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Executives

John Greisch - President and CEO

Mark Guinan - Chief Financial Officer

Blair A. Reith - Vice President of Investor Relations

Analysts

Brian Kennedy – Wells Fargo

Lawrence Keusch - Morgan Keegan

Matt Miksic - Piper Jaffray

Greg Soffer - Goldman Sachs

Lennox Ketner – Bank of America

Presentation

Hill-Rom Holdings, (HRC) F3Q 2011 Earnings Conference Call July 28, 2011 8:00 AM ET

Operator

(Operator Instructions) Now I'd like to turn the call over to Mr. Andy Reith, Vice President of Investor Relations. Please go ahead.

Blair A. Reith

Thank you, Operator, good morning and thanks for joining us for our third quarter fiscal 2011 earnings call. Before we begin I'd like to provide our usual caution that this morning's call may contain forward-looking statements such as forecasts of business performance and company results as well as expectations about the company's plans and future initiatives. Actual results may differ materially from those projected. For an in-depth discussion of risk factors that could cause actual results to differ from those contained in forward-looking statements made on today's call please see the risk factors in our annual report on form 10K and subsequent quarterly reports on forms 10Q. We plan to file our 10Q for the third quarter later this week. Joining me on the call today will be John Greisch, President and CEO of Hill-Rom and Mark Guinan, Hill-Rom's Senior Vice President and Chief Financial Officer. The usual ground rules will apply to make the call more efficient. We have scheduled and hour in order to accommodate our prepared remarks and leave plenty of time for Q&A. During Q&A please limit your inquiries to one question plus a follow- up per person. If you have additional questions you may rejoin the queue. As you listen to our remarks we are also displaying slides that amplify our disclosure. I would encourage you to follow along with us. The slides were posted last night on our website and will also be part of the archives and I'll turn the call over to John.

John Greisch

Thanks, Andy, good morning everybody and thanks for joining us today. As you saw in our press release the third quarter was one of mixed results for the company. We are pleased with our overall results this quarter where we delivered mid-single digit constant currency revenue growth. Earnings growth over a particularly strong third quarter last year and strong growth and operating cash flow however, following a very strong first half of the year we encountered some head wins this quarter particularly in our international operations. As many of you know the third quarter tends to be our seasonally weakest quarter of the year and this year is no exception. Consistent with the trends of the past several quarters we saw continued strength with double digit growth in our North American Acute Care and Respiratory Care Businesses.

We also saw a decline in several of our international markets specifically Europe which represents about 70% of our international revenue. Despite weaker results internationally, a slightly lower growth margins for the quarter over all, we delivered strong results even after taking into account the 23% increase in R&D spending for the quarter. And we delivered a 31% increase in operating cash flow. Our outlook for the full year calls for approximately 7% constant currency revenue growth and a 28% to 31% percent increase in adjusted earnings per share along with strong cash flow performance. Mark will cover all of this in more detail shortly.

We also reported and after tax charge of $30 million for the potential settlements of a matter with the United States Government involving the period between 1999 and 2007. This matter relates to the companies interpretation to certain reimbursement regulations. We've been working with the Office of Inspector General for Health and Human Services for some time and we have recently reached an agreement in principal on the financial terms of a settlement which prompted us to vote the charge. A settlement however remains contingent on the final negotiation of an acceptable corporate integrity agreement.

Looking at the quarter overall, while we were please with the strong results, we continue to experience in North America Acute Care, we have seen declines in our international operations as the macro challenges in Europe are impacting our results more than we have seen in the past. We remain cautious with respect to our international outlook in the near term, particularly in Europe. We also experienced a decline in our operating margin this quarter due to a number of factors which Mark will cover in more detail in his comments. We’re committed to the long-term goals we articulated at our investor conference in May and as seen in our full-year outlook, we expect to deliver on all of our key initiatives for 2011 despite an increasingly challenging external environment in several of our key markets.

Turning to specific highlights for the quarter, we grew overall revenue 7% or 4% in constant currency. This is driven primarily by 11% growth in our North America Acute Care business along with a solid contribution from our Respiratory Care business which achieved high teens revenue growth during the quarter. Highlights in our North America Acute Care business for the quarter include the following: 16% growth in capital sales, a 21% growth in patient support systems sales bringing year-to-date growth in this product category to 27%, a year over year increase in capital orders for the seventh quarter in a row, and over 20% increases in order backlog relative to last year. This is the second highest level since we became a stand-alone public company, the highest being last quarter.

Despite tougher comparables as we move into the second half of the year, we’re very pleased at the ongoing performance of North America Acute Care. Our international business experienced sales declines on both the reported and constant currency basis. Despite the macro economic challenges, Europe had been doing reasonably well for us over the past several quarters, while at the same time orders in the rest of the world were lagging behind the unusually strong second half of 2010; however, in the third quarter of 2011 our business in Europe has weakened. We believe the weakness is due, in part, to increasingly challenging economic conditions contributing to our overall international third quarter sales performance. We anticipate a decline in fourth quarter international revenues as a result of strong 2010 comparables and weaker third quarter rates.

Our North America Post-Acute business achieved growth of 3% for the quarter, the highest growth we have seen in this business thus far in 2011. As I previously noted, our Respiratory Care business posted strong high teens growth partially offset by declines in the Extended Care and Homecare businesses. The strength in our Respiratory business has been driven by the introduction of new products and new approved indications. Our Extended Care and Homecare businesses continue to face competitive and reimbursement pressures and we experienced modest revenue declines in the third quarter as expected.

Let me review a few other key highlights for the quarter before I turn the call over to Mark. First, we continue to launch new products to strength our portfolio. Our Architectural Products business launched a basis head long system this quarter. This new system can be used in either ICU or general care Med-Surg settings. It delivers clean aesthetics, functionality, and ease of use and installation. Second, Alton Shader joined us as Senior Vice President and President of our North America Post-Acute Care business.

Before joining Hill Rom Alton was general manager of the U.S. Renal business at Baxter. Previously he held several domestic and internationally based senior positions at Baxter and several other organizations including Bain & Company. I’m very pleased to have someone of Alton’s caliber and experience join the team.

So, overall, despite the economic head winds the third quarter was solid. We’re pleased at the continued strength of our North American Acute Care capital business and leading indicators point to continuing growth in that business. Our focus on operational improvements across the company continues to yield strong results as we generated $82 million of operating cash flow. Our financial guidance, which Mark will detail in a moment, reflects strong improvement for the full year in all our deep focus areas. With that, let me turn the call over to Mark before I make some closing remarks and open the call to Q&A. Mark?

Mark Guinan

Thank you John and good morning to everyone on the call before we get started I want to highlight that all amounts we will discuss today and the amounts included in the slides are presented on a cap-adjusted basis to remove the items that are not representative of our ongoing business. Reconciliations to our U.S. gap numbers are included in the Appendix to our slide data. Now let’s get started with revenue. On a consolidated basis, reported revenue increased 6.7% or 3.9% on a constant currency basis to $385 million led by our North America Acute Care segment. Our capital sales increased 8.5% to $267 million or 5.2% on a constant currency basis. This was driven by a 16.1% improvement in North America Acute Care led by 20.8% growth from our patient support systems platform. This strength was partially offset by a 13.7% coins and currency decline in our international segment.

Our European capital business declined 17.7% as a result top prior-year comparable and the weakened economic conditions in Europe. This was particularly acute in Spain where our business was down significantly versus Q3 of 2010. Another factor in our year over year international revenue performance was the prior year’s comparable figure from the Middle East where we had unusually strong shipments during 2010 for both the third and fourth quarters based on a number of large, one-time orders.

Consolidated rental revenue increased by2.8% to $118 million on the strength of Respiratory Care and international segment rentals. Domestic revenue increased 8.9% to $275 million while revenues outside the United States increased 1.6% to $110 million on favorable foreign exchange rates. On a constant currency basis revenues outside the United States decreased 7.7%. Looking at revenue by segment, North America Acute Care increased 11.3% to $239 million led by significant growth in both our Med-Surg and ICU products. Orders continued to be strong as we experienced our seventh consecutive quarter with year over year increases. Backlog is up over 20% versus a year ago and we are encouraged over the positive trend in our North America capital business. North America Acute rental revenue was essentially flat year over year and in line with expectations as we continue to experience pressure on our rental revenue as hospitals seek to reduce daily operating costs. We expect this pressure to continue.

Moving to our North America Post-Acute Care business revenue improved just over 3% to $52 million as double digit growth and Respiratory Care was partially offset by declines in both our Extended Care and Homecare businesses. This growth is in line with the modest top line improvements we forecasted for the North America Post-Acute business during our last call. International revenue declined 1.8% to $94 million or 11.5% in constant currency.

Our business in Europe, the Middle East and Asia experience year over year declines while Latin America experienced strong growth. In the second quarter we express caution with respect to our international markets and this caution was warranted as the European region continues to come under pressure. In the rest of the world, order patterns are now relatively stable after a strong second half of last year. We continue to be cautiously optimistic regarding our international business, but the timing of any improvements is uncertain at this time as concerns over austerity measures continue to influence spending in Europe.

Moving to margins we slipped a bit from recent trends, but still posted solid adjusted gross margin performance at 48.6%, which represents an 80 basis point decline year over year. Specifically our capital sales gross margin declined 60 basis points to 45.6% accompanied by a rental margin decline of 80 basis points to 55.4%. Capital margins were down despite higher volumes and favorable geographic mix. As these favorable trends were more than offset by unfavorable product mix and the effects of higher commodity and fuel prices. We said last quarter that we expected inflationary pressures to increase in the second half of the fiscal year and we are beginning to see that come to fruition. We believe the margin decline in our rental business related to the effort by hospitals to reduce operating costs, which is putting pressure on our ability to further leverage field-service costs, which is especially true in this seasonal slow-down from the peak rental revenues generally realized in our second fiscal quarter.

Regarding operating expenses, our R&D investments for the quarter increased 22.7% year over year and 6.8% sequentially increasing to 4.5% of sales. As we have previously discussed we expect to continue to increase investments in R&D over time. ST&A expenses for the quarter increased by 7.2% year over year to just under $125 million, but were nearly flat as a percentage of revenue at 32.4%. Sequentially operating expenses were down from the prior quarter nearly $6 million or 4.5%. As you may recall, last quarter included approximately three million of severance and community donation costs that we did not expect to repeat. The year over year increases were primarily the result of legal costs for litigation and patent related matters, the unfavorable effect of foreign exchange rates, costs associated with the upgrade of our information technology platform, as well as increases in sales and marketing expenses. Adjusted operating profit for the quarter was $45 million representing an 11.7% operating margin down 150 basis points versus last year’s comparable results as noted previously, a drop in gross margin combined with increased investment in R&D were the drivers. The adjusted tax rate for the quarter was 31.5% compared to 37.1% in the third quarter of the prior year. Favorable items that impacted our effective tax rate in the quarter are consistent with those cited last call including benefits from the reinstatement of the R&D credit along with increased earnings in lower tax rate jurisdictions. Summarizing the income statement adjustment earnings per diluted shared were 44cents in the third quarter representing a 4% increase compared to 45 cents in the prior year.

One final comment on operating results before I move to cash flow and our guidance for the remainder of the year. During the quarter we had three items manning $40.5 million of pre-tax expense in our GAP earnings that we have excluded in our adjusted results. The most significant of these items relates to the $42.3 million litigation charge John referred to earlier. The second item is a net favorable adjustment of $1.2 million to original estimates made as part of our fiscal 2010 fourth quarter restructuring actions related to severance and a write-down of assets held for sale. The last item, which is a continuation from last quarter, is a $600,000 benefit reflected in gross margin related to a continuing vendor product recall action. Moving on to cash flow, our operating cash flow from the third quarter was nearly 82 million, compared to 62.1 million of operating cash flow realized in the prior year. The increase primarily the result of higher adjusted earnings and approved day's sales outstanding and inventory models. This strong cast generation brings our year to date operating cash flow to 189.2 million an increase of 78 million versus the prior year. Also during the quarter, we repurchased 600,000 additional shares of common stock, for approximately $27 billion. This brings our year-to-date purchases to just over 1.5 million shares, leaving us with the remaining share purchase authorization of about 3.5 million shares. Now let’s turn to guidance. We are updating our full year constant currency guidance to a target of approximately 7% growth compared to our previous guidance of 7% to 8%.

This updated guidance takes into account the Q3 performance and Q4 updated outlook for our international segment. We are also accordingly revising our adjusted earnings guidance to a range of 226 to 230 per diluted share, compared to a prior range of 226 to 232. This revised 2011 full year financial output reflects constant currency growth of approximately 7% just mentioned, driven by double digit growth in North American acute, gross margin of approximately 49% to 50%, low double digit growth in RND spending as we continue to invest in new and innovative products, continued operating leverage of our STNA info structure, tax rate of approximately 29% to 30%, compared to our prior guidance of approximately 31% and the number of shares outstanding for the year to average 64.9. We project 2011 adjusted operating cash flow to remain in a range of approximately 230 to 240 million. With that I’ll turn the call back to John with concluding comments. John?

John Greisch

Thanks, Mark. Our plans to deliver sustainable earnings growth, margin improvement and cash flow, remain on track. Because we discussed before, given the diversity of our portfolio, we’ll need to continue to manage through cycles in our markets that will present us a challenge at different times resulting in a nonlinear path towards our long term goal. This quarter is a good example of that. Our full year outlook however, reflects our confidence in delivering a strong fourth quarter and full year, with improvements in all of our key focus areas -- revenue growth, strong margin and earnings improvements, increased RND investments and sustainable cash flow. We believe that this management team, our broad product portfolio, our unparalleled channel presence and service organization and our commitment to accelerate innovation, will serve our patients, customers and shareholders well as we deploy our strong cash flows to create value in the years end. With that operator, please open the call to questions.

Question and Answers

Operator

(Operator Instructions), your first question comes from Lennox Ketner of Bank of America, please go ahead.

Lennox Ketner – Bank of America

Oh hi. Good morning. Can you hear me okay?

Unknown Corporate Executive

Hey, Lennox. Yes.

Lennox Ketner – Bank of America

A few questions, first I wanted to start on the margins because I think that drove most of the EPS financial relative to consensus. I’m just wondering, either John or Mark, if you could extrapolate a little bit on what happened on the margin side? I know you readjusted the decline in growth margins to product mix and commodity costs? But, I just wonder if you could a, extrapolate a little bit on exactly what the products mix was that drove that decline and then on commodity cost, my impression in the first half of the year was that the message there was that you would see increased pressure from commodities cost but that could be offset both by hedging and by underlying margin improvements, which is why you guided the 49% growth margin. So, just wondering if you could explain what happened there, whether commodities cost was worse than you thought or you weren’t able to offset a 200 line growth margin improvement.

Mark Guinan

I’ll handle that Lennox. I think there’s two questions there. I’ll take them separately. The first one is in terms of how we projected the commodity cost. Largely they’re in line with what we projected. If you look at where we are now in our EPS guidance, we’re pretty much within the range, we’ve tightened the range at a little bit lower than the range we gave previously and as we said we’re reflecting, we’re timing revision downwards as well on the top line, given where the international revenues have come in where we project to the balance of the year. So in terms of gross margin we haven’t had any surprises, we told you it was built into our projections and it was built into our projections. When we’re providing reconciliation, we’re reconciling to Q3 of last year. So, we’re talking about higher commodity cost versus what we incurred last year fiscal 2010, not versus what we expected and projected within our forecast and within our guidance.

So, within our product mix, it’s really a – the big driver is the mix between our rental and capital businesses, so capital has been growing at a faster rate as you know, rental has a higher gross margin, so as capital this proportionately fast, that’s going to have some negative impact on our mix. And then also within the capital business we had some product mix as well, that when unfavorable in terms of some of those sub products that certainly have lower gross margins. And that’s going to happen quarter onto quarter. We’re going to have different mixes quarter to quarter. So, those are two drivers in terms of product mix.

John Greisch

Lennox, just a couple of other things to add, you mentioned hedging, I think we’ve talked about doing hedging in the past because we’re really not doing any hedging of commodity cost. But as Mark said, they’re pretty much in line with our expectations. As are the cost reduction programs that we have in place across our supplies and organization. I think on the products mix issue, the one area within the portfolio that’s under some margin pressure, I mentioned it in my comments, is our post-acute care business. We have seen margin erosion there to some degree as we’ve gone through the year. I think you’re well aware of the reimbursement pressures in both Medicare and Medicaid and the spillover effect from that. So, that’s really the only business that’s under any margin pressure externally. I think if you look at international – two, three our international revenues as a percent of our total were relatively flat, almost exactly flat with the last quarter.

So, there was no major impact from lower international sales relative to last quarter. I think could be expected to have actually a positive impact on our margins but, as a percent of our total revenues, international was pretty flat with last quarter.

Lennox Ketner - Bank of America

Okay, thanks and then a follow up if you could just talk a little bit about the longer term expectations in light of the guidance that you’ve given at your analyst (inaudible) for double digit earnings growth long-term. I think your guidance for the back half of the year now implies kind of mid to high single digit earnings growth. I’m wondering if you could just give us your thoughts on how investors could get confidence that that growth will return to double digits particularly given that the macro environment could be challenging for some time.

John Greisch

Sure, our outlet remains unchanged long-term. In fact our outlook for 2011, if you look at our full year, guidance for earnings is largely unchanged from what we put out there last quarter. We’ve obviously lowered the high end range of our earnings guidance by a couple of cents for this year but, it’s essentially equivalent guidance to what we had out there last quarter. We don’t provide quarterly guidance, as you guys well know. But, for the full year our outlook for 2011 is at the lower end on the revenue side, as Mark said but earnings guidance relative to last year is essentially consistence with our guidance that we had last quarter. So our outlook looking forward beyond 2011, across all of our businesses, both on a top line, on a margin, cash flow perspective remains unchanged from what we laid out at the investor conference in May. I think I’ve commented over the past several quarters this business does have some lumpiness to it and we’ve seen some of that obviously here in Q3.

Relative to our international business, Europe, we did not have the strongest quarter that we’ve had since I’ve been here. Relative to quarter intake in Europe, in Q3 we also had some shipment push outs from Q3 into Q4 and that had an impact on us here for the third quarter. But, if you look at our full year guidance and do the math on what that implies for the fourth quarter, we’re obviously going to deliver. And I commented in my prepared remarks, our confidence in the fourth quarter, we’re going to deliver a strong fourth quarter and a full year that shows strong improvement over 2010. So, as I said and I think it's really critical that investors understand our outlook for this year and beyond this year remains unchanged.

Lennox Ketner - Bank of America

So, even absent any change in the macro environment you still have confidence you can get back double digits earning growth after second half of 2011?

John Greisch

Absent to any major change, yes I think that’s true. I mean we can’t control obviously what happens externally but, barring any major adverse change over the long term, our confidence remains the same.

Mark Guinan

I do want to emphasis (Lennox) as we’ve said several times including our investor day. That is on annual basis. That is not necessarily each quarter, quarter-over-quarter. So, yes we are committed to the growth rates and targets or forecasts we gave at the investor’s day 3/20/15 but, you should not expect it to happen each quarter.

Lennox Ketner - Bank of America

Okay, thanks. I’ll get back in queue.

Mark Guinan

Okay thanks, (Lennox).

Operator

Our next question comes from David Roman of Goldman Sachs. Please go ahead.

Greg Soffer - Goldman Sachs

Thanks guys. Greg Soffer in for David.

Mark Guinan

(Inaudible), hey Soffer.

Greg Soffer - Goldman Sachs

How you guys doing?

Mark Guinan

Great.

Greg Soffer - Goldman Sachs

I was hoping we could touch a little bit on the competitive environment. I know that some of your competitors put up slightly higher growth numbers than you guys did and I know that there are some components of the macro environment that are weak but, by enlarge a lot of the hostile CapEx players that have reported so far seems as though growth has been pretty strong. And are they any areas in your business where you’re seeing increased competitive pressures or is it mostly tied to the macro environment.

Mark Guinan

I just want to clarify David, I think the one piece of our business which is able to be compared to competitive reports is our patient's support systems businesses within the North American acute care segment. And as I mentioned in my prepared remarks, our growth this quarter in that segment was 21%, year-to-date it’s 27%. Last quarter, our fiscal second quarter was 39%, again indicative of the – what I call the lumpiness of this business. So, I think our reported results over the last several quarters are quite strong in that product category, which is largely our North American bedframe and surface business. So, I’m quite pleased with both supporter results and the year to date results that we’re seeing in that business, relative to what we believe market growth is and certainly relative to our expectations.

To answer your question specifically, increased competitive pressures – I think I commented -- in the post-acute care business, the reimbursement pressures in certain elements of that business, largely the extended care and home care business are tougher today than they were a year ago. Our customers in those segments are clearly operating under increased reimbursement pressure from the payers. And some of that is spilling over into our business and we’re dealing with that as effectively as we can. In Europe, I commented earlier on the performance there and I think the issues we’re dealing with in Europe, particularly in the third quarter, in your words as much a market dynamic. And the pressures that the health care systems are under across Europe that we’re all dealing with across the industry. We do expect to see some rebounds in Europe in the fourth quarter.

As I mentioned there were some push outs from Q3 to Q4 but competitively I haven’t seen any major changes in any of our specific markets. As I mentioned, our largest business I’m quite pleased with the performance that we’ve seen here in the quarter and in year to date.

Greg Soffer - Goldman Sachs

Okay, great. Thanks and then just a question on capital allocation. If the environment does stay weaker, would you guys be prone to return more cash to shareholders? Because I know you guys had some targets during your analyst day but, I guess those things are – can be in flux. Is that something you guys would consider?

John Greisch

This is John. I think my comments and Mark’s comments at the investor’s conference really remain unchanged. We have a desire to boast return cash to shareholders and pursue acquisitions if appropriate opportunities exist. And we’re going to balance those two along with reinvestments in the business as we go forward. And over time, I think the allocation percentages that Mark laid out at the conference are ones that investors should expect us to follow. As you mentioned in weak times there may also be acquisitions that become more attractive to dissemble the pressures that potential companies are under. So, we’re going to remained balanced and if there are no acquisition opportunities in the near term, you can probably expect us to deploy more cash to our shareholder returns. But again, that’s going to be balanced quarter to quarter and year to year. And I think we’re going to remain committed to the allocation percentages that we laid out in May.

Greg Soffer - Goldman Sachs

Okay, thanks, and just one last quick one if I can. I know you guys lowered the tax rate guidance for the year. How should we think about that at end to 2012 and maybe longer term?

Mark Guinan

Yeah, Soffer – this is Mark. I’m not going to comment on 2012 yet.

Greg Soffer - Goldman Sachs

Okay. Thanks guys.

Operator

Our next question come from Matt Miksic from Piper Jaffray. Please go ahead.

Matt Miksic - Piper Jaffray

Hey good morning. Thanks for taking our questions. So, we've got one here just on the PNL, to make sure I understand, sort of the gives and takes. If I do the math on the short fall and gross margin to our estimate it’s not all that much maybe a penny or two, R&D’s a penny or two. Just to make sure I’m understanding were the impact on the bottom line came from in the quarter. Is it sales? Was it – I mean what was the surprise that drove most of downside in earnings?

John Greisch

Well, Matt I want to comment on your target because, the shortfall to your target – I don’t have your model in front of me for one thing. But I think relative to expectations that we have for the quarter and I guess for the full year, as I mentioned in my comments, international revenues certainly impacted our revenue expectations this quarter. And on the margin front it’s largely what Mark said, there were some product mix issues, both between capital and rental, with the growth profile of those businesses. And then within the capital segment, Mark mentioned a couple of our segments growing disproportionately that that carried lower margins attached to them. So, the performance for the quarter I think was both a combination of slightly lower revenues, slightly lower overall growth margins, and as Mark indicated, we are ramping up R&D spending as we anticipated we would be. But, again I urge everyone to look at the full year margin performance. And I think you’ll see through our guidance continued expectations of margin expansion year or year from where we were last year and in line with our expectations for the full year.

John Greisch

The other thing I would add Matt, is that we’ve as I said, tightened our revenue guidance down from the higher end of our previous range. And we’ve slightly reduced the higher end of our EPS. And so therefore you should probably conclude that we weren’t dramatically surprised in the third quarter.

Matt Miksic - Piper Jaffray

Right and I guess that’s what I’m trying to get at is not to compare your results necessarily to mine estimates, but if we think about what was the most significant contribution to things like margin pressure and the bottom line and more importantly which one's of those issues is going to turn here in the fourth quarter, to give us confidence that you can still get to something that’s pretty close to the guidance that you had heading into the quarter?

John Greisch

That’s a good question Matt. I think the things that I’m most disappointed in, let me put it that way, for Q3 were the ones that I mentioned. Our international performance was lower than I certainly hoped it to be and expected it to be, both for two reasons. The order push outs that I mentioned and an overall reduction in our order rate pier in Q3 growth into the trend that we’ve been seeing. As I mentioned, even though we expect declines in our international revenues again in Q4, we had and incredibly strong Q3 and Q4 last year declines in our international revenues, again in Q4. We had an incredibly strong Q3 and Q4 last year. Mark mentioned the Middle East, I think we talked about that last year. We also saw strength in a couple of Asian markets last year. Those are going to be head winds for us in Q4; however, we do expect to see Europe rebounded in Q4 and some of the rates that we saw as we closed the quarter, in terms of orders in Europe, certainly support that. I think you’ll see some improvement in our European business in Q4. The other area that I mentioned is the margin performance in our post-acute business and that we’re working diligently to ensure that we mitigate as much as we can, some of the reimbursement pressures that we see in there. I’d like to be able to sit here and say this business is going to grow on a nice smooth linear path quarter to quarter, but again, I think I’ve been clear over the last several quarters that we were going to encounter some lumpiness and this quarter, as I mentioned in my comments, is a quarter where that occurred, but again, I’m more focused on the longer term and even in the near term year over year performance for 2011, as you indicated, is largely in line with our expectations, albeit with a bit of a speed bump here in Q3.

Matt Miksic - Piper Jaffray

Just to be clear on that it sounds like the push – because we talk interchangeably about international and Europe …

John Greisch

Yeah.

Matt Miksic - Piper Jaffray

... international is facing tougher prior-year comps, obviously in getting into Q4. Is Europe facing tougher prior-year comps?

Mark Guinan

Less so in Q4 for Europe than the Middle East and Asia.

Matt Miksic - Piper Jaffray

Also, just a clarification, it sounds like there were push-outs in your fiscal Q3 that were closed here in Q4 and is that in fact, what some of the confidence that you have in a rebound in Q4?

John Greisch

Yes.

Matt Miksic - Piper Jaffray

And then, finally, I know just to connect the dots on …

John Greisch

No - oh, go ahead.

Matt Miksic - Piper Jaffray

… I just want to make sure …

John Greisch

I was just going to say Matt …

Matt Miksic - Piper Jaffray

… coming back to Q4 here.

Mark Guinan

I’m still cautious about Europe, for obvious reasons. So, I don’t want to leave the impression that Europe is in an easy market for us or anybody else. It is a difficult environment, as you well know, but to answer your specific question, yes. The outlook for Q4 for Europe I feel better about than what we saw in Q3.

Matt Miksic - Piper Jaffray

And then, just finally, just to make sure I’m adding up the gives and takes here in Q4, very strong Q3 U.S. number again, seasonally I guess to make that 7% constant currency number I have to assume that you’re growing at roughly the same rate, maybe a little faster in the U.S. heading into Q4. Is that – am I not looking at that the right way?

John Greisch

Uh, sure.

Matt Miksic - Piper Jaffray

Thank you and thanks for taking the questions, I’ll hop out.

John Greisch

Thanks Matt.

Operator

Our next question comes from Lawrence Keusch of Morgan Keegan. Please go ahead.

Lawrence Keusch - Morgan Keegan

Hi, good morning. I want to just make sure that I’m fully understanding this, so if you look at the street consensus for the third quarter you guys missed by nine cents and if you look at the implied guidance for the fourth quarter you’re sort of nine to thirteen cents above the street consensus. So, I guess the fundamental question here is was the miss relative to your expectations for the third quarter much less than what the street was looking for, in other words, did the street have the gating wrong or is there something that you guys are really going to do in the fourth quarter that allows you to make a lot of that back up again?

John Greisch

Our expectations for Q3 and Q4 were different from the street, that’s the fair assumption.

Lawrence Keusch - Morgan Keegan

Okay, so the street had the gating a bit different than you guys are looking for because again, when you take the – the top line wasn’t off that much, margins weren’t off that much, it’s not the magnitude of the nine cents that the street was looking for it sounds like.

John Greisch

And Larry, as you well know, we don’t give quarterly guidance and really don’t comment, obviously, on consensus on a quarterly basis, but your assessment there is correct.

Lawrence Keusch - Morgan Keegan

Okay, perfect. The one thing I was curious on was we didn’t see SG&A leverage this quarter relative to the last four quarters and I think Mark indicated earlier that you anticipate seeing that as you move into the fourth quarter, but was there something – is it just really a function of you met some of those fails and that changed leverage or was there really more spent in this quarter than you had anticipated or a methodical reason why we didn’t get leverage this time?

John Greisch

Yeah, I think Mark laid out the reasons. I’ll answer your last question specifically in terms of more spend than we anticipated and the answer to that is no. More spend than last year, obviously the answer to that is yes and I think Mark laid out the reasons being CapEx, higher litigation and legal expenses for some of the various actions that we have under way and higher investments for some of our IT upgrades and increased sales and marketing expenses, but in terms of control over our SG&A and spending in line with expectations, I have absolutely no concerns over that.

Lawrence Keusch - Morgan Keegan

Okay, and then just the last one for you, as you look at some of the expenses that came through the SG & A line in the 3Q is any of that sort of elevated or sort of one time in nature that goes away as you move into the fourth quarter and as part of that question if we’re really sort of riding on Europe to get better, although still down year over year, how much visibility do you have outside of the orders that you’ve gotten thus far that are going to get people comfortable that you really can get a better result out of Europe in the 4Q?

John Greisch

Yeah, I’ll take the second part of that question Larry and I’ll, in part, respond to the SG&A question. Not a lot of visibility beyond orders or the sales funnel that the teams manage to, both in Europe as well as here in the U.S., so, the visibility is relatively short term. Obviously, we have some visibility as we sit here at the end of July beyond what we reported in Q3, but the order bank and the order rate is really the best visibility that we have.

Lawrence Keusch - Morgan Keegan

Okay.

Mark Guinan

In terms of anything extraordinary in the third quarter no, I would’ve commented on that, but I will say that as you look forward we’ve talked about continuing to look to leverage SG&A and of course, we manage the business responsibly as we see the trends and so on and so forth. So, we’re absolutely going to manage the SG&A going forward and there’s nothing in the third quarter though that would not be repeated in the fourth of substance.

Lawrence Keusch - Morgan Keegan

Okay, perfect, thanks very much.

John Greisch

Thanks Larry.

Operator

Our next question comes from Brian Kennedy of Wells Fargo, please go ahead.

Brian Kennedy – Wells Fargo

Hi, thank you for taking my questions. Just to follow up on the commentary regarding the gating of full-year numbers can you give an estimate of how much revenue was actually affected by delayed shipments or shipment push outs, I believe as you phrased it?

John Greisch

It was just a few million dollars.

Brian Kennedy – Wells Fargo

Okay.

John Greisch

That happens every quarter so it’s hard to pinpoint that to be unique. As I said, in the capital business, as you well know, there are orders that we don’t have complete control over timing with respect to shipments, but in Europe specifically it was a few million bucks in a couple of specific countries that got pushed out of Q3 into Q4.

Brian Kennedy – Wells Fargo

Okay and from a sales perspective did the quarter worsen progressively, especially internationally, was June worse than April and May?

John Greisch

No.

Brian Kennedy – Wells Fargo

Okay, all right, and I guess, just lastly, what accounts for the increased R&D during the quarter and can you give a sense of one, whether this trends continues in the near term and two, just an estimate regarding when increased R&D can make a positive impact commercially?

John Greisch

Sure, I think we’ve been consistent with our comments about our objective to increase R&D in double digit rates this year and that’s clearly what we did in Q3 and I think for the full year. Mark commented that expectation is built into our guidance as well. We’re innovative reinvestment mode here with R&D from where we were a couple years ago when the breaks got put on, on the back of the downturn back in 2008 and 2009. So it’s fundamental to our long-term success that we continue to reinvest in R&D and we’re committed to continue to do so. In terms of when are we going to see some impact, it’s an ongoing impact we’ve launched new products every quarter this year. We’ve got a number of launches here coming in Q4 and next year, I think, you’ll begin to see an increased flow of new or improved products coming out of our R&D spending, but as you’ve seen, throughout the year the big ramp in R&D really began here in Q3 with a 20% plus increase over last year. So, it’s going to be 2012 and beyond when we start seeing real impact from that spending.

Brian Kennedy – Wells Fargo

Okay, thank you.

John Greisch

Okay, thanks.

Operator

Again, ladies and gentlemen if you have a question at this time please press star then one on your touch tone telephone. Our next question is a follow up from Lennox Ketner of Bank of America, please go ahead.

Lennox Ketner – Bank of America

Oh hi, just a couple follow ups on margins. I know Brian asked whether revenue growth was any worse in June than in April or May were margins any worse in June?

John Greisch

Lennox you there?

Mark Guinan

Lennox, you’re kind of cutting out.

Lennox Ketner – Bank of America

Oh, can you hear me now?

John Greisch

Yeah, you’re back.

Mark Guinan

Okay, try again please.

Lennox Ketner – Bank of America

Okay, I just -- I know Brian asked whether revenue growth was any worse in June relative to the earlier part of the quarter, I’m just wondering whether margins were any worse in June relative to April or May?

John Greisch

Lennox, I don’t want to get into the monthly comparisons. One of the reasons we don’t give quarterly guidance is because of some of the challenges and the lumpiness in the business and then monthly comparisons, if we got into that, would be misleading for a whole lot of reasons.

Lennox Ketner

Okay, I think what people are trying to get is you’d raised your guidance in April, which was a third of the way through the quarter so then to lower it slightly now people are worried that there was a deterioration in margins or revenue growth towards the end of the quarter which could continue into Q4.

John Greisch

I think the top line guidance changed from seven and eight to seven is largely a function of the weakness in Europe that I talked about, but again, our margin expectations, our earnings expectations for the full year and beyond remain unchanged

Lennox Ketner – Bank of America

Okay, and last one, your full year guidance does imply a pretty meaningful improvement in Q4 margins, is that just driven mainly by the seasonality that you see in Q4 or are there other kind of underlying margin improvements that you’re expecting in the fourth quarter?

John Greisch

I think it’s more the former and again, continuation of all the various cost reduction programs that we have in place, but the improvement, as you mentioned, sequentially certainly from Q3 is our expectation.

Lennox Ketner – Bank of America

Okay, that’s all I have, thanks.

John Greisch

Okay, thanks a lot.

Operator

I’m showing no further questions at this time and I’d like to turn the call back over to management for any closing remarks.

Mark Guinan - CFO for Hill Rom

We have no further closing remarks at this time, so thanks everybody for your attendance and we’ll talk to you soon, thank you.

Operator

Ladies and gentlemen this does conclude today’s conference, you may all disconnect and have a wonderful day.

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