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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 27, 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
----- -----
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 - 62,531,433 as of July 5, 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 Six Months
Ended 5/27/00 and 5/29/99
Condensed Consolidated Balance Sheets at 4
5/27/00 and 11/27/99
Condensed Statements of Consolidated Cash Flows 5
for the Six Months Ended 5/27/00 and 5/29/99
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 4 - Submission of Matters to a Vote of Security Holders 19
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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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 Six Months Ended
------------------ -------------------
05/27/00 05/29/99 05/27/00 05/29/99
-------- -------- -------- --------
(In Millions Except Per Share Data)
<S> <C> <C> <C> <C>
Net revenues:
Health Care sales ........................... $ 187 $ 192 $ 360 $ 369
Health Care rentals ......................... 77 87 161 180
Funeral Services sales ...................... 148 157 316 318
Insurance revenues .......................... 91 88 180 173
-------- -------- -------- --------
Total revenues .............................. 503 524 1,017 1,040
Cost of revenues:
Health Care cost of goods sold .............. 106 111 204 213
Health Care rental expenses ................. 56 60 113 121
Funeral Services cost of goods sold ......... 75 79 161 162
Insurance cost of revenue ................... 73 70 151 136
-------- -------- -------- --------
Total cost of revenues ...................... 310 320 629 632
Gross profit ..................................... 193 204 388 408
Other operating expenses ......................... 135 136 273 264
Unusual charges (expense), net ................... -- (9) 2 (10)
-------- -------- -------- --------
Operating profit ................................. 58 59 117 134
Interest expense ................................. (6) (6) (13) (13)
Investment income ................................ 5 3 9 7
Other income (expense), net ...................... (1) (1) -- (2)
-------- -------- -------- --------
Income before income taxes ....................... 56 55 113 126
Income taxes ..................................... 20 20 41 46
-------- -------- -------- --------
Net income ....................................... $ 36 $ 35 $ 72 $ 80
======== ======== ======== ========
Basic and diluted earnings
per common share (Note 3) ...................... $ .56 $ .53 $ 1.14 $ 1.20
======== ======== ======== ========
Dividends per common share ....................... $ .20 $ .195 $ .40 $ .39
======== ======== ======== ========
Average shares outstanding (thousands) ........... 62,885 66,575 63,069 66,725
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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Hillenbrand Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS 05/27/00 11/27/99
-------- --------
(In Millions)
<S> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments ........ $ 206 $ 170
Trade receivables ........................................ 368 413
Inventories .............................................. 116 113
Other .................................................... 94 86
------- -------
Total current assets .................................... 784 782
Equipment leased to others, net ............................ 68 69
Property, net .............................................. 198 198
Other assets:
Intangible assets, net ................................... 184 192
Other .................................................... 110 101
------- -------
Total other assets ...................................... 294 293
Insurance assets:
Investments .............................................. 2,280 2,311
Deferred policy acquisition costs ........................ 609 584
Deferred income taxes .................................... 123 79
Other .................................................... 117 117
------- -------
Total insurance assets .................................. 3,129 3,091
------- -------
Total assets ............................................... $ 4,473 $ 4,433
======= =======
LIABILITIES
Current liabilities:
Short-term debt .......................................... $ 58 $ 52
Trade accounts payable ................................... 66 80
Other .................................................... 254 239
------- -------
Total current liabilities ............................... 378 371
Other liabilities:
Long-term debt ........................................... 303 302
Other long-term liabilities .............................. 74 68
Deferred income taxes .................................... -- 3
------- -------
Total other liabilities ................................. 377 373
Insurance liabilities:
Benefit reserves ......................................... 2,173 2,092
Unearned revenue ......................................... 738 719
Other .................................................... 49 40
------- -------
Total insurance liabilities ............................. 2,960 2,851
------- -------
Total liabilities .......................................... 3,715 3,595
------- -------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common stock ............................................. 4 4
Additional paid-in capital ............................... 23 24
Retained earnings ........................................ 1,340 1,293
Accumulated other comprehensive income (loss) (Note 4) ... (129) (38)
Treasury stock ........................................... (480) (445)
------- -------
Total shareholders' equity .............................. 758 838
------- -------
Total liabilities and
shareholders' equity ...................................... $ 4,473 $ 4,433
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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Hillenbrand Industries, Inc. and Subsidiaries
Condensed Statements of Consolidated Cash Flows
Six Months Ended
05/27/00 05/29/99
-------- --------
(In Millions)
Net income ...................................... $ 72 $ 80
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization ................. 46 45
Change in noncurrent deferred income taxes .... -- (3)
Change in net working capital excluding cash,
current debt and acquisitions ............... 35 (65)
Change in insurance items:
Deferred policy acquisition costs ............ (25) (21)
Other insurance items, net ................... 61 40
Other, net .................................... (5) (26)
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Net cash provided by operating activities ......... 184 50
----- -----
Investing activities:
Capital expenditures ............................ (46) (42)
Proceeds on disposal of fixed assets and
equipment leased to others .................... 6 --
Acquisition of business, net of cash acquired ... -- (26)
Other investments ............................... (1) --
Insurance investments:
Purchases ..................................... (265) (490)
Proceeds on maturities ........................ 99 112
Proceeds on sales ............................. 60 351
----- -----
Net cash used in investing activities ............. (147) (95)
----- -----
Financing activities:
Additions to debt, net .......................... 12 2
Payment of cash dividends ....................... (25) (26)
Treasury stock acquisitions ..................... (36) (25)
Insurance deposits received ..................... 183 170
Insurance benefits paid ......................... (133) (124)
----- -----
Net cash provided by (used in) financing activities 1 (3)
----- -----
Effect of exchange rate changes on cash ........... (2) (2)
----- -----
Total cash flows .................................. 36 (50)
Cash, cash equivalents and short-term investments:
At beginning of period ........................... 170 297
----- -----
At end of period ................................. $ 206 $ 247
===== =====
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:
05/27/00 11/27/99
----------- -----------
Allowance for possible losses and
discounts on trade receivables ...... $ 53 $ 54
Inventories
Finished Products ................... $ 75 $ 67
Work in Process ..................... 27 31
Raw Materials ....................... 14 15
----- ----
Total Inventory ................... $ 116 $113
===== ====
Accumulated depreciation of equipment
leased to others and property ....... $ 590 $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
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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 Six Months Ended
05/27/00 05/29/99 05/27/00 05/29/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (in thousands) .... $ 35,271 $ 35,062 $ 71,790 $ 79,803
Average shares outstanding ... 62,885,126 66,575,338 63,068,738 66,724,789
Basic and diluted earnings per
common share ............. $ .56 $ .53 $ 1.14 $ 1.20
</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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
05/27/00 05/29/99 05/27/00 05/29/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income ..................... $ 36 $ 35 $ 72 $ 80
Net change in unrealized gain
(loss) on available-for-sale
securities ................. (38) (30) (85) (67)
Foreign currency translation
adjustment ................. (4) 2 (6) 5
---- ---- ---- ----
Comprehensive income (loss) .... $ (6) $ 7 $(19) $ 18
==== ==== ==== ====
</TABLE>
7
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The composition of accumulated other comprehensive income (loss) at May
27, 2000 and November 27, 1999 is the cumulative adjustment for
unrealized gains or losses on available-for-sale securities of ($115)
and ($30) million, respectively, and the foreign currency translation
adjustment of ($14) 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 May 27, 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 May 27, 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 May 27, 2000, approximately $4 million in work force reduction
costs and $1 million in facility closure costs have been incurred. The
Company expects substantially all employee related costs to be
completed within the next six 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
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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. Nearly all severance and employee benefit
costs and $5 million in other plant closing costs have been incurred.
In the fourth quarter of 1999, approximately $2 million of the
provision for other plant closing costs was 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 the plant in Germany is targeted to be completed by
the end of fiscal 2000, but could take longer. 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.
In addition to costs accrued under the above outlined plans,
approximately $1 million of incremental costs related to the closure of
manufacturing facilities in Germany, Austria and Campbellsville,
Kentucky were incurred through the second 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 $15 million and $21 million as of May 27, 2000
and November 27, 1999, respectively.
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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
MAY 27, 2000
------------------------------------------------------------------------------------------------------------
Net revenues $264 $148 $91 $ - $503
Income before income taxes,
unusual items and capital
charges $ 23 $ 34 $11 $(12) $ 56
Capital charges (11) (4) - 15 -
--------------------------------------------------------------------------
Segment income $ 12 $ 30 $11 $ 3 $ 56
-------------
Income before income taxes $ 56
------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MAY 29, 1999
------------------------------------------------------------------------------------------------------------
Net revenues $279 $157 $88 $ - $524
Income before income taxes,
unusual items and capital
charges $ 27 $ 37 $10 $(10) $ 64
Capital charges (12) (4) - 16 -
--------------------------------------------------------------------------
Segment income $ 15 $ 33 $10 $ 6 $ 64
Unusual items (b) $ - $ (9) $ - $ - (9)
-------------
Income before income taxes $ 55
------------------------------------------------------------------------------------------------------------
</TABLE>
11
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<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Funeral Services Corporate
Health ---------------- and Other
Care Products Insurance Expense Consolidated
------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MAY 27, 2000
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $521 $316 $180 $ - $1,017
Income before income taxes,
unusual items and capital
charges $ 46 $ 76 $ 12 $(23) $ 111
Capital charges (23) (9) - 32 2
--------------------------------------------------------------------------
Segment income $ 23 $ 67 $ 12 $ 9 $ 111
Unusual items (a) $ 2 $ - $ - $ - 2
-------------
Income before income taxes $ 113
------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MAY 29, 1999
------------------------------------------------------------------------------------------------------------
Net revenues $549 $318 $173 $ - $1,040
Income before income taxes,
unusual items and capital
charges $ 58 $ 78 $ 21 $(21) $ 136
Capital charges (24) (9) - 33 -
--------------------------------------------------------------------------
Segment income $ 34 $ 69 $ 21 $ 12 $ 136
Unusual items (b) $ (1) $ (9) $ - $ - (10)
-------------
Income before income taxes $ 126
------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Health Care reflects a gain on the sale of a facility in Austria
in the first quarter of 2000, which was closed as part of a plan
to discontinue manufacturing operations in Germany and Austria.
(b) Health Care reflects incremental costs incurred related to the
plan to discontinue manufacturing operations at facilities 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).
SECOND QUARTER 2000 COMPARED WITH SECOND QUARTER 1999
Consolidated revenues of $503 million decreased $21 million compared to the
second quarter of 1999. Operating profit decreased $1 million, or 2%, to $58
million. Net income of $36 million increased 3%, and earnings per share
increased 6% to $.56. Excluding 1999 unusual charges primarily related to the
closure of a manufacturing facility, earnings per share would have decreased
11%.
Health care sales for the second quarter decreased $5 million, or 3%, to $187
million, mainly due to decreased shipments in acute care, long-term care and
U.S. export markets and a negative foreign exchange impact partially offset by
increased European revenues. Acute care sales decreased approximately 4%
compared to last year primarily due to softness in the United States, while
European Health Care sales increased at double-digit rates. Health Care rental
revenues also decreased in the second quarter to $77 million compared to $87
million last year, an 11% decline. Long-term care continues to experience
declines in rates and volume due to previous changes in Medicare Part A patient
reimbursement practices. Acute care and home care did experience increased
volume which was more than offset by lower rates. Overall, home care experienced
the largest decline in rental revenues due to lower Medicare reimbursement
experience. European rental revenues were flat compared to 1999. Funeral
services sales declined $9 million, or 6%, to $148 million in the second quarter
mostly due to decreased unit volume as the result of an earlier flu season
compared to 1999. Insurance revenues increased to $91 million compared to $88
million in the second quarter of 1999 despite $9 million less in capital gains
in the 2000 second quarter compared to 1999. Excluding capital gains, insurance
revenues would have increased approximately 15% compared to a 3% increase
including the gains. Investment income and earned premiums both experienced
double-digit percentage increases due to the increased size of the investment
portfolio and increased policies in-force year over year.
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Gross profit on Health Care sales of $81 million was equivalent to 1999, but as
a percentage of sales increased from 42.2% to 43.3%. This increase was primarily
due to decreased warranty costs compared to 1999 and efficiencies realized as a
result of cost cutting actions associated with previously announced plans. Gross
profit on rental revenues decreased $6 million, or 22%, to $21 million and as a
percentage of sales declined from 31.0% to 27.3%, primarily due to lower
Medicare reimbursement experience in the home care market and the previous
changes in Medicare Part A reimbursement practices described above. Funeral
Services sales gross profit declined 6% to $73 million compared to $78 million
in 1999. As a percentage of sales Funeral Services gross profit was 49.3%
compared to 49.7% in the second quarter of 1999. This reduction was due mainly
to decreased unit volume across nearly all product lines as a result of an
earlier flu season in 2000 compared to 1999 partially offset by continued good
cost control and production efficiencies.
Funeral Services insurance operating profit was flat compared to 1999 at $10
million. Excluding the decrease in capital gains of $9 million compared to 1999,
operating profit would have increased by approximately $9 million.
Other operating expenses (including insurance operations) decreased $1 million
to $135 million compared to the second quarter of 1999. As a percentage of
revenues, operating expenses were 26.8% versus 26.0% in 1999. 2000 operating
costs are higher as a percentage of revenues due to increased incentive
compensation compared to the prior year depressed levels and investments in
additional initiatives.
Interest expense and other income (expense), net were comparable to the prior
year while investment income increased $2 million due to higher money market
rates and the previously anticipated partial sale of an investment.
The effective income tax rate was 36.4% in the second quarter of 2000 compared
to 37.0% in the second quarter of 1999. The decrease in the tax rate was
primarily due to lower operating losses in Europe.
SIX MONTHS 2000 COMPARED TO SIX MONTHS 1999
Except as noted below, the factors affecting the second quarter comparisons also
affected the year-to-date comparison.
Consolidated revenues of $1,017 million decreased 2% compared to the first six
months of 1999. Operating profit decreased $17 million, or 13%, to $117 million.
Net income of $72 million decreased 10%, and earnings per share decreased 5% to
$1.14.
14
<PAGE> 15
Results for the first six 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. This gain is included in the
Unusual charges line of the Statements of Consolidated Income. 1999 results
include a $9 million charge related to the closing of a casket manufacturing
plant in Campbellsville, Kentucky and $1 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 declined 20% and earnings per share decreased
approximately 15% in the first six months of 2000 compared to 1999.
Health Care sales were down slightly to $360 million compared to $369 million in
1999 primarily due to decreases in long-term care and export sales and a
negative foreign exchange impact partially offset by increases in acute care and
European sales. The increase in acute care sales was predominantly related to
the 1999 acquisition of Amatech. Health Care rental revenue decreased $19
million, or 11%, to $161 million due to decreases in home care, long-term care
and European rental revenue slightly offset by an increase in acute care.
Funeral Services sales declined $2 million, or less than 1%, to $316 million due
to a decrease in unit volume believed to be due to a slight decrease in the
death rate. Funeral Services insurance revenues of $180 million were up $7
million, or 4%, compared to 1999. Excluding the impact of capital gains,
insurance revenues would have increased approximately $22 million, or 14%.
Earned premiums and investment income increased at double-digit rates.
Consolidated gross profit of $388 million, decreased 5%, or $20 million. Gross
profit on Health Care sales was equal to 1999, but as a percentage of sales
increased to 43.3% compared to 42.3% last year. Health Care rental revenue gross
profit decreased $11 million, or 19%, to $48 million and was 29.8% versus 32.8%
of revenues in 1999. This degradation is primarily due to lower Medicare
reimbursement experience in the home care market and previous changes to
Medicare reimbursement in the long-term care market as described above. Gross
profit on Funeral Services sales was essentially flat with the prior year at
49.1% despite lower unit volume in 2000.
Insurance operating profit of $12 million was $9 million below the 1999 level of
$21 million due to $15 million less capital gains in 2000. Excluding 2000 and
1999 capital gains, insurance operating profit would have more than doubled in
2000 compared to 1999.
Other operating expenses (including insurance operations) were up $9 million, or
3%, to $273 million and as a percentage of revenues were 26.8% versus 25.4% in
1999.
Investment income increased $2 million due to higher money market rates and the
previously anticipated partial sale of an investment.
The effective income tax rate was 36.4% in 2000 compared to 37.0% in 1999. The
decrease in the tax rate was primarily due to lower operating losses in Europe.
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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 May 27, 2000 increased $36
million to $206 million compared to November 27, 1999.
Net cash generated from operating activities of $184 million increased $134
million compared to $50 million generated in 1999. The increase was mainly due
to good working capital management partially offset by lower earnings. A $45
million decrease in accounts receivable and a $15 million increase in other
current liabilities were somewhat offset by small increases in inventory and
other current assets and a decrease in accounts payable. The decrease in
accounts receivable is primarily due to lower sales volume, a company-wide
effort to decrease day sales outstanding and lower reimbursement experience on
rental products.
Net cash used in investing activities increased $52 million to $147 million.
This increase is primarily due to unfavorable effects of investment activities
at Forethought partially offset by 1999 acquisition activities.
In financing activities, treasury stock acquisitions of $36 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 May 27, 2000, approximately $4 million in work force reduction costs and
$1 million in facility closure costs have been incurred. The Company expects
substantially all employee related costs to be completed within the next six
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. Nearly all severance and employee benefit costs and $5 million
in other plant closing costs have been incurred. In the fourth quarter of 1999,
approximately $2 million of the provision for other plant closing costs was
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 the plant in Germany is targeted to be completed by the end
of fiscal 2000, but could take longer. 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.
In addition to costs accrued under the above outlined plans, approximately $1
million of incremental costs related to the closure of manufacturing facilities
in Germany, Austria and Campbellsville, Kentucky were incurred through the
second 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 $15 million and $21 million as of May 27, 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.
The Company is experiencing and may continue to experience pressure on
reimbursement rates related to its home care rental business.
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of shareholders on April 11, 2000. Matters
voted upon by proxy were: The election of four directors nominated for three
year terms expiring in 2003, the reapproval of the Hillenbrand Industries, Inc.
Senior Executive Compensation Program and the ratification of the Board of
Director's appointment of PricewaterhouseCoopers LLP as independent accountants
of the Company.
Voted
For Withheld
----- --------
Election of directors in Class I
for terms expiring in 2003:
Peter F. Coffaro 53,630,960 1,932,852
Edward S. Davis 53,454,788 2,109,024
Leonard Granoff 53,731,614 1,832,198
W August Hillenbrand 51,840,585 3,723,227
Messrs. Lawrence R. Burtschy, Daniel A. Hillenbrand and Ray J. Hillenbrand will
continue to serve as Class II directors and Messrs. John C. Hancock, George M.
Hillenbrand II, John A. Hillenbrand II and Frederick W. Rockwood will continue
to serve as Class III directors.
Voted Voted
For Against Abstained
----- ------- ---------
Proposal to reapprove the
Hillenbrand Industries, Inc.
Senior Executive Compensation
Program 53,010,272 1,356,059 1,197,474
Proposal to ratify
PricewaterhouseCoopers LLP
as the Company's
independent accountants 55,408,997 90,348 64,467
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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 second quarter ended
May 27, 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: July 5, 2000 BY: /s/ Donald G. Barger, Jr.
-------------------------------
Donald G. Barger, Jr.
Vice President and
Chief Financial Officer
DATE: July 5, 2000 BY: /s/ James D. Van De Velde
---------------------------
James D. Van De Velde
Vice President and Controller
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