-----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, JGbYZfCy3jpyHSIvdKAeSRD6H3bJxCp7YyXo1MSsAtfRtIp4O9Jkk7q1+k0SpG/Y 9HbLorQpzh6jJzVgbEMhWg== 0000950137-99-002461.txt : 19990712 0000950137-99-002461.hdr.sgml : 19990712 ACCESSION NUMBER: 0000950137-99-002461 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990529 FILED AS OF DATE: 19990709 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: 99662079 BUSINESS ADDRESS: STREET 1: 1069 STATE ROUTE 46E CITY: BATESVILLE STATE: IN ZIP: 47006-9166 BUSINESS PHONE: 8129347000 10-Q 1 FORM 10-Q DATED 5/29/99 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 MAY 29, 1999 COMMISSION FILE NO. 1-6651 HILLENBRAND INDUSTRIES, INC. (Exact name of registrant as specified in its charter) INDIANA 35-1160484 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 STATE ROUTE 46 EAST BATESVILLE, INDIANA 47006-8835 (Address of principal executive offices) (Zip Code) (812) 934-7000 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. Yes X No ----- ----- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, without par value - 66,257,190 as of July 1, 1999. ================================================================================ 1 2 HILLENBRAND INDUSTRIES, INC. INDEX TO FORM 10-Q
Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (Unaudited) Consolidated Income for the Three Months 3 And Six Months Ended 5/29/99 and 5/30/98 Consolidated Balance Sheets at 4 5/29/99 and 11/28/98 Consolidated Cash Flows for the Six Months 5 Ended 5/29/99 and 5/30/98 Notes to Consolidated Financial Statements 6-11 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12-18 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders 19 Item 5 - Other Information 19-20 Item 6 - Exhibits and Reports on Form 8-K 20 SIGNATURES 21
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Hillenbrand Industries, Inc. and Subsidiaries Consolidated Income
Three Months Ended Six Months Ended --------------------- -------------------- 05/29/99 05/30/98 05/29/99 05/30/98 -------- -------- -------- -------- (In Millions Except Per Share Data) Net revenues: Health Care sales .............................. $ 192 $ 197 $ 369 $ 343 Health Care rentals ............................ 87 104 180 212 Funeral Services sales ......................... 157 134 318 282 Insurance revenues ............................. 88 73 173 150 -------- -------- -------- -------- Total revenues ................................. 524 508 1,040 987 Cost of revenues: Health Care cost of goods sold ................. 113 112 215 198 Health Care rental expenses .................... 60 62 121 124 Funeral Services cost of goods sold ............ 79 69 162 146 Insurance cost of revenues ..................... 64 53 126 110 -------- -------- -------- -------- Total cost of revenues ......................... 316 296 624 578 Other operating expenses ............................ 140 138 273 263 Unusual charges ..................................... 9 -- 9 -- -------- -------- -------- -------- Operating profit .................................... 59 74 134 146 Interest expense .................................... (6) (7) (13) (14) Investment income ................................... 3 3 7 8 Other income (expense), net ......................... (1) 2 (2) 1 -------- -------- -------- -------- Income before income taxes .......................... 55 72 126 141 Income taxes ........................................ 20 27 46 53 -------- -------- -------- -------- Net income .......................................... $ 35 $ 45 $ 80 $ 88 ======== ======== ======== ======== Basic and diluted earnings per common share (Note 3) ........................ $ .53 $ .66 $ 1.20 $ 1.30 ======== ======== ======== ======== Dividends per common share .......................... $ .195 $ .180 $ .39 $ .36 ======== ======== ======== ======== Average shares outstanding (thousands) .............. 66,575 67,525 66,725 67,530 ======== ======== ======== ========
See Notes to Consolidated Financial Statements 3 4 Hillenbrand Industries, Inc. and Subsidiaries Consolidated Balance Sheets
ASSETS 05/29/99 11/28/98 -------- -------- (In Millions) Current assets: Cash and cash equivalents ................................ $ 247 $ 297 Trade receivables ........................................ 387 392 Inventories .............................................. 127 105 Other .................................................... 69 64 ------- ------- Total current assets .................................... 830 858 Equipment leased to others, net ............................ 78 81 Property, net .............................................. 213 221 Other assets: Intangible assets, net ................................... 180 198 Other .................................................... 140 89 ------- ------- Total other assets ...................................... 320 287 Insurance assets: Investments .............................................. 2,221 2,204 Deferred policy acquisition costs ........................ 557 536 Deferred income taxes .................................... 71 34 Other .................................................... 71 59 ------- ------- Total insurance assets .................................. 2,920 2,833 ------- ------- Total assets ............................................... $ 4,361 $ 4,280 ======= ======= LIABILITIES Current liabilities: Short-term debt .......................................... $ 56 $ 60 Current portion of long-term debt ........................ -- 1 Trade accounts payable ................................... 66 69 Other .................................................... 206 245 ------- ------- Total current liabilities ............................... 328 375 Other liabilities: Long-term debt ........................................... 302 303 Other long-term liabilities .............................. 89 86 Deferred income taxes .................................... 1 4 ------- ------- Total other liabilities ................................. 392 393 Insurance liabilities: Benefit reserves ......................................... 1,982 1,856 Unearned revenue ......................................... 697 674 Other .................................................... 40 30 ------- ------- Total insurance liabilities ............................. 2,719 2,560 ------- ------- Total liabilities .......................................... 3,439 3,328 ------- ------- Commitments and contingencies (Note 5) SHAREHOLDERS' EQUITY Common stock ............................................. 4 4 Additional paid-in capital ............................... 17 15 Retained earnings ........................................ 1,275 1,221 Accumulated other comprehensive (loss)income (Note 4) .... (17) 45 Treasury stock ........................................... (357) (333) ------- ------- Total shareholders' equity .............................. 922 952 ------- ------- Total liabilities and shareholders' equity ...................................... $ 4,361 $ 4,280 ======= =======
See Notes to Consolidated Financial Statements 4 5 Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Cash Flows Six Months Ended ------------------ 05/29/99 05/30/98 -------- -------- (In Millions) Operating activities: Net income ....................................... $ 80 $ 88 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization .................. 45 51 Change in noncurrent deferred income taxes ................................. (3) (6) Change in net working capital, excluding cash, current debt and acquisitions ................................. (65) (83) Change in insurance items: Deferred policy acquisition costs ............. (21) (32) Other insurance items, net .................... 34 33 Other, net ..................................... (26) (19) ----- ----- Net cash provided by operating activities .......... 44 32 ----- ----- Investing activities: Capital expenditures, net ........................ (42) (38) Acquisitions of businesses, net of cash acquired ....................................... (26) (159) Insurance investments: Purchases ...................................... (504) (371) Proceeds on maturities ......................... 112 63 Proceeds on sales .............................. 351 207 ----- ----- Net cash used in investing activities ........................................ (109) (298) ----- ----- Financing activities: Additions to debt, net ........................... 2 98 Payment of cash dividends ........................ (26) (25) Treasury stock acquisitions ...................... (25) (43) Insurance premiums received ...................... 232 255 Insurance benefits paid .......................... (166) (148) ----- ----- Net cash provided by financing activities .......... 17 137 ----- ----- Effect of exchange rate changes on cash ............ (2) (1) ----- ----- Total cash flows ................................... (50) (130) Cash and cash equivalents: At beginning of period ............................ 297 364 ----- ----- At end of period .................................. $ 247 $ 234 ===== =====
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 or where otherwise noted) 1. Basis of Presentation The unaudited, condensed consolidated financial statements appearing in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The statements herein have been prepared in accordance with the Company's understanding of the instructions to Form 10-Q. In the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows, for the interim periods. Certain prior year amounts have been reclassified to conform to the current year's presentation. 2. Supplementary Balance Sheet Information The following information pertains to non-insurance assets and consolidated shareholders' equity:
05/29/99 11/28/98 -------- -------- Allowance for possible losses and discounts on trade receivables ........... $ 26 $ 27 Inventories Finished products ........................ 73 58 Work in process .......................... 40 32 Raw materials ............................ 14 15 ----------- ----------- Total inventory ..................... 127 105 Accumulated depreciation of equipment leased to others and property ............ $ 658 $ 648 Accumulated amortization of intangible assets ................................... $ 153 $ 150 Capital Stock: Preferred stock, without par value: Authorized 1,000,000 shares; Shares issued .................... None None Common stock, without par value: Authorized 199,000,000 shares; Shares issued .................... 80,323,912 80,323,912
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 under the Company's Senior Executive Compensation Program. Diluted earnings per common share were computed consistent with the basic earnings per share calculation including the effect of dilutive potential common shares. Potential common shares arising from shares awarded under the Company's various stock-based compensation plans, including the 1996 Stock Option Plan, did not have a material effect on diluted earnings per common share in any of the periods presented. Cumulative treasury stock acquired of 15,704,391 shares, less cumulative shares reissued of 1,647,669, have been excluded in determining the average number of shares outstanding. Earnings per share is calculated as follows:
Three Months Ended Six Months Ended -------------------------- ------------------------- 05/29/99 05/30/98 05/29/99 05/30/98 ----------- ------------ ----------- ----------- Net income (in thousands) $ 35,062 $ 44,706 $ 79,803 $ 87,614 Average shares outstanding 66,575,338 67,524,650 66,724,789 67,529,891 Basic and diluted earnings per common share $ .53 $ .66 $ 1.20 $ 1.30
4. Comprehensive Income As of November 29, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". The adoption of this Standard did not affect the Company's financial position or results of operations. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Due to this change, certain balance sheet reclassifications have been made in order for previously reported amounts to conform to SFAS No. 130. 7 8 The components of comprehensive income are as follows:
Three Months Ended Six Months Ended ---------------------- ---------------------- 05/29/99 05/30/98 05/29/99 05/30/98 -------- -------- -------- -------- Net income $ 35 $ 45 $ 80 $ 88 Net change in unrealized gain (loss) on available-for-sale securities (30) 5 (67) 12 Foreign currency translation adjustment 2 (6) 5 (11) ------- ------- -------- ------- Comprehensive income $ 7 $ 44 $ 18 $ 89 ======= ======= ======== =======
The composition of accumulated other comprehensive income at May 29, 1999 and November 28, 1998 is the cumulative adjustment for unrealized gains or losses on available-for-sale securities of ($15) and $52 million, respectively, and the foreign currency translation adjustment of ($2) and ($7) million, respectively. 5. Contingencies As discussed under Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended November 28, 1998, Hillenbrand Industries, Inc., and its subsidiary Hill-Rom Company, Inc., are the subject of an antitrust suit brought by Kinetic Concepts, Inc. (KCI) in the health care equipment market. The plaintiff seeks monetary damages totaling in excess of $269 million, trebling of any damages that may be allowed by the court, and injunctions to prevent further alleged unlawful activities. The Company believes that the claims are without merit and is aggressively defending itself against all allegations. Accordingly, it has not recorded any loss provision relative to damages sought by the plaintiffs. There was no material change in the status of this litigation during the quarter ended May 29, 1999. On November 20, 1996, the Company filed a Counterclaim to the above action against KCI in the U.S. District Court in San Antonio, Texas. The Counterclaim alleges that KCI has attempted to monopolize the therapeutic bed market and to interfere with the Company's and Hill-Rom's business relationships by conducting a campaign of anticompetitive conduct. It further alleges that KCI abused the legal process for its own advantage, interfered with existing Hill-Rom contractual relationships, interfered with Hill-Rom's prospective contractual and business relationships, commercially disparaged the Company and Hill-Rom by uttering and publishing false statements to customers and prospective customers not to do business with the Company and Hill-Rom, and committed libel and slander in statements made both orally and published by KCI that the Company and Hill-Rom were providing illegal discounts. The Company alleges that KCI's intent is to eliminate legal competitive marketplace activity. There was no material change in the status of this litigation during the quarter ended May 29, 1999. 8 9 The Company has voluntarily entered into remediation agreements with environmental authorities, and has been issued Notices of Violation alleging violations of certain permit conditions. Accordingly, the Company is in the process of implementing plans of abatement in compliance with agreements and regulations. The Company has also been notified as a potentially responsible party in investigations of certain offsite disposal facilities. The cost of all plans of abatement and waste site cleanups in which the Company is currently involved is not expected to exceed $5 million. The Company has provided adequate reserves in its financial statements for these matters. These reserves have been determined without consideration of possible loss recoveries from third parties. Changes in environmental law might affect the Company's future operations, capital expenditures and earnings. The cost of complying with these provisions is not known. The Company is subject to various other claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, product liability, safety, health, taxes, environmental and other matters. Management believes that the ultimate liability, if any, in excess of amounts already provided or covered by insurance, is not likely to have a material adverse effect on the Company's financial condition, results of operations or cash flows. 6. Acquisitions On December 31, 1998, Forethought Life Insurance Company, a wholly-owned subsidiary of Forethought Financial Services, Inc., acquired the stock of Arkansas National Life Insurance Company for approximately $31 million, including costs of acquisition. This acquisition has been accounted for as a purchase, and the results of operations of the acquired business have been included in the consolidated financial statements since the acquisition date. The excess of the purchase price over the fair value of net assets acquired was approximately $3 million which is being amortized on a straight-line basis over 20 years. Unaudited fiscal 1998 and 1999 pro forma revenue, net income and earnings per share amounts would not have been materially different from reported amounts herein. In the second quarter of 1999, Hill-Rom, a wholly-owned subsidiary, finalized the purchase price for Air-Shields, Inc. As a result of this settlement, goodwill related to the acquisition was reduced by $5 million. 9 10 7. Restructuring Charges and Impairment of Assets On March 30, 1999, Batesville Casket Company, a wholly owned subsidiary, announced the planned closing of its Campbellsville, Kentucky casket manufacturing plant. Approximately 200 production and administrative employees are affected. Future production of Campbellsville casket units is being transferred to existing plants located in Batesville, Indiana and Manchester, Tennessee. The plan to close the Campbellsville manufacturing plant necessitated a $9 million charge in the second quarter. The non-cash component consisted of a $5 million write-down of property, plant and equipment which was determined based upon independent assessments, market appraisals and management estimates of losses to be incurred upon the disposition of the Campbellsville facility and surplus equipment. Property, plant and equipment to be disposed of have an adjusted fair market value of approximately $5 million, not including costs of disposal as of May 29, 1999. Additional charges in the plan include $3 million for severance and employee benefit costs and $1 million of other estimated plant closing costs. In addition to costs accrued under the plan, additional costs of approximately $2 million will be incurred to relocate certain manufacturing and business processes to Batesville and Manchester. These costs will be expensed as incurred as required by generally accepted accounting principles. As of May 29, 1999, manufacturing operations had been discontinued at the plant. Approximately $1 million of costs have been incurred primarily related to severance and employee benefits. Substantially all employee related costs are expected to be paid in the next six months. The disposition of property, plant and equipment is targeted to be completed within the next twelve months, but could take longer. Depreciation expense on assets to be sold was reflected through the plant closing date. In August 1998, the Board of Directors of the Company approved a plan to restructure Hill-Rom's direct and support operations in Germany and Austria to permit the Company to more efficiently meet the needs of its customers and improve profitability. Under the plan, the Company will reduce fixed costs and align manufacturing, distribution, sales and administrative functions with anticipated demand. The alignment will result in the closure of manufacturing facilities in Germany and Austria and the relocation of certain manufacturing and business processes to other European locations. The restructuring plan necessitated the provision of a $70 million asset impairment and restructuring charge in 1998. The non-cash component of the charge included a $43 million write-off of German subsidiary goodwill, $7 million for the write-down of property, plant and equipment held for sale and $3 million for obsolete inventory resulting from the realignment of operations. The plan also included additional charges for severance and employee benefit costs of $10 million and other estimated plant closing costs of $7 million. 10 11 As of May 29, 1999, manufacturing operations have been discontinued in Germany and Austria. Approximately $9 million in severance and employee benefit costs and $3 million in other plant closing costs were incurred through the second quarter of 1999. No adjustments were made to reserves through the second quarter. The Company expects substantially all employee related costs associated with this restructuring to be paid in fiscal 1999. The disposition of property, plant and equipment, along with excess and discontinued inventories, is targeted to be completed within the next six months, but could take longer. The remaining reserve balances as of May 29, 1999 for the above restructuring plans are as follows: Inventory $3 Severance and employee benefit costs $3 Other plant closing costs $5 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998 Consolidated revenues of $524 million increased $16 million, or 3%, compared to the second quarter of 1998. Health Care sales decreased $5 million, or 3%, to $192 million. This decrease is mainly due to the inclusion of Medeco in the prior year. Medeco was sold in the third quarter of 1998. Excluding prior year Medeco revenues, Health Care sales increased approximately 7% due to continued strong sales of the TotalCare(R) bed, and increased sales of Long Term Care capital and procedural products offset by lower revenues from architectural and maternal infant care products. European Health Care sales decreased approximately 26% in the second quarter due primarily to the discontinuance of certain products associated with the realignment and restructuring of European manufacturing operations. Health Care rental revenue of $87 million decreased $17 million, or 16%, due mainly to the change in Medicare Part A patient reimbursement practices in the U.S. long-term care market. The U.S. long-term care business unit continues to experience unfavorable changes in product mix and volume. The U.S. acute care and home care business units experienced good revenue growth over the second quarter of 1998 while the European business unit experienced marginal increases in revenue. Excluding revenues from the long term care business unit in 1999 and 1998, Health Care rental revenues increased approximately 7%. Funeral Services sales increased $23 million, or 17%, to $157 million in the second quarter due to increased unit volume and market penetration of traditional caskets and cremation products. Funeral Services insurance revenues were up 21%, or $15 million, to $88 million. Higher investment income reflected the larger investment portfolio. Earned premium revenue increased due to the increase in policies in-force year over year. Net gains on the sale of investments of approximately $8 million compares with approximately $2 million in the second quarter of 1998. Gross profit on Health Care sales of $79 million decreased $6 million, or 7%. As a percentage of sales gross profit was 41.1% compared to 43.1% in the second quarter of 1998. Gross profit in the second quarter was affected by increased warranty costs, product mix, production scheduling and other inefficiencies. Gross profit on rental revenues decreased $15 million, or 36% to $27 million and as a percentage of revenues declined from 40.4% to 31.0%, primarily due to the change in Medicare Part A reimbursement practices described above. Funeral Services sales gross profit increased 20%, or $13 million, to $78 million. As a percentage of sales, gross profit increased from 48.5% in the second quarter of 1998 to 49.7% in 1999 due to unit volume and good cost control. Funeral Services insurance operating profit of $10 million was comparable to the second quarter of 1998. This was mainly due to an increase in benefits paid in the second quarter compared to the prior year period. 12 13 Other operating expenses (including insurance operations) increased $2 million or 1% and as a percentage of revenues were 26.7% compared to 27.2% in the second quarter of 1998. 1998 was affected by costs associated with acquisitions, and 1999 experienced lower incentive compensation costs. The consolidated effective income tax rate was 36.7% in the second quarter of 1999 compared to 37.5% in the comparable period of 1998 mainly due to decreased state tax expense. SIX MONTHS 1999 COMPARED WITH SIX MONTHS 1998 Except as noted below, the factors affecting the second quarter comparisons also affected year to date comparisons. Consolidated revenues of $1,040 million increased $53 million, or 5%. Health Care sales were up $26 million, or 8%, to $369 million. Excluding Medeco, which was sold in the third quarter of 1998, health care sales increased approximately 15% driven by increased shipments of the TotalCare(R) bed, which has been very successful, and increased shipments of Long Term Care capital products partially offset by decreased sales in Europe. Health Care rental revenue decreased $32 million, or 15%, to $180 million due mainly to the change in Medicare Part A reimbursement practices in the U.S. long-term care market. Excluding long-term care revenues, overall rental revenues are up approximately 5% over last year. European rental revenues are up approximately 2%. Funeral Services sales were up 13%, or $36 million, to $318 million compared to $282 million in 1998 due to increased unit volume and greater market penetration. Funeral Services insurance revenues were $173 million versus $150 million in 1998, a 15% increase. Earned premiums, investment income and capital gains all increased at double digit rates. Consolidated gross profit increased $7 million, or 2% to $416 million. Gross profit on Health Care sales increased 6%, or $9 million, to $154 million, and as a percentage of sales was 41.7%, down from 42.3% in 1998. Health Care rental gross profit was down $29 million to $59 million, a 33% decrease, and as a percentage of sales was 32.8% versus 41.5% in 1998. This change is primarily due to changes in Medicare Part A reimbursement discussed above. Gross profit on Funeral Services sales of $156 million was a 15% increase over last year. As a percentage of sales, Funeral Services gross profit was 49.1% versus 48.2% in 1998. This increase is mainly due to increased volume, good cost control and process improvements. Insurance operating profit of $21 million increased 5%, or $1 million, over 1998. Other operating expenses (including insurance operations) were up $10 million, or 4%, to $273 million and as a percentage of revenues were 26.3% versus 26.6% in 1998. 13 14 Investment income decreased $1 million due to a lower average cash balance compared to 1998. The consolidated income tax rate declined from 37.6% to 36.9% in 1999 due to decreased state tax expense. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities and selected borrowings represent the Company's primary sources of funds for growth of the business, including capital expenditures and acquisitions. Cash and cash equivalents (excluding investments of insurance operations) at May 29, 1999 of $247 million decreased $50 million from November 28, 1998. Net cash generated from operating activities of $44 million was an increase of $12 million compared to 1998. Working capital, excluding cash, current debt and acquisitions, increased $65 million from year-end mainly due to an increase in inventory and a decrease in accounts payable and current liabilities partially offset by a decrease in trade receivables. The increase in inventory of $22 million relates primarily to building up inventory to normal levels. Near the end of fiscal 1998, the Company experienced a heavy shipping period, which decreased inventory levels. In addition, some product has not shipped as planned, thus increasing inventory. The decreases in accounts payable and current liabilities of $42 million were due to first and second quarter payments on various items accrued at year-end, including 1998 incentive compensation and other operating expenses driven by high fourth quarter production and sales levels. In the second quarter, the Company paid the loan of approximately $44 million relating to its Company Owned Life Insurance (COLI) program. Capital expenditures increased $4 million compared to 1998. In the first quarter, Forethought Life Insurance Company, a wholly-owned subsidiary of Forethought Financial Services, Inc., acquired Arkansas National Life Insurance Company (see Note 6 for more information). Included in the acquisition of Arkansas National Life Insurance Company were investments of approximately $80 million and approximately $54 million of benefit reserves. The activity in Forethought's investment portfolio reflects the objective of matching proceeds with expected policy benefit payments while maximizing yields within statutory and management constraints. In financing activities, treasury stock acquisitions of $25 million consisted of purchases on the open market. Insurance premiums received were $23 million lower than the first half of last year due to fewer trust rollovers and lower contract volume. The decrease in policy sales is due to slowed growth as Forethought's entry into targeted jurisdictions is nearly complete and due to increased competition. Insurance benefits paid increased $18 million primarily due to adverse mortality in the second quarter. 14 15 FACTORS THAT MAY AFFECT FUTURE RESULTS As discussed in the Company's latest annual report, legislative changes phased in beginning July 1, 1998 have had and will continue to have a dampening effect on the Company's rental revenue derived from Medicare patients in the long-term care market. RESTRUCTURING CHARGES AND IMPAIRMENT OF ASSETS On March 30, 1999, Batesville Casket Company, a wholly owned subsidiary, announced the planned closing of its Campbellsville, Kentucky casket manufacturing plant. Approximately 200 production and administrative employees are affected. Future production of Campbellsville casket units is being transferred to existing plants located in Batesville, Indiana and Manchester, Tennessee. The plan to close the Campbellsville manufacturing plant necessitated a $9 million charge in the second quarter. The non-cash component consisted of a $5 million write-down of property, plant and equipment which was determined based upon independent assessments, market appraisals and management estimates of losses to be incurred upon the disposition of the Campbellsville facility and surplus equipment. Property, plant and equipment to be disposed of have an adjusted fair market value of approximately $5 million, not including costs of disposal as of May 29, 1999. Additional charges in the plan include $3 million for severance and employee benefit costs and $1 million of other estimated plant closing costs. In addition to costs accrued under the plan, additional costs of approximately $2 million will be incurred to relocate certain manufacturing and business processes to Batesville and Manchester. These costs will be expensed as incurred as required by generally accepted accounting principles. As of May 29, 1999, manufacturing operations had been discontinued at the plant. Approximately $1 million of costs have been incurred primarily related to severance and employee benefits. Substantially all employee related costs are expected to be paid in the next six months. The disposition of property, plant and equipment is targeted to be completed within the next twelve months, but could take longer. Depreciation expense on assets to be sold was reflected through the plant closing date. In August 1998, the Board of Directors of the Company approved a plan to restructure Hill-Rom's direct and support operations in Germany and Austria to permit the Company to more efficiently meet the needs of its customers and improve profitability. Under the plan, the Company will reduce fixed costs and align manufacturing, distribution, sales and administrative functions with anticipated demand. The alignment will result in the closure of manufacturing facilities in Germany and Austria and the relocation of certain manufacturing and business processes to other European locations. 15 16 The restructuring plan necessitated the provision of a $70 million asset impairment and restructuring charge in 1998. The non-cash component of the charge included a $43 million write-off of German subsidiary goodwill, $7 million for the write-down of property, plant and equipment held for sale and $3 million for obsolete inventory resulting from the realignment of operations. The plan also included additional charges for severance and employee benefit costs of $10 million and other estimated plant closing costs of $7 million. As of May 29, 1999, manufacturing operations have been discontinued in Germany and Austria. Approximately $9 million in severance and employee benefit costs and $3 million in other plant closing costs were incurred through the second quarter of 1999. No adjustments were made to reserves through the second quarter. The Company expects substantially all employee related costs associated with this restructuring to be paid in fiscal 1999. The disposition of property, plant and equipment, along with excess and discontinued inventories, is targeted to be completed within the next six months, but could take longer. The remaining reserve balances as of May 29, 1999 for the above restructuring plans are as follows: Inventory $3 Severance and employee benefit costs $3 Other plant closing costs $5 16 17 YEAR 2000 DATE CONVERSION Many existing computer programs use only two digits to identify years. These programs were designed without consideration for the effect of the upcoming change in century, and if not corrected, could fail or create erroneous results by or at the year 2000. Essentially all of the Company's information technology based systems, as well as many non-information technology based systems, are potentially affected by the Year 2000 issue. Technology based systems reside on mainframes, servers and personal computers in the U.S. and in the foreign countries where the Company has operations. Specific systems include accounting, payroll, financial reporting, product development, inventory tracking and control, business planning, tax, accounts receivable, accounts payable, purchasing, distribution, and numerous word processing and spreadsheet applications. The Company's financial services business utilizes life insurance, accounting and actuarial systems that are also affected. Non-information technology based systems include equipment and services containing embedded microprocessors, such as building management systems, manufacturing process control systems, clocks, security systems and products sold or leased to customers. All of the Company's businesses have relationships with numerous third parties, including material suppliers, utility companies, transportation companies, insurance companies, banks and brokerage firms, that may be affected by the Year 2000 issue. The Company's State of Readiness Remediation plans have been established for all major systems potentially affected by the Year 2000 issue. The primary phases and current status of the plans for information technology based systems are summarized as follows: 1. Identification of all applications and hardware with potential Year 2000 issues. To the best of the Company's knowledge, this phase has been completed. 2. For each item identified, perform an assessment to determine an appropriate action plan and timetable for remediation of each item. A plan may consist of replacement, code remediation, upgrade or elimination of the application and includes resource requirements. To the best of the Company's knowledge, this phase has been completed. 3. Implementation of the specific action plan. Specific action plans have been started for all systems. Some action plans have been completed. 4. Test each application upon completion. Testing is in process or has been completed for all systems for which the remediation plan has been completed. Testing of the remaining systems should be completed in the fourth quarter of 1999. 5. Place the new process into production. Many applications and systems have been put into production. These include servers, personal computers and various software programs. Applications and systems are being put into production once they have been tested. All affected applications and systems should be in production in the fourth quarter of 1999. 17 18 The Company is in the process of identifying all non-information technology based systems. Appropriate remediation plans are being developed, implemented and tested when each affected system is identified. To the best of the Company's knowledge, all affected non-information technology based systems have been identified, and plans should be developed and implemented by the end of the third quarter of 1999. The Company is in the process of identifying all products sold or leased to customers which are affected by the Year 2000 issue. Once a Year 2000 affected product is identified, remediation plans are developed, implemented and tested, if deemed appropriate. A product listing is available to customers on the Company's Hill-Rom web page depicting Year 2000 compliance (www.hill-rom.com). Assessment of all affected products has been completed to the best of the Company's knowledge, and corrective actions, if required, should be completed by the end of the third quarter of 1999. One small subsidiary, Narco Medical Services, Inc., distributes medical devices manufactured by third parties. Each supplier has been surveyed to determine its readiness. Customers have been referred to manufacturers for Year 2000 readiness information. Contingency plans are being developed to address any resulting issues. Identification and assessment of areas of potential third party risk is nearly complete and, for those areas identified to date, remediation plans are being developed. Plans should be developed and implemented by the end of the third quarter of 1999. The Costs Involved The total cost to the Company of achieving Year 2000 compliance is not expected to exceed $8 million and will consist primarily of the utilization of internal resources. Spending to date totals approximately $6 million. Costs relating to internal systems' Year 2000 compliance are included in the Information Systems budget and are immaterial as a percentage of that budget. All costs related to achieving Year 2000 compliance are based on management's best estimates. There can be no guarantee that actual results will not differ from estimates. Risks and Contingency Plan The Company is in the process of determining the risks it would face in the event certain aspects of its Year 2000 remediation plan failed. It is also developing contingency plans for all mission-critical processes. Under a "worse case" scenario, the Company's manufacturing operations would be unable to build and deliver product due to internal system failures and/or the inability of vendors to deliver raw materials and components. Alternative suppliers are being identified and inventory levels of certain key components may be temporarily increased. While virtually all internal systems can be replaced with manual systems on a temporary basis, the failure of any mission-critical system will have at least a short-term negative effect on operations. The failure of national and worldwide banking information systems or the loss of essential utilities services due to the Year 2000 issue could result in the inability of many businesses, including the Company, to conduct business. Risk assessment is nearly complete, and contingency plans should be completed in the fourth quarter. 18 19 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of shareholders on April 13, 1999. Matters voted upon by proxy were: The election of three directors nominated for three year terms expiring in 2002 and the ratification of the Board of Director's appointment of PricewaterhouseCoopers LLP as independent accountants of the Company
Voted For Withheld ----- -------- Election of directors in Class III for terms expiring in 2002: John C. Hancock 57,094,791 1,301,426 George M. Hillenbrand II 57,084,420 1,311,797 John A. Hillenbrand II 57,083,958 1,312,259
Messrs. Peter F. Coffaro, Edward S. Davis, Leonard Granoff and W. August Hillenbrand will continue to serve as Class I directors and Messrs. Lawrence R. Burtschy, Daniel A. Hillenbrand and Ray J. Hillenbrand will continue to serve as Class II directors.
Voted Voted For Against Abstained ----- ------- --------- Proposal to ratify PricewaterhouseCoopers LLP as the Company's independent accountants 58,298,851 51,607 45,759
ITEM 5. OTHER INFORMATION From time to time, the Company makes oral and written statements that may constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "Act") or by the SEC in its rules, regulations and releases. The Company desires to take advantage of the "safe harbor" provisions in the Act for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements relating to the future performance of the Company contained in Management's Discussion and Analysis (under Item 2 Form 10-Q), and the Notes to Consolidated Financial Statements (under Item 1 on Form 10-Q) and other statements made in this Form 10-Q and in other filings with the SEC. 19 20 The Company cautions readers that any such forward-looking statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks, and there is no assurance that actual results may not differ materially. Important factors that could cause actual results to differ include but are not limited to: differences in anticipated and actual product introduction dates, the ultimate success of those products in the marketplace, continuation of production scheduling issues, changes in Medicare reimbursement trends, the success of cost control and restructuring efforts, the success of Year 2000 (Y2K) remediation efforts, and the integration of acquisitions, among other things. Realization of the Company's objectives and expected performance can also be adversely affected by the outcome of pending litigation and rulings by the Internal Revenue Service on certain tax positions taken by the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits Exhibit 27 Financial Data Schedule B. Reports on Form 8-K There were no reports filed on Form 8-K during the second quarter ended May 29, 1999. 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HILLENBRAND INDUSTRIES, INC. DATE: July 6, 1999 BY: /s/ Donald G. Barger, Jr. ------------------------------- Donald G. Barger, Jr. Vice President and Chief Financial Officer DATE: July 6, 1999 BY: /s/ James D. Van De Velde --------------------------- James D. Van De Velde Vice President and Controller 21 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED UNDER ITEM 1 OF THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 29, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS NOV-27-1999 NOV-29-1998 MAY-29-1999 247 0 387 26 127 830 949 658 4,361 328 302 0 0 4 918 4,361 687 1,040 377 624 282 1 13 126 46 80 0 0 0 80 1.20 1.20
-----END PRIVACY-ENHANCED MESSAGE-----