UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2013
OR
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to ____
Commission File No. 1-6651
HILL-ROM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Indiana | 35-1160484 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1069 State Route 46 East Batesville, Indiana | 47006-8835 |
(Address of principal executive offices) | (Zip Code) |
(812) 934-7777
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes | Ö | 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 | Ö | No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer R Accelerated filer £ Non-accelerated filer £ Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | No | Ö |
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 – 58,668,441 shares as of July 18, 2013.
HILL-ROM HOLDINGS, INC.
INDEX TO FORM 10-Q
Page | |||
PART I - FINANCIAL INFORMATION | |||
3 | |||
3 | |||
4 | |||
5 | |||
6 | |||
7 | |||
17 | |||
25 | |||
26 | |||
PART II - OTHER INFORMATION | |||
26 | |||
26 | |||
27 | |||
27 | |||
28 |
2
PART I – FINANCIAL INFORMATION
Hill-Rom Holdings, Inc. and Subsidiaries
(Dollars in millions except per share data)
Quarterly Period Ended June 30 | Year To Date Period Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net Revenues | ||||||||||||||||
Capital sales | $ | 323.1 | $ | 300.6 | $ | 965.8 | $ | 868.1 | ||||||||
Rental revenues | 101.1 | 105.9 | 312.5 | 334.6 | ||||||||||||
Total revenues | 424.2 | 406.5 | 1,278.3 | 1,202.7 | ||||||||||||
Cost of Revenues | ||||||||||||||||
Cost of goods sold | 187.5 | 188.1 | 558.1 | 505.1 | ||||||||||||
Rental expenses | 46.6 | 45.7 | 142.6 | 144.0 | ||||||||||||
Total cost of revenues | 234.1 | 233.8 | 700.7 | 649.1 | ||||||||||||
Gross Profit | 190.1 | 172.7 | 577.6 | 553.6 | ||||||||||||
Research and development expenses | 16.7 | 16.1 | 52.2 | 48.2 | ||||||||||||
Selling and administrative expenses | 136.4 | 120.5 | 414.9 | 366.3 | ||||||||||||
Impairment of other intangibles | - | - | - | 8.0 | ||||||||||||
Special charges (Note 8) | 0.8 | 1.7 | 3.7 | 9.7 | ||||||||||||
Operating Profit | 36.2 | 34.4 | 106.8 | 121.4 | ||||||||||||
Interest expense | (2.3 | ) | (1.4 | ) | (6.9 | ) | (4.4 | ) | ||||||||
Investment income and other, net | - | 0.4 | (0.7 | ) | 1.6 | |||||||||||
Income Before Income Taxes | 33.9 | 33.4 | 99.2 | 118.6 | ||||||||||||
Income tax expense (Note 9) | 10.5 | 10.0 | 29.5 | 37.0 | ||||||||||||
Net Income | $ | 23.4 | $ | 23.4 | $ | 69.7 | $ | 81.6 | ||||||||
Net Income per Common Share - Basic | $ | 0.39 | $ | 0.38 | $ | 1.16 | $ | 1.31 | ||||||||
Net Income per Common Share - Diluted | $ | 0.39 | $ | 0.37 | $ | 1.15 | $ | 1.31 | ||||||||
Dividends per Common Share | $ | 0.1375 | $ | 0.1250 | $ | 0.3875 | $ | 0.3625 | ||||||||
Average Common Shares Outstanding - Basic (thousands) (Note 10) | 59,743 | 62,319 | 60,273 | 62,130 | ||||||||||||
Average Common Shares Outstanding - Diluted (thousands) (Note 10) | 60,163 | 62,570 | 60,578 | 62,423 |
See Notes to Condensed Consolidated Financial Statements
3
Hill-Rom Holdings, Inc. and Subsidiaries
(Dollars in millions)
Quarterly Period Ended June 30 | Year To Date Period Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income | $ | 23.4 | $ | 23.4 | $ | 69.7 | $ | 81.6 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Available-for-sale securities and currency hedges, net of tax of $0.0 | - | 0.4 | 0.4 | 0.8 | ||||||||||||
million and ($0.2) million for the quarterly periods, and ($0.2) million | ||||||||||||||||
and ($0.3) million for the year to date periods, respectively | ||||||||||||||||
Foreign currency translation adjustment, net of tax of $0.0 million | (0.2 | ) | (9.6 | ) | (4.5 | ) | (7.2 | ) | ||||||||
and $1.5 million for the quarterly periods, and ($0.1) million | ||||||||||||||||
and $1.7 million for the year to date periods, respectively | ||||||||||||||||
Items not yet recognized as a component of net periodic pension | - | - | - | (0.2 | ) | |||||||||||
and postretirement healthcare costs, net of tax of $0.0 million | ||||||||||||||||
for all periods | ||||||||||||||||
Total other comprehensive income (loss) | (0.2 | ) | (9.2 | ) | (4.1 | ) | (6.6 | ) | ||||||||
Total comprehensive income | $ | 23.2 | $ | 14.2 | $ | 65.6 | $ | 75.0 |
See Notes to Condensed Consolidated Financial Statements
4
Hill-Rom Holdings, Inc. and Subsidiaries
(Dollars in millions)
June 30, 2013 | September 30, 2012 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 91.3 | $ | 84.3 | ||||
Trade accounts receivable, net of allowances (Note 2) | 361.2 | 392.6 | ||||||
Inventories (Note 2) | 122.8 | 126.9 | ||||||
Deferred income taxes (Notes 1 and 9) | 50.7 | 48.6 | ||||||
Other current assets | 28.6 | 29.4 | ||||||
Total current assets | 654.6 | 681.8 | ||||||
Property, plant and equipment, net (Note 2) | 237.6 | 250.1 | ||||||
Investments and investment securities (Notes 1 and 7) | 7.3 | 7.3 | ||||||
Goodwill (Note 4) | 338.7 | 335.2 | ||||||
Software and other intangible assets, net (Notes 2 and 4) | 258.3 | 290.8 | ||||||
Deferred income taxes (Notes 1 and 9) | 34.2 | 38.9 | ||||||
Other assets | 22.2 | 23.5 | ||||||
Total Assets | $ | 1,552.9 | $ | 1,627.6 | ||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Trade accounts payable | $ | 65.6 | $ | 80.7 | ||||
Short-term borrowings (Note 5) | 95.1 | 115.2 | ||||||
Accrued compensation | 85.9 | 73.4 | ||||||
Accrued product warranties (Note 12) | 41.4 | 42.2 | ||||||
Other current liabilities | 54.4 | 66.6 | ||||||
Total current liabilities | 342.4 | 378.1 | ||||||
Long-term debt (Note 5) | 229.5 | 237.5 | ||||||
Accrued pension and postretirement benefits (Note 6) | 89.4 | 89.6 | ||||||
Deferred income taxes (Notes 1 and 9) | 47.6 | 68.1 | ||||||
Other long-term liabilities | 39.1 | 41.7 | ||||||
Total Liabilities | 748.0 | 815.0 | ||||||
Commitments and Contingencies (Note 14) | ||||||||
SHAREHOLDERS' EQUITY | ||||||||
Common Stock (Note 2) | 4.4 | 4.4 | ||||||
Additional paid-in-capital | 121.3 | 116.8 | ||||||
Retained earnings | 1,446.6 | 1,400.3 | ||||||
Accumulated other comprehensive loss | (82.1 | ) | (78.0 | ) | ||||
Treasury stock, at cost (Note 2) | (685.3 | ) | (630.9 | ) | ||||
Total Shareholders' Equity | 804.9 | 812.6 | ||||||
Total Liabilities and Shareholders' Equity | $ | 1,552.9 | $ | 1,627.6 |
See Notes to Condensed Consolidated Financial Statements
5
Hill-Rom Holdings, Inc. and Subsidiaries
(Dollars in millions)
Year to Date Period Ended June 30 | ||||||||
2013 | 2012 | |||||||
Operating Activities | ||||||||
Net income | $ | 69.7 | $ | 81.6 | ||||
Adjustments to reconcile net income to net cash provided by | ||||||||
operating activities: | ||||||||
Depreciation | 54.1 | 54.7 | ||||||
Amortization | 34.7 | 26.0 | ||||||
Provision for deferred income taxes | (15.9 | ) | (9.9 | ) | ||||
Loss on disposal of property, equipment leased to others, | ||||||||
intangible assets and impairments | 0.4 | 7.7 | ||||||
Stock compensation | 11.3 | 9.0 | ||||||
Excess tax benefits from employee stock plans | (0.4 | ) | (1.3 | ) | ||||
Change in working capital excluding cash, current investments, | ||||||||
current debt, acquisitions and dispositions: | ||||||||
Trade accounts receivable | 31.4 | 46.0 | ||||||
Inventories | 3.9 | (1.4 | ) | |||||
Other current assets | (2.4 | ) | 9.3 | |||||
Trade accounts payable | (15.1 | ) | (11.8 | ) | ||||
Accrued expenses and other liabilities | (1.9 | ) | (16.7 | ) | ||||
Other, net | (2.1 | ) | (5.8 | ) | ||||
Net cash provided by operating activities | 167.7 | 187.4 | ||||||
Investing Activities | ||||||||
Capital expenditures and purchase of intangibles | (49.7 | ) | (55.9 | ) | ||||
Proceeds on sale of property and equipment leased to others | 5.3 | 7.1 | ||||||
Payment for acquisition of businesses, net of cash acquired | (0.2 | ) | (77.0 | ) | ||||
Proceeds on investment sales and maturities | - | 4.5 | ||||||
Net cash used in investing activities | (44.6 | ) | (121.3 | ) | ||||
Financing Activities | ||||||||
Net change in short-term debt | (0.1 | ) | (7.8 | ) | ||||
Net change in revolver | (20.0 | ) | - | |||||
Payment of long-term debt | (8.0 | ) | (47.5 | ) | ||||
Purchase of noncontrolling interest | (1.3 | ) | (1.3 | ) | ||||
Payment of cash dividends | (23.1 | ) | (22.5 | ) | ||||
Proceeds on exercise of options | 6.0 | 6.2 | ||||||
Proceeds from stock issuance | 2.1 | 2.2 | ||||||
Excess tax benefits from employee stock plans | 0.4 | 1.3 | ||||||
Treasury stock acquired | (69.9 | ) | (1.8 | ) | ||||
Net cash used in financing activities | (113.9 | ) | (71.2 | ) | ||||
Effect of exchange rate changes on cash | (2.2 | ) | 0.5 | |||||
Net Cash Flows | 7.0 | (4.6 | ) | |||||
Cash and Cash Equivalents: | ||||||||
At beginning of period | 84.3 | 224.6 | ||||||
At end of period | $ | 91.3 | $ | 220.0 |
See Notes to Condensed Consolidated Financial Statements
6
Hill-Rom Holdings, Inc. and Subsidiaries
(Dollars in millions except per share data)
1. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
Unless the context otherwise requires, the terms “Hill-Rom,” “we,” “our” and “us” refer to Hill-Rom Holdings, Inc. and our 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 our latest Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (“2012 Form 10-K”) as filed with the United States (“U.S.”) Securities and Exchange Commission. The September 30, 2012 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 U.S. In the opinion of management, the Condensed Consolidated Financial Statements herein include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position, results of operations and cash flows for the interim periods presented. Quarterly results are not necessarily indicative of annual results.
The Condensed Consolidated Financial Statements include the accounts of Hill-Rom and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires our management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the period. Actual results could differ from those estimates. Examples of such estimates include our accounts receivable reserves (Note 2), accrued warranties (Note 12), investments (Note 7), income taxes (Notes 1 and 9) and commitments and contingencies (Note 14), among others.
Investment Securities
At June 30, 2013, investment securities consisted primarily of AAA rated student loan auction rate securities (“ARS”). These securities are generally insured through the U.S. government’s Federal Family Education Loan Program, to the extent the borrowers meet certain prescribed criteria in their underlying lending practices. These securities are classified as available-for-sale and changes in their fair value are recorded in Accumulated Other Comprehensive Loss (“AOCL”).
We regularly evaluate all investments classified as available-for-sale for possible impairment based on current economic conditions, credit loss experience and other criteria. The evaluation of investments for impairment requires significant judgments to be made including (i) the identification of potentially impaired securities; (ii) the determination of their estimated fair value; (iii) the assessment of whether any decline in estimated fair value is other-than-temporary; and (iv) the likelihood of selling before recovery. If there is a decline in a security’s net realizable value that is other-than-temporary and we are not likely to sell before recovery, the decline is separated into the amount of impairment related to credit loss and the amount of impairment related to all other factors. The decline related to the credit loss is recognized in earnings, while the decline related to all other factors is recognized in AOCL.
See Note 7 for further details on our fair value measurements.
Taxes Collected from Customers and Remitted to Governmental Units
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 accounted for on a net (excluded from revenues and costs) basis.
7
Income Taxes
We and our eligible domestic subsidiaries file a consolidated U.S. income tax return. Foreign operations file income tax returns in a number of jurisdictions. Deferred income taxes 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. We have a variety of deferred tax assets in numerous tax jurisdictions. These deferred tax assets are subject to periodic assessment as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recognized. 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, 2013, we had $8.2 million of valuation allowances on deferred tax assets, on a tax-effected basis, primarily related to foreign operating loss carryforwards and other tax attributes. We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances.
We account for uncertain income tax positions using a threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The difference between the tax benefit recognized in the financial statements for an uncertain income tax position and the tax benefit claimed in the tax return is referred to as an unrecognized tax benefit.
Recently Issued Accounting Standards
There have been no significant changes to our assessment of the impact of recently issued accounting standards included in Note 1 of Notes to Consolidated Financial Statements in our 2012 Form 10-K except as noted below:
In June 2011, the Financial Accounting Stands Board (“FASB”) issued an amendment to the authoritative guidance on comprehensive income. The amendment eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity or include the components in the Notes to our Condensed Consolidated Financial Statements and instead requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. We adopted the new requirement in the first quarter of fiscal 2013 resulting in the presentation of a separate statement for the Condensed Consolidated Statements of Comprehensive Income.
In December 2011, the FASB issued a standard increasing disclosure about offsetting assets and liabilities. For financial instruments and derivative instruments, the standard requires disclosure of the gross amounts of recognized assets and liabilities, the amounts offset on the balance sheet, and the amounts subject to the offsetting requirements but not offset on the balance sheet. In January 2013, the FASB issued updated guidance which clarified that the 2011 amendment to the balance sheet offsetting standard does not cover transactions that are not considered part of the guidance for derivatives and hedge accounting. The standard is effective for fiscal 2014 and is to be applied retrospectively. The adoption of this standard is not expected to have a significant impact on our Consolidated Financial Statements.
In February 2013, an accounting standards update was issued that amends the reporting of amounts reclassified out of accumulated other comprehensive income. This standard does not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component, either on the face of the financial statement where net income is presented or in the notes to the financial statements. The standard is effective for fiscal 2014 and is to be applied prospectively. The adoption of this standard is not expected to have a significant impact on our Consolidated Financial Statements.
8
2. Supplementary Balance Sheet Information
June 30, 2013 | September 30, 2012 | |||||||
Allowance for possible losses and discounts on trade receivables | $ | 31.0 | $ | 38.5 | ||||
Inventories: | ||||||||
Finished products | $ | 71.0 | $ | 71.8 | ||||
Raw materials and work in process | 51.8 | 55.1 | ||||||
Total inventory | $ | 122.8 | $ | 126.9 | ||||
Accumulated depreciation of property, plant and equipment | $ | 576.0 | $ | 584.8 | ||||
Accumulated amortization of software and other intangible assets | $ | 228.4 | $ | 198.8 | ||||
Preferred stock, without par value: | ||||||||
Shares authorized | 1,000,000 | 1,000,000 | ||||||
Shares issued | None | None | ||||||
Common stock, without par value: | ||||||||
Shares authorized | 199,000,000 | 199,000,000 | ||||||
Shares issued | 80,323,912 | 80,323,912 | ||||||
Shares outstanding | 59,136,025 | 60,796,923 | ||||||
Treasury shares | 21,187,887 | 19,526,989 |
3. Acquisitions
Aspen Surgical
On July 23, 2012, we completed a stock purchase agreement with the stockholders and optionholders of Aspen Surgical Products Holding, Inc. (“Aspen Surgical”) to acquire the entire equity interest in Aspen Surgical. The purchase price for Aspen Surgical was $402.2 million ($399.8 million net of cash acquired). We funded the transaction with a combination of cash on hand and borrowings under the revolving credit facility. The results of Aspen Surgical are included in the Condensed Consolidated Financial Statements since the date of acquisition.
During the first, second, and third quarters of 2013, we made certain adjustments to the opening balance sheet as of the acquisition date. The calculation of fair value of the assets and liabilities is preliminary and subject to adjustment based on finalization of contractual conditions under the terms of the purchase agreement. The following summarizes the fair value of assets acquired and liabilities assumed at the date of the acquisition.
Amount | ||||
Inventory | $ | 25.6 | ||
Other current assets | 19.7 | |||
Property, plant, and equipment | 24.6 | |||
Goodwill | 221.1 | |||
Trade name (Indefinite Lived) | 29.0 | |||
Trade name (15-year weighted-average useful life) | 4.6 | |||
Customer relationships (13-year weighted-average useful life) | 121.9 | |||
Technology (10-year weighted-average useful life) | 9.1 | |||
Other noncurrent assets | 1.6 | |||
Current liabilities | (14.0 | ) | ||
Deferred tax liability | (41.0 | ) | ||
Total purchase price | $ | 402.2 |
Goodwill was allocated entirely to our Surgical and Respiratory Care segment and is not deductible for tax purposes.
9
Our total revenues on an unaudited proforma basis, as if the Aspen Surgical acquisition had been consummated at the beginning of our 2012 fiscal year, would have been higher by approximately $28.7 million and $85.9 million for the quarterly and year to date periods ended June 30, 2012. Net income, on an unaudited proforma basis, would have been higher by approximately $1.6 million and $5.3 million for the quarterly and year to date periods ended June 30, 2012 and earnings per diluted share would have been higher by $0.03 and $0.09. The unaudited pro forma results are based on the Company’s historical financial statements and those of the Aspen Surgical business and do not necessarily indicate the results of operations that would have resulted had the acquisition been completed at the beginning of the comparable period presented and are not indicative of the results of operations in future periods.
Völker
On February 13, 2012, we acquired the Germany-based Völker group (“Völker”). The purchase price for Völker was $80.7 million ($77.0 million net of cash acquired), which was reduced to $76.7 million, resulting from a $4.0 million purchase price adjustment, $1.2 million of which was recorded as a receivable from the seller as of June 30, 2013. The results of Völker are included in the Condensed Consolidated Financial Statements since the date of acquisition.
During the fourth quarter of 2012, we made certain adjustments to the opening balance sheet as of the acquisition date as we finalized the purchase price with the seller. During the second quarter of 2013, we made additional adjustments to the opening balance sheet related to the finalization of certain liabilities existing at the date of acquisition. Certain contractual conditions under the terms of the purchase agreement remain open. The following summarizes the revised fair value of assets acquired and liabilities assumed at the date of the acquisition.
Amount | ||||
Goodwill | $ | 33.2 | ||
Trade name (7-year useful life) | 12.3 | |||
Customer relationships (8-year weighted average useful life) | 17.5 | |||
Net assets acquired | 24.2 | |||
Deferred tax liability | (10.5 | ) | ||
Total purchase price | $ | 76.7 |
Goodwill is not deductible for tax purposes and was allocated entirely to our International segment.
Our total revenues on an unaudited proforma basis, as if the Völker acquisition had been consummated at the beginning of our 2012 fiscal year, would have been higher by approximately $0 million and $49.9 million for the quarterly and year to date periods ended June 30, 2012. The impact to net income and earnings per diluted share on an unaudited proforma basis would not have been significant to our financial results for those periods.
4. Goodwill and Indefinite-Lived Intangible Assets
Goodwill
The following summarizes goodwill activity:
North America | Surgical and Respiratory Care | International | Total | |||||||||||||
Balances at September 30, 2012: | ||||||||||||||||
Goodwill | $ | 383.0 | $ | 271.5 | $ | 153.5 | $ | 808.0 | ||||||||
Accumulated impairment losses | (358.1 | ) | - | (114.7 | ) | (472.8 | ) | |||||||||
Goodwill, net at September 30, 2012 | 24.9 | 271.5 | 38.8 | 335.2 | ||||||||||||
Changes in Goodwill during the period: | ||||||||||||||||
Goodwill related to acquisitions | - | 5.8 | (1.6 | ) | 4.2 | |||||||||||
Currency translation effect | - | (1.3 | ) | 0.6 | (0.7 | ) | ||||||||||
Balances at June 30, 2013: | ||||||||||||||||
Goodwill | 383.0 | 276.0 | 152.5 | 811.5 | ||||||||||||
Accumulated impairment losses | (358.1 | ) | - | (114.7 | ) | (472.8 | ) | |||||||||
Goodwill, net at June 30, 2013 | $ | 24.9 | $ | 276.0 | $ | 37.8 | $ | 338.7 |
10
As discussed in Note 13, we operate in three reportable business segments. Goodwill impairment testing is performed at the reporting unit level, which is one level below a reportable business segment. We have determined that we have nine reporting units. Goodwill is assigned to reporting units at the date the goodwill is initially recorded and has been reallocated as necessary based on the restructuring of reporting units over time. Once goodwill has been 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.
Testing for impairment must be 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 fiscal quarter of 2013 and 2012 did not result in any impairments.
A 10 percent reduction in the fair value of any of our reporting units would not result in an impairment charge.
During the first nine months of fiscal 2013, we recorded adjustments to goodwill related to the Aspen Surgical acquisition completed during the fourth quarter of fiscal 2012 and the Völker acquisition completed during the second quarter of fiscal 2012. See Note 3 for further details.
Indefinite-lived intangible assets
We have various indefinite-lived intangible assets representing trade names with a carrying value of $32.9 million at both June 30, 2013 and September 30, 2012. Testing for impairment must be 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 fiscal quarter of 2013 and 2012 did not result in impairment.
5. Financing Agreements
Total debt consists of the following:
June 30, 2013 | September 30, 2012 | |||||||
Outstanding finance credit lines | $ | 0.1 | $ | 0.2 | ||||
Revolving credit facility | 85.0 | 105.0 | ||||||
Term loan current portion | 10.0 | 10.0 | ||||||
Term loan long-term portion | 180.0 | 187.5 | ||||||
Unsecured 7.00% debentures due on February 15, 2024 | 19.5 | 19.6 | ||||||
Unsecured 6.75% debentures due on December 15, 2027 | 29.8 | 29.8 | ||||||
Other | 0.2 | 0.6 | ||||||
Total debt | 324.6 | 352.7 | ||||||
Less current portion of debt | 95.1 | 115.2 | ||||||
Total long-term debt | $ | 229.5 | $ | 237.5 |
We have trade finance credit lines and uncommitted letter of credit facilities. These lines are associated with the normal course of business and are not currently, nor have they historically, been of material size to the overall business.
Unsecured debentures outstanding at June 30, 2013 have fixed rates of interest. We have deferred gains of approximately $0.8 million included in the preceding table from the termination of previous interest rate swap agreements. The deferred gains are being amortized and recognized as a reduction of interest expense over the remaining term of the related debt through 2024, and as a result, the effective interest rates on that debt have been and will continue to be lower than the stated interest rates.
During the fourth quarter of fiscal 2012, we entered into a credit facility. The credit facility provides for revolving loans of up to $500.0 million, plus term loans in the aggregate amount of $200.0 million. The Company may request to increase the revolving loan commitment and the amount of the term loans by up to an additional $250.0 million. All amounts due under the credit facility mature upon expiration on August 24, 2017. The outstanding term loans amortize so that 37.5 percent of the principal will be repaid over the five year term, with the balance due at maturity. The new credit facility replaced in its entirety our previous $500.0 million credit agreement. Borrowings under the revolving credit facility and term loan bear interest at variable rates specified therein, that to date have been under 2.0 percent, and the availability of borrowings is subject to our ability to meet certain specified conditions at the time of borrowing, including compliance with covenants. The covenants, among other things, require us to maintain a ratio of consolidated indebtedness to consolidated EBITDA (each as defined in the credit agreement) of not more than 3.5:1.0 and a ratio of consolidated EBITDA to interest expense of not less than 3.5:1.0. As of June 30, 2013, we had outstanding borrowings of $85.0 million and undrawn letters of credit of $5.8 million under the facility, leaving $409.2 million of borrowing capacity available. We are in compliance with all of our debt covenants as of June 30, 2013.
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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 short-term debt instruments approximate fair value. The estimated fair values of our long-term unsecured debentures were $54.6 million and $56.2 million at June 30, 2013 and September 30, 2012, and were based on observable inputs such as quoted prices in markets that are not active. The estimated fair value of our term loan was $190.0 and $197.5 million based on quoted prices for similar liabilities at June 30, 2013 and September 30, 2012. The fair value measurements for both our long-term unsecured debentures and our term loan were classified as Level 2, as described in Note 7.
As of June 30, 2013, we had one interest rate swap agreement with a notional amount of $135 million to hedge the variability of cash flows associated with a portion of the term loan variable interest rate payments for the period of January 2014 to August 2017. The interest rate swap has been designated as a cash-flow hedge. The fair value as of June 30, 2013 was nominal. As of September 30, 2012, we did not maintain any interest rate swaps.
6. Retirement and Postretirement Plans
We sponsor four defined benefit plans: a master defined benefit retirement plan, a nonqualified supplemental executive defined benefit retirement plan and two defined benefit retirement plans covering employees in Germany and France. Benefits for such plans are based primarily on years of service and the employee’s level of compensation during 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 for our funded plans. All of our plans have an annual measurement date of September 30. The following table includes the components of net pension expense for our defined benefit plans.
Quarterly Period Ended June 30 | Year To Date Period Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Service cost | $ | 1.5 | $ | 1.3 | $ | 4.5 | $ | 4.1 | ||||||||
Interest cost | 3.2 | 3.3 | 9.8 | 10.0 | ||||||||||||
Expected return on plan assets | (3.9 | ) | (4.1 | ) | (11.9 | ) | (12.5 | ) | ||||||||
Amortization of unrecognized prior service cost, net | 0.1 | 0.1 | 0.4 | 0.4 | ||||||||||||
Amortization of net loss | 2.0 | 1.6 | 5.9 | 4.6 | ||||||||||||
Net pension expense | $ | 2.9 | $ | 2.2 | $ | 8.7 | $ | 6.6 |
We also sponsor a domestic postretirement health care plan that provides health care benefits to qualified retirees and dependents until eligible for Medicare. Annual costs related to the domestic postretirement health care plan are not significant.
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 during retirement by providing employees with an incentive to make regular savings. Company contributions to the plans are based on eligibility and employee contributions. Expense under these plans was $10.3 million and $9.3 million in the year to date periods ended June 30, 2013 and 2012.
7. Fair Value Measurements
Fair value measurements 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 shall be developed based on the best information available in the circumstances, which might include our own data. |
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The following table summarizes our financial assets measured at fair value on a recurring basis included in our Condensed Consolidated Balance Sheet, as of June 30, 2013:
Fair Value Measurements | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 91.3 | $ | 91.3 | $ | - | $ | - | ||||||||
Available-for-sale marketable securities | 7.3 | - | - | 7.3 | ||||||||||||
Total assets at fair value | $ | 98.6 | $ | 91.3 | $ | - | $ | 7.3 |
At both June 30, 2013 and September 30, 2012, we had $7.3 million of available-for-sale marketable securities, consisting of AAA rated investment securities, primarily student loan auction rate securities (“ARS”). The carrying value of the investments are net of temporary valuation adjustments of approximately $0.5 million at each date. Since these valuation adjustments are deemed to be temporary, they are recorded in Accumulated Other Comprehensive Loss, net of a related tax benefit. During the year to date period of fiscal 2013, we did not recognize any realized gains or losses related to these investments. While we continue to earn interest on the ARS at the contractual rate, these investments are not currently being bought and sold in an active market and therefore do not have readily determinable market values.
Using a valuation based on unobservable inputs for the ARS, a discounted cash flow analysis (an “income approach”) was prepared by us to arrive at this valuation. The assumptions used in preparing the discounted cash flow model include estimates of interest rates, timing and amount of cash flows, credit spread related yield and illiquidity premiums and the expected holding periods of the ARS. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change.
8. Special Charges
Over the past several years, we have placed a focus on improving our cost structure and business processes through various means including consolidation of certain manufacturing and select back office operations, customer rationalizations and various other organizational changes. Activity related to these actions during fiscal 2013 was as follows:
Balance | Balance | |||||||||||||||||||
September 30, 2012 | Expenses | Cash Payments | Reversals | June 30, 2013 | ||||||||||||||||
Fiscal 2013 Action | $ | - | $ | 2.5 | $ | (1.2 | ) | $ | - | $ | 1.3 | |||||||||
Prior Restructuring Actions | 4.7 | - | (3.0 | ) | (0.6 | ) | 1.1 | |||||||||||||
$ | 4.7 | $ | 2.5 | $ | (4.2 | ) | $ | (0.6 | ) | $ | 2.4 |
During the second quarter of fiscal 2013, we announced a plan to improve our cost structure and streamline our organization by eliminating in excess of 100 positions across the Company, roughly half of which are contract and open positions. This resulted in a special charge of $1.7 million related to severance and other benefits to be provided to affected employees. We also incurred a contract termination charge of $0.6 million, a non-cash asset impairment charge of $0.2 million related to a product discontinuance action and $1.0 million in other related costs. During the third quarter of fiscal 2013, we continued actions under the previously announced plan by eliminating 40 additional positions, including approximately 15 contract and open positions. We incurred a charge of $0.8 million related to the continued action. Additional costs associated with these actions of $1 to $3 million are expected to be incurred over the balance of the fiscal year. These actions will be substantially complete by the end of fiscal year 2013, but certain cash expenditures could shift into fiscal 2014.
During the second quarter of fiscal 2012, we announced a similar plan that, among other things, eliminated approximately 200 positions across the Company. This resulted in a special charge of $4.8 million and $1.7 million, net of reversals, in the second and third quarter of fiscal 2012 related to severance and other benefits to be provided to affected employees, $0.6 million of which was determined to be excessive and was reversed in the second quarter of fiscal 2013. We also incurred an impairment of certain tangible assets for which the carrying values could not be fully recovered as a result of various strategic decisions, which resulted in a non-cash charge of $3.2 million. In addition, we incurred an impairment of a previously acquired trade name whose assessment was triggered by strategic changes in how the asset would be utilized on a go forward basis. This resulted in a non-cash impairment charge of $8.0 million.
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9. Income Taxes
The effective tax rate for the three- and nine-month periods ended June 30, 2013 was 31.0 and 29.7 percent compared to 29.9 and 31.2 percent for the comparable periods in the prior year.
The effective tax rate for the first nine months of fiscal 2013 is lower than the comparable period in fiscal 2012 due primarily to the retroactive extension of the research tax credit during the second quarter of the year. Both nine month periods were favorably impacted by the recognition of period tax benefits. The first nine months of fiscal 2013 included $2.3 million of favorable period tax benefits principally related to the retroactive reinstatement of the research and development tax credit, which was recognized in the second quarter. This compares to $0.7 million of period tax benefits recorded in the first nine months of fiscal 2012 which related primarily to the release of foreign reserves.
10. Earnings per Common Share
Basic earnings per share 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.
Earnings per share are calculated as follows (share information in thousands):
Quarterly Period Ended June 30 | Year To Date Period Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income | $ | 23.4 | $ | 23.4 | $ | 69.7 | $ | 81.6 | ||||||||
Average shares outstanding - Basic | 59,743 | 62,319 | 60,273 | 62,130 | ||||||||||||
Add potential effect of exercise of stock options | ||||||||||||||||
and other unvested equity awards | 420 | 251 | 305 | 293 | ||||||||||||
Average shares outstanding - Diluted | 60,163 | 62,570 | 60,578 | 62,423 | ||||||||||||
Net income per common share - Basic | $ | 0.39 | $ | 0.38 | $ | 1.16 | $ | 1.31 | ||||||||
Net income per common share - Diluted | $ | 0.39 | $ | 0.37 | $ | 1.15 | $ | 1.31 | ||||||||
Shares with anti-dilutive effect excluded | ||||||||||||||||
from the computation of Diluted EPS | 480 | 1,547 | 1,576 | 1,361 |
11. Common Stock
The stock based compensation cost that was charged against income, net of tax, for all plans was $2.3 million and $7.2 million for the three- and nine-month periods ended June 30, 2013 and $1.4 million and $5.5 million for the comparable periods of fiscal 2012.
12. Guarantees
We routinely grant limited warranties on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year, however, certain components and products have substantially longer warranty periods. We recognize a reserve with respect to these obligations at the time of product sale, with subsequent warranty claims recorded directly against the reserve. The amount of the warranty reserve is determined based on historical trend experience for the covered products. For more significant warranty-related matters which might require a broad-based correction, separate reserves are established when such events are identified and the cost of correction can be reasonably estimated. During the third quarter of fiscal 2012, we initiated a field corrective action on one of our med-surg product lines related to an electronics issue and recognized a charge of $16.0 million. During fiscal 2013, we have recognized charges of $12.2 million to cover the estimated costs associated with field corrective actions on five different product lines, $4.5 million of which was recognized in the third quarter. These field corrective actions do not limit the manufacture, sale or ongoing use of these products.
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A reconciliation of changes in the warranty reserve for the periods covered in this report is as follows:
Quarterly Period Ended June 30 | Year To Date Period Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Balance at beginning of period | $ | 41.1 | $ | 23.5 | $ | 42.2 | $ | 17.8 | ||||||||
Provision for warranties during the period | 8.7 | 18.6 | 25.8 | 27.4 | ||||||||||||
Warranty reserves acquired | - | - | (2.6 | ) | 4.7 | |||||||||||
Warranty claims during the period | (8.4 | ) | (3.3 | ) | (24.0 | ) | (11.1 | ) | ||||||||
Balance at end of period | $ | 41.4 | $ | 38.8 | $ | 41.4 | $ | 38.8 |
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 nor do we expect them to have a material impact on our financial condition or results of operations, 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.
13. Segment Reporting
We disclose segment information that is consistent with the way in which management operates and views the business. During the fourth quarter of fiscal 2012, we changed our segment reporting to reflect changes in our organizational structure and management’s view of the business. As part of these changes, we combined the North America Acute Care and components of the North America Post-Acute Care segments into a new North America segment. At the same time we created the Surgical and Respiratory Care segment which contains the surgical reporting unit (formerly part of the North America Acute Care segment), the respiratory care reporting unit (formerly part of the North America Post-Acute Care segment) and the acquired Aspen Surgical business. There were no changes to the International segment. The prior year segment information included below has been updated to reflect these changes.
Our operating structure contains the following reporting segments:
· | North America - sells and rents our patient support and near-patient technologies and services, as well as our health information technology solutions, in the U.S. and Canada. |
· | Surgical and Respiratory Care - sells and rents our surgical and respiratory care products. |
· | International - sells and rents similar products as our North America segment in regions outside of the U.S. and Canada. |
Our segment performance is measured on a divisional income basis before impairment of goodwill and other intangibles and special charges. Divisional income generally represents the division’s standard gross profit less its direct operating costs along with an allocation of manufacturing and distribution costs, research and development and corporate functional expenses.
Corporate expenses, while not considered a segment, are presented separately to aid in the reconciliation of segment information to consolidated financial information. These costs include corporate expenses that support the entire organization such as administration, finance, legal and human resources.
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Quarterly Period Ended June 30 | Year To Date Period Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenues: | ||||||||||||||||
North America | $ | 238.9 | $ | 240.8 | $ | 713.3 | $ | 748.5 | ||||||||
Surgical and Respiratory Care | 61.9 | 31.7 | 182.1 | 97.6 | ||||||||||||
International | 123.4 | 134.0 | 382.9 | 356.6 | ||||||||||||
Total revenues | $ | 424.2 | $ | 406.5 | $ | 1,278.3 | $ | 1,202.7 | ||||||||
Divisional income: | ||||||||||||||||
North America | $ | 48.5 | $ | 34.1 | $ | 140.4 | $ | 146.1 | ||||||||
Surgical and Respiratory Care | 11.3 | 9.4 | 30.5 | 29.2 | ||||||||||||
International | (1.7 | ) | 5.8 | 2.5 | 12.7 | |||||||||||
Corporate expenses | (21.1 | ) | (13.2 | ) | (62.9 | ) | (48.9 | ) | ||||||||
Total divisional income | 37.0 | 36.1 | 110.5 | 139.1 | ||||||||||||
Impairment of other intangibles | - | - | - | (8.0 | ) | |||||||||||
Special charges | (0.8 | ) | (1.7 | ) | (3.7 | ) | (9.7 | ) | ||||||||
Operating profit | 36.2 | 34.4 | 106.8 | 121.4 | ||||||||||||
Interest expense | (2.3 | ) | (1.4 | ) | (6.9 | ) | (4.4 | ) | ||||||||
Investment income and other, net | - | 0.4 | (0.7 | ) | 1.6 | |||||||||||
Income before income taxes | $ | 33.9 | $ | 33.4 | $ | 99.2 | $ | 118.6 |
14. Commitments and Contingencies
General
We are subject to various other 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 material adverse effect on our financial condition, results of operations and cash flows.
We are generally self-insured up to certain limits for product/general liability, workers’ compensation, auto liability and professional liability insurance programs. These policies have deductibles and self-insured retentions ranging from $150 thousand to $1.5 million per occurrence, depending upon the type of coverage and policy period. We are also generally self-insured up to certain stop-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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions except per share data) |
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 regarding our future plans, objectives, beliefs, expectations, representations and projections.
Forward-looking statements are not guarantees of future performance, and our actual results could differ materially from those set forth in any forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include but are not limited to the factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (“2012 Form 10-K”) and subsequent quarterly reports on Form 10-Q as well as the discussions in this “Management’s Discussion and Analysis”. We assume no obligation to update or revise any forward-looking statements.
Overview
The following discussion and analysis should be read in conjunction with the accompanying interim financial statements and our 2012 Form 10-K.
Hill-Rom Holdings, Inc. (“we,” “us,” or “our”) is a leading worldwide manufacturer and provider of medical technologies and related services for the health care industry, including patient support systems, safe mobility and handling solutions, non-invasive therapeutic products for a variety of acute and chronic medical conditions, medical equipment rentals, surgical products and information technology solutions. Our comprehensive product and service offerings are used by health care providers across the health care continuum and around the world in hospitals, extended care facilities and home care settings, to enhance the safety and quality of patient care.
Use of Non-GAAP Financial Measures
The accompanying Condensed Consolidated Financial Statements, including the related notes, are presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”). We also provide adjusted income before taxes, income tax expense and diluted earnings per share results because we use these measures internally for planning, forecasting and evaluating the performance of the business.
In addition, we analyze net revenues on a constant currency basis to better measure the comparability of results between periods. We believe that evaluating growth in net revenues on a constant currency basis provides an additional and meaningful assessment to both management and investors.
We believe use of these non-GAAP measures contributes to an understanding of our financial performance and provides an additional analytical tool to understand our results from core operations and to reveal underlying trends. These measures should not, however, be considered in isolation, as a substitute for, or as superior to measures of financial performance prepared in accordance with GAAP.
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Consolidated Results of Operations
In this section, we provide a high-level overview of our consolidated results of operations. Immediately following this section is an in-depth discussion of our results of operations by reportable segment. See Note 13 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for a discussion of changes in our reportable segments.
Net Revenues
Quarterly Period Ended June 30 | Percentage Change | |||||||||||||||
Constant | ||||||||||||||||
2013 | 2012 | As Reported | Currency | |||||||||||||
Revenues: | ||||||||||||||||
Capital sales | $ | 323.1 | $ | 300.6 | 7.5 | 7.1 | ||||||||||
Rental revenues | 101.1 | 105.9 | (4.5 | ) | (4.5 | ) | ||||||||||
Total Revenues | $ | 424.2 | $ | 406.5 | 4.4 | 4.1 | ||||||||||
Year To Date Period Ended June 30 | Percentage Change | |||||||||||||||
Constant | ||||||||||||||||
2013 | 2012 | As Reported | Currency | |||||||||||||
Revenues: | ||||||||||||||||
Capital sales | $ | 965.8 | $ | 868.1 | 11.3 | 11.3 | ||||||||||
Rental revenues | 312.5 | 334.6 | (6.6 | ) | (6.5 | ) | ||||||||||
Total Revenues | $ | 1,278.3 | $ | 1,202.7 | 6.3 | 6.4 |
Capital sales increased for both the three- and nine-month periods ended June 30, 2013 as a result of sales associated with our fiscal 2012 acquisitions of Aspen Surgical and Völker. These incremental sales were partially offset by a nearly 10 percent decline in International segment revenue, excluding Völker, for the three-month period due to declines in Eastern Europe, the Middle East, and Latin America. For the nine-month period, the incremental acquisition sales were partially offset by declines in Eastern Europe and the Middle East combined with a mid-single digit decline in North America due to lower patient support systems sales in the first half of 2013.
Rental revenues declined in both the three- and nine-month periods. In our North America segment, revenues were down in all product lines, but most significantly in Home Care rentals following our exit of a portion of this business in the prior year. In Surgical and Respiratory Care, revenues declined on lower respiratory care volumes and pricing. International rental revenues were up for the three-month period, but down slightly for the nine-month period on lower volume.
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Gross Profit
Quarterly Period Ended June 30 | Percentage Change | |||||||||||
2013 | 2012 | |||||||||||
Gross Profit | ||||||||||||
Capital | $ | 135.6 | $ | 112.5 | 20.5 | |||||||
Percent of Related Revenues | 42.0 | % | 37.4 | % | ||||||||
Rental | $ | 54.5 | $ | 60.2 | (9.5 | ) | ||||||
Percent of Related Revenues | 53.9 | % | 56.8 | % | ||||||||
Total Gross Profit | $ | 190.1 | $ | 172.7 | 10.1 | |||||||
Percent of Related Revenues | 44.8 | % | 42.5 | % | ||||||||
Year To Date Period Ended June 30 | Percentage Change | |||||||||||
2013 | 2012 | |||||||||||
Gross Profit | ||||||||||||
Capital | $ | 407.7 | $ | 363.0 | 12.3 | |||||||
Percent of Related Revenues | 42.2 | % | 41.8 | % | ||||||||
Rental | $ | 169.9 | $ | 190.6 | (10.9 | ) | ||||||
Percent of Related Revenues | 54.4 | % | 57.0 | % | ||||||||
Total Gross Profit | $ | 577.6 | $ | 553.6 | 4.3 | |||||||
Percent of Related Revenues | 45.2 | % | 46.0 | % |
Capital gross profit increased 20.5 and 12.3 percent, while gross margin increased 460 basis points and 40 basis points for the three- and nine-month periods ended June 30, 2013. The margin increase in both periods was impacted by charges for field corrective actions which totaled $16.0 million for the three- and nine-month periods ended June 30, 2012, compared to $4.5 million and $12.2 million for the comparative periods of the current year. Favorable product mix and improved cost efficiencies and leverage contributed to the remainder of the third quarter margin increase. The margin increase for the nine-month period, in addition to being impacted by the field corrective actions, also reflected the carryover effect of a number of factors from the first and second quarters, most notably, inventory step-up associated with recent acquisitions, unfavorable geographic and product mix, and generally lower margins associated with Völker products following the acquisition of that business in the second quarter of 2012.
Rental gross profit decreased 9.5 and 10.9 percent and gross margin decreased 290 and 260 basis points for the three- and nine-month periods ended June 30, 2013. The margin decline in both periods is the result of lower consolidated revenues and the reduced leverage of our fleet and field service infrastructure. The margin comparison is also negatively impacted by prior year gains of $1.7 million and $4.8 million recognized in connection with a vendor product recall that was completed in fiscal 2012.
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Other
Quarterly Period Ended June 30 | Year To Date Period Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Research and development expenses | $ | 16.7 | $ | 16.1 | $ | 52.2 | $ | 48.2 | ||||||||
Percent of Total Revenues | 3.9 | % | 4.0 | % | 4.1 | % | 4.0 | % | ||||||||
Selling and administrative expenses | $ | 136.4 | $ | 120.5 | $ | 414.9 | $ | 366.3 | ||||||||
Percent of Total Revenues | 32.2 | % | 29.6 | % | 32.5 | % | 30.5 | % | ||||||||
Impairment of other intangibles | $ | - | $ | - | $ | - | $ | (8.0 | ) | |||||||
Special charges | $ | (0.8 | ) | $ | (1.7 | ) | $ | (3.7 | ) | $ | (9.7 | ) | ||||
Interest expense | $ | (2.3 | ) | $ | (1.4 | ) | $ | (6.9 | ) | $ | (4.4 | ) | ||||
Investment income and other, net | $ | - | $ | 0.4 | $ | (0.7 | ) | $ | 1.6 |
Research and development expenses increased 3.7 and 8.3 percent for the three- and nine-month periods ended June 30, 2013 due to the effect of the acquisitions and investment spending in new products, including a new critical care bed platform. Research and development expenses were relatively flat as a percentage of revenue for the three-month period, but increased as a percentage of revenue for the nine-month period as a result of investment spending in new products. Selling and administrative expenses include incremental cost of approximately $7 million and $30 million for the three- and nine-month periods ended June 30, 2013 from our fiscal 2012 acquisitions. Additionally, the intangible amortization related to these acquisitions was $3.7 million and $11.1 million in the three- and nine-month periods ended June 30, 2013, compared to $1.0 million and $1.3 million in the three- and nine-month periods ended June 30, 2012. Selling and administrative expenses were also impacted by various other items, most notably higher variable compensation costs, FDA remediation, and the medical device tax, which were partially offset by cost savings from prior restructuring actions and lower litigation costs.
During the second quarter of fiscal 2013, we announced a plan to improve our cost structure and streamline our organization by eliminating in excess of 100 positions across the Company, roughly half of which are contract and open positions. This resulted in a special charge of $1.7 million related to severance and other benefits to be provided to affected employees. We also incurred a contract termination charge of $0.6 million, a non-cash asset impairment charge of $0.2 million related to a product discontinuance action and $1.0 million in other related costs. During the third quarter of fiscal 2013, we continued actions under the previously announced plan by eliminating 40 additional positions, including approximately 15 contract and open positions. We incurred a charge of $0.8 million related to the continued action. Additional costs associated with these actions of $1 to $3 million are expected to be incurred over the balance of the fiscal year. These actions will be substantially complete by the end of fiscal year 2013, but certain cash expenditures could shift into fiscal 2014. The actions are anticipated to yield annualized cost savings of approximately $8 million after full implementation.
During the second quarter of fiscal 2012, we announced a similar plan that, among other things, eliminated approximately 200 positions across the Company. This resulted in a special charge of $4.8 million and $1.7 million, net of reversals, in the second and third quarter of fiscal 2012 related to severance and other benefits to be provided to affected employees, $0.6 million of which was determined to be excessive and was reversed in the second quarter of fiscal 2013. We also incurred an impairment of certain tangible assets for which the carrying values could not be fully recovered as a result of various strategic decisions, which resulted in a non-cash charge of $3.2 million. In addition, we incurred an impairment of a previously acquired trade name whose assessment was triggered by strategic changes in how the asset would be utilized on a go forward basis. This resulted in a non-cash impairment charge of $8.0 million.
Interest expense increased in both the three- and nine-month periods on higher outstanding borrowings associated with the recent acquisitions and slightly higher interest rates. Investment income and other, net has turned to expense for the nine-month period ended June 30, 2013 as a result of foreign exchange losses in the second quarter of fiscal 2013.
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Reported and Adjusted Earnings
Quarterly Period Ended June 30, 2013 | Quarterly Period Ended June 30, 2012 | |||||||||||||||||||||||
Income Before Income Taxes | Income Tax Expense | Diluted EPS | Income Before Income Taxes | Income Tax Expense | Diluted EPS* | |||||||||||||||||||
GAAP Earnings | $ | 33.9 | $ | 10.5 | $ | 0.39 | $ | 33.4 | $ | 10.0 | $ | 0.37 | ||||||||||||
Adjustments: | ||||||||||||||||||||||||
Acquisition and integration costs | 1.2 | 0.4 | 0.01 | 1.9 | 0.7 | 0.02 | ||||||||||||||||||
Field corrective actions | 4.5 | 1.2 | 0.06 | 16.0 | 5.9 | 0.16 | ||||||||||||||||||
FDA remediation expenses | 2.2 | 0.8 | 0.02 | - | - | - | ||||||||||||||||||
Special charges | 0.8 | 0.2 | 0.01 | 1.7 | 0.6 | 0.02 | ||||||||||||||||||
Vendor product recall | - | - | - | (1.7 | ) | (0.7 | ) | (0.02 | ) | |||||||||||||||
Adjusted Earnings | $ | 42.6 | $ | 13.1 | $ | 0.49 | $ | 51.3 | $ | 16.5 | $ | 0.56 | ||||||||||||
Year To Date Period Ended June 30, 2013 | Year To Date Period Ended June 30, 2012 | |||||||||||||||||||||||
Income Before Income Taxes | Income Tax Expense | Diluted EPS | Income Before Income Taxes | Income Tax Expense | Diluted EPS* | |||||||||||||||||||
GAAP Earnings | $ | 99.2 | $ | 29.5 | $ | 1.15 | $ | 118.6 | $ | 37.0 | $ | 1.31 | ||||||||||||
Adjustments: | ||||||||||||||||||||||||
Acquisition and integration costs | 6.9 | 2.3 | 0.08 | 5.5 | 1.5 | 0.06 | ||||||||||||||||||
Field corrective actions | 12.2 | 4.0 | 0.14 | 16.0 | 5.9 | 0.16 | ||||||||||||||||||
FDA remediation expenses | 4.1 | 1.5 | 0.04 | - | - | - | ||||||||||||||||||
Litigation | 0.5 | 0.5 | - | - | - | - | ||||||||||||||||||
Special charges | 3.7 | 1.2 | 0.04 | 9.7 | 3.6 | 0.10 | ||||||||||||||||||
Impairment of other intangibles | - | - | - | 8.0 | 2.1 | 0.09 | ||||||||||||||||||
Vendor product recall | - | - | - | (4.8 | ) | (1.9 | ) | (0.05 | ) | |||||||||||||||
Adjusted Earnings | $ | 126.6 | $ | 39.0 | $ | 1.45 | $ | 153.0 | $ | 48.2 | $ | 1.68 |
*May not add due to rounding.
The effective tax rate for the three- and nine-month periods ended June 30, 2013 was 31.0 and 29.7 percent compared to 29.9 and 31.2 percent for the comparable periods in the prior year.
The effective tax rate for the first nine months of fiscal 2013 is lower than the comparable period in fiscal 2012 due primarily to the retroactive extension of the research tax credit during the second quarter of the year. Both nine month periods were favorably impacted by the recognition of period tax benefits. The first nine months of fiscal 2013 included $2.3 million of favorable period tax benefits principally related to the retroactive reinstatement of the research and development tax credit, which was recognized in the second quarter. This compares to $0.7 million of period tax benefits recorded in the first nine months of fiscal 2012 which related primarily to the release of foreign reserves.
On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012 (Taxpayer Relief Act). The Taxpayer Relief Act retroactively extended the research tax credit for a two-year period beginning January 1, 2012 through December 31, 2013. The research credit had previously expired effective December 31, 2011.
The reinstatement of the research credit favorably impacts the effective tax rate for fiscal 2013 through a combination of a one-time catch-up adjustment from the reinstatement of the credit and the inclusion of the current year research credit into the fiscal 2013 effective tax rate.
The adjusted effective tax rate for the three- and nine-month periods ended June 30, 2013 was 30.8 and 30.8 percent compared to 32.2 and 31.5 percent for the comparable periods in the prior year. The lower rate in fiscal 2013 is due primarily to the same factors outlined above.
Net income was $23.4 million for the third quarter ended June 30, 2013, same as the prior year period. On an adjusted basis, net income decreased $5.3 million, or 15.2 percent. Diluted earnings per share increased 5.4 percent on a reported basis and decreased 12.5 percent on an adjusted basis. Net income for the year to date period was $69.7 million compared to $81.6 million in the prior year, a decrease of 14.6 percent. On an adjusted basis, net income decreased $17.2 million or 16.4 percent. Diluted earnings per share decreased 12.2 percent on a reported basis and 13.7 percent on an adjusted basis.
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Business Segment Results of Operations
Quarterly Period Ended June 30 | Percentage Change | |||||||||||||||
Constant | ||||||||||||||||
2013 | 2012 | As Reported | Currency | |||||||||||||
Revenues: | ||||||||||||||||
North America | $ | 238.9 | $ | 240.8 | (0.8 | ) | (0.7 | ) | ||||||||
Surgical and Respiratory Care | 61.9 | 31.7 | 95.3 | 95.9 | ||||||||||||
International | 123.4 | 134.0 | (7.9 | ) | (9.0 | ) | ||||||||||
Total revenues | $ | 424.2 | $ | 406.5 | 4.4 | 4.1 | ||||||||||
Divisional income: | ||||||||||||||||
North America | $ | 48.5 | $ | 34.1 | 42.2 | |||||||||||
Surgical and Respiratory Care | 11.3 | 9.4 | 20.2 | |||||||||||||
International | (1.7 | ) | 5.8 | (129.3 | ) | |||||||||||
Corporate Expenses | (21.1 | ) | (13.2 | ) | 59.8 | |||||||||||
Total divisional income | $ | 37.0 | $ | 36.1 | 2.5 | |||||||||||
Year To Date Period Ended June 30 | Percentage Change | |||||||||||||||
Constant | ||||||||||||||||
2013 | 2012 | As Reported | Currency | |||||||||||||
Revenues: | ||||||||||||||||
North America | $ | 713.3 | $ | 748.5 | (4.7 | ) | (4.7 | ) | ||||||||
Surgical and Respiratory Care | 182.1 | 97.6 | 86.6 | 86.7 | ||||||||||||
International | 382.9 | 356.6 | 7.4 | 7.5 | ||||||||||||
Total revenues | $ | 1,278.3 | $ | 1,202.7 | 6.3 | 6.4 | ||||||||||
Divisional income: | ||||||||||||||||
North America | $ | 140.4 | $ | 146.1 | (3.9 | ) | ||||||||||
Surgical and Respiratory Care | 30.5 | 29.2 | 4.5 | |||||||||||||
International | 2.5 | 12.7 | (80.3 | ) | ||||||||||||
Corporate Expenses | (62.9 | ) | (48.9 | ) | 28.6 | |||||||||||
Total divisional income | $ | 110.5 | $ | 139.1 | (20.6 | ) |
North America
North America revenues decreased 0.8 and 4.7 percent for the three- and nine-month periods ended June 30, 2013. Capital sales were up 1.7 percent for the quarter with flat acute care patient support systems sales and higher sales for other products. For the nine-month period, capital sales were down 3.8 percent related primarily to year to date declines in our patient support systems sales, which were down 8.3 percent, in a difficult North American health care environment where there is continued pressure on capital spending. Rental revenues declined in both periods by 6.1 and 6.6 percent, with declines in all product lines, but most significantly in Home Care rentals following our exit of a portion of this business in the prior year.
North America divisional income increased for the three-month period due to a higher charge for field corrective actions in the prior year, but decreased for the nine-month period due to lower revenues and the resulting lower gross profit. Capital gross margins increased for the three- and nine-month periods due to the timing of the various field corrective actions. Rental margins were lower for the three- and nine-month periods as the decline in revenues resulted in reduced leverage of field infrastructure costs. In addition, rental margins in the prior year included gains recognized in connection with a vendor product recall that was completed in the prior year of $1.7 million and $4.8 million for the three- and nine-month periods. Operating expenses were favorable for both periods; due primarily to lower selling costs on lower revenues.
Surgical and Respiratory Care
Surgical and Respiratory Care capital sales were up nearly three times for the three- and nine-month periods ended June 30, 2013, almost entirely related to the incremental sales associated with the Aspen Surgical acquisition. Rental revenues decreased 5.6 and 10.7 percent for the three- and nine-month periods as a result of lower rental volumes and pricing for both periods in our respiratory care business.
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Surgical and Respiratory Care divisional income was up for the three- and nine-month periods ended June 30, 2013, as the incremental income associated with the Aspen Surgical business was partially offset by lower earnings from respiratory care on lower revenues. Gross profit for the nine-month period was negatively impacted by $2.5 million of inventory step-up associated with purchase accounting for the Aspen Surgical acquisition recognized in the first quarter. Additionally, divisional income was negatively impacted by $2.7 million and $8.1 million of intangible amortization in the three- and nine-month periods.
International
International capital sales decreased 9.4 percent for the three-month period but increased 8.4 percent for the nine-month period ended June 30, 2013 due primarily to the sales included from our mid-second quarter fiscal 2012 acquisition of Völker. Eastern Europe and the Middle East were down for the three- and nine-month periods and Latin America sales were down for the quarter, but are still up for the year to date period on a strong first quarter performance. Rental revenues increased 6.3 percent on new rental agreements for the three-month period and declined 1.0 percent for the nine-month period on lower volumes. The impact of foreign exchange rates on both capital and rental revenues was relatively minor for both periods.
International divisional income decreased for the three- and nine-month periods ended June 30, 2013. For the three-month period, gross profit and margins were lower on the effects of field corrective actions of $3.9 million and lower revenues. For the nine-month period, gross profit was higher on increased sales, but margins were negatively impacted by the field corrective actions. Operating expenses were higher in both periods, including intangible amortization of $1.0 million and $3.0 million, acquisition integration costs of $1.0 million and $3.6 million, and incremental Völker expenses in the year to date period.
Liquidity and Capital Resources
Year To Date Period Ended June 30 | ||||||||
2013 | 2012 | |||||||
Cash Flows Provided By (Used In): | ||||||||
Operating activities | $ | 167.7 | $ | 187.4 | ||||
Investing activities | (44.6 | ) | (121.3 | ) | ||||
Financing activities | (113.9 | ) | (71.2 | ) | ||||
Effect of exchange rate changes on cash | (2.2 | ) | 0.5 | |||||
Increase (Decrease) in Cash and Cash Equivalents | $ | 7.0 | $ | (4.6 | ) |
Operating Activities
Cash provided by operating activities during fiscal 2013 was driven primarily by net income, adjusted for the non-cash effects of depreciation and amortization, along with collections of high year-end receivables. The decrease over the first half of fiscal 2012 was due primarily to a decline in net income, smaller changes in accounts receivable year over year and nearly $11 million of incremental income tax payments.
Investing Activities
Cash used for investing activities consists mainly of capital expenditures, which decreased from the prior year. Also fiscal 2012 was impacted by our acquisition of the Völker group ($77.0 million).
Financing Activities
Cash used for financing activities during fiscal 2013 consisted mainly of treasury stock acquired of $69.9 million, dividend payments of $23.1 million, and repayments on our revolver and long-term debt obligations. The increase in the use of cash compared to the first nine months of fiscal 2012 was due primarily to the treasury stock purchases and higher debt repayments in fiscal 2013 than in fiscal 2012.
Other Liquidity Matters
Net cash flow from operating activities and selected borrowings have represented our primary sources of funds for growth of the business, including capital expenditures and acquisitions.
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As of June 30, 2013, we held investment securities with a fair value of $7.3 million, which consisted primarily of AAA rated student loan auction rate securities. We have estimated the current fair value of our portfolio of auction rate securities, including consideration of the credit quality of the underlying securities and the provisions of the respective security agreements. At June 30, 2013, we have recorded temporary unrealized losses totaling $0.5 million on these securities to reflect the estimated decline in fair value associated with the current illiquidity in the auction rate market. If current market conditions do not improve or worsen, the result could be further realized or unrealized losses or impairments and liquidity and earnings could be adversely affected.
During the fourth quarter of fiscal 2012, we entered into a credit facility. The new credit facility provides for revolving loans of up to $500.0 million, plus term loans in the aggregate amount of $200.0 million. The Company may request to increase the revolving loan commitment and the amount of the term loans by up to an additional $250.0 million. All amounts due under the new credit facility mature upon expiration on August 24, 2017. The outstanding term loans will amortize so that 37.5 percent of the principal will be repaid over the five year term, with the balance due at maturity. The new credit facility replaces in its entirety our previous $500.0 million credit agreement which was scheduled to expire in March 2013. Borrowings under the revolving credit facility and term loan bear interest at variable rates specified therein, that for fiscal 2012 and 2013 were under 2.0 percent, and the availability of borrowings is subject to our ability to meet certain specified conditions at the time of borrowing, including compliance with covenants. The covenants, among other things, require us to maintain a ratio of consolidated indebtedness to consolidated EBITDA (each as defined in the credit agreement) of not more than 3.5:1.0 and a ratio of consolidated EBITDA to interest expense of not less than 3.5:1.0. As of June 30, 2013, we had outstanding borrowings of $85.0 million and undrawn letters of credit of $5.8 million under the facility, leaving $409.2 million of available borrowing capacity. We are in compliance with all of our debt covenants as of June 30, 2013.
We also have trade finance credit lines and uncommitted letter of credit facilities. These lines are associated with the normal course of business and do not currently, nor have they historically, been of material size to the overall business.
We have $49.3 million of senior notes outstanding at various fixed interest rates as of June 30, 2013, classified as long-term in the Condensed Consolidated Balance Sheet.
As of June 30, 2013, we had one interest rate swap agreement with a notional amount of $135 million to hedge the variability of cash flows associated with a portion of the term loan variable interest rate payments for the period of January 2014 to August 2017. The interest rate swap has been designated as a cash-flow hedge. The fair value as of June 30, 2013 was nominal. As of September 30, 2012, we did not maintain any interest rate swaps.
Our pension plans invest in a variety of equity and debt securities. At September 30, 2012, our latest measurement date, our pension plans were underfunded by approximately $81.0 million. Given the significant funding contribution made during fiscal 2010, we currently do not anticipate any further contributions to our master pension plan in fiscal 2013.
During the third quarter of 2013, we announced an increase of our quarterly dividend by 10 percent to $0.1375 per share, bringing the annualized dividend rate per share to $0.55 from $0.50.
As disclosed in our 2012 Form 10-K, 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 of Directors and will depend upon many factors, including financial condition, earnings, capital requirements, covenants associated with debt obligations, legal requirements and other factors deemed relevant by our Board of Directors.
We intend to continue to pursue selective acquisition candidates 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. We expect to fund future acquisitions primarily with cash on hand, cash flow from operations and borrowings, within our set limits.
In October 2012, the Board of Directors approved an expansion of its previously announced share repurchase authorization by 3.5 million shares. In the nine-month period ended June 30, 2013, we purchased 2.1 million shares of our common stock for $68.7 million in the open market, leaving 1.9 million shares available for purchase under our current authorization as of June 30, 2013. The authorization does not have an expiration date and currently there are no plans to terminate this program in the future. Repurchases may be made on the open market or via private transactions.
We believe that cash on hand and generated from operations, along with amounts available under our credit facility, will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations.
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Contractual Obligations and Contingent Liabilities and Commitments
There have not been any significant changes since September 30, 2012 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, revenues and expenses. If future experience differs materially 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 1 of Notes to Consolidated Financial Statements and the Critical Accounting Policies Section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2012 Form 10-K. There have been no material changes to such policies since September 30, 2012.
For a further summary of certain accounting policies and estimates and recently issued accounting pronouncements applicable to us, see Note 1 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q.
We are exposed to various market risks, including fluctuations in interest rates, liquidity issues with respect to auction rate securities, 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. We, from time-to-time, enter into currency exchange agreements to manage our exposure arising from fluctuating exchange rates related to specific and forecasted transactions. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currencies.
Our currency risk consists primarily of foreign currency denominated firm commitments and forecasted foreign currency denominated intercompany and third-party transactions. At June 30, 2013, the notional amount of open foreign exchange contracts was $13.5 million. The maximum length of time over which we hedge transaction exposures is 15 months. Derivative gains/(losses), initially reported as a component of Accumulated Other Comprehensive Loss, are reclassified to earnings in the period when the transaction affects earnings.
For additional information on market risks related to our auction rate securities and pension plan assets, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2012 Form 10-K.
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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, 2013. 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, 2013.
We completed the acquisitions of Völker and Aspen Surgical during our fiscal year 2012. Management considers these transactions to be material to our consolidated financial statements and believes that the internal controls and procedures of Völker and Aspen Surgical have a material effect on our internal control over financial reporting. We are currently in the process of incorporating the internal controls and procedures of Völker and Aspen Surgical into our internal controls over financial reporting and extending our Section 404 compliance program under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations under such Act to include Völker and Aspen Surgical. We will report on our assessment of the consolidated operations within the time period provided by the Act and the applicable SEC rules and regulations concerning business combinations.
Other than the acquisitions of Völker and Aspen Surgical noted above, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recent completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Refer to Note 14 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q for further information on our legal proceedings.
For information regarding the risks we face, see the discussion under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2012. There have been no material changes to the risk factors described in that report.
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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 | Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs (2) | ||||||||||||
April 1, 2013 - April 30, 2013 | 61 | $ | 33.60 | - | 2,605,000 | |||||||||||
May 1, 2013 - May 31, 2013 | 704,493 | $ | 36.75 | 700,000 | 1,905,000 | |||||||||||
June 1, 2013 - June 30, 2013 | - | $ | - | - | 1,905,000 | |||||||||||
Total | 704,554 | $ | 36.75 | 700,000 |
(1) | Shares purchased during the three-month period ended June 30, 2013 were in connection with the share repurchase program discussed below as well as employee payroll tax withholding for restricted and deferred stock distributions. |
(2) | In October 2012, the Board of Directors approved an expansion of its previously announced share repurchase authorization by 3.5 million shares, bringing the total number of shares available for repurchase to 32.2 million shares. As of June 30, 2013, a cumulative total of 30.3 million shares have been repurchased under this existing authorization. The plan does not have an expiration date and currently there are no plans to terminate this program in the future. |
A. | Exhibits |
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 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101. INS | XBRL Instance Document | |
101. SCH | XBRL Taxonomy Extension Schema Document | |
101. CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101. LAB | XBRL Extension Labels Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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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: July 25, 2013 | By: | /s/ Michael S. Macek | ||
Name: Title: | Michael S. Macek Vice President, Treasurer and Interim Chief Financial Officer (duly authorized officer and principal financial officer) |
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