<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 29, 1998 COMMISSION FILE NO. 1-6651
HILLENBRAND INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1160484
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 STATE ROUTE 46 EAST
BATESVILLE, INDIANA 47006-8835
(Address of principal executive offices) (Zip Code)
(812) 934-7000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former
fiscal year, if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
Yes____X______ No__________
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 - 66,959,519 as of October 7, 1998.
1
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HILLENBRAND INDUSTRIES, INC.
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Income for the Three Months 3
and Nine Months Ended 8/29/98 and 8/30/97
Consolidated Balance Sheets at 4
8/29/98 and 11/29/97
Consolidated Cash Flows for the Nine Months 5
Ended 8/29/98 and 8/30/97
Notes to Consolidated Financial Statements 6-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
PART II - OTHER INFORMATION
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 15
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- ----------------------
08/29/98 08/30/97 08/29/98 08/30/97
--------- -------- ---------- --------
(In Millions Except Per Share Data)
<S> <C> <C> <C> <C>
Net revenues:
Health Care sales . . . . . . . . . . . . . . . . . . . . . . $ 181 $ 143 $ 524 $ 415
Health Care rentals . . . . . . . . . . . . . . . . . . . . . 98 92 310 281
Funeral Service sales . . . . . . . . . . . . . . . . . . . 124 125 406 407
Insurance revenues. . . . . . . . . . . . . . . . . . . . . . 80 69 230 198
---------- --------- ---------- ---------
Total revenues . . . . . . . . . . . . . . . . . .. . . . . . 483 429 1,470 1,301
Cost of revenues:
Health Care cost of goods sold. . . . . . . . . . . . . . . . 107 79 305 233
Health Care rental expenses. . . . . . .. . . . . . . . . . . 61 59 185 175
Funeral Service cost of goods sold. . . . . . . . . . . . . . 66 64 212 210
Insurance cost of revenues. . . . . . . . . . . . . . . . . . 53 48 163 143
---------- --------- ---------- ---------
Total cost of revenues. . . . . . . . . . . . . . . . . . . . 287 250 865 761
Other operating expenses . . . . . . . . . . . . . . . . . . . . 128 121 391 353
Restructuring charges. . . . . . . . . . . . . . . . . . . . . . 73 - 73 -
---------- --------- ---------- ---------
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . (5) 58 141 187
Interest expense. . . . . . . . . . . . . . . . . . . .. . . . . (6) (6) (20) (17)
Investment income . . . . . . . . . . . . . . . . .. . . . . . . 5 5 13 14
Other income (expense), net . . . . . . . . . . . . . . . . . . 73 1 74 (1)
---------- --------- ---------- ---------
Income before income taxes. . . . . . . . . . .. . . . . . . . . 67 58 208 183
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 25 23 78 72
---------- --------- ---------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42 $ 35 $ 130 $ 111
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Basic and diluted earnings
per common share . . . . . . . . . . . . . . . . .. . . . . . $ .63 $ .51 $ 1.93 $ 1.61
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Dividends per common share. . . . . . . . . .. . . . . . . . . . $ .18 $ .165 $ .54 $ .495
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Average shares outstanding (thousands) . . . . . . . . . . . . . 67,465 68,801 67,508 68,797
---------- --------- ---------- ---------
---------- --------- ---------- ---------
See Notes to Consolidated Financial Statements
</TABLE>
3
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Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS 08/29/98 11/29/97
-------- --------
(In Millions)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 283 $ 364
Trade receivables. . . . . . . . . . . . . . . . . . . . . . . . . 350 333
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 79
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 45
------- ------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 818 821
Equipment leased to others, net . . . . . . . . . . . . . . . . . 86 91
Property, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 238
Other assets:
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . 204 126
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 51
------- ------
Total other assets. . . . . . . . . . . . . . . . . . . . . . . . 301 177
Insurance assets:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,134 1,934
Deferred policy acquisition costs . . . . . . . . . . . . . . . . 520 473
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 39 43
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 51
------- --------
Total insurance assets . . . . . . . . . . . . . . . . . . . . . . 2,748 2,501
------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,178 $3,828
------- --------
------- --------
LIABILITIES
Current liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58 $ 60
Current portion of long-term debt. . . . . . . . . . . . . . . . 1 1
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . 68 71
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 227
------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . 368 359
Other liabilities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 303 203
Other long-term liabilities . . . . . . . . . . . . . . . . . . . 81 75
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . 1 7
------- --------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . 385 285
Insurance liabilities:
Benefit reserves. . . . . . . . . . . . . . . . . . . . . . . . . . 1,810 1,667
Unearned revenue. . . . . . . . . . . . . . . . . . . . . . . . . . 659 605
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 26
------- --------
Total insurance liabilities. . . . . . . . . . . . . . . . . . . . 2,513 2,298
------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 3,266 2,942
------- --------
Commitments and contingencies (Note 4)
SHAREHOLDERS' EQUITY
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 14 14
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . 1,178 1,085
Accumulated unrealized gain on
investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 34
Foreign currency translation adjustment . . . . . . . . . .. . (18) (3)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . (311) (248)
------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . 912 886
------- --------
Total liabilities and
shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . $4,178 $3,828
------- --------
------- --------
</TABLE>
See Notes to Consolidated Financial Statements
4
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Hillenbrand Industries, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Cash Flows Nine Months Ended
---------------------
08/29/98 08/30/97
-------- --------
(In Millions)
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $130 $ 111
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation, amortization and write-down
of goodwill. . . . . . . . . . . . . . . . . . . . 119 79
Change in noncurrent deferred
income taxes . . . . . . . . . . . . . . . . . . . (7) (6)
Gain on sale of business before
income taxes . . . . . . . . . . . . . . . . . . . (75) -
Change in net working capital,
excluding cash, current debt and
acquisitions . . . . . . . . . . . . . . . . . . . (65) (12)
Change in insurance items:
Deferred policy acquisition costs . . . . . . . . (47) (51)
Other insurance items, net . . . . . . . . . . . . 49 31
Other, net . . . . . . . . . . . . . . . . . . . .. (28) 7
------- --------
Net cash provided by operating activities. . . . 76 159
------- --------
Investing activities:
Capital expenditures, net . . . . . . . . . . . . . . . (52) (63)
Acquisitions of businesses. . . . . . . . . . . . . . . (162) -
Proceeds on sale of business . . . . . . . . . . . . . 64 -
Other investments. . . . . . . . . . . . . . . . . . . . (11) (5)
Insurance investments:
Purchases. . . . . . . . . . . . . . . . . . . . . . . (567) (578)
Proceeds on maturities . . . . . . . . . . . . . . . . 120 73
Proceeds on sales prior to maturity . . . . . . 263 323
------- --------
Net cash used in investing
activities . . . . . . . . . . . . . . . . . . . . . . (345) (250)
------- --------
Financing activities:
Additions (reductions) to debt, net . . . . . . . . 126 (5)
Payment of cash dividends . . . . . . . . . . . . . . (36) (34)
Treasury stock acquisitions. . . . . . . . . . . . . . (64) -
Insurance premiums received . . . . . . . . . . . 377 388
Insurance benefits paid . . . . . . . . . . . . . . . . (214) (193)
------- --------
Net cash provided by financing
activities . . . . . . . . . . . . . . . . . . . . . . . . 189 156
------- --------
Effect of exchange rate changes on cash . . . . (1) (1)
------- --------
Total cash flows . . . . . . . . . . . . . . . . . . . . . (81) 64
Cash and cash equivalents:
At beginning of period . . . . . . . . . . . . . . . . . . 364 266
------- --------
At end of period . . . . . . . . . . . . . . . . . . . $283 $330
------- --------
------- --------
See Notes to Consolidated Financial Statements
</TABLE>
5
<PAGE>
Hillenbrand Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions except per share data)
1. Basis of Presentation
The unaudited, condensed consolidated financial statements appearing in
this quarterly report on Form 10-Q should be read in conjunction with the
financial statements and notes thereto included in the Company's latest
annual report. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
statements herein have been prepared in accordance with the Company's
understanding of the instructions to Form 10-Q. In the opinion of
management, such financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
financial position, results of operations, and cash flows, for the interim
periods.
2. Supplementary Balance Sheet Information
The following information pertains to non-insurance assets and consolidated
shareholders' equity:
<TABLE>
<CAPTION>
08/29/98 11/29/97
----------- ----------
<S> <C> <C>
Allowance for possible losses and
discounts on trade receivables.......... $ 26 $ 25
Accumulated depreciation of equipment
leased to others and property........... $ 609 $ 602
Accumulated amortization of intangible
assets.................................. $ 142 $ 156
Capital Stock:
Preferred stock, without par value:
Authorized 1,000,000 shares;
Shares issued.................. None None
Common stock, without par value:
Authorized 199,000,000 shares;
Shares issued.................... 80,323,912 80,323,912
</TABLE>
3. Earnings per Common Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," effective November 30, 1997 (the beginning of fiscal
year 1998). This standard requires disclosure of basic earnings per share
and diluted earnings per share. Basic earnings per share is defined as
income available to common shareholders divided by the weighted-average
number of
6
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common shares outstanding during the applicable period. Diluted earnings
per share gives effect to the dilutive potential common shares that were
outstanding during the period. Potential common shares arising from shares
awarded under the Company's various stock-based compensation plans,
including the 1996 Stock Option Plan, did not have a material dilutive
effect on earnings per share in the third quarter of 1998 and all prior
periods. Cumulative treasury stock acquired of 14,684,267 shares, less
cumulative shares reissued of 1,585,738, have been excluded in determining
the average number of shares outstanding during each period.
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- ------------------------
08/29/98 08/30/97 08/29/98 08/30/97
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income (in thousands) $42,512 $35,165 $130,126 $110,622
Average shares outstanding 67,464,938 68,800,958 67,508,240 68,796,858
Basic and diluted earnings
per common share $.63 $.51 $1.93 $1.61
</TABLE>
4. Contingencies
As discussed under Item 3 of the Company's Annual Report on Form 10-K for
the fiscal year ended November 29, 1997, Hillenbrand Industries, Inc., and
its subsidiary Hill-Rom Company, Inc., are the subject of an antitrust suit
brought by a competitor in the health care equipment market. The plaintiff
seeks monetary damages totaling in excess of $269 million, trebling of any
damages that may be allowed by the court, and injunctions to prevent
further alleged unlawful activities. The Company believes that the claims
are without merit and is aggressively defending itself against all
allegations. Accordingly, it has not recorded any loss provision relative
to damages sought by the plaintiffs. There was no material change in the
status of this litigation during the quarter ended August 29, 1998.
On November 20, 1996, the Company filed a Counterclaim to the above action
against Kinetic Concepts, Inc. (KCI) in the U.S. District Court in San
Antonio, Texas. The Counterclaim alleges that KCI has attempted to
monopolize the therapeutic bed market and to interfere with the Company's
and Hill-Rom's business relationships by conducting a campaign of
anticompetitive conduct. It further alleges that KCI abused the legal
process for its own advantage, interfered with existing Hill-Rom
contractual relationships, interfered with Hill-Rom's prospective
contractual and business relationships, commercially disparaged the Company
and Hill-Rom by uttering and publishing false statements to customers and
prospective customers not to do business with the Company and Hill-Rom, and
committed libel and slander in statements made both orally and published by
KCI that the Company and Hill-Rom were providing illegal discounts. The
Company alleges that KCI's intent is to eliminate legal competitive
marketplace activity. There was no material change in the status of this
litigation during the quarter ended August 29, 1998.
7
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The Company has voluntarily entered into remediation agreements with
environmental authorities, and has been issued Notices of Violation
alleging violations of certain permit conditions. Accordingly, the Company
is in the process of implementing plans of abatement in compliance with
agreements and regulations. The Company has also been notified as a
potentially responsible party in investigations of certain offsite disposal
facilities. The cost of all plans of abatement and waste site cleanups in
which the Company is currently involved is not expected to exceed $10
million. The Company has provided adequate reserves in its financial
statements for these matters. Changes in environmental law might affect
the Company's future operations, capital expenditures and earnings. The
cost of complying with these provisions is not known.
The Company is subject to various other claims and contingencies arising
out of the normal course of business, including those relating to
commercial transactions, product liability, safety, health, taxes,
environmental and other matters. Management believes that the ultimate
liability, if any, in excess of amounts already provided or covered by
insurance, is not likely to have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
5. Acquisitions
On December 18, 1997, the Company's subsidiary, Hill-Rom, acquired the
stock of Air-Shields, Inc., a manufacturer and supplier of infant
incubators and warmers, and certain other businesses of Vickers PLC for a
cash payment of $102 million and the assumption of certain liabilities
totaling $34 million, which includes costs of acquisition. On February 9,
1998, Hill-Rom acquired the stock of MEDAES Holdings, Inc., a manufacturer
of medical architectural systems, for a cash payment of $60 million and the
assumption of certain liabilities totaling $18 million, including costs of
acquisition. These acquisitions have been accounted for as purchases and,
accordingly, their results are included in the Company's consolidated
financial statements since the dates of acquisition. The excess of the
purchase price over the fair value of the assets acquired, totaling $137
million, has been recorded as goodwill and is being amortized over 20
years. The purchase price allocations are preliminary pending the
completion of certain contractual commitments. These acquisitions,
singularly and combined, will not have a significant effect on the
Company's results of operations. The pro forma impact of these
acquisitions on prior periods would also not be material.
6. Disposition of Business
On July 1, 1998, the Company sold its high security and access control
business, Medeco Security Locks, Incorporated, to ASSA ABLOY AB. The
Company recorded an after tax gain of approximately $47 million ($.70 per
share) in the third quarter. Results for Medeco were included in the
Health Care Group through the date of disposition and did not have a
material effect on the results of that group or the Company's consolidated
earnings, cash flows and financial position.
8
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7. Restructuring Charges and Impairment of Assets
On August 17, 1998, the Board of Directors of the Company approved a
restructuring plan relative to Hill-Rom's operation in Europe that will
permit the Company to more efficiently meet the needs of its customers and
improve profitability. Changes in market conditions, health care reform
and increased competitive pressures have greatly extended the time required
for the Company to achieve profitability and significantly reduced
management's projections of future cash flows from operations in Germany.
Market demand has not met expectations and remains far below
estimates established at the time the German and Austrian businesses were
acquired in 1994. Under this plan the Company will align manufacturing,
distribution, sales and administrative functions with anticipated
demand. This alignment will result in the closing of manufacturing
facilities in Germany and Austria and relocating certain manufacturing
and business processes to other European locations. The Company will
continue to serve the German and Austrian markets with products
manufactured specifically for these markets by its other operations. A
restructuring charge totaling $29 million was recorded in the third
quarter and consists of the write-down of assets to be disposed of to
their fair market value ($11 million), severance and employee benefit
costs ($11 million) and various other plant closing expenses ($7 million).
Approximately $18 million of this charge represents future cash outflows
to be made over the next 12 months, while the remaining $11 million is
non-cash in nature. Approximately 250 production and administrative
employees are affected by this plan. In addition, a non-cash charge of
$44 million was recorded to write-down goodwill associated with the
German business. An income tax benefit of approximately $28 million
related to the impaired value of the German business was also
recognized in the third quarter.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER 1998 COMPARED WITH THIRD QUARTER 1997
Consolidated revenues of $483 million increased $54 million or 13%. Health Care
sales grew $38 million, or 27%, which includes the acquisition of Air-Shields
and MEDAES in the first quarter and the sale of Medeco Security Locks on July 1.
Excluding the effect of the acquisitions and disposition, Health Care sales
increased 11% due to higher electric bed, frames, furniture and architectural
product shipments in the acute care market. In Europe, sales declined
marginally, excluding unfavorable currency adjustments, as a result of continued
economic weakness in those markets. Health Care rental revenue increased $6
million or 7%. In North America, higher units in use in the acute care, long
term care and home care markets were partially offset by lower prices and a mix
down in product utilization. Rental revenue in Europe was essentially flat
compared to 1997. Funeral Service sales were down $1 million, or 1%, due
primarily to pricing and lower product mix, partially offset by increased unit
volume of burial caskets and cremation products. Insurance revenues grew $11
million or 16%. Earned premium revenue was up due to the increase in insurance
in-force year over year. Policy sales were down in the third quarter due
primarily to increased competitive pressures. Higher investment income
reflected the larger investment portfolio, partially offset by marginally lower
yields. Net gains on the sale of investments of $7 million compares with $4
million in the third quarter of 1997.
Gross profit on Health Care sales of $74 million was up $10 million, or 16%, and
as a percentage of sales was 40.9% compared with 44.8% in the third quarter of
1997. The growth in gross profit dollars reflects the acquisitions and higher
shipments, partially offset by the sale of Medeco. The decline in margins on a
percentage basis was due largely to the effect of the acquired companies' lower
margins. Excluding the acquisitions and Medeco, gross profit margins were
unchanged year over year. Gross profit on rental revenue was up $4 million, or
12%, and as a percentage of revenues was 37.8% versus 35.9% in 1997. This
improvement in profitability reflected increased therapy unit utilization and
control of service costs, partially offset by the aforementioned pricing and mix
issues. Gross profit on Funeral Service sales declined $3 million, or 5%, and
as a percentage of sales was 46.8% versus 48.8% in the third quarter of 1997 due
primarily to lower pricing and mix.
Insurance operating profit of $16 million increased $5 million, or 45%, as a
result of the revenue factors discussed above. The shortfall in policy sales
did not have a significant effect on current year revenues and profitability.
Other operating expenses (including those of insurance operations and excluding
the restructuring charges discussed in Note 7) increased $7 million, or 6%, and
as a percentage of revenues were 26.5% versus 28.2% in last year's third
quarter. Costs associated with the 1998 acquisitions were offset by ongoing
operational improvements.
10
<PAGE>
Other income, net, reflects the pre-tax gain on the sale of Medeco as discussed
in Note 6.
The consolidated effective income tax rate was 37.3% in the third quarter of
1998 versus 39.7% in the comparable period of 1997 due primarily to lower
operating losses in Europe.
NINE MONTHS ENDED AUGUST 29, 1998 COMPARED WITH NINE MONTHS
ENDED AUGUST 30, 1997
Except as noted below, the factors affecting third quarter comparisons also
affected year to date comparisons.
Consolidated revenues of $1,470 million were up $169 million or 13%. Health
Care sales grew $109 million or 26%. Excluding acquisitions and results for
Medeco, they were up $35 million or 9% due to higher electric bed, frames,
furniture and architectural product shipments in North America. Excluding
unfavorable currency adjustments, capital shipments in Europe increased
approximately 5%. Health Care rental revenue of $310 million grew 10% year over
year as higher units in use were offset by pricing pressures and lower product
mix. Funeral Service sales were essentially unchanged due to unit volume
increases being offset by pricing and mix. Insurance revenue increased $32
million, or 16%, due to growth in earned premiums, investment income and net
capital gains.
Gross profit on Health Care sales of $219 million was up $37 million, or 20%,
and as a percentage of sales was 41.8% versus 43.9% in 1997. Excluding
acquisitions and Medeco, margins were down slightly. Gross profit on rental
revenues was up $19 million, or 18%, and as a percentage of revenues was 40.3%
versus 37.7% in 1997. Gross profit on Funeral Service sales of $194 million
declined $3 million, or 2%, and as a percentage of sales was down marginally due
to the aforementioned pricing and mix issues.
Insurance operating profit of $36 million was up $9 million or 33% due primarily
to higher investment income and capital gains.
Other operating expenses (including insurance operating and excluding the
restructuring charges) increased $38 million, or 11%, and as a percentage of
revenues were 26.6% in 1998 compared with 27.1% in 1997. Various operational
improvements and lower legal expenses were largely offset by acquisition related
costs.
Interest expense increased $3 million due to the $100 million of debentures
issued in the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities and selected borrowings represent the
Company's primary sources of funds for growth of the business, including capital
expenditures and acquisitions. Cash and cash equivalents (excluding the
investments of insurance operations) at August 29, 1998 of $283 million were
down $81 million from November 29, 1997. Cash provided by operating activities
of $76 million in the first nine months was
11
<PAGE>
$83 million lower than the comparable period of 1997. Excluding the effect of
acquisitions, net working capital increased $65 million from year end. The
increase in other current assets primarily reflects the tax benefit relative to
the impaired value of the German business. The decline in accounts payable and
accrued expenses totaling $38 million was due to payments on various items
accrued at year end, including a $13 million treasury stock purchase, 1997
incentive compensation and other operating expenses driven by high fourth
quarter production levels.
Acquisitions (discussed in Note 5) included Air-Shields, Inc. ($102 million) and
MEDAES Holdings, Inc. ($60 million). The activity in Forethought's investment
portfolio reflects the objective of matching proceeds with expected policy
benefit payments while maximizing yields within statutory and management
constraints.
On December 8, 1997, the Company issued the remaining $100 million of debentures
under a shelf registration statement filed with Securities and Exchange
Commission in 1993. The net proceeds of $98 million will be used for working
capital, capital expenditures and acquisitions. Treasury stock acquisitions
include $42 million for the acquisition of 990,000 shares from a trust
established by a founder of the Company and $22 million purchased on the open
market. Insurance premiums received were $11 million below the first three
quarters of 1997 due to fewer trust rollovers and lower contract volume and
average funeral value.
FACTORS THAT MAY AFFECT FUTURE RESULTS
As discussed in the Company's latest annual report, legislative changes which
were phased in beginning in the third quarter will have a dampening effect on
the Company's rental revenue derived from Medicare patients in the long-term
care market.
YEAR 2000 DATE CONVERISON
Many existing computer programs use only two digits to identify years. These
programs were designed without consideration for the affect of the upcoming
change in century, and if not corrected, could fail or create erroneous
results by or at the year 2000. Essentially all of the Company's information
technology based systems, as well as many non-information technology based
systems, are affected by the "Year 2000" issue. Technology based systems
reside on mainframes, servers and personal computers in the U.S. and in the
foreign countries where the Company has operations. Specific systems include
accounting, payroll, financial reporting, product development, inventory
tracking and control, business planning, tax, accounts receivable, accounts
payable, purchasing, distribution, and numerous word processing and
spreadsheet applications. The Company's financial services business utilizes
life insurance, accounting and actuarial systems that are also affected.
Non-information technology based systems include equipment and services
containing imbedded microprocessors, such as building management systems,
manufacturing process control systems, clocks, security systems and products
sold or leased to customers. All of the Company's businesses have relationships
with numerous third parties, including material suppliers, utility companies,
transportation companies, insurance companies, banks and brokerage firms, that
may be affected by the Year 2000 issue.
12
<PAGE>
The Company's State of Readiness
- --------------------------------
Remediation plans have been established for all major systems potentially
affected by the Year 2000 issue. The primary phases and current status of the
plans for internal technology based systems are summarized as follows:
1. IDENTIFICATION OF ALL APPLICATIONS AND HARDWARE WITH POTENTIAL YEAR 2000
ISSUES. To the best of the Company's knowledge, this phase has been
completed with the exception of certain systems in Hill-Rom's recently
acquired operations, which should be complete in the fourth quarter of
1998.
2. FOR EACH ITEM IDENTIFIED, PERFORM AN ASSESSMENT TO DETERMINE AN APPROPRIATE
ACTION PLAN AND TIMETABLE FOR REMEDIATION OF EACH ITEM. A PLAN MAY CONSIST
OF REPLACEMENT, CODE REMEDIATION, UPGRADE OR ELIMINATION OF THE APPLICATION
AND INCLUDES RESOURCE REQUIREMENTS. This phase has been completed with the
exception of certain systems noted above, which should be complete in the
first quarter of 1999.
3. IMPLEMENTATION OF THE SPECIFIC ACTION PLAN. Specific action plans have
been started for nearly all known mission-critical systems as of the end of
the third quarter. Action plans for remaining systems should begin by the
end of the first quarter of 1999.
4. TEST EACH APPLICATION UPON COMPLETION. Testing is in process or has been
completed for all systems for which the remediation plan has been
completed. Testing of the remaining systems should be completed by the
third quarter of 1999.
5. PLACE THE NEW PROCESS INTO PRODUCTION. Many applications and systems have
been put into production. These include servers, personal computers and
various software programs. Applications and systems are being put into
production once they have been tested. All affected applications and
systems should be in production by the third quarter of 1999 with the
exception of certain systems in Hill-Rom's European operations which should
be placed into production by the fourth quarter of 1999.
The Company is in the process of identifying all non-information technology
based systems. Appropriate remediation plans are being developed, implemented
and tested when each affected system is identified. Identification should be
completed by the first quarter of 1999, and plans should be developed and
implemented by the end of the third quarter of 1999.
Identification of areas of potential third party risk is currently in process
and, for those areas identified to date, remediation plans are being developed.
Identification should be completed in the fourth quarter and plans should be
developed and implemented by the end of the third quarter of 1999.
13
<PAGE>
The Costs Involved
- ------------------
The total cost to the Company of achieving Year 2000 compliance is not expected
to exceed $10 million and will consist primarily of the utilization of internal
resources. Spending to date totals approximately $2.5 million. Costs relating
to Year 2000 compliance are included in the Information Systems budget and are
immaterial as a percentage of that budget. All costs related to achieving Year
2000 compliance are based on management's best estimates. There can be no
guarantee that actual results will not differ from estimates.
Risks and Contingency Plan
- --------------------------
The Company is in the process of determining the risks it would face in the
event certain aspects of its Year 2000 remediation plan fail. It is also
developing contingency plans for all mission-critical processes. Under a
"worse case" scenario, the Company's manufacturing operations would be unable
to build and deliver product due to internal system failures and/or the
inability of vendors to deliver raw materials and components. Alternative
suppliers are being identified and inventory levels of certain key components
may be temporarily increased. While virtually all internal systems can be
replaced with manual systems on a temporary basis, the failure of any
mission-critical system will have at least a short-term negative affect on
operations. The failure of national and worldwide banking information
systems or the loss of essential utilities services due to the Year 2000
issue could result in the inability of many businesses, including the
Company, to conduct business. Risk assessment and contingency plans should
be completed in the first quarter of 1999.
ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", in June 1998. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities and requires that all derivatives be recognized on the
balance sheet at fair value. Changes in fair values of derivatives will be
accounted for based upon their intended use and designation. Since the
Company's holdings in such instruments is minimal, adoption of this standard is
not expected to have a material effect on the financial statements. The Company
is required to adopt the Statement not later than the first quarter of fiscal
2000.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
This report contains certain forward-looking statements which are based on
management's current views and assumptions regarding future events and financial
performance. These statements are qualified by reference to "Disclosure
Regarding Forward-Looking Statements" in Part II of the Company's Annual Report
on Form 10-K for the fiscal year ended November 29, 1997 which lists important
factors that could cause actual results to differ materially from those
discussed in this report.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 27 Financial Data Schedule
B. Reports on Form 8-K
There were no reports filed on Form 8-K during the third quarter
ended August 29, 1998.
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.
HILLENBRAND INDUSTRIES, INC.
DATE: October 12, 1998 BY: /S/ Donald G. Barger, Jr.
----------------------------
Donald G. Barger, Jr.
Chief Financial Officer
DATE: October 12, 1998 BY: /S/ James D. Van De Velde
------------------------------
James D. Van De Velde
Controller
15
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED AUGUST 29,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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