Hill-Rom (HRC) 10-Q 2010 Q3 Quarterly report

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

For the quarterly period endedJune 30, 2010

OR

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

For the transition period from ____ to ____

Commission File No. 1-6651

HILL-ROM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Indiana (State or other jurisdiction of incorporation or organization)	35-1160484 (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 or15(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.

Yesþ Noo

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).

Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerþ Accelerated filero Non-accelerated filero
(Do not check if smaller reporting company) Smaller reporting companyo

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

Yeso Noþ

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 — 63,493,840 shares as of July 21, 2010.

HILL-ROM HOLDINGS, INC.

INDEX TO FORM 10-Q

	Page
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements
Condensed Consolidated Statements of Income (Loss) (Unaudited) for the Quarterly and Year-to-Date Periods Ended 6/30/10 and 6/30/09		3
Condensed Consolidated Balance Sheets (Unaudited) at 6/30/10 and 9/30/09		4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Year-to-Date Periods Ended 6/30/10 and 6/30/09		5
Notes to Condensed Consolidated Financial Statements (Unaudited)		6-20
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		21-30
Item 3 — Quantitative and Qualitative Disclosures About Market Risks		31
Item 4 — Controls and Procedures		31
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings		32
Item 1A — Risk Factors		32
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 5 — Other Information		32
Item 6 — Exhibits		33
SIGNATURES		34
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

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PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Hill-Rom Holdings, Inc. and Subsidiaries

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

	Quarterly Period Ended						Year-To-Date Period Ended
	June 30,			June 30,			June 30,			June 30,
	2010			2009			2010			2009
Net Revenues
Capital sales	$	246.2		$	219.1		$	714.0		$	674.7
Rental revenues		114.4			115.6			359.0			348.9
Total revenues		360.6			334.7			1,073.0			1,023.6
Cost of Revenues
Cost of goods sold		132.5			134.6			397.4			414.3
Rental expenses		50.1			49.4			155.0			152.7
Total cost of revenues		182.6			184.0			552.4			567.0
Gross Profit		178.0			150.7			520.6			456.6
Research and development expenses		14.1			13.0			43.4			40.8
Selling and administrative expenses		116.2			113.7			358.6			343.5
Impairment of goodwill and other intangibles (Note 5)		—			3.8			—			473.8
Special charges (Note 10)		—			2.6			5.0			20.4
Operating Profit (Loss)		47.7			17.6			113.6			(421.9	)
Gain on sale of non-strategic assets (Note 4)		—			10.2			—			10.2
Interest expense		(2.1	)		(2.5	)		(6.4	)		(7.6	)
Investment income and other, net		0.7			1.8			1.5			3.4
Income (Loss) Before Income Taxes		46.3			27.1			108.7			(415.9	)
Income tax expense (Note 11)		15.5			6.9			33.5			15.5
Net Income (Loss)		30.8			20.2			75.2			(431.4	)
Less: Net income attributable to noncontrolling interest		0.2			—			0.6			—
Net Income (Loss) Attributable to Common Shareholders	$	30.6		$	20.2		$	74.6		$	(431.4	)
Net Income (Loss) Attributable to Common Shareholders per Common Share — Basic	$	0.48		$	0.32		$	1.19		$	(6.89	)
Net Income (Loss) Attributable to Common Shareholders per Common Share — Diluted	$	0.48		$	0.32		$	1.17		$	(6.89	)
Dividends per Common Share	$	0.1025		$	0.1025		$	0.3075		$	0.3075
Average Common Shares Outstanding — Basic (thousands) (Note 12)		63,193			62,583			62,889			62,573
Average Common Shares Outstanding — Diluted (thousands) (Note 12)		63,987			62,880			63,516			62,573

See Notes to Condensed Consolidated Financial Statements

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Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in millions)

	June 30,			September 30,
	2010			2009
Assets
Current Assets
Cash and cash equivalents	$	196.1		$	170.6
Short-term investments (Notes 1 and 8)		12.0			26.4
Trade accounts receivable, net of allowances (Note 2)		329.3			346.6
Inventories (Note 2)		106.7			92.0
Deferred income taxes (Notes 1 and 11)		50.1			46.0
Other current assets		26.2			13.5
Total current assets		720.4			695.1
Equipment leased to others, net (Note 2)		139.1			154.8
Property, net (Note 2)		110.2			117.6
Investments and investment securities (Notes 1 and 8)		12.3			17.2
Goodwill (Notes 3 and 5)		80.8			73.1
Software and other intangibles, net (Note 2)		136.6			141.9
Notes receivable, net of discounts		6.8			5.5
Other assets		27.0			27.4
Total Assets	$	1,233.2		$	1,232.6
Liabilities
Current Liabilities
Trade accounts payable	$	71.6		$	81.3
Short-term borrowings (Note 6)		55.8			102.2
Accrued compensation		85.8			72.7
Accrued product warranties (Note 14)		14.9			17.1
Accrued litigation (Note 16)		21.2			21.2
Other current liabilities		42.3			49.8
Total current liabilities		291.6			344.3
Long-term debt (Note 6)		98.7			99.7
Accrued pension and postretirement benefits (Note 7)		97.9			100.7
Deferred income taxes (Notes 1 and 11)		3.3			16.8
Other long-term liabilities		56.2			61.8
Total Liabilities		547.7			623.3
Noncontrolling interest (Note 3)		8.9			—
Commitments and contingencies (Note 16)
Shareholders’ Equity
Common stock (Note 2)		4.4			4.4
Additional paid-in-capital		118.7			119.0
Retained earnings		1,159.3			1,105.2
Accumulated other comprehensive loss (Note 9)		(72.9	)		(59.9	)
Treasury stock, at cost (Note 2)		(532.9	)		(559.4	)
Total Shareholders’ Equity		676.6			609.3
Total Liabilities, Noncontrolling Interest and Shareholders’ Equity	$	1,233.2		$	1,232.6

See Notes to Condensed Consolidated Financial Statements

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Hill-Rom Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in millions)

	Year-to-Date Period Ended
	June 30,			June 30,
	2010			2009
Operating Activities
Net income (loss)	$	75.2		$	(431.4	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization		73.7			75.3
Impairment of goodwill and other intangibles		—			473.8
Investment loss		0.2			0.1
Provision for deferred income taxes		(12.7	)		(1.6	)
Loss on disposal of property, equipment leased to others and intangible assets		2.0			2.5
Gain on sale of non-strategic assets		—			(10.2	)
Stock compensation		9.0			8.9
Tax settlements		(8.2	)		—
Change in working capital excluding cash, current investments, current debt and acquisitions:
Trade accounts receivable		19.2			91.2
Inventories		(14.4	)		10.8
Other current assets		(12.4	)		(6.2	)
Trade accounts payable		(11.4	)		(40.1	)
Accrued expenses and other liabilities		0.6			(21.0	)
Other, net		(9.6	)		15.8
Net cash provided by operating activities		111.2			167.9
Investing Activities
Capital expenditures and purchase of intangibles		(43.9	)		(46.8	)
Proceeds on sales of property and equipment leased to others		1.6			2.0
Investment in/acquisitions of businesses, net of cash acquired		(7.1	)		(187.2	)
Proceeds from sale of non-strategic assets		—			11.9
Proceeds on investment sales/maturities		19.2			1.6
Net cash used in investing activities		(30.2	)		(218.5	)
Financing Activities
Change in short-term debt		(1.4	)		1.5
Payment on revolver		(45.0	)		—
Payment of long-term debt, net of proceeds from settlement of interest rate swaps		—			(25.7	)
Payment of cash dividends		(19.4	)		(19.2	)
Proceeds on exercise of options		15.1			—
Proceeds from stock issuance		1.9			0.6
Treasury stock acquired		(2.3	)		(0.6	)
Net cash used in financing activities		(51.1	)		(43.4	)
Effect of exchange rate changes on cash		(4.4	)		0.6
Total Cash Flows		25.5			(93.4	)
Cash and Cash Equivalents:
At beginning of period		170.6			221.7
At end of period	$	196.1		$	128.3

See Notes to Condensed Consolidated Financial Statements

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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

The unaudited, Condensed Consolidated Financial Statements appearing in this Quarterly Report on Form 10-Q (“Form 10-Q”) should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended September 30, 2009 (“2009 Form 10-K”) as filed with the U.S. Securities and Exchange Commission (“SEC”). Unless the context otherwise requires, the terms “Hill-Rom,” “the Company,” “we,” “our” and “us” refer to Hill-Rom Holdings, Inc. and its majority-owned subsidiaries. The September 30, 2009 Consolidated Balance Sheet data 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 (“U.S.”). In the opinion of management, the Condensed Consolidated Financial Statements herein include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position, results of operations, and cash flows for the interim periods presented. Quarterly results are not necessarily indicative of annual results.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. All subsidiaries are wholly-owned with the exception of the 60 percent owned joint venture acquired during the first quarter of fiscal 2010 and discussed in 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 reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Examples of such estimates include our accounts receivable reserves (Note 2), investments (Note 8), income taxes (Note 11), accrued warranties (Note 14) and accrued litigation and self insurance reserves (Note 16), among others.

Investment Securities

At June 30, 2010, investment securities consisted primarily of AAA rated student loan auction rate securities (“ARS”). These securities are generally insured through the U.S. government’s Federal Family Education Loan Program, to the extent the borrowers meet certain prescribed criteria in their underlying lending practices. During the first quarter of fiscal 2009, we entered into an enforceable, non-transferable right (the “Put”) with UBS Financial Services (“UBS”), which allows the Company to put all or part of the ARS held with UBS at par value anytime during the period of June 30, 2010 through July 2, 2012. During the quarter ended June 30, 2010, UBS redeemed $14.1 million of our ARS plus interest. On June 30, 2010, we successfully exercised our rights under this Put for all remaining ARS held with UBS and received cash proceeds of $12.0 million including accrued interest on July 1, 2010.

At June 30, 2010, the $12.0 million of our ARS not subject to the Put continued to be 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

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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, 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 other comprehensive income.

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 the Company and its 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

The Company and its 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 account for uncertain income tax positions using a threshold and measurement attribute for the financial statements 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 recently issued accounting standards included in Note 1 of Notes to Consolidated Financial Statements in our 2009 Form 10-K and our assessment of those standards’ impact, except as noted below:

On October 1, 2009, we adopted the Financial Accounting Standard Board’s (“FASB”) authoritative guidance related to business combinations, noncontrolling interests in consolidated financial statements and assets acquired and liabilities assumed in a business combination that arise from contingencies. Our adoption of this guidance is prospective and applies to business combinations that occurred on or after October 1, 2009. See Note 3 for application of this standard to the joint venture entered into during our first quarter.

On October 1, 2009, we adopted the FASB’s authoritative guidance related to the determination of the useful life of intangible assets. Our adoption of this guidance is prospective and did not have a material impact on our consolidated financial statements or the joint venture discussed in Note 3.

On October 1, 2009, we early adopted the FASB’s authoritative guidance for arrangements with multiple deliverables and arrangements that include software elements. Our adoption of this guidance is prospective and did not have a material impact on our consolidated financial statements.

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2. Supplementary Balance Sheet Information

The following information pertains to assets and consolidated shareholders’ equity.

	June 30,		September 30,
	2010		2009
Allowance for possible losses and discounts on trade receivables	$	29.3	$	27.5
Inventories:
Finished products	$	61.7	$	57.4
Raw materials and work in process		45.0		34.6
Total inventory	$	106.7	$	92.0
Accumulated depreciation of equipment leased to others and property	$	557.4	$	548.8
Accumulated amortization of intangible assets	$	128.0	$	111.5
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		63,488,819		62,667,562
Treasury shares		16,835,093		17,656,350

3. Acquisitions

Encompass

On November 9, 2009, the Company entered into a joint venture with Encompass Group, LLC (“Encompass Group”), a leader in health care textiles and therapeutic and prevention surfaces, to form Encompass TSS, LLC (“Encompass”). This joint venture includes contributed former assets of Encompass Therapeutic Support Systems (“ETSS”), a division of Encompass Group and is 60 percent owned by Hill-Rom and 40 percent owned by Encompass Group. Encompass Group, through its ETSS business unit, traditionally focused on providing surface replacement systems. For our 60 percent ownership interest in Encompass we paid $7.2 million to Encompass Group, contributed cash and entered into license and distribution agreements with Encompass.

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The following summarizes the fair value of the assets acquired and liabilities assumed at the date of formation.

Goodwill	$	7.7
Trade Name		1.5
Customer relationships		7.7
Technology		2.4
Net liabilities assumed		(0.7	)
Noncontrolling interest		(7.5	)
Additional paid-in-capital		(3.9	)
Total purchase price	$	7.2

The calculation of fair value of the assets and liabilities is preliminary and subject to adjustment based on working capital adjustments.

The joint venture agreements contain both a put option for Encompass Group and a call option for the Company, requiring or allowing Hill-Rom to purchase the remaining 40 percent interest, which are based on predetermined earnings multiples. Changes to the value of the put are accreted to noncontrolling interest in our Condensed Consolidated Balance Sheet with the offset being recorded as a component of retained earnings.

The goodwill of $7.7 million arising from the joint venture consists largely of the synergies created from combining ETSS’s focus on customer replacement surfaces with our platform brands. The goodwill is deductible for tax purposes and will be allocated entirely to our North America Acute Care segment.

The useful lives assigned to intangibles identified as part of the joint venture are as follows:

	Useful Life
Trade name		7
Customer relationships		7
Technology		5

If the Encompass joint venture had been consummated at the beginning of our 2009 fiscal year, 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.

Liko

On October 1, 2008, the Company acquired two affiliated companies: Liko Vårdlyft AB (“Liko Sweden”) and Liko North America Corporation (“Liko North America” and, together with Liko Sweden, “Liko”). The purchase price for Liko was $190.4 million, including direct acquisition costs of $3.6 million and the payment of outstanding Liko debt of $9.8 million ($187.2 million net of cash acquired). The purchase price remains subject to adjustment based on finalization of working capital and net debt adjustment provisions contained in the purchase agreements. Any such adjustment is expected to be favorable and not material and would be recorded in our Consolidated Statement of Income (Loss) as a reduction of the goodwill impairment charge that we recorded during fiscal 2009.

4. Sale of Non-Strategic Assets

In June 2009, we completed the sale of patents and intellectual property related to our Negative Pressure Wound Therapy technology for which there were no capitalized costs reflected on our consolidated balance sheet. In May 2009, we finalized a strategic development agreement with Teletracking Technologies, Inc. (“TeleTracking”) that resulted in the purchase by TeleTracking of

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certain assets and obligations related to the NaviCare^® Patient Flow product line. These combined transactions resulted in a gain of $10.2 million, net of related transaction costs.

5. Impairment of Goodwill and Other Intangibles

The Company tests goodwill and other intangible assets for impairment on an annual basis during its third fiscal quarter, or more often if events or circumstances indicate there may be impairment. The assessment during the third quarter of 2010 and 2009 indicated that there was no impairment with respect to goodwill or other recorded intangible assets.

During the second quarter of fiscal 2009, as a result of the decline in our market capitalization related to the overall macro-economic climate and its resulting unfavorable impact on hospital capital spending and our operating results, the Company determined it was required to perform an interim impairment test with respect to goodwill and certain other intangibles outside of its normal third fiscal quarter test period.

The impairment test initially performed in the second quarter of fiscal 2009 resulted in an impairment of goodwill and other intangibles in each of the Company’s three reportable segments in the following amounts: North America Acute Care $292.0 million, North America Post-Acute Care $62.0 million and International and Surgical $116.0 million, which represented a full impairment of goodwill in the applicable North America Acute Care and International and Surgical reporting units. During the third quarter of fiscal 2009, the Company refined its impairment assessment and recorded an additional charge of $3.8 million related to North America Post-Acute Care segment.

6. Financing Agreements

Total debt consists of the following:

	June 30,		September 30,
	2010		2009
Outstanding finance credit lines	$	10.8	$	12.2
Revolving credit facility		45.0		90.0
Unsecured 8.50% debentures due on December 1, 2011		48.6		49.3
Unsecured 7.00% debentures due on February 15, 2024		19.7		19.8
Unsecured 6.75% debentures due on December 15, 2027		29.8		29.8
Other		0.6		0.8
Total debt		154.5		201.9
Less current portion of debt		55.8		102.2
Total long-term debt	$	98.7	$	99.7

We have trade finance credit lines and uncommitted letter of credit facilities. These lines are associated with the normal course of business and are not currently, nor have they historically, been of material size to the overall business.

Unsecured debentures outstanding at June 30, 2010 have fixed rates of interest. We have deferred gains included in the amounts above from the termination of previous interest rate swap agreements, and those deferred gains amounted to $2.3 million at June 30, 2010 and $3.1 million at September 30, 2009. 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.

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The Company has a $500.0 million five-year senior revolving credit facility. The term of the five-year facility 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 specified therein, 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 the Company 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 June 30, 2010, we had outstanding borrowings of $45.0 million and undrawn letters of credit of $6.2 million under the five-year facility, leaving $448.8 million of borrowing capacity. During the first quarter of fiscal 2010, we made a payment of $45.0 million on our credit facility to reduce a portion of the short-term debt originally borrowed in conjunction with the Liko acquisition.

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 $111.2 and $95.7 million at June 30, 2010 and September 30, 2009.

7. Retirement and Postretirement Plans

The Company sponsors five defined benefit pension plans. Those plans include a master defined benefit retirement plan, a nonqualified supplemental executive defined benefit retirement plan, two defined benefit retirement plans covering employees in Germany and France and a frozen defined benefit retirement plan related to our fiscal 2004 acquisition of Mediq, Inc. Benefits for such plans are based primarily on years of service and the employee’s level of compensation during specific periods of employment. We generally contribute funds to trusts as necessary to provide for current service and for any unfunded projected future benefit obligation over a reasonable period of time. All of our plans have a September 30 measurement date. The Company also sponsors 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.

As discussed in Note 10, the Company announced a restructuring plan during its second quarter of fiscal 2009. The restructuring resulted in a curtailment and remeasurement of both the master defined benefit plan and postretirement health care plan. The plan curtailment and special termination benefits related to the postretirement health care plan were $1.4 million. The impact of the remeasurement in the master defined benefit plan is included within the following table of the components of net pension expense for our defined benefit plans.

	Quarterly Period Ended						Year-To-Date Period Ended
	June 30,			June 30,			June 30,			June 30,
	2010			2009			2010			2009
Service cost	$	1.3		$	1.0		$	3.8		$	3.0
Interest cost		3.3			3.4			9.9			10.0
Expected return on plan assets		(3.2	)		(3.1	)		(9.8	)		(9.8	)
Amortization of unrecognized prior service cost, net		0.1			0.1			0.4			0.4
Amortization of net loss		0.7			—			2.0			—
Net periodic benefit cost		2.2			1.4			6.3			3.6
Curtailment loss		—			—			—			1.5
Special termination benefits		—			—			—			1.3
Net pension expense	$	2.2		$	1.4		$	6.3		$	6.4

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8. Fair Value of Financial Assets and Liabilities

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 the Company’s 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 the Company’s own data.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis included in its Condensed Consolidated Balance Sheets, as of June 30, 2010:

			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	$	196.1	$	196.1	$	—	$	—
Trading marketable securities		12.0		12.0		—		—
Available-for-sale marketable securities		12.0		—		—		12.0
Other investments		0.4		—		0.1		0.3
Total assets at fair value	$	220.5	$	208.1	$	0.1	$	12.3

The trading marketable securities identified in the above table relate to ARS held with UBS that have been marked to actual liquidation value as of June 30 (see Note 1) and have been moved from Level 3 classification to Level 1. The available-for-sale marketable securities consist primarily of AAA rated student loan ARS. While we continue to earn interest on the ARS, these investments are not currently being bought and sold in an active market and therefore do not have readily determinable market values. At June 30, 2010, the Company’s 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.

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The following table presents the activity related to our ARS and the Put (see Note 1) during the year-to-date period ended June 30, 2010.

	ARS
	Available-												(Gain)/
	For-Sale			Trading			Put			AOCL			Loss
Balance at October 1, 2009	$	16.7		$	24.9		$	1.5		$	1.2		$	—
Change in fair value		0.1			1.5			(0.3	)		—			(1.6	)
Sales or redemptions		(4.8	)		(14.4	)		(1.2	)		(0.2	)		1.8
Balance at June 30, 2010	$	12.0		$	12.0		$	—		$	1.0		$	0.2

9. Comprehensive Income

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

The composition of comprehensive income (loss) is as follows:

	Quarterly Period Ended						Year-To-Date Period Ended
	June 30,			June 30,			June 30,			June 30,
	2010			2009			2010			2009
Net income (loss)	$	30.8		$	20.2		$	75.2		$	(431.4	)
Net gain (loss) on available-for-sale securities and other investments		—			(0.7	)		0.3			(0.1	)
Foreign currency translation adjustment, net-of-tax		(9.0	)		5.3			(13.2	)		(21.5	)
Items not yet recognized as a component of net periodic pension or postretirement benefit cost, net-of-tax		—			(0.1	)		(0.1	)		(17.0	)
Total comprehensive income (loss)		21.8			24.7			62.2			(470.0	)
Comprehensive income attributable to the noncontrolling interest		(0.2	)		—			(0.6	)		—
Total comprehensive income (loss) attributable to common shareholders	$	21.6		$	24.7		$	61.6		$	(470.0	)

10. Special Charges

During the second quarter of fiscal 2010, we announced organizational changes consistent with our on-going efforts to improve our cost structure and business processes. These changes included the elimination of approximately 160 employees. The result was a special charge of $5.0 million primarily related to severance and other benefits provided to affected employees. The majority of the cash expenditures associated with the severance will be completed by the end of our 2010 fiscal year.

During the second quarter of fiscal 2009, we announced a plan to manage our cost structure through consolidation of certain manufacturing and selected back office operations, redeployment of U.S. sales and service resources to increase our customer presence and support; a further reduction in non-sales, non-research and development discretionary spending; a voluntary early retirement program and involuntary job eliminations to reflect lower capital equipment demand and productivity improvements.

The 2009 plan impacted approximately 450 salaried, hourly and temporary employees, or 7 percent of our U.S. based workforce and resulted in a cumulative charge over the second and third quarters of $11.9 million related to severance and early retirement packages. Additionally,

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postretirement health care costs and the waiver of an early retirement pension penalty offered in conjunction with the voluntary early retirement incentive and the associated special termination and curtailment charges resulted in additional charges of $4.2 million. Asset impairments, the discontinued use of a building under an operating lease and other charges of approximately $4.3 million were also recorded in conjunction with these actions. The charge related to severance and early retirement packages resulted in cash expenditures that will primarily be paid by the end of fiscal 2010. Cash expenditures for the lease will be paid over the remaining lease period.

Activity related to these actions during fiscal 2010 was as follows:

	Beginning									Ending
	Balance									Balance
	October 1,				Cash					June 30,
	2009		Expenses		Payments			Reversals		2010
Fiscal Year 2010
Q2 Action — Restructuring	$	—	$	5.0	$	(1.9	)	$	—	$	3.1
Fiscal Year 2009
Q2 Action — Restructuring	$	4.5	$	—	$	(3.8	)	$	—	$	0.7

The above table excludes the impact of asset impairments related to assets held for sale and the impact of these actions on our pension and postretirement health care plans.

11. Income Taxes

The tax rates for the three- and nine-month periods ended June 30, 2010 are 33.5 and 30.8 percent compared to 25.5 and negative 3.7 percent for the comparable periods in the prior year. The effective tax rates for the three and nine months ended June 30, 2009 are unusual in light of the significance of the non-cash intangible impairment charge and the lack of deductibility of this charge for income tax purposes. The tax rates for all periods were also impacted by certain discrete tax items.

The rate for the three months ended June 30, 2010 was favorably impacted by the recognition of discrete period tax benefits of $1.4 million relating primarily to the recognition of previously unrecognized tax benefits associated with the resolution of an income tax matter with the Internal Revenue Service (“IRS”) during the quarter. This compares to $3.9 million of discrete period benefits recognized in the same period of fiscal 2009 related primarily to the release of valuation allowance on capital loss carryforwards and the deferred tax benefit associated with the intangible impairment charge.

Through the first nine months of our fiscal 2010 we have recorded $6.6 million of discrete tax benefits related primarily to the resolution of income tax matters with the IRS. This compares to the first nine months of fiscal 2009 when we recorded $5.1 million of discrete tax benefits related primarily to the “catch-up” for the retroactive reinstatement of the research and development tax credit and the third quarter discrete items mentioned above.

Primarily as a result of the resolution of income tax matters with the IRS, the total amount of gross unrecognized tax benefits has decreased from September 30, 2009. As of June 30, 2010 the total amount of gross unrecognized tax benefits was $27.5 million, which includes $8.5 million that, if recognized, would impact the effective tax rate in future periods. The remaining amount relates to items which, if recognized would not impact our effective tax rate.

It is reasonably possible that the Company will resolve other on-going audit issues with the IRS, state, local or foreign jurisdictions in the next twelve months. The resolution of these matters, in combination with the expiration of certain statutes of limitation in other jurisdictions, make it reasonably possible that our unrecognized tax benefits may decrease as a result of either payment or recognition by approximately $8 to $12 million in the next twelve months, excluding interest.

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12. 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 2.6 and 4.0 million for the quarterly and year-to-date periods ended June 30, 2010, and 6.3 and 5.9 million for the comparable periods of fiscal year 2009. Cumulative treasury stock acquired, less cumulative shares reissued, have been excluded in determining the average number of shares outstanding. For the year-to-date period ended June 30, 2009, as a result of our net loss and to avoid dilution of the net loss, our basic and diluted earnings per share were identical.

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

	Quarterly Period Ended				Year-to-Date Period Ended
	June 30,		June 30,		June 30,		June 30,
	2010		2009		2010		2009
Net income (loss) attributable to common shareholders	$	30.6	$	20.2	$	74.6	$	(431.4	)
Average shares outstanding — Basic		63,193		62,583		62,889		62,573
Add potential effect of exercise of stock options and other unvested equity awards		794		297		627		—
Average shares outstanding — Diluted		63,987		62,880		63,516		62,573
Net income (loss) attributable to common shareholders per common share — Basic	$	0.48	$	0.32	$	1.19	$	(6.89	)
Net income (loss) attributable to common shareholders per common share — Diluted	$	0.48	$	0.32	$	1.17	$	(6.89	)

13. Stock Based Compensation

The stock based compensation cost that was charged against income, net of tax, for all plans was $1.1 and $5.7 million for the quarterly and year-to-date periods ended June 30, 2010 and $2.2 and $5.6 million for the comparable periods of fiscal year 2009.

14. 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.

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

	Quarterly Period Ended						Year-To-Date Period Ended
	June 30,			June 30,			June 30,			June 30,
	2010			2009			2010			2009
Balance at beginning of period	$	15.2		$	19.1		$	17.1		$	16.9
Provision for warranties during the period		3.3			4.8			10.5			10.0
Effect of acquisition		—			(0.7	)		—			5.8
Warranty claims during the period		(3.6	)		(4.9	)		(12.7	)		(14.4	)
Balance at end of period	$	14.9		$	18.3		$	14.9		$	18.3

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 would not materially impact 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. For those representations and warranties that survive closing, they generally survive for periods up to five years or the expiration of the applicable statutes of limitations. Potential losses under the indemnifications are generally limited to a portion of the original transaction price, or to other lesser specific dollar amounts for select provisions. 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.

15. Segment Reporting

We disclose segment information that is consistent with the way in which management operates and views the Company. Our operating structure contains the following reporting segments:

• North America Acute Care

• North America Post-Acute Care

• International and Surgical

The Company’s performance under each reportable segment is measured on a divisional income basis before special items. Sales between the segments, while not significant, are generally accounted for at current market value or cost plus markup. Divisional income generally represents the division’s standard gross profit less its direct operating costs, excluding functional costs, along with an allocation of fixed manufacturing overhead, research and development, and distribution costs.

Functional costs include costs such as administration, finance, information technology, legal, human resource costs, along with unallocated manufacturing variances and research and development costs. Eliminations represent the elimination of inter-segment sales. Functional costs and eliminations, while not considered segments, are presented separately to aid in the reconciliation of segment information to consolidated financial information.

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	Quarterly Period Ended						Year-To-Date Period Ended
	June 30,			June 30,			June 30,			June 30,
	2010			2009			2010			2009
Revenues:
North America Acute Care	$	205.0		$	189.1		$	609.6		$	581.2
North America Post-Acute Care		49.9			50.3			153.6			149.6
International and Surgical		107.0			95.7			314.6			295.4
Total eliminations		(1.3	)		(0.4	)		(4.8	)		(2.6	)
Total revenues	$	360.6		$	334.7		$	1,073.0		$	1,023.6
Divisional income:
North America Acute Care	$	59.4		$	44.6		$	167.0		$	136.0
North America Post-Acute Care		13.7			15.2			45.3			43.6
International and Surgical		20.3			13.4			47.5			41.2
Functional costs		(45.7	)		(49.2	)		(141.2	)		(148.5	)
Total divisional income		47.7			24.0			118.6			72.3
Impairment of goodwill and other intangibles		—			(3.8	)		—			(473.8	)
Special charges		—			(2.6	)		(5.0	)		(20.4	)
Operating profit (loss)		47.7			17.6			113.6			(421.9	)
Gain on sale of non-strategic assets		—			10.2			—			10.2
Interest expense		(2.1	)		(2.5	)		(6.4	)		(7.6	)
Investment income and other, net		0.7			1.8			1.5			3.4
Income (loss) before income taxes	$	46.3		$	27.1		$	108.7		$	(415.9	)

16. Commitments and Contingencies

Batesville Casket Antitrust Litigation

In 2005 the Funeral Consumers Alliance, Inc. (“FCA”) 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 the Company and its former subsidiary, Batesville Casket Company, Inc. (“Batesville”) (now wholly-owned by Hillenbrand, Inc., an unaffiliated company), and three national funeral home businesses (the “FCA Action”). 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. See Note 3 in our 2009 Form 10-K for more information regarding the judgment sharing agreement.

The FCA plaintiffs sought certification of a class including all United States consumers who purchased Batesville caskets from any of the funeral home co-defendants at any time during the longest period permitted by the applicable statute of limitations. A similar purported antitrust class action lawsuit was later filed by Pioneer Valley Casket Co. and several so-called “independent casket distributors” on behalf of casket sellers who were unaffiliated with any licensed funeral home (the “Pioneer Valley Action”). On March 26, 2009, the District Judge denied class certification in both cases. On April 9, 2009, the plaintiffs in the FCA case filed a petition with the United States Court of Appeals for the Fifth Circuit for leave to file an appeal of the Court’s order denying class certification. On June 19, 2009 a three-judge panel of the Fifth Circuit denied the FCA plaintiffs’ petition. The FCA plaintiffs filed a request for reconsideration of the denial of their petition and on July 29, 2009, a three judge panel of the Fifth Circuit denied the FCA plaintiffs’ motion for reconsideration and their alternative motion for leave to file a petition for rehearing by all of the judges sitting on the Fifth Circuit Court of Appeals.

The Pioneer Valley plaintiffs did not appeal the District Court’s order denying class certification, and on April 29, 2009, pursuant to a stipulation among the parties, the District Court dismissed the Pioneer Valley Action with prejudice (that is, Pioneer Valley cannot appeal or otherwise reinstate the case). Neither the Company nor Batesville provided any payment of consideration

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for the plaintiffs to dismiss this case, other than agreeing to bear their own costs, rather than pursuing plaintiffs for costs.

Plaintiffs in the FCA Action have generally sought monetary damages on behalf of a class, trebling of any such damages that may be awarded, recovery of attorneys’ fees and costs, and injunctive relief. Plaintiffs in the FCA Action filed a report indicating that they were 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.

Because Batesville continues to adhere to its long-standing policy of selling Batesville^® caskets only to licensed funeral homes, a policy that it continues to believe is appropriate and lawful, if a class were ultimately certified and the case was to go to trial, plaintiffs are likely to claim additional alleged damages for the period between their report and the time of trial. At this point, it is not possible to estimate the amount of any additional alleged damage claims that they might make. We and Batesville will vigorously contest both liability and plaintiffs’ damages theories.

Despite the July 29, 2009 ruling denying class certification, the FCA plaintiffs have indicated that they intend to pursue their individual injunctive and damages claims. Their individual damages claims are limited to the alleged overcharges on the plaintiffs’ individual casket purchases (the complaint currently alleges a total of ten casket purchases by the individual plaintiffs), which would be trebled, plus reasonable attorneys fees and costs. The District Court issued an order stating that no summary judgment motions would be entertained. The trial of the FCA plaintiffs’ remaining individual claims may begin as early as late summer 2010. In June 2010, co-defendant Stewart Industries settled with the plaintiffs for an amount that may effectively extinguish any of the plaintiffs’ claims for damages against the remaining defendants. The plaintiffs indicate that they intend to proceed with the case to seek attorneys’ fees and injunctive relief. The remaining defendants intend to vigorously oppose this effort based on the plaintiffs’ lack of damages and because the plaintiffs lack standing to seek injunctive relief against any remaining defendants, particularly Hill-Rom, who is not in the casket industry.

After the district court renders a final judgment as to the individual claims, the FCA plaintiffs may file an appeal, which could include an appeal of the District Court’s order denying class certification. If they succeeded in reversing the district court order denying class certification and a class is certified in the FCA Action filed against Hill-Rom and Batesville and if the plaintiffs prevail at a trial of the class action, 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. In antitrust actions such as the FCA Action the plaintiffs may elect to enforce any judgment against any or all of the co-defendants, who have no statutory contribution rights against each other.

Related Civil Investigative Demands

After the FCA Action was filed, in the summer and fall of 2005, we and Batesville were served with Civil Investigative Demands by the Attorney General of Maryland and certain other state attorneys general who had begun an investigation of possible anticompetitive practices in the death care industry relating to a range of funeral services and products, including caskets. We fully cooperated with the attorneys general. We have been informed by the Maryland and Florida Attorneys General offices, which were leading this investigation, that the investigation has been concluded. No claims were filed against us or Batesville as a result of this investigation. The Maryland Attorney General reserved the right to re-open the investigation and to take any further action in the future as the public interest may require.

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. The investigation was described as focusing on “claims for payment for certain durable medical equipment, including specialized

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support beds.” On September 18, 2008, we were informed by the United States Attorney’s Office that the investigation was precipitated by the filing in 2005 of a qui tam “whistleblower” complaint. A qui tam action is a civil lawsuit brought by an individual on behalf of the government under the False Claims Act. 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. This particular complaint was filed in the United States District Court for the Eastern District of Tennessee. Although the complaint has been only partially unsealed at this point, we know that the plaintiffs seek recovery of unspecified 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. At this point, the government has not yet reached an intervention decision and is continuing its investigation. We have not yet been formally served in this case, nor has the entire complaint been unsealed. 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. We are continuing to cooperate with the government’s investigation.

Freedom Medical Antitrust Litigation

On October 19, 2009, Freedom Medical, Inc. filed a complaint alleging federal antitrust claims and claims under Texas antitrust and common law against the Company, another supplier and two group purchasing organizations (“GPOs”) under the caption Freedom Medical, Inc. v. Hill-Rom Company, Inc. et al (Civil Action No. 5:09cv152, United States District Court, Eastern District of Texas). Freedom Medical alleges that the GPOs’ contracts with the Company and the other supplier excluded Freedom Medical from the biomedical equipment rental market and maintained the Company’s market share in violation of state and federal antitrust laws. Freedom Medical, in fact, has a contract with one of the GPOs. Since the filing of the complaint, Freedom Medical has dismissed that GPO as a defendant, pursuant to a settlement agreement. 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. We cannot give any assurances that this matter will not have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

Antitrust Settlement

In fiscal 2005, we entered into a definitive, court approved agreement with Spartanburg Regional Healthcare Systems and its attorneys to settle a purported antitrust class action lawsuit. The settlement resolved all of the claims of class members that did not opt out of the settlement, including the claims of all United States and Canadian purchasers or renters of Hill-Rom^® products from 1990 through February 2, 2006 related to or arising out of the subject matter of the lawsuit, and the claims that may have resulted from the current or future effects of conduct or events occurring through February 2, 2006. The original settlement amount of $337.5 million was reduced by almost $21.2 million, to $316.3 million, reflecting the portion attributable to customers who opted out of the settlement. Opt-outs from the settlement account for roughly six percent of the total United States and Canadian revenue during the class period, and over 99 percent of that figure is attributable to the United States government’s decision to opt out of the settlement. We believe we have meritorious defenses against any claims the United States government may choose to make, due to, among other reasons, pricing practices of government purchases that are different than the pricing practices primarily at issue in the lawsuit.

In connection with our assessment that it was probable that a settlement would be reached and finally approved by the Court during fiscal 2006, we recorded a litigation charge and established a litigation accrual in the amount of $358.6 million in the fourth quarter of fiscal 2005, which included certain legal and other costs associated with the proposed settlement. The Court entered the Order and Final Judgment in the third quarter of fiscal 2006, and we paid a total

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$316.3 million of the settlement amounts into escrow during that year. As of June 30, 2010 we have retained a $21.2 million litigation accrual associated with the opt-outs.

General

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

We are also involved in other 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.

17. Subsequent Events

We have performed an evaluation of subsequent events and concluded there were no subsequent events that required recognition or disclosure in these condensed consolidated financial statements.

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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 (“Form 10-Q”) contain forward-looking statements within the meaning 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. We caution readers that any such forward-looking statements are based on assumptions that we believe are reasonable, but are subject to a wide range of risks.

It is important to note that 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. There are a number of factors — many of which are beyond our control — that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. For a more in depth discussion of the factors that could cause actual results to differ from those contained in forward-looking statements, see the discussions under the heading “Risk Factors” in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 (“2009 Form 10-K”) as filed with the United States Securities and Exchange Commission (“SEC”), as well as the discussions in this “Management’s Discussion and Analysis”. We assume no obligation to update or revise any forward-looking statements. Readers should also refer to the various disclosures made by us in our periodic reports on Form 8-K filed with the SEC.

Overview

The following discussion and analysis should be read in conjunction with the accompanying interim financial statements and our 2009 Form 10-K.

Hill-Rom Holdings, Inc. (the “Company,” “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.

In March 2010, the U.S. Congress adopted and President Obama signed into law comprehensive health care reform legislation. The new law is expected to increase health coverage, which could translate into increased utilization and associated use of our products and services. However, these bills impose a 2.3 percent excise tax on medical devices beginning January 2013. The impact of the tax, coupled with reform-associated payment reductions to Medicare and Medicaid reimbursement could have a materially adverse affect on our business, results of operations and cash flows. For additional information regarding health care reform see Part II Item 1A. Risk Factors.

For a detailed discussion of industry trends, strategy and other factors impacting our businesses, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Industry Trends, Strategy and Other Factors Impacting Hill-Rom’s Business” in our 2009 Form 10-K.

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Use of Non-GAAP Financial Measures

These 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 income 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, the Company analyzes 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 the non-GAAP measures used 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.

Consolidated Revenues

	Quarterly Period Ended				Percentage Change
	June 30,		June 30,					Constant
(Dollars in millions)	2010		2009		Reported			Currency
Revenues:
Capital sales	$	246.2	$	219.1		12.4			13.2
Rental revenues		114.4		115.6		(1.0	)		(0.9	)
Total Revenues	$	360.6	$	334.7		7.7			8.3

	Year-To-Date Period Ended				Percentage Change
	June 30,		June 30,				Constant
	2010		2009		Reported		Currency
Revenues:
Capital sales	$	714.0	$	674.7		5.8		3.9
Rental revenues		359.0		348.9		2.9		2.1
Total Revenues	$	1,073.0	$	1,023.6		4.8		3.3

Capital sales increased for the three- and nine-month periods ended June 30, 2010 as a result of North America Acute Care sales volume increases in patient support systems. Capital sales also increased for the three- and nine-month periods due to strong growth in Europe during the third quarter and continued growth in Asia and the Middle East and Africa. These increases were offset during both the three- and nine-month periods by our divestiture of certain non-strategic health information technology product lines in the prior year. Our pricing was also modestly favorable for the nine-month period.

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Rental revenues declined slightly for the third quarter due to a North America Post-Acute Care third party payor refund and a decline in International rental revenues, partially offset by increases in North America Acute Care therapy rentals.

The increase in rental revenues for the first nine months was mainly due to North America Acute Care growth in therapy rental revenue due to continued growth of our Envision^® wound surface and VersaCare^® P500 wound surface.

Consolidated Gross Profit

	Quarterly Period Ended						Year-To-Date Period Ended
	June 30,			June 30,			June 30,			June 30,
(Dollars in millions)	2010			2009			2010			2009
Gross Profit
Capital sales	$	113.7		$	84.5		$	316.6		$	260.4
% of Related Revenues		46.2	%		38.6	%		44.3	%		38.6	%
Rental revenues		64.3		$	66.2			204.0		$	196.2
% of Related Revenues		56.2	%		57.3	%		56.8	%		56.2	%
Total Gross Profit	$	178.0		$	150.7		$	520.6		$	456.6
% of Related Revenues		49.4	%		45.0	%		48.5	%		44.6	%

Consolidated gross profit increased 18.1 and 14.0 percent for the three- and nine-month periods ending June 30, 2010, and increased as percentages of revenues 440 and 390 basis points for the same periods.

• Capital sales gross profit increased 34.6 and 21.6 percent for the three- and nine-month periods ended June 30, 2010. Gross margin (as a percentage of revenues) for capital sales increased 760 and 570 basis points for the same periods. The gross margin increases for both periods were primarily due to an improved mix towards higher margin products, favorable material costs and several productivity initiatives which began in fiscal 2009. In addition, the prior year included a third quarter charge of $4.5 million for performance issues associated with a discontinued product and non-recurring charges of $2.9 million related to the acquisition accounting step-up of acquired Liko inventories sold during the nine-month period ended June 30, 2009.

• Rental revenue gross profit decreased 2.9 and increased 4.0 percent for the three- and nine-month periods ended June 30, 2010. Gross margin (as a percentage of revenues) for rental revenues decreased 110 basis points and increased 60 basis points for the same periods. The decline in gross margins for the quarter and increase for the year are due mainly to product mix while the nine-month period also benefited from strong leverage and cost improvements within our field service network.

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Other

	Quarterly Period Ended						Year-To-Date Period Ended
	June 30,			June 30,			June 30,			June 30,
(Dollars in millions)	2010			2009			2010			2009
Research and development expenses	$	14.1		$	13.0		$	43.4		$	40.8
Percent of Total Revenues		3.9	%		3.9	%		4.0	%		4.0	%
Selling and administrative expenses	$	116.2		$	113.7		$	358.6		$	343.5
Percent of Total Revenues		32.2	%		34.0	%		33.4	%		33.5	%
Impairment of goodwill and other intangibles	$	—		$	3.8		$	—		$	473.8
Special charges	$	—		$	2.6		$	5.0		$	20.4
Gain on sale of non-strategic assets	$	—		$	(10.2	)	$	—		$	(10.2	)
Interest expense	$	(2.1	)	$	(2.5	)	$	(6.4	)	$	(7.6	)
Investment income	$	0.6		$	0.5		$	1.7		$	2.1
Other	$	0.1		$	1.3		$	(0.2	)	$	1.3

Research and development expense increased 8.5 and 6.4 percent for the three- and nine-months ended June 30, 2010. The increase in both periods was due to increased investment in the development of innovative new products. Selling and administrative expenses increased 2.2 and 4.4 percent for the three- and nine-month periods ended June 30, 2010. The increase during the three- and nine-month periods relate primarily to performance-based compensation expense. The nine-month period also included the unfavorable impact of foreign exchange rates of $4.9 million. These increases were partially offset by savings from prior period restructuring actions and our continuous improvement activities.

During our second quarter of 2009, we recorded a $470 million impairment of goodwill and other intangibles as a result of the decline in our market capitalization related to the overall macro-economic climate and the resulting unfavorable impact on hospital capital spending and our operating results. In addition, during the third quarter of fiscal 2009, we refined our impairment assessment and recorded an additional charge of $3.8 million. The significance of the charge was reflective of the significant value in our unrecorded intangible assets such as the Hill-Rom trade name, technology and know-how and customer lists which reduced the implied value of our goodwill and increased the magnitude of the impairment charge. For further information regarding the charge, refer to Note 5 to the Condensed Consolidated Financial Statements.

During the second quarter of 2010 and both the second and third quarter of 2009 we recorded special charges related to organizational changes and cost management initiatives. These actions are discussed in Note 10 to the Condensed Consolidated Financial Statements.

During the third quarter of 2009 we completed two separate sales of non-strategic assets that resulted in a gain of $10.2 million, net of transaction related costs. See Note 4 to the Condensed Consolidated Financial Statements for more information.

The decline in interest expense for both the three-and nine-month periods ended June 30, 2010, resulted from lower interest rates and lower outstanding debt during both periods. Investment income decreased for the first nine months, despite a larger cash balance period over period, due to lower interest rates.

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GAAP and Adjusted Earnings

	Quarterly Period Ended
	June 30, 2010							June 30, 2009
	Income							Income
	Before		Income					Before			Income
	Income		Tax		Diluted			Income			Tax			Diluted
(Dollars in millions except per share data)	Taxes		Expense		EPS*			Taxes			Expense			EPS*
GAAP Earnings	$	46.3	$	15.5	$	0.48		$	27.1		$	6.9		$	0.32
Adjustments:
Gain on sale of non-strategic assets		—		1.7		(0.03	)		(10.2	)		(2.0	)		(0.13	)
Impairment of goodwill and other intangibles		—		—		—			3.8			2.2			0.03
Acquisition integration charges		—		—		—			0.6			0.2			0.01
Special charges		—		—		—			2.6			1.0			0.03
Adjusted Earnings	$	46.3	$	17.2	$	0.45		$	23.9		$	8.3		$	0.25

	Year-To-Date Period Ended
	June 30, 2010							June 30, 2009
	Income							Loss
	Before		Income					Before			Income
	Income		Tax		Diluted			Income			Tax			Diluted
	Taxes		Expense		EPS*			Taxes			Expense			EPS*
GAAP Earnings (Loss)	$	108.7	$	33.5	$	1.17		$	(415.9	)	$	15.5		$	(6.89	)
Adjustments:
Tax settlement		—		6.5		(0.10	)		—			—			—
Gain on sale of non-strategic assets		—		1.7		(0.03	)		(10.2	)		(2.0	)		(0.13	)
Special charges		5.0		1.7		0.05			20.4			7.6			0.20
Impairment of goodwill and other intangibles		—		—		—			473.8			2.2			7.54
Effect of Liko inventory valuation		—		—		—			2.9			0.8			0.03
Acquisition integration charges		—		—		—			1.7			0.6			0.02
Adjusted Earnings	$	113.7	$	43.4	$	1.10		$	72.7		$	24.7		$	0.77

* May not add due to rounding.

The tax rates through the three and nine month periods ended June 30, 2010 are 33.5 and 30.8 percent compared to 25.5 and negative 3.7 percent for the comparable periods in the prior year. The effective rates for both the third quarter of 2010 and 2009 were favorably impacted by the discrete tax benefits associated with the sale of non-strategic assets and utilization of previously unrecognized capital loss carry forwards. The nine month effective tax rate for 2010 was also favorably impacted by the recognition of previously unrecognized tax benefits associated with the resolution of an income tax matter with the Internal Revenue Service (“IRS”) during the second quarter of $6.5 million. The effective tax rate for the three- and more notably nine-month periods ended June 30, 2009 were impacted by the significant non-cash intangible impairment charge and the lack of deductibility of this charge for income tax purposes.

The adjusted effective tax rates were 38.2 and 34.0 percent for the nine-month periods ending June 30, 2010 and 2009. The higher rate in 2010 is due primarily to the research and development tax credit and the timing of its expiration in 2010 and its reinstatement in 2009. For fiscal 2009, we entered the year with no allowable credit, but its reinstatement in the first quarter required a retroactive “catch up” of previously unrecognized credits. For fiscal 2010, the credit expired at the end of our first quarter.

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Net income attributable to common shareholders was $30.6 million for the third quarter and $74.6 million for the first nine months ended June 30, 2010. On an adjusted basis, net income attributable to common shareholders increased $13.3 and $21.6 million, representing increases of 85.3 and 45.0 percent, for the three- and nine-month periods ended June 30, 2010. Diluted earnings per share increased 50.0 percent for the third quarter and 80.0 percent on an adjusted basis. For the first nine months, diluted earnings per share increased 42.9 percent on an adjusted basis.

Business Segment Results of Operations

	Quarterly Period Ended						Percentage Change
	June 30,			June 30,						Constant
(Dollars in millions)	2010			2009			% Change			Currency
Revenues:
North America Acute Care	$	205.0		$	189.1			8.4			7.8
North America Post-Acute Care		49.9			50.3			(0.8	)		(0.8	)
International and Surgical		107.0			95.7			11.8			15.4
Total eliminations		(1.3	)		(0.4	)
Total revenues	$	360.6		$	334.7			7.7			8.3
Divisional income:
North America Acute Care	$	59.4		$	44.6			33.2
North America Post-Acute Care		13.7			15.2			(9.9	)
International and Surgical		20.3			13.4			51.5
Functional costs		(45.7	)		(49.2	)		(7.1	)
Total divisional income	$	47.7		$	24.0			98.8

	Year-To-Date Period Ended						Percentage Change
	June 30,			June 30,						Constant
	2010			2009			% Change			Currency
Revenues:
North America Acute Care	$	609.6		$	581.2			4.9			4.1
North America Post-Acute Care		153.6			149.6			2.7			2.7
International and Surgical		314.6			295.4			6.5			2.9
Total eliminations		(4.8	)		(2.6	)
Total revenues	$	1,073.0		$	1,023.6			4.8			3.3
Divisional income:
North America Acute Care	$	167.0		$	136.0			22.8
North America Post-Acute Care		45.3			43.6			3.9
International and Surgical		47.5			41.2			15.3
Functional costs		(141.2	)		(148.5	)		(4.9	)
Total divisional income	$	118.6		$	72.3			64.0

North America Acute Care

North America Acute Care capital sales increased 11.6 and 5.4 percent for the three-and nine-month periods ended June 30, 2010. For the third quarter this increase was due mainly to higher volumes in our patient support systems. The first nine months were also impacted by modestly favorable pricing. Partially offsetting these increases in revenue was the divestiture of certain non-strategic health information technology product lines, which generated revenues of $2.5 and $11.0 million for the three- and nine-month periods ended June 30, 2009. Rental revenues increased by 1.9 and 3.8 percent for the three- and nine-month periods ended June 30, 2010. Rental revenues for both periods reflected higher therapy rental revenues from continued

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growth of our Envision^® wound surface and our new VersaCare^® P500 wound care surface launched in the second quarter of fiscal 2009. In addition to these increases, the nine-month period was also impacted by volume increases in rentals of moveable medical equipment due to a stronger flu season in fiscal 2010 and an increase in bariatric frame rentals.

North America Acute Care divisional income increased primarily due to increases in total gross profit for both periods. The increases in total gross profit were driven by the increase in revenue and margin improvements from an improved mix towards higher margin products, favorable material costs and several productivity initiatives in fiscal 2009 and 2010. In addition, the prior year third quarter included a charge of $4.5 million related to performance issues associated with a discontinued product and the prior year nine-month period included the acquisition accounting step-up of acquired Liko inventories sold. Selling and administrative costs remained relatively flat during the third quarter and for the nine-month period as increases in performance based compensation and administrative costs related to the joint venture with Encompass have been offset by cost improvement initiatives, including previously announced headcount actions.

North America Post-Acute Care

North America Post-Acute Care capital sales increased by 5.5 and 7.3 percent, related to volume growth in both periods of The Vest^® respiratory care system and home care direct to consumer business, offset by a decline in our sales within the extended care environment partially due to the exit of the MedGas product line during 2009. Rental revenues decreased by 2.5 and increased 1.4 percent for the three-and nine-month periods ended June 30, 2010. The decrease in rental revenue during the third quarter is primarily related to a third party payor refund relating to prior years. Offsetting this refund in both periods were increased extended care rentals while the nine-month period was also impacted by strong first quarter rentals of The Vest^® system.

The decline in the third quarter North America Post-Acute Care divisional income was due primarily to the third party payor refund mentioned above. The increase for the nine-month period was driven by increased revenue and gross margin improvements, partially offset by increased operating expenses. The improved gross margin is the result of favorable product mix, improved field service costs and the exit of the MedGas product line during 2009. The increased operating expense is related to an increase in selling efforts and investments in new product development.

International and Surgical

International and Surgical capital sales increased 15.3 and 7.1 percent for the three-and nine-month periods ended June 30, 2010. For the same periods, capital sales increased 18.8 and 3.6 percent on a constant currency basis. On a constant currency basis, the increase for the three- and nine month periods were driven by strong growth in Europe during the third quarter and continued growth in Asia, the Middle East and Africa and our surgical business. The growth in Europe during the third quarter partially offset volume declines experienced during the first half of our fiscal year. Rental revenues decreased 9.6 and increased 2.8 percent for the three- and nine-month periods ended June 30, 2010. On a constant currency basis, rental revenues decreased 5.1 and 1.5 percent for the three- and nine-month periods. The third quarter rental revenue decline was due to a rationalization of unprofitable business and other volume decreases in Europe.

International and Surgical divisional income for the three- and nine-month periods ended June 30, 2010, were up for both periods due to increases in gross profit partially offset by increases in operating expenses. The increases in gross profit for both periods were the result of both revenue increases and margin improvements. Operating expenses increased for the three- and nine-month periods ended June 30, 2010 related to increased selling and marketing efforts to support our long-term growth strategies. In addition, the increase in the first nine months of the fiscal year was also impacted $4.0 million due to the unfavorable impact of exchange rates on costs.

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Liquidity and Capital Resources

	Year-To-Date Period Ended
	June 30,			June 30,
(Dollars in millions)	2010			2009
Cash Flows Provided By (Used In):
Operating activities	$	111.2		$	167.9
Investing activities		(30.2	)		(218.5	)
Financing activities		(51.1	)		(43.4	)
Effect of exchange rate changes on cash		(4.4	)		0.6
Increase/(Decrease) in Cash and Cash Equivalents	$	25.5		$	(93.4	)

Operating Activities

Operating cash flows during the first nine months were driven primarily by net income of $75.2 million, further adjusted by $73.7 million in non-cash expenses related to depreciation and amortization. These sources of cash were offset by changes in our working capital primarily driven by the timing of payments for income taxes including an $8.5 million payment related to the settlement of an outstanding tax matter with the IRS in the second quarter, higher inventory levels in connection with increased volume and the payout of our incentive compensation and restructuring accruals related to our 2009 fiscal year.

The reduction in operating cash flows for the first nine months of fiscal 2010 in comparison to fiscal 2009 was largely driven by the higher collection of year-end receivables in 2009 following record sales levels during the fourth quarter in fiscal 2008, current year investments in inventories to support higher revenue trends and the timing of tax payments related to both higher income levels in 2010 and settlements of prior year tax audits. These decreases were only partially offset by the increase in net income.

Investing Activities

Use of investing cash flows during the first nine months of 2010 was driven primarily by capital expenditures and our investment in the previously discussed joint venture with Encompass Group, offset by proceeds from the sale of a portion of our auction rate securities. The decrease in net cash used in investing activities was driven by our fiscal 2009 purchase of Liko for $187.2 million, offset by proceeds from the sale of non-strategic assets of $11.9 million and a slight decline in capital spending.

Financing Activities

Cash used for financing activities during fiscal 2010 consisted mainly of our $45.0 million payment on our revolving credit facility during the first quarter and dividend payments offset by cash proceeds from option exercises. The increase over 2009 was due to higher debt repayments offset by the cash provided from option exercises.

Other Liquidity Matters

Net cash flows from operating activities and selected borrowings have represented our primary sources of funds for growth of the business, including capital expenditures and acquisitions.

As of June 30, 2010, we held investment securities with a fair value of $24.3 million, which consisted primarily of AAA rated student loan auction rate securities (“ARS”). The market for ARS, of which a key characteristic had historically been a high degree of liquidity, began to experience auction failures in fiscal 2008 as the supply of securities exceeded demand. As a result, our ARS portfolio experienced auction failures and a lower level of liquidity. During the first quarter of fiscal 2009, we entered into a settlement agreement requiring UBS Financial

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Services (“UBS”) to repurchase all of our securities held at UBS at par value (“Put”). On June 30, 2010, we successfully exercised our rights under this Put for all remaining ARS held with UBS and received cash proceeds of $12.0 million, including accrued interest, on July 1, 2010.

We have estimated the current fair value of our ARS portfolio based upon guidance provided by our investment advisors, including consideration of the credit quality of the underlying securities and the provisions of the respective security agreements, and the actual liquidation value of the securities held at UBS upon exercise of our Put. At June 30, 2010, we have recorded to date both temporary unrealized losses and realized losses totaling $1.0 million on these securities to reflect the estimated decline in fair value associated with the current illiquidity in the auction rate market. See Notes 1 and 8 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q for more information pertaining to these securities and the fair value of our portfolio. If current market conditions do not improve or worsen the result could be further realized or unrealized losses or impairments and liquidity and earnings could be adversely affected.

We have a $500.0 million five-year senior revolving credit facility. The syndication group consists of 11 financial institutions, which we believe reduces our exposure to any one institution and should leave us with significant borrowing capacity in the event that any one of the institutions within the group is unable to comply with the terms of our agreement. As of June 30, 2010, we had outstanding borrowings of $45.0 and $6.2 million of outstanding, undrawn letters of credit under the facility, leaving $448.8 million of borrowing capacity available. See Note 6 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q for more details on the credit facility.

We also have trade finance credit lines and uncommitted letter of credit facilities. These lines are associated with the normal course of business and do not currently, nor have they historically, been of a material size to the overall business.

We have $95.8 million of senior notes outstanding at various fixed interest rates as of June 30, 2010, which are classified as long-term in the Condensed Consolidated Balance Sheets.

Our financing agreements contain no restrictive provisions or conditions relating to dividend payments, working capital or additional unsecured indebtedness (except to the extent that a dividend payment or incurrence of additional unsecured indebtedness would result in a default under our financing agreements), but there are limitations with respect to secured indebtedness. Our debt agreements also contain no credit rating triggers. Credit rating changes can, however, impact the cost of borrowings under our financing agreements. Additionally, we have restrictive covenants within the Distribution Agreement with Hillenbrand, Inc. This agreement has certain limitations on indebtedness, dividends and share repurchases, and acquisitions. See Note 3 of Notes to Consolidated Financial Statements in our 2009 Form 10-K for more details on the Distribution Agreement.

Our pension plans invest in a variety of equity and debt securities, including securities that were adversely affected by the disruption in the credit and capital markets. At September 30, 2009, our latest measurement date, our pension plans were underfunded by approximately $93 million. Given the recent performance of our plan assets, we expect increased contributions to fund the plan over the next several years. Our minimum funding requirement for 2010 is less than $10.0 million and we are currently assessing several incremental funding alternatives up to $50.0 million for 2010. Future contributions will also be impacted based on these decisions.

As previously disclosed, we intend to continue to pay quarterly cash dividends comparable to those paid following the completion of the spin-off of the funeral services business. However, the declaration and payment of dividends by us will be subject to the sole discretion of our Board of Directors and will depend upon many factors, including financial condition, earnings, capital requirements, covenants associated with debt obligations, legal requirements and other factors deemed relevant by the Board of Directors.

We intend to continue to pursue selective acquisition candidates in certain areas of our business, but the timing, size or success of any acquisition effort and the related potential capital

29

commitments cannot be predicted. We expect to fund future acquisitions primarily with cash on hand, cash flow from operations and borrowings, within our set limits. The Distribution Agreement executed in conjunction with our spin-off of the funeral services business contains certain restrictions with respect to additional indebtedness we may take on to make acquisitions. We do not anticipate, however, such restrictions will limit our ability to execute our current growth strategy.

As of June 30, 2010, we had Board of Directors’ approval to repurchase 3.0 million additional shares of our common stock. We have not repurchased any shares of our common stock in the open market in recent years. However, we intend to repurchase up to one million shares of our common stock over the remainder of the fiscal year. Repurchased shares are used for general business purposes.

We believe that cash on hand and generated from operations, along with amounts available under our credit facility, will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations. However, disruption and volatility in the credit markets could impede our access to capital. If we need additional sources of capital, whether as a result of reduced cash generated by operations, unavailability of borrowings under our credit facility, adverse results in litigation matters or increased cash requirements to fund acquisitions or pension obligations, such sources of capital may not be available to us on acceptable terms, if at all.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations and Contingent Liabilities and Commitments

There have not been any significant changes since September 30, 2009 impacting our contractual obligations and contingent liabilities and commitments.

Critical Accounting Policies

Our accounting policies require management to make significant estimates and assumptions using information available at the time the estimates are made. Such estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenues and expenses. If future experience differs materially from these estimates and assumptions, our results of operations and financial condition could be affected. A detailed description of our accounting policies is included in Note 1 of Notes to Consolidated Financial Statements and the Critical Accounting Policies Section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2009 Form 10-K. There have been no material changes to such policies since September 30, 2009.

For a further summary of certain accounting policies and estimates and recently issued accounting pronouncements applicable to us, see Note 1 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are exposed to various market risks, including fluctuations in interest rates, credit availability and the current economic downturn, liquidity issues with respect to auction rate securities, collection risk associated with our accounts and notes receivable portfolio and variability in currency exchange rates. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.

We are subject to variability in foreign currency exchange rates in our international operations. Exposure to this variability is periodically managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the local currency. We, from time-to-time, enter into currency exchange agreements to manage our exposure arising from fluctuating exchange rates related to specific and forecasted transactions. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currencies.

Our currency risk consists primarily of foreign currency denominated firm commitments and forecasted foreign currency denominated intercompany and third-party transactions. At June 30, 2010, the notional amount of open foreign exchange contracts was $10 million. The maximum length of time over which the Company is hedging transaction exposures is 15 months. Derivative gains/(losses), initially reported as a component of Accumulated Other Comprehensive Loss, are reclassified to earnings in the period when the forecasted transaction affects earnings.

For additional information on market risks related to our auction rate securities, debt instruments and pension plan assets, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2009 Form 10-K and Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q.

Item 4. CONTROLS AND PROCEDURES

Our management, with the participation of our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer (the “Certifying Officers”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report for the information required to be disclosed in the reports we file or submit under the Exchange Act to be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

See Note 16 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information concerning lawsuits and legal proceedings.

Item 1A. RISK FACTORS

In March 2010, the U.S. Congress adopted and President Obama signed into law comprehensive health care reform legislation through the passage of the Patient Protection and Affordable Health Care Act (H.R. 3590) and the Health Care and Education Reconciliation Act (H.R. 4872). The new law is expected to increase the number of Americans with health insurance coverage by approximately 32 million through individual/employer mandates and subsidies offered to lower income individuals with smaller employers. The majority of the expected increase in the number of insured is expected to occur after 2014, as the insurance exchanges open and Medicaid eligibility is broadened. The increase in coverage could translate into increased utilization and associated use of our products and services. However, among other initiatives, these bills impose a 2.3 percent excise tax on medical devices beginning January 2013. We cannot predict with certainty what healthcare initiatives, if any, will be implemented at the state level, or what the ultimate effect of federal health care reform or any future legislation or regulation will have on us. However, the impact of the tax, coupled with reform-associated payment reductions to Medicare and Medicaid reimbursement could have a materially adverse affect on our business, results of operations and cash flows. For additional information regarding health care reform as well as the other risks we face, see the discussion under “Item 1A. Risk Factors” in our 2009 Form 10-K.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

					Total Number of		Maximum
					Shares		Number of
					Purchased as		Shares that
	Total				Part of Publicly		May Yet Be
	Number				Announced		Purchased
	of Shares		Average Price		Plans or		Under Plans or
Period	Purchased 1		Paid per Share		Programs 2		Programs
April 1, 2010 – April 30, 2010		46,891	$	28.01		—		3,000,000
May 1, 2010 – May 31, 2010		—		—		—		3,000,000
June 1, 2010 – June 30, 2010		655	$	28.35		—		3,000,000
Total		47,546	$	28.01		—		3,000,000

1	All shares purchased in the three months ended June 30, 2010 were in connection with employee payroll tax withholding for restricted and deferred stock distributions.
2	The Board of Directors has approved the repurchase of a total of 25.7 million shares of common stock, of which 3.0 million are still available for repurchase. There were no purchases under this approval in the three months ended June 30, 2010. The approval has no expiration, and there were no terminations or expirations of plans in the current quarter.

Item 5. OTHER INFORMATION

Effective August 2, 2010, Perry Stuckey will be elected Senior Vice President and Chief Human Resources Officer of the Company, and, therefore, effective on that date, John H. Dickey, the Company’s Senior Vice President, Human Resources, will no longer serve in that position and will no longer be an executive officer of the Company.

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Item 6. EXHIBITS

A. Exhibits

Exhibit 10.1	Separation and Release Agreement between Hill-Rom Holdings, Inc. and Gregory J. Tucholski dated April 23, 2010
Exhibit 10.2	Employment Agreement between Hill-Rom Holdings, Inc. and Alejandro Infante-Saracho dated May 6, 2010 (Incorporated herein by reference to Exhibit 10.5 filed with Form 10-Q for the quarter ended March 31, 2010)
Exhibit 10.3	Limited Recapture Agreement between Hill-Rom Holdings, Inc. and Alejandro Infante-Saracho dated May 6, 2010 (Incorporated herein by reference to Exhibit 10.6 filed with Form 10-Q for the quarter ended March 31, 2010)
Exhibit 10.4	Employment Agreement between Hill-Rom Holdings, Inc. and Susan R. Lichtenstein dated May 10, 2010 (Incorporated herein by reference to Exhibit 10.7 filed with Form 10-Q for the quarter ended March 31, 2010)
Exhibit 10.5	Limited Recapture Agreement between Hill-Rom Holdings, Inc. and Susan R. Lichtenstein dated May 10, 2010 (Incorporated herein by reference to Exhibit 10.8 filed with Form 10-Q for the quarter ended March 31, 2010)
Exhibit 10.6	Employment Agreement between Hill-Rom Holdings, Inc. and Philip D. Settimi dated May 6, 2010 (Incorporated herein by reference to Exhibit 10.9 filed with Form 10-Q for the quarter ended March 31, 2010)
Exhibit 10.7	Limited Recapture Agreement between Hill-Rom Holdings, Inc. and Philip D. Settimi dated May 6, 2010 (Incorporated herein by reference to Exhibit 10.10 filed with Form 10-Q for the quarter ended March 31, 2010)
Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*	XBRL Extension Labels Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Furnished with this Form 10-Q

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SIGNATURES

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

	HILL-ROM HOLDINGS, INC.
DATE: July 29, 2010	BY:	/S/ Gregory N. Miller
		Gregory N. Miller
		Senior Vice President and Chief Financial Officer
DATE: July 29, 2010	BY:	/S/ Richard G. Keller
		Richard G. Keller
		Vice President, Controller and Chief Accounting Officer

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