancing our digital and mobile communications platform and capabilities.

We recognized $8.8 million and $10.1 million of acquisition and integration costs, including $2.0 million related to contingent consideration duringaccrual by $8.4 million as the quarter and yearcommercial milestones were not expected to date periods ended June 30, 2019 inbe achieved. This was recorded as a component of Selling and administrative expenses.

On August 1, 2019, we entered into a definitive agreement There were no further adjustments to acquire Breathe Technologies, Inc., a developer and manufacturer of a patented wearable, non-invasive ventilation technology that supports improved patient mobility, for cashthe contingent consideration of $130.0 million. We expectaccrual in the transaction to close during our fiscal fourthsecond quarter of 2019, subject to customary closing conditions.fiscal 2020.

Asset Acquisition

On October 1, 2018, we acquired the right to use patented technology and certain related assets from a supplier to our Front Line Care segment. We paid $17.1 million of cash and committed to guaranteed minimum future royalty payments of $22.0 million, which are presented in Other intangible assets and software, net and are being amortized over the 7-year term of the agreement.

DispositionsDisposition

In fiscal 2017, we sold our Völker business. In the first quarter of fiscal 2018, we recorded a gain of $1.0 million attributable to the final working capital settlement associated with the Völker transaction.

During the second quarter of fiscal 2018, we entered into an agreement to convey certain net assets related to the Company’s third-party rental business, which is comprised of purchased moveable medical equipment that can be rented to customers, to Universal Hospital Services, Inc. (“UHS”) in exchange for UHS’s agreement to dismiss its previously disclosed litigation against the Company (“Settlement Agreement”). During the second quarter of fiscal 2018, we recorded a loss of $23.4 million in Special charges, which includes approximately $20.4 million related to the non-cash loss reserve for the assets that were conveyed, and other Settlement Agreement related costs of approximately $3.0 million. During the third quarter of fiscal 2018, we recorded an additional loss of $0.6 million in Special charges related to additional Settlement Agreement costs. The third-party rental business was part of our Patient Support Systems segment. The transaction closed during the third quarter of fiscal 2018.


InOn August 2, 2019, we completed a divestituredisposition to sell certain of our surgical consumable products and related assets for a purchase price of $170.0$166.6 million, inwhich is net of cash subject to certain post-closing adjustments, pursuant toand working capital adjustments. In fiscal 2019, we recorded a stock purchase agreement dated July 9, 2019. We expect to record apre-tax loss on this divestituredisposition of approximately $20.0$15.9 million in Investment income (expense) and other, net, including transaction costs of approximately $4.0 million. As of June 30, 2019, the evaluation of the recoverability of the value of the asset group for thisThis disposition did not result in any impairment. have a major effect on the Company's operations or financial results, and, therefore, has not been reported as a discontinued operation.

Note 5. Goodwill and Indefinite-Lived Intangible Assets

Goodwill

The following summarizes goodwill activity by reportable segment:
 Patient Support Systems Front Line Care Surgical Solutions Total
Balances as of September 30, 2018       
Goodwill$544.4
 $1,370.6
 $296.1
 $2,211.1
Accumulated impairment losses(472.8) —
 —
 (472.8)
Goodwill, net as of September 30, 201871.6
 1,370.6
 296.1
 1,738.3
        
Changes in goodwill in the period: 
  
  
  
Goodwill related to acquisition98.1
 —
 —
 98.1
Currency translation effect(1.0) (2.1) (2.5) (5.6)
        
Balances as of June 30, 2019 
  
  
  
Goodwill641.5
 1,368.5
 293.6
 2,303.6
Accumulated impairment losses(472.8) —
 —
 (472.8)
Goodwill, net as of June 30, 2019$168.7
 $1,368.5
 $293.6
 $1,830.8


17
As discussed in Note 14, we operate in three reportable business segments. Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded and is reallocated as necessary based on the restructuring
Table of reporting units over time. Once goodwill is assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.Contents

Testing for goodwill impairment is performed annually, or on an interim basis upon the occurrence of a triggering event or change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The annual evaluation of goodwill performed during the third quarter of fiscal 2019 did not result in any impairment.

Indefinite-Lived Intangible Assets

We have various indefinite-lived intangible assets representing trade names with a carrying value of $466.4 million as of June 30, 2019 and $466.9 million as of September 30, 2018. Testing for indefinite-lived intangible asset impairment is performed annually, or on an interim basis upon the occurrence of a triggering event or change in circumstances that would more likely than not reduce the fair value of an indefinite-lived intangible asset below its carrying amount. The annual evaluation of indefinite-lived intangible assets performed during the third quarter of fiscal 2019 did not result in any impairment.


Note 6.5. Financing Agreements

Total debt consists of the following:
 June 30,
2019		 September 30,
2018
Current portion of long-term debt$69.7
 $0.1
Securitization Program109.4
 110.0
Note Securitization Facility67.1
 72.4
Total Short-term borrowings$246.2
 $182.5
    
Revolving credit facility, matures September 2021$100.0
 $—
Senior secured Term Loan A, long-term portion, matures September 2021962.4
 1,029.7
Senior unsecured 5.75% notes due on September 1, 2023421.4
 420.8
Senior unsecured 5.00% notes due on February 15, 2025296.8
 296.4
Unsecured 7.00% debentures due on February 15, 202413.5
 13.6
Unsecured 6.75% debentures due on December 15, 202729.6
 29.5
Other0.3
 0.4
Total Long-term debt$1,824.0
 $1,790.4
    
Total debt$2,070.2
 $1,972.9


Short-Term Borrowings
In May 2019, we renewed our
Securitization Facilities

The Company has a 364-day accounts receivable securitization program (the “Securitization Program”Facility”) with certain financial institutions for borrowings up to $110.0 million. We also renewed our additionalmillion and a 364-day facility for borrowings up to $90.0 million (the “Note Securitization Facility”) in May 2019.with certain financial institutions. Under the terms of each of the Securitization ProgramFacility and Note Securitization Facility, certain of our accounts receivable secure the amounts borrowed and cannot be used to pay our other debts or liabilities. The amount of permissible borrowings outstanding is determined based on the amount of qualifying accounts receivable at any point in time. Borrowings outstanding under the Securitization ProgramFacility and Note Securitization Facility bear interest at the London Interbank Offered Rate (“LIBOR”)LIBOR plus the applicable margin of 0.8% and 1.0% and are included as a component of Short-term borrowings, while the accounts receivable securing these obligations remain as a component of Trade accounts receivable, net of allowances, in our Condensed Consolidated Balance Sheets. In addition,allowances.

As of March 31, 2020 these facilities had an expiration date of May 1, 2020, but were renewed on April 27, 2020 through April 26, 2021. The terms and conditions of the agreements governingrenewed facilities are substantially similar to the expired facilities. Borrowings outstanding under the renewed Securitization ProgramFacility and renewed Note Securitization Facility contain various customary affirmativebear interest at LIBOR plus the applicable margin of 0.8% and negative covenants, and customary default and termination provisions. As of June 30,0.9%.

Long-Term Debt

Long-Term Debt Redemption

In September 2019, we were in compliance with these covenants and provisions.

We have outstandingissued senior unsecured notes of $300.0$425.0 million maturing February 2025September 2027 that bear interest at a fixed rate of 5.00%4.375% annually and senior unsecured notescapitalized debt issuance costs of $425.0 million maturing in September 2023 that bear interest at a fixed rate of 5.75% annually (collectively,$6.3 million. On October 7, 2019, we used the “Senior Notes”). These Senior Notes were issued at par in private placement offerings and are not registered securities on any public market. All ofnet proceeds from the notes were outstanding as of June 30, 2019. We are not required to make any mandatory redemption or sinking fund payments with respect to the Senior Notes, other than in certain circumstances such as a change in control or material sale of assets. We may redeem the 5.00% and 5.75% notes prior to maturity, but doing so would require payment of a premium on any amounts redeemed, the amount of which varies based on the timing of the redemption. The indentures governing the Senior Notes contain certain covenants which impose limitations on the amount of dividends we may pay and the amount of common shares we may repurchase in the open market, but we do not expect these covenants to affect our current dividend policy or open share repurchase program. The termsoffering of these indentures also impose certain restrictions onnotes, together with funds borrowed from the amount and type of additional indebtedness we may obtain in the future, as well as the types of liens and guarantees we may provide.

Our Senior Credit Agreement consists of two facilities as follows:
•
$1,462.5 million senior secured Term Loan A facility (“TLA Facility”), maturing in September 2021
•
Revolving Credit Facility providing borrowing capacity of up to $700.0 million, maturing in September 2021

The TLA Facility and Revolving Credit Facility bear interest at variable ratesmaturing in August 2024 (“2024 Revolving Credit Facility”), to redeem all of our previously outstanding senior unsecured 5.75% notes due September 2023 and to pay the prepayment premium of $12.2 million. We recorded a loss on extinguishment of debt of $15.6 million, which currently approximate 3.9%. These interest rates are based primarily on LIBOR, but under certain conditions could also be based onwas comprised of the U.S. Federal Funds Rate or the U.S. Prime Rate, at our option. We are able to voluntarily prepay outstanding loans under the TLA Facility at any time. In the quarter ended June 30, 2019, we did not make any payments on the TLA Facility.$12.2 million prepayment premium and $3.4 million of debt issuance costs previously capitalized.


As of June 30, 2019,March 31, 2020, there were $185.0 million outstanding borrowings of $100.0 million on the 2024 Revolving Credit Facility, and available borrowing capacity was $592.0$1,007.8 million after giving effect to $8.0the $7.2 million of outstanding standby letters of credit. The availabilityAs of September 30, 2019, there were $80.0 million outstanding borrowings under ouron the 2024 Revolving Credit Facility, is subjectand available borrowing capacity was $1,112.8 million after giving effect to our ability at$7.2 million of outstanding standby letters of credit.

See Note 6. Financing Agreements within the time of borrowing to meet certain specified conditions, including compliance with covenants contained in2019 Form 10-K for the Senior Credit Agreement.fiscal year ended September 30, 2019 for further information.

The facilities provided by the Senior Credit Agreement are held with a syndicate of banks, which includes over 30 institutions. Our general corporate assets, including those of certain of our subsidiaries, collateralize these obligations. The credit agreement governing these facilities contains financial covenants which specify a maximum secured net leverage ratio and a minimum interest coverage ratio, which are defined in the credit agreement. These financial covenants are measured at the end of each quarter. For the quarter ended in December 31, 2019 and thereafter, the required maximum secured net leverage ratio is 3.00x and the required minimum interest coverage ratio is 4.00x. We were in compliance with all financial covenants under our financing agreements as of June 30, 2019.Fair Value

The fair value of our debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. The book values of our variable rate short-term debt instruments, our senior secured Term Loan A facility maturing in August 2024 (“2024 TLA Facility”) and our 2024 Revolving Credit Facility approximate fair value.

The estimated fair values of our long-term debt instruments are described in the table below:
 March 31,
2020		September 30, 2019
Senior unsecured 5.00% notes due on February 14, 2025$303.1  $312.4  
Senior unsecured 4.375% notes due on September 15, 2027419.1  435.4  
Unsecured debentures44.8  48.1  
Total$767.0  $795.9  
 June 30,
2019		 September 30,
2018
Senior secured Term Loan A$1,003.3
 $991.9
Senior unsecured 5.75% notes due on September 1, 2023439.6
 437.3
Senior unsecured 5.00% notes due on February 14, 2025309.7
 294.0
Unsecured debentures45.8
 42.9
Total$1,798.4
 $1,766.1


The estimated fair values of our long-term unsecured debentures were based on observable inputs such as quoted prices in markets that are not active. The estimated fair values of our term loans and the Senior Notes were based on quoted prices for similar liabilities. These fair value measurements arewere classified as Level 2, as described2.
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Debt Covenants

As of March 31, 2020, we were in compliance with all debt covenants under our financing agreements.

Note 1.

Derivatives6. Derivative Instruments and Hedging ActivitiesActivity

We are exposed to various market risks, including fluctuations in interest rates and variability in foreign currency exchange rates. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks. We employ cash flow hedges, net investment hedges, and other derivative instruments not designated for hedge accounting to manage these risks.

Cash Flow Hedges

We are exposedTo manage our exposure to market risk from fluctuations in interest rates. We sometimes manage our exposure torates, we enter into interest rate fluctuations through the useswaps that are designated as cash flow hedges. As of March 31, 2020, we had interest rate swaps.swap agreements with an aggregate notional amount of $750.0 million to hedge the variability of cash flows through August 2024 associated with a portion of the variable interest rate payments on outstanding borrowings under our Senior Credit Agreement. As of JuneMarch 31, 2020, these swaps were in a net liability position with an aggregate fair value of $45.2 million and were classified as Other current liabilities. As of September 30, 2019, we had five interest rate swap agreements, with an aggregate notional amount of $750.0 million to hedge the variability of cash flows associated with a portion of the variable interest rate payments on outstanding borrowings under our Senior Credit Agreement through September 2021 on the Senior Credit Agreement. The interest rate swaps have effective start dates ranging between December 31, 2018 and September 8, 2020 and were designated as cash flow hedges.2021. As of JuneSeptember 30, 2019, these swaps were in a net liability position with an aggregate fair value of $4.0$6.8 million, of which was$0.9 million were classified as Other assets and $7.7 million were classified as Other current liabilities. As of September 30, 2018, these swaps were in a net asset position with an aggregate fair value of $24.8 million, all of which were classified as Other assets. We classify fair value measurements on our interest rate swaps as Level 2, as described in Note 1.2.

We are subject to variability in foreign currency exchange rates due to our international operations. Exposure to this variability is periodically managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the local currency. From time-to-time, weWe enter into currency exchange agreements that are designated as cash flow hedges to manage our exposure arising from fluctuating exchange rates related to specific and projected transactions. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currencies. Our currency risk consists primarily of foreign currency denominated firm commitments and projected foreign currency denominated intercompany and third-party transactions. As of JuneMarch 31, 2020, there were no foreign exchange contracts outstanding. As of September 30, 2019, the notional amount of openoutstanding foreign exchange contracts was $23.8 million. These contracts$6.7 million and they were in a net asset position reported in Other current assets with aan aggregate fair value of $0.2 million. The maximum length of time over which we hedge transaction exposures is generally 15 months. Derivative gains and losses, initially reported as a component of Accumulated other comprehensive income (loss), are reclassified to earnings in the period when the transaction affects earnings.


Net Investment Hedges

In July 2018,As of March 31, 2020, we entered into twohad cross-currency swap agreements, with an aggregate notional amount of $198.3 million, to hedge the variability of net assets due to changes in the U.S. dollar-Euro spot exchange rates through July 2023. These cross-currency swaps are designated as net investment hedges of subsidiaries using the Euro as their functional currency. We entered into these cross-currency swaps to mitigate changes in net assets due to changes in U.S. dollar-Euro spot exchange rates. As of JuneMarch 31, 2020 and September 30, 2019, these swaps were in a net asset position with an aggregate fair valuevalues of $9.4$22.3 million which wasand $16.9 million, respectively, and were classified as Other assets. As of September 30, 2018, these swaps were in a net liability position with an aggregate fair value of $1.2 million which was classified as Other current liabilities.

We classify fair value measurements on our cross-currency swaps as Level 2, as described in Note 1.2. We assess hedge effectiveness under the spot-to-spot method and record changes in fair value attributable to the translation of foreign currencies through Accumulated other comprehensive income (loss). We amortize the impact of all other changes in fair value of the derivativederivatives through Interest expense, which was income of $1.3 million and $3.9$2.6 million for the quarterthree and yearsix months ended March 31, 2020 compared to date periodsincome of $1.2 million and expense of $0.1 million for the three and six months ended June 30,March 31, 2019.

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Undesignated Derivative Instruments

We use forward contracts to mitigate the foreign exchange revaluation risk associated with recorded monetary assets and liabilities that are denominated in a non-functional currency. These derivative instruments are not formally designated as hedges and the terms of these instruments generally do not exceed one month. As of JuneMarch 31, 2020, we had forward contracts not designated as hedges with aggregate notional amounts of $76.0 million. As of September 30, 2019, we had forward contracts not designated as hedges with an aggregate notional amountamounts of $95.7$76.7 million. DuringFor the quarter and year to date periodsthree months ended June 30, 2019,March 31, 2020, we recognized unrealized gains of $0.1 million and realized gains of $0.6 million. For the six months ended March 31, 2020, we recognized unrealized gains of $0.1 million and realized gains of $1.1 million. We recognized unrealized losses of $0.5 million and realized losses of $1.3$0.3 million for both the three and six months ended March 31, 2019. The unrealized and realized gains and losses for forward contracts not designated as hedges are recorded in Investment income (expense) and other, netnet.

Note 7. Leases

Hillrom as the Lessee

We determine if an arrangement is a lease or contains a lease at contract inception. We lease real estate, automobiles and equipment under various operating leases. A lease liability and ROU asset is recognized for operating leases with terms greater than one year at the lease commencement date. The lease liability is measured as the present value of all remaining fixed payments calculated using our estimated secured incremental borrowing rate. The ROU asset is measured as the sum of the lease liability and any initial indirect costs incurred, less any lease incentives received. We use our estimated secured incremental borrowing rate as most lease agreements do not specify an interest rate. Our lease agreements include leases that have both lease and non-lease components. We have elected to account for lease components and the associated non-lease components as a single lease component.

Our leases have remaining lease terms of approximately 1 year to 8.6 years. Many of our real estate and equipment leases include options to renew. Renewal periods are generally not included when calculating the remaining lease term unless we are reasonably certain to exercise a renewal option based on beneficial terms or significance of the leased asset to our operations.

Expense for operating leases and leases with a term of one year or less is recognized on a straight-line basis over the lease term. Lease expense for the three months ended March 31, 2020 was $9.8 million, of which $7.0 million related to operating leases and $2.8 million related to short-term leases and variable lease payments. For the six months ended March 31, 2020, lease expense was $19.4 million, of which $13.8 million related to operating leases and $5.6 million related to short-term leases and variable lease payments. Lease expense is recorded in Cost of goods sold or Selling and administrative expenses based on the purpose of the leased asset.

The following table summarizes the balance sheet classification of our operating leases and amounts of the ROU asset and lease liability as of March 31, 2020:

Balance Sheet ClassificationMarch 31, 2020
Right-of-use assetsOther assets$72.6 
Current lease liabilitiesOther current liabilities22.0 
Non-current lease liabilitiesOther long-term liabilities55.2 

Supplemental information:March 31, 2020
Weighted-average discount rate3.3 %
Weighted-average remaining lease term in years4.8

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The following table summarizes the maturities of our operating leases as of March 31, 2020:

Fiscal YearAmount
Remaining 2020$12.7  
202122.5  
202217.2  
202312.1  
20247.3  
20254.8  
Thereafter10.2  
Total lease payments86.8  
Less: imputed interest(9.6) 
Total lease liability$77.2  

Disclosures Related to Periods Prior to Adopting the New Lease Guidance

As disclosed in the 2019 Form 10-K, future minimum payments under non-cancellable operating leases (excluding executory costs) aggregating $94.9 million for manufacturing facilities, warehouse distribution centers, service centers, sales offices, automobiles and other equipment consisted of the following:

Fiscal YearAmount
2020$25.7  
202121.4  
202215.7  
202311.1  
20246.4  
2025 and beyond14.6  

Rental expense in fiscal 2019, 2018 and 2017 was $39.8 million, $41.3 million and $38.0 million.

Hillrom as the Lessor

We make certain products available to customers under short-term lease arrangements. Rental usage of these forward contractsproducts is provided as an alternative to product sales and is short-term in nature. Products primarily include smart beds, including, but not designatedlimited to, bariatric, critical care, maternal, and home care beds, as hedges.well as other surfaces. These lease arrangements provide our customers with our products during periods of peak demand or often times for specialty purposes. Additionally, we provide wearable, non-invasive ventilation products to patients covered by monthly medical insurance reimbursements, which are considered month-to-month leasing arrangements. Income arising from these lease arrangements where we are the lessor is recognized within Rental revenue. We have accounted for these lease arrangements as operating leases.

Note 7.8. Retirement and Postretirement Plans

We sponsor fivesix defined benefit retirement plans. Those plans include a master defined benefit retirement plan in the United States, a nonqualified supplemental executive defined benefit retirement plan, and three defined benefit retirement plans covering employees in Germany and France.France, and a defined benefit retirement plan of Excel Medical that was acquired on January 10, 2020. Benefits for such plans are based primarily on years of service and the employee’s level of compensation in specific periods of employment. We contribute funds to trusts as necessary to provide for current service and for any unfunded projected future benefit obligation over a reasonable period of time. All of our plans have a September 30 measurement date. The following table details the components of net pension expense for our defined benefit retirement plans.
 Quarter Ended June 30 Year to Date Ended June 30 Condensed Consolidated Statements of Income Item
 2019 2018 2019 2018 
Service cost$0.5
 $0.4
 $1.2
 $1.1
 Cost of goods sold
Service cost0.6
 0.8
 2.1
 2.5
 Selling and administrative expenses
Interest cost3.1
 2.7
 9.4
 8.2
 Investment income (expense) and other, net
Expected return on plan assets(3.7) (3.9) (11.1) (11.8) Investment income (expense) and other, net
Amortization of unrecognized prior service cost, net0.1
 0.1
 0.1
 0.1
 Investment income (expense) and other, net
Amortization of net loss0.7
 1.1
 1.8
 3.3
 Investment income (expense) and other, net
Net pension expense$1.3
 $1.2
 $3.5
 $3.4
  

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 Three Months Ended
March 31		Six Months Ended
March 31		Condensed Consolidated Statements of Income Item
 2020201920202019
Service cost$0.4  $0.4  $0.8  $0.7  Cost of goods sold  
Service cost0.8  0.7  1.6  1.5  Selling and administrative expenses  
Interest cost2.4  3.2  4.9  6.3  Investment income (expense) and other, net 
Expected return on plan assets(3.7) (3.7) (7.4) (7.4) Investment income (expense) and other, net 
Amortization of unrecognized prior service cost, net—  —  0.1  —  Investment income (expense) and other, net 
Amortization of net loss1.6  0.6  3.1  1.2  Investment income (expense) and other, net 
Settlement charge8.5  —  8.5  —  Investment income (expense) and other, net 
Net pension expense$10.0  $1.2  $11.6  $2.3  

In addition to defined benefit retirement plans, we also offer two postretirement health care plans in the United States that provide health care benefits to qualified retirees and their dependents. The plans are closed to new participants and include retiree cost sharing provisions and generally extendsextend retiree coverage for medical and prescription benefits beyond the COBRA continuation period to the date of Medicare eligibility. Annual costs related to these plans are not significant.

On March 9, 2020, we transferred pension assets totaling $40.6 million to purchase annuity contracts for a certain population of retirees with a third-party insurance company. As a result, we recognized a non-cash settlement loss of $8.5 million, which is recorded as a component of Investment income (expense) and other, net in the Condensed Consolidated Statements of Income.

We have defined contribution savings plans that cover substantially all U.S. employees and certain non-U.S. employees. The general purpose of these plans is to provide additional financial security in retirement by providing employees with an incentive to make regular savings.regularly save a portion of their earnings. Our contributions to the plans are based on eligibility and, in some cases, employee contributions. Expense

under these plans was $6.9$10.1 million and $7.0$16.3 million in each offor the quarterly periodsthree and six months ended June 30, 2019March 31, 2020, and 2018. Expense under these plans was $21.4$8.3 million and $20.9$14.5 million infor the year to date periodsthree and six months ended June 30, 2019 and 2018.March 31, 2019.

Note 8.9. Other Comprehensive Income (Loss)

The following table representstables represent the changes in Other comprehensive income (loss) and Accumulated other comprehensive income (loss) by component for the quarterthree months ended June 30,March 31, 2020 and 2019:
Three Months Ended March 31, 2020
 Other comprehensive income (loss)Accumulated other comprehensive income (loss)
 Prior to
reclassification		Reclassification
from		Pre-taxTax effectNet of taxBeginning
balance		Net activity
Ending
balance 2
Derivative instruments designated as hedges 1:
Foreign exchange forward contracts$—  $—  $—  $—  $—  $—  $—  $—  
Interest rate swaps(39.7) (0.4) (40.1) 9.2  (30.9) (3.9) (30.9) (34.8) 
Cross-currency swaps10.2  —  10.2  (2.4) 7.8  8.5  7.8  16.3  
Derivative instruments designated as hedges total(29.5) (0.4) (29.9) 6.8  (23.1) 4.6  (23.1) (18.5) 
Foreign currency translation adjustment(31.6) —  (31.6) —  (31.6) (122.3) (31.6) (153.9) 
Change in pension and postretirement defined benefit plans0.1  (10.3) (10.2) 2.6  (7.6) (43.6) (7.6) (51.2) 
Total$(61.0) $(10.7) $(71.7) $9.4  $(62.3) $(161.3) $(62.3) $(223.6) 

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 Quarter Ended June 30, 2019
 Other comprehensive income (loss) Accumulated other comprehensive income (loss)
 Prior to
reclassification		 Reclassification
from		 Pre-tax Tax effect Net of tax Beginning
balance		 Net activity 
Ending
balance2
Derivative instruments designated as hedges1:
               
Foreign exchange forward contracts$(0.8) $0.4
 $(0.4) $0.1
 $(0.3) $0.4
 $(0.3) $0.1
Interest rate swaps(9.0) (1.8) (10.8) 2.5
 (8.3) 5.3
 (8.3) (3.0)
Cross-currency swaps(1.0) —
 (1.0) 0.2
 (0.8) 6.3
 (0.8) 5.5
Derivative instruments designated as hedges total(10.8) (1.4) (12.2) 2.8
 (9.4) 12.0
 (9.4) 2.6
Foreign currency translation adjustment4.1
 —
 4.1
 —
 4.1
 (122.5) 4.1
 (118.4)
Change in pension and postretirement defined benefit plans—
 0.7
 0.7
 (0.3) 0.4
 (29.8) 0.4
 (29.4)
Total$(6.7) $(0.7) $(7.4) $2.5
 $(4.9) $(140.3) $(4.9) $(145.2)


Three Months Ended March 31, 2019
 Other comprehensive income (loss)Accumulated other comprehensive income (loss)
 Prior to
reclassification		Reclassification
from		Pre-taxTax effectNet of taxBeginning
balance		Net activity
Ending
balance
Derivative instruments designated as hedges 1:
Foreign exchange forward contracts$(0.7) $(0.1) $(0.8) $0.3  $(0.5) $0.9  $(0.5) $0.4  
Interest rate swaps(9.1) (1.7) (10.8) 2.3  (8.5) 13.8  (8.5) 5.3  
Cross-currency swaps8.1  —  8.1  (1.0) 7.1  (0.8) 7.1  6.3  
Derivative instruments designated as hedges total(1.7) (1.8) (3.5) 1.6  (1.9) 13.9  (1.9) 12.0  
Foreign currency translation adjustment(3.6) —  (3.6) —  (3.6) (118.9) (3.6) (122.5) 
Change in pension and postretirement defined benefit plans0.1  0.6  0.7  (0.2) 0.5  (30.3) 0.5  (29.8) 
Total$(5.2) $(1.2) $(6.4) $1.4  $(5.0) $(135.3) $(5.0) $(140.3) 

The following tables represent the changes in Other comprehensive income (loss) and Accumulated other comprehensive income (loss) by component for the six months ended March 31, 2020 and 2019:

Six Months Ended March 31, 2020
 Other comprehensive income (loss)Accumulated other comprehensive income (loss)
 Prior to
reclassification		Reclassification
from		Pre-taxTax effectNet of taxBeginning
balance		Net activity
Ending
balance 2
Derivative instruments designated as hedges 1:
Foreign exchange forward contracts$(0.3) $0.1  $(0.2) $—  $(0.2) $0.2  $(0.2) $—  
Interest rate swaps(38.8) 0.4  (38.4) 8.8  (29.6) (5.2) (29.6) (34.8) 
Cross-currency swaps5.4  —  5.4  (1.3) 4.1  12.2  4.1  16.3  
Derivative instruments designated as hedges total(33.7) 0.5  (33.2) 7.5  (25.7) 7.2  (25.7) (18.5) 
Foreign currency translation adjustment(8.5) —  (8.5) —  (8.5) (145.4) (8.5) (153.9) 
Change in pension and postretirement defined benefit plans(0.1) (9.1) (9.2) 2.3  (6.9) (44.3) (6.9) (51.2) 
Total$(42.3) $(8.6) $(50.9) $9.8  $(41.1) $(182.5) $(41.1) $(223.6) 


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Six Months Ended March 31, 2019
 Other comprehensive income (loss)Accumulated other comprehensive income (loss)
 Prior to
reclassification		Reclassification
from		Pre-taxTax effectNet of taxBeginning
balance		Impacts of ASU 2018-02 Adoption as of October 1, 2018Net activityEnding
balance
Derivative instruments designated as hedges 1:
Foreign exchange forward contracts$0.5  $(0.2) $0.3  $(0.1) $0.2  $0.2  $—  $0.2  $0.4  
Interest rate swaps(14.2) (3.8) (18.0) 4.2  (13.8) 18.3  0.8  (13.8) 5.3  
Cross-currency swaps10.3  —  10.3  (2.3) 8.0  (1.7) —  8.0  6.3  
Derivative instruments designated as hedges total(3.4) (4.0) (7.4) 1.8  (5.6) 16.8  0.8  (5.6) 12.0  
Foreign currency translation adjustment(17.2) —  (17.2) —  (17.2) (105.3) —  (17.2) (122.5) 
Change in pension and postretirement defined benefit plans0.1  1.1  1.2  (0.3) 0.9  (24.5) (6.2) 0.9  (29.8) 
Total$(20.5) $(2.9) $(23.4) $1.5  $(21.9) $(113.0) $(5.4) $(21.9) $(140.3) 

1 See Note 66. Derivative Instruments and Hedging Activity for information regarding our hedging strategies.

2 The estimated net amount of gains and losses that are reported in Accumulated other comprehensive income (loss) related to our derivative instruments designated as hedges as of June 30, 2019March 31, 2020 that isare expected to be reclassified into earnings within the next 12 months is $0.1expense of $4.8 million.

The following table represents the changes in Other comprehensive income (loss) and Accumulated other comprehensive income (loss) by component for the quarter ended June 30, 2018:
 Quarter Ended June 30, 2018
 Other comprehensive income (loss) Accumulated other comprehensive income (loss)
 Prior to
reclassification		 Reclassification
from		 Pre-tax Tax effect Net of tax Beginning
balance		 Net activity Ending
balance
Derivative instruments designated as hedges:               
Foreign exchange forward contracts$1.1
 $(0.3) $0.8
 $(0.2) $0.6
 $(0.2) $0.6
 $0.4
Interest rate swaps3.7
 (1.6) 2.1
 (0.5) 1.6
 15.8
 1.6
 17.4
Derivative instruments designated as hedges total4.8
 (1.9) 2.9
 (0.7) 2.2
 15.6
 2.2
 17.8
Foreign currency translation adjustment(43.9) —
 (43.9) —
 (43.9) (58.7) (43.9) (102.6)
Change in pension and postretirement defined benefit plans0.3
 1.1
 1.4
 (0.4) 1.0
 (31.4) 1.0
 (30.4)
Total$(38.8) $(0.8) $(39.6) $(1.1) $(40.7) $(74.5) $(40.7) $(115.2)



The following table represents the changes in Other comprehensive income (loss) by component for the year to date period ended June 30, 2019:
 Year to Date Ended June 30, 2019
 Other comprehensive income (loss)
 
Prior to
reclassification
 
Reclassification
from
 Pre-tax Tax effect Net of tax
Derivative instruments designated as hedges:         
Foreign exchange forward contracts$(0.3) $0.2
 $(0.1) $—
 $(0.1)
Interest rate swaps(23.2) (5.6) (28.8) 6.7
 (22.1)
Cross-currency swaps9.3
 —
 9.3
 (2.1) 7.2
Derivative instruments designated as hedges total(14.2) (5.4) (19.6) 4.6
 (15.0)
Foreign currency translation adjustment(13.1) —
 (13.1) —
 (13.1)
Change in pension and postretirement defined benefit plans0.1
 1.8
 1.9
 (0.6) 1.3
Total$(27.2) $(3.6) $(30.8) $4.0
 $(26.8)

The following table represents the changes in Accumulated other comprehensive income (loss) by component for the year to date period ended June 30, 2019:
 Accumulated other comprehensive income (loss)
 Balances as of September 30, 2018 Impacts of ASU 2018-02 Adoption as of October 1, 2018 Net activity for Year to Date Ended June 30, 2019 Balances as of June 30, 2019
Derivative instruments designated as hedges:       
Foreign exchange forward contracts$0.2
 $—
 $(0.1) $0.1
Interest rate swaps18.3
 0.8
 (22.1) (3.0)
Cross-currency swaps(1.7) —
 7.2
 5.5
Derivative instruments designated as hedges total16.8
 0.8
 (15.0) 2.6
Foreign currency translation adjustment(105.3) —
 (13.1) (118.4)
Change in pension and postretirement defined benefit plans(24.5) (6.2) 1.3
 (29.4)
Total$(113.0) $(5.4) $(26.8) $(145.2)


The following table represents the changes in Other comprehensive income (loss) and Accumulated other comprehensive income (loss) by component for the year to date period ended June 30, 2018:
 Year to Date Ended June 30, 2018
 Other comprehensive income (loss) Accumulated other comprehensive income (loss)
 Prior to
reclassification		 Reclassification
from		 Pre-tax Tax effect Net of tax Beginning
balance		 Net activity Ending
balance
Derivative instruments designated as hedges:               
Foreign exchange forward contracts$0.6
 $0.5
 $1.1
 $(0.3) $0.8
 $(0.4) $0.8
 $0.4
Interest rate swaps19.7
 (3.3) 16.4
 (3.7) 12.7
 4.7
 12.7
 17.4
Derivative instruments designated as hedges total20.3
 (2.8) 17.5
 (4.0) 13.5
 4.3
 13.5
 17.8
Foreign currency translation adjustment(21.3) —
 (21.3) —
 (21.3) (81.3) (21.3) (102.6)
Change in pension and postretirement defined benefit plans0.1
 3.3
 3.4
 (0.8) 2.6
 (33.0) 2.6
 (30.4)
Total$(0.9) $0.5
 $(0.4) $(4.8) $(5.2) $(110.0) $(5.2) $(115.2)

The following table represents the items reclassified out of Accumulated other comprehensive income (loss) and the related tax effects for the quartersthree months ended June 30, 2019March 31, 2020 and 2018:2019:

 Three Months Ended March 31
 20202019
 Amount
reclassified		Tax effectNet of taxAmount
reclassified
Tax effect 4
Net of tax
Derivative instruments designated as hedges:
Foreign exchange forward contracts 1
$—  $—  $—  $(0.1) $(0.1) $(0.2) 
Interest rate swaps 2
(0.4) 0.1  (0.3) (1.7) 0.5  (1.2) 
Derivative instruments designated as hedges total(0.4) 0.1  (0.3) (1.8) 0.4  (1.4) 
Change in pension and postretirement defined benefit plans 3
(10.3) 2.6  (7.7) 0.6  (0.2) 0.4  

24
  Quarter Ended June 30
 2019 2018
 Amount
reclassified		 Tax effect Net of tax 
Amount
reclassified
 Tax effect Net of tax
Derivative instruments designated as hedges:           
Foreign exchange forward contracts1
$0.4
 $—
 $0.4
 $(0.3) $—
 $(0.3)
Interest rate swaps2
(1.8) 0.2
 (1.6) (1.6) 0.4
 (1.2)
Derivative instruments designated as hedges total(1.4) 0.2
 (1.2) (1.9) 0.4
 (1.5)
Change in pension and postretirement defined benefit plans3
0.7
 (0.3) 0.4
 1.1
 (0.4) 0.7
Table of Contents

The following table represents the items reclassified out of Accumulated other comprehensive income (loss) and the related tax effects for the year to date periodssix months ended June 30, 2019March 31, 2020 and 2018:2019:


 Six Months Ended March 31
 20202019
 Amount
reclassified		Tax effectNet of taxAmount
reclassified
Tax effect 4
Net of tax
Derivative instruments designated as hedges:
Foreign exchange forward contracts 1
$0.1  $(0.1) $—  $(0.2) $—  $(0.2) 
Interest rate swaps 2
0.4  (0.1) 0.3  (3.8) 1.1  (2.7) 
Derivative instruments designated as hedges total0.5  (0.2) 0.3  (4.0) 1.1  (2.9) 
Change in pension and postretirement defined benefit plans 3
(9.1) 2.3  (6.8) 1.1  (6.5) (5.4) 
 Year to Date Ended June 30
 2019 2018
 Amount
reclassified		 
Tax effect4
 Net of tax Amount
reclassified		 Tax effect Net of tax
Derivative instruments designated as hedges:           
Foreign exchange forward contracts1
$0.2
 $—
 $0.2
 $0.5
 $(0.1) $0.4
Interest rate swaps2
(5.6) 1.3
 (4.3) (3.3) 0.7
 (2.6)
Derivative instruments designated as hedges total(5.4) 1.3
 (4.1) (2.8) 0.6
 (2.2)
Change in pension and postretirement defined benefit plans3
1.8
 (6.8) (5.0) 3.3
 (0.8) 2.5

1 Reclassified from Accumulated other comprehensive income (loss) into Investment income (expense) and other, net.
2 Reclassified from Accumulated other comprehensive income (loss) into Interest expense.
3 Reclassified from Accumulated other comprehensive income (loss) into Cost of goods sold and Investment income (expense) and other, net. These components are included in the computation of net periodic pension expense.
4 As a result of the adoption of ASU 2018-02, we reclassified $5.4 million from Accumulated other comprehensive income (loss) to Retained earnings.

Note 9.10. Special Charges

In connection with various organizational changes to improve our business alignment and cost structure, we recognized Special charges of $6.2$8.8 million and $14.0$16.6 million for the quartersthree and six months ended June 30, 2019 and 2018 and $17.7March 31, 2020 compared to $3.5 million and $64.4$11.5 million for the year to date periodsthree and six months ended June 30, 2019 and 2018. We continue to evaluate additional actions related toMarch 31, 2019. Although these programs and expectcharges are non-recurring in nature, additional Special charges are expected to be incurred related to restructuring and transformative initiatives in future fiscal quarters. However, itperiods. It is not practicable to estimate the amount of these future expected costs until such time as the evaluations are complete.

These charges are summarized as follows:

Legal Claim Recovery

During the third quarter of fiscal 2018, we received a settlement payment for a legal claim and recorded a gain of $1.2 million in Special charges.

Disposition

During the second quarter of fiscal 2018, we recorded a loss of $23.4 million in Special charges related to the UHS Settlement Agreement (Note 4). During the third quarter of fiscal 2018, we recorded an additional loss of $0.6 million in Special charges related to additional Settlement Agreement costs.
Business Optimization and Realignment

Management pursues opportunities to align our operations to achieve synergies and position the business for growth. In fiscal 2018, a global transformation program was launched that was focused on reducing complexity, increasing efficiency and improving our cost structure with targeted investments that align with our strategic priorities.

As part of this program, management launched an initiative related to a global information technology transformation, including rationalizing and transforming our enterprise resource planning software solutions and other complementary information technology systems. For the quarterthree months ended March 31, 2020, the Company incurred $9.9 million related to this initiative, of which $5.4 million was capitalized and year to date periods$4.5 million was expensed in Special charges. For the six months ended June 30, 2019, this program resulted in charges of $4.7 million and $11.2March 31, 2020, the Company incurred $19.3 million, of which $3.2$10.7 million was capitalized and $8.6 million was expensed in Special charges. The objective of this initiative is to consolidate and streamline our key workstreams that interact with customers and vendors and support our financial reporting processes while maintaining the security of our data. The solutions designed under this initiative will be implemented over the next five to seven years.

We acquired several businesses in fiscal 2019 and 2020 as disclosed within Note 4. Business Combinations for which we continue to incur integration-related costs and severance costs. These costs were recorded to Special charges for the three and six months ended March 31, 2020. We also incurred costs, including severance and benefit costs, associated with other business realignment and integration activities. 

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For the three and six months ended March 31, 2020, we incurred total business optimization and realignment charges of $8.2 million and $6.9$15.5 million, of which $2.1 million and $3.9 million were severance and benefit costs with the remainder related to professional fees and project management costs. These amounts compare to charges of $7.1$2.5 million and $26.3$6.3 million infor the quarterthree and year to date periodssix months ended June 30, 2018,March 31, 2019, of which $1.9$1.0 million and $12.7$3.8 million were severance and benefit costs with the remainder related to professional fees and project management costs.

Site Consolidation

We continue to streamline our operations and simplify our supply chain by consolidating certain manufacturing and distribution operations (“Site Consolidation”). SinceFor the inception of this program, we have announced the closure of nine sites. In the quarterthree and year to date periodssix months ended June 30, 2019,March 31, 2020, we recorded charges of $1.5$0.7 million and $6.5$1.2 million related to these efforts, primarily comprised of

which $0.9 million site closure costs and $1.6 million were severance and benefit costs for the quarter and year to date periods ending June 30, 2019. The remaining costs primarily consisted of lease termination and facility closure costs. These amounts compare to charges of $7.5$1.0 million and $15.3$5.1 million inrelated to these efforts for the quarterthree and year to date periodssix months ended June 30, 2018,March 31, 2019, primarily comprised of which $1.3 million and $2.0 million were severance and benefit costs, lease termination and facility closure costs.

Since the inception of the Site Consolidation program through June 30, 2019, we have recognized aggregate Special charges of $57.3 million.

For all accrued severance and other benefit charges described above, we record restructuring reserves within Other current liabilities. The reserve activity for severance and other benefits infor the year to date periodsix months ended June 30, 2019March 31, 2020 was as follows:
Balance as of September 30, 2018$8.5
Expenses10.1
Cash Payments(10.9)
Reversals(1.2)
Balance as of June 30, 2019$6.5


Balance as of September 30, 2019$8.5 
Expenses4.4 
Cash Payments(7.8)
Reversals(0.3)
Balance as of March 31, 2020$4.8 

Note 10.11. Income Taxes

The effective tax rate for the quarterthree months ended June 30, 2019March 31, 2020 was 28.7%17.4% compared to 18.6%18.5% for the comparable period in the prior year due primarily to the difference in the discrete tax benefits realized in each period. The current period rate was unfavorably impacted by $3.0 million of net discrete tax expense, including $5.2 million of unfavorable uncertain tax positions primarily associated with a domestic tax reserve for a position related to the Transition Tax, offset by $2.2 million of other favorable discrete benefits. This compares to $2.7 million of discrete tax benefits in the comparable prior year period which primarily included excess tax benefits on deductible stock compensation and differences between our prior year tax provisions and our filed returns.

year. The effective tax rate for the yearthree months ended March 31, 2020 was favorably impacted primarily by an increased projected benefit for the deduction attributed to date periodforeign derived intangible income (“FDII”).

The effective tax rate for the six months ended June 30, 2019March 31, 2020 was 20.3%12.8% compared to (50.3)%16.9% for the comparable period in the prior year due primarily toyear. The effective tax benefits recorded inrate for the prior period related to the Tax Act. The year to date period ratesix months ended March 31, 2020 was favorably impacted primarily by $1.5an increased projected benefit for the deduction attributed to FDII as well as a small benefit from current year discrete items. The effective tax rate for the six months ended March 31, 2020 was also favorably impacted by the reduction of the contingent consideration accrual of $8.4 million, of net discrete tax benefits primarily relatedthat is not subject to $2.6 million of excess tax benefits on deductible stock compensation and $3.3 million of other favorable discrete items, offset by $4.4 million of unfavorable changes to uncertain tax positions. This compares to $78.3 million of discrete tax benefits in the prior year to date period primarily related to the Tax Act and a change in tax accounting method for historical currency losses. tax.

On December 22, 2017,March 25, 2020, the U.S. government enacted comprehensive tax legislation commonly referredapproved the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to asprovide economic stimulus to address the Tax Act. The Tax Act made broad and complex changes to the U.S. tax code which impacted the financial results of our fiscal year ended September 30, 2018, and continues to impact the financial results of the quarter and year to date periods ended June 30, 2019, including, but not limited to (1) reducing the U.S. Federal corporate tax rate, (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may electively be paid over eight years, and (3) accelerated first year expensing of certain capital expenditures. The Tax Act reduced the U.S. Federal corporate tax rate from 35.0% to 21.0% effective January 1, 2018 for calendar year tax filers. In accordance with Internal Revenue Code Section 15, our fiscal year ended September 30, 2018 had a blended corporate tax rate of 24.5%, which was based on a proration of the applicable tax rates before and after the effective date of the Tax Act. The statutory tax rate of 21.0% applies to our current fiscal 2019.

The Tax Act also put in place new tax laws that will impact our taxable income in fiscal 2019, which include, but are not limited to (1) creating a Base Erosion Anti-abuse Tax (“BEAT”), which is a tax on certain related-party payments that reduce the U.S. tax base, (2) generally eliminating U.S. Federal income taxes on dividends from foreign subsidiaries, (3) a new provision designed to tax currently global intangible low-taxed income (“GILTI”), which allows for the possibility of utilizing foreign tax credits and a deduction equal to 50.0% to offset the income tax liability (subject to some limitations), (4) a provision that could limit the amount of deductible interest expense, (5) the repeal of the domestic production activity deduction replaced with an additional deduction for foreign-derived intangible income (“FDII”), (6) limitations on the deductibility of certain executive compensation, and (7) limitations on the utilization of foreign tax credits to reduce the U.S. income tax liability.

Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which provides guidance on accounting for the Tax Act’s impact. SAB 118 provided a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Act under ASC Topic 740. In accordance with the expiration of the SAB 118 measurement period, we completed the assessment of the income tax effects of the Tax Act in the first quarter of fiscal 2019 and further reduced our Transition Tax liability by $1.0 million in the first quarter of fiscal 2019.

The U.S. Internal Revenue Service and Treasury Department continue to release proposed guidance with respect to the Tax Act.pandemic. We continue to evaluate what impact, if any, each piece of guidancethe CARES Act, or any similar legislation in other non-U.S. jurisdictions, may have on our related tax positions and our effective tax rate if, and when, such guidance is finalized.rate.

Note 11.12. Earnings per Common Share

Basic earnings per share (“EPS”) is calculated based upon the weighted average number of outstanding common shares for the period, plus the effect of deferred vested shares. Diluted earnings per share is calculated consistent with the basic earnings per share calculation plus the effect of dilutive unissued common shares related to stock-based employee compensation programs. For all periods presented, anti-dilutive stock options were excluded from the calculation of diluted earnings per share. Cumulative treasury stock acquired, less cumulative shares reissued, have been excluded in determining the average number of shares outstanding.

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Earnings per share are calculated as follows (share information in thousands):follows:
 Three Months Ended March 31Six Months Ended March 31
 2020201920202019
Net Income$46.9  $49.5  $86.7  $91.7  
Net Income per Basic Common Share$0.70  $0.74  $1.30  $1.37  
Net Income per Diluted Common Share$0.70  $0.74  $1.29  $1.36  
Average Basic Common Shares Outstanding (in thousands)66,685  66,696  66,731  66,866  
Add potential effect of exercise of stock options and other unvested equity awards533  648  578  659  
Average Diluted Common Shares Outstanding (in thousands)67,218  67,344  67,309  67,525  
Shares with anti-dilutive effect excluded from the computation of diluted EPS320  307  332  286  
 Quarter Ended June 30 Year to Date Ended June 30
 2019 2018 2019 2018
Net income$32.6
 $45.2
 $124.3
 $162.0
        
Average basic shares outstanding66,777
 66,299
 66,822
 66,121
Add potential effect of exercise of stock options and other unvested equity awards669
 1,347
 662
 1,429
Average diluted shares outstanding67,446
 67,646
 67,484
 67,550
        
Net income per basic common share$0.49
 $0.68
 $1.86
 $2.45
    
  
  
Net income per diluted common share$0.48
 $0.67
 $1.84
 $2.40
        
Shares with anti-dilutive effect excluded from the computation of diluted EPS258
 273
 299
 249


Note 12. Common Stock

The stock-based compensation cost that was charged against income for all plans was $10.0 million and $5.8 million in the quarterly periods ended June 30, 2019 and 2018. The stock-based compensation cost that was charged against income for all plans was $26.9 million and $21.6 million in the year to date periods ended June 30, 2019 and 2018.

In connection with employees satisfying payroll tax withholding obligations for restricted stock distributions, we purchased 44,647 shares of our common stock for $4.2 million in the year to date period ended June 30, 2019, and 87,749 shares for $7.4 million in the year to date period ended June 30, 2018.

We purchased 792,264 shares of our common stock in the open market under our share repurchase program for $75.0 million in the year to date period ended June 30, 2019. We did not repurchase shares in the quarter ended June 30, 2019 in the open market.

As of June 30, 2019, a cumulative total of $250.3 million of our share repurchase program had been used, leaving us with the ability to repurchase shares with a value of $89.7 million. This program does not have an expiration date and there are no plans to terminate this program in the future.

Note 13. Warranties and Guarantees

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


A rollforward of changes in the warrantyAccrued product warranties reserve for the periods covered in this report is as follows:
 Quarter Ended June 30 Year to Date Ended June 30
 2019 2018 2019 2018
Balance as of beginning of period$24.5
 $25.0
 $20.5
 $25.5
Provision for warranties in the period9.9
 2.1
 19.1
 9.6
Warranty reserves assumed1
—
 —
 2.8
 —
Warranty claims in the period(4.5) (3.8) (12.5) (11.8)
Balance as of end of period$29.9
 $23.3
 $29.9
 $23.3

 Three Months Ended March 31Six Months Ended March 31
 2020201920202019
Balance as of beginning of period$28.8  $24.9  $29.7  $20.5  
Provision for warranties in the period4.3  4.1  7.8  9.2  
Warranty reserves assumed 1
—  —  —  2.8  
Warranty claims in the period(4.1) (4.5) (8.5) (8.0) 
Balance as of end of period$29.0  $24.5  $29.0  $24.5  
1As a result of the asset acquisition in our Front Line Care segment discussed in Note 4. Business Combinations.

In the normal course of business, we enter into various other guarantees and indemnities in our relationships with suppliers, service providers, customers, business partners and others. Examples of these arrangements would include guarantees of product performance, indemnifications to service providers and indemnifications of our actions to business partners. These guarantees and indemnifications have not historically had a material impact on our financial condition or results of operations, nor do we expect them to, although indemnifications associated with our actions generally have no dollar limitations.

In conjunction with our acquisition and divestiture activities, we have entered into select guarantees and indemnifications of performance with respect to the fulfillment of commitments under applicable purchase and sale agreements. The arrangements generally indemnify the buyer or seller for damages associated with breach of contract, inaccuracies in representations and warranties surviving the closing date and satisfaction of liabilities and commitments retained under the applicable contract. With respect to sale transactions, we also routinely enter into non-competition agreements for varying periods of time. Guarantees and indemnifications with respect to acquisition and divestiture activities, if triggered, could have a materially adverse impact on our financial condition and results of operations.

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Note 14. Segment Reporting

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 our med-surg and specialty bed systems and surfaces, safe patient handling equipment and mobility solutions, as well as our care communications platform that delivers software and information technologies to improve care and deliver actionable insight to caregivers and patients.

•Front Line Care – globally provides patient monitoring and diagnostic technologies, including a diversified portfolio of physical assessment tools that help diagnose, treat and manage a wide variety of illnesses and diseases, including a portfolio of vision care and respiratory health devices.

•Surgical Solutions – globally provides products that improve safety and efficiency in the surgical space, including tables, lights, pendants, precision positioning devices and other accessories.

 globally provides our med-surg and specialty bed systems and surfaces, safe patient handling equipment and mobility solutions, as well as our clinical workflow solutions that deliver software and information technologies to improve care and deliver actionable insight to caregivers and patients.

•
Front Line Care – globally provides patient monitoring and diagnostic technologies, including a diversified portfolio of physical assessment tools that help diagnose, treat and manage a wide variety of illnesses and diseases, as well as a portfolio of vision care and respiratory care devices.

•
Surgical Solutions – globally provides products that improve surgical safety and efficiency in the operating room including tables, lights, pendants, positioning devices and various other surgical instruments and accessories.

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


Non-allocated operating costs, administrative costs, and other includes functional expenses that support the entire organization such as administration, finance, legal and human resources, expenses associated with strategic developments, acquisition-related intangible asset amortization, and other events that are not indicative of operating trends. We exclude such amounts from divisional income to allow management to evaluate and understand divisional operating trends. The chief operating decision maker does not receive any asset information by operatingreportable segment and, accordingly, we do not report asset information by operatingreportable segment.
  Quarter Ended
June 30		 Year to Date Ended
June 30
 2019 2018 2019 2018
Net revenue:       
Patient Support Systems$374.5
 $359.7
 $1,075.1
 $1,049.1
Front Line Care244.4
 239.0
 720.9
 701.5
Surgical Solutions107.9
 109.9
 328.5
 338.2
Total net revenue$726.8
 $708.6
 $2,124.5
 $2,088.8
        
Divisional income: 
  
  
  
Patient Support Systems$81.9
 $71.3
 $208.5
 $191.9
Front Line Care70.2
 62.2
 197.2
 178.1
Surgical Solutions17.8
 11.4
 44.2
 36.6
        
Other operating costs: 
  
  
  
Non-allocated operating costs, administrative costs, and other93.8
 52.4
 210.2
 165.5
Special charges6.2
 14.0
 17.7
 64.4
Operating profit69.9
 78.5
 222.0
 176.7
        
Interest expense(23.1) (24.2) (66.2) (71.5)
Investment income (expense) and other, net(1.1) 1.2
 0.2
 2.6
Income before income taxes$45.7
 $55.5
 $156.0
 $107.8


Effective for fiscal 2020, the allocation of operating costs to each segment was modified to improve the alignment to how management evaluates the performance of each segment. The fiscal 2019 segment information has been recast to conform to the current presentation. The reclassification did not impact our reported Consolidated Net Revenue or Income Before Income Taxes.
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  Three Months Ended March 31Six Months Ended March 31
 2020201920202019
Net Revenue - United States:
Patient Support Systems$289.3  $267.2  $555.9  $515.3  
Front Line Care179.2  170.2  357.3  336.7  
Surgical Solutions38.0  55.6  75.1  109.5  
Total net revenue - United States$506.5  $493.0  $988.3  $961.5  
Net Revenue - Outside of the United States (“OUS”):
Patient Support Systems$92.8  $92.4  $170.4  $185.3  
Front Line Care79.0  72.9  155.5  139.8  
Surgical Solutions44.9  55.9  94.0  111.1  
Total net revenue - OUS$216.7  $221.2  $419.9  $436.2  
Net Revenue:    
Patient Support Systems$382.1  $359.6  $726.3  $700.6  
Front Line Care258.2  243.1  512.8  476.5  
Surgical Solutions82.9  111.5  169.1  220.6  
Total net revenue$723.2  $714.2  $1,408.2  $1,397.7  
Divisional Income:    
Patient Support Systems$74.9  $72.2  $133.3  $131.9  
Front Line Care77.7  67.2  151.2  128.9  
Surgical Solutions13.7  15.1  26.5  26.4  
Other Operating Costs:    
Non-allocated operating costs, administrative costs, and other70.2  69.7  128.2  123.6  
Special charges8.8  3.5  16.6  11.5  
Operating Profit87.3  81.3  166.2  152.1  
Interest expense(19.1) (21.8) (38.5) (43.1) 
Loss on extinguishment of debt—  —  (15.6) —  
Investment income (expense) and other, net(11.4) 1.2  (12.7) 1.3  
Income Before Income Taxes$56.8  $60.7  $99.4  $110.3  

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Note 15. Commitments and Contingencies

General

We are subject to various claims and contingencies arising out of the normal course of business, including those relating to governmental investigations and proceedings, commercial transactions, product liability, employee related matters, antitrust, safety, health, taxes, environmental and other matters. Litigation is subject to many uncertainties and the outcome of individual litigated matters is not predictable with assurance. It is possible that some litigation matters for which reserves have not been established could be decided unfavorably to us, and that any such unfavorable decisions could have a materialmaterially adverse effect on our financial condition, results of operations and cash flows.

Self InsuranceSelf-Insurance

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

30
Item 2.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements and Factors That May Affect Future Results

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

Forward-looking statements are not guarantees of future performance, and our actual results could differ materially from those set forth in any forward-looking statements. For a more in-depth discussion of factors that could cause actual results to differ from forward-looking statements, see the discussions under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 (“2018 Form 10-K”) as well as the discussions in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We assume no obligation to update or revise any forward-looking statements unless required by law.

Overview

The following discussion and analysis should be read in conjunction with the accompanying interim financial statements and our 20182019 Form 10-K.

Hill-Rom Holdings, Inc. (the “Company,” “Hillrom,” “we,” “us,” or “our”) was incorporated on August 7, 1969 in the State of Indiana and is headquartered in Chicago, Illinois. We are 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.Advancing Connected CareTM. 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 carehealth devices, advanced operating room equipment for the surgical space and more, delivering actionable, real-time insights at the point of care.

Use of Non-GAAP Financial Measures

The accompanying Condensed Consolidated Financial Statements including theand related notes are presented in accordance with accounting principles generally accepted in the United States (“GAAP”).GAAP. In addition to the results reported in accordance with GAAP, we routinely provide gross margin, operating margin, income tax expense and earnings per diluted share results on an adjusted basis becauseas we believe these measures contribute to anthe 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 9 of our Condensed Consolidated Financial Statements in this Form 10-Q,10. Special Charges, the transitional impacts of the U.S. Tax Cuts and Jobs Act (the “Tax Act”), changechanges in tax accounting methods, and other tax law changes as described in Note 10 of our Condensed Consolidated Financial Statements in this11. Income Taxes within the 2019 Form 10-Q,10-K, expenses associated with these tax items, the impacts of significant litigation matters, or 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 into U.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.


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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 our med-surg and specialty bed systems and surfaces, safe patient handling equipment and mobility solutions, as well as our care communications platform that delivers software and information technologies to improve care and deliver actionable insight to caregivers and patients.

•Front Line Care – globally provides patient monitoring and diagnostic technologies, including a diversified portfolio of physical assessment tools that help diagnose, treat and manage a wide variety of illnesses and diseases, including a portfolio of vision care and respiratory health devices.

•Surgical Solutions – globally provides products that improve safety and efficiency in the surgical space, including tables, lights, pendants, precision positioning devices and other accessories.

 globally provides our med-surg and specialty bed systems and surfaces, safe patient handling equipment and mobility solutions, as well as our clinical workflow solutions that deliver software and information technologies to improve care and deliver actionable insight to caregivers and patients.

•
Front Line Care – globally provides patient monitoring and diagnostic technologies, including a diversified portfolio of physical assessment tools that help diagnose, treat and manage a wide variety of illnesses and diseases, as well as a portfolio of vision care and respiratory care devices.

•
Surgical Solutions – globally provides products that improve surgical safety and efficiency in the operating room including tables, lights, pendants, positioning devices and various other surgical instruments and accessories.

Net Revenue
(In millions)U.S.OUS
Three Months Ended March 31Change As
Reported		Constant
Currency		Change As
Reported		Change As
Reported		Constant
Currency
20202019
Net Revenue:
Product sales and service$647.0  $636.5  1.6 %2.6 %3.4 %(1.9)%1.1 %
Rental revenue76.2  77.7  (1.9)%(1.7)%(1.6)%(4.9)%(2.9)%
Total net revenue$723.2  $714.2  1.3 %2.2 %2.7 %(2.0)%0.9 %
Net Revenue:       
Patient Support Systems$382.1  $359.6  6.3 %7.2 %8.3 %0.4 %4.1 %
Front Line Care258.2  243.1  6.2 %7.0 %5.3 %8.4 %10.8 %
Surgical Solutions82.9  111.5  (25.7)%(24.6)%(31.6)%(19.7)%(17.4)%
Total net revenue$723.2  $714.2  1.3 %2.2 %2.7 %(2.0)%0.9 %
OUS - Outside of the United States
         U.S. OUS
 Quarter Ended
June 30		 
Change As
Reported
 
Constant
Currency
 
Change As
Reported
 
Change As
Reported
 
Constant
Currency
 2019 2018     
Net Revenue:             
Product sales and service$653.0
 $617.6
 5.7 % 7.0 % 12.6 % (8.2)% (4.3)%
Rental revenue73.8
 91.0
 (18.9)% (18.5)% (20.4)% (7.2)% (2.9)%
Total net revenue$726.8
 $708.6
 2.6 % 3.8 % 7.2 % (8.1)% (4.2)%
              
Net Revenue:             
Patient Support Systems$374.5
 $359.7
 4.1 % 5.2 % 8.3 % (8.1)% (4.0)%
Front Line Care244.4
 239.0
 2.3 % 3.3 % 5.3 % (5.0)% (1.4)%
Surgical Solutions107.9
 109.9
 (1.8)% 0.2 % 8.3 % (12.2)% (8.1)%
Total net revenue$726.8
 $708.6
 2.6 % 3.8 % 7.2 % (8.1)% (4.2)%
              
OUS - Outside of the United States            


Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019
The following table reflects sales growth data for the quarter ended June 30, 2019 excluding the impacts of the adoption of ASC 606 to supplement our discussion and analysis of net revenue by quantifying and excluding the impact of the adoption of this rule for revenue streams and reportable segments:


 Quarter Ended
June 30		 Change Constant
Currency		 U.S. OUS
 
Adjusted 20191
 2018   Change Change Constant
Currency
Net Revenue:             
Product sales and service$625.8
 $617.6
 1.3 % 2.6% 6.0% (8.2)% (4.2)%
Rental revenue97.5
 91.0
 7.1 % 7.6% 9.1% (8.2)% (3.5)%
Total net revenue$723.3
 $708.6
 2.1 % 3.3% 6.5% (8.2)% (4.2)%
              
Net Revenue:             
Patient Support Systems$371.2
 $359.7
 3.2 % 4.3% 7.1% (8.2)% (4.0)%
Front Line Care244.2
 239.0
 2.2 % 3.2% 5.1% (5.0)% (1.4)%
Surgical Solutions107.9
 109.9
 (1.8)% 0.2% 8.3% (12.2)% (8.1)%
Total net revenue$723.3
 $708.6
 2.1 % 3.3% 6.5% (8.2)% (4.2)%
              
OUS - Outside of the United States            
1Adjusted to remove the impacts of ASC 606. See Note 1, Summary of Significant Accounting Policies, and Note 2, Revenue Recognition, of our Condensed Consolidated Financial Statements in this Form 10-Q for additional information on the impact of adopting ASC 606.

         U.S. OUS
 Year to Date Ended
June 30		 Change As
Reported		 Constant
Currency		 Change As
Reported		 Change As
Reported		 Constant
Currency
 2019 2018     
Net Revenue:             
Product sales and service$1,901.1
 $1,803.5
 5.4 % 6.9 % 11.8 % (6.1)% (1.8)%
Rental revenue223.4
 285.3
 (21.7)% (21.1)% (23.2)% (10.1)% (5.1)%
Total net revenue$2,124.5
 $2,088.8
 1.7 % 3.1 % 5.6 % (6.3)% (2.0)%
              
Net Revenue:             
Patient Support Systems$1,075.1
 $1,049.1
 2.5 % 3.7 % 5.9 % (6.7)% (2.1)%
Front Line Care720.9
 701.5
 2.8 % 3.9 % 5.0 % (2.4)% 1.5 %
Surgical Solutions328.5
 338.2
 (2.9)% (0.6)% 5.5 % (10.4)% (6.0)%
Total net revenue$2,124.5
 $2,088.8
 1.7 % 3.1 % 5.6 % (6.3)% (2.0)%
              
OUS - Outside of the United States            

The following table reflects sales growth data for the year to date period ended June 30, 2019 excluding the impacts of the adoption of ASC 606 to supplement our discussion and analysis of net revenue by quantifying and excluding the impact of the adoption of this rule for revenue streams and reportable segments:



 Year to Date Ended
June 30		 Change Constant
Currency		 U.S. OUS
 
Adjusted 20191
 2018   Change Change Constant
Currency
Net Revenue:             
Product sales and service$1,821.8
 $1,803.5
 1.0 % 2.6 % 5.0% (6.2)% (1.8)%
Rental revenue296.2
 285.3
 3.8 % 4.4 % 5.7% (10.3)% (5.3)%
Total net revenue$2,118.0
 $2,088.8
 1.4 % 2.8 % 5.1% (6.4)% (2.0)%
              
Net Revenue:             
Patient Support Systems$1,070.4
 $1,049.1
��2.0 % 3.4 % 5.4% (6.8)% (1.9)%
Front Line Care719.1
 701.5
 2.5 % 3.6 % 4.6% (2.4)% 1.3 %
Surgical Solutions328.5
 338.2
 (2.9)% (0.6)% 5.5% (10.4)% (6.0)%
Total net revenue$2,118.0
 $2,088.8
 1.4 % 2.8 % 5.1% (6.4)% (2.0)%
              
OUS - Outside of the United States            
1Adjusted to remove the impacts of ASC 606. See Note 1, Summary of Significant Accounting Policies, and Note 2, Revenue Recognition, of our Condensed Consolidated Financial Statements in this Form 10-Q for additional information on the impact of adopting ASC 606.

Consolidated Revenue

Product sales and service revenue increased 5.7% and 5.4%1.6% on a reported basis, or 7.0% and 6.9%2.6% on a constant currency basis, for the quarterthree months ended March 31, 2020 compared to the three months ended March 31, 2019. The increases were driven by increased demand, partially attributable to the COVID-19 pandemic, for Patient Support Systems and yearFront Line Care products. New products and recent acquisitions also contributed to date periods ended June 30, 2019revenue growth. These increases were partially offset by the decline in Surgical Solutions primarily due to the reclassificationdisposition of $23.5 million and $71.0 million of certain revenue streams to Product sales and services for the quarter and year to date periods ended June 30, 2019 as a result of adopting ASC 606, as well as strong new product growthsurgical consumable products business in the United States and incremental revenue from our Voalte, Inc. (“Voalte”) acquisition. These growth drivers were partly offset by declines in our surgical original equipment manufacturer (“OEM”) business and recently divested third-party surface business.August 2019.

Rental revenue decreased 18.9% and 21.7%1.9% on a reported basis, or 18.5% and 21.1%1.7% on a constant currency basis, for the quarter and year to date periodsthree months ended June 30, 2019 primarily dueMarch 31, 2020 compared to the reclassificationthree months ended March 31, 2019. The decreases were attributable to the exit of $23.5 million and $71.0 million of certain revenue streams to Product sales and services fora rental arrangement remaining from the quarter and year to date periods ended June 30, 2019 as a result of adopting ASC 606 as well as the divestiture of ourpreviously divested third-party rental business in fiscal 2018.business.

Excluding the impact
32
Table of adopting ASC 606,Contents
Business Segment Revenue

Patient Support Systems revenue increased 2.1% and 1.4%6.3% on a reported basis, or 3.3% and 2.8%7.2% on a constant currency basis, for the quarterthree months ended March 31, 2020 compared to the three months ended March 31, 2019. The increases were driven primarily by growth in the United States, with growth in new products, accelerated customer orders globally for our beds and year to date periods ended June 30, 2019, primarilysurfaces, partially due to strong new product growththe COVID-19 pandemic, and contributions from recent acquisitions. The increases during the incremental revenue from our Voalte acquisition. These growth driversthree months ended March 31, 2020 were partlypartially offset by declines inproject delays for products that require installation or customization, such as our surgical OEM business and recently divested businesses.care communications products. Revenue for the quarter and year to date periodsthree months ended June 30, 2019March 31, 2020 does not reflect approximately $3.3$1.4 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred revenue related to the Voalte acquisition.recent acquisitions.

Business Segment Revenue

Patient Support SystemsFront Line Care revenue increased 4.1% and 2.5%6.2% on a reported basis, or 5.2% and 3.7%7.0% on a constant currency basis, for the quarter and year to date periodsthree months ended June 30, 2019March 31, 2020 compared to the prior year periods.three months ended March 31, 2019. The increases in the quarter and year to date periods were driven by stronghigher demand globally for patient diagnostic and monitoring products and respiratory health products, including Breathe, which was acquired in September 2019.

Surgical Solutions revenue decreased 25.7% on a reported basis, and 24.6% on a constant currency basis, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to the disposition of the surgical consumable products business in August 2019.The decreases were partially offset by sales growth in med-surg frames, clinical workflow solutionsfrom integrated operating tables.

Refer to the section titled “The Impacts of COVID-19 on Hillrom” within Management’s Discussion & Analysis of Financial Condition and safe patient handling equipmentResults of Operations for further information.

Net Revenue
(In millions)U.S.OUS
Six Months Ended March 31Change As
Reported		Constant
Currency		Change As
Reported		Change As
Reported		Constant
Currency
20202019
Net Revenue:
Product sales and service$1,261.3  $1,248.1  1.1 %1.8 %3.4 %(3.7)%(1.4)%
Rental revenue146.9  149.6  (1.8)%(1.5)%(1.3)%(5.5)%(3.5)%
Total net revenue$1,408.2  $1,397.7  0.8 %1.4 %2.8 %(3.7)%(1.5)%
Net Revenue:
Patient Support Systems$726.3  $700.6  3.7 %4.4 %7.9 %(8.0)%(5.3)%
Front Line Care512.8  476.5  7.6 %8.1 %6.1 %11.2 %12.9 %
Surgical Solutions169.1  220.6  (23.3)%(22.3)%(31.4)%(15.4)%(13.3)%
Total net revenue$1,408.2  $1,397.7  0.8 %1.4 %2.8 %(3.7)%(1.5)%
OUS - Outside of the United States

Six Months Ended March 31, 2020 Compared to the Six Months Ended March 31, 2019

Consolidated Revenue

Product sales and service revenue increased 1.1% on a reported basis, and 1.8% on a constant currency basis, for the six months ended March 31, 2020 compared to the six months ended March 31, 2019. The increases were primarily due to Patient Support Systems sales growth in the United States driven by new products and recent acquisitions, as well as incrementalFront Line Care growth globally. The increases were partially offset by the decline in Surgical Solutions sales related to the disposition of the surgical consumable products business in August 2019. Increased demand for our products due to the COVID-19 pandemic also contributed to the sales growth for Patient Support Systems and Front Line Care.

Rental revenue decreased 1.8% on a reported basis, and 1.5% on a constant currency basis, for the six months ended March 31, 2020 compared to the six months ended March 31, 2019. The decreases were attributable to the exit of a rental arrangement remaining from our Voalte acquisition. Growththe previously divested third-party rental business.

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Table of Contents
Business Segment Revenue

Patient Support Systems revenue increased 3.7% on a reported basis, and 4.4% on a constant currency basis, for the six months ended March 31, 2020 compared to the six months ended March 31, 2019. The increases were driven primarily by growth in the United States was partlyfrom our care communications platform, which includes recent acquisitions, new product introductions and increased demand for beds and surfaces, partially due to the COVID-19 pandemic. The increases were partially offset by lower sales OUSoutside of the United States due to large projectsnotable declines mainly in the prior year. Revenue was also higher by $3.3 million and $4.7 million forMiddle East due to the quarter and year to date periods ended June 30, 2019 under ASC 606 in comparison to previous accounting guidance. Under ASC 606 the performance obligation for revenue related to certain products was determined to be a fully installed system whereas historically, this obligation was accounted for as a multiple element arrangement and revenue was recognized upon deliverytiming of hardware and software and the remainder when installation was complete.large projects. Revenue for the quarter and year to date periodssix months ended June 30, 2019March 31, 2020 does not reflect approximately $3.3$2.0 million of revenue that was eliminated in fair value purchase accounting adjustments to deferred revenue related to the Voalte acquisition.recent acquisitions.


Front Line Care revenue increased 2.3% and 2.8%7.6% on a reported basis, or 3.3% and 3.9%8.1% on a constant currency basis, for the quarter and year to date periodssix months ended June 30, 2019March 31, 2020 compared to the prior year periods. These improvementssix months ended March 31, 2019. The increases were primarily due to strongdriven by global sales growth in our respiratory care business due tofor patient diagnostic and monitoring products and incremental revenue from the launchacquisition of new products. Revenue was also higher by $0.2 million and $1.8 million for the quarter and year to date periods ended June 30, 2019 under ASC 606 in comparison to previous accounting guidance. Revenue related to certain products is required to be accelerated under ASC 606 compared to historical practice as we have no on-going performance obligation after delivery of the product to the customer, whereas previously this revenue was recognized over the period the Company was reimbursed by third parties.Breathe.

Surgical Solutions revenue decreased 1.8% and 2.9%23.3% on a reported basis, or increased 0.2% and decreased 0.6%22.3% on a constant currency basis, for the quarter and year to date periodssix months ended June 30, 2019March 31, 2020 compared to the prior year periods. Thesesix months ended March 31, 2019 primarily due to the disposition of the surgical consumable products business in August 2019. The decreases were mainly duepartially offset by sales growth from integrated operating tables.

Refer to declines in our international OEM business.the section titled “The Impacts of COVID-19 on Hillrom” within Management’s Discussion & Analysis of Financial Condition and Results of Operations for further information.

Gross Profit
(In millions)Three Months Ended March 31Six Months Ended March 31
 2020201920202019
Gross Profit 1
Product sales and service$329.8  $313.8  $637.8  $609.1  
Percent of Related Net Revenue51.0 %49.3 %50.6 %48.8 %
Rental$37.7  $38.8  $71.4  $73.5  
Percent of Related Net Revenue49.5 %49.9 %48.6 %49.1 %
Total Gross Profit$367.5  $352.6  $709.2  $682.6  
Percent of Total Net Revenue50.8 %49.4 %50.4 %48.8 %
  Quarter Ended June 30 Year to Date Ended June 30
 2019 2018 2019 2018
Gross Profit       
Product sales and service$320.7
 $300.1
 $929.8
 $868.2
Percent of Related Net Revenue49.1% 48.6% 48.9% 48.1%
        
Rental35.9
 47.9
 109.4
 149.8
Percent of Related Net Revenue48.6% 52.6% 49.0% 52.5%
        
Total Gross Profit$356.6
 $348.0
 $1,039.2
 $1,018.0
Percent of Total Net Revenue49.1% 49.1% 48.9% 48.7%
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 March 31, 2020 Compared to the Three and Six Months Ended March 31, 2019

Product sales and service gross marginprofit increased 50by $16.0 million and 80 basis points$28.7 million, or 5.1% and 4.7%, for the quarterthree and year to date periodssix months ended June 30, 2019March 31, 2020 compared to the prior year periodsthree and six months ended March 31, 2019.  The increases in gross profit were primarily duedriven by strategic changes in product sales mix across all segments, which included recent acquisitions and the disposition of the surgical consumable products business in August 2019. The increases were also attributable to product mix cost reductionswithin Patient Support Systems and the reclassification of products previously classified as rental revenue due to the adoption of ASC 606, offset by voluntary field corrective action costs of $5.6 million incurred to address two product performance matters outside of normal warranty provisions.Front Line Care and improved operating efficiencies resulting in lower operating costs.

Rental gross marginprofit decreased 400$1.1 million and 350 basis points$2.1 million, or 2.8% and 2.9%, for the quarterthree and year to date periodssix months ended June 30, 2019March 31, 2020 compared to the prior year periodsthree and six months ended March 31, 2019 primarily due to the reclassificationexit of productsa rental arrangement remaining from the previously classified asdivested third-party rental revenue duebusiness.

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Operating Expenses
(In millions)Three Months Ended March 31Six Months Ended March 31
 2020201920202019
Research and development expenses$34.4  $36.6  $65.9  $69.8  
Percent of Total Net Revenue4.8 %5.1 %4.7 %5.0 %
Selling and administrative expenses$209.9  $203.9  $406.7  $396.2  
Percent of Total Net Revenue29.0 %28.5 %28.9 %28.3 %
Acquisition-related intangible asset amortization$27.1  $27.3  $53.8  $53.0  
Percent of Total Net Revenue3.7 %3.8 %3.8 %3.8 %

Three and Six Months Ended March 31, 2020 Compared to the adoption of ASC 606.

Three and Six Months Ended March 31, 2019
Operating Expenses
  Quarter Ended June 30 Year to Date Ended June 30
 2019 2018 2019 2018
Research and development expenses$34.1
 $33.6
 $103.9
 $100.6
Percent of Total Net Revenue4.7% 4.7% 4.9% 4.8%
        
Selling and administrative expenses$246.4
 $221.9
 $695.6
 $676.3
Percent of Total Net Revenue33.9% 31.3% 32.7% 32.4%

Research and development expenses increased 1.5%decreased $2.2 million and 3.3%$3.9 million, or 6.0% and 5.6%, for the quarterthree and year to date periodssix months ended June 30, 2019March 31, 2020 compared to the prior year periodsthree and six months ended March 31, 2019 due to continued investment in new products. As a percentagethe timing of revenue, research and development expenses remained relatively consistent.

projects.
As a percentage of total net revenue, selling
Selling and administrative expenses increased in$6.0 million and $10.5 million, or 2.9% and 2.7%, for the quarterthree and year to date periodssix months ended June 30, 2019March 31, 2020 compared to the prior year periods. Sellingthree and administrative expenses include acquisition-relatedsix months ended March 31, 2019 due to increased information technology costs and increased investment in emerging markets.

Acquisition-related intangible asset amortization acquisition and integration costs and costs related to tax law changes totaling $44.5 million and $105.4 millionremained relatively flat for the quarter and yearthree months ended March 31, 2020 compared to date periodsthe three months ended June 30,March 31, 2019. Selling and administrative expenses include acquisition-relatedFor the six months ended March 31, 2020, Acquisition-related intangible asset amortization acquisition and integration costs and significant litigation related costs totaling $30.2increased $0.8 million, and $95.5 million

for the quarter and year to date periods ended June 30, 2018. Excluding these items, as a percentage of total revenue, selling and administrative expenses increased 5.3% and 1.6% for the quarter and year to date periods ended June 30, 2019or 1.5%, compared to the prior year periodssix months ended March 31, 2019 due to our recent acquisitionthe acquisitions of Voalte and investmentsBreathe during fiscal 2019 and Excel Medical in our sales and marketing activities.January 2020.

Business Segment Divisional Income
  Quarter Ended
June 30		 Change Year to Date Ended June 30 Change
 2019 2018  2019 2018 
Divisional income: 
  
    
  
  
Patient Support Systems$81.9
 $71.3
 14.9% $208.5
 $191.9
 8.7%
Front Line Care70.2
 62.2
 12.9% 197.2
 178.1
 10.7%
Surgical Solutions17.8
 11.4
 56.1% 44.2
 36.6
 20.8%

Refer to Note 14 of our Condensed Consolidated Financial Statements in this Form 10-Q for a description of how divisional income is determined.

Patient Support Systems divisional income increased 14.9% and 8.7% for the quarter and year to date periods ended June 30, 2019 compared to the prior year periods primarily due to revenue growth in the United States, and lower operating expenses as a percentage of revenue.

Front Line Care divisional income increased 12.9% and 10.7% for the quarter and year to date periods ended June 30, 2019 compared to the prior year periods as a result of revenue growth and higher margins from new products.

Surgical Solutions divisional income increased 56.1% and 20.8% for the quarter and year to date periods June 30, 2019 compared to the prior year period as a result of cost and operating expense reductions.

Special Charges and Other
(In millions)Three Months Ended March 31Six Months Ended March 31
 2020201920202019
Special charges$8.8  $3.5  $16.6  $11.5  
Interest expense$(19.1) $(21.8) $(38.5) $(43.1) 
Loss on extinguishment of debt$—  $—  $(15.6) $—  
Investment income (expense) and other, net$(11.4) $1.2  $(12.7) $1.3  
  Quarter Ended June 30 Year to Date Ended June 30
 2019 2018 2019 2018
Special charges$6.2
 $14.0
 $17.7
 $64.4
        
Interest expense$(23.1) $(24.2) $(66.2) $(71.5)
Investment income (expense) and other, net$(1.1) $1.2
 $0.2
 $2.6

Three and Six Months Ended March 31, 2020 Compared to the Three and Six Months Ended March 31, 2019

In connection with various organizational changes to improve our business alignment and cost structure, we recognized Special charges of $6.2$8.8 million and $14.0$16.6 million for the quartersthree and six months ended June 30, 2019 and 2018, and $17.7March 31, 2020 compared to $3.5 million and $64.4$11.5 million for the year to date periodsthree and six months ended June 30, 2019 and 2018.March 31, 2019. These charges relaterelated to the initiatives described in Note 9 of our Condensed Consolidated Financial Statements in this Form 10-Q.10. Special Charges.
Interest expense was lower indecreased $2.7 million and $4.6 million, or 12.4% and 10.7%, for the quarterthree and yearsix months ended March 31, 2020 compared to date periodsthe three and six months ended June 30,March 31, 2019 due to a decreaselower interest rates resulting from the refinancing of senior unsecured notes of $425.0 million in long-term debt compared to the prior year periods and the impact of our cross-currency swaps entered into in July 2018.September 2019.  See Note 6 of our Condensed Consolidated Financial Statements in this Form 10-Q5. Financing Agreements for additional information.

Loss on extinguishment of debt related to the refinancing of senior unsecured notes of $425.0 million in September 2019.  See Note 5. Financing Agreementsfor further information.

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Investment income (expense) and other, net decreased infor the quarterthree and yearsix months ended March 31, 2020 was expense of $11.4 million and $12.7 million comprised primarily of $2.0 million of losses related to date periods ended June 30, 2019 primarily due toour cost and equity method investments, the recognition of a non-cash pension plan settlement loss of $8.5 million, and unfavorable movements in foreign exchange ratesrates. These balances were partially offset by a $1.2 million litigation settlement award. See Note 3. Supplementary Financial Statement Information and Note 8. Retirement and Postretirement Plans for additional information. Investment income (expense) and other, net for the gain we recorded related to the working capital settlementthree and six months ended March 31, 2019 was income of the Völker disposition$1.2 million and $1.3 million driven primarily by favorable movements in the prior year period.foreign exchange rates.

Income Tax Expense

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

The effective tax rate for the quarterthree months ended June 30, 2019March 31, 2020 was 28.7%17.4% compared to 18.6%18.5% for the comparable period in the prior year due primarily to the difference in the discrete tax benefits realized in each period. The current period rate was unfavorably impacted by $3.0 million of net discrete tax expense, including $5.2 million of unfavorable uncertain tax positions primarily associated with a domestic tax reserve for a position related to the Transition Tax, offset by $2.2 million of other favorable discrete

benefits. This compares to $2.7 million of discrete tax benefits in the comparable prior year period which primarily included excess tax benefits on deductible stock compensation and differences between our prior year tax provisions and our filed returns.

year. The effective tax rate for the year to date periodthree months ended June 30, 2019 was 20.3% compared to (50.3)% for the comparable period in the prior year due primarily to tax benefits recorded in the prior period related to the Tax Act. The year to date period rateMarch 31, 2020 was favorably impacted primarily by $1.5 million of net discrete tax benefits primarily relatedan increased projected benefit for the deduction attributed to $2.6 million of excess tax benefits on deductible stock compensation and $3.3 million of other favorable discrete items, offset by $4.4 million of unfavorable changes to uncertain tax positions. This compares to $78.3 million of discrete tax benefits in the prior year to date period primarily related to the Tax Act and a change in tax accounting method for historical currency losses. foreign derived intangible income (“FDII”).

The adjusted effective tax rate for the quarter and year to date periodsthree months ended June 30, 2019March 31, 2020 was 20.8% and 20.3%20.9% compared to 21.7%20.4% for the comparable period in the prior year. The differences from the current year period and 20.8% for the prior year periods. The lower adjusted tax rate inperiod primarily relate to discrete items, including the current year is primarily due to the reduction in the U.S. federal corporate tax rate from Tax Act legislation partially offset by lower excess tax benefits on deductible stock compensation.

Six Months Ended March 31, 2020 Compared to the Six Months Ended March 31, 2019

The effective tax rate for the six months ended March 31, 2020 was 12.8% compared to 16.9% for the comparable period in the prior year. The effective tax rate for the six months ended March 31, 2020 was favorably impacted primarily by an increased projected benefit for the deduction attributed to FDII as well as a small benefit from current year discrete items. The effective tax rate for the six months ended March 31, 2020 was also favorably impacted by the reduction of the contingent consideration accrual of $8.4 million, that is not subject to tax. See Note 4. Business Combinations for additional information.

The adjusted effective tax rate for the six months ended March 31, 2020 was 19.0% compared to 20.1% for the comparable period in the prior year. The differences from the current year period and the prior year period primarily relate to discrete items, including the excess tax benefits on deductible stock compensation.

On March 25, 2020, the U.S. government approved the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to provide economic stimulus to address the impact of the pandemic. We continue to evaluate what impact, if any, the CARES Act, or any similar legislation in other non-U.S. jurisdictions, may have on our related tax positions and our effective tax rate.

Earnings per Share

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Diluted earnings per share decreased from $0.67$0.74 to $0.48$0.70 for the quarterthree months ended June 30,March 31, 2020 compared to the three months ended March 31, 2019 due to a pension settlement loss of $8.5 million. See Note 8. Retirement and Postretirement Plansfor additional information.

Six Months Ended March 31, 2020 Compared to the Six Months Ended March 31, 2019

Diluted earnings per share decreased from $1.36 to $1.29 for the six months ended March 31, 2020 compared to the six months ended March 31, 2019 due to a loss on the extinguishment of debt of $15.6 million and a pension plan settlement loss of $8.5 million. The losses were partially offset by higher gross profits and lower tax rates. See Note 5. Financing Agreements and Note 8. Retirement and Postretirement Plansfor additional information.
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Business Segment Divisional Income
(In millions)Three Months Ended March 31Change As ReportedSix Months Ended March 31Change As Reported
 2020201920202019
Divisional Income:    
Patient Support Systems$74.9  $72.2  3.7 %$133.3  $131.9  1.1 %
Front Line Care77.7  67.2  15.6 %151.2  128.9  17.3 %
Surgical Solutions13.7  15.1  (9.3)%26.5  26.4  0.4 %

Refer to Note 14. Segment Reporting for a description of how divisional income is determined.

Three and Six Months Ended March 31, 2020 Compared to the Three and Six Months Ended March 31, 2019

Patient Support Systems divisional income increased $2.7 million and $1.4 million, or 3.7% and 1.1%, for the three and six months ended March 31, 2020 compared to the three and six months ended March 31, 2019 primarily due to revenue growth in the United States from our care communications platform, which includes recent acquisitions, and sales growth during the three months ended March 31, 2020.The increases in revenue were offset primarily by an increase in Sellinginvestments to support growth initiatives.
Front Line Care divisional income increased $10.5 million and administrative expenses in$22.3 million, or 15.6% and 17.3% for the current quarter asthree and six months ended March 31, 2020 compared to the prior year period. Sellingthree and administrative expenses include acquisition-related intangible asset amortization, acquisitionsix months ended March 31, 2019 due to overall revenue growth in the United States and integration costsinternationally driven by sales of respiratory health and costs relatedpatient monitoring products as well as higher gross margins.

Surgical Solutions divisional income decreased $1.4 million, or 9.3% for the three months ended March 31, 2020 compared to tax law changes.the three months ended March 31, 2019 as a result of the disposition of the surgical consumable products business in August 2019, partially offset by higher gross margins and reductions in operating costs. Divisional income remained relatively flat for the six months ended March 31, 2020 compared to the six months ended March 31, 2019 due to sales growth from integrated operating tables and other equipment installed as part of new construction, which was offset by the disposition of the surgical consumable products business in August 2019.

GAAP 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 table below.tables below for the three and six months ended March 31, 2020 and the three and six months ended March 31, 2019. GAAP 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.

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 Quarter Ended June 30, 2019 Quarter Ended June 30, 2018
 Operating
Margin		 Income
Before
Income
Taxes		 Income Tax
Expense		 Diluted EPS Operating
Margin		 Income
Before
Income
Taxes		 Income Tax
Expense		 Diluted EPS
GAAP Basis9.6% $45.7
 $13.1
 $0.48
 11.1% $55.5
 $10.3
 $0.67
Adjustments: 
  
  
  
  
  
  
  
Acquisition and integration costs and related fair value adjustments1.9% 13.9
 2.8
 0.16
 0.4% 2.7
 0.7
 0.03
Acquisition-related intangible asset amortization4.0% 29.3
 7.4
 0.33
 3.7% 26.8
 7.4
 0.28
Field corrective actions0.8% 5.6
 1.4
 0.06
 —% —
 —
 —
Regulatory compliance costs0.6% 4.6
 1.1
 0.05
 0.1% 0.6
 0.2
 0.01
Special charges0.9% 6.2
 1.5
 0.07
 2.0% 14.0
 4.1
 0.14
Tax law and method changes—% —
 (5.4) 0.08
 —% 0.1
 (1.1) 0.02
Adjusted Basis17.8% $105.3
 $21.9
 $1.23
 17.3% $99.7
 $21.6
 $1.15
Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Related fair value adjustments of $5.3 million represent purchase accounting adjustments for deferred revenue and contingent consideration associated with our business combinations in Note 4 of our Condensed Consolidated Financial Statements in this Form 10-Q.
 Three Months Ended March 31, 2020Three Months Ended March 31, 2019
 Operating
Margin		Income
Before
Income
Taxes		Income Tax
Expense		Diluted EPSOperating
Margin		Income
Before
Income
Taxes		Income Tax
Expense		Diluted EPS
GAAP Basis12.1 %$56.8  $9.9  $0.70  11.4 %$60.7  $11.2  $0.74  
Adjustments:          
Acquisition and integration costs and related fair value adjustments 1
0.4 %2.7  0.7  0.03  0.2 %1.6  0.3  0.02  
Acquisition-related intangible asset amortization 2
3.7 %27.1  6.6  0.31  3.8 %27.3  6.4  0.30  
Field corrective actions 3
0.2 %1.4  0.4  0.01  — %—  —  —  
Regulatory compliance costs 4
0.7 %4.8  1.2  0.05  0.5 %3.3  0.9  0.04  
Special charges 5
1.2 %8.8  2.3  0.10  0.5 %3.5  0.9  0.04  
Pension Settlement Expense 6
— %8.5  2.0  0.09  — %—  —  —  
Litigation Settlement 7
— %(1.2) (0.3) (0.01) — %—  —  —  
Adjusted Basis18.3 %$108.9  $22.8  $1.28  16.4 %$96.4  $19.7  $1.14  
1 Acquisition and integration costs and related fair value adjustments include legal and professional fees, temporary labor, consulting and other costs related to the closing and integration of acquired businesses, including purchase accounting adjustments for deferred revenue and other items, and contingent consideration. For the three months ended March 31, 2020, a fair value adjustment of $1.7 million represents purchase accounting adjustments for deferred revenue and contingent consideration associated with our business combinations in Note 4. Business Combinations.
2 Acquisition-related intangible asset amortization relates to the amortization of intangible assets associated with our 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. 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.
6 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 for additional information.
7 Litigation settlements and expenses are the aggregate charges, costs or recoveries associated with litigation settlements. For the three months ended March 31, 2020, we received a litigation settlement award totaling $1.2 million, which was recorded as a component of Investment income (expense) and other, net.




















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 Year to Date Ended June 30, 2019 Year to Date Ended June 30, 2018
 Operating
Margin		 Income
Before
Income
Taxes		 Income Tax
Expense		 Diluted EPS Operating
Margin		 Income
Before
Income
Taxes		 Income Tax
Expense		 Diluted EPS
GAAP Basis10.5% $156.0
 $31.7
 $1.84
 8.5% $107.8
 $(54.2) $2.40
Adjustments: 
  
  
  
  
  
  
  
Acquisition and integration costs and related fair value adjustments0.7% 15.7
 3.2
 0.19
 0.3% 7.3
 1.9
 0.08
Acquisition-related intangible asset amortization3.9% 82.3
 19.7
 0.93
 3.8% 80.5
 20.9
 0.88
Field corrective actions0.3% 5.6
 1.4
 0.06
 —% —
 —
 —
Regulatory compliance costs0.5% 10.7
 2.7
 0.12
 0.1% 1.8
 0.5
 0.02
Litigation expenses—% —
 —
 —
 0.3% 5.8
 1.5
 0.06
Special charges0.8% 17.7
 4.3
 0.20
 3.1% 64.4
 17.3
 0.70
Tax law and method changes—% —
 (4.4) 0.06
 —% 0.1
 67.7
 (1.00)
Gain on disposition—% —
 —
 —
 —% (1.0) —
 (0.01)
Adjusted Basis16.7% $288.0
 $58.6
 $3.40
 16.1% $266.7
 $55.6
 $3.13
Six Months Ended March 31, 2020 Compared to the Six Months Ended March 31, 2019

Related fair value adjustments
 Six Months Ended March 31, 2020Six Months Ended March 31, 2019
 Operating
Margin		Income
Before
Income
Taxes		Income Tax
Expense		Diluted EPSOperating
Margin		Income
Before
Income
Taxes		Income Tax
Expense		Diluted EPS
GAAP Basis11.8 %$99.4  $12.7  $1.29  10.9 %$110.3  $18.6  $1.36  
Adjustments:          
Acquisition and integration costs and related fair value adjustments 1
(0.3)%(3.8) 1.0  (0.07) 0.1 %1.8  0.4  0.02  
Acquisition-related intangible asset amortization 2
3.8 %53.8  13.0  0.61  3.8 %53.0  12.3  0.60  
Field corrective actions 3
0.1 %1.4  0.4  0.01  — %—  —  —  
Regulatory compliance costs 4
0.6 %8.7  1.8  0.10  0.5 %6.1  1.6  0.07  
Special charges 5
1.2 %16.6  3.5  0.19  0.8 %11.5  2.8  0.13  
Tax law and method changes 6
— %—  —  —  — %—  1.0  (0.02) 
Debt refinancing costs 7
— %16.1  3.7  0.18  — %—  —  —  
Loss on disposition of business 8
— %0.4  0.1  0.01  — %—  —  —  
Pension settlement expense 9
— %8.5  2.0  0.10  — %—  —  —  
Litigation settlement 10
— %(1.2) (0.3) (0.01) — %—  —  —  
Adjusted Basis17.2 %$199.9  $37.9  $2.41  16.1 %$182.7  $36.7  $2.16  
1 Acquisition and integration costs and related fair value adjustments include legal and professional fees, temporary labor, consulting and other costs related to the closing and integration of acquired businesses, including purchase accounting adjustments for deferred revenue and other items, and contingent consideration. For the six months ended March 31, 2020, a fair value adjustment of $6.2 million represents purchase accounting adjustments for deferred revenue and contingent consideration associated with our business combinations in Note 4. Business Combinations.
2 Acquisition-related intangible asset amortization relates to the amortization of intangible assets associated with our 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. 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.
6 Tax law and method changes relate to tax expenses and related unrecognized tax benefits due to the Tax Cuts and Jobs Act enacted in the United States in December 2017. See Note 11. Income Taxes within the 2019 Form 10-K for the fiscal year ended September 30, 2019 for further information
7 Debt refinancing costs are expenses related to the costs incurred between the issuance and redemption of our senior unsecured notes due 2027 and 2023. For the six months ended March 31, 2020, debt refinancing costs include a loss on extinguishment of debt of $15.6 million related to the redemption of all of our previously outstanding senior unsecured 5.75% notes due September 2023 as discussed within Note 5. Financing Agreements, as well as $0.5 million of duplicative interest costs.
8 Loss on disposition of business relates to losses recorded in Investment income (expense) and other, net resulting from business dispositions.
9 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 for additional information.
10 Litigation settlements and expenses are the aggregate charges, costs or recoveries associated with litigation settlements. For the six months ended March 31, 2020, we received a litigation settlement award totaling $1.2 million, which was recorded as a component of Investment income (expense) and other, net.

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Table of $5.3 million represent purchase accounting adjustments for deferred revenue and contingent consideration associated with our business combinations in Note 4 of our Condensed Consolidated Financial Statements in this Form 10-Q.Contents

Liquidity and Capital Resources

Six Months Ended March 31
20202019
Cash Flows Provided By (Used In):  
Operating activities$156.7  $158.2  
Investing activities(57.9) (71.8) 
Financing activities(439.4) (80.1) 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(2.7) (2.3) 
(Decrease) Increase in Cash and cash equivalents$(343.3) $4.0  
 Year to Date Ended June 30
 2019 2018
Cash Flows Provided By (Used In):   
Operating activities$301.1
 $249.8
Investing activities(267.9) (64.7)
Financing activities(11.9) (166.0)
Effect of exchange rate changes on cash(1.7) (4.4)
Increase in Cash and cash equivalents$19.6
 $14.7

Net cash flows from operating activities and selected borrowings represented our primary sources of funds for growth of the
business, including capital expenditures and acquisitions. Our financing agreements contain certain restrictions relating to dividend payments, the making of restricted payments, and the incurrence of additional secured and unsecured indebtedness. None of our financing agreements contain any credit rating triggers that would increase or decrease our cost of borrowings. Credit rating changes can, however, impact the cost of borrowings and any potential future borrowings under any new financing agreements.

Operating Activities

Cash provided by operating activities increased $51.3decreased $1.5 million for the six months ended March 31, 2020 compared to the prior year due to highersix months ended March 31, 2019. The primary drivers include an increase in incentive compensation payments, partially offset by improved operating profit and working capital improvements. Net income in the prior year period was impacted by the non-cash incremental tax benefits recorded related to the Tax Act, offset by a net loss on disposition of businesses of $22.4 million. See Note 10 and Note 4 of our Condensed Consolidated Financial Statements in this Form 10-Q for information on the Tax Act and the net loss on disposition of businesses.margins.

Investing Activities

Cash used in investing activities was $267.9decreased by $13.9 million infor the yearsix months ended March 31, 2020 compared to date periodthe six months ended June 30,March 31, 2019 primarily driven bydue to our acquisitionacquisitions of Voalte for consideration of $175.8 million, net of cash acquired, as described in Note 4 of our Condensed Consolidated Financial Statements in this Form 10-Q. We also acquired non-marketable equity securities of $26.6 million as described in Note 3, as well asand the right to use patented technology and certain related assets from a supplier in our Front Line Care segment of $17.1 million as describedduring the six months ended March 31, 2019. The decrease was partially offset by the payment of $13.1 million for the acquisition of Excel Medical in January 2020. See Note 3. Supplementary Financial Statement Information and Note 4. For the year to date period ended June 30, 2018, cash used in investing activities was $64.7 million, primarily consisting of capital expenditures of $71.9 million.Business Combinations for additional information.


Financing Activities

Cash used in financing activities was $11.9increased $359.3 million infor the yearsix months ended March 31, 2020 compared to date periodthe six months ended June 30,March 31, 2019 primarily driven by purchasesdue to the redemption of our common stock under our share repurchase programpreviously outstanding senior unsecured 5.75% notes due September 2023 of $75.0$425.0 million and the related prepayment premium of $12.2 million as described inwithin Note 125. Financing Agreements.

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Table of our Condensed Consolidated Financial Statements in this Form 10-Q as well as dividend payments of $41.4 million. These cash uses were partly offset by additional net borrowings on our various borrowing facilities of $94.0 million. For the year to date period ended June 30, 2018, cash used in financing activities was $166.0 million, primarily driven by net payments on our various borrowing facilities of $138.9 million and dividend payments of $38.4 million. See Note 6 of our Condensed Consolidated Financial Statements in this Form 10-Q for information on our financing agreements.Contents

Other Liquidity Matters

Our cash balances and cash flows generated from operations may be used to fund strategic investments, business acquisitions, working capital needs, capital expenditures, investments in technology and marketing, share repurchases and payments of dividends to our shareholders. We believe that our cash on handbalances and cash flows generated from operations, along with amounts available under our Revolving Credit Facility and Securitization Program,financing agreements, will be sufficient to fund operations, working capital needs, capital expenditure requirements, and financing obligations for at least the next twelve months. Our $700.012 months from the date of this filing.

As of March 31, 2020, there were $185.0 million outstanding borrowings on the 2024 Revolving Credit Facility, is with a syndicate of banks, which we believe reduces our exposure to any one institution and would still leave us with significantavailable borrowing capacity inwas $1,007.8 million after giving effect to the event that any one of the institutions within the group is unable to comply with the terms of our amended and restated credit agreement. However, disruption and volatility in the credit markets could impede our access to capital.

On April 1, 2019, we completed the acquisition of Voalte for total aggregate consideration of $181.0 million, comprised of $175.8 million cash and $5.2$7.2 million of contingent consideration measured at fair value asoutstanding standby letters of the acquisition date. The purchase price is subject to certain post-closing adjustments. Contingent consideration is payable of up to $15.0 million based upon the achievement of certain commercial milestones.

In August 2019, we completed a divestiture to sell certain of our surgical consumable products and related assets for a purchase price of $170.0 million in cash, subject to certain post-closing adjustments, pursuant to a stock purchase agreement dated July 9, 2019. We expect to record a loss on this divestiture of approximately $20.0 million, including transaction costs of approximately $4.0 million.

On August 1, 2019, we entered into a definitive agreement to acquire Breathe Technologies, Inc., a developer and manufacturer of a patented wearable, non-invasive ventilation technology that supports improved patient mobility, for cash consideration of $130.0 million. We expect the transaction to close during our fiscal fourth quarter of 2019, subject to customary closing conditions.

We purchased 792,264 shares of our common stock in the open market under our share repurchase program for $75.0 million in the year to date period ended June 30, 2019. We did not repurchase shares in the quarter ended June 30, 2019 in the open market. The timing and amount of share repurchases, if any, will be determined based on market conditions, limitations under our financing agreements, share price and other factors.

In addition to the discussion of our financing agreements and share repurchases detailed in Note 6 and Note 12 of our Condensed Consolidated Financial Statements in this Form 10-Q, our primary pension plan invests in a variety of equity and debt securities.credit. As of September 30, 2018,2019, there were $80.0 million outstanding borrowings on the 2024 Revolving Credit Facility, and available borrowing capacity was $1,112.8 million after giving effect to $7.2 million of outstanding standby letters of credit.

Hillrom’s cash flows from operating activities for the six months ended March 31, 2020 were not materially impacted by the outbreak of a respiratory illness caused by the coronavirus. There have been no changes to our latest measurement date,cost of or access to our pension planscapital and funding sources. We have not currently identified instability of the financial institutions with whom we maintain our financing relationships. Hillrom believes it will continue to service our outstanding borrowings or other financial obligations.

Hillrom’s long-term debt instruments require nominal repayments over the next 12 months, with our next significant maturity occurring in August 2024. Since the beginning of the global COVID-19 pandemic in December 2019, we have not experienced liquidity constraints through either the movement of cash or under our 2024 Revolving Credit Facility. Furthermore, Hillrom has successfully extended its 364-day accounts receivable securitization facilities as of April 27, 2020. As of March 31, 2020, we were underfunded by approximately $54.8 million. Basedin compliance with all debt covenants under our financing agreements. See Note 5. Financing Agreements for additional information on our current funded status,financing agreements.

Hillrom does not anticipate incurring significant incremental capital expenditures due to the pandemic. We may delay discretionary capital spending or redirect capital spending to support the increased demand for certain products used to treat patients diagnosed with COVID-19.

Refer to the section titled “The Impacts of COVID-19 on Hillrom” within Management’s Discussion & Analysis of Financial Condition and Results of Operations for further information.

Over the long term, we are not requiredintend to make any contributions to our primary pension plan in fiscal 2019.

We continue to expectpursue inorganic growth in certain areas of our business, but the timing, size or success of any acquisition effort and the related potential capital spending in fiscal 2019 tocommitments cannot be approximately $80.0 million.predicted.

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

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

As of June 30, 2019,March 31, 2020, approximately 76.4%53.0% of our cash and cash equivalents were held by our foreign subsidiaries. As of June 30, 2019,March 31, 2020, our practice and intention waswere to reinvest the earnings in our non-U.S. subsidiaries outside of the United States.


With regard to our non-U.S. subsidiaries, it is our practice and intention to reinvest the earnings in those businesses to fund capital expenditures and other operating cash needs. Because the undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested, no U.S. deferred income taxes or foreign withholding taxes have been provided on earnings subsequent to the enactment of the Tax Act. Future repatriations of cash and cash equivalents, if any, held by our foreign subsidiaries will generally not be subject to U.S. Federal tax if earned prior to the enactment of the Tax Act. As we evaluate the impact of the Tax Act and the future cash needs of our global operations, we may revise the amount of foreign earnings generated prior to the enactment of the Tax Act considered to be permanently reinvested in our foreign subsidiaries. We believe that cash on hand and cash generated from U.S. operations, along with amounts available under our financing agreements, will be sufficient to fund U.S. operations, working capital needs, capital expenditure requirements and financing obligations.

The U.S. Internal Revenue Service and Treasury Department continue to release proposed guidance with respect to the Tax Act. We continue to evaluate what impact, if any, each piece of guidance may have on our related tax positions and our effective tax rate if, and when, such guidance is finalized.

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Contractual Obligations and Contingent Liabilities and Commitments

There have not been any significant changes since September 30, 20182019 impacting our contractual obligations and contingent liabilities and commitments.

Critical Accounting Policies

Our accounting policies require management to make significant estimates and assumptions using information available at the time the estimates are made. Such estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenue, and expenses. If future experience differs materiallysignificantly from these estimates and assumptions, our results of operations and financial condition could be affected. A detailed description of our accounting policies is included in Note 11. Summary of our Consolidated Financial StatementsSignificant Accounting Policies and the Critical Accounting Policies Section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 20182019 Form 10-K. With the exception of our new revenue recognition policy disclosed in Note 1 of our Condensed Consolidated Financial Statements in this Form 10-Q, thereThere have been no materialsignificant changes to such policies since September 30, 2018.2019.

For a further summary of certain accounting policies and estimates and recently issued accounting pronouncements applicable to us, see Note 11. Summary of Significant Accounting Policies.

The Impacts of COVID-19 on Hillrom

During December 2019, an outbreak of COVID-19 was reported in Wuhan, China. Since that time, the virus spread globally and has resulted in confirmed cases in regions and countries in which we conduct our business. Subsequent to December 31, 2019, the World Health Organization declared COVID-19 a “Public Health Emergency of International Concern.” The United States and countries around the world are taking extreme precautionary and preventive measures to reduce the spread of COVID-19. COVID-19 has impacted global economies as travel, leisure and discretionary consumer spending has reduced significantly causing companies to make drastic changes to their investments, human capital, and financial outlooks.

Revenues and Customers

As a result of preventive and cautionary measures taken by Hillrom, other businesses and governments, we may experience changes in demand for certain of our Condensed Consolidated Financial Statementsproducts as health care customers prioritize the treatment of patients diagnosed with COVID-19. For the three and six months ended March 31, 2020, we experienced an increase in demand for select products including ICU and med-surg beds, specialty surfaces and patient mobility solutions within Patient Support Systems, and respiratory health ventilators, thermometry and patient monitoring products within Front Line Care. We also experienced declines in revenue related to project delays in our care communications business. The combined impact to total net revenues in the second quarter of fiscal 2020 was a net increase of approximately $15 million due to higher demand for products used to treat patients diagnosed with COVID-19.

In the second half of 2020, the Company expects near-term increases in demand for products used to treat patients diagnosed with COVID-19. This demand is expected to be partially offset by near-term lower demand for information technologies and software solutions in Patient Support Systems due to limited access to hospitals and the near term reprioritization of customer demand for products used to treat patients diagnosed with COVID-19. In addition, we expect near-term lower demand for operating room infrastructure in Surgical Solutions due to project delays as customers are focusing on the demands of the pandemic. The ultimate impact of the COVID-19 pandemic or a similar public health event is highly uncertain and subject to change. In this Form 10-Q.regard, the extent of potential impacts on our business, healthcare systems and other customers and the U.S. and global economies as a whole is evolving, and the development of customer demand described above and other factors could materially and adversely affect our business, results of operations, financial condition and prospects. Management intends to continue focusing on the Company's strategic growth objectives, while also working to meet the immediate demands relating to the COVID-19 pandemic.


Operations and Workforce

We are actively managing our supply chain to ensure we are securing raw materials and components for manufacturing products in high demand due to COVID-19. We have not experienced significant supply chain constraints nor significant increases in supply costs as a result of the pandemic and we are adjusting resource allocation as needed to meet customer demand.

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Hillrom continues to operate our production facilities as our products are essential to healthcare providers. Some of our products are specifically being used to treat patients diagnosed with COVID-19. Many employees in our administrative functions have effectively worked remotely since mid-March. Due to the importance of Hillrom’s products relative to treating the virus, the Company has maintained employment levels and has prudently augmented staffing as needed to meet near-term incremental demand as a result of the pandemic. Management does not believe that the pandemic will have a long-term impact on Hillrom’s organizational structure or number of employees.

Hillrom is currently evaluating governmental subsidies and incentives available within the various jurisdictions in which we operate. Management will evaluate these opportunities as well as the related requirements or restrictions to support our operations and workforce in a manner that allow us to continue to operate efficiently and effectively.

While the financial impact on Hillrom has not been significant to date, given the rapid and evolving nature of the pandemic, COVID-19 could negatively affect our sales, and it is uncertain how COVID-19 will affect our global operations generally if these impacts persist or exacerbate over an extended period of time. Any of these impacts could have a material adverse effect on our business, financial condition and results of operations. For further discussion, see the risk factor within PART II – OTHER INFORMATION, Item 1.A Risk Factors, entitled “Our business, results of operations, financial condition and prospects could be materially and adversely affected by the recent COVID-19 pandemic and the related effects on public health.”

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Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are exposed to various market risks, including fluctuations in interest rates, collection risk associated with our accounts and notes receivable portfolio and variability in currency exchange rates. We have established policies, procedures, and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.

We are subject to variability in foreign currency exchange rates in our international operations. Exposure to this variability is periodically managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the local currency. From time-to-time, we enter into currency exchange agreements including forward contracts and cross-currency swaps, to manage exposures arising from fluctuating exchange rates related to specific and forecasted transactions. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currencies. The maximum length of time over which we hedge transaction exposures is generally 15 months. Derivative gains and losses, when initially reported as a component of Accumulated other comprehensive income (loss), are reclassified to earnings in the period when the transaction affects earnings.

Refer to Note 6 of our Condensed Consolidated Financial Statements in this Form 10-Q6. Derivative Instruments and Hedging Activity for discussions and quantitative disclosures about our derivative agreements.

For additional information on market risks related to our pension plan assets, see Item 7A,7A. Quantitative and Qualitative Disclosures About Market Risk, in our 20182019 Form 10-K.

Item 4.CONTROLS AND PROCEDURES
Item 4. CONTROLS AND PROCEDURES

Our management, with the supervision and participation of our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer (the “Certifying Officers”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019.March 31, 2020. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to management, including our Certifying Officers and our Board of Directors, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective as of June 30, 2019.March 31, 2020.

There have been no changes to our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred in our most recent completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II – OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS
Item 1. LEGAL PROCEEDINGS

Refer to Note 15 of our Condensed Consolidated Financial Statements in this Form 10-Q15. Commitments and Contingencies for further information on our legal proceedings.

Item 1A.
Item 1A. RISK FACTORS

There
Our business involves risks. With the exception of the below risk, there have been no material changes to our risk factors as disclosed in “ItemItem 1A. Risk Factors”Factors in our 20182019 Form 10-K for the year ended September 30, 2018.2019. The following information about the risk should be considered carefully together with the other information contained herein.

Our business, results of operations, financial condition andprospects could be materially and adversely affected by the recent COVID-19 pandemic and the related effects on public health.

We are susceptible to a widespread outbreak of an illness or other public health issue, such as the recent COVID-19 pandemic that has resulted in confirmed cases in regions and countries in which we conduct our business. Such outbreaks, including the COVID-19 pandemic, could, among other things:

•interrupt, slow, or render our supply chains inoperable, resulting in more expensive alternative sources of labor and materials or an inability to find such alternative sources of labor and materials for our products;
•subject us to governmental mandates and quarantines that may require forced shutdowns of our facilities for extended or indefinite periods due to public health measures;
•increase regulation of our industry, up to and including the exercise of war powers under The Defense Production Act of 1950 that could require us to turn over our production capabilities to the U.S. Government;
•substantially interfere with general commercial activity related to our customer base if our customers’ businesses are affected by the outbreak, including through delays or reductions of our customers’ purchases from us;
•cause health care providers to limit or restrict access to their facilities to only essential personnel for a material amount of time, adversely impacting our ability to complete installations of our care communications offerings and operating room equipment, and limiting contact with our sales personnel;
•reduce the number of ambulatory care or office visits if health care providers prioritize pandemic-related treatment and governmental and industry associations recommend the deferral of elective surgeries;
•cause our employees, including key executives, our production and service workforce and functional team members to become ill, quarantined or otherwise unable to work or travel due to health reasons or governmental restrictions;
•increase absenteeism or cause workplace disruption related to employees working from home or remotely;
•contribute to adverse changes in general domestic and global economic conditions, including recession or economic slowdown and disruption of domestic and international credit markets, which could negatively impact our customers’ ability to pay us as well as our ability to access capital thatcould in the future negatively affect our liquidity;
•result in the establishment of trade barriers that disrupt the flow of goods and increase costs associated with logistics and transportation;
•decrease our ability to grow our business through mergers, acquisitions and other similar business arrangements during any such pandemic or other outbreak as targets focus on operating their respective businesses;
•negatively impact innovation and development of new products as our R&D teams may be required to work from home and resources and energy may be redirected during any such outbreak; or
•contribute to a recession or market correction that could adversely affect the value of our common stock.

If the COVID-19 pandemic continues to spread and escalate domestically or internationally, or if governments impose additional measures intended to mitigate the spread and related effects of the pandemic, the risks described above could be elevated significantly.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material adverse impact on our business, results of operations, financial condition and prospects and could heighten many of our known risks described in Item 1A. Risk Factors of our 2019 Form 10-K.
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Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Period
Total
Number
of Shares
Purchased (1)
Average
Price Paid
per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans or Programs (2)
Approximate
Dollar Value
of Shares That
May Yet Be
Purchased Under
the Programs (2)
January 1, 2020 - January 31, 202095,415  $108.96  91,600  $207.5  
February 1, 2020 - February 29, 2020408,538  $108.04  408,400  $163.4  
March 1, 2020 - March 31, 20202,864  $95.69  —  $163.4  
Total506,817  500,000  

(1)Shares purchased in the three months ended March 31, 2020 were in connection with employee payroll tax withholding for restricted stock distributions and shares purchased of our common stock in the open market under our share repurchase program.

(2)In September 2019, the Board approved an additional $170.0 million for share repurchases. The below table reflects the date of Board approval, the authorized dollar value of the shares to be repurchased under each approval and the availability to repurchase as of March 31, 2020. As of March 31, 2020, a cumulative total of $346.6 million had been used, leaving us with availability of $163.4 million under the share repurchase program. There is no expiration date or plans to terminate this program in the future.
Board Approval DateAuthorized Dollar ValueDollar Value of Shares Purchased Prior to Fiscal 2020Dollar Value of Shares Purchased in Fiscal 2020Availability to Purchase as of March 31, 2020
November 2017$150.0  $102.5  $47.5  $—  
September 2019170.0  —  6.6  163.4  
Totals$320.0  $102.5  $54.1  $163.4  


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Period
Total
Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans or Programs (2)
 
Approximate
Dollar Value
of Shares That
May Yet Be
Purchased Under
the Programs (2)
April 1, 2019 - April 30, 2019778
 $101.56
 —
 $89.7
May 1, 2019 - May 31, 2019734
 $100.17
 —
 $89.7
June 1, 2019 - June 30, 2019—
 $—
 —
 $89.7
Total1,512
   —
  

Table of Contents
(1)Shares purchased in the quarter ended June 30, 2019 were in connection with employee payroll tax withholding for restricted stock distributions.

(2)In September 2013, the Board approved an expansion of its previously announced share repurchase authorization to a total of $190.0 million. In November 2017, the Board approved an increase to the share repurchase program in an amount of $150.0 million. As of June 30, 2019, a cumulative total of $250.3 million had been used, leaving us with availability of $89.7 million under the share repurchase programs. The program does not have an expiration date and currently there are no plans to terminate this program in the future.



Item 6. EXHIBITS

A. Exhibits
Item 6.EXHIBITS

A.Exhibits
10.131.1 
Residential Lease Agreement between Hill-Rom Holdings, Inc. and Andreas Frank dated May 1, 2019
10.2
Third Amendment to the Credit Agreement dated as of June 28, 2019, among the Company, as borrower, guarantors party hereto, the consenting lenders and JPMorgan Chase Bank, N.A., as administrative agent
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
101.INS XBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Extension Labels Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HILL-ROM HOLDINGS, INC.
(Registrant)

DATE: August 2, 2019By:HILL-ROM HOLDINGS, INC.
(Registrant)

Date: May 1, 2020By:/s/ Barbara W. Bodem
Name:

Title:
Barbara W. Bodem

Senior Vice President and Chief Financial Officer

(duly authorized officer and principal financial officer)

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