<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 FEBRUARY 28, 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 - 67,526,880 as of April 4, 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
Ended 2/28/98 and 3/1/97
Consolidated Balance Sheets at 4
2/28/98 and 11/29/97
Consolidated Cash Flows for the Three Months 5
Ended 2/28/98 and 3/1/97
Notes to Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II - OTHER INFORMATION
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 11
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
------------------
02/28/98 03/01/97
-------- --------
(In Millions Except Per Share Data)
<S> <C> <C>
Net revenues:
Health Care sales . . . . . . . . . . . $ 146 $ 139
Health Care rentals . . . . . . . . . . 108 96
Funeral Service sales . . . . . . . . 148 147
Insurance revenues. . . . . . . . . . . 77 64
-------- -------
Total revenues. . . . . . . . . . . . . 479 446
Cost of revenues:
Health Care cost of goods sold. . . . . 86 78
Health Care rental expenses . . . . . . 62 61
Funeral Service cost of goods sold. . . 77 76
Insurance cost of revenues. . . . . . . 57 47
-------- -------
Total cost of revenues. . . . . . . . . 282 262
Other operating expenses . . . . . . . . . . 125 118
-------- -------
Operating profit . . . . . . . . . . . . . . 72 66
Interest expense . . . . . . . . . . . . . . (7) (6)
Investment income. . . . . . . . . . . . . . 5 4
Other expense, net. . . . . . . . . . . . . . (1) -
-------- -------
Income before income taxes . . . . . . . . . 69 64
Income taxes . . . . . . . . . . . . . . . . 26 25
-------- -------
Net income . . . . . . . . . . . . . . . . . $ 43 $ 39
-------- -------
-------- -------
Basic and diluted net income
per common share . . . . . . . . . . . . . $ .64 $ .56
-------- -------
-------- -------
Dividends per common share . . . . . . . . . $ .180 $ .165
-------- -------
-------- -------
Average shares outstanding (thousands) 67,535 68,793
-------- -------
-------- -------
</TABLE>
See Notes to Consolidated Financial Statements
3
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Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS 02/28/98 11/29/97
-------- --------
(In Millions)
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 251 $ 364
Trade receivables. . . . . . . . . . . . . . . . . . . . 364 333
Inventories. . . . . . . . . . . . . . . . . . . . . . . 122 79
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 50 45
------- -------
Total current assets. . . . . . . . . . . . . . . . . . 787 821
Equipment leased to others, net. . . . . . . . . . . . . . 95 91
Property, net. . . . . . . . . . . . . . . . . . . . . . . 241 238
Other assets:
Intangible assets, net . . . . . . . . . . . . . . . . . 240 126
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 60 51
------- -------
Total other assets. . . . . . . . . . . . . . . . . . . 300 177
Insurance assets:
Investments. . . . . . . . . . . . . . . . . . . . . . . 1,989 1,934
Deferred policy acquisition costs. . . . . . . . . . . . 489 473
Deferred income taxes . . . . . . . . . . . . . . . . . 40 43
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 50 51
------- -------
Total insurance assets. . . . . . . . . . . . . . . . . 2,568 2,501
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 3,991 $ 3,828
------- -------
------- -------
LIABILITIES
Current liabilities:
Short-term debt. . . . . . . . . . . . . . . . . . . . . $ 59 $ 60
Current portion of long-term debt. . . . . . . . . . . . 1 1
Trade accounts payable . . . . . . . . . . . . . . . . . 66 71
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 229 227
------- -------
Total current liabilities . . . . . . . . . . . . . . . 355 359
Other liabilities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . 303 203
Other long-term liabilities . . . . . . . . . . . . . . 86 75
Deferred income taxes. . . . . . . . . . . . . . . . . . 1 7
------- -------
Total other liabilities . . . . . . . . . . . . . . . . 390 285
Insurance liabilities:
Benefit reserves . . . . . . . . . . . . . . . . . . . . 1,711 1,667
Unearned revenue . . . . . . . . . . . . . . . . . . . . 626 605
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 31 26
------- -------
Total insurance liabilities . . . . . . . . . . . . . . 2,368 2,298
------- -------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 3,113 2,942
------- -------
Commitments and contingencies (Note 4)
SHAREHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . . . . . . . . 4 4
Additional paid-in capital . . . . . . . . . . . . . . . 14 14
Retained earnings. . . . . . . . . . . . . . . . . . . . 1,116 1,085
Accumulated unrealized gain on investments . . . . . . . 41 34
Foreign currency translation adjustment. . . . . . . . . (8) (3)
Treasury stock . . . . . . . . . . . . . . . . . . . . . (289) (248)
------- -------
Total shareholders' equity . . . . . . . . . . . . . . 878 886
------- -------
Total liabilities and shareholders' equity . . . . . . . . $ 3,991 $ 3,828
------- -------
------- -------
</TABLE>
See Notes to Consolidated Financial Statements
4
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Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Cash Flows
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
02/28/98 03/01/97
-------- --------
(In Millions)
<S> <C> <C>
Operating activities:
Net income. . . . . . . . . . . . . . . . . . . $ 43 $ 39
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization . . . . . . . . 25 26
Change in noncurrent deferred income taxes. . (6) (4)
Change in net working capital excluding
cash, current debt and acquisitions . . . . (53) (10)
Change in insurance items:
Deferred policy acquisition costs. . . . . . (16) (19)
Other insurance items, net . . . . . . . . . 21 15
Other, net . . . . . . . . . . . . . . . . . 7 3
----- -----
Net cash provided by operating activities . . . . 21 50
----- -----
Investing activities:
Capital expenditures, net . . . . . . . . . . . (21) (13)
Acquisitions of businesses. . . . . . . . . . . (164) -
Insurance investments:
Purchases . . . . . . . . . . . . . . . . . . (154) (327)
Proceeds on maturities. . . . . . . . . . . . 32 40
Proceeds on sales prior to maturity . . . . . 77 222
----- -----
Net cash used in investing activities . . . . . . (230) (78)
----- -----
Financing activities:
Additions (reductions) to debt, net . . . . . . 101 (4)
Payment of cash dividends . . . . . . . . . . . (12) (11)
Treasury stock acquisitions . . . . . . . . . . (42) -
Insurance premiums received. . . . . . . . . . 128 147
Insurance benefits paid . . . . . . . . . . . . (78) (70)
----- -----
Net cash provided by financing activities . . . . 97 62
----- -----
Effect of exchange rate changes on cash . . . . . (1) -
----- -----
Total cash flows. . . . . . . . . . . . . . . . . (113) 34
Cash and cash equivalents:
At beginning of period . . . . . . . . . . . . . 364 266
At end of period . . . . . . . . . . . . . . . . $ 251 $ 300
----- -----
----- -----
</TABLE>
See Notes to Consolidated Financial Statements
5
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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>
02/28/98 11/29/97
-------- --------
<S> <C> <C>
Allowance for possible losses and
discounts on trade receivables.......... $ 24 $ 25
Accumulated depreciation of equipment
leased to others and property........... $ 614 $ 602
Accumulated amortization of intangible
assets.................................. $ 157 $ 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 common shares outstanding during
6
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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
first quarter of 1998 and all prior periods. Cumulative treasury stock
acquired of 14,289,067 shares, less cumulative shares reissued of
1,576,399, 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
------------------
02/28/98 03/01/97
-------- --------
<S> <C> <C>
Net income (in thousands) $42,908 $38,504
Average shares outstanding 67,535,131 68,792,649
Basic and diluted earnings
per common share $.64 $.56
</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 February 28, 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 February 28, 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, 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 $62
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 has been recorded as goodwill and is being amortized over
20 years. These acquisitions, singularly and combined, will not have a
significant effect on the Company's results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997
Consolidated revenues of $479 million were up $33 million or 7%. Health Care
sales grew $7 million, or 5%, due primarily to the acquisition of Air-Shields
early in the quarter. The incremental Air-Shields volume and increased
architectural products and long-term care shipments were partially offset by
lower bed, frames and furniture shipments. Sales growth in Europe (France,
Germany and the United Kingdom) was mostly offset by unfavorable currency
adjustments. At Medeco Security Locks, shipments were up marginally in both
8
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the door security and route management businesses. Health Care rental revenue
increased $12 million or 13%. In North America, higher units in use in the
acute care, home care and long-term care markets was partially offset by lower
rates caused by a mix down in product utilization and pricing pressures. Rental
revenue in Europe was essentially flat due to unfavorable currency adjustments.
Funeral Service sales were up $1 million, or 1%, due to increased unit volume
and market penetration of traditional caskets and cremation products, partially
offset by lower product mix. Insurance revenues grew $13 million or 20%.
Earned premium revenue was up due to increased insurance in force. Higher
investment income reflected the larger investment portfolio, partially offset by
marginally lower yields. Capital gains were also up year over year.
Gross profit on Health Care sales of $60 million was down $1 million, or 2%, and
as a percentage of sales was 41.1% compared with 43.9% in the first quarter of
1997 due primarily to product mix. In addition to the effect of the inclusion
of lower margin Air-Shields products, sales of architectural products, which
also generate lower margins, were up and Advance series bed sales were down.
Start-up costs associated with early shipments of the TotalCare bed also had a
negative effect on margins. Gross profit on rental revenues was up $11 million,
or 31%, and as a percentage of revenues improved from 36.5% to 42.6% due to
increased therapy unit utilization and control of service costs, partially
offset by the aforementioned lower rates. Consistent with sales growth, gross
profit on Funeral Service sales was essentially unchanged at $71 million. As a
percentage of sales it was down marginally from 48.3% to 48.0% due to lower
product mix.
Insurance operating profit of $10 million increased $3 million, or 43%, from the
first quarter of 1997 due to the revenue factors discussed above and continued
control of administrative expenses.
Other operating expenses (including insurance operations) increased $7 million,
or 6%, and as a percentage of revenues were 26.1% versus 26.5% in last year's
first quarter. Higher incentive compensation expense and costs associated with
recent acquisitions were largely offset by lower legal expenses and ongoing
operational improvements.
The increase in interest expense reflects the issuance of debentures in the
first quarter, as discussed below.
The consolidated effective income tax rate was 37.7% in the first quarter of
1998 versus 39.1% in the comparable period of 1997. This improvement was due
primarily to lower operating losses in Europe.
9
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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 February 28, 1998 of $251 million
were down $113 million from November 29, 1997. Cash flow from operating
activities of $21 million in the first quarter was $29 million lower than the
first quarter of 1997. Excluding the effect of acquisitions, net working
capital increased $53 million from year end. The inventory increase of $13
million primarily reflected inventory associated with Hill-Rom's TotalCare
bed, which was introduced in late 1997. The decline in accounts payable and
accrued expenses totaling $40 million was due to first quarter 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.
Capital expenditures were up $8 million from the first quarter of 1997 due to
higher spending throughout the Company. Capital spending in 1997 was at its
lowest level in six years. Acquisitions (discussed in Note 5) included
Air-Shields, Inc. ($102 million) and MEDAES Holdings, Inc. ($62 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. The $42 million
stock purchase in the first quarter represented the acquisition of 990,000
shares from a trust established by a founder of the Company. Insurance
premiums received were $19 million below the first quarter of 1997 due to
fewer trust rollovers. Excluding trust rollovers, premiums were up
marginally as increased contract volume was mostly offset by lower average
funeral value.
FACTORS THAT MAY AFFECT FUTURE RESULTS
As discussed in the Company's latest annual report, legislative changes to be
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. Although losses in Hill-Rom's European operations have been reduced,
continued softness in most markets will result in Europe remaining unprofitable
overall for the year.
10
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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.
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 first quarter
ended February 28, 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: April 9, 1998 BY: /S/ Donald G. Barger, Jr.
----------------------------------
Donald G. Barger, Jr.
Chief Financial Officer
DATE: April 9, 1998 BY: /S/ James D. Van De Velde
----------------------------------
James D. Van De Velde
Controller
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED UNDER ITEM 1 OF THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-28-1998
<PERIOD-START> NOV-30-1997
<PERIOD-END> FEB-28-1998
<CASH> 251
<SECURITIES> 0
<RECEIVABLES> 388
<ALLOWANCES> 24
<INVENTORY> 122
<CURRENT-ASSETS> 787
<PP&E> 950
<DEPRECIATION> 614
<TOTAL-ASSETS> 3,991
<CURRENT-LIABILITIES> 355
<BONDS> 303
0
0
<COMMON> 4
<OTHER-SE> 874
<TOTAL-LIABILITY-AND-EQUITY> 3,991
<SALES> 294
<TOTAL-REVENUES> 479
<CGS> 163
<TOTAL-COSTS> 282
<OTHER-EXPENSES> 125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 69
<INCOME-TAX> 26
<INCOME-CONTINUING> 43
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
