UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 1-6651

Enhancing Outcomes for Patients and Their Caregivers.^TM

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 þ No o

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 þ No o

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 þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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 – 63,167,275 shares as of April 21, 2011.

 

 

HILL-ROM HOLDINGS, INC.

INDEX TO FORM 10-Q

		Page
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements
Condensed Consolidated Statements of Income (Unaudited) for the Quarterly and Year to Date Periods Ended March 31, 2011 and 2010			3
Condensed Consolidated Balance Sheets (Unaudited) at March 31, 2011 and September 30, 2010			4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Year to Date Periods Ended March 31, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3 — Quantitative and Qualitative Disclosures About Market Risks			22
Item 4 — Controls and Procedures			22
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings			23
Item 1A — Risk Factors			23
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			23
Item 6 — Exhibits			24
SIGNATURES			25
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)
(Dollars in millions except per share data)

		Quarterly Period Ended March 31								Year To Date Period Ended March 31
		2011				2010				2011				2010
Net Revenues
Capital sales		$	278.8			$	236.2			$	535.5			$	467.8
Rental revenues			123.3				120.9				240.8				244.6
Total revenues			402.1				357.1				776.3				712.4
Cost of Revenues
Cost of goods sold			151.0				134.4				290.6				264.9
Rental expenses			52.5				50.9				102.6				104.9
Total cost of revenues			203.5				185.3				393.2				369.8
Gross Profit			198.6				171.8				383.1				342.6
Research and development expenses			16.2				14.4				31.0				29.3
Selling and administrative expenses			130.5				120.8				250.5				242.4
Special charges (Note 8)			2.6				5.0				2.6				5.0
Operating Profit			49.3				31.6				99.0				65.9
Interest expense			(2.1	)			(2.2	)			(4.2	)			(4.3	)
Investment income and other, net			0.7				0.3				0.7				0.8
Income Before Income Taxes			47.9				29.7				95.5				62.4
Income tax expense (Note 9)			14.8				5.2				27.0				18.0
Net Income			33.1				24.5				68.5				44.4
Less: Net income attributable to noncontrolling interest			—				0.3				0.2				0.4
Net Income Attributable to Common Shareholders		$	33.1			$	24.2			$	68.3			$	44.0
Net Income Attributable to Common Shareholders per Common Share — Basic		$	0.53			$	0.38			$	1.08			$	0.70
Net Income Attributable to Common Shareholders per Common Share — Diluted		$	0.52			$	0.38			$	1.07			$	0.69
Dividends per Common Share		$	0.1025			$	0.1025			$	0.2050			$	0.2050
Average Common Shares Outstanding — Basic (thousands) (Note 10)			63,000				62,887				62,989				62,768
Average Common Shares Outstanding — Diluted (thousands) (Note 10)			63,911				63,500				64,056				63,324

See Notes to Condensed Consolidated Financial Statements

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in millions)

		March 31, 2011				September 30, 2010
ASSETS
Current Assets
Cash and cash equivalents		$	235.2			$	184.5
Trade accounts receivable, net of allowances (Note 2)			366.6				353.1
Inventories (Note 2)			115.8				108.5
Deferred income taxes (Notes 1 and 9)			40.3				40.4
Other current assets			37.8				52.7
Total current assets			795.7				739.2
Property, plant and equipment, net (Note 2)			230.2				243.7
Investments and investment securities (Notes 1 and 6)			11.5				12.1
Goodwill			81.1				81.1
Software and other intangible assets, net (Note 2)			130.9				136.6
Other assets			31.4				32.9
Total Assets		$	1,280.8			$	1,245.6
LIABILITIES
Current Liabilities
Trade accounts payable		$	72.5			$	80.6
Short-term borrowings (Note 4)			104.3				53.1
Accrued compensation			77.8				88.9
Accrued product warranties (Note 12)			16.5				15.8
Other current liabilities			53.8				50.3
Total current liabilities			324.9				288.7
Long-term debt (Note 4)			50.0				98.5
Accrued pension and postretirement benefits (Note 5)			59.3				59.0
Deferred income taxes (Notes 1 and 9)			28.0				31.3
Other long-term liabilities			57.8				52.3
Total Liabilities			520.0				529.8
Noncontrolling interest (Note 3)			—				8.3
Commitments and Contingencies (Note 14)
SHAREHOLDERS’ EQUITY
Common Stock			4.4				4.4
Additional paid-in-capital			111.3				119.3
Retained earnings			1,258.9				1,203.6
Accumulated other comprehensive loss (Note 7)			(52.8	)			(61.8	)
Treasury stock, at cost (Notes 2 and 11)			(561.0	)			(558.0	)
Total Shareholders’ Equity			760.8				707.5
Total Liabilities, Non-Controlling Interest and Shareholders’ Equity		$	1,280.8			$	1,245.6

See Notes to Condensed Consolidated Financial Statements.

Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)

		Year To Date Period Ended March 31
		2011				2010
Operating Activities
Net income		$	68.5			$	44.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			51.6				49.5
Provision for deferred income taxes			(1.3	)			(8.4	)
Loss on disposal of property, equipment leased to others, intangible assets and impairments			1.0				1.8
Stock compensation			6.7				7.2
Tax settlement			—				(6.5	)
Excess tax benefits from employee stock plans			(4.1	)			—
Change in working capital excluding cash, current investments, current debt, acquisitions and dispositions:
Trade accounts receivable			(12.5	)			3.9
Inventories			(7.3	)			(13.4	)
Other current assets			15.1				(22.4	)
Trade accounts payable			(8.1	)			(4.7	)
Accrued expenses and other liabilities			(8.1	)			1.8
Other, net			6.1				(4.1	)
Net cash provided by operating activities			107.6				49.1
Investing Activities
Capital expenditures and purchase of intangibles			(30.9	)			(27.5	)
Proceeds on sales of property and equipment leased to others			4.3				1.0
Acquisitions of businesses, net of cash acquired			—				(7.1	)
Proceeds on investment sales/maturities			0.2				5.0
Net cash used in investing activities			(26.4	)			(28.6	)
Financing Activities
Change in short-term debt			3.2				(0.2	)
Payment on revolver			—				(45.0	)
Purchase of noncontrolling interest			(11.2	)			—
Payment of cash dividends			(12.9	)			(12.9	)
Proceeds on exercise of options			23.1				2.9
Proceeds from stock issuance			1.5				1.3
Excess tax benefits from employee stock plans			4.1				—
Treasury stock acquired			(41.6	)			(1.0	)
Net cash used in financing activities			(33.8	)			(54.9	)
Effect of exchange rate changes on cash			3.3				(1.0	)
Total Cash Flows			50.7				(35.4	)
Cash and Cash Equivalents:
At beginning of period			184.5				170.6
At end of period		$	235.2			$	135.2

See Notes to Condensed Consolidated Financial Statements

Hill-Rom Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions except per share data)

1. Summary of Significant Accounting Policies

Basis of Presentation

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, 2010 (“2010 Form 10-K”) as filed with the U.S. Securities and Exchange Commission. The September 30, 2010 Condensed Consolidated Balance Sheet was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of Hill-Rom and its subsidiaries. All subsidiaries are wholly-owned as of March 31, 2011. During the first quarter of our fiscal 2011 we acquired the remaining 40 percent noncontrolling interest in our former joint venture (Note 3). 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 management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements including the accompanying notes. Actual results could differ from those estimates. Examples of such estimates include our accounts receivable reserves (Note 2), investments (Note 6), income taxes (Note 9), accrued warranties (Note 12) and accrued litigation and self insurance reserves (Note 14), among others.

Investment Securities

At March 31, 2011, investment securities consisted primarily of $11.3 million in 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.

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.

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.

We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances. Entering the fiscal year we had $28.5 million of valuation allowances on deferred tax assets, on a tax-effected basis, primarily related to foreign operating loss carryforwards and other tax attributes. It is possible that sustainable improvements in foreign earnings could result in a reconsideration of the need for these valuation allowances, resulting in the accelerated recognition of all or some portion of the previously unrecognized tax benefits.

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 2010 Form 10-K except as noted below:

On October 1, 2010 we adopted the Financial Accounting Standard Board’s (“FASB”) revised authoritative guidance requiring entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk with respect to the assets. Our adoption of this guidance was prospective and did not have a material impact on our Condensed Consolidated Financial Statements.

On October 1, 2010, we adopted the FASB’s revised authoritative guidance to improve financial reporting for companies involved with variable interest entities to provide more relevant and reliable information to users of financial statements. Our adoption of this guidance was prospective and did not have a material impact on our Condensed Consolidated Financial Statements.

2. Supplementary Balance Sheet Information

		March 31, 2011				September 30, 2010
Allowance for possible losses and discounts on trade receivables		$	27.4			$	29.0
Inventories:
Finished products		$	65.4			$	64.2
Raw materials and work in process			50.4				44.3
Total inventory		$	115.8			$	108.5
Accumulated depreciation of property, plant and equipment		$	582.7			$	561.3
Accumulated amortization of software and other intangible assets		$	152.6			$	137.8
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			62,974,896				62,786,883
Treasury shares			17,349,016				17,537,029

3. Acquisitions

On November 9, 2009, we entered into a joint venture with Encompass Group, LLC (“Encompass Group”), to form Encompass TSS, LLC (“Encompass”), of which we ultimately owned 60 percent. For our 60 percent ownership interest we paid $7.5 million to Encompass Group, contributed cash and entered into license and distribution agreements with Encompass. On November 30, 2010, we purchased the remaining 40 percent of Encompass for $10.6 million, plus a variable earn-out with a minimum of $1.2 million and a maximum of $1.6 million per year over five years. We have a total of $5.6 million accrued in other current liabilities and other long-term liabilities on our Condensed Consolidated Balance Sheet at March 31, 2011 related to the earn-out.

If the Encompass joint venture had been consummated at the beginning of our 2010 fiscal year or wholly-owned, the impact to revenues and net income on an unaudited pro forma basis would not have been significant to our financial results in any of the periods presented.

4. Financing Agreements

Total debt consists of the following:

		March 31, 2011				September 30, 2010
Outstanding finance credit lines		$	11.4			$	8.1
Revolving credit facility			45.0				45.0
Unsecured 8.50% debentures due on December 1, 2011			47.9				48.4
Unsecured 7.00% debentures due on February 15, 2024			19.7				19.7
Unsecured 6.75% debentures due on December 15, 2027			29.8				29.8
Other			0.5				0.6
Total debt			154.3				151.6
Less current portion of debt			104.3				53.1
Total long-term debt		$	50.0			$	98.5

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 March 31, 2011 have fixed rates of interest. We have deferred gains included in the preceding table from the termination of previous interest rate swap agreements, and those deferred gains amounted to $1.6 million at March 31, 2011 and $2.1 million at September 30, 2010. The deferred gains are being amortized and recognized as a reduction of interest expense over the remaining term of the related debt through 2011 and 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.

We have a $500.0 million senior revolving credit facility, which expires on March 28, 2013 (subject to extension upon satisfaction of certain conditions set forth in the credit facility). Borrowings under the credit facility bear interest at variable rates, and the availability of borrowings is subject to our ability at the time of borrowing to meet certain specified conditions, including compliance with covenants contained in the credit agreement governing the facility. The credit agreement contains covenants that, among other matters, 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. The proceeds of the five-year facility shall be used, as needed: (i) for working capital, capital expenditures, and other lawful corporate purposes; and (ii) to finance acquisitions.

As of March 31, 2011, we had outstanding borrowings of $45.0 million and undrawn letters of credit of $5.8 million under the five-year facility, leaving $449.2 million of borrowing capacity available under the facility.

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 debt instruments were $50.5 and $95.7 million at March 31, 2011 and September 30, 2010.

5. 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. All of our plans have a September 30th measurement date. The following table includes the components of net pension expense for our defined benefit plans.

		Quarterly Period Ended March 31								Year To Date Period Ended March 31
		2011				2010				2011				2010
Service cost		$	1.3			$	1.3			$	2.6			$	2.5
Interest cost			3.3				3.3				6.6				6.6
Expected return on plan assets			(4.2	)			(3.3	)			(8.4	)			(6.6	)
Amortization of unrecognized prior service cost, net			0.1				0.1				0.3				0.3
Amortization of net loss			1.0				0.7				2.0				1.3
Net pension expense		$	1.5			$	2.1			$	3.1			$	4.1

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.

6. 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.

The following table summarizes our financial assets measured at fair value on a recurring basis included in our Condensed Consolidated Balance Sheet, as of March 31, 2011:

						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		$	235.2			$	235.2			$	—			$	—
Available-for-sale marketable securities			11.3				—				—				11.3
Other investments			0.2				—				—				0.2
Total assets at fair value		$	246.7			$	235.2			$	—			$	11.5

At March 31, 2011, we had $11.3 million of AAA rated student loan ARS. 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. At March 31, 2011, our investment advisors provided a valuation based on unobservable inputs for the ARS. The investment advisors utilized a discounted cash flow approach (an “income approach”) to arrive at this valuation, which was corroborated by separate and comparable discounted cash flow analysis prepared by us. 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 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. Activity related to our ARS was not significant during the first six months of fiscal 2011.

7. Comprehensive Income

The net-of-tax effect of unrealized gains or losses on: our available-for-sale securities, foreign currency translation adjustments, pension (or other defined benefit postretirement plans’) actuarial gains or losses, prior service costs or credits are required to be included in comprehensive income.

The composition of comprehensive income is as follows:

		Quarterly Period Ended March 31								Year To Date Period Ended March 31
		2011				2010				2011				2010
Net income		$	33.1			$	24.5			$	68.5			$	44.4
Net gain (loss) on available-for-sale securities and other investments			(0.1	)			0.2				(0.1	)			0.3
Foreign currency translation adjustment, net-of-tax			9.0				(1.2	)			9.4				(4.2	)
Items not yet recognized as a component of net periodic pension or postretirement benefit cost, net-of-tax			(0.1	)			—				(0.3	)			(0.1	)
Total comprehensive income			41.9				23.5				77.5				40.4
Comprehensive income attributable to the noncontrolling interest			—				(0.3	)			(0.2	)			(0.4	)
Total comprehensive income attributable to common shareholders		$	41.9			$	23.2			$	77.3			$	40.0

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 2011 was as follows:

		Beginning Balance																Ending Balance
		September 30, 2010				Expenses				Cash Payments				Reversals				March 31, 2011
Fiscal Year 2010 Actions
Q2 - Restructuring		$	1.5			$	—			$	0.8			$	—			$	0.7
Q4 - Restructuring			3.7				2.1				1.0				—				4.8
Total		$	5.2			$	2.1			$	1.8			$	—			$	5.5

During the second quarter of fiscal 2011, we recorded an additional special charge of $2.6 million related to our fiscal 2010 fourth quarter action. The majority of the charge related to additional severance and other benefits provided to affected employees of that action as well as a further write-down of assets held for sale. The above table excludes the write-down of our assets.

9. Income Taxes

The effective tax rate for the three- and six-month periods ended March 31, 2011 was 30.9 and 28.3 percent compared to 17.5 and 28.8 percent for the comparable periods in the prior year. The effective rate for both periods in fiscal 2011 benefited from increased earnings in lower-rate jurisdictions, including improved European income, some of which was not subject to tax as a result of the utilization of previously unrecognized operating loss carryforwards. We currently carry full valuation allowances on these loss carryforwards, thus the recognition of income and the release of valuation allowance results in no tax expense on the earnings. The effective tax rate for the six months ended March 31, 2011 also benefited from the first quarter recognition of period tax benefits of $2.2 million relating principally to the one-time “catch up” associated with the retroactive reinstatement of the research and development tax credit.

The comparable prior year periods included a favorable period tax benefit in the second quarter of $6.5 million relating to the recognition of previously unrecognized tax benefits associated with the resolution of an income tax matter with the IRS.

10. Earnings per Common Share

Basic earnings per share are 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 are 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. Excluded shares were 0.7 and 0.6 million for the three- and six-month periods ended March 31, 2011, and 5.4 and 5.2 million for the comparable periods of fiscal 2010. Cumulative treasury stock acquired, less cumulative shares reissued, have been excluded in determining the average number of shares outstanding.

Earnings per share is calculated as follows (share information in thousands):

		Quarterly Period Ended March 31								Year To Date Period Ended March 31
		2011				2010				2011				2010
Net income attributable to common shareholders		$	33.1			$	24.2			$	68.3			$	44.0
Average shares outstanding — Basic			63,000				62,887				62,989				62,768
Add potential effect of exercise of stock options and other unvested equity awards			911				613				1,067				556
Average shares outstanding — Diluted			63,911				63,500				64,056				63,324
Net income attributable to common shareholders per common share — Basic		$	0.53			$	0.38			$	1.08			$	0.70
Net income attributable to common shareholders per common share — Diluted		$	0.52			$	0.38			$	1.07			$	0.69

11. Common Stock

Share Repurchases

We repurchased 0.3 and 0.9 million shares of our common stock during the three- and six-month periods ended March 31, 2011 for $12.2 and $37.4 million. Our Board of Directors has approved the repurchase of a total of 25.7 million shares of our common stock through the open market or private transactions and as of March 31, 2011, a cumulative total of 24.6 million shares had been repurchased by us at market trading prices. The Board’s approval has no expiration date and currently there are no plans to terminate this program in the future.

Stock Based Compensation

The stock based compensation cost that was charged against income, net of tax, for all plans was $2.6 and $4.3 million for the three- and six-month periods ended March 31, 2011, and $2.3 and $4.6 million for the comparable periods of fiscal 2010.

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.

A reconciliation of changes in the warranty reserve for the periods covered in this report is as follows:

		Quarterly Period Ended March 31								Year To Date Period Ended March 31
		2011				2010				2011				2010
Balance at beginning of period		$	16.0			$	15.4			$	15.8			$	17.1
Provision for warranties during the period			4.0				4.2				8.2				7.2
Warranty claims during the period			(3.5	)			(4.4	)			(7.5	)			(9.1	)
Balance at end of period		$	16.5			$	15.2			$	16.5			$	15.2

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 first quarter of fiscal 2011, we changed our segment reporting to reflect changes in our organizational structure and management’s view of the business. We moved our surgical reporting unit from the International and Surgical segment (now referred to as the International segment) to the North America Acute Care segment. In addition, manufacturing and research and development costs were further allocated to the segments such that all manufacturing and research and development costs are now included in divisional income. We have also assigned additional direct functional costs to the segments as well as an allocation of certain corporate functional expenses that can be attributed to the segments. The prior year segment information included in this Note has been updated to reflect these changes. Our new operating structure contains the following reporting segments:

•

North America Acute Care — sells and rents our hospital patient support and near-patient technologies, as well as our health information technology solutions and surgical accessories, to acute care facilities.

•

North America Post-Acute Care — sells and rents a variety of products outside of the hospital setting including long-term acute care, extended care and home care and our respiratory care products in all settings.

•

International — sells and rents similar products as our North America businesses to Europe and the rest of the world.

Our performance under the new operating structure continues to be measured on a divisional income basis before special items. 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 costs that support the entire organization such as administration, finance, legal and human resources.

		Quarterly Period Ended March 31								Year To Date Period Ended March 31
		2011				2010				2011				2010
Revenues:
North America Acute Care		$	251.3			$	217.7			$	469.4			$	423.3
North America Post-Acute Care			52.2				51.1				104.5				103.7
International			98.6				88.3				202.4				185.4
Total revenues		$	402.1			$	357.1			$	776.3			$	712.4
Divisional income:
North America Acute Care		$	62.7			$	39.0			$	107.3			$	76.4
North America Post-Acute Care			10.1				11.0				22.3				23.8
International			4.2				3.4				14.7				4.0
Corporate expenses			(25.1	)			(16.8	)			(42.7	)			(33.3	)
Total divisional income			51.9				36.6				101.6				70.9
Special charges			(2.6	)			(5.0	)			(2.6	)			(5.0	)
Operating profit			49.3				31.6				99.0				65.9
Interest expense			(2.1	)			(2.2	)			(4.2	)			(4.3	)
Investment income and other, net			0.7				0.3				0.7				0.8
Income before income taxes		$	47.9			$	29.7			$	95.5			$	62.4

14. Commitments and Contingencies

Batesville Casket Antitrust Litigation

In 2005 the Funeral Consumers Alliance, Inc. and a number of individual consumer casket purchasers filed a purported class action antitrust lawsuit on behalf of certain consumer purchasers of Batesville^® caskets against us and our former Batesville Casket Company, Inc. subsidiary (now wholly-owned by Hillenbrand, Inc.), and three national funeral home businesses.

The district court has dismissed the claims and denied class certification, but in October 2010, the plaintiffs appealed these decisions to the United States Court of Appeals for the Fifth Circuit. If the plaintiffs were to succeed in reversing the district court’s dismissal of the claims, but not the denial of class certification, then the plaintiffs would be able to pursue individual damages claims: the alleged overcharges on the plaintiffs’ individual casket purchases, which would be trebled as a matter of law, plus reasonable attorneys fees and costs.

If the plaintiffs were to (1) succeed in reversing the district court’s dismissal of the claims, (2) succeed in reversing the district court order denying class certification and certify a class, and (3) prevail at trial, then the damages awarded to the plaintiffs, which would be trebled as a matter of law, could have a significant material adverse effect on our results of operations, financial condition and/or liquidity. The plaintiffs filed a report indicating that they are seeking damages ranging from approximately $947.0 million to approximately $1.46 billion before trebling on behalf of the purported class of consumers they seek to represent, based on claims of approximately one million casket purchases by the purported class members.

We and Hillenbrand, Inc. have entered into a judgment sharing agreement that apportions the costs and any potential liabilities associated with this litigation between us and Hillenbrand, Inc.

We believe that we have committed no wrongdoing as alleged by the plaintiffs and that we have meritorious defenses to class certification and to plaintiffs’ underlying allegations and damage theories.

Office of Inspector General Investigation

On February 8, 2008, we were served with an Administrative Investigative Demand subpoena by the United States Attorney’s Office for the Eastern District of Tennessee pursuant to a Health and Human Services’ Office of Inspector General investigation. On September 18, 2008, we were informed that the investigation was precipitated by the filing in 2005 of a qui tam (whistleblower) complaint under the False Claims Act in the United States District Court for the Eastern District of Tennessee. Once the complaint is filed with the court under seal, the Department of Justice investigates the allegations and has the right to intervene and in effect take over the prosecution of the lawsuit if it believes the allegations warrant. At this point, the government has not yet reached a final intervention decision and is continuing its investigation.

Although the complaint has been only partially unsealed at this point and we have not been formally served, we know that the plaintiffs seek recovery of significant damages and civil penalties relating to the alleged submission of false and fraudulent claims to Medicare and/or Medicaid for the provision of durable medical equipment. In the event that this matter were to proceed to litigation, if it were found that we had failed to comply with applicable laws and regulations, we could be subject to substantial fines or penalties and possible exclusion from participation in federal health care programs. At this time, we are continuing to cooperate with the government’s investigation. We cannot provide any assurances as to when the government will finish its investigation, or when, if ever, it will determine to formally intervene.

Freedom Medical Antitrust Litigation

On October 19, 2009, Freedom Medical, Inc. filed a complaint against us, another manufacturer and two group purchasing organizations in the United States District Court for the Eastern District of Texas. The plaintiff alleges that we and the other defendants conspired to exclude it from the biomedical equipment rental market and to maintain our market share by engaging in a variety of conduct in violation of state and federal antitrust laws. The plaintiff also has asserted claims for business disparagement, common law conspiracy and tortuous interference with business relationships. The plaintiff seeks injunctive relief and money damages in an unspecified amount. We intend to defend this matter vigorously. Because the litigation is in a preliminary stage, we cannot assess the likelihood of an adverse outcome or determine an estimate, or a range of estimates, of potential damages, nor can we give any assurances that this matter will not have a material adverse impact on our financial condition, results of operations or cash flows.

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, product guarantees and warranties as well as 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 involved in possible claims and 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-loss limits for certain employee health benefits, including medical, drug and dental. Our policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but not reported claims and outside actuarial analysis, which are based on historical information along with certain assumptions about future events.

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

Forward-Looking Statements and Factors That May Affect Future Results

Certain statements in this Quarterly Report on Form 10-Q contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 regarding our future plans, objectives, beliefs, expectations, representations and projections. We have tried, whenever possible, to identify these forward-looking statements by using words such as “intend,” “anticipate,” “believe,” “plan,” “encourage,” “expect,” “may,” “goal,” “become,” “pursue,” “estimate,” “strategy,” “will,” “projection,” “forecast,” “continue,” “accelerate,” “promise,” “increase,” “higher,” “lower,” “reduce,” “improve,” “expand,” “progress,” “potential” or the negative of those terms or other variations of them or by comparable terminology. The absence of such terms, however, does not mean that the statement is not forward-looking.

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, 2010 (“2010 Form 10-K”) 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 “Managements Discussion and Analysis of Financial Conditions and Results of Operations” included in our 2010 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 and information technology solutions. Our comprehensive product and service offerings are used by health care providers across the health care continuum in hospitals, extended care facilities and home care settings worldwide, 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 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 contribute to an understanding of our financial performance and provide 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.

Consolidated Results of Operations

In this section, we provide a high-level overview of our consolidated results of operations. Immediately following this section is a discussion of our results of operations by reportable segment.

Net Revenues

		Quarterly Period Ended March 31								Percentage Change
														Constant
(Dollars in millions)		2011				2010				As Reported				Currency
Revenues:
Capital sales		$	278.8			$	236.2				18.0				16.7
Rental revenues			123.3				120.9				2.0				1.8
Total Revenues		$	402.1			$	357.1				12.6				11.7

		Year To Date Period Ended March 31								Percentage Change
														Constant
(Dollars in millions)		2011				2010				As Reported				Currency
Revenues:
Capital sales		$	535.5			$	467.8				14.5				14.4
Rental revenues			240.8				244.6				(1.6	)			(1.3	)
Total Revenues		$	776.3			$	712.4				9.0				9.0

Capital sales increased for both the three- and six-month periods ended March 31, 2011 primarily as a result of North America Acute Care sales volume growth in several major product categories led by patient support systems (increased 39.2 and 31.2 percent), favorable product mix and second quarter volume growth in Europe. The first six months also benefited from volume increases in the Middle East and Latin America.

Rental revenues increased in the second quarter in all segments, led by growth in Europe from a recent bariatric product introduction and strong respiratory care revenues. Rental revenues declined for the first six months overall due to first quarter volume declines in our therapy rental business and our movable medical equipment fleet in each case associated with a weaker flu season than compared to fiscal 2010.

Gross Profit

		Quarterly Period Ended March 31								Year To Date Period Ended March 31
(Dollars in millions)		2011				2010				2011				2010
Gross Profit
Capital		$	127.8			$	101.8			$	244.9			$	202.9
Percent of Related Revenues			45.8	%			43.1	%			45.7	%			43.4	%
Rental			70.8			$	70.0				138.2			$	139.7
Percent of Related Revenues			57.4	%			57.9	%			57.4	%			57.1	%
Total Gross Profit		$	198.6			$	171.8			$	383.1			$	342.6
Percent of Related Revenues			49.4	%			48.1	%			49.3	%			48.1	%

Total gross profit increased 15.6 and 11.8 percent; and gross margin (as a percentage of revenues) increased by 130 and 120 basis points for the three- and six-month periods ended March 31, 2011.

Capital gross profit increased 25.5 and 20.7 percent and gross margin increased 270 and 230 basis points for the three- and six-month periods ended March 31, 2011. The gross margin increase for both periods was primarily due to improved geographic and product mix, as well as favorable material costs.

Rental gross profit and margins were relatively consistent for the three- and six-month periods ended March 31, 2011. Our second quarter in fiscal 2011 included a gain of $0.8 million recognized in connection with a vendor’s product recall.

Other

		Quarterly Period Ended March 31								Year To Date Period Ended March 31
(Dollars in millions)		2011				2010				2011				2010
Research and development expenses		$	16.2			$	14.4			$	31.0			$	29.3
Percent of Total Revenues			4.0	%			4.0	%			4.0	%			4.1	%
Selling and administrative expenses		$	130.5			$	120.8			$	250.5			$	242.4
Percent of Total Revenues			32.5	%			33.8	%			32.3	%			34.0	%
Special charges		$	2.6			$	5.0			$	2.6			$	5.0
Interest expense		$	(2.1	)		$	(2.2	)		$	(4.2	)		$	(4.3	)
Investment income		$	0.5			$	0.5			$	1.0			$	1.1
Other		$	0.2			$	(0.2	)		$	(0.3	)		$	(0.3	)

Research and development expenses increased 12.5 and 5.8 percent for the three- and six-month periods ended March 31, 2011 due to increased investment in the development of new products and remained consistent as a percentage of sales. Selling and administrative expenses grew during both periods, however, they improved as a percentage of sales by 130 and 170 basis points for the three- and six-month periods ended. The increase in expense for both periods was the result of increases in legal costs for litigation and patent related matters, costs associated with the upgrade of our information technology platform, investments in sales channels and higher variable compensation, including sales commissions. Our second quarter selling and administrative expenses also included approximately $3 million of costs related to community donations and severance that we do not expect to repeat.

During the second quarter of fiscal 2011, we recorded a special charge of $2.6 million related to our fiscal 2010 fourth quarter restructuring action for additional severance provided to affected employees of that action as well as a further write-down of assets held for sale. Our second quarter of fiscal 2010 included a charge of $5.0 million related to organizational changes that included the elimination of approximately 160 employee positions.

GAAP and Adjusted Earnings

		Quarterly Period Ended March 31, 2011												Quarterly Period Ended March 31, 2010
														Income Before
		Income Before				Income Tax								Income Taxes				Income Tax
(Dollars in millions except per share data)		Income Taxes				Expense				Diluted EPS*				and NCI				Expense				Diluted EPS*
GAAP Earnings		$	47.9			$	14.8			$	0.52			$	29.7			$	5.2			$	0.38
Adjustments:
Vendor product recall			(0.8	)			(0.3	)			(0.01	)			—				—				—
Special charges			2.6				1.0				0.03				5.0				1.7				0.05
Tax settlement			—				—								—				6.5				(0.10	)
Adjusted Earnings		$	49.7			$	15.5			$	0.54			$	34.7			$	13.4			$	0.33
		Year To Date Period Ended March 31, 2011												Year To Date Period Ended March 31, 2010
		Income Before												Income Before
		Income Taxes				Income Tax				Diluted				Income Taxes				Income Tax				Diluted
		and NCI				Expense				EPS*				and NCI				Expense				EPS*
GAAP Earnings		$	95.5			$	27.0			$	1.07			$	62.4			$	18.0			$	0.69
Adjustments:
Vendor product recall			(0.8	)			(0.3	)			(0.01	)			—				—				—
Special charges			2.6				1.0				0.03				5.0				1.7				0.05
Tax settlement			—				—								—				6.5				(0.10	)
Adjusted Earnings		$	97.3			$	27.7			$	1.08			$	67.4			$	26.2			$	0.64

*		May not add due to rounding.

The effective tax rate for the three- and six-month periods ended March 31, 2011 was 30.9 and 28.3 percent compared to 17.5 and 28.8 percent for the comparable periods in the prior year. The adjusted effective rate for the three- and six-month periods ended March 31, 2011 was 31.2 and 28.5 percent compared to 38.6 and 38.9 percent for the comparable periods in the prior year. The lower adjusted effective rate for both periods in fiscal 2011 benefited from increased earnings in lower-rate jurisdictions, including improved European income, some of which was not subject to tax as a result of the utilization of previously unrecognized operating loss carryforwards. We currently carry full valuation allowances on these loss carryforwards, thus the recognition of income and the release of valuation allowance results in no tax expense on the earnings. The adjusted effective tax rate for the six months ended March 31, 2011 also benefited from the first quarter recognition of period tax benefits of $2.2 million relating principally to the impact of the retroactive reinstatement of the research and development tax credit back to January 1, 2010.

The comparable prior year periods included a favorable period tax benefit in the second quarter of $6.5 million relating to the recognition of previously unrecognized tax benefits associated with the resolution of an income tax matter with the IRS. This amount was excluded from the adjusted effective tax rate for fiscal 2010.

Net income attributable to common shareholders was $33.1 million for the second quarter and $68.3 million for the first six months ended March 31, 2011. On an adjusted basis, net income attributable to common shareholders increased $13.2 and $28.6 million, representing increases of 62.9 and 70.1 percent for the three- and six-month periods ended. Diluted earnings per share increased 36.8 percent for the second quarter and 63.6 percent on an adjusted basis. For the first six months, diluted earnings per share increased 55.1 percent, or 68.8 percent as adjusted.

Business Segment Results of Operations

During the first quarter of fiscal 2011, we changed our segment reporting to reflect changes in our organizational structure and management’s view of the business. We moved our surgical reporting unit from the International and Surgical segment (now referred to as the International segment) to the North America Acute Care segment. In addition, manufacturing and research and development costs were further allocated to the segments such that all manufacturing and research and development costs are now included in divisional income. We have also assigned additional direct functional costs to the segments as well as an allocation of certain corporate functional expenses that can be attributed to the segments. The prior year segment information below has been updated to reflect these changes.

		Quarterly Period Ended March 31								Percentage Change
														Constant
(Dollars in millions)		2011				2010				As Reported				Currency
Revenues:
North America Acute Care		$	251.3			$	217.7				15.4				14.7
North America Post-Acute Care			52.2				51.1				2.2				2.2
International			98.6				88.3				11.7				9.9
Total revenues		$	402.1			$	357.1				12.6				11.7
Divisional income:
North America Acute Care		$	62.7			$	39.0				60.8
North America Post-Acute Care			10.1				11.0				(8.2	)
International			4.2				3.4				23.5
Corporate Expenses			(25.1	)			(16.8	)			(49.4	)
Total divisional income		$	51.9			$	36.6				41.8

		Year To Date Period Ended March 31								Percentage Change
														Constant
(Dollars in millions)		2011				2010				As Reported				Currency
Revenues:
North America Acute Care		$	469.4			$	423.3				10.9				10.4
North America Post-Acute Care			104.5				103.7				0.8				0.8
International			202.4				185.4				9.2				10.5
Total revenues		$	776.3			$	712.4				9.0				9.0
Divisional income:
North America Acute Care		$	107.3			$	76.4				40.4
North America Post-Acute Care			22.3				23.8				(6.3	)
International			14.7				4.0				267.5
Corporate Expenses			(42.7	)			(33.3	)			(28.2	)
Total divisional income		$	101.6			$	70.9				43.3