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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 AUGUST 26, 2000
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 - 62,502,100 as of October 2, 2000.
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HILLENBRAND INDUSTRIES, INC.
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Statements of Consolidated Income 3
for the Three Months And Nine Months
Ended 8/26/00 and 8/28/99
Condensed Consolidated Balance Sheets at 4
8/26/00 and 11/27/99
Condensed Statements of Consolidated Cash Flows 5
for the Nine Months Ended 8/26/00 and 8/28/99
Notes to Condensed Consolidated Financial Statements 6-12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-19
PART II - OTHER INFORMATION
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Hillenbrand Industries, Inc. and Subsidiaries
Statements of Consolidated Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- --------------------
08/26/00 08/28/99 08/26/00 08/28/99
-------- -------- -------- --------
(In Millions Except Per Share Data)
<S> <C> <C> <C> <C>
Net revenues:
Health Care sales ................. $ 182 $ 178 $ 542 $ 547
Health Care rentals ............... 79 76 240 256
Funeral Services sales ............ 138 137 454 455
Insurance revenues ................ 93 90 273 263
-------- -------- -------- --------
Total revenues .................... 492 481 1,509 1,521
Cost of revenues:
Health Care cost of goods sold .... 100 108 304 321
Health Care rental expenses ....... 55 60 168 181
Funeral Services cost of goods sold 72 73 233 235
Insurance cost of revenue ......... 73 65 224 201
-------- -------- -------- --------
Total cost of revenues ............ 300 306 929 938
Gross profit ........................... 192 175 580 583
Other operating expenses ............... 141 132 414 396
Unusual charges (expense), net (Note 6) 1 (1) 3 (11)
-------- -------- -------- --------
Operating profit ....................... 52 42 169 176
Interest expense ....................... (7) (7) (20) (20)
Investment income ...................... 8 3 17 10
Other income (expense), net ............ (1) (1) (1) (3)
-------- -------- -------- --------
Income before income taxes ............. 52 37 165 163
Income taxes ........................... 18 14 59 60
-------- -------- -------- --------
Net income ............................. $ 34 $ 23 $ 106 $ 103
======== ======== ======== ========
Basic and diluted earnings
per common share (Note 3) ............ $ .54 $ .35 $ 1.68 $ 1.55
======== ======== ======== ========
Dividends per common share ............. $ .20 $ .195 $ .60 $ .585
======== ======== ======== ========
Average shares outstanding (thousands).. 62,758 66,395 62,966 66,616
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
3
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Hillenbrand Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS 08/26/00 11/27/99
-------- --------
(In Millions)
<S> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments.......... $ 208 $ 170
Trade receivables.......................................... 358 413
Inventories................................................ 116 113
Other...................................................... 91 86
------- -------
Total current assets...................................... 773 782
Equipment leased to others, net.............................. 67 69
Property, net................................................ 200 198
Other assets:
Intangible assets, net..................................... 182 192
Other...................................................... 97 101
------- -------
Total other assets........................................ 279 293
Insurance assets:
Investments................................................ 2,406 2,311
Deferred policy acquisition costs.......................... 623 584
Deferred income taxes...................................... 97 79
Other...................................................... 119 117
------- -------
Total insurance assets.................................... 3,245 3,091
------- -------
Total assets................................................. $ 4,564 $ 4,433
======= =======
LIABILITIES
Current liabilities:
Short-term debt............................................ $ 56 $ 52
Trade accounts payable..................................... 59 80
Other...................................................... 220 239
------- -------
Total current liabilities................................. 335 371
Other liabilities:
Long-term debt............................................. 303 302
Other long-term liabilities................................ 67 68
Deferred income taxes...................................... - 3
------- -------
Total other liabilities................................... 370 373
Insurance liabilities:
Benefit reserves........................................... 2,230 2,092
Unearned revenue........................................... 749 719
Other...................................................... 57 40
------- -------
Total insurance liabilities............................... 3,036 2,851
------- -------
Total liabilities............................................ 3,741 3,595
------- -------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common stock............................................... 4 4
Additional paid-in capital................................. 22 24
Retained earnings.......................................... 1,361 1,293
Accumulated other comprehensive income (loss) (Note 4)..... (83) (38)
Treasury stock............................................. (481) (445)
------- -------
Total shareholders' equity................................... 823 838
------- -------
Total liabilities and
shareholders' equity........................................ $ 4,564 $ 4,433
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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Hillenbrand Industries, Inc. and Subsidiaries
Condensed Statements of Consolidated Cash Flows
Nine Months Ended
08/26/00 08/28/99
-------- --------
(In Millions)
Net income ......................................... $ 106 $ 103
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization .................... 67 71
Change in noncurrent deferred income taxes ....... 1 (3)
Change in net working capital excluding cash,
current debt and acquisitions .................. 6 (44)
Change in insurance items:
Deferred policy acquisition costs ............... (39) (34)
Other insurance items, net ...................... 86 74
Other, net ....................................... 1 (40)
----- -----
Net cash provided by operating activities ............ 228 127
----- -----
Investing activities:
Capital expenditures ............................... (70) (66)
Proceeds on disposal of fixed assets and
equipment leased to others ....................... 7 1
Acquisition of businesses, net of cash acquired .... -- (54)
Other investments .................................. (1) (4)
Insurance investments:
Purchases ........................................ (482) (640)
Proceeds on maturities ........................... 101 144
Proceeds on sales ................................ 230 386
----- -----
Net cash used in investing activities ................ (215) (233)
----- -----
Financing activities:
Additions to debt, net ............................. 11 3
Payment of cash dividends .......................... (38) (39)
Treasury stock acquisitions ........................ (37) (47)
Insurance deposits received ........................ 280 266
Insurance benefits paid ............................ (189) (175)
----- -----
Net cash provided by financing activities ............ 27 8
----- -----
Effect of exchange rate changes on cash .............. (2) (1)
----- -----
Total cash flows ..................................... 38 (99)
Cash, cash equivalents and short-term investments:
At beginning of period .............................. 170 297
----- -----
At end of period .................................... $ 208 $ 198
===== =====
See Notes to Condensed Consolidated Financial Statements
5
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Hillenbrand Industries, Inc. and Subsidiaries
Notes to Condensed 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.
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>
08/26/00 11/27/99
-------- --------
<S> <C> <C>
Allowance for possible losses and
discounts on trade receivables............. $ 56 $ 54
Inventories
Finished Products.......................... $ 77 $ 67
Work in Process............................ 27 31
Raw Materials.............................. 12 15
----- -----
Total Inventory.......................... $ 116 $ 113
===== =====
Accumulated depreciation of equipment
leased to others and property.............. $599 $588
Accumulated amortization of intangible
assets..................................... $105 $100
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>
6
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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, less cumulative shares reissued, have
been excluded in determining the average number of shares outstanding.
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
08/26/00 08/28/99 08/26/00 08/28/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (in thousands) $33,752 $23,258 $105,542 $103,061
Average shares outstanding 62,757,736 66,395,139 62,966,342 66,616,353
Basic and diluted earnings per
common share $.54 $.35 $1.68 $1.55
</TABLE>
4. Comprehensive Income (Loss)
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
accumulated other comprehensive income (loss).
The components of comprehensive income (loss) are as follows (in millions):
Three Months Ended Nine Months Ended
08/26/00 08/28/99 08/26/00 08/28/99
-------- -------- -------- --------
Net income ..................... $ 34 $ 23 $ 106 $ 103
Net change in unrealized gain
(loss) on available-for-sale
securities ................. 44 (17) (41) (84)
Foreign currency translation
adjustment ................. 2 (6) (4) (1)
----- ----- ----- -----
Comprehensive income (loss) .... $ 80 $ -- $ 61 $ 18
===== ===== ===== =====
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The composition of accumulated other comprehensive income (loss) at August
26, 2000 and November 27, 1999 is the cumulative adjustment for unrealized
gains or losses on available-for-sale securities of ($71) and ($30)
million, respectively, and the foreign currency translation adjustment of
($12) and ($8) 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 27, 1999, Hillenbrand Industries, Inc., and
its subsidiary Hill-Rom Company, Inc. (Hill-Rom), 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
August 26, 2000.
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 urging them 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 26, 2000.
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, if
any, is not known.
8
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The Company is subject to various other claims and contingencies arising
out of the normal course of business, including those relating to
commercial transactions, antitrust, 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. Unusual Charges
In November 1999, the Company announced a plan to reduce the future
operating cost structure at Hill-Rom, to write-down the value of certain
impaired assets and to recognize a liability associated with the estimated
cost of a field corrective action for a previously acquired product line.
The total estimated cost of these actions necessitated an unusual charge of
$29 million in the fourth quarter of 1999. The cash component of this
charge was $19 million.
Included in the cost-cutting actions announced at Hill-Rom is the reduction
of 350 employees, most of which are administrative personnel, in the United
States and Europe and the closure of select manufacturing and sales,
service/distribution facilities in the United States and Europe to
eliminate redundant operations. Estimated costs for the work force and
facility closure actions were $8 million and $3 million, respectively.
The unusual charge also included a total of $10 million relative to asset
impairments of a small Hill-Rom investment in a non-core business currently
being liquidated and the write-off of goodwill and other strategic
investments which were significantly underperforming original expectations
or had essentially discontinued operations.
The remaining component of the 1999 fourth quarter unusual charge related
to an $8 million field corrective action to be taken relative to a
previously acquired product line.
As of August 26, 2000, approximately $6 million in work force reduction
costs, $1 million in facility closure costs and $2 million related to the
field corrective action have been incurred. The Company expects
substantially all employee related costs to be completed within the next
three months. The facility closures and field corrective actions are also
expected to occur on a similar timeline, but could take longer.
In March 1999, Batesville Casket announced the planned closing of its
Campbellsville, Kentucky casket manufacturing plant. Approximately 200
production and administrative employees were affected and the closure
necessitated a $9 million unusual charge in the second quarter of 1999.
Production of Campbellsville casket units was transferred to existing
plants located in Batesville, Indiana and Manchester, Tennessee.
9
<PAGE> 10
Manufacturing operations were discontinued at the plant and production
successfully relocated in the second quarter of 1999. All severance and
employee benefit costs and estimated plant closing costs have been
incurred, with no adjustments being made to such reserves. The Company is
continuing to work to dispose of the property and plant.
In August 1998, the Company approved a plan to restructure Hill-Rom's
operations in Germany and Austria. This plan resulted in the closure of all
manufacturing facilities in Germany and Austria, whose markets will now be
served with products from other existing operations.
The plan necessitated the provision of a $70 million asset impairment and
restructuring charge in 1998. The non-cash component of the charge included
$53 million for the write-off of German subsidiary goodwill, the write-down
of property, plant and equipment held for sale and 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.
Manufacturing operations were discontinued in Germany and Austria by the
second quarter of 1999. All severance and employee benefit costs and $5
million in other plant closing costs have been incurred. In the third
quarter of 2000 and the fourth quarter of 1999, approximately $1 million
and $2 million of the provisions for severance and employee benefits and
other plant closing costs, respectively, were reversed to income within the
Unusual charges line of the Statement of Consolidated Income as actual
costs were less than originally estimated.
The disposition of excess and discontinued inventories and production
equipment from the German and Austrian facilities is complete, and the
facility in Austria was sold in December 1999 for a gain of $2 million.
This is reflected within the Unusual charges line of the Statement of
Consolidated Income. The disposition of the plant in Germany is targeted to
be completed by the end of fiscal 2000, but could take longer.
In addition to costs accrued under the above outlined plans, approximately
$2 million of incremental costs related to the closure of manufacturing
facilities in Germany, Austria and Campbellsville, Kentucky were incurred
through the third quarter of 1999. These incremental costs include expenses
such as travel, employee relocation and the relocation of certain
manufacturing and business processes. These costs were expensed as incurred
as required by generally accepted accounting principles and are included
within the Unusual charges line of the Statement of Consolidated Income as
such incremental costs were incurred directly in conjunction with the
execution of the respective plans.
The reserve balances for the above plans included in other current
liabilities approximated $10 million and $21 million as of August 26, 2000
and November 27, 1999, respectively.
10
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7. Segment Reporting
Effective November 27, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes previously issued segment reporting disclosure rules and
requires reporting of segment information that is consistent with the way
in which management operates and views the Company. The adoption of SFAS
No. 131 did not affect the Company's financial position or results of
operations.
In analyzing segment performance, the Company's management reviews 1)
income before income taxes, unusual items, and capital charges and 2)
segment income (income before income taxes and unusual items). The capital
charge is an estimate of the cost of capital a segment would incur if not a
part of Hillenbrand Industries.
Based on criteria established in SFAS No. 131, the Company's reporting
segments are Health Care (Hill-Rom), Funeral Services Products (Batesville
Casket Company - Batesville) and Funeral Services Insurance (Forethought
Financial Services - Forethought). Corporate, while not a segment, is
presented separately to aid in the reconciliation of segment information to
that reported in the Statements of Consolidated Income.
Financial information regarding the Company's reportable segments is
presented below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Funeral Services Corporate
Health ---------------- and Other
Care Products Insurance Expense Consolidated
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
AUGUST 26, 2000
--------------------------------------------------------------------------------------------------------------
Net revenues $ 261 $ 138 $ 93 $ - $ 492
Income before income taxes,
unusual items and capital
charges $ 25 $ 31 $ 12 $ (17) $ 51
Capital charges (11) (5) - 16 -
-----------------------------------------------------------------------
Segment income $ 14 $ 26 $ 12 $ (1) $ 51
Unusual items (a) $ 1 $ - $ - $ - 1
-------------
Income before income taxes $ 52
--------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
AUGUST 28, 1999
--------------------------------------------------------------------------------------------------------------
Net revenues $ 254 $ 137 $ 90 $ - $ 481
Income before income taxes,
unusual items and capital
charges $ 2 $ 28 $ 15 $ (7) $ 38
Capital charges (13) (4) - 17 -
-----------------------------------------------------------------------
Segment income $ (11) $ 24 $ 15 $ 10 $ 38
Unusual items (b) $ (1) $ - $ - $ - (1)
-------------
Income before income taxes $ 37
--------------------------------------------------------------------------------------------------------------
</TABLE>
11
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<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Funeral Services Corporate
Health ---------------- and Other
Care Products Insurance Expense Consolidated
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
AUGUST 26, 2000
---------------------------------------------------------------------------------------------------------------
Net revenues $ 782 $ 454 $ 273 $ - $ 1,509
Income before income taxes,
unusual items and capital
charges $ 71 $ 107 $ 24 $ (40) $ 162
Capital charges (34) (14) - 48 -
-------------------------------------------------------------------------
Segment income $ 37 $ 93 $ 24 $ 8 $ 162
Unusual items (a) $ 3 $ - $ - $ - 3
---------------
Income before income taxes $ 165
---------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
AUGUST 28, 1999
---------------------------------------------------------------------------------------------------------------
Net revenues $ 803 $ 455 $ 263 $ - $ 1,521
Income before income taxes,
unusual items and capital
charges $ 60 $ 106 $ 36 $ (28) $ 174
Capital charges (36) (13) - 49 -
-------------------------------------------------------------------------
Segment income $ 24 $ 93 $ 36 $ 21 $ 174
Unusual items (b) $ (2) $ (9) $ - $ - (11)
---------------
Income before income taxes $ 163
---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Health Care reflects a gain on the sale of a facility in Austria in the
first quarter of 2000 and the partial reversal of a provision for severance
and employee benefits in the third quarter of 2000 both related to the 1998
plan to discontinue manufacturing operations in Germany and Austria.
(b) Health Care reflects incremental costs incurred related to the plan to
discontinue manufacturing operations in Germany and Austria. Funeral
Services Products mainly reflects a charge for the closure of a
manufacturing facility.
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Hillenbrand Industries is organized into two business groups. The Health Care
Group, which is considered one reporting segment, consists of Hill-Rom. The
Funeral Services Group consists of two reporting segments, Funeral Services
Products (Batesville Casket Company - Batesville) and Funeral Services Insurance
(Forethought Financial Services - Forethought).
THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999
Consolidated revenues of $492 million increased $11 million, or 2%, compared to
the third quarter of 1999. Operating profit also increased 24%, or $10 million,
to $52 million. Net income of $34 million increased 48%, or $11 million,
compared to $23 million for the third quarter of 1999, and earnings per share
increased 54% to $.54 compared to $.35 in 1999. Excluding 1999 and 2000 unusual
items, primarily related to the closure of manufacturing facilities, earnings
per share would have increased 51%.
Health Care sales increased $4 million, or 2%, to $182 million in the third
quarter, primarily due to increased shipments in the European and U.S. export
markets partially offset by the negative impact of currency fluctuations and
slightly lower shipments to acute care, long-term care and home care customers.
European Health Care sales increased nearly 8% while acute care sales decreased
by less than 1%. Health Care rental revenues were up $3 million, or 4%, to $79
million compared to the third quarter of 1999. The growth in rental revenues is
mainly due to higher units in use in the acute care and home care markets
partially offset by decreased revenue in Europe and decreased revenue in the
home care market due to continued lower Medicare reimbursement experience. U.S.
long-term care revenues increased slightly as there was a small improvement in
rate and mix compared to the third quarter of 1999. Overall, acute care revenues
increased 11% and home care revenues decreased 19%. Funeral Services sales
increased $1 million, or 1%, to $138 million for the third quarter mostly due to
an improvement in the mix of product sold partially offset by decreased volume.
Insurance revenues of $93 million increased $3 million, or 3%, compared to $90
million in 1999 despite $8 million less in capital gains in the third quarter of
2000 compared to 1999. Excluding capital gains, insurance revenues would have
increased approximately 13% for the quarter. Both investment income and earned
premiums continue to experience double-digit percentage increases due to the
increased size of the investment portfolio and increased policies in-force year
over year.
13
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Gross profit on Health Care sales of $82 million was a $12 million, or 17%,
increase over the third quarter of 1999. As a percentage of sales, Health Care
sales gross profit increased from 39.3% to 45.1% for the quarter mainly due to
productivity and cost improvements associated with previously announced plans
and decreases in warranty costs and inventory provisions compared to the third
quarter of 1999. Gross profit on rental revenues increased $8 million, or 50%,
to $24 million compared to 1999 and as a percentage of sales improved from 21.1%
to 30.4%. This increase was due to higher volume and productivity improvements
in acute care and home care and a slight improvement in the mix and rate in
long-term care partially offset by continued lower Medicare reimbursement
experience in the home care market. Funeral Services sales gross profit was up
$2 million, or 3%, to $66 million even though revenues were only up $1 million.
As a percentage of sales, Funeral Services gross profit was 47.8% compared to
46.7% in the third quarter of 1999 and was mainly due to productivity
improvements resulting from the closing of the Campbellsville facility in 1999.
Funeral Services insurance operating profit decreased $3 million to $12 million
compared to the third quarter of 1999. Excluding the $8 million reduction in
capital gains compared to 1999, operating profit would have increased $5
million. This increase is due to an increased volume of policies and
productivity improvements.
Other operating expenses (including insurance operations) increased 7% to $141
million and as a percentage of revenues was 28.7% compared to 27.4% in 1999.
This increase is a result of company-wide investments in new business
development opportunities and higher levels of incentive compensation
accompanying increased profitability.
Interest expense and other income (expense), net were comparable to the prior
year while investment income increased $5 million due to higher money market
rates, increased interest on receivables and the previously anticipated partial
sale of an investment.
The effective income tax rate was 35.5% in the third quarter of 2000 compared to
36.2% in 1999. The decrease in the tax rate was primarily due to tax initiatives
undertaken by the Company.
NINE MONTHS 2000 COMPARED TO NINE MONTHS 1999
Except as noted below, the factors affecting the third quarter comparisons also
affected the year-to-date comparison.
Consolidated revenues of $1,509 million decreased 1%, or $12 million, in the
first nine months of 2000 compared to 1999. Operating profit was down $7
million, or 4%, to $169 million. Net income of $106 million is up $3 million, or
3%, compared to 1999, and earnings per share increased 8%, or $.13, to $1.68.
14
<PAGE> 15
Results for the first nine months of 2000 include a $2 million gain on the sale
of a facility in Austria which was closed and sold under the August 1998 plan to
discontinue operations in Germany and Austria and the reversal of approximately
$1 million of severance and employee benefit costs related to this same plan due
to actual costs being less than original estimates. This gain and reversal are
included in the Unusual charges line of the Statement of Consolidated Income.
1999 results include a $9 million charge related to the closing of a casket
manufacturing plant in Campbellsville, Kentucky and $2 million related to
incremental costs associated with the discontinuance of manufacturing operations
at facilities in Germany, Austria and Campbellsville, Kentucky. Excluding the
unusual items mentioned above, operating profit decreased 11% and earnings per
share declined approximately 1% in the first nine months of 2000 compared to
1999.
Health Care sales declined $5 million, or 1%, to $542 million compared to $547
million in 1999 mainly due to decreases in long-term care and export sales and
the negative impact of currency fluctuations partially offset by increases in
acute care, home care and Europe. European sales, excluding currency
fluctuations, increased nearly 26% in the first nine months of 2000 compared to
last year. Health Care rental revenues of $240 million were down $16 million, or
6%. This decrease is due to declines in home care, long-term care and Europe
slightly offset by an increase in acute care. Long-term care has experienced
declines in the first nine months of 2000 in rates and volume due to previous
changes in Medicare Part A patient reimbursement practices. Home care has
experienced the largest decline due to lower Medicare reimbursement experience
despite a higher volume of products rented. Funeral Services sales is relatively
flat in the first nine months at $454 million, down $1 million. This is due to a
decrease in volume believed to be due to a slight decrease in the death rate.
Funeral Services insurance revenues of $273 million is up $10 million, or 4%,
despite $23 million less in capital gains in 2000 compared to 1999. Excluding
the impact of capital gains in 2000 and 1999, insurance revenues would have
increased approximately $33 million, or 14%. Investment income and earned
premiums increased at double-digit rates.
Consolidated gross profit of $580 million, decreased $3 million, or 1%. Gross
profit on Health Care sales increased $12 million, or 5%, to $238 million, and
as a percentage of sales increased from 41.3% to 43.9%. Health Care rental
revenue gross profit declined $3 million, or 4%, to $72 million. As a percentage
of sales, rental revenue was 30.0% compared to 29.3% in 1999. Gross profit on
Funeral Services sales increased to $221 million, $1 million greater than 1999.
As a percentage of sales, gross profit on Funeral Services sales was 48.7%
compared to 48.4% in 1999.
Insurance operating profit of $24 million decreased $12 million compared to 1999
due to $23 million less in capital gains. Excluding 2000 and 1999 capital gains,
insurance operating profit increased $11 million, or 97%.
Other operating expenses (including insurance operations) grew by $18 million,
or 5%, to $414 million. As a percentage of sales other operating expenses
increased from 26.0% to 27.4%.
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Investment income increased $7 million due to higher money market rates,
increased interest on receivables and the previously anticipated partial sale of
an investment.
The effective income tax rate was 36.1% in 2000 compared to 36.7% in 1999. The
decrease in the tax rate was primarily due to tax initiatives undertaken by the
Company.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities and selected borrowings represent the
Company's primary sources of funds for growth of the business, including capital
expenditures and acquisitions. Cash, cash equivalents and short-term investments
(excluding investments of insurance operations) at August 26, 2000 increased $38
million to $208 million compared to November 27, 1999.
Net cash generated from operating activities of $228 million increased $101
million due to good working capital management and the payment of a loan by the
Company of approximately $44 million in 1999 related to its Company Owned Life
Insurance (COLI) program. A $54 million decrease in accounts receivable was
partially offset by increases in inventory and other current assets and
decreases in trade accounts payable and other current liabilities. The decrease
in accounts receivable is due to a company-wide effort to decrease days sales
outstanding and lower reimbursement experience on rental products. The decrease
in accounts payable is due to payments made in fiscal 2000 on accrued operating
expenses which were higher at year-end due to heavy production levels.
Net cash used in investing activities decreased $18 million primarily due to
1999 acquisition activities.
In financing activities, treasury stock acquisitions of $37 million consisted of
purchases on the open market. The addition to debt was primarily related to debt
denominated in a foreign currency.
ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," in June 1998. This Standard
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. Adoption of this
Standard is not expected to have a material effect on the Company's consolidated
financial statements. The Company is required to adopt the Standard not later
than the first quarter of fiscal 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial Statements".
The Company is currently studying the impact of adopting SAB No. 101, as
amended, which is required to be adopted no later than the fourth quarter of
fiscal 2001. No estimate of its possible effect is currently available.
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UNUSUAL CHARGES
In November 1999, the Company announced a plan to reduce the future operating
cost structure at Hill-Rom, to write-down the value of certain impaired assets
and to recognize a liability associated with the estimated cost of a field
corrective action for a previously acquired product line. The total estimated
cost of these actions necessitated an unusual charge of $29 million in the
fourth quarter of 1999. The cash component of this charge was $19 million.
Included in the cost-cutting actions announced at Hill-Rom is the reduction of
350 employees, most of which are administrative personnel, in the United States
and Europe and the closure of select manufacturing and sales,
service/distribution facilities in the United States and Europe to eliminate
redundant operations. Estimated costs for the work force and facility closure
actions were $8 million and $3 million, respectively.
The unusual charge also included a total of $10 million relative to asset
impairments of a small Hill-Rom investment in a non-core business currently
being liquidated and the write-off of goodwill and other strategic investments
which were significantly underperforming original expectations or had
essentially discontinued operations.
The remaining component of the 1999 fourth quarter unusual charge related to an
$8 million field corrective action to be taken relative to a previously acquired
product line.
As of August 26, 2000, approximately $6 million in work force reduction costs,
$1 million in facility closure costs and $2 million related to the field
corrective action have been incurred. The Company expects substantially all
employee related costs to be completed within the next three months. The
facility closures and field corrective actions are also expected to occur on a
similar timeline, but could take longer.
In March 1999, Batesville Casket announced the planned closing of its
Campbellsville, Kentucky casket manufacturing plant. Approximately 200
production and administrative employees were affected and the closure
necessitated a $9 million unusual charge in the second quarter of 1999.
Production of Campbellsville casket units was transferred to existing plants
located in Batesville, Indiana and Manchester, Tennessee.
Manufacturing operations were discontinued at the plant and production
successfully relocated in the second quarter of 1999. All severance and employee
benefit costs and estimated plant closing costs have been incurred, with no
adjustments being made to such reserves. The Company is continuing to work to
dispose of the property and plant.
In August 1998, the Company approved a plan to restructure Hill-Rom's operations
in Germany and Austria. This plan resulted in the closure of all manufacturing
facilities in Germany and Austria, whose markets will now be served with
products from other existing operations.
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The plan necessitated the provision of a $70 million asset impairment and
restructuring charge in 1998. The non-cash component of the charge included $53
million for the write-off of German subsidiary goodwill, the write-down of
property, plant and equipment held for sale and 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.
Manufacturing operations were discontinued in Germany and Austria by the second
quarter of 1999. All severance and employee benefit costs and $5 million in
other plant closing costs have been incurred. In the third quarter of 2000 and
the fourth quarter of 1999, approximately $1 million and $2 million of the
provisions for severance and employee benefits and other plant closing costs,
respectively, were reversed to income within the Unusual charges line of the
Statement of Consolidated Income as actual costs were less than originally
estimated.
The disposition of excess and discontinued inventories and production equipment
from the German and Austrian facilities is complete, and the facility in Austria
was sold in December 1999 for a gain of $2 million. This is reflected within the
Unusual charges line of the Statement of Consolidated Income. The disposition of
the plant in Germany is targeted to be completed by the end of fiscal 2000, but
could take longer.
In addition to costs accrued under the above outlined plans, approximately $2
million of incremental costs related to the closure of manufacturing facilities
in Germany, Austria and Campbellsville, Kentucky were incurred through the third
quarter of 1999. These incremental costs include expenses such as travel,
employee relocation and the relocation of certain manufacturing and business
processes. These costs were expensed as incurred as required by generally
accepted accounting principles and are included within the Unusual charges line
of the Statement of Consolidated Income as such incremental costs were incurred
directly in conjunction with the execution of the respective plans.
The reserve balances for the above plans included in other current liabilities
approximated $10 million and $21 million as of August 26, 2000 and November 27,
1999, respectively.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
Cuts in Medicare funding mandated by the Balanced Budget Act of 1997 (BBA) have
had and could continue to have an adverse effect on the Company's health care
sales derived from the acute-care market. However, based on recent order
patterns, the Company does believe the acute-care market is starting to adapt to
these cuts in Medicare funding.
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The Company is experiencing and may continue to experience pressure on
reimbursement rates related to its home care rental business.
The market for casketed deaths is expected to remain flat for the foreseeable
future. The Company believes Batesville Casket has been able to increase its
share of this market, as well as the growing cremation market, by providing
innovative products and marketing programs for its funeral director customers.
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 27, 1999 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 third quarter ended
August 26, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILLENBRAND INDUSTRIES, INC.
DATE: October 4, 2000 BY: /S/ Donald G. Barger, Jr.
-----------------------------------
Donald G. Barger, Jr.
Vice President and
Chief Financial Officer
DATE: October 4, 2000 BY: /S/ James D. Van De Velde
-----------------------------------
James D. Van De Velde
Vice President and Controller
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