Indiana (State or other jurisdiction of incorporation or organization) |
35-1160484 (I.R.S. Employer Identification No.) |
700 State Route 46 East Batesville, Indiana (Address of principal executive offices) |
47006-8835 (Zip Code) |
1
2
Quarterly | Year-To-Date | |||||||||||||||
Period Ended | Period Ended | |||||||||||||||
6/30/05 | 6/30/04 | 6/30/05 | 6/30/04 | |||||||||||||
Net Revenues |
||||||||||||||||
Health Care sales |
$ | 190.3 | $ | 187.1 | $ | 583.2 | $ | 528.6 | ||||||||
Health Care rentals |
115.4 | 121.3 | 356.9 | 333.2 | ||||||||||||
Funeral Services sales |
160.3 | 153.1 | 501.4 | 493.4 | ||||||||||||
Total revenues |
466.0 | 461.5 | 1,441.5 | 1,355.2 | ||||||||||||
Cost of Revenues |
||||||||||||||||
Health Care cost of goods sold |
106.9 | 99.1 | 321.9 | 276.5 | ||||||||||||
Health Care rental expenses |
71.9 | 69.9 | 217.8 | 177.8 | ||||||||||||
Funeral Services cost of goods sold |
76.3 | 70.5 | 234.5 | 220.5 | ||||||||||||
Total cost of revenues |
255.1 | 239.5 | 774.2 | 674.8 | ||||||||||||
Gross Profit |
210.9 | 222.0 | 667.3 | 680.4 | ||||||||||||
Other operating expenses |
145.8 | 145.0 | 450.5 | 428.9 | ||||||||||||
Special charges (credits) |
5.6 | (1.4 | ) | 5.5 | (1.4 | ) | ||||||||||
Operating Profit |
59.5 | 78.4 | 211.3 | 252.9 | ||||||||||||
Other income (expense), net: |
||||||||||||||||
Interest expense |
(4.3 | ) | (4.5 | ) | (12.7 | ) | (11.5 | ) | ||||||||
Investment income |
6.3 | 1.3 | 18.5 | 3.7 | ||||||||||||
Loss on extinguishment of debt |
— | (6.4 | ) | — | (6.4 | ) | ||||||||||
Other |
(1.7 | ) | 4.5 | (3.1 | ) | 0.5 | ||||||||||
Income from Continuing Operations Before Income Taxes |
59.8 | 73.3 | 214.0 | 239.2 | ||||||||||||
Income tax expense (Note 11) |
22.1 | 28.6 | 79.2 | 97.0 | ||||||||||||
Income from Continuing Operations |
37.7 | 44.7 | 134.8 | 142.2 | ||||||||||||
Discontinued Operations (Note 4): |
||||||||||||||||
Income (loss) from discontinued operations before income taxes (including loss (income) on impairment of discontinued operations of $0, $5.9, ($0.1) and $134.9) |
0.5 | (6.0 | ) | 1.3 | (103.8 | ) | ||||||||||
Income tax expense (benefit) |
0.2 | (0.3 | ) | 0.5 | (9.3 | ) | ||||||||||
Income (loss) from discontinued operations |
0.3 | (5.7 | ) | 0.8 | (94.5 | ) | ||||||||||
Net Income |
$ | 38.0 | $ | 39.0 | $ | 135.6 | $ | 47.7 | ||||||||
Income per common share from continuing operations
– Basic (Note 5) |
$ | 0.61 | $ | 0.72 | $ | 2.18 | $ | 2.29 | ||||||||
Income (loss) per common share from discontinued operations
– Basic (Note 5) |
0.00 | (0.09 | ) | 0.01 | (1.52 | ) | ||||||||||
Net Income per Common Share – Basic |
$ | 0.62 | $ | 0.63 | $ | 2.19 | $ | 0.77 | ||||||||
Income per common share from continuing operations
– Diluted (Note 5) |
$ | 0.61 | $ | 0.71 | $ | 2.17 | $ | 2.27 | ||||||||
Income (loss) per common share from discontinued operations
– Diluted (Note 5) |
0.00 | (0.09 | ) | 0.01 | (1.51 | ) | ||||||||||
Net Income per Common Share – Diluted |
$ | 0.61 | $ | 0.62 | $ | 2.18 | $ | 0.76 | ||||||||
Dividends per Common Share |
$ | 0.28 | $ | 0.27 | $ | 0.84 | $ | 0.81 | ||||||||
Average Common Shares Outstanding – Basic (thousands) |
61,526 | 62,303 | 61,852 | 62,248 | ||||||||||||
Average Common Shares Outstanding – Diluted (thousands) |
61,896 | 62,637 | 62,253 | 62,603 | ||||||||||||
3
6/30/05 | 9/30/04 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 75.5 | $ | 127.7 | ||||
Current investments (Note 1) |
76.5 | 52.5 | ||||||
Trade receivables, net |
401.3 | 416.7 | ||||||
Inventories |
129.4 | 121.5 | ||||||
Deferred income taxes |
26.2 | 4.3 | ||||||
Other |
22.1 | 15.5 | ||||||
Total current assets |
731.0 | 738.2 | ||||||
Equipment Leased to Others, net |
160.8 | 150.7 | ||||||
Property, net |
210.4 | 221.5 | ||||||
Investments |
80.6 | 79.5 | ||||||
Other Assets |
||||||||
Intangible assets: |
||||||||
Goodwill (Note 3) |
357.6 | 359.9 | ||||||
Software and other |
181.2 | 190.1 | ||||||
Note receivable, net of discount |
113.2 | 105.2 | ||||||
Prepaid pension costs |
15.4 | — | ||||||
Deferred charges and other assets |
36.2 | 49.0 | ||||||
Total other assets |
703.6 | 704.2 | ||||||
Assets of Discontinued Operations (Note 4) |
105.8 | 98.3 | ||||||
Total Assets |
$ | 1,992.2 | $ | 1,992.4 | ||||
LIABILITIES |
||||||||
Current Liabilities |
||||||||
Trade accounts payable |
$ | 92.4 | $ | 93.6 | ||||
Short-term borrowings |
6.9 | 11.0 | ||||||
Accrued compensation |
69.4 | 86.6 | ||||||
Accrued warranty |
15.8 | 18.5 | ||||||
Other |
90.0 | 103.8 | ||||||
Total current liabilities |
274.5 | 313.5 | ||||||
Long-Term Debt |
354.1 | 359.9 | ||||||
Other Long-Term Liabilities |
102.6 | 124.6 | ||||||
Deferred Income Taxes |
43.2 | 7.5 | ||||||
Liabilities of Discontinued Operations (Note 4) |
98.3 | 91.6 | ||||||
Total Liabilities |
872.7 | 897.1 | ||||||
Commitments and Contingencies (Note 9) |
||||||||
SHAREHOLDERS’ EQUITY |
||||||||
Common stock |
4.4 | 4.4 | ||||||
Additional paid-in capital |
62.6 | 62.1 | ||||||
Retained earnings |
1,658.3 | 1,574.3 | ||||||
Accumulated other comprehensive income (Note 6) |
2.5 | 6.0 | ||||||
Treasury stock |
(608.3 | ) | (551.5 | ) | ||||
Total Shareholders’ Equity |
1,119.5 | 1,095.3 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 1,992.2 | $ | 1,992.4 | ||||
4
Year-to-Date Period Ended | ||||||||
6/30/05 | 6/30/04 | |||||||
Operating Activities |
||||||||
Net income |
$ | 135.6 | $ | 47.7 | ||||
Adjustments to reconcile net income to net cash flows from
operating activities: |
||||||||
Depreciation and amortization |
86.8 | 76.1 | ||||||
Accretion and capitalized interest on financing provided on
divestiture |
(10.4 | ) | — | |||||
Net capital gains – Insurance |
— | (9.7 | ) | |||||
Provision for deferred income taxes |
19.6 | (21.5 | ) | |||||
Loss on impairment of discontinued operations |
— | 114.4 | ||||||
Loss on disposal of fixed assets |
4.4 | 7.4 | ||||||
Loss on extinguishment of debt |
— | 6.4 | ||||||
Defined benefit plan funding |
(76.7 | ) | (7.4 | ) | ||||
Change in working capital excluding cash, current
investments, current debt, prepaid pension costs,
acquisitions and dispositions |
(9.1 | ) | (42.7 | ) | ||||
Change in insurance items: |
||||||||
Increase in benefit reserves |
— | 56.6 | ||||||
Other insurance items, net |
— | 34.7 | ||||||
Other, net |
25.4 | (0.7 | ) | |||||
Net cash provided by operating activities |
175.6 | 261.3 | ||||||
Investing Activities |
||||||||
Capital expenditures and purchase of intangibles |
(82.0 | ) | (79.7 | ) | ||||
Proceeds on sale of business |
— | 39.6 | ||||||
Acquisitions of businesses, net of cash acquired |
(9.5 | ) | (429.4 | ) | ||||
Investment purchases and capital calls |
(121.5 | ) | (27.3 | ) | ||||
Proceeds on investment sales/maturities |
101.3 | 59.7 | ||||||
Insurance investments: |
||||||||
Purchases |
— | (616.0 | ) | |||||
Proceeds on maturities |
— | 93.9 | ||||||
Proceeds on sales |
— | 416.8 | ||||||
Net cash used in investing activities |
(111.7 | ) | (542.4 | ) | ||||
Financing Activities |
||||||||
Change in short-term debt |
(4.1 | ) | 5.2 | |||||
Additions to long-term debt |
— | 534.9 | ||||||
Repayments of long-term debt |
— | (294.9 | ) | |||||
Debt issuance costs |
— | (1.7 | ) | |||||
Payment of cash dividends |
(51.6 | ) | (50.5 | ) | ||||
Proceeds on exercise of options |
11.5 | 21.4 | ||||||
Treasury stock acquired |
(71.4 | ) | (26.5 | ) | ||||
Insurance deposits received |
— | 228.1 | ||||||
Insurance benefits paid |
— | (221.6 | ) | |||||
Net cash (used in) provided by financing activities |
(115.6 | ) | 194.4 | |||||
Effect of exchange rate changes on cash |
(0.5 | ) | 0.5 | |||||
Total Cash Flows |
(52.2 | ) | (86.2 | ) | ||||
Cash and Cash Equivalents: |
||||||||
At beginning of period |
127.7 | 154.9 | ||||||
At end of period |
$ | 75.5 | $ | 68.7 | ||||
5
1. | Summary of Significant Accounting Policies | |
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 on Form 10-K as filed with the U.S. Securities and Exchange Commission. Unless the context otherwise requires, the terms “Hillenbrand”, “the Company”, “we”, “our” and “us” refer to Hillenbrand Industries, Inc. and its consolidated subsidiaries, and the terms “Hill-Rom Company”, “Batesville Casket Company”, and derivations thereof, refer to one or more of the subsidiary companies of Hillenbrand that comprise those respective business units. Prior to July 1, 2004, Forethought Financial Services (“Forethought”) was our third operating company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of management, the financial statements herein include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position, results of operations, and cash flows for the interim periods presented. Quarterly results are not necessarily indicative of annual results. | ||
We divested the piped-medical gas and infant care businesses of Hill-Rom and Forethought in the first, third and fourth quarters, respectively, of fiscal 2004 as further described in Note 4 below. These operations were presented as discontinued operations within our Condensed Consolidated Statements of Income for all periods up to the disposal date. Under this presentation, the revenues and variable costs associated with the businesses have been removed from the individual line items comprising the Condensed Consolidated Statements of Income and are presented in a separate section entitled, “Discontinued Operations”. In addition, fixed costs related to the businesses eliminated with the divestitures have also been included as a component of discontinued operations. The results of discontinued operations are not necessarily indicative of the results of the businesses if they had been operated on a stand-alone basis. On the Condensed Consolidated Balance Sheets, the assets and liabilities of the discontinued operations are also presented separately beginning in the period in which the businesses were discontinued. On the Condensed Consolidated Statements of Cash Flows, proceeds from the sale of discontinued operations are classified as an investing cash inflow and any losses are presented as a reconciling item in the reconciliation of net income to net cash provided from operations. Year-to-date operating, investing and financing activities of the discontinued operations are reflected within the respective captions of the Condensed Consolidated Statements of Cash Flows up to the disposal date, consistent with previous periods. As of and for the three- and nine-month periods ended June 30, 2005, the condensed consolidated financial statements included as a discontinued operation the results of Forethought Federal Savings Bank, whose divestiture is expected to close by the end of 2005. | ||
Principles of Consolidation | ||
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Material intercompany accounts and transactions have been eliminated in consolidation. | ||
Reclassification | ||
Certain prior year amounts have been reclassified to conform to the current year’s presentation, including the reclassification of financial statement items not separately stated in the prior year. |
6
Revision in the Classification of Certain Securities | ||
During the first quarter of fiscal 2005, we concluded that it was appropriate to classify our auction rate municipal bonds as current investments. Previously, such investments had been classified as cash and cash equivalents. Accordingly, we have revised the classification to report these securities as current investments in a separate line item on our Condensed Consolidated Balance Sheet as of September 30, 2004. We have also made corresponding adjustments to our Condensed Consolidated Statement of Cash Flows for the period ended June 30, 2004, to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. This change in classification does not affect previously reported cash flows from operations or from financing activities in our previously reported Consolidated Statements of Cash Flows, or our previously reported Consolidated Statements of Income for any period. | ||
As of September 30, 2003, $33.4 million of these current investments were classified as cash and cash equivalents on our Consolidated Balance Sheet. | ||
For the fiscal years ended September 30, 2004 and 2003 and for the ten months ended September 30, 2002, net cash provided by (used in) investing activities related to these current investments of ($19.1) million, $169.5 million and $1.8 million, respectively, which were previously included in cash and cash equivalents in our Consolidated Statements of Cash Flows. | ||
Current Investments | ||
At June 30, 2005 and September 30, 2004, we held $76.5 million and $52.5 million, respectively, of current investments, which consist of auction rate municipal bonds classified as available-for-sale securities. Our investments in these securities are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset every 7 to 35 days, and, despite the long-term nature of their stated contractual maturities, we have the ability to quickly liquidate these securities. As a result, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from our current investments. All income generated from these current investments was recorded as Investment income. | ||
Investments | ||
We use the equity method of accounting for certain private equity limited partnership investments, with earnings or losses reported within Investment income in the Condensed Consolidated Statements of Income. Other minority investments are accounted for on either a cost or equity basis, dependent upon our level of influence over the investee. | ||
Stock-Based Compensation | ||
We apply the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, in accounting for stock-based compensation. As a result, no compensation expense is recognized for stock options granted with exercise prices equivalent to the fair market value of stock on date of grant. Compensation expense is recognized on other forms of stock-based compensation, including stock and performance-based awards and units. | ||
The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, to all stock-based employee compensation for the periods covered in this report. The fair values of stock option grants are estimated on the date of grant. Prior to fiscal year 2005 we used the Black-Scholes option-pricing model, but all stock options granted in fiscal year 2005 are valued with the Binomial option-pricing model for pro forma expense purposes only. Our Binomial model incorporates the possibility of early exercise of options into the valuation, as well as our historical exercise and termination experience to determine the option value. For these |
7
reasons, we believe the Binomial model provides a fair value that is more representative of actual historical experience than the value calculated under the Black-Scholes model. | ||
The weighted average fair value of options granted in the first nine months of fiscal 2005 was $13.19 under the Binomial model using the following assumptions: (i) risk-free interest rates of 2.64-4.09 percent; (ii) expected dividend yields of 1.70-2.08 percent; (iii) expected volatility factors of 0.2023-0.2592; and (iv) expected term of 6.8 years. |
Quarterly | Year-to-Date | |||||||||||||||
Period Ended | Period Ended | |||||||||||||||
6/30/05 | 6/30/04 | 6/30/05 | 6/30/04 | |||||||||||||
Net income, as reported |
$ | 38.0 | $ | 39.0 | $ | 135.6 | $ | 47.7 | ||||||||
Add: |
||||||||||||||||
Total stock-based employee compensation,
net of related tax effects, included in
net income, as reported |
1.0 | 0.6 | 2.4 | 1.9 | ||||||||||||
Deduct: |
||||||||||||||||
Total stock-based employee compensation,
net of related tax effects, assuming fair
value based method of accounting |
(2.0 | ) | (1.9 | ) | (5.6 | ) | (5.9 | ) | ||||||||
Pro forma net income |
$ | 37.0 | $ | 37.7 | $ | 132.4 | $ | 43.7 | ||||||||
Earnings per share: |
||||||||||||||||
Basic – as reported |
$ | 0.62 | $ | 0.63 | $ | 2.19 | $ | 0.77 | ||||||||
Basic – pro forma |
$ | 0.60 | $ | 0.61 | $ | 2.14 | $ | 0.70 | ||||||||
Diluted – as reported |
$ | 0.61 | $ | 0.62 | $ | 2.18 | $ | 0.76 | ||||||||
Diluted – pro forma |
$ | 0.60 | $ | 0.60 | $ | 2.13 | $ | 0.70 | ||||||||
New Accounting Pronouncements | ||
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), “Share-Based Payment.” This Statement requires companies to measure and recognize compensation expense for all stock options and share-based compensation transactions using a fair-value-based method. SFAS No. 123(R) thereby eliminates the use of the intrinsic value method of accounting in APB No. 25, “Accounting for Stock Issued to Employees”, which was permitted under SFAS No. 123, as long as the footnotes to the financial statements disclosed pro forma net income as if the fair-value-based method had been used. In April 2005, the effective date of SFAS No. 123(R) was delayed to the annual periods beginning after June 15, 2005, and thus will become effective for us in the first quarter of fiscal 2006. We are currently evaluating the adoption methods available and the impact of this pronouncement to our consolidated financial statements and results of operations. | ||
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, to amend Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing”. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material by requiring these items to be recognized as current-period charges. Additionally, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. The adoption of SFAS No. 151 is required for fiscal years beginning after June 15, 2005. We adopted SFAS No. 151 in the second quarter of fiscal 2005 without an impact on our consolidated financial statements and results of operations. | ||
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Assets”. SFAS No. 153 requires that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged. Further, it expands the exception for nonmonetary exchanges of similar |
8
productive assets to nonmonetary assets that do not have commercial substance. The provisions of the Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of the provisions of SFAS No. 153 is not expected to have a material impact on our consolidated financial statements or results of operations. | ||
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a Replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle. This Statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by this Statement. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We are required to adopt the provisions of SFAS No. 154, as applicable, beginning in fiscal year 2007. | ||
In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – an Interpretation of FASB Statement No. 143” (FIN 47). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. FIN 47 clarifies a conditional asset retirement obligation, as used in SFAS 143, “Accounting for Asset Retirement Obligations,” as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred, generally upon acquisition, construction or development and/or through the normal operation of the asset. Uncertainty about the timing and/or method of settlement of the conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. The provisions of FIN 47 are required to be applied no later than the end of fiscal years ending after December 15, 2005. As such, we are required to adopt FIN 47 by September 30, 2006. We do not expect the adoption of FIN 47 to have a material impact on our consolidated financial statements or results of operations. | ||
At its November 2004 meeting, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) regarding Issue No. 03-13, “Applying the Conditions in Paragraph 42 of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations.” The Issue provides a model to assist in evaluating (a) which cash flows should be considered in the determination of whether cash of the discontinued operation have been, or will be, eliminated from ongoing operations and (b) the types of continuing involvement that constitute significant continuing involvement. The Issue should be applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004. In analyzing the model included in this Issue, we determined that, although we receive continuing cash flows from a transition agreement with the previously disposed Forethought business, these cash flows are not significant, they are indirect cash flows and we do not have significant continuing involvement in the operations of their business. Therefore, the classification of Forethought as a discontinued operation under SFAS No. 144 is appropriate. | ||
On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 – 2010. In return, the Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. We expect the net effect of the phase out of the ETI and the phase in of this new deduction to result in a minimal impact in the effective tax rate for 2005 based on current |
9
earnings levels. In the long-term, we expect the new deduction will result in a decrease in the annual effective tax rate by at least one percent based on current earnings levels. | ||
The Act has significantly changed the tax rules for nonqualified deferred compensation plans including the Company’s plans and executive and key employee contracts that have deferral or other delayed payment features. As of January 1, 2005, we believe we have been in operational compliance with applicable legal and regulatory requirements. Pending issuance of final rules from the U.S. Department of the Treasury, we will make appropriate amendments to Board plans, executive plans and executive contracts as required before the current December 31, 2005 deadline. | ||
Under the guidance in FASB Staff Position (FSP) No. FAS 109-1, Application of FASB Statement No. 109, “Accounting for Income Taxes”, to the Tax Deduction on Qualified Production Activities Provided by The American Jobs Creation Act of 2004, the deduction will be treated as a “special deduction” as described in FASB Statement 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return. | ||
In December 2004, the FASB also issued FSP No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The Act created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. It is not anticipated that we will benefit from this provision of the Act. | ||
2. | Supplementary Balance Sheet Information | |
The following information pertains to assets and consolidated shareholders’ equity: |
6/30/05 | 9/30/04 | |||||||
Allowance for possible losses and
discounts on trade receivables |
$ | 35.5 | $ | 30.7 | ||||
Inventories: |
||||||||
Finished products |
$ | 94.9 | $ | 87.6 | ||||
Work in process |
9.2 | 9.8 | ||||||
Raw materials |
25.3 | 24.1 | ||||||
Total inventory |
$ | 129.4 | $ | 121.5 | ||||
Accumulated depreciation of equipment
leased to others and property |
$ | 677.6 | $ | 631.7 | ||||
Accumulated amortization of other intangible assets |
$ | 84.0 | $ | 137.1 | ||||
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 | ||||||
Shares outstanding |
61,096,116 | 61,960,392 | ||||||
Treasury shares outstanding |
19,227,796 | 18,363,520 |
3. | Acquisitions | |
During fiscal 2004, Hill-Rom completed the acquisitions of Advanced Respiratory, Inc. (“ARI”), Mediq, Incorporated (“Mediq”) and NaviCare Systems, Inc. (“NaviCare”). The results of these businesses have been included in the Condensed Consolidated Financial Statements since each acquisition’s date of close. | ||
On October 17, 2003, Hill-Rom acquired ARI, a manufacturer and distributor of non-invasive airway clearance products and systems, for approximately $103.0 million, plus an additional $2.2 million of acquisition costs incurred in relation to the transaction. This purchase price included a first quarter 2005 payment of $8.2 million resulting from net |
10
revenues achieved in fiscal 2004. An additional deferred payment of $5.7 million is outstanding and payable no later than the end of calendar 2005 and is accrued in the Condensed Consolidated Balance Sheets as of June 30, 2005 and September 30, 2004. An additional contingent payment, which could also be payable by the end of calendar 2005, is dependent upon ARI achieving certain net revenue targets during fiscal 2005. Any such contingent payment would increase goodwill associated with the acquisition, however, at this time no additional payment is anticipated. | ||
On January 30, 2004, Hill-Rom acquired Mediq, a company in the medical equipment outsourcing and asset management business, for approximately $328.8 million, plus an additional $5.9 million of acquisition costs incurred in relation to the transaction. This purchase price included $23 million deposited in an escrow account, of which $20 million remained at June 30, 2005 related to potential adjustments resulting primarily from the funded status of Mediq’s defined benefit pension plan as of the end of fiscal 2005, along with the occurrence of any issues associated with seller representations, warranties and other matters. The escrow amount has been included in the allocation of purchase price outlined below. We currently estimate that any adjustment related to Mediq’s pension plan will be favorable to us. Final resolution of the remaining amount in escrow is expected to occur in the first half of fiscal 2006. If any adjustment differs in amount from the current escrow balance, the reported purchase price would be decreased by the amount of any valid claims against the escrow amounts, and the reported amount of goodwill associated with the Mediq acquisition would be adjusted accordingly. | ||
On January 30, 2004, we completed the acquisition of the remaining 84 percent of the equity of NaviCare that we did not already own for approximately $14.1 million. | ||
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at their dates of acquisition. During the first nine months of fiscal 2005, we reduced goodwill by approximately $3.4 million to reflect the true-up of deferred taxes for opening balance sheet adjustments on ARI and NaviCare and a reduction to the previously accrued contingent payment made to ARI in the first quarter of 2005. The purchase prices remain subject to adjustment for the contingent payments outlined above; thus, the allocation of the purchase prices is subject to refinement. |
ARI | Mediq | NaviCare | ||||||||||
Current assets |
$ | 24.9 | $ | 43.8 | $ | 1.7 | ||||||
Property, plant and equipment |
6.1 | 99.1 | 0.1 | |||||||||
Intangible assets |
9.3 | 68.9 | 3.8 | |||||||||
Goodwill |
71.6 | 196.9 | 9.9 | |||||||||
Other long-term assets |
1.7 | 1.5 | 1.5 | |||||||||
Total assets acquired |
113.6 | 410.2 | 17.0 | |||||||||
Current liabilities |
(4.9 | ) | (37.6 | ) | (1.7 | ) | ||||||
Long-term liabilities |
(3.5 | ) | (37.9 | ) | (1.2 | ) | ||||||
Total liabilities assumed |
(8.4 | ) | (75.5 | ) | (2.9 | ) | ||||||
Net assets acquired |
$ | 105.2 | $ | 334.7 | $ | 14.1 | ||||||
4. | Discontinued Operations | |
On July 1, 2004, we closed the sale of Forethought Financial Services, Inc. to FFS Holdings, Inc., an acquisition vehicle formed by the Devlin Group, LLC, which acquired all the common stock of Forethought and its subsidiaries for a combination of cash, seller financing, certain retained assets of Forethought and stock warrants. Total nominal consideration for the transaction was approximately $323 million, which included a $28 million adjustment for the book value at closing and the value of the partnership assets transferred to us. This consideration excluded a dividend received by us in December 2003 from Forethought in the amount of approximately $29 million made in anticipation of the transaction. Hillenbrand received cash proceeds in the transaction of approximately $105 million. An additional cash payment of approximately $6.4 million is due upon the |
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regulatory approval of the sale of Forethought Federal Savings Bank, which is expected to occur by the end of 2005. | ||
In October 2003, Hill-Rom sold its piped-medical gas business to Beacon Medical Products LLC, for $13 million, after final purchase price adjustments. | ||
In August 2004, Hill-Rom completed the sale of its Air-Shields infant care business to a subsidiary of Dräger Medical AG & Co. KGaA for approximately $31 million. | ||
These businesses have been treated as discontinued operations for all periods presented within the Condensed Consolidated Statements of Income in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. | ||
Operating results for the discontinued operations were as follows for the quarterly and nine-month periods ended June 30, 2005 and 2004: |
Quarterly | Year-to-Date | |||||||||||||||
Period Ended | Period Ended | |||||||||||||||
6/30/05 | 6/30/04 | 6/30/05 | 6/30/04 | |||||||||||||
Investment income |
$ | 1.3 | $ | 44.5 | $ | 3.7 | $ | 132.5 | ||||||||
Earned revenue |
— | 53.7 | — | 162.0 | ||||||||||||
Net capital gains (losses) |
— | (6.4 | ) | — | 4.2 | |||||||||||
Other revenues |
(0.2 | ) | 12.0 | (0.6 | ) | 47.3 | ||||||||||
Net revenues from discontinued
operations |
1.1 | 103.8 | 3.1 | 346.0 | ||||||||||||
Benefits paid |
— | 19.4 | — | 66.3 | ||||||||||||
Credited interest |
— | 45.6 | — | 134.1 | ||||||||||||
Other costs of revenue |
— | 23.6 | — | 77.4 | ||||||||||||
Other operating expenses |
0.6 | 15.3 | 1.9 | 37.1 | ||||||||||||
Loss on impairment of discontinued
operations |
— | 5.9 | (0.1 | ) | 134.9 | |||||||||||
Pre-tax income (loss) from discontinued
operations |
0.5 | (6.0 | ) | 1.3 | (103.8 | ) | ||||||||||
Income tax expense (benefit) |
0.2 | (0.3 | ) | 0.5 | (9.3 | ) | ||||||||||
Income (loss) from discontinued
operations |
$ | 0.3 | $ | (5.7 | ) | $ | 0.8 | $ | (94.5 | ) | ||||||
6/30/05 | 9/30/04 | |||||||
Investments |
$ | 105.3 | $ | 97.1 | ||||
Other assets |
0.5 | 1.2 | ||||||
Assets of discontinued operations |
105.8 | 98.3 | ||||||
Liabilities |
98.3 | 91.6 | ||||||
Net assets of discontinued operations |
$ | 7.5 | $ | 6.7 | ||||
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5. | Earnings per Common Share | |
Basic earnings per share were calculated based upon the weighted average number of outstanding common shares for the period, plus the effect of deferred vested shares. Diluted earnings per share were calculated consistent with the basic earnings per share calculation including the effect of dilutive unissued common shares related to stock-based employee compensation programs. For all periods presented, anti-dilutive stock options were excluded in the calculation of diluted earnings per share. Excluded shares were 1,230,766 and 1,150,576 for the three- and nine-month periods ended June 30, 2005 and 56,824 and 54,270 for the comparable periods of 2004. 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: |
Quarterly | Year-to-Date | |||||||||||||||
Period Ended | Period Ended | |||||||||||||||
6/30/05 | 6/30/04 | 6/30/05 | 6/30/04 | |||||||||||||
Net income (in thousands) |
$ | 37,956 | $ | 39,042 | $ | 135,605 | $ | 47,752 | ||||||||
Average shares outstanding
– Basic (thousands) |
61,526 | 62,303 | 61,852 | 62,248 | ||||||||||||
Add potential effect of: |
||||||||||||||||
Exercise of stock options and other
unvested equity awards |
370 | 334 | 401 | 355 | ||||||||||||
Average shares outstanding
– Diluted (thousands) |
61,896 | 62,637 | 62,253 | 62,603 | ||||||||||||
Income per common share from
continuing operations — Basic |
$ | 0.61 | $ | 0.72 | $ | 2.18 | $ | 2.29 | ||||||||
Income (loss) per common share from
discontinued operations — Basic |
0.00 | (0.09 | ) | 0.01 | (1.52 | ) | ||||||||||
Net income per common
share – Basic |
$ | 0.62 | $ | 0.63 | $ | 2.19 | $ | 0.77 | ||||||||
Income per common share from
continuing operations — Diluted |
$ | 0.61 | $ | 0.71 | $ | 2.17 | $ | 2.27 | ||||||||
Income (loss) per common share from
discontinued operations — Diluted |
0.00 | (0.09 | ) | 0.01 | (1.51 | ) | ||||||||||
Net income per common
share – Diluted |
$ | 0.61 | $ | 0.62 | $ | 2.18 | $ | 0.76 | ||||||||
Note: Certain per share amounts may not accurately add due to rounding. | ||
6. | Comprehensive Income | |
SFAS No. 130, “Reporting Comprehensive Income”, requires unrealized gains or losses on available-for-sale securities, foreign currency translation adjustments and minimum pension liability adjustments to be included in accumulated other comprehensive income. |
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The components of comprehensive income (loss) are as follows: |
Quarterly | Year-to-Date | |||||||||||||||
Period Ended | Period Ended | |||||||||||||||
6/30/05 | 6/30/04 | 6/30/05 | 6/30/04 | |||||||||||||
Net income |
$ | 38.0 | $ | 39.0 | $ | 135.6 | $ | 47.7 | ||||||||
Net change in unrealized gain (loss)
on available-for-sale securities,
net-of-tax |
(1.4 | ) | (2.5 | ) | (2.8 | ) | (117.0 | ) | ||||||||
Foreign currency translation
adjustment, net-of-tax |
(3.2 | ) | (0.7 | ) | 0.1 | 4.5 | ||||||||||
Minimum pension liability, net-of-tax |
— | — | (0.8 | ) | — | |||||||||||
Comprehensive income (loss) |
$ | 33.4 | $ | 35.8 | $ | 132.1 | $ | (64.8 | ) | |||||||
The composition of accumulated other comprehensive income at June 30, 2005 and September 30, 2004 was the cumulative adjustment for unrealized gains on available-for-sale securities of $7.6 million and $10.4 million, respectively, foreign currency translation adjustments of ($2.5) million and ($2.6) million, respectively, and a minimum pension liability adjustment of ($2.6) million and ($1.8) million, respectively. | ||
7. | Retirement Plans | |
Hillenbrand and its subsidiaries have several defined benefit retirement plans covering the majority of employees, including certain employees in foreign countries. We contribute funds to trusts as necessary to provide for current service and for any unfunded projected future benefit obligation over a reasonable period. The benefits for these plans are based primarily on years of service and the employee’s level of compensation during specific periods of employment. We also sponsor nonqualified, unfunded defined benefit pension plans for certain members of management. | ||
The components of net pension expense for defined benefit retirement plans in the United States for the quarterly and nine-month periods ended June 30, 2005 and 2004 were as follows: |
Quarterly | Year-to-Date | |||||||||||||||
Period Ended | Period Ended | |||||||||||||||
6/30/05 | 6/30/04 | 6/30/05 | 6/30/04 | |||||||||||||
Service cost |
$ | 2.6 | $ | 2.6 | $ | 7.8 | $ | 7.7 | ||||||||
Interest cost |
4.6 | 4.0 | 13.9 | 11.5 | ||||||||||||
Expected return on plan assets |
(4.9 | ) | (4.3 | ) | (14.7 | ) | (12.0 | ) | ||||||||
Amortization of prior service cost, net |
0.6 | 0.3 | 1.9 | 0.9 | ||||||||||||
Net periodic benefit cost |
$ | 2.9 | $ | 2.6 | $ | 8.9 | $ | 8.1 | ||||||||
The 2005 periods presented above include the net pension expense associated with our nonqualified supplemental pension plan offered to certain members of management. The comparable 2004 fiscal year presentation does not include these costs, as the amounts were immaterial to the total net periodic pension cost for all defined benefit retirement plans for those periods. | ||
As of June 30, 2005 we have made contributions of approximately $76.7 million to our defined benefit retirement plans during fiscal 2005. In June 2005, we fully funded our master defined benefit retirement plan by contributing approximately $75.5 million. As a |
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result, future funding requirements associated with this plan will be reduced. We do not anticipate contributing any additional funds during fiscal year 2005. | ||
We sponsor both qualified and nonqualified defined contribution retirement plans for all eligible employees, as defined in the plan documents. The qualified plans fall under Section 401(k) of the Internal Revenue Code. Contributions to the qualified plans are based on both employee and Company contributions. Our contributions to the plans were $4.1 million and $11.6 million, for the quarterly and nine-month periods ended June 30, 2005 and $4.0 million and $9.8 million for the same periods ended June 30, 2004. We expect to contribute an additional $2.1 million to the plans during the remainder of fiscal year 2005 for a total of $13.7 million. The nonqualified plans are unfunded and carried a liability of less than $1 million at June 30, 2005 and September 30, 2004. | ||
8. | Guarantees | |
Limited warranties are routinely granted on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year, however, certain components and products have substantially longer warranty periods. A reserve is recognized with respect to these obligations at the time of product sale, with subsequent warranty claims recorded directly against the reserve. The amount of the warranty reserve is determined based on historical trend experience for the covered products. For more significant warranty-related matters which might require a broad-based correction, separate reserves are established when such events are identified and the cost of correction can be reasonably estimated. A reconciliation of changes in the warranty reserve for the periods covered in this report is as follows: |
Quarterly | Year-to-Date | |||||||||||||||
Period Ended | Period Ended | |||||||||||||||
6/30/05 | 6/30/04 | 6/30/05 | 6/30/04 | |||||||||||||
Balance at beginning of period |
$ | 17.1 | $ | 19.7 | $ | 18.5 | $ | 20.8 | ||||||||
Provision for warranties during the period |
2.5 | 3.3 | 9.5 | 9.8 | ||||||||||||
Warranty reserves acquired |
— | — | — | 1.1 | ||||||||||||
Warranty claims during the period |
(3.8 | ) | (3.4 | ) | (12.2 | ) | (12.1 | ) | ||||||||
Balance at end of period |
$ | 15.8 | $ | 19.6 | $ | 15.8 | $ | 19.6 | ||||||||
In the normal course of business we enter into various other guarantees and indemnities in our relationships with suppliers, service providers, customers, business partners and others. Examples of these arrangements would include guarantees of product performance, indemnifications to service providers and indemnifications of our actions to business partners. These guarantees and indemnifications would not materially impact our financial condition or results of operations, although indemnifications associated with our actions generally have no dollar limitations. | ||
In conjunction with our acquisition and divestiture activities, we have entered into select guarantees and indemnifications of performance with respect to the fulfillment of commitments under applicable purchase and sale agreements. The arrangements generally indemnify the buyer or seller for damages associated with breach of contract, inaccuracies in representations and warranties surviving the closing date and satisfaction of liabilities and commitments retained under the applicable agreement. For those representations and warranties that survive closing, they generally survive for periods up to five years or the expiration of the applicable statutes of limitations. Potential losses under the indemnifications are generally limited to a portion of the original transaction price, or to other lesser specific dollar amounts for select provisions. With respect to sale transactions, we also routinely enter into non-competition agreements for varying periods |
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of time. Guarantees and indemnifications with respect to acquisitions and divestiture activities would not materially impact our financial condition or results of operations. | ||
9. | Commitments and Contingencies | |
On June 30, 2003, Spartanburg Regional Healthcare System (the “Plaintiff”) filed an antitrust suit against Hillenbrand and its Hill-Rom subsidiary, in the United States District Court for the District of South Carolina, as described in the Annual Report on Form 10-K for the period ended September 30, 2004. Plaintiff alleges violations of the federal antitrust laws, including attempted monopolization and tying claims. Discovery is underway. The trial is currently scheduled to occur on or after April 28, 2006. The hearing on class certification is anticipated to occur by the end of October 2005. | ||
On May 6, 2005, the Court granted Plaintiff’s Motion for Leave to File a Second Amended Complaint with the effects of adding new theories of recovery, significantly enlarging the potential class and significantly extending the class period. Specifically, among other things, the period for which Plaintiff seeks damages has been extended from 1990 through the present, and a new allegation of monopoly maintenance of an alleged standard hospital bed market has been added. The proposed class definition has also been broadened so that Plaintiff is seeking certification of a class of all purchasers of Hill-RomÒ standard and/or specialty hospital beds, and/ or architectural and in-room products from 1990 to the present where there have been contracts between Hill-Rom and such purchasers, either on behalf of themselves or through purchasing organizations, where those contracts conditioned discounts on Hill-RomÒ hospital beds and other architectural and in-room products on commitments to rent or purchase a very high percentage (e.g. ninety percent) of specialty beds from Hill-Rom. Plaintiff claims that it and the alleged class sustained injury caused by the Hill-Rom package discount, because of an alleged harm to competition resulting in higher prices for standard and/or specialty hospital beds and/or architectural and in-room products. | ||
Plaintiff seeks actual monetary damages on behalf of the purported class in excess of $100 million, trebling of any such damages that may be awarded, recovery of attorney’s fees and injunctive relief. If a class is certified and if Plaintiffs prevail at trial, potential trebled damages awarded the Plaintiffs could be substantially in excess of $100 million and have a significant material adverse effect on our results of operations, financial condition, and liquidity. Therefore, we are aggressively defending against Plaintiff’s allegations and will assert what we believe to be meritorious defenses to class certification and Plaintiff’s allegations and damage theories. | ||
On May 2, 2005, a non-profit entity called Funeral Consumers Alliance, Inc. and several individual consumers filed a purported class action antitrust lawsuit (“FCA Action”) against Hillenbrand, its Batesville Casket Company, Inc. subsidiary (“Batesville”), and three of Batesville’s national funeral home customers, Service Corporation International (“SCI”), Alderwoods Group, Inc. (“Alderwoods”), and Stewart Enterprises, Inc. (“Stewart”) in the United States District Court for the Northern District of California ( “Court”). This lawsuit alleges a conspiracy to suppress competition in an alleged market for the sale of caskets through a group boycott of so-called “independent casket discounters”; a campaign of disparagement against these independent casket discounters; and concerted efforts to restrict casket price competition and to coordinate and fix casket pricing, all in violation of federal antitrust law and California’s Unfair Competition Law. The lawsuit claims, among other things, that Batesville’s maintenance and enforcement of, and alleged modifications to, its long-standing policy of selling caskets only to licensed funeral homes were the product of a conspiracy among Batesville and the other defendants to exclude “independent casket discounters,” that is, casket retailers who are not licensed funeral homes and who do not offer funeral services, and this alleged conspiracy, combined with other alleged matters, suppressed competition in the alleged market for caskets and led consumers to pay higher than competitive prices for caskets. The Complaint also alleges that SCI, Alderwoods, Stewart and other unnamed co-conspirators conspired to monopolize the alleged market for the sale of caskets in the United States. |
16
Since that case was filed, several more purported class action lawsuits on behalf of consumers have been filed in the Court based on essentially the same factual allegations and alleging violations of federal antitrust law and related state law claims. Two similar cases filed in other districts were voluntarily dismissed by the plaintiffs. We anticipate that they will be refiled. Though the purported classes vary slightly, all of these actions purport to represent classes that include purchasers of Batesville caskets. Each case alleges that two of Batesville’s competitors, York Group, Inc. and Aurora Casket Company, are co-conspirators but does not name them as defendants. It is not unusual to have multiple copycat class action suits filed after an initial filing, and it is possible that additional suits based on the same or similar allegations will be brought against Hillenbrand and Batesville. Some of these cases have been consolidated in the Court, and we anticipate that any others will also be consolidated with the Court, subject to the motion to transfer venue discussed below. | ||
Plaintiffs are seeking certification of various classes, including, among others, all United States consumers who purchased Batesville caskets from the co-defendants at any time from January 1, 1994 until the present. Plaintiffs generally seek actual unspecified monetary damages on behalf of the purported classes, trebling of any such damages that may be awarded, recovery of attorneys’ fees and costs and injunctive relief. | ||
In order to transfer the litigation to a venue that is more convenient for all parties, the defendants have jointly moved to transfer these cases to the United States District Court for the Southern District of Texas. All the plaintiffs oppose this motion. In addition, Batesville, Hillenbrand, and the other defendants have moved to dismiss the FCA Action on the grounds that it fails to state a claim upon which relief can be granted. Batesville and Hillenbrand intend to move to dismiss the other cases at the appropriate time. The motion to transfer and the motion to dismiss are scheduled to be heard by the Court on September 8, 2005. | ||
The Court held a case management conference on August 4, 2005. At the conference, the Court ordered discovery to commence immediately, set a hearing for class certification of the FCA plaintiffs’ proposed class for January 24, 2006, and set a trial date of December 4, 2006. If the motion to transfer is granted, it is likely, but not certain, that the new court to which the case is assigned would set its own case management schedule. | ||
In addition to the consumer lawsuits, Pioneer Valley Casket Co. (“Pioneer Valley”), a casket store and Internet retailer, has filed another class action lawsuit against Batesville, Hillenbrand, Alderwoods, SCI, and Stewart in the Court purportedly on behalf of the class of “independent casket distributors,” alleging violations of state and federal antitrust law and state unfair and deceptive practices laws based on essentially the same factual allegations as in the consumer cases. Pioneer Valley alleges that it and other independent casket distributors were injured by the defendants’ alleged conspiracy to boycott and suppress competition in the alleged market for caskets, and by a conspiracy among SCI, Alderwoods, Stewart and other unnamed co-conspirators to monopolize the alleged market for funeral caskets. The defendants anticipate that they will move to transfer this action to the Southern District of Texas, as well, and move to dismiss at the appropriate time. | ||
Plaintiff Pioneer Valley seeks certification of a class of all independent casket distributors who are now in business or have been in business since July 8, 2001. Pioneer Valley generally seeks actual unspecified monetary damages on behalf of the purported class, trebling of any such damages that may be awarded, recovery of attorneys’ fees and costs and injunctive relief. | ||
If a class is certified in any of the antitrust cases filed against Hillenbrand and Batesville and if plaintiffs in any such case prevail at trial, potential trebled damages awarded to the plaintiffs could have a significant material adverse effect on our results of operations, financial condition, and/or liquidity. Accordingly, we intend to aggressively defend against the allegations made in all of these cases and intend to assert what we believe to be meritorious defenses to class certification and to plaintiffs’ allegations and damage theories. | ||
On August 8, 2005 Batesville Casket Company was served with a Civil Investigative Demand by the Attorney General of Maryland on behalf of a number of other undisclosed state attorneys general who have begun an investigation of possible anticompetitive practices in the funeral services industry relating to a range of funeral services and products, including caskets. |
17
We are subject to various other claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, product liability, employee related matters, antitrust, safety, health, taxes, environmental and other matters. Litigation is subject to many uncertainties and the outcome of individual litigated matters is not predictable with assurance. It is possible that some litigation matters for which reserves have not been established could be decided unfavorably to us, and that any such unfavorable decisions could have a material adverse effect on our financial condition, results of operations and cash flows. | ||
10. | Special Charges | |
2005 Actions | ||
In the third fiscal quarter of 2005, we announced plans to close Batesville Casket’s Nashua, New Hampshire plant and consolidate Batesville’s solid wood casket production into its Batesville, Mississippi plant (“Panola”). The consolidation of the two plants is expected to result in a total pre-tax charge of approximately $4.5 million, that should be realized through the estimated completion of the consolidation in the second quarter of fiscal 2006. Cash components of these charges include approximately $2.3 million in employee-related costs, including severance, pension and other termination benefits, and approximately $1.6 million in costs related to the transfer of equipment, training of employees and other associated costs. The remaining $0.6 million consists of non-cash charges resulting from the accelerated depreciation of equipment and amortization of software. Approximately $1.8 million of this charge was incurred in the third fiscal quarter of 2005, of which $1.5 million of severance and benefit costs was recorded as a special charge. Upon completion, this action is expected to lower operating costs by approximately $4.3 million (pre-tax) annually, which includes $0.2 million in reduced depreciation. Additionally, we announced the retirement of Frederick Rockwood, former Chief Executive Officer. We incurred a charge of approximately $2.4 million related to future payments and other compensation related items under the terms of Mr. Rockwood’s retirement agreement. | ||
On March 22, 2005, the Food and Drug Administration (FDA) and the U.S. Department of Justice initiated a seizure at Vail Products, Inc., of Toledo, Ohio, on several models of an enclosure bed system manufactured by Vail, and advised Vail’s customers to cease using those beds immediately. On June 24, 2005, the FDA announced that Vail Products was permanently ceasing the manufacture, sale, and distribution of all Vail enclosed bed systems and would no longer be available to provide accessories, replacement parts, or retrofit kits. Hill-Rom was a distributor of Vail products and had a number of the affected beds in its rental fleet. In its role as a distributor, Hill-Rom responded promptly to the FDA notification and permanently ceased all sale or rental of the affected products. As a result, in the third quarter of fiscal 2005, we recorded a $1.7 million impairment on these assets. We will continue to explore opportunities to salvage our costs, however recoverability is uncertain at this time. | ||
2004 Actions | ||
During the fourth fiscal quarter of 2004, we announced a restructuring intended to better align Hill-Rom’s financial and personnel resources to fully support its growth initiatives, decrease overall costs, and improve performance in Europe. The plan included the expected elimination of approximately 130 salaried positions in the U.S. and approximately 100 positions in Europe and resulted in a fourth quarter charge of approximately $7.3 million associated with severance and benefit-related costs. As of June 30, 2005, approximately 170 positions have been eliminated with 35 of the original list of terminees being transferred to other positions or retained. As of this same date, there was approximately $3.2 million remaining in the reserve. All obligations associated with this action, which is expected to be completed in 2005, will be settled in cash. |
18
2003 Actions | ||
During the third fiscal quarter of 2003, we announced a new business structure at Hill-Rom to accelerate the execution of its strategy and strengthen its businesses. As a result of this action, Hill-Rom announced it expected to eliminate approximately 300 salaried positions globally. Hill-Rom also announced it expected to hire approximately 100 new personnel with the skills and experience necessary to execute its business strategy. A fiscal 2003 third quarter charge of $9.3 million was recognized with respect to this action, essentially all related to severance and benefit-related costs. During fiscal 2004, approximately $1.4 million of the originally recorded reserve was reversed. This action was completed during the first quarter of fiscal 2005. We eliminated 288 salaried positions under this action, with 65 of the original list of terminees being transferred to other positions in line with Hill-Rom’s strategy. In addition, approximately 90 new positions were hired under the new business structure. | ||
11. | Income Taxes | |
The effective income tax rate for the third quarter and the year-to-date periods ended June 30, 2005 was 37.0 percent. The effective tax rates for the same periods ending June 30, 2004 were 39.0 percent and 40.6 percent, respectively. The higher effective tax rates for last year reflect the establishment of a valuation allowance on foreign net operating losses of approximately $2 million and $10 million for the three- and nine-months ended June 30, 2004. Excluding the effect of the portion of the valuation allowance related to 2003 fiscal year losses, the effective tax rate for the first nine months of 2004 would have approximated 38 percent compared to 37.0 percent for the first nine months of 2005. We continue to provide a full valuation allowance for certain foreign net operating losses in the current year. Although these loss carryforwards have no expiration date, current operating results and economic conditions have made it difficult to predict full recoverability of these tax assets. We will continue to pursue opportunities to reduce our effective tax rate in future periods. | ||
12. | Segment Reporting | |
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, requires reporting of segment information that is consistent with the way in which management operates and views the business. | ||
With the continued evolution of the prior year realignment of the Hill-Rom business structure, changes were adopted in fiscal 2004 and 2005 in terms of the way in which management views the business, including reporting to our executive management team. With these changes, in fiscal 2004 the prior Hill-Rom reporting segment was split into Americas/Asia Pacific and EMEA (Europe, Middle East and Africa) reporting segments, with performance measured on a divisional income basis before special items. Divisional income under this approach was defined as the division’s gross profit less their direct operating costs. This measure excluded a number of functional costs which were managed on an overall Hill-Rom basis, including finance, information technology, human resources, legal, regulatory and strategy. In fiscal 2005, a change was made to the definition of divisional income. Beginning in the first quarter of 2005, divisional income now includes functional costs previously excluded from the measure. Functional costs directly related to a specific division are now borne directly by such division based on the Hill-Rom annual plan. For functional costs not directly tied to a specific division, the costs have been allocated to the respective divisions on the basis of various allocation methodologies, also based on the Hill-Rom annual plan. Management now evaluates divisional performance on this new basis. Segment data for 2004 has been restated to conform with this new presentation. | ||
Intersegment sales between the Americas/Asia Pacific and EMEA are generally accounted for at current market value or cost plus markup. Eliminations, net of allocations, while not considered a segment, will be presented separately to aid in the reconciliation of segment information to consolidated Hill-Rom financial information. |
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The reporting segment of Batesville Casket is measured on the basis of income from continuing operations before income taxes. Intersegment sales do not occur between Hill-Rom and Batesville Casket. Forethought results, which were previously considered a reporting segment, are now being presented in the results from discontinued operations as further discussed in Note 4 to the Condensed Consolidated Financial Statements. Corporate, while not a segment, is presented separately to aid in the reconciliation of segment information to that reported in the Condensed Consolidated Statements of Income. | ||
As discussed in Note 13 of the Condensed Consolidated Financial Statements, in July 2005 we announced a change in our architecture intended to simplify both the Hillenbrand corporate and Hill-Rom organizational structures and to support Hill-Rom’s strategy to focus on its core frames, support surfaces and services businesses. We will re-evaluate our reportable segments as the structure of the new organization is completed. | ||
Financial information regarding our reportable segments is presented below: |
Eliminations | Corporate | |||||||||||||||||||||||||||
Americas/ | Net of | Total | Batesville | and Other | ||||||||||||||||||||||||
Asia Pacific | EMEA | Allocations | Hill-Rom | Casket | Expense | Consolidated | ||||||||||||||||||||||
Quarterly Period Ended
June 30, 2005 |
||||||||||||||||||||||||||||
Net revenues |
$ | 256.2 | $ | 49.5 | $ | — | $ | 305.7 | $ | 160.3 | $ | — | $ | 466.0 | ||||||||||||||
Intersegment revenues |
$ | 6.3 | $ | 9.6 | $ | (15.9 | ) | $ | — | |||||||||||||||||||
Divisional income (loss) |
$ | 28.0 | $ | 3.3 | $ | (3.3 | ) | $ | 28.0 | |||||||||||||||||||
Income (loss) from continuing
operations before income taxes
and special charges |
$ | 27.7 | $ | 44.5 | $ | (6.8 | ) | $ | 65.4 | |||||||||||||||||||
Special charges |
$ | 1.7 | $ | 1.5 | $ | 2.4 | $ | 5.6 | ||||||||||||||||||||
Income (loss) from continuing
operations before income taxes |
$ | 26.0 | $ | 43.0 | $ | (9.2 | ) | $ | 59.8 | |||||||||||||||||||
Income tax expense |
$ | 22.1 | ||||||||||||||||||||||||||
Income from continuing operations |
$ | 37.7 | ||||||||||||||||||||||||||
Income from discontinued operations (a) |
$ | 0.3 | ||||||||||||||||||||||||||
Net income |
$ | 38.0 | ||||||||||||||||||||||||||
Eliminations | Corporate | |||||||||||||||||||||||||||
Americas/ | Net of | Total | Batesville | and Other | ||||||||||||||||||||||||
Asia Pacific | EMEA | Allocations | Hill-Rom | Casket | Expense | Consolidated | ||||||||||||||||||||||
Quarterly Period Ended
June 30, 2004 |
||||||||||||||||||||||||||||
Net revenues |
$ | 260.2 | $ | 48.2 | $ | — | $ | 308.4 | $ | 153.1 | $ | — | $ | 461.5 | ||||||||||||||
Intersegment revenues |
$ | 6.6 | $ | 2.9 | $ | (9.5 | ) | $ | — | |||||||||||||||||||
Divisional income (loss) |
$ | 55.9 | $ | (4.8 | ) | $ | (9.4 | ) | $ | 41.7 | ||||||||||||||||||
Income (loss) from continuing
operations before income taxes
and special charges |
$ | 41.8 | $ | 45.5 | $ | (15.4 | ) | $ | 71.9 | |||||||||||||||||||
Special charges (credits) |
$ | (1.4 | ) | $ | — | $ | — | $ | (1.4 | ) | ||||||||||||||||||
Income (loss) from continuing
operations before income taxes |
$ | 43.2 | $ | 45.5 | $ | (15.4 | ) | $ | 73.3 | |||||||||||||||||||
Income tax expense |
$ | 28.6 | ||||||||||||||||||||||||||
Income from continuing operations |
$ | 44.7 | ||||||||||||||||||||||||||
Loss from discontinued operations (a) |
$ | (5.7 | ) | |||||||||||||||||||||||||
Net income |
$ | 39.0 |
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Eliminations | Corporate | |||||||||||||||||||||||||||
Americas/ | Net of | Total | Batesville | and Other | ||||||||||||||||||||||||
Asia Pacific | EMEA | Allocations | Hill-Rom | Casket | Expense | Consolidated | ||||||||||||||||||||||
Year-to-Date Period Ended
June 30, 2005 |
||||||||||||||||||||||||||||
Net revenues |
$ | 798.3 | $ | 141.8 | $ | — | $ | 940.1 | $ | 501.4 | $ | — | $ | 1,441.5 | ||||||||||||||
Intersegment revenues |
$ | 15.1 | $ | 14.5 | $ | (29.6 | ) | $ | — | |||||||||||||||||||
Divisional income (loss) |
$ | 115.6 | $ | (1.9 | ) | $ | (10.1 | ) | $ | 103.6 | ||||||||||||||||||
Income (loss) from continuing
operations before income taxes
and special charges |
$ | 103.7 | $ | 140.1 | $ | (24.3 | ) | $ | 219.5 | |||||||||||||||||||
Special charges |
$ | 1.6 | $ | 1.5 | $ | 2.4 | $ | 5.5 | ||||||||||||||||||||
Income (loss) from continuing
operations before income taxes |
$ | 102.1 | $ | 138.6 | $ | (26.7 | ) | $ | 214.0 | |||||||||||||||||||
Income tax expense |
$ | 79.2 | ||||||||||||||||||||||||||
Income from continuing operations |
$ | 134.8 | ||||||||||||||||||||||||||
Income from discontinued operations (a) |
$ | 0.8 | ||||||||||||||||||||||||||
Net income |
$ | 135.6 | ||||||||||||||||||||||||||
Eliminations | Corporate | |||||||||||||||||||||||||||
Americas/ | Net of | Total | Batesville | and Other | ||||||||||||||||||||||||
Asia Pacific | EMEA | Allocations | Hill-Rom | Casket | Expense | Consolidated | ||||||||||||||||||||||
Year-to-Date Period Ended
June 30, 2004 |
||||||||||||||||||||||||||||
Net revenues |
$ | 718.7 | $ | 143.1 | $ | — | $ | 861.8 | $ | 493.4 | $ | — | $ | 1,355.2 | ||||||||||||||
Intersegment revenues |
$ | 22.7 | $ | 4.3 | $ | (27.0 | ) | $ | — | |||||||||||||||||||
Divisional income (loss) |
$ | 163.1 | $ | (16.1 | ) | $ | (10.8 | ) | $ | 136.2 | ||||||||||||||||||
Income (loss) from continuing
operations before income taxes
and special charges |
$ | 136.1 | $ | 146.0 | $ | (44.3 | ) | $ | 237.8 | |||||||||||||||||||
Special charges (credits) |
$ | (1.4 | ) | $ | — | $ | — | $ | (1.4 | ) | ||||||||||||||||||
Income (loss) from continuing
operations before income taxes |
$ | 137.5 | $ | 146.0 | $ | (44.3 | ) | $ | 239.2 | |||||||||||||||||||
Income tax expense |
$ | 97.0 | ||||||||||||||||||||||||||
Income from continuing operations |
$ | 142.2 | ||||||||||||||||||||||||||
Loss from discontinued operations (a) |
$ | (94.5 | ) | |||||||||||||||||||||||||
Net income |
$ | 47.7 | ||||||||||||||||||||||||||
(a) | Reflects results of Forethought, including Forethought Federal Savings Bank, and the Hill-Rom piped-medical gas and infant care businesses classified as discontinued operations. |
13. | Subsequent Events | |
On July 14, 2005, we announced a change in our architecture intended to simplify both the corporate and Hill-Rom organizational structures and to support Hill-Rom’s strategy to focus on its core frames, support surfaces and services businesses, while remaining flexible for future opportunities. Operationally, the change is designed to align the Hill-Rom organization more closely with its customers to more effectively bring products and services to the market. Hill-Rom is in the process of establishing two commercial divisions, one focusing on North America and one focusing internationally, each consisting of capital sales, clinical and services businesses with supporting sales, marketing and field service organizations. Home Care and Surgical products will be run as a separate, fully integrated division and profit center. Hill-Rom will also combine sourcing, manufacturing, and product development under one new function. At the same time, all Hillenbrand corporate functions, including human resources, finance, strategy, legal and information technology, have been consolidated with those in Hill-Rom. There is now one interim Chief Executive Officer and President, and one Chief Financial Officer, in each case, for the combined Hillenbrand/Hill-Rom organization. The costs and benefits associated with these and other potential related actions are not currently available, but are expected to be announced in September 2005. | ||
In building on our recently announced organizational changes in support of our strategic focus on our core frames, support surfaces and services businesses, and to further capitalize on progress we have made in our previously announced negotiations with the works council at our Pluvigner, France facility with respect to voluntary departures, we plan to take additional restructuring actions in the United States and Europe during the fourth quarter of 2005. While the final details of these plans are still in development, these actions, which were approved by the Board of Directors on August 4, 2005, will include the elimination of salaried and hourly positions in the United States and Europe, |
21
the outsourcing of various products and sub-assembly parts, the impairment of certain assets no longer considered necessary to the execution of our strategy and the termination of certain contractual obligations. We expect the cost of these actions will result in a fourth quarter pre-tax charge of between $40 million and $45 million, broken down by component as follows: |
Range of Pre-Tax Charge | ||||
Severance and related benefits |
$ | 25 to $30 | ||
Asset impairment |
$ | 5 to $7 | ||
Contract termination costs |
$ | 3 to $4 | ||
Other |
$ | 3 to $4 |
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26
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
(Dollars in millions) | 2005 | 2004 | % Change | 2005 | 2004 | % Change | ||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Health Care sales |
$ | 190.3 | $ | 187.1 | 1.7 | $ | 583.2 | $ | 528.6 | 10.3 | ||||||||||||||
Health Care rentals |
115.4 | 121.3 | (4.9 | ) | 356.9 | 333.2 | 7.1 | |||||||||||||||||
Funeral Services sales |
160.3 | 153.1 | 4.7 | 501.4 | 493.4 | 1.6 | ||||||||||||||||||
Total Revenues |
$ | 466.0 | $ | 461.5 | 1.0 | $ | 1,441.5 | $ | 1,355.2 | 6.4 | ||||||||||||||
27
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2005 | June 30, 2004 | |||||||||||||||
% of Related | % of Related | |||||||||||||||
(Dollars in millions) | Revenues | Revenues | ||||||||||||||
Gross Profit |
||||||||||||||||
Health Care sales |
$ | 83.4 | 43.8 | $ | 88.0 | 47.0 | ||||||||||
Health Care rentals |
43.5 | 37.7 | 51.4 | 42.4 | ||||||||||||
Funeral Services |
84.0 | 52.4 | 82.6 | 54.0 | ||||||||||||
Total Gross Profit |
$ | 210.9 | 45.3 | $ | 222.0 | 48.1 | ||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
June 30, 2005 | June 30, 2004 | |||||||||||||||
% of Related | % of Related | |||||||||||||||
(Dollars in millions) | Revenues | Revenues | ||||||||||||||
Gross Profit |
||||||||||||||||
Health Care sales |
$ | 261.3 | 44.8 | $ | 252.1 | 47.7 | ||||||||||
Health Care rentals |
139.1 | 39.0 | 155.4 | 46.6 | ||||||||||||
Funeral Services |
266.9 | 53.2 | 272.9 | 55.3 | ||||||||||||
Total Gross Profit |
$ | 667.3 | 46.3 | $ | 680.4 | 50.2 | ||||||||||
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
(Dollars in millions) | 2005 | 2004 | % Change | 2005 | 2004 | % Change | ||||||||||||||||||
Other operating expenses |
$ | 145.8 | $ | 145.0 | 0.6 | $ | 450.5 | $ | 428.9 | 5.0 | ||||||||||||||
Percent of Total Revenues |
31.3 | % | 31.4 | % | 31.3 | % | 31.6 | % | ||||||||||||||||
Special charges (credits) |
5.6 | (1.4 | ) | (500.0 | ) | 5.5 | (1.4 | ) | (492.9 | ) | ||||||||||||||
Interest expense |
$ | (4.3 | ) | $ | (4.5 | ) | (4.4 | ) | $ | (12.7 | ) | $ | (11.5 | ) | 10.4 | |||||||||
Investment income |
6.3 | 1.3 | 384.6 | 18.5 | 3.7 | 400.0 | ||||||||||||||||||
Loss on extinguishment of debt |
— | (6.4 | ) | (100.0 | ) | — | (6.4 | ) | (100.0 | ) | ||||||||||||||
Other |
(1.7 | ) | 4.5 | (137.8 | ) | (3.1 | ) | 0.5 | (720.0 | ) | ||||||||||||||
Other income/(expense), net |
$ | 0.3 | $ | (5.1 | ) | (105.9 | ) | $ | 2.7 | $ | (13.7 | ) | (119.7 | ) | ||||||||||
29
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
(Dollars in millions) | 2005 | 2004 | % Change | 2005 | 2004 | % Change | ||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Health Care sales |
$ | 190.3 | $ | 187.1 | 1.7 | $ | 583.2 | $ | 528.6 | 10.3 | ||||||||||||||
Health Care rentals |
$ | 115.4 | $ | 121.3 | (4.9 | ) | $ | 356.9 | $ | 333.2 | 7.1 | |||||||||||||
Cost of revenues: |
||||||||||||||||||||||||
Health Care sales |
$ | 106.9 | $ | 99.1 | 7.9 | $ | 321.9 | $ | 276.5 | 16.4 | ||||||||||||||
Health Care rentals |
$ | 71.9 | $ | 69.9 | 2.9 | $ | 217.8 | $ | 177.8 | 22.5 | ||||||||||||||
Gross profit: |
||||||||||||||||||||||||
Health Care sales |
$ | 83.4 | $ | 88.0 | (5.2 | ) | $ | 261.3 | $ | 252.1 | 3.6 | |||||||||||||
Percent of revenues |
43.8 | % | 47.0 | % | 44.8 | % | 47.7 | % | ||||||||||||||||
Health Care rentals |
$ | 43.5 | $ | 51.4 | (15.4 | ) | $ | 139.1 | $ | 155.4 | (10.5 | ) | ||||||||||||
Percent of revenues |
37.7 | % | 42.4 | % | 39.0 | % | 46.6 | % | ||||||||||||||||
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
(Dollars in millions) | 2005 | 2004 | % Change | 2005 | 2004 | % Change | ||||||||||||||||||
Funeral Services: |
||||||||||||||||||||||||
Revenues |
$ | 160.3 | $ | 153.1 | 4.7 | $ | 501.4 | $ | 493.4 | 1.6 | ||||||||||||||
Cost of revenues |
$ | 76.3 | $ | 70.5 | 8.2 | $ | 234.5 | $ | 220.5 | 6.3 | ||||||||||||||
Gross profit |
$ | 84.0 | $ | 82.6 | 1.7 | $ | 266.9 | $ | 272.9 | (2.2 | ) | |||||||||||||
Percent of revenues |
52.4 | % | 54.0 | % | 53.2 | % | 55.3 | % | ||||||||||||||||
32
Nine Months Ended | ||||||||
June 30, | ||||||||
(Dollars in millions) | 2005 | 2004 | ||||||
Cash Flows Provided By (Used In): |
||||||||
Operating activities |
$ | 175.6 | $ | 261.3 | ||||
Investing activities |
(111.7 | ) | (542.4 | ) | ||||
Financing activities |
(115.6 | ) | 194.4 | |||||
Effect of exchange rate
changes on cash |
(0.5 | ) | 0.5 | |||||
Decrease in Cash and Cash Equivalents |
$ | (52.2 | ) | $ | (86.2 | ) | ||
33
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• | Failure by us or our suppliers to comply with the Food and Drug Administration (FDA) regulations and similar foreign regulations applicable to the products we manufacture or distribute could expose us to enforcement actions or other adverse consequences. For example, during the third quarter of fiscal 2005, the FDA announced that Vail Products was permanently ceasing the manufacture, sale, and distribution of all Vail enclosed bed systems. As a result, we recorded a $1.7 million impairment on the Vail enclosure beds in our Health Care rental fleet. | |
• | Continued declines and fluctuations in mortality rates and increased cremations may adversely affect, as they have in recent years, the volume of Batesville Casket’s sales of burial caskets. | |
• | Future financial performance will depend in part on the successful introduction of new products into the marketplace on a cost-effective basis. The financial success of new products could be adversely impacted by competitors’ products, customer acceptance, difficulties in product development and manufacturing, certain regulatory approvals and other factors. The introduction of new products may cause customers to defer purchases of existing products, which could have an adverse effect on sales. | |
• | Our health care and funeral services businesses are significantly dependent on several major contracts with large national providers and group purchasing organizations (“GPOs”). Our contracts with six of the larger GPOs, which represent a significant portion of Hill-Rom’s sales and most of which are sole-source or dual-source contracts, will reach the end of their current terms in calendar year 2005. Given the industry trend toward multi-source GPO agreements and other factors, we will not be able to retain sole-source or dual-source status in all situations where we have expiring sole-source or dual-source agreements. If we are unable to retain current sole-source or dual-source positions in contracts with these GPOs, our results of operations could be materially adversely affected. Additionally, Batesville Casket has sole-source contracts with two of its large national accounts that reach the end of their current terms in calendar year 2005. The contracts with these two national accounts represent a material part of Batesville’s business. Batesville is currently in contract renewal negotiations with these two national accounts. The funeral services industry is becoming even more competitive given the excess capacity that exists in the industry, along with the introduction of foreign-sourced products. The results of these negotiations could result in some changes to our relationships with these national accounts that may include a lower product line mix, a reduction in average wholesale price, lower volume and/or a modification in sourcing provisions. Any combination of these items may have a materially adverse effect on our financial condition, results of operations and cash flows. |
39
• | Increased prices for, or unavailability of, raw materials or finished goods used in our products could adversely affect profitability or revenues. In particular, our results of operations continue to be adversely affected by high prices for steel, red metals, solid wood, plastic and fuel. | |
• | We may not be successful in achieving expected operating efficiencies and operating cost reductions associated with announced restructuring, realignment and cost reduction activities, including the restructuring activities announced in July and August 2005 and those of the prior year. These activities may not provide the full efficiency and cost reduction benefits we expect from these activities. Further, such benefits may be realized later than expected, and the costs of implementing these measures may be greater than anticipated. If these measures are not successful, we may undertake additional realignment and cost reduction efforts, which could result in future charges. Moreover, our ability to achieve our other strategic goals and business plans may be adversely affected if our restructuring and realignment efforts prove ineffective. | |
• | During the third quarter, we implemented the final phase of our Enterprise Resource Planning System with respect to Hill-Rom’s domestic rental business. Due to complexities and business process changes associated with this implementation, we have encountered a number of issues related to the start-up of the system, including improper billings to customers, customer disruptions and the loss of some business. We continue to devote additional resources to the stabilization of our rental business system. If we are unsuccessful, our relationships with certain customers could be adversely affected. | |
• | Product liability or other liability claims could expose us to adverse judgments or could affect the sales of our products. | |
• | We are involved on an ongoing basis in claims and lawsuits relating to our operations, including environmental, antitrust, patent infringement, business practices, commercial transactions, and other matters. We continue to incur significant legal costs in the defense of antitrust litigation matters involving both Hill-Rom and Batesville Casket and expect these increased costs to continue for the foreseeable future. Moreover, if class certification is granted in any of these antitrust matters and the plaintiffs prevail at trial, our results of operations, financial position and liquidity could be materially adversely affected. | |
• | Our funeral services business is facing increasing competition from a number of non-traditional sources, including internet casket retailers, large retail discount stores, and caskets manufactured abroad and imported into North America. | |
• | We may not be able to execute our growth strategy if we are unable to successfully acquire and integrate other companies in the health care industry. | |
• | Our success depends on our ability to retain our executive officers and other key personnel. As a result of our recent consolidation of management functions at Hillenbrand corporate and Hill-Rom and other realignment initiatives, the potential risks to our business of our inability to retain key personnel may be magnified. | |
• | A substantial portion of our workforce is unionized, and we could face labor disruptions that would interfere with our operations. | |
• | Volatility of our investment portfolio could negatively impact earnings. |
40
• | Improper billings to customers | ||
• | Order fulfillment and rental asset inventory accuracy | ||
• | Reporting of customer and management operational information | ||
• | Customer disruption and the loss of some business |
• | Establishment of dedicated, multi-functional teams to identify and resolve data conversion and system function issues | ||
• | Performance of incremental substantive procedures, including analytical assessments, to validate the accuracy of key financial balances and amounts | ||
• | Detailed testing of reports used in the substantive procedures outlined above | ||
• | Assessment and quantification of known, significant conversion or system function issues |
41
42
Total Number of | Maximum | |||||||||||||||
Shares | Number of | |||||||||||||||
Purchased as | Shares that May | |||||||||||||||
Part of Publicly | Yet Be | |||||||||||||||
Total Number | Announced | Purchased | ||||||||||||||
of Shares | Average Price | Plans or | Under the plans | |||||||||||||
Period | Purchased1 | Paid per Share | Programs 2 | of Programs | ||||||||||||
April 1, 2005 — April 30, 2005 |
192,882 | 55.64 | 192,800 | 2,108,000 | ||||||||||||
May 1,
2005 — May 31, 2005 |
304,020 | 50.02 | 298,000 | 1,810,000 | ||||||||||||
June 1,
2005 — June 30, 2005 |
232,013 | 50.51 | 231,600 | 1,578,400 | ||||||||||||
Total |
728,915 | 51.67 | 722,400 | 1,578,400 |
1 | The total number of shares purchased includes: (i) shares purchased pursuant to the 2000 plan described in footnote (2) below; and (ii) shares purchased in connection with employee payroll tax withholding for restricted and deferred stock distributions totaling 82 shares, 6,020 shares and 413 shares, respectively, for the months of April, May and June, 2005. | |
2 | This column discloses the number of shares purchased through the publicly announced program approved by the Board of Directors. The shares purchased in the current quarter were purchased through open market transactions. In January 2000, the Board of Directors had approved the repurchase of a total of 24,289,067 shares. The approval has no expiration, and there were no terminations or expirations of plans in the current quarter. |
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Exhibit 10.1
|
Employment Agreement between Hillenbrand Industries, Inc. and Rolf A. Classon dated June 20, 2005. (Incorporated herein by reference to Exhibit 10.1 filed with Form 8-K/A dated May 11, 2005.) | |
Exhibit 10.2
|
Stock Award between Hillenbrand Industries, Inc. and Rolf Classon dated June 20, 2005. (Incorporated herein by reference to Exhibit 10.2 filed with Form 8-K/A dated May 11, 2005.) | |
Exhibit 10.3
|
Separation and Release Agreement between Hillenbrand Industries, Inc. and Frederick W. Rockwood dated July 12, 2005. (Incorporated herein by reference to Exhibit 10.1 filed with Form 8-K dated July 12, 2005.) | |
Exhibit 10.4
|
Executive Amended Employment Agreement between Hillenbrand Industries, Inc. and Gregory N. Miller dated August 8, 2005, as amended. | |
Exhibit 10.5
|
Executive Amended Employment Agreement between Hillenbrand Industries, Inc. and Patrick D. de Maynadier dated August 8, 2005, as amended. | |
Exhibit 10.6
|
Executive Amended Employment Agreement between Hillenbrand Industries, Inc. and Bruce J. Bonnevier dated August 8, 2005, as amended. | |
Exhibit 10.7
|
Executive Amended Employment Agreement between Hillenbrand Industries, Inc. and Kenneth A. Camp dated August 8, 2005, as amended. | |
Exhibit 31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
45
HILLENBRAND INDUSTRIES, INC. | ||||||
DATE: August 9, 2005
|
BY: | /S/ | Gregory N. Miller | |||
Gregory N. Miller | ||||||
Senior Vice President, | ||||||
Chief Financial Officer | ||||||
DATE: August 9, 2005
|
BY: | /S/ | Richard G. Keller | |||
Richard G. Keller | ||||||
Vice President, Controller | ||||||
and Chief Accounting Officer |
46