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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 MAY 29, 1999 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
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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 - 66,257,190 as of July 1, 1999.
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HILLENBRAND INDUSTRIES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Income for the Three Months 3
And Six Months Ended 5/29/99 and 5/30/98
Consolidated Balance Sheets at 4
5/29/99 and 11/28/98
Consolidated Cash Flows for the Six Months 5
Ended 5/29/99 and 5/30/98
Notes to Consolidated Financial Statements 6-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 5 - Other Information 19-20
Item 6 - Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
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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 Six Months Ended
--------------------- --------------------
05/29/99 05/30/98 05/29/99 05/30/98
-------- -------- -------- --------
(In Millions Except Per Share Data)
<S> <C> <C> <C> <C>
Net revenues:
Health Care sales .............................. $ 192 $ 197 $ 369 $ 343
Health Care rentals ............................ 87 104 180 212
Funeral Services sales ......................... 157 134 318 282
Insurance revenues ............................. 88 73 173 150
-------- -------- -------- --------
Total revenues ................................. 524 508 1,040 987
Cost of revenues:
Health Care cost of goods sold ................. 113 112 215 198
Health Care rental expenses .................... 60 62 121 124
Funeral Services cost of goods sold ............ 79 69 162 146
Insurance cost of revenues ..................... 64 53 126 110
-------- -------- -------- --------
Total cost of revenues ......................... 316 296 624 578
Other operating expenses ............................ 140 138 273 263
Unusual charges ..................................... 9 -- 9 --
-------- -------- -------- --------
Operating profit .................................... 59 74 134 146
Interest expense .................................... (6) (7) (13) (14)
Investment income ................................... 3 3 7 8
Other income (expense), net ......................... (1) 2 (2) 1
-------- -------- -------- --------
Income before income taxes .......................... 55 72 126 141
Income taxes ........................................ 20 27 46 53
-------- -------- -------- --------
Net income .......................................... $ 35 $ 45 $ 80 $ 88
======== ======== ======== ========
Basic and diluted earnings
per common share (Note 3) ........................ $ .53 $ .66 $ 1.20 $ 1.30
======== ======== ======== ========
Dividends per common share .......................... $ .195 $ .180 $ .39 $ .36
======== ======== ======== ========
Average shares outstanding (thousands) .............. 66,575 67,525 66,725 67,530
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS 05/29/99 11/28/98
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(In Millions)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 247 $ 297
Trade receivables ........................................ 387 392
Inventories .............................................. 127 105
Other .................................................... 69 64
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Total current assets .................................... 830 858
Equipment leased to others, net ............................ 78 81
Property, net .............................................. 213 221
Other assets:
Intangible assets, net ................................... 180 198
Other .................................................... 140 89
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Total other assets ...................................... 320 287
Insurance assets:
Investments .............................................. 2,221 2,204
Deferred policy acquisition costs ........................ 557 536
Deferred income taxes .................................... 71 34
Other .................................................... 71 59
------- -------
Total insurance assets .................................. 2,920 2,833
------- -------
Total assets ............................................... $ 4,361 $ 4,280
======= =======
LIABILITIES
Current liabilities:
Short-term debt .......................................... $ 56 $ 60
Current portion of long-term debt ........................ -- 1
Trade accounts payable ................................... 66 69
Other .................................................... 206 245
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Total current liabilities ............................... 328 375
Other liabilities:
Long-term debt ........................................... 302 303
Other long-term liabilities .............................. 89 86
Deferred income taxes .................................... 1 4
------- -------
Total other liabilities ................................. 392 393
Insurance liabilities:
Benefit reserves ......................................... 1,982 1,856
Unearned revenue ......................................... 697 674
Other .................................................... 40 30
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Total insurance liabilities ............................. 2,719 2,560
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Total liabilities .......................................... 3,439 3,328
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Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common stock ............................................. 4 4
Additional paid-in capital ............................... 17 15
Retained earnings ........................................ 1,275 1,221
Accumulated other comprehensive (loss)income (Note 4) .... (17) 45
Treasury stock ........................................... (357) (333)
------- -------
Total shareholders' equity .............................. 922 952
------- -------
Total liabilities and
shareholders' equity ...................................... $ 4,361 $ 4,280
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
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Hillenbrand Industries, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Cash Flows Six Months Ended
------------------
05/29/99 05/30/98
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(In Millions)
<S> <C> <C>
Operating activities:
Net income ....................................... $ 80 $ 88
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization .................. 45 51
Change in noncurrent deferred
income taxes ................................. (3) (6)
Change in net working capital,
excluding cash, current debt and
acquisitions ................................. (65) (83)
Change in insurance items:
Deferred policy acquisition costs ............. (21) (32)
Other insurance items, net .................... 34 33
Other, net ..................................... (26) (19)
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Net cash provided by operating activities .......... 44 32
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Investing activities:
Capital expenditures, net ........................ (42) (38)
Acquisitions of businesses, net of cash
acquired ....................................... (26) (159)
Insurance investments:
Purchases ...................................... (504) (371)
Proceeds on maturities ......................... 112 63
Proceeds on sales .............................. 351 207
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Net cash used in investing
activities ........................................ (109) (298)
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Financing activities:
Additions to debt, net ........................... 2 98
Payment of cash dividends ........................ (26) (25)
Treasury stock acquisitions ...................... (25) (43)
Insurance premiums received ...................... 232 255
Insurance benefits paid .......................... (166) (148)
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Net cash provided by financing activities .......... 17 137
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Effect of exchange rate changes on cash ............ (2) (1)
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Total cash flows ................................... (50) (130)
Cash and cash equivalents:
At beginning of period ............................ 297 364
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At end of period .................................. $ 247 $ 234
===== =====
</TABLE>
See Notes to Consolidated Financial Statements
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Hillenbrand Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions except per share data or where otherwise noted)
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.
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
2. Supplementary Balance Sheet Information
The following information pertains to non-insurance assets and
consolidated shareholders' equity:
<TABLE>
<CAPTION>
05/29/99 11/28/98
-------- --------
<S> <C> <C>
Allowance for possible losses and
discounts on trade receivables ........... $ 26 $ 27
Inventories
Finished products ........................ 73 58
Work in process .......................... 40 32
Raw materials ............................ 14 15
----------- -----------
Total inventory ..................... 127 105
Accumulated depreciation of equipment
leased to others and property ............ $ 658 $ 648
Accumulated amortization of intangible
assets ................................... $ 153 $ 150
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>
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3. Earnings per Common Share
Basic earnings per common share were computed by dividing net income by
the average number of common shares outstanding including the effect of
deferred vested shares under the Company's Senior Executive
Compensation Program. Diluted earnings per common share were computed
consistent with the basic earnings per share calculation including the
effect of dilutive potential common shares. 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 effect on diluted earnings per common share in any of the
periods presented. Cumulative treasury stock acquired of 15,704,391
shares, less cumulative shares reissued of 1,647,669, have been
excluded in determining the average number of shares outstanding.
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- -------------------------
05/29/99 05/30/98 05/29/99 05/30/98
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net income (in thousands) $ 35,062 $ 44,706 $ 79,803 $ 87,614
Average shares outstanding 66,575,338 67,524,650 66,724,789 67,529,891
Basic and diluted earnings per
common share $ .53 $ .66 $ 1.20 $ 1.30
</TABLE>
4. Comprehensive Income
As of November 29, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
The adoption of this Standard did not affect the Company's financial
position or results of operations. SFAS No. 130 requires unrealized
gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. Due to this change, certain balance sheet
reclassifications have been made in order for previously reported
amounts to conform to SFAS No. 130.
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The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
05/29/99 05/30/98 05/29/99 05/30/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 35 $ 45 $ 80 $ 88
Net change in unrealized gain
(loss) on available-for-sale
securities (30) 5 (67) 12
Foreign currency translation
adjustment 2 (6) 5 (11)
------- ------- -------- -------
Comprehensive income $ 7 $ 44 $ 18 $ 89
======= ======= ======== =======
</TABLE>
The composition of accumulated other comprehensive income at May 29,
1999 and November 28, 1998 is the cumulative adjustment for unrealized
gains or losses on available-for-sale securities of ($15) and $52
million, respectively, and the foreign currency translation adjustment
of ($2) and ($7) million, respectively.
5. Contingencies
As discussed under Item 3 of the Company's Annual Report on Form 10-K
for the fiscal year ended November 28, 1998, Hillenbrand Industries,
Inc., and its subsidiary Hill-Rom Company, Inc., are the subject of an
antitrust suit brought by Kinetic Concepts, Inc. (KCI) 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 May 29, 1999.
On November 20, 1996, the Company filed a Counterclaim to the above
action against 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 May 29, 1999.
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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 $5 million. The Company has provided adequate
reserves in its financial statements for these matters. These reserves
have been determined without consideration of possible loss recoveries
from third parties. 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.
6. Acquisitions
On December 31, 1998, Forethought Life Insurance Company, a
wholly-owned subsidiary of Forethought Financial Services, Inc.,
acquired the stock of Arkansas National Life Insurance Company for
approximately $31 million, including costs of acquisition. This
acquisition has been accounted for as a purchase, and the results of
operations of the acquired business have been included in the
consolidated financial statements since the acquisition date. The
excess of the purchase price over the fair value of net assets acquired
was approximately $3 million which is being amortized on a
straight-line basis over 20 years. Unaudited fiscal 1998 and 1999 pro
forma revenue, net income and earnings per share amounts would not have
been materially different from reported amounts herein.
In the second quarter of 1999, Hill-Rom, a wholly-owned subsidiary,
finalized the purchase price for Air-Shields, Inc. As a result of this
settlement, goodwill related to the acquisition was reduced by $5
million.
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7. Restructuring Charges and Impairment of Assets
On March 30, 1999, Batesville Casket Company, a wholly owned
subsidiary, announced the planned closing of its Campbellsville,
Kentucky casket manufacturing plant. Approximately 200 production and
administrative employees are affected. Future production of
Campbellsville casket units is being transferred to existing plants
located in Batesville, Indiana and Manchester, Tennessee.
The plan to close the Campbellsville manufacturing plant necessitated a
$9 million charge in the second quarter. The non-cash component
consisted of a $5 million write-down of property, plant and equipment
which was determined based upon independent assessments, market
appraisals and management estimates of losses to be incurred upon the
disposition of the Campbellsville facility and surplus equipment.
Property, plant and equipment to be disposed of have an adjusted fair
market value of approximately $5 million, not including costs of
disposal as of May 29, 1999. Additional charges in the plan include $3
million for severance and employee benefit costs and $1 million of
other estimated plant closing costs. In addition to costs accrued under
the plan, additional costs of approximately $2 million will be incurred
to relocate certain manufacturing and business processes to Batesville
and Manchester. These costs will be expensed as incurred as required by
generally accepted accounting principles.
As of May 29, 1999, manufacturing operations had been discontinued at
the plant. Approximately $1 million of costs have been incurred
primarily related to severance and employee benefits. Substantially all
employee related costs are expected to be paid in the next six months.
The disposition of property, plant and equipment is targeted to be
completed within the next twelve months, but could take longer.
Depreciation expense on assets to be sold was reflected through the
plant closing date.
In August 1998, the Board of Directors of the Company approved a plan
to restructure Hill-Rom's direct and support operations in Germany and
Austria to permit the Company to more efficiently meet the needs of its
customers and improve profitability. Under the plan, the Company will
reduce fixed costs and align manufacturing, distribution, sales and
administrative functions with anticipated demand. The alignment will
result in the closure of manufacturing facilities in Germany and
Austria and the relocation of certain manufacturing and business
processes to other European locations.
The restructuring plan necessitated the provision of a $70 million
asset impairment and restructuring charge in 1998. The non-cash
component of the charge included a $43 million write-off of German
subsidiary goodwill, $7 million for the write-down of property, plant
and equipment held for sale and $3 million for obsolete inventory
resulting from the realignment of operations. The plan also included
additional charges for severance and employee benefit costs of $10
million and other estimated plant closing costs of $7 million.
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As of May 29, 1999, manufacturing operations have been discontinued in
Germany and Austria. Approximately $9 million in severance and employee
benefit costs and $3 million in other plant closing costs were incurred
through the second quarter of 1999. No adjustments were made to reserves
through the second quarter.
The Company expects substantially all employee related costs associated
with this restructuring to be paid in fiscal 1999. The disposition of
property, plant and equipment, along with excess and discontinued
inventories, is targeted to be completed within the next six months, but
could take longer.
The remaining reserve balances as of May 29, 1999 for the above
restructuring plans are as follows:
Inventory $3
Severance and employee
benefit costs $3
Other plant closing
costs $5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
Consolidated revenues of $524 million increased $16 million, or 3%, compared to
the second quarter of 1998. Health Care sales decreased $5 million, or 3%, to
$192 million. This decrease is mainly due to the inclusion of Medeco in the
prior year. Medeco was sold in the third quarter of 1998. Excluding prior year
Medeco revenues, Health Care sales increased approximately 7% due to continued
strong sales of the TotalCare(R) bed, and increased sales of Long Term Care
capital and procedural products offset by lower revenues from architectural and
maternal infant care products. European Health Care sales decreased
approximately 26% in the second quarter due primarily to the discontinuance of
certain products associated with the realignment and restructuring of European
manufacturing operations. Health Care rental revenue of $87 million decreased
$17 million, or 16%, due mainly to the change in Medicare Part A patient
reimbursement practices in the U.S. long-term care market. The U.S. long-term
care business unit continues to experience unfavorable changes in product mix
and volume. The U.S. acute care and home care business units experienced good
revenue growth over the second quarter of 1998 while the European business unit
experienced marginal increases in revenue. Excluding revenues from the long term
care business unit in 1999 and 1998, Health Care rental revenues increased
approximately 7%. Funeral Services sales increased $23 million, or 17%, to $157
million in the second quarter due to increased unit volume and market
penetration of traditional caskets and cremation products. Funeral Services
insurance revenues were up 21%, or $15 million, to $88 million. Higher
investment income reflected the larger investment portfolio. Earned premium
revenue increased due to the increase in policies in-force year over year. Net
gains on the sale of investments of approximately $8 million compares with
approximately $2 million in the second quarter of 1998.
Gross profit on Health Care sales of $79 million decreased $6 million, or 7%. As
a percentage of sales gross profit was 41.1% compared to 43.1% in the second
quarter of 1998. Gross profit in the second quarter was affected by increased
warranty costs, product mix, production scheduling and other inefficiencies.
Gross profit on rental revenues decreased $15 million, or 36% to $27 million and
as a percentage of revenues declined from 40.4% to 31.0%, primarily due to the
change in Medicare Part A reimbursement practices described above. Funeral
Services sales gross profit increased 20%, or $13 million, to $78 million. As a
percentage of sales, gross profit increased from 48.5% in the second quarter of
1998 to 49.7% in 1999 due to unit volume and good cost control.
Funeral Services insurance operating profit of $10 million was comparable to the
second quarter of 1998. This was mainly due to an increase in benefits paid in
the second quarter compared to the prior year period.
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Other operating expenses (including insurance operations) increased $2 million
or 1% and as a percentage of revenues were 26.7% compared to 27.2% in the second
quarter of 1998. 1998 was affected by costs associated with acquisitions, and
1999 experienced lower incentive compensation costs.
The consolidated effective income tax rate was 36.7% in the second quarter of
1999 compared to 37.5% in the comparable period of 1998 mainly due to decreased
state tax expense.
SIX MONTHS 1999 COMPARED WITH SIX MONTHS 1998
Except as noted below, the factors affecting the second quarter comparisons also
affected year to date comparisons.
Consolidated revenues of $1,040 million increased $53 million, or 5%. Health
Care sales were up $26 million, or 8%, to $369 million. Excluding Medeco, which
was sold in the third quarter of 1998, health care sales increased approximately
15% driven by increased shipments of the TotalCare(R) bed, which has been very
successful, and increased shipments of Long Term Care capital products partially
offset by decreased sales in Europe. Health Care rental revenue decreased $32
million, or 15%, to $180 million due mainly to the change in Medicare Part A
reimbursement practices in the U.S. long-term care market. Excluding long-term
care revenues, overall rental revenues are up approximately 5% over last year.
European rental revenues are up approximately 2%. Funeral Services sales were up
13%, or $36 million, to $318 million compared to $282 million in 1998 due to
increased unit volume and greater market penetration. Funeral Services insurance
revenues were $173 million versus $150 million in 1998, a 15% increase. Earned
premiums, investment income and capital gains all increased at double digit
rates.
Consolidated gross profit increased $7 million, or 2% to $416 million. Gross
profit on Health Care sales increased 6%, or $9 million, to $154 million, and as
a percentage of sales was 41.7%, down from 42.3% in 1998. Health Care rental
gross profit was down $29 million to $59 million, a 33% decrease, and as a
percentage of sales was 32.8% versus 41.5% in 1998. This change is primarily due
to changes in Medicare Part A reimbursement discussed above. Gross profit on
Funeral Services sales of $156 million was a 15% increase over last year. As a
percentage of sales, Funeral Services gross profit was 49.1% versus 48.2% in
1998. This increase is mainly due to increased volume, good cost control and
process improvements.
Insurance operating profit of $21 million increased 5%, or $1 million, over
1998.
Other operating expenses (including insurance operations) were up $10 million,
or 4%, to $273 million and as a percentage of revenues were 26.3% versus 26.6%
in 1998.
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Investment income decreased $1 million due to a lower average cash balance
compared to 1998.
The consolidated income tax rate declined from 37.6% to 36.9% in 1999 due to
decreased state tax expense.
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 investments
of insurance operations) at May 29, 1999 of $247 million decreased $50 million
from November 28, 1998. Net cash generated from operating activities of $44
million was an increase of $12 million compared to 1998. Working capital,
excluding cash, current debt and acquisitions, increased $65 million from
year-end mainly due to an increase in inventory and a decrease in accounts
payable and current liabilities partially offset by a decrease in trade
receivables. The increase in inventory of $22 million relates primarily to
building up inventory to normal levels. Near the end of fiscal 1998, the Company
experienced a heavy shipping period, which decreased inventory levels. In
addition, some product has not shipped as planned, thus increasing inventory.
The decreases in accounts payable and current liabilities of $42 million were
due to first and second quarter payments on various items accrued at year-end,
including 1998 incentive compensation and other operating expenses driven by
high fourth quarter production and sales levels. In the second quarter, the
Company paid the loan of approximately $44 million relating to its Company Owned
Life Insurance (COLI) program.
Capital expenditures increased $4 million compared to 1998. In the first
quarter, Forethought Life Insurance Company, a wholly-owned subsidiary of
Forethought Financial Services, Inc., acquired Arkansas National Life Insurance
Company (see Note 6 for more information). Included in the acquisition of
Arkansas National Life Insurance Company were investments of approximately $80
million and approximately $54 million of benefit reserves. 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.
In financing activities, treasury stock acquisitions of $25 million consisted of
purchases on the open market. Insurance premiums received were $23 million lower
than the first half of last year due to fewer trust rollovers and lower contract
volume. The decrease in policy sales is due to slowed growth as Forethought's
entry into targeted jurisdictions is nearly complete and due to increased
competition. Insurance benefits paid increased $18 million primarily due to
adverse mortality in the second quarter.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
As discussed in the Company's latest annual report, legislative changes phased
in beginning July 1, 1998 have had and will continue to have a dampening effect
on the Company's rental revenue derived from Medicare patients in the long-term
care market.
RESTRUCTURING CHARGES AND IMPAIRMENT OF ASSETS
On March 30, 1999, Batesville Casket Company, a wholly owned subsidiary,
announced the planned closing of its Campbellsville, Kentucky casket
manufacturing plant. Approximately 200 production and administrative employees
are affected. Future production of Campbellsville casket units is being
transferred to existing plants located in Batesville, Indiana and Manchester,
Tennessee.
The plan to close the Campbellsville manufacturing plant necessitated a $9
million charge in the second quarter. The non-cash component consisted of a $5
million write-down of property, plant and equipment which was determined based
upon independent assessments, market appraisals and management estimates of
losses to be incurred upon the disposition of the Campbellsville facility and
surplus equipment. Property, plant and equipment to be disposed of have an
adjusted fair market value of approximately $5 million, not including costs of
disposal as of May 29, 1999. Additional charges in the plan include $3 million
for severance and employee benefit costs and $1 million of other estimated plant
closing costs. In addition to costs accrued under the plan, additional costs of
approximately $2 million will be incurred to relocate certain manufacturing and
business processes to Batesville and Manchester. These costs will be expensed as
incurred as required by generally accepted accounting principles.
As of May 29, 1999, manufacturing operations had been discontinued at the plant.
Approximately $1 million of costs have been incurred primarily related to
severance and employee benefits. Substantially all employee related costs are
expected to be paid in the next six months. The disposition of property, plant
and equipment is targeted to be completed within the next twelve months, but
could take longer. Depreciation expense on assets to be sold was reflected
through the plant closing date.
In August 1998, the Board of Directors of the Company approved a plan to
restructure Hill-Rom's direct and support operations in Germany and Austria to
permit the Company to more efficiently meet the needs of its customers and
improve profitability. Under the plan, the Company will reduce fixed costs and
align manufacturing, distribution, sales and administrative functions with
anticipated demand. The alignment will result in the closure of manufacturing
facilities in Germany and Austria and the relocation of certain manufacturing
and business processes to other European locations.
15
<PAGE> 16
The restructuring plan necessitated the provision of a $70 million asset
impairment and restructuring charge in 1998. The non-cash component of the
charge included a $43 million write-off of German subsidiary goodwill, $7
million for the write-down of property, plant and equipment held for sale and $3
million for obsolete inventory resulting from the realignment of operations. The
plan also included additional charges for severance and employee benefit costs
of $10 million and other estimated plant closing costs of $7 million.
As of May 29, 1999, manufacturing operations have been discontinued in Germany
and Austria. Approximately $9 million in severance and employee benefit costs
and $3 million in other plant closing costs were incurred through the second
quarter of 1999. No adjustments were made to reserves through the second
quarter.
The Company expects substantially all employee related costs associated with
this restructuring to be paid in fiscal 1999. The disposition of property, plant
and equipment, along with excess and discontinued inventories, is targeted to be
completed within the next six months, but could take longer.
The remaining reserve balances as of May 29, 1999 for the above restructuring
plans are as follows:
Inventory $3
Severance and employee
benefit costs $3
Other plant closing
costs $5
16
<PAGE> 17
YEAR 2000 DATE CONVERSION
Many existing computer programs use only two digits to identify years. These
programs were designed without consideration for the effect 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
potentially 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 embedded
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.
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 information 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.
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. To the best of the Company's knowledge,
this phase has been completed.
3. Implementation of the specific action plan. Specific action plans have been
started for all systems. Some action plans have been completed.
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 in the
fourth 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 in the fourth quarter of 1999.
17
<PAGE> 18
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. To the best of the Company's
knowledge, all affected non-information technology based systems have been
identified, and plans should be developed and implemented by the end of the
third quarter of 1999.
The Company is in the process of identifying all products sold or leased to
customers which are affected by the Year 2000 issue. Once a Year 2000 affected
product is identified, remediation plans are developed, implemented and tested,
if deemed appropriate. A product listing is available to customers on the
Company's Hill-Rom web page depicting Year 2000 compliance (www.hill-rom.com).
Assessment of all affected products has been completed to the best of the
Company's knowledge, and corrective actions, if required, should be completed by
the end of the third quarter of 1999.
One small subsidiary, Narco Medical Services, Inc., distributes medical devices
manufactured by third parties. Each supplier has been surveyed to determine its
readiness. Customers have been referred to manufacturers for Year 2000 readiness
information. Contingency plans are being developed to address any resulting
issues.
Identification and assessment of areas of potential third party risk is nearly
complete and, for those areas identified to date, remediation plans are being
developed. Plans should be developed and implemented by the end of the third
quarter of 1999.
The Costs Involved
The total cost to the Company of achieving Year 2000 compliance is not expected
to exceed $8 million and will consist primarily of the utilization of internal
resources. Spending to date totals approximately $6 million. Costs relating to
internal systems' 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 failed. 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 effect 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 is
nearly complete, and contingency plans should be completed in the fourth
quarter.
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of shareholders on April 13, 1999. Matters
voted upon by proxy were: The election of three directors nominated for three
year terms expiring in 2002 and the ratification of the Board of Director's
appointment of PricewaterhouseCoopers LLP as independent accountants of the
Company
<TABLE>
<CAPTION>
Voted
For Withheld
----- --------
<S> <C> <C>
Election of directors in Class III
for terms expiring in 2002:
John C. Hancock 57,094,791 1,301,426
George M. Hillenbrand II 57,084,420 1,311,797
John A. Hillenbrand II 57,083,958 1,312,259
</TABLE>
Messrs. Peter F. Coffaro, Edward S. Davis, Leonard Granoff and W. August
Hillenbrand will continue to serve as Class I directors and Messrs. Lawrence R.
Burtschy, Daniel A. Hillenbrand and Ray J. Hillenbrand will continue to serve as
Class II directors.
<TABLE>
<CAPTION>
Voted Voted
For Against Abstained
----- ------- ---------
<S> <C> <C> <C>
Proposal to ratify
PricewaterhouseCoopers LLP
as the Company's
independent accountants 58,298,851 51,607 45,759
</TABLE>
ITEM 5. OTHER INFORMATION
From time to time, the Company makes oral and written statements that may
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the SEC in its rules,
regulations and releases. The Company desires to take advantage of the "safe
harbor" provisions in the Act for forward-looking statements made from time to
time, including, but not limited to, the forward-looking statements relating to
the future performance of the Company contained in Management's Discussion and
Analysis (under Item 2 Form 10-Q), and the Notes to Consolidated Financial
Statements (under Item 1 on Form 10-Q) and other statements made in this Form
10-Q and in other filings with the SEC.
19
<PAGE> 20
The Company cautions readers that any such forward-looking statements are based
on assumptions that the Company believes are reasonable, but are subject to a
wide range of risks, and there is no assurance that actual results may not
differ materially. Important factors that could cause actual results to differ
include but are not limited to: differences in anticipated and actual product
introduction dates, the ultimate success of those products in the marketplace,
continuation of production scheduling issues, changes in Medicare reimbursement
trends, the success of cost control and restructuring efforts, the success of
Year 2000 (Y2K) remediation efforts, and the integration of acquisitions, among
other things. Realization of the Company's objectives and expected performance
can also be adversely affected by the outcome of pending litigation and rulings
by the Internal Revenue Service on certain tax positions taken by the Company.
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 second quarter ended
May 29, 1999.
20
<PAGE> 21
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: July 6, 1999 BY: /s/ Donald G. Barger, Jr.
-------------------------------
Donald G. Barger, Jr.
Vice President and
Chief Financial Officer
DATE: July 6, 1999 BY: /s/ James D. Van De Velde
---------------------------
James D. Van De Velde
Vice President and Controller
21
<TABLE> <S> <C>
<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 MAY 29, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-27-1999
<PERIOD-START> NOV-29-1998
<PERIOD-END> MAY-29-1999
<CASH> 247
<SECURITIES> 0
<RECEIVABLES> 387
<ALLOWANCES> 26
<INVENTORY> 127
<CURRENT-ASSETS> 830
<PP&E> 949
<DEPRECIATION> 658
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<BONDS> 302
0
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</TABLE>
