Leases

6 Months Ended

Mar. 31, 2020

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 Classification

March 31, 2020

Right-of-use assets

Other assets

72.6

Current lease liabilities

Other current liabilities

22.0

Non-current lease liabilities

Other long-term liabilities

55.2


Supplemental information:	March 31, 2020
Weighted-average discount rate	3.3	%
Weighted-average remaining lease term in years	4.8

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


Fiscal Year	Amount
Remaining 2020	$	12.7
2021	22.5
2022	17.2
2023	12.1
2024	7.3
2025	4.8
Thereafter	10.2
Total lease payments	86.8
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 Year	Amount
2020	$	25.7
2021	21.4
2022	15.7
2023	11.1
2024	6.4
2025 and beyond	14.6

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 products is provided as an alternative to product sales and is short-term in nature. Products primarily include smart beds, including, but not limited to, bariatric, critical care, maternal, and home care beds, as 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.