e10vq
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 June 30, 2007
Commission File No. 1- 6651
HILLENBRAND INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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Indiana
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35-1160484 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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1069 State Route 46 East |
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Batesville, Indiana
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47006-8835 |
(Address of principal executive offices)
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(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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
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 – 61,937,850 shares as of August 1, 2007.
HILLENBRAND INDUSTRIES, INC.
INDEX TO FORM 10-Q
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
Hillenbrand Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in millions, except per share data)
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Quarterly |
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Nine-Month |
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Period Ended |
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Period Ended |
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6/30/07 |
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6/30/06 |
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6/30/07 |
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6/30/06 |
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Net Revenues |
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Health Care sales |
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$ |
225.4 |
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$ |
199.8 |
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$ |
664.1 |
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$ |
604.6 |
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Health Care rentals |
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103.1 |
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104.5 |
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320.4 |
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326.5 |
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Funeral Services sales |
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165.6 |
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165.0 |
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509.0 |
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511.3 |
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Total revenues |
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494.1 |
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469.3 |
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1,493.5 |
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1,442.4 |
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Cost of Revenues |
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Health Care cost of goods sold |
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132.3 |
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117.0 |
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384.9 |
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357.1 |
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Health Care rental expenses |
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50.7 |
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53.7 |
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156.5 |
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|
163.7 |
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Funeral Services cost of goods sold |
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98.7 |
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96.2 |
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293.3 |
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302.0 |
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Total cost of revenues |
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281.7 |
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|
266.9 |
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834.7 |
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822.8 |
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Gross Profit |
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212.4 |
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202.4 |
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658.8 |
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619.6 |
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Other operating expenses |
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162.5 |
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127.1 |
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446.9 |
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396.8 |
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Litigation credits |
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— |
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(2.3 |
) |
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— |
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(2.3 |
) |
Special charges |
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— |
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0.1 |
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0.2 |
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2.5 |
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Operating Profit |
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49.9 |
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77.5 |
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211.7 |
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222.6 |
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Other income (expense), net: |
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Interest expense |
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(5.5 |
) |
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(5.4 |
) |
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(16.7 |
) |
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(15.5 |
) |
Investment income and other |
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9.3 |
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8.3 |
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25.9 |
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35.9 |
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Income from Continuing Operations Before Income Taxes |
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53.7 |
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80.4 |
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220.9 |
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243.0 |
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Income tax expense (Note 8) |
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18.0 |
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29.3 |
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78.4 |
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88.8 |
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Income from Continuing Operations |
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35.7 |
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51.1 |
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142.5 |
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154.2 |
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Discontinued Operations (Note 4): |
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Loss from discontinued operations before income taxes
(including loss on divestiture of $1.0) |
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— |
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— |
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— |
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(0.5 |
) |
Income tax benefit |
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— |
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— |
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— |
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0.2 |
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Loss from discontinued operations |
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— |
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— |
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— |
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(0.3 |
) |
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Net Income |
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$ |
35.7 |
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$ |
51.1 |
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$ |
142.5 |
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$ |
153.9 |
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Income per common share from continuing operations
– Basic (Note 9) |
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$ |
0.58 |
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$ |
0.83 |
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$ |
2.31 |
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$ |
2.51 |
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Loss per common share from discontinued operations
– Basic (Note 9) |
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— |
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— |
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— |
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(0.01 |
) |
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Net Income per Common Share – Basic |
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$ |
0.58 |
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$ |
0.83 |
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$ |
2.31 |
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$ |
2.51 |
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Income per common share from continuing operations
– Diluted (Note 9) |
|
$ |
0.57 |
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$ |
0.83 |
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$ |
2.30 |
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$ |
2.51 |
|
Loss per common share from discontinued operations
– Diluted (Note 9) |
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— |
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— |
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— |
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(0.01 |
) |
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Net Income per Common Share – Diluted |
|
$ |
0.57 |
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$ |
0.83 |
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$ |
2.30 |
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$ |
2.50 |
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Dividends per Common Share |
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$ |
0.2850 |
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$ |
0.2825 |
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$ |
0.8525 |
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$ |
0.8475 |
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Average Common Shares Outstanding – Basic (thousands) |
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61,913 |
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61,487 |
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61,732 |
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61,434 |
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Average Common Shares Outstanding – Diluted (thousands) |
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62,241 |
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61,610 |
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62,007 |
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61,545 |
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Note: Certain per share amounts may not accurately add due to rounding.
See Notes to Condensed Consolidated Financial Statements
3
Hillenbrand Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions)
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6/30/07 |
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9/30/06 |
|
ASSETS |
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Current Assets |
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Cash and cash equivalents |
|
$ |
77.7 |
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$ |
81.9 |
|
Current investments (Note 1) |
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68.4 |
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— |
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Trade receivables, net |
|
|
472.7 |
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|
495.1 |
|
Inventories |
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172.2 |
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129.8 |
|
Income taxes receivable |
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2.2 |
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5.9 |
|
Deferred income taxes |
|
|
28.7 |
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|
28.2 |
|
Other |
|
|
24.9 |
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23.0 |
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Total current assets |
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846.8 |
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|
763.9 |
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Equipment Leased to Others, net |
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|
179.0 |
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|
160.7 |
|
Property, net |
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|
218.5 |
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|
208.4 |
|
Investments (Note 1) |
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|
58.2 |
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64.3 |
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Other Assets |
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Intangible assets: |
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Goodwill |
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428.0 |
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|
414.1 |
|
Software and other, net |
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154.8 |
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|
157.6 |
|
Notes receivable, net of discounts |
|
|
141.5 |
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|
134.4 |
|
Prepaid pension costs |
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20.5 |
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25.2 |
|
Deferred charges and other assets |
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20.6 |
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23.6 |
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Total other assets |
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|
765.4 |
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|
754.9 |
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Total Assets |
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$ |
2,067.9 |
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$ |
1,952.2 |
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LIABILITIES |
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Current Liabilities |
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Trade accounts payable |
|
$ |
98.0 |
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|
$ |
91.7 |
|
Short-term borrowings |
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|
8.3 |
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|
10.9 |
|
Accrued compensation |
|
|
94.4 |
|
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|
88.5 |
|
Accrued warranty (Note 11) |
|
|
16.6 |
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|
17.8 |
|
Accrued customer rebates |
|
|
20.2 |
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|
23.4 |
|
Accrued restructuring (Note 7) |
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4.4 |
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8.9 |
|
Accrued litigation (Note 13) |
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|
22.4 |
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22.6 |
|
Other |
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|
58.9 |
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|
61.4 |
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Total current liabilities |
|
|
323.2 |
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|
325.2 |
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Long-Term Debt |
|
|
346.8 |
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|
347.0 |
|
Other Long-Term Liabilities |
|
|
87.6 |
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|
91.3 |
|
Deferred Income Taxes |
|
|
55.2 |
|
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|
57.0 |
|
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|
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|
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Total Liabilities |
|
|
812.8 |
|
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|
820.5 |
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Commitments and Contingencies (Note 13) |
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SHAREHOLDERS’ EQUITY |
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Common stock |
|
|
4.4 |
|
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|
4.4 |
|
Additional paid-in capital |
|
|
95.4 |
|
|
|
79.1 |
|
Retained earnings |
|
|
1,736.4 |
|
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|
1,646.8 |
|
Accumulated other comprehensive income (loss), net-of-tax (Note 6) |
|
|
1.9 |
|
|
|
(0.3 |
) |
Treasury stock |
|
|
(583.0 |
) |
|
|
(598.3 |
) |
|
|
|
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|
|
|
Total Shareholders’ Equity |
|
|
1,255.1 |
|
|
|
1,131.7 |
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Total Liabilities and Shareholders’ Equity |
|
$ |
2,067.9 |
|
|
$ |
1,952.2 |
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|
See Notes to Condensed Consolidated Financial Statements
4
Hillenbrand Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in millions)
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Nine-Month Period Ended |
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|
|
6/30/07 |
|
|
6/30/06 |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
142.5 |
|
|
$ |
153.9 |
|
Adjustments to reconcile net income to net cash flows from
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
80.7 |
|
|
|
81.4 |
|
Accretion and capitalized interest on financing provided on
divestiture |
|
|
(11.1 |
) |
|
|
(10.7 |
) |
Loss on divestiture of discontinued operations (net-of-tax) |
|
|
— |
|
|
|
0.6 |
|
Investment income/gains on equity method investments |
|
|
(10.1 |
) |
|
|
(10.1 |
) |
Investment impairments |
|
|
— |
|
|
|
2.0 |
|
Provision for deferred income taxes |
|
|
(6.1 |
) |
|
|
14.1 |
|
(Gain) loss on disposal of fixed assets |
|
|
(0.1 |
) |
|
|
0.8 |
|
Change in working capital excluding cash, current
investments, current debt, acquisitions and dispositions |
|
|
(15.4 |
) |
|
|
(35.4 |
) |
Other, net |
|
|
17.0 |
|
|
|
(10.9 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
197.4 |
|
|
|
185.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures and purchase of intangibles |
|
|
(100.6 |
) |
|
|
(70.3 |
) |
Proceeds on sales of fixed assets |
|
|
1.6 |
|
|
|
5.6 |
|
Proceeds on sale of business |
|
|
— |
|
|
|
6.5 |
|
Acquisitions of businesses, net of cash acquired |
|
|
(20.7 |
) |
|
|
(8.3 |
) |
Investment purchases and capital calls |
|
|
(164.0 |
) |
|
|
(229.1 |
) |
Proceeds on investment sales/maturities |
|
|
114.6 |
|
|
|
162.4 |
|
Bank investments: |
|
|
|
|
|
|
|
|
Purchases |
|
|
— |
|
|
|
(5.0 |
) |
Proceeds on maturities |
|
|
— |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(169.1 |
) |
|
|
(133.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Change in short-term debt |
|
|
(2.6 |
) |
|
|
4.6 |
|
Payment of cash dividends |
|
|
(52.9 |
) |
|
|
(52.3 |
) |
Proceeds on exercise of options |
|
|
22.3 |
|
|
|
2.9 |
|
Treasury stock acquired |
|
|
(1.2 |
) |
|
|
(0.5 |
) |
Bank deposits received |
|
|
— |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(34.4 |
) |
|
|
(41.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
1.9 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Flows |
|
|
(4.2 |
) |
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents: |
|
|
|
|
|
|
|
|
At beginning of period |
|
|
81.9 |
|
|
|
76.8 |
|
|
|
|
|
|
|
|
At end of period |
|
$ |
77.7 |
|
|
$ |
88.8 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
5
Hillenbrand Industries, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)
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. The year-end Condensed
Consolidated Balance Sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in the United
States of America. 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. |
|
|
|
In 2004, we closed the sale of Forethought Financial Services, Inc. (“Forethought”), and in
January 2006 closed on the sale of Forethought Federal Savings Bank (“FFSB”), which had
been a subsidiary of Forethought (see Note 4). These transactions represented discontinued
operations, and, accordingly, the revenues and costs associated with the business were
removed from the individual line items comprising the Condensed Consolidated Statements of
Income and presented in a separate section entitled, “Discontinued Operations.” Within the
Condensed Consolidated Statements of Cash Flows, year-to-date operating, investing and
financing activities of FFSB were reflected within the respective captions of the Condensed
Consolidated Statements of Cash Flows. |
|
|
|
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. |
|
|
|
Use of Estimates |
|
|
|
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual results
could differ from those estimates. Examples of such estimates include the establishment of
liabilities related to our accounts receivable reserves (Note 2), income taxes (Note 8),
accrued warranties (Note 11) and accrued litigation and self insurance reserves (Note 13),
among others. |
|
|
|
Revision of Prior Year Amounts |
|
|
|
In order to better align the presentation of our cost structure between cost of goods sold
and operating expenses, we made revisions to the classification of certain costs within our
Condensed Consolidated Statements of Income beginning in the fourth quarter of fiscal 2006.
All product distribution costs, which were previously included as a component of operating
expenses, are now included within costs of goods sold. This is consistent with the previous
classification of distribution and logistics costs associated with Health Care rentals. |
6
|
|
Additionally, rental sales costs, including commissions, are now reflected as a component of
operating expenses. This is consistent with the previous classification of selling expenses
associated with Health Care sales and Funeral Services sales. Collectively these revisions
offer a better reflection of true product sourcing and delivery costs, improve the
consistency of the classification of such costs within our various revenue streams and also
generally increase the comparability of our results with those of our peers. The
classification of certain prior year amounts has been revised herein to conform to this new
presentation. Distribution costs of $27.7 million and $86.3 million were moved from
operating expenses to cost of goods sold for the third quarter and year-to-date periods of
fiscal 2006 and $14.9 million and $46.2 million of rental sales expenses were moved from
cost of goods sold to operating expenses for the same periods, respectively. This revision
had no impact on operating income, cash flows or earnings per share. |
|
|
|
Current Investments |
|
|
|
At June 30, 2007, we held $68.4 million 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. These current investments 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 within Investment income and other
within the Condensed Consolidated Statements of Income. |
|
|
|
Investments |
|
|
|
We use the equity method of accounting for certain private equity limited partnership
investments, with earnings or losses reported within Investment income and other in the
Condensed Consolidated Statements of Income. Our portion of any unrealized gains (losses)
related to such investments, as well as unrealized gains (losses) on our other investments,
are charged or credited to Accumulated other comprehensive income (loss) in shareholders’
equity, net of deferred taxes recognized for the income tax effect of any such unrealized
gains (losses). Earnings and values for investments accounted for under the equity method
are determined based on financial statements provided by the investment companies. |
|
|
|
Other minority investments are accounted for on either a cost, fair value or equity basis,
dependent upon our level of influence over the investee. The seller financing provided upon
the divestiture of Forethought included preferred stock at a notional amount of $28.7
million, which accrues cumulative dividends at the rate of 5 percent per annum. The carrying
value as of June 30, 2007 was $30.7 million. The preferred stock is redeemable at any time
at the option of FFS Holdings, Inc., the entity that purchased Forethought, and must be
redeemed by FFS Holdings, Inc. under specified circumstances. This investment is classified
as held-to-maturity and recorded at amortized cost. |
|
|
|
When an investment is sold, we report the difference between the sales proceeds and carrying
value (determined based on specific identification) as a gain or loss. |
|
|
|
We regularly evaluate all investments for possible impairment based on current economic
conditions, credit loss experience and other criteria. If there is a decline in a
security’s net realizable value that is other-than-temporary, the decline is recognized as a
realized loss and the cost basis of the investment is reduced to its estimated fair value.
The evaluation of investments for impairment requires significant judgments to be made
including (i) the identification of potentially impaired securities; (ii) the determination
of their estimated fair value; and (iii) assessment of whether any decline in estimated fair
value is other-than-temporary. |
|
|
|
For the quarterly and nine-month periods ended June 30, 2007, we recognized income on our
investments of $4.0 million and $12.5 million, respectively, and $0.7 million and $18.3 |
7
|
|
million for the comparable prior year periods. These amounts were recorded as a component of
Investment income and other within our Condensed Consolidated Statements of Income. |
|
|
|
Taxes Collected from Customers and Remitted to Governmental Units |
|
|
|
Taxes assessed by a governmental authority that are directly imposed on a revenue producing
transaction between the Company and its customers, including but not limited to sales taxes,
use taxes, and value added taxes, are accounted for on a net (excluded from revenues and
costs) basis. |
|
|
|
Recently Issued Accounting Standards |
|
|
|
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No.
109” (“FIN 48”), which clarifies the accounting for income taxes by prescribing the minimum
recognition threshold as “more-likely-than-not” that a tax position must meet before being
recognized in the financial statements. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting for income taxes in interim periods,
financial statement disclosure and transition rules. Additionally, in May 2007, the FASB
published FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation
No. 48” (FSP FIN 48-1). FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an
enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. This Interpretation is effective for
fiscal years beginning after December 15, 2006. As such, we are required to adopt FIN 48 by
October 1, 2007, our fiscal year 2008. We have not yet analyzed the effect of this
Interpretation or Staff Position on our consolidated financial statements or results of
operations. |
|
|
|
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines
fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. This Statement
does not require any new fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify the source of the
information. SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, our fiscal year 2009, and interim periods within those
fiscal years. The adoption of SFAS No. 157 is not expected to have a material impact on our
consolidated financial statements or results of operations. |
|
|
|
In September 2006, the FASB also issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88,
106 and 132(R).” This Statement requires recognition of the funded status of a benefit plan
in the statement of financial position. SFAS No. 158 also requires recognition in other
comprehensive income of certain gains and losses that arise during the period but are
deferred under pension accounting rules, as well as modifies the timing of reporting and
adds certain disclosures. The Statement provides recognition and disclosure elements to be
effective as of the end of the fiscal year after December 15, 2006, our fiscal year 2007,
and measurement elements to be effective for fiscal years ending after December 15, 2008, or
our fiscal year 2009. As such, we will adopt the recognition and disclosure elements at the
end of our current fiscal year. Had the recognition elements been effective as of the end
of our last fiscal year, total assets would have been approximately $27 million lower due to
the elimination of prepaid and intangible pension assets, and total liabilities would have
been unchanged as the recognition of additional accrued pension costs to fully reflect the
funded status of our defined benefit pension plans would have been offset by a reduction in
deferred tax liabilities at September 30, 2006. Additionally, Accumulated other
comprehensive loss would have increased by approximately $27 million. |
|
|
|
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting
Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements |
8
|
|
when Quantifying Misstatements in Current Year Financial Statements.” This SAB redefines
the SEC staff views regarding the process of quantifying financial statement misstatements
and is aimed at eliminating diversity with respect to the manner in which registrants
quantify such misstatements. Specifically, the SAB requires an entity to consider both a
balance sheet and income statement approach in its evaluation as to whether misstatements
are material. We will adopt SAB No. 108 at the end of the current fiscal year. We
identified three prior period misstatements during the second quarter of fiscal 2007, which
have now been determined not to be material to prior periods under the Company’s
historically accepted methodology of assessing misstatements. These misstatements were
related to (1) adjustments to our unrealized profit reserves for leased assets procured from
intercompany sources, (2) the recognition of deferred taxes relative to our unrealized
profit reserves and (3) the recognition of an obligation for a postretirement benefit health
care plan that bridges health coverage from early retirement to Medicare eligibility. In
the third quarter of fiscal 2007, we identified an additional prior period misstatement,
which was also determined not to be material to prior periods under the Company’s
historically accepted methodology of assessing misstatements. This item related to the
failure to properly eliminate the cumulative translation adjustment balance of a disposed
entity upon its sale. |
|
|
|
These misstatements will be reassessed according to the provisions of SAB No. 108 at the
time of adoption at the end of fiscal 2007. As part of that assessment under SAB No. 108,
and based upon our current quantification of the misstatements, the corrections will be
recorded as adjustments to the opening balance of retained earnings as the effect of
correcting the misstatements is considered to be material to current year income. We
currently expect the reduction in beginning retained earnings associated with these
corrections to approximate $16 million. There will be no effect on the Company’s
Consolidated Statements of Income. |
|
|
|
In February of 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”, which gives entities the option to measure eligible
financial assets, and financial liabilities at fair value. Its objective is to improve
financial reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. If opted, the difference between
carrying value and fair value at the election date is recorded as a transition adjustment to
opening retained earnings. SFAS No. 159 is effective as of the beginning of a company’s
first fiscal year after November 15, 2007, our fiscal year 2009. We are evaluating the
statement and have not yet determined the impact its adoption will have on our consolidated
financial statements. |
9
2. |
|
Supplementary Balance Sheet Information |
|
|
|
The following information pertains to assets and consolidated shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
6/30/07 |
|
|
9/30/06 |
|
Allowance for possible losses and
discounts on trade receivables |
|
$ |
55.3 |
|
|
$ |
58.8 |
|
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Finished products |
|
$ |
110.7 |
|
|
$ |
83.0 |
|
Work in process |
|
|
17.1 |
|
|
|
13.7 |
|
Raw materials |
|
|
44.4 |
|
|
|
33.1 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
172.2 |
|
|
$ |
129.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation of equipment
leased to others and property |
|
$ |
771.0 |
|
|
$ |
703.5 |
|
|
|
|
|
|
|
|
|
|
Accumulated amortization of intangible assets |
|
$ |
92.1 |
|
|
$ |
81.8 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
61,916,887 |
|
|
|
61,415,314 |
|
|
|
|
|
|
|
|
|
|
Treasury shares outstanding |
|
|
18,407,025 |
|
|
|
18,908,598 |
|
3. |
|
Acquisitions |
|
|
|
The results of acquired businesses are included in the Condensed Consolidated Financial
Statements since each acquisition’s date of close. |
|
|
|
In January 2007, Batesville Casket acquired a small regional casket distributor. This
acquisition capitalizes on our capacity to serve the broad needs of funeral service
professionals and maximizes our distribution base in the Midwest and Florida. We have
completed a preliminary valuation of assets and liabilities acquired and an allocation of
the purchase price, resulting in the recognition of approximately $1.6 million of intangible
assets and nearly $2.8 million of goodwill. The purchase price remains subject to an earnout
provision of up to $5.3 million based on volume retention which would be recorded as an
adjustment to goodwill, thus this allocation of purchase price remains subject to change.
If the purchase had occurred at the beginning of fiscal 2006, the impact to our results of
operations and financial condition would not have been material. |
|
|
|
On October 6, 2006, Hill-Rom acquired Medicraft, Australia PTY, LTD (“Medicraft”), the
leader in acute and post-acute hospital beds and furniture in Australia. The acquisition
expands Hill-Rom’s sales channel for therapy and higher acuity products in Australia and we
believe that several Medicraft products can be adapted for global and price-sensitive bed
markets throughout the world. The purchase price for Medicraft was $15.8 million, including
direct acquisition costs. We have nearly completed the valuation of assets and liabilities
acquired in this transaction and our allocation of purchase price, resulting in the
recognition of approximately $10.9 million of goodwill and $4.3 million of amortizable
intangible assets. If the purchase had occurred at the beginning of fiscal 2006, the impact
to our results of operations and financial condition would not have been material. |
|
|
|
In March 2006, Batesville Casket made an acquisition of a small regional casket distributor.
Goodwill of $1.8 million was recorded on the transaction. If the purchase had occurred at
the beginning of fiscal 2006, the impact to our results of operations and financial
condition would not have been material. |
10
4. |
|
Discontinued Operations |
|
|
|
In 2004, we closed the sale of Forethought Financial Services, Inc. (“Forethought”) 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 and other
consideration. Because of the need for regulatory approval, we were not able to include
with that transaction the sale of Forethought Federal Savings Bank (“FFSB”), which had been
a subsidiary of Forethought, but instead retained ownership of FFSB pending approval of the
sale from the Office of Thrift Supervision. We received that approval at the end of
December 2005 and closed the sale on January 3, 2006, receiving cash consideration of
approximately $6.5 million. We recognized a loss on this transaction of $0.6 million
(net-of-tax) in the first quarter of fiscal 2006. |
|
|
|
As the sale of FFSB was not completed prior to fiscal 2006, its results continued to be
reflected as discontinued operations within the Condensed Consolidated Statements of Income
for the 2006 period presented herein in accordance with the provisions of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”. The total net loss
including the loss on the transaction of $0.6 million for FFSB was $0.3 million in the first
quarter of fiscal 2006. |
|
5. |
|
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 were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly |
|
|
Nine-Month |
|
|
|
Period Ended |
|
|
Period Ended |
|
|
|
6/30/07 |
|
|
6/30/06 |
|
|
6/30/07 |
|
|
6/30/06 |
|
Service cost |
|
$ |
2.4 |
|
|
$ |
2.8 |
|
|
$ |
7.2 |
|
|
$ |
8.4 |
|
Interest cost |
|
|
5.3 |
|
|
|
5.1 |
|
|
|
15.9 |
|
|
|
15.4 |
|
Expected return on plan assets |
|
|
(6.3 |
) |
|
|
(6.0 |
) |
|
|
(18.9 |
) |
|
|
(18.3 |
) |
Amortization of prior service cost, net |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
1.2 |
|
|
|
1.2 |
|
Actuarial loss |
|
|
0.1 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1.9 |
|
|
$ |
2.7 |
|
|
$ |
5.7 |
|
|
$ |
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007 we have made $2.1 million in contributions to our defined benefit
retirement plans during fiscal 2007, and we do not anticipate contributing any additional
amounts during the remainder of fiscal year 2007 to fund our pension plans. |
|
|
|
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. The nonqualified defined contribution plans
are unfunded and carried a liability of less than $1 million at June 30, 2007 and September
30, 2006. |
11
6. |
|
Comprehensive Income |
|
|
|
SFAS No. 130, “Reporting Comprehensive Income,” requires the net-of-tax effect of unrealized
gains or losses on our available-for-sale securities, foreign currency translation
adjustments and minimum pension liability adjustments to be included in comprehensive
income. |
|
|
|
The components of comprehensive income are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly |
|
|
Nine-Month |
|
|
|
Period Ended |
|
|
Period Ended |
|
|
|
6/30/07 |
|
|
6/30/06 |
|
|
6/30/07 |
|
|
6/30/06 |
|
Net income |
|
$ |
35.7 |
|
|
$ |
51.1 |
|
|
$ |
142.5 |
|
|
$ |
153.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on available-for-sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains/(losses) arising
during period, net-of-tax |
|
|
1.8 |
|
|
|
(0.2 |
) |
|
|
5.3 |
|
|
|
3.8 |
|
Less: Reclassification adjustment for gains
realized in net income, net-of-tax |
|
|
(1.4 |
) |
|
|
— |
|
|
|
(5.3 |
) |
|
|
(10.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss), net-of-tax |
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment, net-of-tax |
|
|
1.7 |
|
|
|
2.0 |
|
|
|
2.2 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability, net-of-tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
37.8 |
|
|
$ |
52.9 |
|
|
$ |
144.7 |
|
|
$ |
148.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The composition of Accumulated other comprehensive income (loss) at June 30, 2007 and
September 30, 2006 consisted of unrealized gains on available-for-sale securities of $3.4
million each period, foreign currency translation adjustments of $1.7 million and ($0.5)
million, and a minimum pension liability loss of $3.2 million for each period, respectively. |
|
7. |
|
Special Charges |
2007 Actions
|
|
During the second quarter of fiscal 2007, we initiated restructuring actions, in
anticipation of the commencement of manufacturing capabilities in Monterrey, Mexico later
this year, to reduce Hill-Rom’s Batesville, Indiana manufacturing organization. The
restructuring action took the form of an early retirement option offered to select members
of the Batesville manufacturing organization, of which 27 accepted. Accordingly, a special
termination benefit charge of $1.0 million was recognized in the second quarter, the
majority of which, except for $0.3 million related to additional pension benefits, will be
paid in the next 12 months. Of the non-pension amounts as of June 30, 2007, approximately
$0.5 million remained in the reserve. |
2006 Actions
|
|
In the fourth quarter of fiscal 2006, we initiated restructuring actions taken primarily to
reduce Hill-Rom’s North American field service organization in response to declines in
rental revenue. This restructuring resulted in the elimination of approximately 140
positions and the rationalization of certain rental product offerings which were no longer
strategically necessary. The result was a one-time charge of $4.2 million in the fourth
quarter of fiscal 2006, of which the cash component was $2.6 million. During the nine-month
period ended June 30, 2007, approximately $0.3 million of excess reserve related to |
12
|
|
this action was reversed. As of September 30, 2006 and June 30, 2007, approximately $2.6
million and $0.2 million, respectively, remained in the reserve. |
2005 Actions
|
|
During the fourth quarter of fiscal 2005, we announced several changes intended to simplify
both the corporate and Hill-Rom organizational structures and to support Hill-Rom’s strategy
to focus on its core hospital bed frames, therapy support surfaces and services businesses.
As part of this change, Hill-Rom established new commercial divisions and also combined
sourcing, manufacturing and product development under one new function to support the
commercial divisions. Additionally, all Hillenbrand corporate functions, including human
resources, finance, strategy, legal and information technology, were consolidated with those
of Hill-Rom. |
|
|
|
In building on these announced changes and to further capitalize on progress we had made
with the works council at our Pluvigner, France facility with respect to voluntary
departures, we took additional restructuring actions, in the United States and Europe during
the fourth quarter of fiscal 2005. These actions included the elimination of salaried and
hourly positions in the United States and Europe, 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. |
|
|
|
These actions resulted in a fourth quarter fiscal 2005 charge of approximately $30.8
million. The majority of that amount was cash charges related to severance and benefits
costs of $24.0 million, of which $7.3 million was paid in that quarter. In fiscal 2006, a
net of $1.4 million in additional charges directly related to the continuation of these
efforts was recorded and additional payments were made in the amount of $19.2 million.
Further, reversals of approximately $0.6 million were recorded in the second quarter of
fiscal 2007 as some amounts previously recorded were not required, and another $1.9 million
has been paid through June 30, 2007. As of September 30, 2006 and June 30, 2007,
approximately $5.7 million and $3.2 million, respectively, remained in the reserve related
to these actions, and the remaining balance is expected to be paid during the next 12
months. |
|
|
|
In the third fiscal quarter of 2005 we announced the retirement of Frederick W. Rockwood,
former Chief Executive Officer. We incurred a charge of $2.4 million related to future
payments and other compensation related items under the terms of Mr. Rockwood’s retirement
agreement. At September 30, 2006 and June 30, 2007, $0.6 million and $0.5 million,
respectively, had not yet been paid. |
|
8. |
|
Income Taxes |
|
|
|
The effective tax rates for the third quarter and the year-to-date periods ended June 30,
2007 were 33.5 percent and 35.5 percent, respectively. The tax rates for the same periods
ending June 30, 2006 were 36.4 percent and 36.5 percent, respectively. The effective tax
rates for the third quarter and year-to-date periods ended June 30, 2007 reflect the
recognition of $1.4 million and $3.1 million of discrete period tax benefits which are
primarily related to the release of valuation allowances on capital loss carryforwards, tax
provision to return adjustments, the reinstatement of the research and development credit
and the impact of non-deductible separation costs. This compares to $0.2 million and $2.9
million of discrete period tax benefits recorded in the third quarter and year-to-date
fiscal 2006, principally related to the release of valuation allowances on capital loss and
foreign tax credit related carryforwards and a deferred tax benefit reflecting favorable
state tax law changes. |
|
9. |
|
Earnings per Common Share |
|
|
|
Basic earnings per share is 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 is calculated consistent with the basic earnings per share calculation plus the
effect of dilutive unissued common shares related to stock-based |
13
|
|
employee compensation programs. For all periods presented, anti-dilutive stock options were
excluded from the calculation of diluted earnings per share. Excluded shares were 484,367
and 579,621 for the three and nine-month periods ended June 30, 2007 and 1,220,621 and
1,456,362 for the comparable periods of 2006. 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 |
|
|
Nine-Month |
|
|
|
Period Ended |
|
|
Period Ended |
|
|
|
6/30/07 |
|
|
6/30/06 |
|
|
6/30/07 |
|
|
6/30/06 |
|
Net income (in thousands) |
|
$ |
35,767 |
|
|
$ |
51,103 |
|
|
$ |
142,527 |
|
|
$ |
153,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
– Basic (thousands) |
|
|
61,913 |
|
|
|
61,487 |
|
|
|
61,732 |
|
|
|
61,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add potential effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and other
unvested equity awards (thousands) |
|
|
328 |
|
|
|
123 |
|
|
|
275 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
– Diluted (thousands) |
|
|
62,241 |
|
|
|
61,610 |
|
|
|
62,007 |
|
|
|
61,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from
continuing operations — Basic |
|
$ |
0.58 |
|
|
$ |
0.83 |
|
|
$ |
2.31 |
|
|
$ |
2.51 |
|
Loss per common share from
discontinued operations — Basic |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share – Basic |
|
$ |
0.58 |
|
|
$ |
0.83 |
|
|
$ |
2.31 |
|
|
$ |
2.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from
continuing operations — Diluted |
|
$ |
0.57 |
|
|
$ |
0.83 |
|
|
$ |
2.30 |
|
|
$ |
2.51 |
|
Loss per common share from
discontinued operations — Diluted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share – Diluted |
|
$ |
0.57 |
|
|
$ |
0.83 |
|
|
$ |
2.30 |
|
|
$ |
2.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. |
|
Stock Based Compensation |
|
|
|
We adopted SFAS 123(R) in the first quarter of fiscal 2006, and thus recognize the cost of
our stock based compensation plans using the fair value based method for all periods
presented. |
|
|
|
The stock based compensation cost that was charged against income, net of tax, for all plans
was $0.5 million and $0.3 million for the three-month periods ended June 30, 2007 and 2006,
respectively, and was $1.5 million and $0.7 million for the nine-month periods ended June
30, 2007 and 2006, respectively. |
|
|
|
During the third quarter of 2007, we granted Performance Based Stock Awards to our
executives. These awards are consistent with our compensation program’s guiding principles
and are designed to (i) align management’s interest with those of shareholders, (ii)
motivate and provide incentive to achieve superior results, (iii) assure clear
accountabilities and provide rewards for producing results, and (iv) ensure competitive
compensation in order to attract and retain superior talent. These awards are performance
based restricted stock units, which are subject to any stock dividends, stock splits, and
other similar rights inuring to common stock, but unlike our restricted stock units are not
entitled to cash dividend reinvestment. Vesting of the grants is contingent upon
achievement of certain one, two, and three-year performance targets and corresponding
service requirements. |
14
|
|
As of June 30, 2007, 68,550 performance based restrictive stock units had been granted and
were outstanding, with fair values on the date of grant ranging between $60.86 and $66.18
per share. The maximum amount we could be required to expense for the performance based
restrictive stock units is $4.2 million and nothing would be expensed if none of the
performance targets and/or service requirements were met. Compensation expense, based on
the estimated achievement of performance and service requirements, is recognized over the
performance period through September 30, 2009. |
|
11. |
|
Guarantees |
|
|
|
We routinely grant limited warranties 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. We recognize a reserve
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 |
|
|
Nine-Month |
|
|
|
Period Ended |
|
|
Period Ended |
|
|
|
6/30/07 |
|
|
6/30/06 |
|
|
6/30/07 |
|
|
6/30/06 |
|
Balance at beginning of period |
|
$ |
17.9 |
|
|
$ |
16.5 |
|
|
$ |
17.8 |
|
|
$ |
16.6 |
|
Provision for warranties during the period |
|
|
3.5 |
|
|
|
3.8 |
|
|
|
12.3 |
|
|
|
11.8 |
|
Warranty reserves acquired |
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
Warranty claims during the period |
|
|
(4.8 |
) |
|
|
(3.7 |
) |
|
|
(13.8 |
) |
|
|
(11.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
16.6 |
|
|
$ |
16.6 |
|
|
$ |
16.6 |
|
|
$ |
16.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 contract. 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 of
time. Guarantees and indemnifications with respect to acquisition and divestiture
activities, if triggered, could have a materially adverse impact on our financial condition
and results of operations. |
15
12. |
|
Segment Reporting |
|
|
|
We are organized into two operating companies, Hill-Rom and Batesville Casket. 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 Company. Accordingly, the Company’s segment activities are reported
herein in a manner consistent with the way management monitors its performance. |
|
|
|
In October 2006, we initiated new operational strategies and associated initiatives for our
two operating companies, and as a result, Hill-Rom’s organizational structure was modified
to better align with those strategies and initiatives. The new structure categorizes
Hill-Rom activities into three commercial divisions, reflecting our broad customer segments.
Sourcing, manufacturing, and product development continue to be combined under one function
to support these commercial divisions. When combined with the Batesville Casket segment,
our 2007 reportable segments are as follows: |
|
• |
|
North America Acute Care (Acute) |
|
|
• |
|
North America Post-Acute Care (Post-Acute) |
|
|
• |
|
International and Surgical |
|
|
• |
|
Batesville Casket |
|
|
The Company’s performance under each reportable segment is measured on a divisional income
basis before special items. Inter-segment sales do not occur between Hill-Rom and
Batesville Casket. |
|
|
|
Hill-Rom’s divisional income generally represents the division’s standard gross profit less
their direct operating costs. In the second quarter of fiscal 2007, we expanded the
definition of divisional income to include an allocation of certain operations and
development costs such as fixed manufacturing overhead, research and development, and
distribution costs. All amounts, including the year-to-date periods, presented below
reflect this new definition of divisional income. With respect to the reporting of revenues
in this structure, the division responsible for the ultimate sale to the end customer is the
only division to receive credit for the revenue. As a result, there are no inter-segment
sales between the Hill-Rom divisions requiring elimination for segment reporting purposes. |
|
|
|
Hill-Rom’s functional costs include common costs, such as administration, finance and
non-divisional legal and human resource costs and other charges not directly attributable to
the segments. Functional costs and eliminations, while not considered a segment, are
presented separately to aid in the reconciliation of segment information to consolidated
Hill-Rom financial information. We also break out certain continuing public entity
corporate-related costs separately to improve readability and understanding. |
|
|
|
Financial information regarding our reportable segments is presented below. Segment data
for fiscal 2006 has been restated to conform with the new reporting structure outlined
above: |
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hill-Rom |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
Functional |
|
|
Total |
|
|
Batesville |
|
|
|
|
|
|
Acute |
|
|
Post-Acute |
|
|
& Surgical |
|
|
Costs |
|
|
Hill-Rom |
|
|
Casket |
|
|
Consolidated |
|
|
Quarterly Period Ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
206.8 |
|
|
$ |
45.3 |
|
|
$ |
76.4 |
|
|
$ |
— |
|
|
$ |
328.5 |
|
|
$ |
165.6 |
|
|
$ |
494.1 |
|
|
Divisional income (loss) |
|
$ |
51.4 |
|
|
$ |
11.4 |
|
|
$ |
10.7 |
|
|
$ |
(47.8 |
) |
|
$ |
25.7 |
|
|
$ |
36.0 |
|
|
$ |
61.7 |
|
Public entity costs and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.8 |
) |
Special charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Other income (expense) net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53.7 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,782.2 |
|
|
$ |
285.7 |
|
|
$ |
2,067.9 |
|
Capital expenditures and intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23.4 |
|
|
$ |
5.0 |
|
|
$ |
28.4 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22.8 |
|
|
$ |
4.5 |
|
|
$ |
27.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hill-Rom |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
Functional |
|
|
Total |
|
|
Batesville |
|
|
|
|
|
|
Acute |
|
|
Post-Acute |
|
|
& Surgical |
|
|
Costs |
|
|
Hill-Rom |
|
|
Casket |
|
|
Consolidated |
|
|
Quarterly Period Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
205.3 |
|
|
$ |
42.6 |
|
|
$ |
56.4 |
|
|
$ |
— |
|
|
$ |
304.3 |
|
|
$ |
165.0 |
|
|
$ |
469.3 |
|
|
Divisional income (loss) |
|
$ |
50.4 |
|
|
$ |
12.8 |
|
|
$ |
6.4 |
|
|
$ |
(34.0 |
) |
|
$ |
35.6 |
|
|
$ |
45.2 |
|
|
$ |
80.8 |
|
Public entity costs and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.5 |
) |
Special charges (credits) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.2 |
) |
Other income (expense) net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80.4 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,908.8 |
|
|
$ |
281.4 |
|
|
$ |
2,190.2 |
|
Capital expenditures and intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19.1 |
|
|
$ |
5.5 |
|
|
$ |
24.6 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22.6 |
|
|
$ |
4.4 |
|
|
$ |
27.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hill-Rom |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
Functional |
|
|
Total |
|
|
Batesville |
|
|
|
|
|
|
Acute |
|
|
Post-Acute |
|
|
& Surgical |
|
|
Costs |
|
|
Hill-Rom |
|
|
Casket |
|
|
Consolidated |
|
|
Nine-Month Period Ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
630.0 |
|
|
$ |
133.5 |
|
|
$ |
221.0 |
|
|
$ |
— |
|
|
$ |
984.5 |
|
|
$ |
509.0 |
|
|
$ |
1,493.5 |
|
|
Divisional income (loss) |
|
$ |
166.4 |
|
|
$ |
36.6 |
|
|
$ |
28.0 |
|
|
$ |
(127.9 |
) |
|
$ |
103.1 |
|
|
$ |
134.5 |
|
|
$ |
237.6 |
|
Public entity costs and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.7 |
) |
Special charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Other income (expense) net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220.9 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
142.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,782.2 |
|
|
$ |
285.7 |
|
|
$ |
2,067.9 |
|
Capital expenditures and intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
90.7 |
|
|
$ |
9.9 |
|
|
$ |
100.6 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
67.5 |
|
|
$ |
13.2 |
|
|
$ |
80.7 |
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hill-Rom |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
Functional |
|
|
Total |
|
|
Batesville |
|
|
|
|
|
|
Acute |
|
|
Post-Acute |
|
|
& Surgical |
|
|
Costs |
|
|
Hill-Rom |
|
|
Casket |
|
|
Consolidated |
|
|
Nine-Month Period Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
622.8 |
|
|
$ |
127.3 |
|
|
$ |
181.0 |
|
|
$ |
— |
|
|
$ |
931.1 |
|
|
$ |
511.3 |
|
|
$ |
1,442.4 |
|
|
Divisional income (loss) |
|
$ |
152.9 |
|
|
$ |
37.4 |
|
|
$ |
23.9 |
|
|
$ |
(111.4 |
) |
|
$ |
102.8 |
|
|
$ |
138.9 |
|
|
$ |
241.7 |
|
Public entity costs and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18.9 |
) |
Special charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
Other income (expense) net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243.0 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154.2 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
153.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,908.8 |
|
|
$ |
281.4 |
|
|
$ |
2,190.2 |
|
Capital expenditures and intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
57.2 |
|
|
$ |
13.1 |
|
|
$ |
70.3 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
68.4 |
|
|
$ |
13.0 |
|
|
$ |
81.4 |
|
13. |
|
Commitments and Contingencies |
|
|
|
Hill-Rom Antitrust Litigation |
|
|
|
In fiscal 2005, Hillenbrand, Hill-Rom, Inc. and Hill-Rom Company, Inc. entered into a
definitive, court approved agreement with Spartanburg Regional Healthcare Systems and its
attorneys to settle a purported antitrust class action lawsuit. The settlement resolved all
of the claims of class members that did not opt out of the settlement, including the claims
of all U.S. and Canadian purchasers or renters of Hill-Rom® products from 1990 through
February 2, 2006 related to or arising out of the subject matter of the lawsuit, and the
claims that may have resulted from the current or future effects of conduct or events
occurring through February 2, 2006. The original settlement amount of $337.5 million was
reduced by almost $21.2 million, to $316.3 million, reflecting the portion attributable to
customers who opted out of the settlement. Opt-outs from the settlement account for roughly
six percent of the total U.S. and Canadian revenue during the class period, and over 99
percent of that figure is attributable to the U.S. government’s decision to opt out of the
settlement. We believe we have meritorious defenses against any claims the U.S. government
may choose to make, due to, among other reasons, pricing practices of government purchases
that are different than the pricing practices primarily at issue in the lawsuit. |
|
|
|
In connection with our assessment that it was probable that a settlement would be reached
and finally approved by the Court during fiscal 2006, we recorded a litigation charge and
established a litigation accrual in the amount of $358.6 million in the fourth quarter of
fiscal 2005, which included certain legal and other costs associated with the proposed
settlement. With the Court’s entering of the Order and Final Judgment in the third quarter
of fiscal 2006, we reversed $2.3 million of the $21.1 million of estimated legal and other
costs originally provided as part of the litigation accrual as such amounts were not
probable of payment. We paid the remaining $266.3 million of the settlement amount into
escrow in August 2006 and have retained a $21.2 million litigation accrual associated with
the opt-outs. |
|
|
|
Batesville Casket Antitrust Litigation |
|
|
|
The previously disclosed purported class action antitrust lawsuit (“FCA Action”) filed by a
non-profit entity called Funeral Consumers Alliance, Inc. (“FCA”) and several individual
consumers against three national funeral home businesses, Service Corporation International
(“SCI”), Alderwoods Group, Inc. (“Alderwoods”), and Stewart Enterprises, Inc. (“Stewart”)
together with Hillenbrand and Batesville, is pending in the United States District Court for
the Southern District of Texas (Houston, Texas) (“Court”). This lawsuit alleges a conspiracy
to suppress competition in an alleged market for the sale of caskets |
18
|
|
through a group boycott of so-called “independent casket discounters,” that is, third-party
casket sellers unaffiliated with licensed funeral homes; 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, the other defendants and others to exclude “independent casket
discounters” and that 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 FCA Action alleges that two of Batesville’s
competitors, York Group, Inc. and Aurora Casket Company, are co-conspirators but did not
name them as defendants. The FCA Action 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. |
|
|
|
On October 26, 2006 a new purported class action was filed by additional consumer plaintiffs
against Batesville and Hillenbrand in the Western District of Oklahoma alleging violation of
the antitrust laws in fourteen states based on allegations that Batesville engaged in
conduct designed to foreclose competition and gain a monopoly position in an alleged market
for the sale of caskets. This lawsuit is largely based on similar factual allegations to the
FCA Action. 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. The Company has had this
case transferred to the Southern District of Texas in order to coordinate this action with
the FCA Action, and has filed a motion to dismiss this action. To date, other purported
consumer class actions that had been filed in the wake of the FCA Action have either been
consolidated into the FCA Action or dismissed. |
|
|
|
The FCA plaintiffs are seeking certification of a class that includes all United States
consumers who purchased Batesville caskets from any of the funeral home co-defendants at any
time during the fullest period permitted by the applicable statute of limitations. |
|
|
|
In addition, the previously disclosed purported class action lawsuit (the “Pioneer Valley
Action”) against Batesville, Hillenbrand, SCI, Alderwoods, and Stewart, filed by Pioneer
Valley Casket Co. (“Pioneer Valley”), an alleged casket store and Internet retailer, and
three other current or former “independent casket distributors,” seeking to represent a
purported class of “independent casket distributors,” is pending in the Southern District of
Texas. The Pioneer Valley Action has not been consolidated with the FCA Action, although
the scheduling orders for both cases are identical. The Pioneer Valley Action alleges
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. However, this
case does not include causes of actions for alleged price fixing, conspiracy to monopolize,
and violations of state antitrust law and state unfair and deceptive practices laws alleged
in the FCA Action. Pioneer Valley claims 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 an alleged conspiracy among SCI, Alderwoods, Stewart
and other unnamed co-conspirators to monopolize the alleged market for caskets. |
|
|
|
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. |
|
|
|
Class certification hearings in the FCA Action and the Pioneer Valley Action were held in
early December 2006 and post-hearing briefing on the plaintiffs’ class certification motions
in both cases was completed in March 2007, but the Court has not yet ruled on the motions.
Trials in the FCA and Pioneer Valley Actions are scheduled to begin on or about February 4,
2008, but could be delayed if the Court’s rulings on class certification are appealed by the
plaintiffs or defendants in either case, or for other reasons. |
19
|
|
Plaintiffs in the consumer cases and the Pioneer Valley Action generally seek monetary
damages, trebling of any such damages that may be awarded, recovery of attorneys’ fees and
costs, and injunctive relief. The plaintiffs in the FCA Action filed a report indicating
that they are seeking damages ranging from approximately $947 million to approximately $1.46
billion before trebling. Additionally, the Pioneer Valley plaintiffs filed a report
indicating that they are seeking damages of approximately $99.2 million before trebling.
Because Batesville continues to adhere to its long-standing policy of selling Batesville
caskets only to licensed funeral homes, a policy that it continues to believe is appropriate
and lawful, if the case goes to trial the plaintiffs are likely to claim additional alleged
damages for periods between their reports and the time of trial. At this point, it is not
possible to estimate the amount of any additional alleged damage claims that they may make.
The defendants are vigorously contesting both liability and the plaintiff’s damages
theories. |
|
|
|
If a class is certified in any of the antitrust cases filed against Hillenbrand and
Batesville and if the 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. In antitrust actions such as
the FCA and Pioneer Valley Actions the plaintiffs may elect to enforce any judgment against
any or all of the codefendants, who have no contribution rights against each other. |
|
|
|
We believe we have meritorious defenses to class certification and to plaintiffs’ underlying
allegations and damage theories and we will continue to assert those defenses vigorously in all of
these cases. In accordance with applicable accounting standards, we have not established a
loss reserve for any of these cases. |
|
|
|
As previously disclosed, Batesville was served with Civil Investigative Demands (“CIDs”) by
the Attorney General of Maryland and certain other state attorneys general who have begun an
investigation of possible anticompetitive practices in the funeral service industry relating
to a range of funeral services and products, including caskets. Batesville is cooperating
with the attorneys general and no claims have been filed against Batesville. |
|
|
|
HRDI Investigation |
|
|
|
As previously disclosed, Hill-Rom has received and responded to civil subpoenas from the
Offices of the Connecticut and Illinois Attorneys General seeking documents and information
related to their investigations of the Healthcare Research & Development Institute, LLC
(“HRDI”), a health care trade organization, of which Hill-Rom was a corporate member. On
January 25, 2007, the Connecticut Attorney General’s Office announced a settlement with HRDI
and its hospital Chief Executive Officer members, at the same time announcing that the
investigation is ongoing as to supplier members and others. The investigations appear to
concern whether HRDI supplier members had influence over hospitals represented among HRDI’s
Chief Executive Officer members. We are cooperating with both investigations and no claims
have been filed against Hill-Rom. |
|
|
|
General |
|
|
|
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. |
|
|
|
We are also involved in other possible claims, including product liability, workers
compensation, auto liability and employment related matters. These have deductibles and
self-insured retentions ranging from $150 thousand to $1.5 million per occurrence or per
claim, depending upon the type of coverage and policy period. |
20
|
|
Since December 1999, we have purchased deductible reimbursement policies from our
wholly-owned insurance company, Sycamore Insurance Company, for the deductibles and
self-insured retentions associated with our product liability, workers compensation and auto
liability programs. For these self-insured exposures, outside insurance companies and
third-party claims administrators establish individual claim reserves and an independent
outside actuary provides estimates of ultimate projected losses, including incurred but not
reported claims. The actuary also provides estimates of ultimate projected losses used to
determine accrual adequacy for losses incurred prior to December 1999. These independent
third-party estimates are used to record reserves for all projected deductible and
self-insured retention exposures. |
|
|
|
Claim reserves for employment related matters are established based upon advice from
internal and external counsel and historical settlement information for claims and related
fees when such amounts are considered probable of payment. |
21
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements and Factors That May Affect Future Results
Certain statements in this Quarterly Report on Form 10-Q contain forward-looking statements within
the meanings of the Private Securities Litigation Reform Act of 1995 regarding our future plans,
objectives, beliefs, expectations, representations and projections. We have tried, whenever
possible, to identify these forward-looking statements by using words such as “intend,”
“anticipate,” “believe,” “plan,” “encourage,” “expect,” “may,” “goal,” “become,” “pursue,”
“estimate,” “strategy,” “will,” “projection,” “forecast,” “continue,” “accelerate,” “promise,”
“increase,” or the negative of those terms or other variations of them or by comparable
terminology. The absence of such terms, however, does not mean that the statement is not
forward-looking. We caution readers that any such forward-looking statements are based on
assumptions that we believe are reasonable, but are subject to a wide range of risks. It is
important to note that forward-looking statements are not guarantees of future performance, and our
actual results could differ materially from those set forth in any forward-looking statements.
There are a number of factors — many of which are beyond our control — that could cause actual
conditions, events or results to differ significantly from those described in the forward-looking
statements. For a more in depth discussion of these and other factors that could cause actual
results to differ from those contained in forward-looking statements, see the discussions under the
heading “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2006
filed with the U.S. Securities and Exchange Commission. We assume no obligation to update or
revise any forward-looking statements. Readers should also refer to the various disclosures made
by us in our periodic reports on Form 8-K filed with the U.S. Securities and Exchange Commission.
Overview
The following discussion and analysis should be read in conjunction with the accompanying interim
financial statements and our Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended
September 30, 2006.
Hillenbrand Industries is organized into two operating companies serving the health care and
funeral services industries.
Hill-Rom is a leading worldwide manufacturer and provider of medical technologies and related
services for the health care industry, including patient support systems, non-invasive therapeutic
products for a variety of acute and chronic medical conditions, medical equipment rentals, and
health information technology solutions. Hill-Rom’s comprehensive product and service offerings
are used by health care providers across the health care continuum in hospitals, extended care
facilities and home care settings worldwide to enhance the safety and quality of patient care.
Batesville Casket Company is a leader in the North American death care industry through the sale of
funeral services products, including burial caskets, cremation caskets, containers and urns,
selection room display fixturing and other personalization and memorialization products.
For a more detailed discussion of industry trends impacting our businesses, our complete fiscal
2007 strategy and other factors impacting our businesses, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Industry Trends, Fiscal 2007 Strategy and Other
Factors Impacting the Business” in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2006.
Progress against Three Year Strategic Plan
We previously outlined our key strategic initiatives for both Hill-Rom and Batesville Casket, to
support our desire to grow organic revenue and operating income by an average of mid-to-high single
digits over the 2007-2009 time frame, in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2006. We are still in the early phases of the various initiatives necessary to
achieve these goals and this is a critical year of investing in the
business to support future growth. While we have begun to make
progress against the initiatives, we discuss below
areas primarily where we have made significant progress or have
22
encountered challenges. For additional details regarding the current year financial impact of
these strategic initiatives, see “Consolidated Results of Operations” which follows in this Form
10-Q.
Fiscal 2007 Strategic Imperatives – Hill-Rom
Protect and Differentiate Our Core Business
We
continue to focus on increasing our overall competitiveness and
stemming share erosion in our
core North America acute care patient support systems business through the launch of new products
and existing important core product extensions across the price feature continuum, augmentation of
our sales and marketing capabilities, increasing sales effectiveness and partnering with customers
to improve clinical outcomes by reducing adverse events. We continue to face increasing
competitive pressure, which supports our increasing efforts to differentiate our product offerings.
In the area of new product development, we have successfully launched a number of new and enhanced
products. While we have experienced slight delays in some of our product releases, which may
challenge our ability to realize significant top-line revenue growth for the balance of the fiscal
year, we expect significant new product introductions before the end of the first quarter of fiscal 2008.
Some of the more significant releases thus far are summarized below.
|
• |
|
In the first quarter of the fiscal year, we introduced our new Affinity® IV birthing
bed, including the innovative Stow and Go™ feature which allows the foot section to stow
quickly and easily under the bed with no lifting of the foot section. |
|
|
• |
|
In the second quarter, we launched a complete new line of stretchers, with an industry
first offering of a full product line capable of fully supporting patients weighing up to
700 pounds. |
|
|
• |
|
In April we announced an alliance with Tempur-Pedic, which will result in a new line of
medical mattresses being offered to Hill-Rom’s acute care customers for use with our
leading market products such as the VersaCare®, CareAssist® and Affinity® IV beds, as well
as stretchers and mattress replacement systems. These new mattresses introduce a new level
of comfort to patients using these products and shipments began during the third quarter. |
|
|
• |
|
In May we launched the Navicare® Patient
Safety Suite of software applications that work
with our “smart” ICU and medical-surgical beds. |
While we expect to increase our competitiveness as a result of these new and enhanced products,
certain of these product introductions or anticipated
competitors’ new product offerings appear to be
resulting in temporary delays in some customer purchasing decisions related to the evaluation of new products. In
particular, similar to the delays in customer purchases we experienced when we released our
VersaCare® platform in 2004, a competitor’s anticipated launch of a new critical care bed may cause
such delays, potentially impacting the timing of customer orders and shipments.
While some of our competitors have chosen to focus primarily on price and product features to drive
sales, we continue to stand firm in our resolve that both we and our customers will best succeed if
we remain focused on improving clinical outcomes through a combination of people, processes and
differentiated technology. With that objective, we have made some exciting strides this year and
are pursuing additional opportunities to collaborate with certain of our customers to reduce
adverse events associated with hospital stays.
As part of our mission to enhance outcomes for patients and their caregivers, we have aligned our
people, processes and technologies to help health care providers achieve superior clinical outcomes
for their patients and meet safety guidelines set by a number of organizations.
Our Navicare® Patient
Safety Solutions are embodied by our No Falls, Clear Lungs, Safe Skin™ programs. These
programs address three of The Joint Commission’s National Patient Safety Goals (NPSG) for 2007.
The No Falls, Clear Lungs, Safe Skin™ Programs take a comprehensive approach that include working
with health care providers to help optimize safety protocols and enable change
23
management, offering a technology portfolio of innovative software, patient support systems,
communication technologies and reporting tools that are designed to work together to improve
patient safety and outcomes. Our experiences with customers have demonstrated that a system of
care addressing these issues can reduce patient length of stay, help prevent injuries to patients
and caregivers, lower costs and improve patient and nurse satisfaction.
Improve Gross Margins
Building off the positive momentum established in fiscal 2006, we have continued to mitigate the
impact of rising material and fuel prices and competitive pressures on our gross margins. To date,
our most significant actions have focused on continuous improvement activities within operations
including the restructuring of our France manufacturing facility, enhanced pricing discipline and
an increased focus on customer profitability. We also continue to leverage our low-cost sourcing
operations in Suzhou, China in the procurement of components, sub-assemblies and finished products
throughout the Pacific Rim, as well as improve our sourcing processes to consolidate our core
supply base to better leverage our volume of purchases to reduce costs. While these and other
efforts have provided gross margin improvements in recent quarters, gross margins will likely
continue to be subject to some volatility from quarter to quarter based on sales patterns and
emerging market purchasing trends.
As previously disclosed, on February 1, 2007 we acquired a manufacturing facility in Monterrey,
Mexico as part of our effort to mitigate the impact of rising material and fuel prices and other
competitive pressures for products used in lower acuity and selected post-acute care settings. We
are in the process of bringing the facility on-line. Facility preparation for the first production
line is complete. Start up efforts continue to progress well and we remain on track to ship first
production units from this facility before the end of fiscal 2007.
Revitalize North American Rental Business Operations
As previously disclosed, we face a number of challenges in our rental operations. We believe in
the importance of rental products as a component of our portfolio and have significant initiatives
currently underway to mitigate those challenges. Some of those initiatives have already begun to
yield positive results in fiscal 2007, and we remain committed to further progress to enhance our
position and profitability in this part of our business. The more significant rental developments
are as follows:
|
• |
|
During the first quarter of this fiscal year, we launched in select markets a new and
improved TotalCare® BariatricPlus product, which is an integrated frame and surface that
can accommodate a 500-pound patient, treat advanced wounds and pulmonary complications,
provide low airloss therapy and provide enhanced features for patient ingress and egress in
select markets for use primarily in our rental business. This product has received
excellent customer acceptance and is expected to be available nationally before the end of
the first quarter of fiscal 2008. |
|
|
• |
|
In late May, we completed the final phase of planned enhancements to our third party
rental order management and billing system on-time and under budget. These system
enhancements were aimed at simplifying our third party rental order processing and
administration in order to provide further efficiencies and effectiveness, allowing us to
better serve our home care, extended care and respiratory care rental customers. With the
new third party enhancements in place, we will continue to maintain attention on improving
the overall customer experience through more user-friendly interaction and by providing
greater insight through information technology. Additional enhancements continue for our
North America Acute Care rental business. |
|
|
• |
|
The difficulties encountered in the launch of the rental billing system had an adverse
impact on rental revenues in fiscal 2006. Some issues have carried forward into 2007,
including increased customer allowances for past rental billing issues and the resolution
of related aged receivables, strained customer relationships, reduced sales time available
for our clinical sales force and the loss of some rental business. While we have made
substantial progress, exposure still remains as we continue to address aged rental |
24
receivables. We continue to devote significant attention, time and resources to the
collection of our aged receivables. In the third quarter, we began to dedicate additional
resources from both our accounts receivable department and members of our sales force to the
collection of aged receivables. We believe these efforts will continue to facilitate
improved cash collections. However, our rental revenues could be materially adversely
impacted during the fourth quarter of this fiscal year as a result of increased customer
allowances to deal with aged receivables and reduced selling time by our sales force.
|
• |
|
As previously reported, in the fourth quarter of fiscal 2006 we announced a reduction of
our North American rental organization and the rationalization of a number of our rental
product offerings. We remain on target to realize $16 million of annual savings from this
action, which is helping and will continue to help mitigate other cost and revenue
pressures faced within our rental operations. |
|
|
• |
|
We previously announced plans to invest approximately $60 million in our rental fleet in
fiscal 2007 to remedy an underinvestment in our fleet over the last several years. We
remain on target with our plans, having invested approximately $47 million in our rental
fleet through June 30, 2007. |
|
|
• |
|
In July we launched a new therapeutic mattress for our proprietary TotalCare® and
VersaCare® frames. This new therapeutic mattress will also be compatible with certain
competitor frames. |
Develop our Post-Acute Care Business
We continue to believe that we have substantial opportunity to increase our penetration into the
North America post-acute care marketplace for patient support systems, surfaces, furniture and
accessories. Thus far in fiscal 2007 we have launched a basic wound prevention surface that
completes our core surface offering and better positions us for subsequent referrals of more
feature-rich and higher margin products. Additionally, we have launched a bariatric frame,
together with a basic bariatric wound prevention surface. We also expect, as a complement to these
new offerings, to release in the first quarter of fiscal 2008, a new frame, furniture and
additional accessories to augment our current limited offering of home care therapy surfaces. We
believe that our extensive service and distribution capabilities will allow us to bypass
traditional channels of distribution and reach customers directly. Additionally, our ability to
rent or make our products available for capital sale, positions us to serve our customers’ needs,
regardless of their purchasing preference.
While we are optimistic about our growth opportunities within the post-acute marketplace, we are
currently experiencing pressure on both volume and price in both our core home care and extended
care rental businesses. Further, the recently approved competitive bidding guidelines for
Medicare, discussed below, could put additional price pressure on our home care business beginning
in 2009.
Expand International Business
We continue to see our International business as an area for strong future growth potential. In
order to take advantage of our opportunities in under penetrated regions, we are investing in
direct selling resources and are continuing to look to establish additional distribution channels.
In late July, we announced a distribution agreement with Paramount Bed, Japan’s leading maker of
medical beds and patient support systems, for the distribution of Hill-Rom’s products in Japan.
Additionally, we continue to evaluate other opportunities to address gaps in our overall product
offering through new product development, alliances, and the introduction of certain U.S. products
to the international market. Selective acquisitions, like our fully integrated acquisition of
Medicraft in Australia, also remain an area of opportunity and focus.
25
Grow Entrepreneurial Businesses
We have identified three distinct businesses in our portfolio, Hill-Rom Information Technology
Solutions, Allen Medical and The Vest® products, which we believe to have opportunities for strong
growth. We have targeted compounded growth rates of 15 percent in revenues and operating income
for these combined businesses. On a year-to-date basis, we have achieved combined revenue growth
of approximately 12 percent and have far surpassed our target with respect to operating income
growth. To maintain such growth rates we will need to continue to develop and launch new products
and invest in the respective sales channels of each business. Thus far in fiscal 2007, we have
launched updated versions of both acute care and home versions of The Vest® systems, and we have
better aligned our information technology solutions products with our core business to facilitate
the goal of enhanced outcomes in patient care. While we are encouraged by our success to-date, the
competition in these businesses is significant and we must continue to execute in order to achieve
our goals.
Other Factors Impacting Hill-Rom
GPO Contracts
The majority of Hill-Rom’s North American hospital sales and rentals are made pursuant to contracts
with group purchasing organizations (GPOs). A number of those GPO contracts came up for renewal
during fiscal 2006 and 2007, and our results confirmed our preliminary expectations that GPOs are
generally moving from sole-source agreements to dual and multi-source awards.
In almost all instances our new or amended contracts negotiated with GPOs in fiscal 2006 and 2007
are dual or multi-source and, in some instances, we have not been awarded contracts in specific
product categories, primarily related to rental products. While difficult to predict, these
changes will put additional pressure on our rental revenues. We are taking significant actions
with respect to our rental operations, which we expect will limit the future unfavorable annual
revenue impact of the GPO contract changes to approximately $25 million, but there can be no
assurance that these actions will be successful.
To date, the financial impact of these changes on the capital side of our business has not been as
significant. At any given time, we are typically at various stages of responding to bids and
negotiating and renewing expiring GPO agreements. Failure to be included in one or more of these
agreements could have a material adverse effect on our business, including both capital and rental
revenues.
Health Care Regulation
The Medicare Modernization Act, or MMA, passed in November of 2003, represents some of the most
complex and far-reaching changes to Medicare since its inception. While the MMA has not been fully
implemented and all of the implications of this far-reaching law are not yet clear, there has been
and will continue to be an affect on durable medical equipment placed in the home. The latest of
these developments is the recently finalized rules on competitive bidding. Competitive bidding
will commence for ten product categories within ten metropolitan statistical areas (“MSAs”) in
2007, with bids due later this year and actual pricing under those bids to take effect in the last
half of fiscal 2008. Following this initial implementation, competitive bidding is planned to be
rolled out to seventy additional MSAs in 2009 and nationally thereafter, and the products covered
will also increase with the roll-out. The overall effect of these actions on Hill-Rom is not yet
known. As discussed above, we have planned overall to increase our extended and home care
offerings. With respect to the competitive bidding initiative, of the ten product categories
included, only two categories are applicable to Hill-Rom’s current product offerings. Hospital
beds and related supplies will be bid in each of the ten MSAs, while support surfaces are limited
to only two of the MSAs. We plan to compete in most of the MSAs where our products are included.
As the goal of the new rules is solely to reduce spending on this type of equipment, it is
appropriate to expect pricing for such products to be lower as a result. Further, as the bidding
process could effectively “lock” out vendors from the individual product categories if their bids
are too high, the
26
implications could be even more severe. We are closely watching this situation and are actively
engaged in the on-going dialogue surrounding program implementation.
Competitive Developments
Competition continues to be strong in both the capital and rental sides of our business. Within
capital; product innovation, technology, ease of use and clinical outcomes continue to be critical
in the success of new product introductions. Occasionally, new product introductions, either by us
or our competitors, can temporarily slow sales of certain products as customers evaluate competing
products. While not significant as of yet, we have begun to see some signs that this might be
taking place in response to an acute care product introduction from a competitor.
Additionally, we have recently seen various acquisition and business alliances in the medical
technology arena that could alter the competitive landscape. For example, during the second
quarter of fiscal 2007 two of our competitors entered into a partnership to facilitate the supply
of a combination frame and surface rental solution, a practice which we have employed for many
years. Such alliances could pose a threat to our business.
Fiscal 2007 Strategic Imperatives – Batesville Casket
For fiscal 2007, Batesville Casket Company identified a two-prong strategy, one of which
essentially focused on what has long been considered our “core business” and the other focused on
initiatives outside the core. Included in the core business initiatives were efforts to improve
sales force effectiveness, streamline processes, increase customer focus, and pursue strategic
acquisitions within the casket industry.
A key component of improved sales force effectiveness has been a renewed focus on funeral product
merchandising, which continues to show positive financial results through the first nine-months of
fiscal 2007. We have experienced increased sales and improved product mix by a very large
percentage of customers who have implemented the merchandising systems. Effective merchandising
enables our customers to present a broad array of products to serve all of their client families,
to improve family satisfaction, and to help offset the financial effects of the continuing gradual
decline in the number of burial deaths.
In an effort to respond to consumers who prefer high eye-appeal caskets with relatively low feature
content, we launched two model series that have lower than average selling prices.
While our sales focused initiatives have shown positive results, we continue to be challenged by
declining burial trends as well as increased price competition in the market. Another pressure to
revenues includes the importation of foreign-produced burial caskets that have recently shown
increased activity. We remain committed to differentiating our product offering based on service,
quality and merchandising expertise.
Both the manufacturing and logistics areas of Batesville continue to undergo continuous improvement
exercises to advance their skills and capitalize on the process improvements that come from the
practice of continuous improvement. Our concierge’s office continues to provide a ready “human”
contact point for customers, which improves communication and makes Batesville “easier to do
business with” in the eyes of our customers.
In January of 2007, we consummated the acquisition of a small regional casket distributor and have
effectively integrated that business into ours. On July 24, 2007, we announced the termination of
negotiations related to the possible acquisition of Yorktowne Caskets, Inc. (“Yorktowne”). Our
intentions to acquire Yorktowne were previously announced in the fall of 2005, but our efforts were
delayed because of certain legal impediments, which expired on April 15, 2007. Effective as of
that date, a supply agreement between Yorktowne and Batesville Casket was put into place and we
began to update the due diligence process that originally led to our announced interest to acquire
Yorktowne. Unfortunately we were unable to reach acceptable terms with Yorktowne with respect to
an acquisition and Matthews International subsequently announced that it had purchased certain
assets of Yorktowne. Termination of the negotiations resulted in the recognition of a $2.8 million
charge in the third quarter of fiscal 2007 for
27
previously deferred costs related to the planned acquisition. Shortly before the transfer of its
assets to Matthews, Yorktowne ceased purchasing funeral products from
us under the supply agreement. We are currently evaluating our legal rights under the
supply agreement and other areas of potential financial impact associated with that
Agreement and have taken a $3.2 million reserve
in connection therewith.
Outside our core business, we continue to emphasize the sale of NorthStar™ caskets and related
products to independent casket manufacturers and distributors. NorthStar™ branded caskets are
visually distinct from the Batesville® branded caskets and exclude many of the patented features
that are part of the Batesville® brand. NorthStar™ casket sales are growing at a steady pace. We
have created a focused NorthStar™ casket sales team that functions independent of the sales
organization that sells Batesville branded caskets.
We also continue to evaluate acquisition and business planning opportunities adjacent to our core
business.
Separation into Two Independent Companies
On May 10, 2007 Hillenbrand announced that its board of directors had approved in principle a plan
to separate into two independent publicly traded companies, each strategically positioned to
capitalize on growth opportunities in their respective markets. Under the previously disclosed
plan approved by the Board, Hill-Rom would be spun out of Hillenbrand through a tax free dividend
of its shares to shareholders of Hillenbrand, and Batesville Casket would become the sole operating
unit of Hillenbrand and continue to be publicly traded under the Hillenbrand name.
As work on the separation progresses, the potential advantage of spinning off Batesville
Casket—rather than Hill-Rom—through a tax free dividend of its shares to shareholders is being
considered. This alternative mechanism may provide greater structural simplicity and other
benefits. A final decision will be subject to review and approval by the Hillenbrand Board of
Directors. Regardless of the mechanism, we are still planning to
complete the separation by February, 2008 as originally intended.
In
arriving at the decision to separate the two operating companies, the
Board of Directors and senior leadership team of the Company
carefully weighed a number of alternatives related to the
maximization of long-term value for Company shareholders. After a
detailed review, the Board concluded that there is a strong business
case to support the separation of the two operating companies
comprising Hillenbrand. By operating independently, each company will
be able to adopt an appropriate capital structure to allow it to
better execute its business plans. Each company would also be able to
utilize its own equity as currency for strategic purposes. Two
focused companies would also be better positioned for investors
looking for specific industry, valuation, yield, and growth profiles.
The plan to separate into two companies is consistent with our
strategy to create focused, mission-driven enterprises and as
independent and focused companies, each would be better able to
compete for, attract and retain talent.
Under the
plan, the current management team of each company would remain in
place. Hill-Rom would be led by Peter H. Soderberg, and Batesville
Casket would be led by Kenneth A. Camp.
Immediately
after the separation, Hillenbrand shareholders would own shares in
both entities. The transaction will be subject to the final approval
of the Board of Directors, favorable market conditions, receipt of a
favorable tax ruling from the IRS, formal tax opinions on select
aspects of the transaction from legal counsel, the filing and
effectiveness by the entity to be spun off of a registration
statement with the U.S. Securities and Exchange Commission (SEC),
completion of necessary debt refinancing and other customary
conditions.
Upon
separation, each company should enjoy sufficient financial strength
and flexibility to achieve its objectives. Subject to review by
independent rating agencies, it is intended that upon separation,
each company’s financial policies, credit metrics and balance
sheets would be commensurate with investment grade credit ratings. In
addition, the total dividends of the two companies would be at least
equal to the current dividend paid by Hillenbrand. Until the
transaction is completed, Hillenbrand expects to pay its current
quarterly dividend of $0.2850 per share. We also intend that the
separation preserve the economic status quo of uninsured claimants
against Hillenbrand and Batesville Casket at the time of the spin-off.
To date we are progressing with our plans to execute the
separation of our companies within the expected nine-month frame
previously communicated.
Consolidated Results of Operations
In this section, we provide a high-level overview of our consolidated results of operations.
Immediately following this section is a discussion of our results of operations by reportable
segment.
Consolidated Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
June 30, |
|
June 30, |
(Dollars in millions) |
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
225.4 |
|
|
$ |
199.8 |
|
|
|
12.8 |
|
|
$ |
664.1 |
|
|
$ |
604.6 |
|
|
|
9.8 |
|
Health Care rentals |
|
|
103.1 |
|
|
|
104.5 |
|
|
|
(1.3 |
) |
|
|
320.4 |
|
|
|
326.5 |
|
|
|
(1.9 |
) |
Funeral Services sales |
|
|
165.6 |
|
|
|
165.0 |
|
|
|
0.4 |
|
|
|
509.0 |
|
|
|
511.3 |
|
|
|
(0.4 |
) |
|
Total Revenues |
|
$ |
494.1 |
|
|
$ |
469.3 |
|
|
|
5.3 |
|
|
$ |
1,493.5 |
|
|
$ |
1,442.4 |
|
|
|
3.5 |
|
|
Consolidated revenues for the third quarter of 2007 increased $24.8 million, or 5.3 percent,
compared to the third quarter of 2006. The increase in revenues was driven by Health Care sales
revenues, which increased $25.6 million, or 12.8 percent, on higher volumes and to a lesser extent
favorable exchange rates and price realization when compared to the prior year. The higher volumes
were driven by our International and Surgical segment, which experienced continued success with our
new AvantGuard™ 800 product line in the mid and low-end acuity bed frame segment within Europe,
along with sales from our recent acquisition in Australia, Medicraft, which approximated $4.2
million. Some volume strength was also realized in our North America Acute Care segment, led by
CareAssist® bed frames, our Latitude® system intensive care architectural arm platform, parts and
service revenue and our recently updated stretcher line. Somewhat
28
offsetting the volume strength from these products, we experienced lower volumes in our high-acuity
and VersaCare® bed platforms and in our aging furniture and communications product lines.
As expected, Health Care rental revenues declined compared to the prior year same quarter, by $1.4
million, driven by lower rental volume in our North America Acute Care segment resulting from
changes in GPO affiliations and the carryover effect of many of the unfavorable conditions
encountered in fiscal 2006 as further outlined below. That decline was partially offset by
increases in rentals of The Vest® products within our North America Post-Acute segment and
favorable exchange rates in our International and Surgical segment. Current year rental revenues
also benefited from lower customer allowances, including a reduction of quarter-end reserve
adjustments associated with such allowances, which were down $3.7 million compared to the prior
year.
Funeral Services revenues were up slightly for the quarter, increasing $0.6 million, driven by
favorable net price realization, which was nearly offset by lower volume—primarily the result of
the continued decline in burial deaths during the period and competitive market dynamics. Although
we have seen some mix improvement as a result of our merchandising focus, overall mix for the
quarter was unfavorable. One key driver to the mix results is the increased sales in our new line
of lower-end metal products.
Consolidated revenues for the nine-months ended June 30, 2007 increased $51.1 million, or 3.5
percent, compared to the same period in 2006. The increase in revenues was related to Health Care
sales revenues increasing $59.5 million, or 9.8 percent, from the prior year as a result of the
same relative drivers as experienced in the quarter—higher volumes, the acquisition of Medicraft
contributing $10.7 million, favorable exchange rates of $9.0 million and to a lesser extent
favorable price realization. On a year-to-date basis, volume strength was led by the same product
lines as discussed above for the third quarter, along with health information technology solutions
products.
Health Care rental revenues for the first nine-months of fiscal 2007 were $6.1 million,
or 1.9 percent, lower than the first nine-months of 2006 related primarily as a result of changes
in GPO affiliations and lower volumes, which were expected as we continue to experience the
carryover effect of many of the unfavorable conditions encountered in fiscal 2006, including
customer relationship issues resulting from past billing and processing issues. Partially
offsetting this unfavorability was lower customer allowances, including quarter-end reserve
adjustments, as outlined in the third quarter discussion above. As discussed earlier, we have
significant initiatives underway to reverse those unfavorable trends and revitalize our rental
operations, including increased investments in our therapy rental fleet, increased efficiencies and
a reenergized customer focus. We have already begun to realize benefits in these areas which have
received our initial focus and investments, but certain other initiatives will require more time
and focus to take hold. Accordingly, the desired benefits of some of these initiatives are not
expected to be fully realized until fiscal 2008.
Funeral Services revenues were down $2.3 million,
or 0.4 percent, for the nine-months of 2007, compared to the prior year, due to lower volumes and
unfavorable product mix shifts explained above, partially offset by favorable net price
realization.
Consolidated Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
June 30, 2007 |
|
June 30, 2006 |
|
|
|
|
|
|
% of Related |
|
|
|
|
|
% of Related |
(Dollars in millions) |
|
|
|
|
|
Revenues |
|
|
|
|
|
Revenues |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
93.1 |
|
|
|
41.3 |
|
|
$ |
82.8 |
|
|
|
41.4 |
|
Health Care rentals |
|
|
52.4 |
|
|
|
50.8 |
|
|
|
50.8 |
|
|
|
48.6 |
|
Funeral Services |
|
|
66.9 |
|
|
|
40.4 |
|
|
|
68.8 |
|
|
|
41.7 |
|
|
Total Gross Profit |
|
$ |
212.4 |
|
|
|
43.0 |
|
|
$ |
202.4 |
|
|
|
43.1 |
|
|
Consolidated gross profit for the third quarter of 2007 increased $10.0 million, or 4.9% percent,
and was essentially flat as a percentage of revenues compared to the prior year period. Health
29
Care sales gross profit increased $10.3 million, due primarily to the positive effects of the
higher volumes and favorable price realization, along with cost savings realized from various
sourcing and other manufacturing cost reduction initiatives. This favorability was partially
offset by costs associated with the continuing start-up of our low-cost manufacturing facility in
Mexico of $1.4 million. Health Care sales gross margin as a
percentage of revenue was relatively unchanged despite the
favorability outlined above as a result of a heavier mix of
International revenues which generally carry lower gross margins and
unfavorable product mix. Health Care rental gross profit also increased for the third quarter,
despite slightly lower revenues, as a result of cost reductions following our prior year field
service restructuring efforts. Funeral Services gross profit decreased $1.9 million, or 130 basis
points as a percentage of revenues, primarily the result of lower volumes, increased commodity
costs and the product mix trends described above. These margin declines were partially offset by
favorable price realization and continued productivity improvements at our manufacturing locations.
It is important to note that prior year Funeral Services gross profit also included $1.6 million
in gains on the sale of certain distribution and manufacturing facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
June 30, 2007 |
|
June 30, 2006 |
|
|
|
|
|
|
% of Related |
|
|
|
|
|
% of Related |
(Dollars in millions) |
|
|
|
|
|
Revenues |
|
|
|
|
|
Revenues |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
279.2 |
|
|
|
42.0 |
|
|
$ |
247.5 |
|
|
|
40.9 |
|
Health Care rentals |
|
|
163.9 |
|
|
|
51.2 |
|
|
|
162.8 |
|
|
|
49.9 |
|
Funeral Services |
|
|
215.7 |
|
|
|
42.4 |
|
|
|
209.3 |
|
|
|
40.9 |
|
|
Total Gross Profit |
|
$ |
658.8 |
|
|
|
44.1 |
|
|
$ |
619.6 |
|
|
|
43.0 |
|
|
Consolidated gross profit for the nine-month period ended June 30, 2007 increased $39.2 million, or
6.3 percent, and was higher as a percentage of revenues by 110 basis points when compared to the
prior year period. Health Care sales gross profit increased $31.7 million, or 110 basis points as
a percentage of revenues, driven by the increased volume, various cost savings initiatives in our
sourcing and manufacturing areas and favorable price realization. This favorability was partially
offset by start-up costs associated with our new manufacturing
facility in Mexico of $2.3 million and the higher mix of International
revenues as outlined above for the quarter negatively impacted gross
margins as a percentage of revenue.
Health Care rental gross profit was essentially flat to the prior year period, but increased 130
basis points to 51.2 percent as a percentage of revenues, as a result of our field service
restructuring efforts. Funeral Services gross profit increased $6.4 million, or 150 basis points as
a percentage of revenues despite the lower volumes and product mix decline, as a result of
favorable price realization, cost savings associated with our prior year wood plant consolidation,
other manufacturing process and sourcing efficiencies and lower relative fuel and utility costs.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
June 30, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
Other operating expenses |
|
$ |
162.5 |
|
|
$ |
127.1 |
|
|
|
27.9 |
|
|
$ |
446.9 |
|
|
$ |
396.8 |
|
|
|
12.6 |
|
Percent of Total Revenues |
|
|
32.9 |
% |
|
|
27.1 |
% |
|
|
|
|
|
|
29.9 |
% |
|
|
27.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges and litigation
credits |
|
$ |
— |
|
|
$ |
(2.2 |
) |
|
|
(100.0 |
) |
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
(5.5 |
) |
|
$ |
(5.4 |
) |
|
|
1.9 |
|
|
$ |
(16.7 |
) |
|
$ |
(15.5 |
) |
|
|
7.7 |
|
Investment income |
|
|
9.0 |
|
|
|
7.7 |
|
|
|
16.9 |
|
|
|
27.3 |
|
|
|
35.7 |
|
|
|
(23.5 |
) |
Other |
|
|
0.3 |
|
|
|
0.6 |
|
|
|
(50.0 |
) |
|
|
(1.4 |
) |
|
|
0.2 |
|
|
|
(800.0 |
) |
|
Other income/(expense), net |
|
$ |
3.8 |
|
|
$ |
2.9 |
|
|
|
31.0 |
|
|
$ |
9.2 |
|
|
$ |
20.4 |
|
|
|
(54.9 |
) |
|
Other operating expenses increased $35.4 million for the third quarter of fiscal 2007 compared to
the same prior year period. The higher expense levels were primarily due to the increased
investments previously outlined as part of our 2007 strategic plan, including increased spending in
research and development, marketing and sales. During the quarter we also incurred $6.2 million of
costs associated with the pending separation of Hillenbrand into two independent public
30
companies, along with an additional $6.0 million associated with deferred acquisition and other
costs related to the previously planned acquisition of Yorktowne and the supply agreement. Also
contributing to this increase were operating expenses associated with the acquisition of Medicraft
made at the beginning of the first quarter and general salary and benefit inflation.
Other operating expenses increased $50.1 million for the nine-month period ended June 30, 2007
compared to the same prior year period. The overall higher expense levels were due to the same
general factors as outlined above for the third quarter partially offset by slightly lower spending
for legal fees related to antitrust lawsuits in 2007. Separation-related costs were identical to
the cost disclosed above for the third quarter. The total year impact of Yorktowne related
reserves and deferred cost totaled $6.0 million. As previously outlined as part of our 2007
strategic plan, we will continue to see an acceleration of spending in the remainder of fiscal 2007
on research and development, marketing and sales initiatives as we look to position ourselves for
future growth.
Special charges for the nine-month period ended June 30, 2007, all of which were recognized in the
second quarter, related to a $1.0 million special termination benefit charge associated with
reductions in force at our Hill-Rom Batesville, Indiana manufacturing plant in anticipation of the
start-up of manufacturing at our new low-cost region facility in Monterrey, Mexico. This charge
was offset by the reversal of $0.8 million of excess reserves from prior year actions. Special
charges of $2.4 million were incurred in the first quarter of fiscal 2006, most notably in Europe
where we continued with restructuring activities previously announced in the fourth quarter of
fiscal 2005. In the third quarter of fiscal 2006, we had a reversal of $2.3 million of the
previously accrued legal costs associated with the original Spartanburg antitrust litigation
settlement accrued in fiscal 2005. Additional special charges of $1 million may be incurred in
Europe during the balance of fiscal 2007 as our restructuring activities and the voluntary
severance program at our French manufacturing facility wrap-up. See Note 7 to the Condensed
Consolidated Financial Statements for more detail on these actions.
Interest expense increased $0.1 million compared to the third quarter of 2006 and $1.2 million
compared to the nine-month period June 30, 2006 due to the increase in short-term interest rates
and their negative impact to our interest rate swaps on long-term debt. Investment income for the
quarter and year-to-date periods increased $1.3 million and decreased $8.4 million in fiscal 2007
from the comparable periods in fiscal 2006. While performance of our limited partnership
investments was favorable in both periods, the gains and corresponding cash distributions received
during the prior year were larger than those of the current year. The timing and magnitude of
gains or losses from our limited partnerships are not subject to our control. Other expense was
negligible in the quarter and nine-month periods ended June 30, 2007 and 2006.
The effective tax rates for the third quarter and the year-to-date periods ended June 30, 2007 were
33.5 percent and 35.5 percent, respectively. The tax rates for the same periods ending June 30,
2006 were 36.4 percent and 36.5 percent, respectively. The third quarter and year-to-date fiscal
2007 effective tax rates reflect the recognition of $1.4 million and $3.1 million of discrete
period tax benefits which are primarily related to the release of valuation allowances on capital
loss carryforwards, tax provision to return adjustments, the re-instatement of the research and
development credit and the impact of non-deductible separation costs. This compares to $0.2
million and $2.9 million of discrete period tax benefits recorded in the third quarter and
year-to-date fiscal 2006, principally related to the release of valuation allowances on capital
loss and foreign tax credit related carryforwards and a deferred tax benefit reflecting favorable
state tax law changes. The effective tax rate without discrete tax benefits was 36.9 percent and
37.7 percent for the year-to-date periods of 2007 and 2006, respectively. The lower rate in fiscal
2007 is due primarily to the estimated benefit of the reinstatement of the research and development
tax credit for a full year and the ability to take advantage of the deduction for qualified
production activities.
Income from continuing operations decreased $15.4 million to $35.7 million in the third quarter of
2007 compared to $51.1 million in the prior year quarter. Year-to-date income from continuing
operations decreased $11.7 million to $142.5 million in 2007, compared to $154.2 million in the
prior year comparable period. This equates to diluted earnings per share of $0.57 and $2.30 for
the three-month and the nine-month periods of 2007, respectively, compared to $0.83 and $2.51 per
share for the comparable periods of 2006.
31
Results from discontinued operations were a loss of $0.3 million for the first quarter of 2006.
With the exception of Forethought Federal Savings Bank (“FFSB”), we completed the divestiture of
Forethought Financial Services in the fourth quarter of fiscal 2004. The sale of FFSB was
completed on January 3, 2006, and, accordingly, the operations of FFSB were presented as
discontinued operations within our Condensed Consolidated Statements of Income for 2006. We
recognized an after tax loss on this transaction of $0.6 million in the first quarter of fiscal
2006. See Note 4 to the Condensed Consolidated Financial Statements for more information.
Business Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
June 30, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Acute Care |
|
$ |
206.8 |
|
|
$ |
205.3 |
|
|
|
0.7 |
|
|
$ |
630.0 |
|
|
$ |
622.8 |
|
|
|
1.2 |
|
North America Post-Acute Care |
|
|
45.3 |
|
|
|
42.6 |
|
|
|
6.3 |
|
|
|
133.5 |
|
|
|
127.3 |
|
|
|
4.9 |
|
International and Surgical |
|
|
76.4 |
|
|
|
56.4 |
|
|
|
35.5 |
|
|
|
221.0 |
|
|
|
181.0 |
|
|
|
22.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Hill-Rom |
|
|
328.5 |
|
|
|
304.3 |
|
|
|
8.0 |
|
|
|
984.5 |
|
|
|
931.1 |
|
|
|
5.7 |
|
Batesville Casket |
|
|
165.6 |
|
|
|
165.0 |
|
|
|
0.4 |
|
|
|
509.0 |
|
|
|
511.3 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
494.1 |
|
|
$ |
469.3 |
|
|
|
5.3 |
|
|
$ |
1,493.5 |
|
|
$ |
1,442.4 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Acute Care |
|
$ |
51.4 |
|
|
$ |
50.4 |
|
|
|
2.0 |
|
|
$ |
166.4 |
|
|
$ |
152.9 |
|
|
|
8.8 |
|
North America Post-Acute Care |
|
|
11.4 |
|
|
|
12.8 |
|
|
|
(10.9 |
) |
|
|
36.6 |
|
|
|
37.4 |
|
|
|
(2.1 |
) |
International and Surgical |
|
|
10.7 |
|
|
|
6.4 |
|
|
|
67.2 |
|
|
|
28.0 |
|
|
|
23.9 |
|
|
|
17.2 |
|
Functional Costs |
|
|
(47.8 |
) |
|
|
(34.0 |
) |
|
|
40.6 |
|
|
|
(127.9 |
) |
|
|
(111.4 |
) |
|
|
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Hill-Rom |
|
|
25.7 |
|
|
|
35.6 |
|
|
|
(27.8 |
) |
|
|
103.1 |
|
|
|
102.8 |
|
|
|
0.3 |
|
Batesville Casket |
|
|
36.0 |
|
|
|
45.2 |
|
|
|
(20.4 |
) |
|
|
134.5 |
|
|
|
138.9 |
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total divisional income |
|
$ |
61.7 |
|
|
$ |
80.8 |
|
|
|
(23.6 |
) |
|
$ |
237.6 |
|
|
$ |
241.7 |
|
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles segment divisional income to income from continuing operations
before income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
June 30, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
Segment divisional income |
|
$ |
61.7 |
|
|
$ |
80.8 |
|
|
|
(23.6 |
) |
|
$ |
237.6 |
|
|
$ |
241.7 |
|
|
|
(1.7 |
) |
Public entity costs and other |
|
|
(11.8 |
) |
|
|
(5.5 |
) |
|
|
(114.5 |
) |
|
|
(25.7 |
) |
|
|
(18.9 |
) |
|
|
(36.0 |
) |
Special charges |
|
|
— |
|
|
|
2.2 |
|
|
|
100.0 |
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
— |
|
Other income |
|
|
3.8 |
|
|
|
2.9 |
|
|
|
31.0 |
|
|
|
9.2 |
|
|
|
20.4 |
|
|
|
(54.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income
taxes |
|
$ |
53.7 |
|
|
$ |
80.4 |
|
|
|
(33.2 |
) |
|
$ |
220.9 |
|
|
$ |
243.0 |
|
|
|
(9.1 |
) |
North America Acute Care
North America Acute Care revenues increased $1.5 million, or 0.7 percent, in the third quarter of
2007 compared to the third quarter of 2006. Sales revenues reflected an increase of $2.6 million,
or 1.7 percent, on both increased volume and favorable price realization, while rental revenues
were lower by $1.1 million, or 2.0 percent, due to lower volumes. Some volume strength was also
realized in our North America Acute Care segment, led by CareAssist® bed frames, our Latitude®
system intensive care architectural arm platform, parts and service revenue and our recently
updated stretcher line. Somewhat offsetting the volume strength from these products, we
experienced lower volumes in our high-acuity and VersaCare® bed platforms and in our aging
furniture and communications product lines. The aging of these product lines is slowing overall
sales growth, thus we are investing heavily in research and development as outlined in our three
year strategic plan. The decline in rental volume was driven by the loss of some business
resulting from changes in GPO
32
affiliations and as we continue to experience the carryover effect of many of the unfavorable
trends encountered in fiscal 2006 resulting from our past rental billing and processing issues.
Volumes were also negatively impacted by continuing declines in the pulmonary product areas
resulting from increasing capital purchases by customers of these products. The lower volumes were
partially offset by lower customer allowances, including a reduction of the quarter-end reserve
adjustment associated with such allowances of $1.4 million.
For the nine-month period ended June 30, 2007, North America Acute Care revenues increased $7.2
million, or 1.2 percent, compared to the same period in 2006. Sales revenues reflected an increase
of $18.3 million, or 4.2 percent, primarily on higher volumes and improved price realization, while
rental revenues were lower by $11.1 million, or 6.0 percent, due to lower volumes. The higher
sales volumes during the nine-months were led by CareAssist® beds, architectural products, parts
and service revenue and health information technology solutions products. Volumes continue to be
lower for our high-acuity bed frame, VersaCare®, and furniture product lines. VersaCare® bed
volumes are lower than the prior year primarily the result of the increasing acceptance of our
CareAssist® bed platform. The expected decline in rental revenue for the year-to-date period was
consistent with that described above for the quarter.
For North America Acute Care, divisional income increased $1.0 million in the third quarter of 2007
compared to the prior year period. Most of this increase resulted from higher gross profit, which
was up $6.8 million compared to the prior period. Sales gross profit was up $6.1 million driven
primarily by improved price realization, better pricing discipline and sourcing efficiencies. For
rentals, gross profit was up $0.7 million despite lower rental revenues resulting from the benefits
of our field service restructuring efforts. Operating expenses increased $5.8 million in the third
quarter of 2007, due to increased spending in research and development, marketing and sales as we
look to better position ourselves for future growth.
Divisional income for North America Acute Care increased $13.5 million, or 8.8 percent, for the
nine-month period ended June 30, 2007 compared to the prior year period due to higher gross profit,
which was up $20.2 million compared to the prior period. Sales gross profit was up $27.0 million
driven by our previously announced strategic initiatives towards price realization and various cost
reductions realized in our service fulfillment channels and manufacturing operations. For rentals,
gross profit was down $6.8 million as with the generally fixed cost nature of the field service and
sales network, only a portion of the $11.1 million revenue shortfall could be recovered by lower
costs associated with our prior year restructuring actions. Operating expenses were up $6.7
million in 2007, due to higher spending related to our current year strategy, as previously
outlined.
North America Post-Acute Care
North America Post-Acute Care revenues increased $2.7 million, or 6.3 percent, in the third quarter
of 2007 compared to the third quarter of 2006. Sales revenues increased by $3.7 million, primarily
due to the increased sales channel focus and improved bed frame sales to our extended care
customers, where we expect to have additional product launches in the near-term. Rental revenues
decreased $1.0 million, primarily related to rental softness in wound and moveable medical equipment
products, partially offset by lower customer allowances, including quarter-end
reserve adjustments associated with such allowances which were down
$2.3 million compared to the prior year, and higher revenue on The Vest® products.
North America Post-Acute Care revenues increased $6.2 million, or 4.9 percent, year-to-date 2007
compared to the comparable period 2006. Sales revenues increased by $4.6 million, primarily due to
the performance of our extended care product line and increased sales of The Vest® products within
acute care facilities. Rental revenues increased $1.6 million, primarily related to an increase in
revenues on The Vest® products and lower customer allowances, partially offset by lower activity in our standard therapy rentals
as outlined above. Standard therapy rentals continue to be an area of concern for us in Home Care
and Extended Care. We are making increased investments in new product development and rental fleet
additions to address this rental softness.
Divisional income for North America Post-Acute Care decreased $1.4 million, or 10.9 percent, in the
third quarter of 2007 compared to the prior year period. The decrease was primarily due to an
increase in operating expenses of $2.4 million due to increased costs related to our on-going
efforts to improve the efficiency and effectiveness of our rental billing system, along with
additional spending in sales, marketing, and new product development initiatives as we look for
33
future growth opportunities. These higher costs were partially offset by higher gross profit of
$1.0 million.
Divisional income for North America Post-Acute Care decreased $0.8 million, or 2.1 percent
year-to-date 2007 compared to the prior year period. Rental gross profit increased $3.6 million
associated with higher Vest® product rental volume, along with lower field service costs as the
result of our prior year restructuring activities. Sales margins decreased $0.2 million from the
prior year, despite the higher volumes, primarily due to higher costs on certain products. In
addition, operating expenses increased from the prior year by $4.2 million mainly due to increased
costs related to our on-going efforts to improve the efficiency and effectiveness of our rental
billing system, along with additional spending in sales, marketing and new product development
initiatives as outlined above. Coming from these new product development initiatives we expect to
launch several new products in the near term.
International and Surgical
International and Surgical revenues increased $20.0 million, or 35.5 percent, in the third quarter
of 2007 compared to the third quarter of 2006, inclusive of favorable exchange rates of $3.5
million. Sales revenues, up $19.3 million, were positively affected by increased sales over the
prior comparable year quarter of our new AvantGuard™ 800 bed frame, which we launched in Europe to
address market demand in the mid and low-end acuity bed frame segment. Our acquisition of
Medicraft, which was completed early in the first quarter, drove $4.2 million of the revenue
increase. Rental revenues were also higher by $0.7 million due to the favorable exchange rates and
increased share. In addition to significant growth in Europe, we experienced growth in nearly all
other sales geographies, as well as our Surgical business.
International and Surgical revenues increased $40.0 million, or 22.1 percent, for the first
nine-month period of 2007 compared to the prior year period, inclusive of the favorable impact of
exchange rates of $11.6 million. Sales revenues up, $36.6 million, were positively affected by our
acquisition of Medicraft, which was completed early in the first quarter and drove $10.7 million of
the revenue increase. Sales of our new AvantGuard™ 800 bed frame, as outlined above, have been
strong with strong period over period increases. Rental revenues were also higher by $3.4 million
due to the favorable exchange rates and increased share. In addition to significant growth in
Europe, we experienced growth in Latin America and the Middle East, as well as our Surgical
business, which have offset the decline in our Asia business.
Divisional income for International and Surgical increased $4.3 million in the third quarter of
2007 compared to the prior year period, including the impact of favorable exchange rates of $0.5
million. Gross profit was up $7.4 million compared to the prior period on the increased sales
revenues described above and the higher rental volume. A 120 basis point reduction in gross margin
resulted from higher volumes of lower margin products, with the impact lessened by favorable
service costs and productivity improvements. Operating expenses increased by $2.1 million
primarily due to the impact of exchange rates on costs, an additional $1.4 million of Australian
expenses associated with the Medicraft acquisition and integration and increased investment in the
strategic initiatives, including research and development, sales, marketing and new channel
development.
Divisional income for International and Surgical increased $4.1 million for the first nine-months
of 2007 compared to the prior year period, including the impact of favorable exchange rates of $1.9
million. Gross profit was up $15.8 million compared to the prior period, on higher revenues and
relatively flat gross margins. Operating expenses increased by $11.8 million primarily due to the
same factors described above for the quarter, including the impact of exchange rates, an additional
$3.9 million of Australian expenses associated with the Medicraft acquisition inclusive of
integration costs, and increased investment spending.
Batesville Casket
Batesville Casket revenues in the third quarter of 2007 increased $0.6 million, or 0.4 percent,
from the prior year comparable period. Revenues were favorably impacted by an increase in net
price realization of $7.1 million that was offset by a decrease in volume of $4.7 million and
34
unfavorable product mix of $1.8 million. The volume decline occurred across almost all product
lines during the quarter, with the exception of veneer and low-end metal, as the decline in burial
deaths continues and competitive pressure builds. Although we are seeing positive mix results from
our merchandising initiative, the overall mix impact was unfavorable for the quarter due primarily
to the expansion of our lower-end metal product offerings at price points where there were
opportunities to grow volume.
For the nine-month period ended June 30, 2007, Batesville Casket revenues were essentially flat
when compared to the same period in the prior year, declining only by 0.4 percent, or $2.3 million.
The year-over-year results were negatively impacted by a $15.5 million decrease in the volume of
burial caskets, primarily a result of the continued decline in burial deaths and competitive market
dynamics. Higher external distributor sales of $6.2 million partially offset an unfavorable
Options® cremations product revenue decrease of $2.0 million. Favorable net price realization of
$17.5 million was partially offset by $6.1 million of product mix decline, consistent with trends
previously outlined for the third quarter.
Batesville Casket divisional income decreased by $9.2 million, or 20.4 percent, in the third
quarter compared to the same period of the prior year. This unfavorability was driven by lower
gross profit as favorable price realization was more than offset by lower product volume, the shift
in product mix mentioned above and the prior year gain on the sale of certain manufacturing and
distribution facilities totaling $1.6 million. Operating expenses included $6.0 million of costs
associated with deferred acquisition and other costs related to the previously planned acquisition
of Yorktowne and the supply agreement, along with current year strategic initiative spending of
$0.8 million. These higher costs were offset by a reduction in incentive compensation of $1.9
million and decreased spending on antitrust litigation costs of $0.5 million.
Batesville Casket divisional income decreased by $4.4 million, or 3.2 percent, in the year-to-date
period of 2007 compared to the same period in the prior year. Gross profit was up despite the
impact of lower volumes, unfavorable product mix and higher commodity costs. The higher gross
profit was driven by favorable realization, cost savings of approximately $2.7 million associated
with our prior year wood plant consolidation, and general efficiencies achieved in manufacturing,
distribution and supply chain associated with continuous improvement initiatives. Other
incremental costs over the prior year included $6.0 million related to Yorktowne activities and a
$2.8 million increase in initiative spending. Partially offsetting these higher costs was a
reduction in incentive compensation costs of $3.1 million.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
June 30, |
(Dollars in millions) |
|
2007 |
|
2006 |
|
Cash Flows Provided By (Used In): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
197.4 |
|
|
$ |
185.7 |
|
Investing activities |
|
|
(169.1 |
) |
|
|
(133.5 |
) |
Financing activities |
|
|
(34.4 |
) |
|
|
(41.2 |
) |
Effect of exchange rate changes on cash |
|
|
1.9 |
|
|
|
1.0 |
|
|
(Decrease) Increase in Cash and Cash Equivalents |
|
$ |
(4.2 |
) |
|
$ |
12.0 |
|
|
Net cash flows from operating activities and selected borrowings have represented our primary
sources of funds for growth of the business, including capital expenditures and acquisitions. Our
financing agreements contain no restrictive provisions or conditions relating to dividend payments,
working capital or additional unsecured indebtedness (except to the extent that a dividend payment
or incurrence of additional unsecured indebtedness would result in a default under our financing
agreements), but there are limitations with respect to secured indebtedness. Our debt agreements
also contain no credit rating triggers. Credit rating changes can, however, impact the cost of
borrowings under our financing agreements.
35
Operating Activities
For the nine-month period ended June 30, 2007, net cash provided by operating activities totaled
$197.4 million compared to $185.7 million for the nine-months ended June 30, 2006.
Depreciation and amortization decreased slightly to $80.7 million in the first nine-months of
fiscal 2007 from $81.4 million in the 2006 comparable period.
Changes in working capital decreased cash from operations in the first nine-months of 2007 by $15.4
million and $35.4 million in the same prior year period. In the first nine-months of fiscal 2007,
accounts receivable decreased $25.1 million, excluding the increase of $2.7 million from
acquisitions, from the prior year-end as a result of the collection of high fiscal year-end
receivables. In addition, income taxes receivable decreased by $3.7 million. These favorable
impacts were more than offset by the effects of increased inventories of $38.0 million, excluding
the impact from acquisitions of $4.3 million. The higher inventories are related to new product
introductions, the start-up of our new facility in Mexico, and the effect of exchange rates. While
there were other movements by comparison, changes in current liabilities had little effect in
working capital for the period. In the first half of fiscal 2006, our cash flows from operations
were significantly adversely impacted by payments related to our restructuring activities and the
initial funding under the Spartanburg settlement agreement of $50 million.
Investing Activities
Net cash used in investing activities for the nine-months ended June 30, 2007 totaled $169.1
million compared to $133.5 million for the nine-months ended June 30, 2006. Capital
expenditures increased to $100.6 million from $70.3 million in the prior year period. Hill-Rom’s
capital expenditures increased $33.5 million over the comparable prior year period, due primarily
to rental fleet additions of approximately $40 million and the purchase of our low-cost
manufacturing facility in Monterey, Mexico for approximately $15 million. Batesville Casket’s
capital expenditures decreased to $9.9 million from $13.1 million in the prior year. Total fiscal
year 2007 capital expenditures are expected to be in the range of $145 million and $155 million, as
we strategically invest in our rental fleet, our rental systems, and Hill-Rom’s low-cost
manufacturing facility in Mexico.
The first nine-months of investment activity in fiscal 2007 included $164.0 million of purchases
and capital calls and $114.6 million provided from sales and maturities. We invest a portion of
our excess cash from operations into highly liquid auction rate municipal bonds. These liquid,
current investments accounted for $162.7 million of the purchases and $94.3 million of the sales
for the first nine-months of fiscal 2007, as they were utilized as a treasury management strategy
to earn better rates of return on available cash. In the first nine-months of fiscal 2006, current
investment purchases were $225.4 million with sales of $149.9 million. In both periods, the
remaining investment activity primarily relates to capital calls and distributions from our private
equity limited partnerships.
On October 17, 2003, we announced that we had completed our acquisition of ARI, a manufacturer and
distributor of non-invasive airway clearance products and systems. The purchase price was $105.2
million. In the first quarter of 2006, the final deferred acquisition payment of $5.7 million was
made. All purchase price obligations relative to ARI have now been completed.
On January 30, 2004, we acquired Mediq, a company in the medical equipment outsourcing and asset
management business. The purchase price for Mediq was approximately $328.9 million plus an
additional $5.9 million of acquisition costs incurred in relation to the transaction. This
purchase price was subject to certain adjustments based upon the Mediq balance sheet at the date of
close. Upon finalization of the funded status of the Mediq defined benefit pension plan, $7.3
million of the purchase price was returned to Hill-Rom in July 2006, which was recorded as a
reduction of goodwill.
In March 2006, Batesville Casket made an acquisition of a small regional casket distributor.
Goodwill of $1.8 million was recorded on the transaction.
36
On October 6, 2006, Hill-Rom acquired Medicraft, Australia PTY, LTD (“Medicraft”), the leader in
acute and post-acute hospital beds and furniture in Australia. The purchase price for Medicraft
was $15.8 million, all of which has been paid as of June 30, 2007.
In January 2007, Batesville Casket acquired a small regional casket distributor. This acquisition
capitalizes on our capacity to serve the broad needs of funeral service professionals and maximizes
our distribution base in the Midwest and Florida. We have completed a preliminary valuation of
assets and liabilities acquired and an allocation of the purchase price, resulting in the
recognition of approximately $1.6 million of intangible assets and nearly $2.8 million of goodwill.
The purchase price remains subject to an earnout provision of up to $5.3 million which would be
recorded as an adjustment to goodwill, thus this allocation of purchase price remains subject to
change.
Financing Activities
Net cash used in financing activities totaled $34.4 million for the nine-months ended June 30, 2007
compared to $41.2 million for the six-months ended June 30, 2006.
Cash dividends paid increased slightly to $52.9 million in the first nine-months of 2007, compared
to $52.3 million in the prior year comparable period due to the increase in shares outstanding and
the slight increase in dividend rate. Quarterly cash dividends per share were $0.285 for the
second and third quarters of fiscal 2007 and $0.2825 for the first quarter of 2007 and $0.2825
throughout fiscal 2006.
Our debt-to-capital ratio was 22.1 percent at June 30, 2007 compared to 24.9 percent at June 30,
2006. This decrease was primarily due to the higher capital resulting from earnings.
Proceeds on the exercise of stock options increased to $22.3 million in the first nine-months of
fiscal 2007 from $2.9 million in the same fiscal 2006 period.
Other Liquidity Matters
As of June 30, 2007, we have a $400.0 million five-year senior revolving credit facility with a
syndicate of banks led by Bank of America, N.A. and Citigroup North America, Inc. The term of the
five-year facility expires on June 1, 2009. Borrowings under the credit facility bear interest at
variable rates, as defined therein. The availability of borrowings under the five-year facility is
subject to our ability at the time of borrowing to meet certain specified conditions. These
conditions include, without limitation, a maximum debt to capital ratio of 55 percent. The
proceeds of the five-year facility shall be used, as needed: (i) for working capital, capital
expenditures, and other lawful corporate purposes; and (ii) to finance acquisitions.
As of June 30, 2007, we: (i) had $13.8 million of outstanding, undrawn letters of credit under the
five-year facility, (ii) were in compliance with all conditions set forth under the facility and
(iii) had complete access to the remaining $386.2 million of borrowing capacity available under
that facility.
We have trade finance credit lines totaling $16.0 million that have no commitment fees or
compensating balance requirements and are renewed annually. As of April 30, 2007, we had $8.2
million outstanding under this credit line as reflected in Short-term borrowings on the Condensed
Consolidated Balance Sheets. In addition, as of June 30, 2007, we had $15.0 million of
outstanding, undrawn letters of credit under uncommitted credit lines totaling $24.0 million that
have no commitment fees, compensating balance requirements or fixed expiration dates.
In fiscal year 2005, we recorded a pre-tax litigation charge of $358.6 million ($226.1 million
net-of-tax). The charge was associated with the definitive agreement to settle for $337.5 million
($212.8 million net-of-tax) the Spartanburg antitrust class action litigation lawsuit. The charge
also included certain legal and other costs related to the settlement. The court entered an Order
and Final Judgment approving the settlement following a fairness hearing on June 14, 2006. The
original cost of the settlement, $337.5 million, was reduced by almost $21.2 million to $316.3
37
million. The reduction in the settlement amount reflects the portion attributable to customers who
opted out of the settlement. In addition to the $50 million that was paid into the escrow fund in
the second quarter of fiscal 2006 pending final court approval, we paid the remaining $266.3
million into the escrow fund in August 2006. The entire funding of the settlement was completed
from cash on hand. After funding the settlement, we continue to have a solid financial position
with continued strong operating cash flows, and remaining availability under our previously
discussed revolving credit facility as well as potential access to the capital markets to fund the
execution of our strategic initiatives.
We intend to continue to pursue selective acquisition candidates in certain areas of our business,
but the timing, size or success of any acquisition effort and the related potential capital
commitments cannot be predicted. We expect to fund future acquisitions primarily with cash on
hand, cash flow from operations and borrowings, including the unborrowed portion of the five-year
credit facility, but we may also issue additional debt and/or equity in connection with
acquisitions.
During the third quarter of 2007, we did not repurchase any shares of our common stock in the open
market. As of June 30, 2007, we had Board of Directors’ approval to repurchase 3,000,000 shares of
our common stock. We may consider additional repurchases of shares if justified by the stock price
or other considerations. Repurchased shares are used for general business purposes.
We believe that cash on hand and generated from operations and amounts available under our
five-year credit facility along with amounts available from the capital markets, will be sufficient
to fund operations, working capital needs, capital expenditure requirements the costs of our
separation activities and financing obligations for the foreseeable future. However, if a class is
certified in any of the purported class action antitrust lawsuits filed against us, as described in
Note 13 of the Condensed Consolidated Financial Statements, and the plaintiffs prevail at trial,
potential damages awarded the plaintiffs could have a material adverse effect on our results of
operations, financial condition and/or liquidity.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Contractual Obligations and Contingent Liabilities and Commitments
For the
three and nine-month periods ended June 30, 2007 there have not been any significant changes
since September 30, 2006 impacting our liquidity or any material changes in our contractual
obligations.
Critical Accounting Policies
Our accounting policies require management to make significant estimates and assumptions using
information available at the time the estimates are made. Such estimates and assumptions
significantly affect various reported amounts of assets, liabilities, revenues and expenses. If
future experience differs materially from these estimates and assumptions, our results of
operations and financial condition could be affected. A detailed description of our accounting
policies is included in the Notes to our Consolidated Financial Statements and the Critical
Accounting Policies Section of Management’s Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2006. There have been no material changes to these critical accounting policies that
impacted the Company’s reported amount of assets, liabilities, revenues or expenses during the
first nine-months of fiscal 2007.
Recently Issued Accounting Standards
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for
income taxes by prescribing the minimum recognition threshold as “more-likely-than-not” that a tax
position must meet before being recognized in the financial statements. FIN 48 also provides
38
guidance on derecognition, classification, interest and penalties, accounting for income taxes in
interim periods, financial statement disclosure and transition rules. Additionally, in May 2007,
the FASB published FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB
Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 is an amendment to FIN 48. It clarifies how
an enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. This Interpretation is effective for fiscal
years beginning after December 15, 2006. As such, we are required to adopt FIN 48 by October 1,
2007, our fiscal year 2008. We have not yet analyzed the effect of this Interpretation or Staff
Position on our consolidated financial statements or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. This Statement does not require any new
fair value measurements, but provides guidance on how to measure fair value by providing a fair
value hierarchy used to classify the source of the information. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007, our fiscal year
2009, and interim periods within those fiscal years. The adoption of SFAS No. 157 is not expected
to have a material impact on our consolidated financial statements or results of operations.
In September 2006, the FASB also issued SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and
132(R).” This Statement requires recognition of the funded status of a benefit plan in the
statement of financial position. SFAS No. 158 also requires recognition in other comprehensive
income of certain gains and losses that arise during the period but are deferred under pension
accounting rules, as well as modifies the timing of reporting and adds certain disclosures. The
Statement provides recognition and disclosure elements to be effective as of the end of the fiscal
year after December 15, 2006, our fiscal year 2007, and measurement elements to be effective for
fiscal years ending after December 15, 2008, our fiscal year 2009. As such, we will adopt the
recognition and disclosure elements at the end of our current fiscal year. Had the recognition
elements been effective as of the end of our last fiscal year, total assets would have been
approximately $27 million lower due to the elimination of prepaid and intangible pension assets,
and total liabilities would have been unchanged as the recognition of additional accrued pension
costs to fully reflect the funded status of our defined benefit pension plans would have been
offset by a reduction in deferred tax liabilities at September 30, 2006. Additionally, Accumulated
other comprehensive loss would have increased by approximately $27 million.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin
(“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” This SAB redefines the SEC staff views
regarding the process of quantifying financial statement misstatements and is aimed at eliminating
diversity with respect to the manner in which registrants quantify such misstatements.
Specifically, the SAB requires an entity to consider both a balance sheet and income statement
approach in its evaluation as to whether misstatements are material. We will adopt SAB No. 108 at
the end of the current fiscal year. We identified three prior period misstatements during the
second quarter of fiscal 2007, which have now been determined not to be material to prior periods
under the Company’s historically accepted methodology of assessing misstatements. These
misstatements were related to (1) adjustments to our unrealized profit reserves for leased assets
procured from intercompany sources, (2) the recognition of deferred taxes relative to our
unrealized profit reserves and (3) the recognition of an obligation for a postretirement benefit
health care plan that bridges health coverage from early retirement to Medicare eligibility. In
the third quarter of fiscal 2007, we identified an additional prior period misstatement, which was
also determined not to be material to prior periods under the Company’s historically accepted
methodology of assessing misstatements. This item related to the failure to properly eliminate the
cumulative translation adjustment balance of a disposed entity upon its sale.
These misstatements will be reassessed according to the provisions of SAB No. 108 at the time of
adoption at the end of fiscal 2007. As part of that assessment under SAB No. 108, and based upon
our current quantification of the misstatements, the corrections will be recorded as
39
adjustments to the opening balance of retained earnings as the effect of correcting the
misstatements is considered to be material to current year income. We currently expect the
reduction in beginning retained earnings associated with these corrections to approximate $16
million. There will be no effect on the Company’s Consolidated Statements of Income
In February of 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities”, which gives entities the option to measure eligible financial assets, and
financial liabilities at fair value. Its objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge accounting
provisions. If opted, the difference between carrying value and fair value at the election date is
recorded as a transition adjustment to opening retained earnings. SFAS No. 159 is effective as of
the beginning of a company’s first fiscal year after November 15, 2007, our fiscal year 2009. We
are evaluating the statement and have not yet determined the impact its adoption will have on our
consolidated financial statements.
40
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS
Our financial instruments expose us to interest rate risk. During the first nine-months of fiscal
2007 and throughout fiscal 2006, we had two interest rate swap agreements outstanding that
converted our fixed interest rate expense to a floating basis. The notional amount of the interest
rate swaps was $200 million at June 30, 2007 and September 30, 2006. The gains or losses arising
from the interest rate swap contracts offset gains or losses on the underlying assets or
liabilities and are recognized as offsetting adjustments to the carrying amounts. Our full
exposure to floating rate risk is reduced due to the fact that we had cash, cash equivalents, and
current investments of $146.1 million and $81.9 million on hand at June 30, 2007 and September 30,
2006, respectively. These holdings are exposed to floating rates as well, and therefore reduce our
total exposure to movements in rates. As of June 30, 2007, the interest rate swap contracts
reflected a cumulative loss of $3.8 million, compared to a cumulative loss of $4.3 million at
September 30, 2006.
In January 2006, we began using derivative instruments to manage our cash flow exposure from
changes in certain currency exchange rates. We operate the program pursuant to documented
corporate risk management policies and do not enter into derivative transactions for speculative
purposes.
Our currency risk consists primarily of foreign currency denominated firm commitments and
forecasted foreign currency denominated intercompany and third-party transactions. We had currency
derivative instruments outstanding in the contract amount of $9.5 million and $14.5 million at June
30, 2007 and September 30, 2006, and those derivative instruments were in a loss position of $0.5
million and in a gain position of $0.3 million, respectively. The maximum length of time over
which the Company has hedging transaction exposure is 12 months. Derivative gains/(losses),
initially reported as a component of other comprehensive income, are reclassified to earnings in
the period when the forecasted transaction affects earnings.
A 10 percent appreciation in the U.S. dollar’s value relative to the hedged currencies would
increase the derivative instruments’ fair value by $0.9 million. A 10 percent depreciation in the
U.S. dollar’s value relative to the hedged currencies would decrease the derivative instruments’
fair value by $1.1 million. Any increase or decrease in the fair value of our currency derivative
instruments would be substantially offset by a corresponding decrease or increase in the fair value
of the hedged underlying asset, liability or cash flow.
Item 4. CONTROLS AND PROCEDURES
Our management, with the participation of our President and Chief Executive Officer and our Senior
Vice President and Chief Financial Officer (the “Certifying Officers”), has evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of the end of the period covered by this report. Based upon that evaluation, the
Certifying Officers concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report for the information required to be disclosed in the
reports we file or submit under the Exchange Act to be recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and for such information to be
accumulated and communicated to management as appropriate to allow timely decisions regarding
required disclosure. There were no changes in our internal control over financial reporting during
the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
41
PART II — OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The previously disclosed purported class action antitrust lawsuit (“FCA Action”) filed by a
non-profit entity called Funeral Consumers Alliance, Inc. (“FCA”) and several individual consumers
against three national funeral home businesses, Service Corporation International (“SCI”),
Alderwoods Group, Inc. (“Alderwoods”), and Stewart Enterprises, Inc. (“Stewart”) together with
Hillenbrand and Batesville, is pending in the United States District Court for the Southern
District of Texas (Houston, Texas) (“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,” that is, third-party casket sellers unaffiliated with licensed
funeral homes; 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, the other defendants and others to exclude
“independent casket discounters” and that 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 FCA Action alleges that two of Batesville’s competitors,
York Group, Inc. and Aurora Casket Company, are co-conspirators but did not name them as
defendants. The FCA Action 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.
On October 26, 2006 a new purported class action was filed by additional consumer plaintiffs
against Batesville and Hillenbrand in the Western District of Oklahoma alleging violation of the
antitrust laws in fourteen states based on allegations that Batesville engaged in conduct designed
to foreclose competition and gain a monopoly position in an alleged market for the sale of caskets.
This lawsuit is largely based on similar factual allegations to the FCA Action. 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. The Company has had this case transferred to the Southern District of Texas in order to
coordinate this action with the FCA Action, and has filed a motion to dismiss this action. To
date, other purported consumer class actions that had been filed in the wake of the FCA Action have
either been consolidated into the FCA Action or dismissed.
The FCA plaintiffs are seeking certification of a class that includes all United States consumers
who purchased Batesville caskets from any of the funeral home co-defendants at any time during the
fullest period permitted by the applicable statute of limitations.
In addition, the previously disclosed purported class action lawsuit (the “Pioneer Valley Action”)
against Batesville, Hillenbrand, SCI, Alderwoods, and Stewart, filed by Pioneer Valley Casket Co.
(“Pioneer Valley”), an alleged casket store and Internet retailer, and three other current or
former “independent casket distributors,” seeking to represent a purported class of “independent
casket distributors,” is pending in the Southern District of Texas. The Pioneer Valley Action has
not been consolidated with the FCA Action, although the scheduling orders for both cases are
identical. The Pioneer Valley Action alleges 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. However, this case does not include causes of actions for alleged price
fixing, conspiracy to monopolize, and violations of state antitrust law and state unfair and
deceptive practices laws alleged in the FCA Action. Pioneer Valley claims 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 an alleged conspiracy among SCI,
Alderwoods, Stewart and other unnamed co-conspirators to monopolize the alleged market for caskets.
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.
42
Class certification hearings in the FCA Action and the Pioneer Valley Action were held in early
December 2006 and post-hearing briefing on the plaintiffs’ class certification motions in both
cases was completed in March 2007, but the Court has not yet ruled on the motions. Trials in the
FCA and Pioneer Valley Actions are scheduled to begin on or about February 4, 2008, but could be
delayed if the Court’s rulings on class certification are appealed by the plaintiffs or defendants
in either case, or for other reasons.
Plaintiffs in the consumer cases and the Pioneer Valley Action generally seek monetary damages,
trebling of any such damages that may be awarded, recovery of attorneys’ fees and costs, and
injunctive relief. The plaintiffs in the FCA Action filed a report indicating that they are
seeking damages ranging from approximately $947 million to approximately $1.46 billion before
trebling. Additionally, the Pioneer Valley plaintiffs filed a report indicating that they are
seeking damages of approximately $99.2 million before trebling. Because Batesville continues to
adhere to its long-standing policy of selling Batesville caskets only to licensed funeral homes, a
policy that it continues to believe is appropriate and lawful, if the case goes to trial the
plaintiffs are likely to claim additional alleged damages for the periods between their reports and
the time of trial. At this point, it is not possible to estimate the amount of any additional
alleged damage claims that they may make. The defendants are vigorously contesting both liability
and the plaintiff’s damages theories.
If a class is certified in any of the antitrust cases filed against Hillenbrand and Batesville and
if the 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. In antitrust actions such as the FCA and Pioneer Valley Actions the
plaintiffs may elect to enforce any judgment against any or all of the codefendants, who have no
contribution rights against each other.
We believe we have meritorious defenses to class certification and to plaintiffs’ underlying
allegations and damage theories and we will continue to assert those defenses vigorously in all of these
cases. In accordance with applicable accounting standards, we have not established a loss reserve
for any of these cases.
Item 1A. RISK FACTORS
For information regarding the risks we face, see the discussion under “Item 1A. Risk Factors” in
our Annual Report on Form 10-K for the year ended September 30, 2006. There have been no material
changes to the risk factors described in that report.
43
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
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Total Number of |
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Maximum |
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Shares |
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Number of |
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Purchased as |
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Shares that May |
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Total |
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Part of Publicly |
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Yet Be |
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Number |
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Announced |
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Purchased |
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of Shares |
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Average Price |
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Plans or |
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Under the Plans |
Period |
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Purchased 1 |
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Paid per Share |
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Programs 2 |
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or Programs |
April 1, 2007 - April 30, 2007 |
|
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— |
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|
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— |
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|
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— |
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3,000,000 |
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May 1, 2007 - May 31, 2007 |
|
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— |
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|
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— |
|
|
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— |
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|
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3,000,000 |
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June 1, 2007 - June 30, 2007 |
|
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77 |
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|
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66.75 |
|
|
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— |
|
|
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3,000,000 |
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Total |
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77 |
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|
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66.75 |
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|
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— |
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3,000,000 |
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1 |
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All shares purchased in the three-months ended June 30, 2007 were in connection with
employee payroll tax withholding for restricted and deferred stock distributions. |
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2 |
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In January 2000, the Board of Directors approved the repurchase of a total of 24,289,067
shares of common stock of which 1,578,400 shares remained available as of September 30, 2006.
Effective October 26, 2006, the Board of Directors authorized the repurchase of an additional
1,421,600 shares, bringing the total available for repurchase to 3,000,000 shares. However,
there were no purchases under this approval in the nine-months ended June 30, 2007. The
approval has no expiration, and there were no terminations or expirations of plans in the
current quarter. |
44
Item 6. EXHIBITS
A. Exhibits
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Exhibit 10.1
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Amendment to the Hillenbrand Industries, Inc. Stock Incentive Plan dated July
12, 2007 |
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Exhibit 31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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Exhibit 31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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Exhibit 32.1
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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 |
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Exhibit 32.2
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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
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.
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HILLENBRAND INDUSTRIES, INC. |
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DATE: August 9, 2007
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BY:
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/S/ Gregory N. Miller |
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Gregory N. Miller |
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Senior Vice President and |
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Chief Financial Officer |
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DATE: August 9, 2007
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BY:
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/S/ Richard G. Keller |
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Richard G. Keller |
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Vice President, Controller |
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and Chief Accounting Officer |
46