10-Q 1 c57794e10-q.txt QUARTERLY REPORT 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2000 COMMISSION FILE NO. 1-6651 HILLENBRAND INDUSTRIES, INC. (Exact name of registrant as specified in its charter) INDIANA 35-1160484 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 STATE ROUTE 46 EAST BATESVILLE, INDIANA 47006-8835 (Address of principal executive offices) (Zip Code) (812) 934-7000 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. Yes X No ---------- ---------- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, without par value - 62,502,100 as of October 2, 2000. ================================================================================ 1 2 HILLENBRAND INDUSTRIES, INC. INDEX TO FORM 10-Q Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (Unaudited) Statements of Consolidated Income 3 for the Three Months And Nine Months Ended 8/26/00 and 8/28/99 Condensed Consolidated Balance Sheets at 4 8/26/00 and 11/27/99 Condensed Statements of Consolidated Cash Flows 5 for the Nine Months Ended 8/26/00 and 8/28/99 Notes to Condensed Consolidated Financial Statements 6-12 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13-19 PART II - OTHER INFORMATION Item 5 - Other Information 19 Item 6 - Exhibits and Reports on Form 8-K 19 SIGNATURES 20 2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Hillenbrand Industries, Inc. and Subsidiaries Statements of Consolidated Income
Three Months Ended Nine Months Ended -------------------- -------------------- 08/26/00 08/28/99 08/26/00 08/28/99 -------- -------- -------- -------- (In Millions Except Per Share Data) Net revenues: Health Care sales ................. $ 182 $ 178 $ 542 $ 547 Health Care rentals ............... 79 76 240 256 Funeral Services sales ............ 138 137 454 455 Insurance revenues ................ 93 90 273 263 -------- -------- -------- -------- Total revenues .................... 492 481 1,509 1,521 Cost of revenues: Health Care cost of goods sold .... 100 108 304 321 Health Care rental expenses ....... 55 60 168 181 Funeral Services cost of goods sold 72 73 233 235 Insurance cost of revenue ......... 73 65 224 201 -------- -------- -------- -------- Total cost of revenues ............ 300 306 929 938 Gross profit ........................... 192 175 580 583 Other operating expenses ............... 141 132 414 396 Unusual charges (expense), net (Note 6) 1 (1) 3 (11) -------- -------- -------- -------- Operating profit ....................... 52 42 169 176 Interest expense ....................... (7) (7) (20) (20) Investment income ...................... 8 3 17 10 Other income (expense), net ............ (1) (1) (1) (3) -------- -------- -------- -------- Income before income taxes ............. 52 37 165 163 Income taxes ........................... 18 14 59 60 -------- -------- -------- -------- Net income ............................. $ 34 $ 23 $ 106 $ 103 ======== ======== ======== ======== Basic and diluted earnings per common share (Note 3) ............ $ .54 $ .35 $ 1.68 $ 1.55 ======== ======== ======== ======== Dividends per common share ............. $ .20 $ .195 $ .60 $ .585 ======== ======== ======== ======== Average shares outstanding (thousands).. 62,758 66,395 62,966 66,616 ======== ======== ======== ======== See Notes to Condensed Consolidated Financial Statements
3 4 Hillenbrand Industries, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
ASSETS 08/26/00 11/27/99 -------- -------- (In Millions) Current assets: Cash, cash equivalents and short-term investments.......... $ 208 $ 170 Trade receivables.......................................... 358 413 Inventories................................................ 116 113 Other...................................................... 91 86 ------- ------- Total current assets...................................... 773 782 Equipment leased to others, net.............................. 67 69 Property, net................................................ 200 198 Other assets: Intangible assets, net..................................... 182 192 Other...................................................... 97 101 ------- ------- Total other assets........................................ 279 293 Insurance assets: Investments................................................ 2,406 2,311 Deferred policy acquisition costs.......................... 623 584 Deferred income taxes...................................... 97 79 Other...................................................... 119 117 ------- ------- Total insurance assets.................................... 3,245 3,091 ------- ------- Total assets................................................. $ 4,564 $ 4,433 ======= ======= LIABILITIES Current liabilities: Short-term debt............................................ $ 56 $ 52 Trade accounts payable..................................... 59 80 Other...................................................... 220 239 ------- ------- Total current liabilities................................. 335 371 Other liabilities: Long-term debt............................................. 303 302 Other long-term liabilities................................ 67 68 Deferred income taxes...................................... - 3 ------- ------- Total other liabilities................................... 370 373 Insurance liabilities: Benefit reserves........................................... 2,230 2,092 Unearned revenue........................................... 749 719 Other...................................................... 57 40 ------- ------- Total insurance liabilities............................... 3,036 2,851 ------- ------- Total liabilities............................................ 3,741 3,595 ------- ------- Commitments and contingencies (Note 5) SHAREHOLDERS' EQUITY Common stock............................................... 4 4 Additional paid-in capital................................. 22 24 Retained earnings.......................................... 1,361 1,293 Accumulated other comprehensive income (loss) (Note 4)..... (83) (38) Treasury stock............................................. (481) (445) ------- ------- Total shareholders' equity................................... 823 838 ------- ------- Total liabilities and shareholders' equity........................................ $ 4,564 $ 4,433 ======= =======
See Notes to Condensed Consolidated Financial Statements 4 5 Hillenbrand Industries, Inc. and Subsidiaries Condensed Statements of Consolidated Cash Flows Nine Months Ended 08/26/00 08/28/99 -------- -------- (In Millions) Net income ......................................... $ 106 $ 103 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization .................... 67 71 Change in noncurrent deferred income taxes ....... 1 (3) Change in net working capital excluding cash, current debt and acquisitions .................. 6 (44) Change in insurance items: Deferred policy acquisition costs ............... (39) (34) Other insurance items, net ...................... 86 74 Other, net ....................................... 1 (40) ----- ----- Net cash provided by operating activities ............ 228 127 ----- ----- Investing activities: Capital expenditures ............................... (70) (66) Proceeds on disposal of fixed assets and equipment leased to others ....................... 7 1 Acquisition of businesses, net of cash acquired .... -- (54) Other investments .................................. (1) (4) Insurance investments: Purchases ........................................ (482) (640) Proceeds on maturities ........................... 101 144 Proceeds on sales ................................ 230 386 ----- ----- Net cash used in investing activities ................ (215) (233) ----- ----- Financing activities: Additions to debt, net ............................. 11 3 Payment of cash dividends .......................... (38) (39) Treasury stock acquisitions ........................ (37) (47) Insurance deposits received ........................ 280 266 Insurance benefits paid ............................ (189) (175) ----- ----- Net cash provided by financing activities ............ 27 8 ----- ----- Effect of exchange rate changes on cash .............. (2) (1) ----- ----- Total cash flows ..................................... 38 (99) Cash, cash equivalents and short-term investments: At beginning of period .............................. 170 297 ----- ----- At end of period .................................... $ 208 $ 198 ===== ===== See Notes to Condensed Consolidated Financial Statements 5 6 Hillenbrand Industries, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Dollars in millions except per share data) 1. Basis of Presentation The unaudited, condensed consolidated financial statements appearing in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The statements herein have been prepared in accordance with the Company's understanding of the instructions to Form 10-Q. In the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows, for the interim periods. Certain prior year amounts have been reclassified to conform to the current year's presentation. 2. Supplementary Balance Sheet Information The following information pertains to non-insurance assets and consolidated shareholders' equity:
08/26/00 11/27/99 -------- -------- Allowance for possible losses and discounts on trade receivables............. $ 56 $ 54 Inventories Finished Products.......................... $ 77 $ 67 Work in Process............................ 27 31 Raw Materials.............................. 12 15 ----- ----- Total Inventory.......................... $ 116 $ 113 ===== ===== Accumulated depreciation of equipment leased to others and property.............. $599 $588 Accumulated amortization of intangible assets..................................... $105 $100 Capital Stock: Preferred stock, without par value: Authorized 1,000,000 shares; Shares issued...................... None None Common stock, without par value: Authorized 199,000,000 shares; Shares issued...................... 80,323,912 80,323,912
6 7 3. Earnings per Common Share Basic earnings per common share were computed by dividing net income by the average number of common shares outstanding including the effect of deferred vested shares under the Company's Senior Executive Compensation Program. Diluted earnings per common share were computed consistent with the basic earnings per share calculation including the effect of dilutive potential common shares. Potential common shares arising from shares awarded under the Company's various stock-based compensation plans, including the 1996 Stock Option Plan, did not have a material effect on diluted earnings per common share in any of the periods presented. Cumulative treasury stock acquired, less cumulative shares reissued, have been excluded in determining the average number of shares outstanding. Earnings per share is calculated as follows:
Three Months Ended Nine Months Ended 08/26/00 08/28/99 08/26/00 08/28/99 -------- -------- -------- -------- Net income (in thousands) $33,752 $23,258 $105,542 $103,061 Average shares outstanding 62,757,736 66,395,139 62,966,342 66,616,353 Basic and diluted earnings per common share $.54 $.35 $1.68 $1.55
4. Comprehensive Income (Loss) As of November 29, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". The adoption of this Standard did not affect the Company's financial position or results of operations. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in accumulated other comprehensive income (loss). The components of comprehensive income (loss) are as follows (in millions): Three Months Ended Nine Months Ended 08/26/00 08/28/99 08/26/00 08/28/99 -------- -------- -------- -------- Net income ..................... $ 34 $ 23 $ 106 $ 103 Net change in unrealized gain (loss) on available-for-sale securities ................. 44 (17) (41) (84) Foreign currency translation adjustment ................. 2 (6) (4) (1) ----- ----- ----- ----- Comprehensive income (loss) .... $ 80 $ -- $ 61 $ 18 ===== ===== ===== ===== 7 8 The composition of accumulated other comprehensive income (loss) at August 26, 2000 and November 27, 1999 is the cumulative adjustment for unrealized gains or losses on available-for-sale securities of ($71) and ($30) million, respectively, and the foreign currency translation adjustment of ($12) and ($8) million, respectively. 5. Contingencies As discussed under Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended November 27, 1999, Hillenbrand Industries, Inc., and its subsidiary Hill-Rom Company, Inc. (Hill-Rom), are the subject of an antitrust suit brought by Kinetic Concepts, Inc. (KCI) in the health care equipment market. The plaintiff seeks monetary damages totaling in excess of $269 million, trebling of any damages that may be allowed by the court, and injunctions to prevent further alleged unlawful activities. The Company believes that the claims are without merit and is aggressively defending itself against all allegations. Accordingly, it has not recorded any loss provision relative to damages sought by the plaintiffs. There was no material change in the status of this litigation during the quarter ended August 26, 2000. On November 20, 1996, the Company filed a Counterclaim to the above action against KCI in the U.S. District Court in San Antonio, Texas. The Counterclaim alleges that KCI has attempted to monopolize the therapeutic bed market and to interfere with the Company's and Hill-Rom's business relationships by conducting a campaign of anticompetitive conduct. It further alleges that KCI abused the legal process for its own advantage, interfered with existing Hill-Rom contractual relationships, interfered with Hill-Rom's prospective contractual and business relationships, commercially disparaged the Company and Hill-Rom by uttering and publishing false statements to customers and prospective customers urging them not to do business with the Company and Hill-Rom, and committed libel and slander in statements made both orally and published by KCI that the Company and Hill-Rom were providing illegal discounts. The Company alleges that KCI's intent is to eliminate legal competitive marketplace activity. There was no material change in the status of this litigation during the quarter ended August 26, 2000. The Company has voluntarily entered into remediation agreements with environmental authorities, and has been issued Notices of Violation alleging violations of certain permit conditions. Accordingly, the Company is in the process of implementing plans of abatement in compliance with agreements and regulations. The Company has also been notified as a potentially responsible party in investigations of certain offsite disposal facilities. The cost of all plans of abatement and waste site cleanups in which the Company is currently involved is not expected to exceed $5 million. The Company has provided adequate reserves in its financial statements for these matters. These reserves have been determined without consideration of possible loss recoveries from third parties. Changes in environmental law might affect the Company's future operations, capital expenditures and earnings. The cost of complying with these provisions, if any, is not known. 8 9 The Company is subject to various other claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, antitrust, product liability, safety, health, taxes, environmental and other matters. Management believes that the ultimate liability, if any, in excess of amounts already provided or covered by insurance, is not likely to have a material adverse effect on the Company's financial condition, results of operations or cash flows. 6. Unusual Charges In November 1999, the Company announced a plan to reduce the future operating cost structure at Hill-Rom, to write-down the value of certain impaired assets and to recognize a liability associated with the estimated cost of a field corrective action for a previously acquired product line. The total estimated cost of these actions necessitated an unusual charge of $29 million in the fourth quarter of 1999. The cash component of this charge was $19 million. Included in the cost-cutting actions announced at Hill-Rom is the reduction of 350 employees, most of which are administrative personnel, in the United States and Europe and the closure of select manufacturing and sales, service/distribution facilities in the United States and Europe to eliminate redundant operations. Estimated costs for the work force and facility closure actions were $8 million and $3 million, respectively. The unusual charge also included a total of $10 million relative to asset impairments of a small Hill-Rom investment in a non-core business currently being liquidated and the write-off of goodwill and other strategic investments which were significantly underperforming original expectations or had essentially discontinued operations. The remaining component of the 1999 fourth quarter unusual charge related to an $8 million field corrective action to be taken relative to a previously acquired product line. As of August 26, 2000, approximately $6 million in work force reduction costs, $1 million in facility closure costs and $2 million related to the field corrective action have been incurred. The Company expects substantially all employee related costs to be completed within the next three months. The facility closures and field corrective actions are also expected to occur on a similar timeline, but could take longer. In March 1999, Batesville Casket announced the planned closing of its Campbellsville, Kentucky casket manufacturing plant. Approximately 200 production and administrative employees were affected and the closure necessitated a $9 million unusual charge in the second quarter of 1999. Production of Campbellsville casket units was transferred to existing plants located in Batesville, Indiana and Manchester, Tennessee. 9 10 Manufacturing operations were discontinued at the plant and production successfully relocated in the second quarter of 1999. All severance and employee benefit costs and estimated plant closing costs have been incurred, with no adjustments being made to such reserves. The Company is continuing to work to dispose of the property and plant. In August 1998, the Company approved a plan to restructure Hill-Rom's operations in Germany and Austria. This plan resulted in the closure of all manufacturing facilities in Germany and Austria, whose markets will now be served with products from other existing operations. The plan necessitated the provision of a $70 million asset impairment and restructuring charge in 1998. The non-cash component of the charge included $53 million for the write-off of German subsidiary goodwill, the write-down of property, plant and equipment held for sale and obsolete inventory resulting from the realignment of operations. The plan also included additional charges for severance and employee benefit costs of $10 million and other estimated plant closing costs of $7 million. Manufacturing operations were discontinued in Germany and Austria by the second quarter of 1999. All severance and employee benefit costs and $5 million in other plant closing costs have been incurred. In the third quarter of 2000 and the fourth quarter of 1999, approximately $1 million and $2 million of the provisions for severance and employee benefits and other plant closing costs, respectively, were reversed to income within the Unusual charges line of the Statement of Consolidated Income as actual costs were less than originally estimated. The disposition of excess and discontinued inventories and production equipment from the German and Austrian facilities is complete, and the facility in Austria was sold in December 1999 for a gain of $2 million. This is reflected within the Unusual charges line of the Statement of Consolidated Income. The disposition of the plant in Germany is targeted to be completed by the end of fiscal 2000, but could take longer. In addition to costs accrued under the above outlined plans, approximately $2 million of incremental costs related to the closure of manufacturing facilities in Germany, Austria and Campbellsville, Kentucky were incurred through the third quarter of 1999. These incremental costs include expenses such as travel, employee relocation and the relocation of certain manufacturing and business processes. These costs were expensed as incurred as required by generally accepted accounting principles and are included within the Unusual charges line of the Statement of Consolidated Income as such incremental costs were incurred directly in conjunction with the execution of the respective plans. The reserve balances for the above plans included in other current liabilities approximated $10 million and $21 million as of August 26, 2000 and November 27, 1999, respectively. 10 11 7. Segment Reporting Effective November 27, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes previously issued segment reporting disclosure rules and requires reporting of segment information that is consistent with the way in which management operates and views the Company. The adoption of SFAS No. 131 did not affect the Company's financial position or results of operations. In analyzing segment performance, the Company's management reviews 1) income before income taxes, unusual items, and capital charges and 2) segment income (income before income taxes and unusual items). The capital charge is an estimate of the cost of capital a segment would incur if not a part of Hillenbrand Industries. Based on criteria established in SFAS No. 131, the Company's reporting segments are Health Care (Hill-Rom), Funeral Services Products (Batesville Casket Company - Batesville) and Funeral Services Insurance (Forethought Financial Services - Forethought). Corporate, while not a segment, is presented separately to aid in the reconciliation of segment information to that reported in the Statements of Consolidated Income. Financial information regarding the Company's reportable segments is presented below:
------------------------------------------------------------------------------------------------------------- Funeral Services Corporate Health ---------------- and Other Care Products Insurance Expense Consolidated -------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED AUGUST 26, 2000 -------------------------------------------------------------------------------------------------------------- Net revenues $ 261 $ 138 $ 93 $ - $ 492 Income before income taxes, unusual items and capital charges $ 25 $ 31 $ 12 $ (17) $ 51 Capital charges (11) (5) - 16 - ----------------------------------------------------------------------- Segment income $ 14 $ 26 $ 12 $ (1) $ 51 Unusual items (a) $ 1 $ - $ - $ - 1 ------------- Income before income taxes $ 52 -------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED AUGUST 28, 1999 -------------------------------------------------------------------------------------------------------------- Net revenues $ 254 $ 137 $ 90 $ - $ 481 Income before income taxes, unusual items and capital charges $ 2 $ 28 $ 15 $ (7) $ 38 Capital charges (13) (4) - 17 - ----------------------------------------------------------------------- Segment income $ (11) $ 24 $ 15 $ 10 $ 38 Unusual items (b) $ (1) $ - $ - $ - (1) ------------- Income before income taxes $ 37 --------------------------------------------------------------------------------------------------------------
11 12
--------------------------------------------------------------------------------------------------------------- Funeral Services Corporate Health ---------------- and Other Care Products Insurance Expense Consolidated --------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED AUGUST 26, 2000 --------------------------------------------------------------------------------------------------------------- Net revenues $ 782 $ 454 $ 273 $ - $ 1,509 Income before income taxes, unusual items and capital charges $ 71 $ 107 $ 24 $ (40) $ 162 Capital charges (34) (14) - 48 - ------------------------------------------------------------------------- Segment income $ 37 $ 93 $ 24 $ 8 $ 162 Unusual items (a) $ 3 $ - $ - $ - 3 --------------- Income before income taxes $ 165 --------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED AUGUST 28, 1999 --------------------------------------------------------------------------------------------------------------- Net revenues $ 803 $ 455 $ 263 $ - $ 1,521 Income before income taxes, unusual items and capital charges $ 60 $ 106 $ 36 $ (28) $ 174 Capital charges (36) (13) - 49 - ------------------------------------------------------------------------- Segment income $ 24 $ 93 $ 36 $ 21 $ 174 Unusual items (b) $ (2) $ (9) $ - $ - (11) --------------- Income before income taxes $ 163 ---------------------------------------------------------------------------------------------------------------
(a) Health Care reflects a gain on the sale of a facility in Austria in the first quarter of 2000 and the partial reversal of a provision for severance and employee benefits in the third quarter of 2000 both related to the 1998 plan to discontinue manufacturing operations in Germany and Austria. (b) Health Care reflects incremental costs incurred related to the plan to discontinue manufacturing operations in Germany and Austria. Funeral Services Products mainly reflects a charge for the closure of a manufacturing facility. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Hillenbrand Industries is organized into two business groups. The Health Care Group, which is considered one reporting segment, consists of Hill-Rom. The Funeral Services Group consists of two reporting segments, Funeral Services Products (Batesville Casket Company - Batesville) and Funeral Services Insurance (Forethought Financial Services - Forethought). THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999 Consolidated revenues of $492 million increased $11 million, or 2%, compared to the third quarter of 1999. Operating profit also increased 24%, or $10 million, to $52 million. Net income of $34 million increased 48%, or $11 million, compared to $23 million for the third quarter of 1999, and earnings per share increased 54% to $.54 compared to $.35 in 1999. Excluding 1999 and 2000 unusual items, primarily related to the closure of manufacturing facilities, earnings per share would have increased 51%. Health Care sales increased $4 million, or 2%, to $182 million in the third quarter, primarily due to increased shipments in the European and U.S. export markets partially offset by the negative impact of currency fluctuations and slightly lower shipments to acute care, long-term care and home care customers. European Health Care sales increased nearly 8% while acute care sales decreased by less than 1%. Health Care rental revenues were up $3 million, or 4%, to $79 million compared to the third quarter of 1999. The growth in rental revenues is mainly due to higher units in use in the acute care and home care markets partially offset by decreased revenue in Europe and decreased revenue in the home care market due to continued lower Medicare reimbursement experience. U.S. long-term care revenues increased slightly as there was a small improvement in rate and mix compared to the third quarter of 1999. Overall, acute care revenues increased 11% and home care revenues decreased 19%. Funeral Services sales increased $1 million, or 1%, to $138 million for the third quarter mostly due to an improvement in the mix of product sold partially offset by decreased volume. Insurance revenues of $93 million increased $3 million, or 3%, compared to $90 million in 1999 despite $8 million less in capital gains in the third quarter of 2000 compared to 1999. Excluding capital gains, insurance revenues would have increased approximately 13% for the quarter. Both investment income and earned premiums continue to experience double-digit percentage increases due to the increased size of the investment portfolio and increased policies in-force year over year. 13 14 Gross profit on Health Care sales of $82 million was a $12 million, or 17%, increase over the third quarter of 1999. As a percentage of sales, Health Care sales gross profit increased from 39.3% to 45.1% for the quarter mainly due to productivity and cost improvements associated with previously announced plans and decreases in warranty costs and inventory provisions compared to the third quarter of 1999. Gross profit on rental revenues increased $8 million, or 50%, to $24 million compared to 1999 and as a percentage of sales improved from 21.1% to 30.4%. This increase was due to higher volume and productivity improvements in acute care and home care and a slight improvement in the mix and rate in long-term care partially offset by continued lower Medicare reimbursement experience in the home care market. Funeral Services sales gross profit was up $2 million, or 3%, to $66 million even though revenues were only up $1 million. As a percentage of sales, Funeral Services gross profit was 47.8% compared to 46.7% in the third quarter of 1999 and was mainly due to productivity improvements resulting from the closing of the Campbellsville facility in 1999. Funeral Services insurance operating profit decreased $3 million to $12 million compared to the third quarter of 1999. Excluding the $8 million reduction in capital gains compared to 1999, operating profit would have increased $5 million. This increase is due to an increased volume of policies and productivity improvements. Other operating expenses (including insurance operations) increased 7% to $141 million and as a percentage of revenues was 28.7% compared to 27.4% in 1999. This increase is a result of company-wide investments in new business development opportunities and higher levels of incentive compensation accompanying increased profitability. Interest expense and other income (expense), net were comparable to the prior year while investment income increased $5 million due to higher money market rates, increased interest on receivables and the previously anticipated partial sale of an investment. The effective income tax rate was 35.5% in the third quarter of 2000 compared to 36.2% in 1999. The decrease in the tax rate was primarily due to tax initiatives undertaken by the Company. NINE MONTHS 2000 COMPARED TO NINE MONTHS 1999 Except as noted below, the factors affecting the third quarter comparisons also affected the year-to-date comparison. Consolidated revenues of $1,509 million decreased 1%, or $12 million, in the first nine months of 2000 compared to 1999. Operating profit was down $7 million, or 4%, to $169 million. Net income of $106 million is up $3 million, or 3%, compared to 1999, and earnings per share increased 8%, or $.13, to $1.68. 14 15 Results for the first nine months of 2000 include a $2 million gain on the sale of a facility in Austria which was closed and sold under the August 1998 plan to discontinue operations in Germany and Austria and the reversal of approximately $1 million of severance and employee benefit costs related to this same plan due to actual costs being less than original estimates. This gain and reversal are included in the Unusual charges line of the Statement of Consolidated Income. 1999 results include a $9 million charge related to the closing of a casket manufacturing plant in Campbellsville, Kentucky and $2 million related to incremental costs associated with the discontinuance of manufacturing operations at facilities in Germany, Austria and Campbellsville, Kentucky. Excluding the unusual items mentioned above, operating profit decreased 11% and earnings per share declined approximately 1% in the first nine months of 2000 compared to 1999. Health Care sales declined $5 million, or 1%, to $542 million compared to $547 million in 1999 mainly due to decreases in long-term care and export sales and the negative impact of currency fluctuations partially offset by increases in acute care, home care and Europe. European sales, excluding currency fluctuations, increased nearly 26% in the first nine months of 2000 compared to last year. Health Care rental revenues of $240 million were down $16 million, or 6%. This decrease is due to declines in home care, long-term care and Europe slightly offset by an increase in acute care. Long-term care has experienced declines in the first nine months of 2000 in rates and volume due to previous changes in Medicare Part A patient reimbursement practices. Home care has experienced the largest decline due to lower Medicare reimbursement experience despite a higher volume of products rented. Funeral Services sales is relatively flat in the first nine months at $454 million, down $1 million. This is due to a decrease in volume believed to be due to a slight decrease in the death rate. Funeral Services insurance revenues of $273 million is up $10 million, or 4%, despite $23 million less in capital gains in 2000 compared to 1999. Excluding the impact of capital gains in 2000 and 1999, insurance revenues would have increased approximately $33 million, or 14%. Investment income and earned premiums increased at double-digit rates. Consolidated gross profit of $580 million, decreased $3 million, or 1%. Gross profit on Health Care sales increased $12 million, or 5%, to $238 million, and as a percentage of sales increased from 41.3% to 43.9%. Health Care rental revenue gross profit declined $3 million, or 4%, to $72 million. As a percentage of sales, rental revenue was 30.0% compared to 29.3% in 1999. Gross profit on Funeral Services sales increased to $221 million, $1 million greater than 1999. As a percentage of sales, gross profit on Funeral Services sales was 48.7% compared to 48.4% in 1999. Insurance operating profit of $24 million decreased $12 million compared to 1999 due to $23 million less in capital gains. Excluding 2000 and 1999 capital gains, insurance operating profit increased $11 million, or 97%. Other operating expenses (including insurance operations) grew by $18 million, or 5%, to $414 million. As a percentage of sales other operating expenses increased from 26.0% to 27.4%. 15 16 Investment income increased $7 million due to higher money market rates, increased interest on receivables and the previously anticipated partial sale of an investment. The effective income tax rate was 36.1% in 2000 compared to 36.7% in 1999. The decrease in the tax rate was primarily due to tax initiatives undertaken by the Company. LIQUIDITY AND CAPITAL RESOURCES Net cash flows from operating activities and selected borrowings represent the Company's primary sources of funds for growth of the business, including capital expenditures and acquisitions. Cash, cash equivalents and short-term investments (excluding investments of insurance operations) at August 26, 2000 increased $38 million to $208 million compared to November 27, 1999. Net cash generated from operating activities of $228 million increased $101 million due to good working capital management and the payment of a loan by the Company of approximately $44 million in 1999 related to its Company Owned Life Insurance (COLI) program. A $54 million decrease in accounts receivable was partially offset by increases in inventory and other current assets and decreases in trade accounts payable and other current liabilities. The decrease in accounts receivable is due to a company-wide effort to decrease days sales outstanding and lower reimbursement experience on rental products. The decrease in accounts payable is due to payments made in fiscal 2000 on accrued operating expenses which were higher at year-end due to heavy production levels. Net cash used in investing activities decreased $18 million primarily due to 1999 acquisition activities. In financing activities, treasury stock acquisitions of $37 million consisted of purchases on the open market. The addition to debt was primarily related to debt denominated in a foreign currency. ACCOUNTING STANDARDS The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998. This Standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires that all derivatives be recognized on the balance sheet at fair value. Changes in fair values of derivatives will be accounted for based upon their intended use and designation. Adoption of this Standard is not expected to have a material effect on the Company's consolidated financial statements. The Company is required to adopt the Standard not later than the first quarter of fiscal 2001. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial Statements". The Company is currently studying the impact of adopting SAB No. 101, as amended, which is required to be adopted no later than the fourth quarter of fiscal 2001. No estimate of its possible effect is currently available. 16 17 UNUSUAL CHARGES In November 1999, the Company announced a plan to reduce the future operating cost structure at Hill-Rom, to write-down the value of certain impaired assets and to recognize a liability associated with the estimated cost of a field corrective action for a previously acquired product line. The total estimated cost of these actions necessitated an unusual charge of $29 million in the fourth quarter of 1999. The cash component of this charge was $19 million. Included in the cost-cutting actions announced at Hill-Rom is the reduction of 350 employees, most of which are administrative personnel, in the United States and Europe and the closure of select manufacturing and sales, service/distribution facilities in the United States and Europe to eliminate redundant operations. Estimated costs for the work force and facility closure actions were $8 million and $3 million, respectively. The unusual charge also included a total of $10 million relative to asset impairments of a small Hill-Rom investment in a non-core business currently being liquidated and the write-off of goodwill and other strategic investments which were significantly underperforming original expectations or had essentially discontinued operations. The remaining component of the 1999 fourth quarter unusual charge related to an $8 million field corrective action to be taken relative to a previously acquired product line. As of August 26, 2000, approximately $6 million in work force reduction costs, $1 million in facility closure costs and $2 million related to the field corrective action have been incurred. The Company expects substantially all employee related costs to be completed within the next three months. The facility closures and field corrective actions are also expected to occur on a similar timeline, but could take longer. In March 1999, Batesville Casket announced the planned closing of its Campbellsville, Kentucky casket manufacturing plant. Approximately 200 production and administrative employees were affected and the closure necessitated a $9 million unusual charge in the second quarter of 1999. Production of Campbellsville casket units was transferred to existing plants located in Batesville, Indiana and Manchester, Tennessee. Manufacturing operations were discontinued at the plant and production successfully relocated in the second quarter of 1999. All severance and employee benefit costs and estimated plant closing costs have been incurred, with no adjustments being made to such reserves. The Company is continuing to work to dispose of the property and plant. In August 1998, the Company approved a plan to restructure Hill-Rom's operations in Germany and Austria. This plan resulted in the closure of all manufacturing facilities in Germany and Austria, whose markets will now be served with products from other existing operations. 17 18 The plan necessitated the provision of a $70 million asset impairment and restructuring charge in 1998. The non-cash component of the charge included $53 million for the write-off of German subsidiary goodwill, the write-down of property, plant and equipment held for sale and obsolete inventory resulting from the realignment of operations. The plan also included additional charges for severance and employee benefit costs of $10 million and other estimated plant closing costs of $7 million. Manufacturing operations were discontinued in Germany and Austria by the second quarter of 1999. All severance and employee benefit costs and $5 million in other plant closing costs have been incurred. In the third quarter of 2000 and the fourth quarter of 1999, approximately $1 million and $2 million of the provisions for severance and employee benefits and other plant closing costs, respectively, were reversed to income within the Unusual charges line of the Statement of Consolidated Income as actual costs were less than originally estimated. The disposition of excess and discontinued inventories and production equipment from the German and Austrian facilities is complete, and the facility in Austria was sold in December 1999 for a gain of $2 million. This is reflected within the Unusual charges line of the Statement of Consolidated Income. The disposition of the plant in Germany is targeted to be completed by the end of fiscal 2000, but could take longer. In addition to costs accrued under the above outlined plans, approximately $2 million of incremental costs related to the closure of manufacturing facilities in Germany, Austria and Campbellsville, Kentucky were incurred through the third quarter of 1999. These incremental costs include expenses such as travel, employee relocation and the relocation of certain manufacturing and business processes. These costs were expensed as incurred as required by generally accepted accounting principles and are included within the Unusual charges line of the Statement of Consolidated Income as such incremental costs were incurred directly in conjunction with the execution of the respective plans. The reserve balances for the above plans included in other current liabilities approximated $10 million and $21 million as of August 26, 2000 and November 27, 1999, respectively. FACTORS THAT MAY AFFECT FUTURE RESULTS Legislative changes phased in beginning July 1, 1998 have had and will continue to have a dampening effect on the Company's rental revenue derived from Medicare patients in the long-term care market. Cuts in Medicare funding mandated by the Balanced Budget Act of 1997 (BBA) have had and could continue to have an adverse effect on the Company's health care sales derived from the acute-care market. However, based on recent order patterns, the Company does believe the acute-care market is starting to adapt to these cuts in Medicare funding. 18 19 The Company is experiencing and may continue to experience pressure on reimbursement rates related to its home care rental business. The market for casketed deaths is expected to remain flat for the foreseeable future. The Company believes Batesville Casket has been able to increase its share of this market, as well as the growing cremation market, by providing innovative products and marketing programs for its funeral director customers. PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION This report contains certain forward-looking statements which are based on management's current views and assumptions regarding future events and financial performance. These statements are qualified by reference to "Disclosure Regarding Forward-Looking Statements" in Part II of the Company's Annual Report on Form 10-K for the fiscal year ended November 27, 1999 which lists important factors that could cause actual results to differ materially from those discussed in this report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits Exhibit 27 Financial Data Schedule B. Reports on Form 8-K There were no reports filed on Form 8-K during the third quarter ended August 26, 2000. 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HILLENBRAND INDUSTRIES, INC. DATE: October 4, 2000 BY: /S/ Donald G. Barger, Jr. ----------------------------------- Donald G. Barger, Jr. Vice President and Chief Financial Officer DATE: October 4, 2000 BY: /S/ James D. Van De Velde ----------------------------------- James D. Van De Velde Vice President and Controller 20