-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Azu1I6gIqydOwiRwh+G/kILsjJ7nz8hMEvR93luoP8EGc1ZIlmb+vrZeG2UJroI4 KWIsZ3bmyzz1l1fPmPjiAQ== 0000950124-00-002107.txt : 20000411 0000950124-00-002107.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950124-00-002107 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000226 FILED AS OF DATE: 20000410 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILLENBRAND INDUSTRIES INC CENTRAL INDEX KEY: 0000047518 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FURNITURE & FIXTURES [2590] IRS NUMBER: 351160484 STATE OF INCORPORATION: IN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06651 FILM NUMBER: 596794 BUSINESS ADDRESS: STREET 1: 700 STATE ROUTE 46 E CITY: BATESVILLE STATE: IN ZIP: 47006-8835 BUSINESS PHONE: 8129347000 10-Q 1 QUARTERLY REPORT 1 ================================================================================ 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 ---------- ---------- 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. ================================================================================ 1 2 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 2 3 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 3 4 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 4 5 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 5 6 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 6 7 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 ==== ==== 7 8 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. 8 9 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. 9 10 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. 10 11 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. 11 12 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. 12 13 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. 13 14 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. 14 15 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. 15 16 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 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 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 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 EX-27 2 FDS
5 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. 1,000,000 3-MOS DEC-02-2000 NOV-28-1999 FEB-26-2000 174 0 395 53 117 772 836 578 4,408 355 302 0 0 4 779 4,408 341 514 184 319 140 5 7 57 21 36 0 0 0 36 .58 .58
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