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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 FEBRUARY 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 - 62,717,733 as of April 3, 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 Ended
2/26/00 and 2/27/99
Consolidated Balance Sheets at 4
2/26/00 and 11/27/99
Statements of Consolidated Cash Flows 5
for the Three Months Ended
2/26/00 and 2/27/99
Notes to Consolidated Financial Statements 6-12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-17
PART II - OTHER INFORMATION
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Hillenbrand Industries, Inc. and Subsidiaries
Statements of Consolidated Income
Three Months Ended
--------------------
02/26/00 02/27/99
-------- --------
(In Millions Except Per Share Data)
Net revenues:
Health Care sales ................. $ 173 $ 177
Health Care rentals ............... 84 93
Funeral Services sales ............ 168 161
Insurance revenues ................ 89 85
-------- --------
Total revenue ..................... 514 516
Cost of revenues:
Health Care cost of goods sold .... 98 102
Health Care rental expenses ....... 57 61
Funeral Services cost of goods sold 86 83
Insurance cost of revenues ........ 78 66
-------- --------
Total cost of revenues ............ 319 312
Gross profit ........................... 195 204
Other operating expenses ............... 138 128
Unusual charges (expense), net ......... 2 (1)
-------- --------
Operating profit ....................... 59 75
Interest expense ....................... (7) (7)
Investment income ...................... 4 4
Other income (expense), net ............ 1 (1)
-------- --------
Income before income taxes ............. 57 71
Income taxes ........................... 21 26
-------- --------
Net income ............................. $ 36 $ 45
======== ========
Basic and diluted earnings
per common share (Note 3) ............ $ .58 $ .67
======== ========
Dividends per common share ............. $ .200 $ .195
======== ========
Average shares outstanding (thousands).. 63,250 66,878
======== ========
See Notes to Consolidated Financial Statements
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Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS 02/26/00 11/27/99
-------- --------
(In Millions)
Current assets:
Cash, cash equivalents and short-term investments .... $ 174 $ 170
Trade receivables .................................... 395 413
Inventories .......................................... 117 113
Other ................................................ 86 86
------- -------
Total current assets ................................ 772 782
Equipment leased to others, net ........................ 67 69
Property, net .......................................... 191 198
Other assets:
Intangible assets, net ............................... 186 192
Other ................................................ 109 101
------- -------
Total other assets .................................. 295 293
Insurance assets:
Investments .......................................... 2,262 2,311
Deferred policy acquisition costs .................... 595 584
Deferred income taxes ................................ 104 79
Other ................................................ 122 117
------- -------
Total insurance assets .............................. 3,083 3,091
------- -------
Total assets ........................................... $ 4,408 $ 4,433
======= =======
LIABILITIES
Current liabilities:
Short-term debt ...................................... $ 50 $ 52
Trade accounts payable ............................... 65 80
Other ................................................ 240 239
------- -------
Total current liabilities ........................... 355 371
Other liabilities:
Long-term debt ....................................... 302 302
Other long-term liabilities .......................... 72 68
Deferred income taxes ................................ 2 3
------- -------
Total other liabilities ............................. 376 373
Insurance liabilities:
Benefit reserves ..................................... 2,123 2,092
Unearned revenue ..................................... 727 719
Other ................................................ 44 40
------- -------
Total insurance liabilities ......................... 2,894 2,851
------- -------
Total liabilities ...................................... 3,625 3,595
------- -------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common stock ......................................... 4 4
Additional paid-in capital ........................... 22 24
Retained earnings .................................... 1,317 1,293
Accumulated other comprehensive income (loss) (Note 4) (86) (38)
Treasury stock ....................................... (474) (445)
------- -------
Total shareholders' equity .......................... 783 838
------- -------
Total liabilities and
shareholders' equity .................................. $ 4,408 $ 4,433
======= =======
See Notes to Consolidated Financial Statements
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Hillenbrand Industries, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
Three Months Ended
02/26/00 02/27/99
-------- --------
(In Millions)
Operating activities:
Net income ..................................... $ 36 $ 45
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization ................ 23 22
Change in noncurrent deferred income taxes ... 2 (2)
Change in net working capital excluding cash,
current debt and acquisitions .............. -- (48)
Change in insurance items:
Deferred policy acquisition costs ........... (12) (9)
Other insurance items, net .................. 26 18
Other, net ................................... -- 18
----- -----
Net cash provided by operating activities ........ 75 44
----- -----
Investing activities:
Capital expenditures, net ...................... (16) (21)
Proceeds on disposal of fixed assets and
equipment leased to others ................... 6 --
Acquisition of business, net of cash acquired .. -- (31)
Other investments .............................. (1) --
Insurance investments:
Purchases .................................... (182) (262)
Proceeds on maturities ....................... 133 113
Proceeds on sales ............................ 20 176
----- -----
Net cash used in investing activities ............ (40) (25)
----- -----
Financing activities:
Payment of cash dividends ...................... (13) (13)
Treasury stock acquisitions .................... (30) (21)
Insurance deposits received .................... 107 96
Insurance benefits paid ........................ (93) (81)
----- -----
Net cash used in financing activities ............ (29) (19)
----- -----
Effect of exchange rate changes on cash .......... (2) (1)
----- -----
Total cash flows ................................. 4 (1)
Cash, cash equivalents and short-term investments:
At beginning of period .......................... 170 297
----- -----
At end of period ................................ $ 174 $ 296
===== =====
See Notes to Consolidated Financial Statements
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Hillenbrand Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions except per share data)
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:
02/26/00 11/27/99
----------- -----------
Allowance for possible losses and
discounts on trade receivables ...... $ 53 $ 54
Inventories
Finished Products ................... $ 76 $ 67
Work in Process ..................... 27 31
Raw Materials ....................... 14 15
------ -----
Total Inventory ................... $117 $113
====== =====
Accumulated depreciation of equipment
leased to others and property ....... $578 $588
Accumulated amortization of intangible
assets .............................. $102 $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 awarded 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:
Three Months Ended
02/26/00 02/27/99
----------- -----------
Net income (in thousands) $36,517 $44,742
Average shares outstanding 63,250,318 66,877,713
Basic and diluted earnings per
common share $.58 $.67
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 other comprehensive income
(loss).
The components of comprehensive income (loss) are as follows (in millions):
Three Months Ended
02/26/00 02/27/99
-------- --------
Net income $ 36 $ 45
Net change in unrealized gain (loss)
on available-for-sale securities (46) (37)
Foreign currency translation adjustment (2) 3
---- ----
Comprehensive income (loss) $(12) $ 11
==== ====
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The composition of accumulated other comprehensive income (loss) at
February 26, 2000 and November 27, 1999 is the cumulative adjustment for
unrealized gains or losses on available-for-sale securities, consisting
primarily of insurance investments, of ($76) and ($30) million,
respectively, and the foreign currency translation adjustment of ($10) 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., 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
February 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
February 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.
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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, 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 held for sale 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 February 26, 2000, approximately $2 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 nine months. The facility closure and field corrective
actions are also expected to occur on a similar timeline, but could take
longer.
In March 1999, Batesville announced the planned closing of its
Campbellsville, Kentucky casket manufacturing plant. Approximately 200
production and administrative employees were affected. Production of
Campbellsville casket units was transferred to existing plants located in
Batesville, Indiana and Manchester, Tennessee.
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The closure of the Campbellsville manufacturing plant necessitated a $9
million unusual charge in the second quarter of 1999. The non-cash
component consisted of a $5 million write-down of property, plant and
equipment which was determined based upon independent assessments, market
appraisals and management estimates of losses to be incurred upon the
disposition of the Campbellsville facility and surplus equipment. Property,
plant and equipment to be disposed of have an adjusted fair market value of
approximately $5 million, not including costs of disposal. Additional
charges in the plan included $3 million for severance and employee benefit
costs and $1 million of other estimated plant closing costs.
As of the second quarter of 1999, manufacturing operations had been
discontinued at the plant and production successfully relocated. Nearly 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
direct and support operations in Germany and Austria. These actions
resulted in the closure of manufacturing facilities in Germany and Austria
and the relocation of certain manufacturing and business processes to other
European locations.
The plan necessitated the provision of a $70 million asset impairment and
restructuring charge in 1998. The non-cash component of the charge included
a $43 million write-off of German subsidiary goodwill, $7 million for the
write-down of property, plant and equipment held for sale and $3 million
for obsolete inventory resulting from the realignment of operations. The
plan also included additional charges for severance and employee benefit
costs of $10 million and other estimated plant closing costs of $7 million.
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.
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The disposition of the plant in Germany is targeted to be completed within
the next three months, 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 and Austria were incurred in the first 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 $17 million and $21 million as of February 26,
2000 and November 27, 1999, respectively.
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 income
before income taxes, unusual items, and capital charges and 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, and the resulting segment income is used as a
measure of segment profitability.
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.
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Financial information regarding the Company's reportable segments is
presented below:
- --------------------------------------------------------------------------------
Health Funeral Services Corporate
---------------- and Other
Care Products Insurance Expense Consolidated
- --------------------------------------------------------------------------------
FIRST QUARTER ENDED
FEBRUARY 26, 2000
- --------------------------------------------------------------------------------
Net revenues $ 257 $ 168 $ 89 $ -- $ 514
Income before income taxes,
unusual items and capital
charges $ 22 $ 42 $ 2 $ (11) $ 55
Capital charges (12) (4) -- 16 --
--------------------------------------------------
Segment income $ 10 $ 38 $ 2 $ 5 $ 55
Unusual items (a) $ 2 $ -- $ -- $ -- 2
-----
Income before income taxes $ 57
- --------------------------------------------------------------------------------
FIRST QUARTER ENDED
FEBRUARY 27, 1999
- --------------------------------------------------------------------------------
Net revenues $ 270 $ 161 $ 85 $ -- $ 516
Income before income taxes,
unusual items and capital
charges $ 31 $ 41 $ 11 $ (11) $ 72
Capital charges (12) (4) -- 16 --
--------------------------------------------------
Segment income $ 19 $ 37 $ 11 $ 5 $ 72
Unusual items (b) $ (1) $ -- $ -- $ -- (1)
-----
Income before income taxes $ 71
- --------------------------------------------------------------------------------
(a) Health Care reflects a gain on the sale of a facility in Austria, 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER 2000 COMPARED WITH FIRST QUARTER 1999
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).
Consolidated revenues of $514 million decreased $2 million compared to the first
quarter of 1999. Operating profit decreased $16 million, or 21%, to $59 million.
Net income of $36 million decreased 20%, and earnings per share decreased 13% to
$.58.
First quarter 2000 results include a $2 million gain on the sale of a facility
in Austria which was closed as part of a third quarter 1998 plan to discontinue
manufacturing operations at facilities in Germany and Austria. This gain is
included in the Unusual charges line of the Statements of Consolidated Income.
1999 results include an unusual charge of $1 million related to incremental
costs associated with the discontinuance of manufacturing operations at
facilities in Germany and Austria as mentioned earlier in this paragraph.
Excluding the unusual items mentioned above, operating profit declined 25% and
net income decreased approximately 22%.
Health Care sales were down $4 million, or 2%, to $173 million primarily due to
decreased unit shipments in the long-term care and U.S. export sales markets,
partially offset by increases in U.S. acute care and European revenues. The
increase in U.S. acute care revenues was mainly driven by the TotalCare(R) bed,
which continues to have good market success, and the inclusion of AMATECH, which
was acquired in the third quarter of 1999. Health Care rental revenues also
decreased in the first quarter compared to last year by $9 million, or 10%. Most
of this decline was in the long-term care market, which experienced lower rates,
product mix and volume compared to the first quarter of 1999 as a result of
changes in Medicare Part A patient reimbursement practices. Even though this
reimbursement change was in affect last year, many of the Company's customers
did not realize the full impact of the reimbursement change during the first
quarter of 1999. European and home care rental revenues were slightly below last
year's levels while acute care increased marginally. Both acute care and home
care experienced increased volume which was offset by lower rates. Funeral
Services sales grew 4%, or $7 million, to $168 million due to increased unit
volume across nearly all product lines as Batesville continued to increase
market penetration. Insurance revenues increased $4 million, or 5%, to $89
million. Earned premium revenue increased primarily due to increased policies
in-force year over year, and investment income grew because of the increased
size of the investment portfolio. Insurance capital gains were approximately $6
million less than the first quarter of last year.
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Gross profit on Health Care sales was $75 million in both 2000 and 1999.
However, as a percentage of sales, Health Care gross profit increased to 43.4%
compared to 42.4% in the first quarter of 1999. This increase was due to
favorable mix, lower warranty costs and favorable production efficiencies. Gross
profit on rental revenues was down $5 million, or 16%, to $27 million and as a
percentage of sales declined from 34.4% to 32.1%, primarily due to the change in
Medicare Part A reimbursement practices as described above and, to a lesser
extent, lower reimbursement experience in the home care market. Gross profit on
Funeral Services sales of $82 million increased $4 million, or 5%. As a
percentage of sales Funeral Services gross profit increased to 48.8% compared to
48.4% last year due to continued good cost control and production efficiencies.
Funeral Services insurance operating profit decreased $9 million to $2 million
compared to the first quarter of 1999 primarily due to decreased capital gains
and increased expenses related to new business development and adverse mortality
in the first quarter of 2000.
Other operating expenses (including insurance operations) increased $10 million,
or 8%, to $138 million and as a percentage of revenues were 26.8% versus 24.8%
in the first quarter of 1999. Increased investment in new business development,
increased compensation expense, the inclusion of prior year's acquisitions and
other items were partially offset by efficiencies realized due to the combining
of certain operations in the United States and Europe.
The effective income tax rate was 36.4% in the first quarter of 2000 compared to
37.0% in the first quarter of 1999. The decrease in the tax rate was primarily
due to lower operating losses in Europe.
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 February 26, 2000 increased
$4 million to $174 million compared to November 27, 1999.
Net cash generated from operating activities of $75 million increased $31
million compared to the $44 million generated in the first quarter of 1999 as
lower earnings were more than offset by improved working capital management.
Net cash used in investing activities increased $15 million to $40 million. This
increase is primarily due to unfavorable effects of investment activities at
Forethought. Offsetting these effects, capital expenditures decreased
approximately $5 million, and the Company sold facilities in the first quarter
which generated proceeds of approximately $6 million.
In financing activities, treasury stock acquisitions of $30 million consisted of
purchases on the open market.
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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. Since the Company's
holdings in such instruments are minimal, 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.
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 held for sale 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 February 26, 2000, approximately $2 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 nine
months. The facility closure and field corrective actions are also expected to
occur on a similar timeline, but could take longer.
In March 1999, Batesville announced the planned closing of its Campbellsville,
Kentucky casket manufacturing plant. Approximately 200 production and
administrative employees were affected. Production of Campbellsville casket
units was transferred to existing plants located in Batesville, Indiana and
Manchester, Tennessee.
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The closure of the Campbellsville manufacturing plant necessitated a $9 million
unusual charge in the second quarter of 1999. The non-cash component consisted
of a $5 million write-down of property, plant and equipment which was determined
based upon independent assessments, market appraisals and management estimates
of losses to be incurred upon the disposition of the Campbellsville facility and
surplus equipment. Property, plant and equipment to be disposed of have an
adjusted fair market value of approximately $5 million, not including costs of
disposal. Additional charges in the plan included $3 million for severance and
employee benefit costs and $1 million of other estimated plant closing costs.
As of the second quarter of 1999, manufacturing operations had been discontinued
at the plant and production successfully relocated. Nearly 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 direct and
support operations in Germany and Austria. These actions resulted in the closure
of manufacturing facilities in Germany and Austria and the relocation of certain
manufacturing and business processes to other European locations.
The plan necessitated the provision of a $70 million asset impairment and
restructuring charge in 1998. The non-cash component of the charge included a
$43 million write-off of German subsidiary goodwill, $7 million for the
write-down of property, plant and equipment held for sale and $3 million for
obsolete inventory resulting from the realignment of operations. The plan also
included additional charges for severance and employee benefit costs of $10
million and other estimated plant closing costs of $7 million.
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 within the
next three months, 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.
16
<PAGE> 17
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 and Austria were incurred in the first 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 $17 million and $21 million as of February 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.
The Company has been notified by the Health Care Financing Administration (HCFA)
that it may review the coding for some of the Company's Home Care rental
products. Depending on the outcome of any decision there could be a dampening
effect on the Company's future rental revenue derived from Medicare patients in
the home care market.
The market for casketed deaths is expected to remain flat for the foreseeable
future. 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.
YEAR 2000 DATE CONVERSION
The Company successfully implemented its remediation plans for all affected
information technology-based systems, non-Management Information Systems and
products sold before the turn of the century. Following the arrival of the Year
2000, including the Leap Year Day, February 29, 2000, the Company has not
experienced any problems with its own operations and systems or with devices and
raw materials manufactured and/or supplied by third parties. The Company has
received no notifications from customers regarding Year 2000 issues related to
products it has sold. The Company continues to monitor its systems, suppliers
and products for any unanticipated issues that may not yet have manifested.
17
<PAGE> 18
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 first quarter ended
February 26, 2000.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILLENBRAND INDUSTRIES, INC.
DATE: April 5, 2000 BY: /S/ Donald G. Barger, Jr.
---------------------------
Donald G. Barger, Jr.
Vice President and
Chief Financial Officer
DATE: April 5, 2000 BY: /S/ James D. Van De Velde
---------------------------
James D. Van De Velde
Vice President and Controller
19
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED UNDER ITEM 1 OF THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 26, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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