Hill Rom Holdings Inc (HRC) Q3 2021 Earnings Call Transcript

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Hill Rom Holdings Inc (HRC)
Q3 2021 Earnings Call
Jul 30, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Hill-Rom's Fiscal Third Quarter 2021 Earnings Conference Call.

[Operator Instructions] I would now like to turn the call over to Ms. Mary Kay Ladone, Senior Vice President, Corporate Development, Strategy and Investor Relations.

Ms. Ladone, you may begin.

Mary Kay Ladone -- Senior Vice President, Corporate Development, Strategy And Investor Relations

Good morning, and thanks for joining us for our fiscal third quarter 2021 earnings conference call. Joining me today are John Groetelaars, President and Chief Executive Officer of Hill-Rom; and Barbara Bodem, Chief Financial Officer. Before we get started, let me begin by reminding you that this presentation includes forward-looking statements that are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those described, including any impact related to the COVID-19 pandemic. Please refer to today's press release and our SEC filings for more information concerning risk factors that could cause actual results to differ materially.

In addition, on today's call, non-GAAP financial measures will be used. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release issued this morning. Finally, I would also like to mention that in addition to the press release, we have posted a supplemental presentation, which highlights Hill-Rom's performance and our 2021 financial guidance. These materials can be accessed on the Investor Relations page of our website.

So with that introduction, let me now turn the call over to John.

John P. Groetelaars -- President and Chief Executive Officer

Thanks, Mary Kay, and good morning, everybody. Let me begin with a review of our fiscal Q3 financial results, which reflect another strong quarter of execution by our Hill-Rom team. We continue to see building momentum and recovery in the underlying business. This resulted in third quarter financial performance that exceeded expectations. This clearly illustrates the benefits of Hill-Rom's transformation, the resiliency of our portfolio and our ongoing commitment to Advancing Connected Care. As previously highlighted, last year in Q3, we benefited from onetime COVID-related demand, generating approximately $130 million in revenue and adjusted earnings of $0.60 per share. With this challenging comparison, Q3 revenue declined six percent on a reported basis.

Excluding the COVID headwind, revenue advanced 10% on a constant currency basis, fueled by stronger-than-expected performance across the vast majority of the portfolio. Adjusted earnings of $1.38 exceeded our guidance range of $1.32 to $1.36 per diluted share. Given our strong performance over the course of this year, and positive recovery dynamics, we are pleased to be raising our financial guidance across all metrics for fiscal 2021. Even with the unprecedented impacts from the global pandemic, Hill-Rom has successfully navigated a challenging environment and will have delivered double-digit EPS growth over the last two years, something we are very proud of. Looking forward, we remain very committed to our category leadership strategy with new product momentum, international expansion, emerging market growth and creating value through portfolio transformation and business development, all of which further strengthen our durable growth profile.

Let me take a few moments to share a few highlights. First, we are making excellent progress with our strategic focus on connected care. One measure of success is the growth we are achieving from our connected care solutions. We define this measure as devices and software that can collect, analyze or communicate information back to caregivers. Examples span across all three businesses and include our Care Communications platforms, connected monitoring devices, intelligent diagnostics and connected devices and software for the operating room. We are pleased to report today nearly 1/3 of Hill-Rom's revenue is connected versus less than 20% of revenue just a few years ago. For fiscal 2021, we are on track to realize growth of more than 20% from across this connected care portfolio.

We look forward to updating you on this important metric going forward as it reflects the evolution and advancement of Hill-Rom's compelling transformation. It's also worth noting that we do not include our connected Smart Beds in this measure, which, as you know, represent another 20% of Hill-Rom's annual revenue. Turning to new products. We remain on track to exceed our objective of $620 million in new product revenue for 2021. Year-to-date, we have achieved new product revenue of more than $480 million, an increase of 11%, and we have launched 10 new products over the course of the year. Our new product pipeline is robust and remains weighted toward our connected care growth platforms, which is intended to boost our overall weighted average market growth rate toward mid-single digits in the years to come.

On the international front, given tough year-over-year comparisons due to COVID, revenues were down, but the underlying business grew in low single digits. Our top-performing region was Asia Pacific with 10% growth in the quarter. We continue to see strong China performance as revenues more than doubled in Q3 off of an easy prior year comparison related to the pandemic. In terms of M&A, we continue to transform our portfolio with a growth-oriented strategy. We remain focused on deploying capital with a disciplined approach, adhering to our rigorous strategic and financial criteria to drive attractive returns and shareholder value. Over the last two years, we have deployed capital of approximately $350 million across six transactions.

In fiscal 2021, these acquisitions are expected to contribute approximately $80 million in annual revenue and collectively generate organic growth of more than 30%. M&A has been and continues to be an important part of our overall growth strategy. With improved balance sheet flexibility, we are in a strong position to enhance our category leadership and further our growth objectives. We remain active in evaluating additional tuck-in opportunities that are aligned with our connected care vision, enhance our business and improve outcomes for patients and their caregivers. Now let me briefly review performance by business at constant currency rates. First, as you may recall, our Patient Support Systems business generated record revenue last year of 21% growth. The business benefited from the global surge in demand for ICU and Med-Surg bed systems, as hospitals around the world expanded capacity in the early phase of the COVID outbreak.

This translated into a PSS headwind of more than $105 million, resulting in the expected Q3 revenue decline of 18% when compared to the prior year. However, excluding last year's onetime COVID benefit, PSS revenue growth was nine percent, reflecting sequential improvement and underlying growth of our bed systems and rentals as well as strong demand for our Care Communications platforms. In Care Communications, revenue increased more than 35% in Q3, setting the stage for sustained acceleration. This business remains an important platform within our connected care ecosystem, in the acute care setting and is well on its way to comprising nearly 10% of Hill-Rom's total annual revenue.

In Front Line Care, third quarter revenue increased three percent. However, excluding last year's onetime impact from the ventilator stockpile orders of approximately $25 million, growth was 14% representing the highest quarterly growth rate since the Welch Allyn acquisition in 2016. Solid performance was driven by accelerated recovery as physician office visits return to pre-COVID levels as well as the continued contribution from new products, including the RetinaVue imager for screening of diabetic retinopathy. Lastly, Surgical Solutions revenue increased eight percent reflecting strong growth in operating room tables, including record placements of Integrated Table Motion as well as patient positioning products as surgical procedures rebound. This more than offset the difficult comparison from the completed exit of the international surgical OEM business.

Excluding the surgical OEM revenue in Q3 last year of approximately $13 million, surgical revenue growth exceeded 30%. Overall, we are very encouraged by the positive momentum and growth in our surgical order book and backlog, a strong indication that hospital constraints are easing and providing enhanced visibility into growth acceleration for fiscal 2022. Before turning the call over to Barb, I'd like to update you on the Bardy Diagnostics transaction. Following the Delaware Court of Chancery's ruling two weeks ago, we thoroughly explored and assessed a variety of strategic options. We have now concluded that the best path forward for our company and for our shareholders is to complete the transaction under the previously announced terms. Even with recent reimbursement decisions, we have renewed confidence in the underlying strength of the Bardy business, the value of Bardy solutions provide to caregivers and patients and the opportunities that lie ahead for the Bardy portfolio as part of Hill-Rom.

Although this didn't turn out as originally contemplated, we believe there is a compelling strategic rationale for the acquisition. Bardy's differentiated diagnostic cardiology platform is complementary and further strengthens Hill-Rom's existing cardiology portfolio and our connected care vision. We expect to be able to leverage our brand and presence in the acute and primary care settings and capabilities around market access, payer contracting, data security and EMR integration to accelerate the adoption of Bardy's CAM patch, among other solutions. Additionally, the Bardy technology and innovation capabilities will enable us to advance the road map of our digital transformation.

As for the reimbursement landscape, once we close the transaction, we will be in a better position to work directly with reimbursement decisions with CMS and Medicare administrative contractors, including Novitas, to ensure that patients have access to critical life-saving monitoring solutions at appropriate and accessible prices. We look forward to closing the acquisition in the next week or so and welcoming the Bardy team to Hill-Rom.

With that, let me now turn the call over to Barb.

Barbara W. Bodem -- Chief Financial Officer

Thanks, John, and good morning, everyone. I will briefly walk through our financial results before turning to our updated guidance. As mentioned, worldwide revenue in Q3 of $718 million declined by six percent on a reported basis compared to $768 million in revenue last year. Revenue declined nine percent on a constant currency basis. Excluding last year's onetime COVID benefit of approximately $103 million, revenue growth was 10%. Adjusted gross margin was 52.2%, which exceeded our expectations. This is 160 basis points below last year's record gross margin of 53.8%, which included a benefit of 230 basis points from onetime COVID-related purchases. Excluding the COVID impact, our gross margin expanded 70 basis points due to continued favorable product mix and operational improvements.

R&D spending of $36 million or five percent of total revenue Was in line with expectations and nearly $2 million higher than last year. Adjusted SG&A of $202 million increased three percent as we continued to invest in our strategic growth platforms while also realizing befits from our business optimization program implemented last year. As a result, the adjusted operating margin was 18.9%. Interest and other nonoperating expenses totaled $19 million, and the adjusted tax rate was 21%. Overall, this translates into an adjusted earnings for the fiscal third quarter of $1.38 per diluted share, a decline from the record set last year of $1.95 per diluted share. Now turning to cash flow. Cash flow from operations for the first nine months of 2021 was $410 million, a 30% increase compared to prior year, primarily driven by higher net income and favorable change in working capital.

Capital expenditures on a year-to-date basis totaled $69 million, $3 million lower than the prior year, which includes the investment we are making in our global information technology transformation. As a result, year-to-date, free cash flow was $341 million, an increase of 41%. Our balance sheet and financial position remains very strong. To date, we returned $186 million to shareholders through dividends and share repurchases, and we raised our dividend for the 11th consecutive year. We ended the quarter with $272 million in cash, and our debt-to-EBITDA ratio at the end of June was 2.6 times or 2.2 on a net basis. Now let me conclude my remarks with our updated fiscal 2021 guidance. As John shared earlier, we now plan to close the Bardy Diagnostics acquisition in the coming weeks.

Therefore, our fourth quarter and full year guidance now includes Bardy. Despite modest dilution related to the Bardy transaction, we are pleased to be raising our revenue, adjusted earnings and operational cash flow guidance for fiscal 2021. So for the full year, we now expect revenue to increase three percent to four percent on a reported basis, which includes the benefit from foreign currency of at least 150 basis points. Excluding the COVID impact in both the current and the prior year, our underlying revenue growth is expected to be five percent to six percent. By business segment at constant currency rates, we now expect Patient Support Systems revenue to decline between one percent and two percent; Front Line Care revenue to grow between five percent and six percent, which includes Bardy; and finally, we continue to expect Surgical Solutions revenue of three percent to five percent. From a profitability perspective, we continue to expect adjusted gross margins of approximately 52% and an operating margin of approximately 19%.

We continue to expect R&D to approach five percent of sales and SG&A to represent approximately 28% of revenue. We continue to expect other expense, which includes interest, of approximately $60 million, reflecting estimated savings related to our bond redemption and a tax rate of approximately 20%. This translates into adjusted earnings of $6.08 to $6.12 per diluted share for the year, which reflects double-digit adjusted earnings-per-share growth. Excluding the COVID impact from both the current and the prior year, our updated guidance contemplates earnings-per-share growth of nearly 20%. From a cash flow perspective, we are now expecting operating cash flow of approximately $480 million, an increase of $30 million at the midpoint compared to our prior guidance of $440 million to $460 million.

We continue to expect capital expenditures of approximately $100 million, resulting in free cash flow of approximately $380 million. For the fiscal fourth quarter 2021, we expect revenue growth of six percent to seven percent on a reported basis and expect adjusted earnings, excluding special items, of $1.44 to $1.48 per diluted share. As a reminder, last year in the fourth quarter, onetime COVID-related purchases contributed revenue of $35 million and estimated earnings per diluted share of approximately $0.10. Excluding the COVID impact, we expect Q4 revenue growth of 10% to 13% and adjusted earnings-per-share growth of 35% to 38%. I'd highlight that our fourth quarter outlook continues to reflect recovery momentum in the underlying business as we exit this fiscal year and does not include any COVID-related purchases. The ongoing scope and evolution of the pandemic remains uncertain and could present pandemic-related risks or opportunities that may require updates to the fiscal 2021 guidance ranges provided today.

And now I'll turn the call back over to John.

John P. Groetelaars -- President and Chief Executive Officer

Thanks, Barb. In summary, we reported solid results for Q3 and raised our guidance for the third consecutive quarter. We are on track to deliver another year of strong financial performance with underlying mid-single-digit revenue and double-digit bottom line growth, showcasing the benefits of our diversified portfolio and optionality it creates as we successfully navigate challenging events like the global pandemic. Importantly, we continue to generate this high level of performance while investing in our business to drive accelerated and sustainable growth in the future. We appreciate that many of you are evaluating Hill-Rom's growth prospects and opportunities beyond the current fiscal year. And while it's too early to provide detailed 2022 guidance, we want to reiterate our conviction and commitment toward our previously disclosed long-term growth profile.

This includes mid-single-digit revenue growth and double-digit EPS growth for the future years. Specifically for fiscal 2022, we expect the floor of our guidance range to reflect this profile after adjusting for the onetime COVID-related benefit in the first half of fiscal 2021. This benefit includes approximately $80 million in revenue and adjusted earnings of $0.40 per share. Obviously, there continues to be uncertainty regarding the pandemic, the effectiveness of vaccination efforts and resurgence of new variants. These factors as well as the underlying strength of the portfolio, the impact of the Bardy transaction and mitigations around a rising cost environment are all contemplated in this outlook. Let me close by once again thanking the Hill-Rom team around the world for their resilience, unwavering commitment, passion for meeting the evolving needs of our customers and their winning spirit. Our vision of Advancing Connected Care is more vital than ever. By successfully executing on our strategy, we look forward to unlocking significant value for patients, caregivers and shareholders as we deliver on our mission. That concludes our prepared remarks.

And now I'd like to open it up for Q and A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And a digital replay will be available on the Hill-Rom website for seven days at www.hillrom.com. Our first question comes from Rick Wise of Stifel. Your question please?

Rick Wise -- Stifel -- Analyst

[Technical Issues] another excellent quarter and the beaten rates. I'm going to start off, hope not in an uncomfortable place, there's been a few rumors and speculation in the market as you know. I'm sure you don't want to address them specifically. But I thought that maybe a way to ask you about it would be to ask the following question. John, where do you see yourself -- where does the Hill-Rom team see themselves in what I know is a multiyear positive transformation, acceleration in growth, margin expansion? And is there anything as we contemplate the future that you might be as a team better able to achieve inside maybe a larger portfolio or access to greater capital or something that you could do better to reach those goals as opposed to independently -- and pursuing a clearly positive plan that's underway?

John P. Groetelaars -- President and Chief Executive Officer

Yes. Thanks, Rick. As you can appreciate, we can't comment on rumors or speculations. What I can say is that we're laser-focused on driving our strategy of connected care and category leadership, and we're very pleased with the progress we're making. To your question, where are we in the journey? My point is a statistic that we shared on the call today that 30% of our revenue today is connected care devices, and it's growing at 20%. So as a proxy, we think that's a very important metric that we will continue to update investors on. So you might say that we're 1/3 of the way there. And we have 2/3 of our portfolio to go to turn it into a complete connected care portfolio growing at those kind of market growth rates.

And as you may have seen in our slide, Slide number eight, you'll see that those growth categories of Care Communications and connected monitoring, that -- those are the highest growth categories that we're in, double-digit growth categories. If we can move our entire portfolio into double-digit growth markets, I would say we have achieved our objective.

Rick Wise -- Stifel -- Analyst

That's great. And just as a second question, a follow-up, on the guide. Totally understand the fourth quarter guide. And I appreciate the comments and sort of early setup and look at 2022. But just -- sorry to use your words against you here, John, but I mean, my goodness, 1/3 of the portfolio growing more rapidly than the rest, 10 new products still launching, markets recovering, the acceleration in investments, continuing M&A, the great balance sheet. Why should we believe you? And I say that with a smile. When you talk about mid-single-digit fiscal 2022 as a way to start, why wouldn't it be -- given all those things that are happening and recovery and portfolio mix, why wouldn't we be sort of thinking that instead of your five percent plus language that you used in the past, why aren't we thinking six percent plus as we contemplate the year ahead? I know you're conservative. But anyway, thank you for the questions.

John P. Groetelaars -- President and Chief Executive Officer

Yes. Thanks, Rick. I appreciate that. And I do take it with a smile I can on your face. We're very pleased with the progress, right? If I just start with the stripping out all the COVID factors for this year, we'd be first half of the year flat growth on the top line. We just reported 10% in Q3. And our guide in Q4 is 12% plus. So we like the momentum we see in the underlying business and are very pleased with the progress that we're making with all of the various investments you outlined through M&A, through new products, through connected care, through emerging markets. So those are all clicking. It's a little bit early for us to provide guidance for 2022.

And we like having a stellar track record of meeting or beating guidance that we put out there. I think we've done that now 16 quarters in a row. [Technical Issues] measured and will be balanced in our outlook. And as we get closer to each of the quarters, we'll update you. But there's reason for optimism. We're comfortable with where consensus currently sits. And we'll, in the next couple of months, close out our year and talk about 2022.

Rick Wise -- Stifel -- Analyst

Sounds great. Thanks, John.

Operator

Bob Hopkins of Bank of America is on the line with a question. Please state your question.

Bob Hopkins -- Bank of America -- Analyst

Great and thank you. So just follow-up there on the 2022. I guess, John, I heard you like -- when you contemplate all of the things that you mentioned there, now that Bardy is happening and all the things you see and kind of dealing with the comparisons on COVID that you're -- as it -- where it stands today, you're roughly comfortable with how consensus modeling for next year at this point. Is that the message on next year?

John P. Groetelaars -- President and Chief Executive Officer

Yes.

Bob Hopkins -- Bank of America -- Analyst

Okay. Great. And then a couple other real quick things. On Bardy, can you just give us a sense for what that is growing today? How things are progressing with that business? And I just want to make sure that -- previously, you had said kind of whatever happens with Bardy you won't let it disrupt the double-digit EPS growth outlook. Just want to confirm now that that's officially part of the portfolio or going to be that, that remains the same. So how is Bardy doing now and still have that same 10% commitment even with this deal now going to close?

John P. Groetelaars -- President and Chief Executive Officer

Yes, sure. Great question, Bob. When we -- obviously, we were in litigation for several months with Bardy. We didn't have visibility to their performance during that period. But a few weeks ago, we got visibility to it. And we were extremely impressed with the execution that the team has continued to work against. To answer your question about growth, it's well over 50% growth in revenue on a year-over-year basis. It's going to contribute, even just in two months of our fourth quarter, there will be 100 basis points of inorganic growth. And we expect there'll be a minimum of 100 basis points of inorganic growth next year as well at gross margins better than the company average. From a dilution point of view, obviously, a cut in reimbursement for roughly 30% of the business does have a bottom line impact. It's about $0.04 to $0.05 this quarter.

And as the business scales into next year, that kind of quarterly dilution rate will subside. And we have a lot of levers inside the company. We're a big, diverse company. We have a lot of levers that we can pull to offset dilution. So yes, there is some dilution in 2022, but nothing we feel we can't handle and incorporate as we manage this business going forward. What we -- we still love the Bardy team, the Bardy technology. It is growing at two to three times market growth rates. It's highly differentiated. It is exceptionally good at diagnosing cardiac arrhythmias. And we bring a tremendous amount of capability with EMR integration and market access and payer relations, not to mention the important, really important, work of Medicare and MAC pricing decisions that will be forthcoming in the near future. So we intend to lean in on all those items and really help the business accelerate under our ownership.

Bob Hopkins -- Bank of America -- Analyst

Great. Thanks very much. I'll go back in queue. Thank you.

John P. Groetelaars -- President and Chief Executive Officer

Thank you Bob.

Operator

Mr. Michael Polark of Baird is on the line with a question. Please state your question.

Michael Polark -- Baird -- Analyst

Hi. Good morning. I'll double-click on the Bardy thread there on reimbursement. John, I'd just love to get your latest thoughts there. I mean I think the current posted Novitas rate in Houston, $115, what do you think is a realistic outcome here and over what time horizon? Whether that be through the contractors or with Medicare? Would love to get your update there now that you're moving forward with the transaction.

John P. Groetelaars -- President and Chief Executive Officer

Sure. Thanks, Mike. We had another really important part of our diligence or evaluation of strategic options in the last few weeks. And we're really pleased with the progress Bardy was making as well as the work that they were doing with other industry players. And without getting into specifics, we feel confident that positive changes can be made with either CMS or the MACs or Novitas in the coming months that we can make some progress to advance those discussions. And we're hopeful that a more positive reimbursement rate will follow for calendar year 2022. No promises yet. We haven't factored in that kind of upside into our outlook. But there's reason to have hope that, that could be in the cards for the next calendar year.

Michael Polark -- Baird -- Analyst

Appreciate that. And I know you don't know, the old rate round numbers, $300 range, $115, do we -- what are you seeing something with a higher one, with a two on it, back to the three. Order of magnitude, what are we talking about here?

John P. Groetelaars -- President and Chief Executive Officer

Yes. I think, Mike, you or maybe another sell-side analyst observing that the proposed higher rate of mid-400s was probably viewed as too high. And then the current -- certainly, the $55 initially, now the $110 Novitas rate was viewed as too low. So I think someone was framing it that way. Nothing in a reasonable way to frame it. I'm not going to put a number out there. But at its term level, it's not sustainable for appropriate access for Medicare patients. That, we all agree on. And that's the case that we need to present data to the MACs and Novitas and CMS that that's not a reimbursement rate that is viable and does not provide appropriate access for these patients. So we'll see where those discussions end up. But we can all -- I think we all in the industry side and those who have access to this information and see what the true cost of delivering service and the devices is, all can agree that the current reimbursement rate is too low.

Michael Polark -- Baird -- Analyst

If I can sneak one last one in on Care Comm, shifting gears. Heard about a good revenue growth rate in that business in the quarter. I would be curious what the forward-looking indicators look like, new bookings in the period, backlog development. Your close peer in that space came out with another positive set of numbers last night, so I would love your comments, John.

John P. Groetelaars -- President and Chief Executive Officer

Yes. I mean in our prepared remarks, we commented it grew 35% in the quarter, which was an acceleration from Q2 at 15%. We're really pleased with our broad portfolio of offerings there. We generally don't comment on the details of our backlog. But I will tell you that, that large deal that we discussed several quarters now is underway. Orders are being received and being shipped. We'll expect to see some revenue recognition in our current fourth quarter. And with that in our pipeline and into next year, we continue to expect double-digit growth in that overall category.

Michael Polark -- Baird -- Analyst

Thank you so much.

John P. Groetelaars -- President and Chief Executive Officer

Thank you.

Operator

Drew Ranieri of Morgan Stanley is on the line with a question. Please state your question.

Drew Ranieri -- Morgan Stanley -- Analyst

Indecipherable] John, just to touch on the Breathe acquisition that you made some time ago. Just like to get an update there. Now that we're kind of getting back to normal in the environment, kind of what's your vision for the product in the home setting? And maybe what investments are you going to be putting behind the product to kind of really see that division playing out?

John P. Groetelaars -- President and Chief Executive Officer

Yes. Thanks for the question. We're -- the COVID period of time was very challenging for that component of our respiratory health business because respiratory therapists were so busy with COVID patients. Now with returning to normalcy of workflow and patient therapies that respirologists and respiratory therapists are dealing with, we're seeing really nice traction resuming in the last couple of quarters with our at-home ventilator product, which is the Life2000 device. And we're kind of back on track with the trajectory that we had shortly after the acquisition. As you'll remember, last year, we had a very large stockpile order for that ventilator product. And now that we're passing -- in Q4, we'll pass the comp of that, which we passed part of it in this last quarter, but it's a significant, I think, $25 million comp in Q4. And once we cycle past that, we'll start to see more transparently the performance of that business. But we're really pleased with the rate of prescription growth and the rate of placements in the home for that therapy.

Barbara W. Bodem -- Chief Financial Officer

Drew, just to clarify, the $25 million year-over-year comp was in Q3, and it's about a $10 million headwind in Q4 on Breathe. And excluding the COVID impact, this business continues to generate double-digit growth.

Drew Ranieri -- Morgan Stanley -- Analyst

Okay, thank you. Great. And just shifting gears to the Surgical Solutions business. John, you talked about constraints being lifted in the hospital environment. But just maybe talk about the remaining opportunity that you see for Integrated Table Motion. I know you said record placements in the quarter. And then just help us frame the order book backlog, anything that you can give to just show us the health of the business would be appreciated. Thank you.

John P. Groetelaars -- President and Chief Executive Officer

Yes. Obviously, now that things are normalizing and access has largely normalized, we've been building a backlog and order book during the last six quarters, and now that's starting to get deployed. So we're really pleased with the performance there. As we talked about in our prepared comments, GSS grew at eight percent, excluding COVID. But if you take out the OEM exit, it's actually 30%. And then if you look into Q4, we expect that growth rate, that high, high double-digit growth to continue. And we're really excited about the new Helion launch, which is our -- really, our first truly connected OR integration product. It is such a cool product for you to see if I can definitely demonstrate it one day for you.

But without the surgeon touching anything, they are able to control all the video elements that are going on in the OR, all the video, the imaging elements, other data that they need to use to navigate during the procedure and access to timely information. This is really truly next-generation integration in the OR, and we're very excited about the opportunities for that platform to serve as our OR connectivity hub as we build out additional digital solutions in the operating room. So we're excited about that business. We're really excited about the new launch for Helion. On Integrated Table Motion now that, again, robotic placements start picking up, our attachment rate to that robotic system is extremely high. So we're pleased with that performance, too.

Drew Ranieri -- Morgan Stanley -- Analyst

[Indecipherable] And just one last one on the China performance in the quarter. You called out double-digit growth but on an easy comp. Would just like to hear maybe an update on that segment of the business where you're seeing the most growth? And just remind us kind of where your emerging market penetration is today and what the growth options are going forward. Thank you.

John P. Groetelaars -- President and Chief Executive Officer

Yes. Just to clarify, Asia Pacific was up 10%, but the China business last quarter doubled, wasn't double digit. We have had double-digit growth in China for eight of the last nine quarters. There was one quarter during the pandemic where it went backwards. But otherwise, we're very pleased with the traction we're seeing there and continue to believe we have significant untapped potential in our China market for our portfolio.

Drew Ranieri -- Morgan Stanley -- Analyst

Thanks for taking the questions.

John P. Groetelaars -- President and Chief Executive Officer

Thank you.

Operator

Matt Taylor of UBS is on the line with a question. Please state your question.

Matt Taylor -- UBS -- Analyst

All right, thanks. Can you hear me OK?

John P. Groetelaars -- President and Chief Executive Officer

Yes.

Matt Taylor -- UBS -- Analyst

Great. So the first question I wanted to ask you is now that you just reported a quarter for the first time in a while that hasn't had this COVID impact, could you talk about your ability to grow in fiscal 2022 over what you still have some tough COVID comp in the first half? Or should we continue to see any COVID benefit going forward? Or is that all done?

John P. Groetelaars -- President and Chief Executive Officer

Yes. We're not calling out any expected COVID benefit in the future. We didn't see anything in Q3, don't expect any in Q4. So with the exception of the $80 million of benefit that we saw in the first two quarters this year, $40 million each quarter on top line, that's the comp or the headwind that we'll overcome as we enter 2022.

Matt Taylor -- UBS -- Analyst

Okay, thanks. And could you make any comments on your ability to grow over that comp based on the comps you're seeing in the underlying business?

John P. Groetelaars -- President and Chief Executive Officer

Look, I think the underlying business, I'll repeat those metrics. I mean, I think that the progression we're seeing on the acceleration of our performance this year. If you do apples-to-apples, excluding COVID, Q1 and Q2 were flat excluding COVID. We had COVID benefit in Q1, Q2 that drove the growth. If you strip that out, it was flat. Q3 was 10% growth, and we expect Q4 to be 12%. So that's a pretty good progression. We're very pleased with that progression. We'll obviously have some headwind comps to overcome in Q1 and Q2. And once we finalize guidance for 2022, we'll be hearing in three months talking about it.

Matt Taylor -- UBS -- Analyst

Okay. Okay. And then this may be an unanswerable question, but I have to ask because there's been speculation about you turning down $144 offer. Could you just offer some thoughts on what you think the business is worth? And I guess if there was an approach from someone, notwithstanding the rumors, how would you think about addressing that kind of an approach?

John P. Groetelaars -- President and Chief Executive Officer

Yes, I can't comment on those kind of rumors, Matt.

Matt Taylor -- UBS -- Analyst

Ok. All right. Thanks, John.

John P. Groetelaars -- President and Chief Executive Officer

Thank you.

Operator

Matthew Mishan of KeyBanc is on the line with a question. Please state your question.

Matthew Mishan -- KeyBanc -- Analyst

Hey. Good morning. Just first, can you guys give us a sense of the early reaction from the docs on the digitalization of the physical assessment tools?

John P. Groetelaars -- President and Chief Executive Officer

Yes. Great question. This is our enhanced physical assessment tool as it adds a smartphone technology to otoscopes and ophthalmoscopes. And the initial response has been very strong. We're seeing a lot of great use cases that we expected. The ability to capture images, store them, see disease progression, share them with other caregivers or share them with family members are all the things we expected would delight those customers. There hasn't been that kind of innovation in this space for a long, long time. So we're super excited about the feedback we're getting. And we think it's going to bring growth to a large category that has largely been flat year-over-year for many years.

Matthew Mishan -- KeyBanc -- Analyst

And then a follow-up on Breathe. Have you've seen any opportunity from a competitor ventilator recall?

John P. Groetelaars -- President and Chief Executive Officer

You know, I'd say nothing material to date. We're looking closely at ways we can help meet patient needs and demand. But we haven't directly seen any benefit there.

Matthew Mishan -- KeyBanc -- Analyst

And then the last one as a follow-up on Bardy. I just want to make sure I understand. I think when you announced it, you said it would be $0.10 dilutive, but it would be captured within the range. It wasn't part of guidance before. It now is part of guidance. And it's $0.04 to $0.05 dilutive to the fourth quarter, which means you could have -- if it wasn't part of it, your EPS would have been a little bit higher. Is that correct?

John P. Groetelaars -- President and Chief Executive Officer

That's exactly right, Matt.

Matthew Mishan -- KeyBanc -- Analyst

Okay, all right. Thank you very much.

[Foreign Speech]

Operator

Thank you. Mr. Mike Matson of Needham & Company is on the line with a question. Please state your question.

Mike Matson -- Needham & Company -- Analyst

You know, I wanted to ask about Slide nine where you show the change in a portion of your business that's coming from connected care. I mean I don't know if you can answer this, but how much of that 15% to 30% increase is driven by M&A versus internal product involvement or just growth of the products that you have already?

John P. Groetelaars -- President and Chief Executive Officer

Sure. Well, of the six acquisitions we've done, five of them would be in the connected care category. In total, as we said in our prepared comments, all those acquisitions were $80 million. So of the five that are connected care, the one that's not is the ventilator, right, the Breathe acquisition. So of that $80 million, I think it's around $50 million of it would be connected care. So it's not a material portion of that growth. It's really a part of it, but it's not a meaningful material needle mover.

Mike Matson -- Needham & Company -- Analyst

Okay.

Barbara W. Bodem -- Chief Financial Officer

And Mike, one other point is that about 40% of the connected care revenue is also in the new product bucket that we talk about.

Mike Matson -- Needham & Company -- Analyst

Okay. [Speech Overlap]. Just in terms of an upper limit. I mean I think you mentioned earlier, John, and you think you can get this to 100% of the business. I mean that's essentially taking things, the products that you're selling and just adding in some sort of connectivity to them essentially or...

John P. Groetelaars -- President and Chief Executive Officer

Yes. That's probably more of a hypothetical -- let me clarify that comment. I mean we're at 30% today. Of course, there's no reason to have certain parts of our portfolio connected. So maybe the upper limit of the practical -- we're not going to connect things just for the sake of connecting them. It's got to add value to the customer. So maybe it's more like -- the upper threshold is probably more like 80% of the portfolio would be benefited by a connected solution. And that's -- it's also incorporating the mix, right, of new products becoming a larger portion of the mix, acquisitions becoming a larger portion of the mix.

And that also helps our gross margin, by the way, because these are accretive gross margin products. So that's another benefit to these connected care products that mix shifts over time, and it's moved quite a bit in the last couple of years as you've seen from that slide on Slide nine. That becomes the growth driver in the company and gives us that gross margin -- enough margin leverage we're looking for.

Mike Matson -- Needham & Company -- Analyst

Okay, got it. Thank you.

John P. Groetelaars -- President and Chief Executive Officer

Thank you. I think that wraps it up, operator. Thank you, everyone, for joining the call today.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Mary Kay Ladone -- Senior Vice President, Corporate Development, Strategy And Investor Relations

John P. Groetelaars -- President and Chief Executive Officer

Barbara W. Bodem -- Chief Financial Officer

Rick Wise -- Stifel -- Analyst

Bob Hopkins -- Bank of America -- Analyst

Michael Polark -- Baird -- Analyst

Drew Ranieri -- Morgan Stanley -- Analyst

Matt Taylor -- UBS -- Analyst

Matthew Mishan -- KeyBanc -- Analyst

Mike Matson -- Needham & Company -- Analyst

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