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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 27, 1994 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (812) 934-7000
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
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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 - 71,162,447 as of October 2, 1994.
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1
HILLENBRAND INDUSTRIES, INC.
INDEX TO FORM 10-Q
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Cash Flows for the Nine Months Exhibit 1
Ended 8/27/94 and 8/28/93
Consolidated Income for the Three Months Exhibit 1
and Nine Months Ended 8/27/94 and 8/28/93
Consolidated Balance Sheet, Exhibit 1
8/27/94 and 11/27/93
Supplementary Financial Information 3-4
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 4-8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 8
Item 6 - Exhibits and Reports on Form 8-K 8
SIGNATURES 9
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The following unaudited, condensed consolidated financial statements appear in
Exhibit 1 to this quarterly report on Form 10-Q which financial statements are
attached hereto and incorporated herein by reference:
Consolidated Balance Sheet, 8/27/94 and 11/27/93
Consolidated Income for the Three Months and Nine Months
Ended 8/27/94 and 8/28/93
Consolidated Cash Flows for the Nine Months
Ended 8/27/94 and 8/28/93
The unaudited, condensed consolidated financial statements appearing in
Exhibit 1 to this quarterly report on Form 10-Q, which are incorporated herein
by reference, 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
necessary to present fairly the financial position, results of operations, and
cash flows, for the interim periods.
Filed as part of this report:
Supplementary Balance Sheet Information
(Pertaining to non-insurance assets and consolidated shareholders' equity)
(Dollars in Thousands)
----------------------
8/27/94 11/27/93
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Allowance for possible losses and
discounts on trade receivables. . . . . . $ 10,708 $ 11,271
Accumulated depreciation of equipment
leased to others and property . . . . . . 501,987 460,443
Accumulated amortization of intangible
assets. . . . . . . . . . . . . . . . . . 130,436 119,258
3
8/27/94 11/27/93
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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
Supplementary Income Statement Information
Earnings per common share were computed by dividing net income by the average
number of common shares, including restricted shares issued to employees,
outstanding during each period (71,229,334 for the three months of 1994;
71,339,643 for the nine months of 1994; 71,295,830 for the three months of 1993;
and 71,455,179 for the nine months of 1993). Under a program begun in 1983, the
Company has acquired to date 10,584,817 shares of common stock of which
1,483,352 shares have been reissued for general corporate purposes. The
remaining treasury stock has been excluded in determining the average number of
shares outstanding during each period. Common share equivalents arising from
shares awarded under the Senior Executive Compensation Program which was
initiated in fiscal year 1978 have also been excluded from the computation
because of their insignificant dilutive effect.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The integration of Hill-Rom and SSI Medical Services was organizationally
completed effective August 1, 1994. The combined company (referred to henceforth
as "Hill-Rom") remains in the Health Care segment with Block Medical and Medeco
Security Locks for reporting purposes.
FINANCIAL CONDITION
THIRD QUARTER 1994 COMPARED TO YEAR END 1993
Liquidity:
Funding of the patent infringement settlement (see the discussion of third
quarter results of operations) occurred in the fourth quarter of 1994. The
$84.8 million payment was funded entirely from the Company's cash and cash
equivalents ($181.1 million at the end of the third quarter). The income
tax benefit of $32.2 million will be realized through lower income tax
payments in the fourth quarter of 1994 and the first quarter of 1995.
4
Net cash generated 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 and cash equivalents (excluding
investments of the insurance operation) declined from $210.2 million at the end
of fiscal 1993 to $181.1 million at the end of the third quarter of 1994.
Net cash flows from operating activities in the first nine months of $119.9
million was down $26.8 million compared with the same period in 1993. Net
working capital (excluding acquisitions and the accrued litigation settlement)
increased $26.3 million versus a $16.5 million increase in 1993. Accounts
receivable declined $4.1 million compared with a $9.7 million decrease in the
first three quarters of 1993. Inventories were up $7.4 million in 1994 and up
$4.9 million in 1993. The litigation settlement (paid subsequent to the
August 27, 1994 balance sheet date) of $52.5 million, net of taxes, is reflected
in accrued expenses. Excluding this item and acquisitions, current liabilities
declined $23.8 million in 1994 and $24.8 million 1993. 'Other' adjustments
reconciling net income to net cash flows from operating activities include
deferred loan expense on debentures, the Company's corporate-owned life
insurance program, non-current accrued expenses and accrued investment income
from insurance operations. The variance between 1994 and 1993 primarily reflects
the liability associated with Forethought's purchase of mortgage-backed dollar
roll contracts in 1993, the cash flow effect of which was offset in the
investment line. This item did not recur in 1994.
The decline in accounts receivable (excluding acquisitions) from year-end was
due to lower bed sales at Hill-Rom. Days sales outstanding (including the
effect of acquisitions) was 69 at the end of the third quarter compared with
70 at year-end.
Annualized inventory turns on revenues was 12.6 at quarter-end, down from 14.7
at year-end due to acquisitions occurring in the first quarter and, to a lesser
extent, lower shipments at Hill-Rom.
Capital spending of $83.7 million was $13.4 million higher than in the prior
year. The growth in spending was primarily in the Health Care segment.
Acquisition payments of $37.6 million represent the purchase in the first
quarter of L. & C. Arnold AG, Industrias Arga, S.A. de C.V and Lincoln Casket
Company. The initial purchase price of L. & C. Arnold was adjusted to reflect
the sale of a portion of that business in the third quarter, as anticipated.
The net cash flow represented by the change in insurance benefit reserves,
unearned revenue and deferred acquisition costs is primarily a function of
policy sales, which were up significantly in the first nine months of 1994
versus the comparable period in 1993.
5
Capital Resources:
In the first quarter of 1994, the Company issued $100.0 million of its 7%
Debentures due February 15, 2024, the proceeds of which are to be used for
general corporate purposes. In the second quarter, a $75.0 million unsecured
promissory note (which was classified as current debt at year end 1993) was
prepaid without penalty. The long-term debt-to-equity ratio was 32.4% at the end
of the third quarter compared with 16.9% at the end of 1993. Additional debt
capacity affords the Company considerable flexibility in the funding of internal
and external growth. As previously discussed, the Company utilized cash and cash
equivalents on hand at August 27, 1994, to fund the $84.8 million litigation
settlement in the fourth quarter.
RESULTS OF OPERATIONS
THIRD QUARTER 1994 COMPARED TO THIRD QUARTER 1993
Net revenues of $377.8 million were up $37.2 million, or 10.9%, with growth
reported in both segments. In the Funeral Services segment, Batesville Casket's
revenue growth was driven by higher casket unit volume, a moderate second
quarter price increase and increased sales of cremation products. At
Forethought, earned premium revenue was up due to increased insurance in force,
and higher investment income was driven by a larger invested asset base and
higher average yields. Revenue growth at Hill-Rom in the Health Care segment was
due to increased bed sales in Europe, including sales by L. & C. Arnold AG which
was acquired in the first quarter of this year, and increased therapy rental
beds in service, offsetting the softness in sales orders for acute care
products in the U.S. Sales at Block were up marginally in the third quarter
as increased shipments of disposable infusion pumps offset lower electronic
pump sales. Medeco reported sales essentially equal to last year's third quarter
with higher door security business offsetting lower OEM shipments.
Gross profit of $170.6 million was up $9.2 million, or 5.7%. As a percentage of
revenues, gross profit was 45.2%, down from 47.4% in the third quarter of 1993.
Profitability in the Funeral Services segment was negatively affected by
increased sales of lower margin cremation products. In the Health Care segment,
margins were down slightly from 1993. At Hill-Rom, increased sales in Europe and
higher shipments of remanufactured furniture, both of which generate lower
margins, were mostly offset by the growth in therapy bed rentals and the
leveraging of the associated fixed expenses.
6
Administrative, distribution and selling expenses increased $7.3 million, or
6.7%, from the third quarter of 1993. As a percentage of revenues, these
expenses declined from 32.2% to 31.0%. The Funeral Services segment reported
improvement as the result of a moderate increase in these expenses combined with
double-digit revenue growth. In the Health Care segment, lower depreciation
expense relative to the acquisition of SSI was offset by costs associated with
the acquisition and rationalization of operations in Europe, higher product
development costs and expenses related to the integration of Hill-Rom and SSI.
Incentive compensation expense was lower throughout the Company.
On September 19, 1994, subsequent to trial on the issues, the Company settled a
patent infringement suit brought by Kinetic Concepts, Inc. against Support
Systems International, Inc. and SSI Medical Services, Inc., wholly owned
subsidiaries of the Company, for a cash payment of $84.8 million. The settlement
amount was reflected in third quarter results as an unusual charge and payment
was made in the fourth quarter. From the date of the initial claim until the
trial commencing August 29, 1994, the Company believed that the outcome of a
trial or any settlement of the matter would not have a significant effect on
the Company's financial condition or results of operations. The settlement of
the patent infringement suit will not affect future operating results.
Interest expense increased $576 thousand, or 11.6%, compared with the third
quarter of 1993 due to the issuance of debentures in the first quarter of 1994,
partially offset by the prepayment of the $75.0 million promissory note and
lower debt associated with the acquisition of LeCouviour.
Other income, net, consisting of investment income and miscellaneous income and
expense, of $1.5 million was down $399 thousand from the third quarter of 1993.
Investment income was up due to higher average levels of interest-earning assets
and higher interest rates. This was offset by other miscellaneous items.
The third quarter income tax credit of $13.7 million includes the $32.2 million
tax benefit relative to the litigation settlement. Excluding this item, the
Company's third quarter effective rate was 37.4%. The 40.7% rate reported in the
third quarter of 1993 reflected the cumulative effect of the one percentage
point increase in the Federal statutory rate which was retroactive to January 1,
1993. The 1994 rate includes the effect of certain state tax planning
strategies.
NINE MONTHS ENDED AUGUST 27, 1994 COMPARED TO NINE MONTHS ENDED AUGUST 28, 1993
Since many of the factors affecting third quarter results also affected first
quarter, second quarter and year to date results, refer to the discussion of
third quarter results for additional analysis.
7
Net revenues of $1.1 billion were up $83.5 million, or 7.9%, with both segments
reporting increases. In the Funeral Services segment, Batesville Casket's casket
unit volume growth in the first and third quarters more than offset the
shortfall in the second quarter. Health Care segment revenues were higher than
1993 on a year to date basis due to increased bed sales in Europe and double-
digit growth in therapy bed rental revenues at Hill-Rom. Medeco's sales remain
ahead of 1993 on a year to date basis while Block was down.
Gross profit of $527.7 million was up $24.5 million, or 4.9%. As a percentage of
revenues, gross profit was 46.4% versus 47.7% in 1993. The issues affecting this
percentage in the third quarter may continue in the fourth quarter.
Administrative, distribution and selling expenses increased $20.3 million, or
6.1%, and as a percentage of revenues were 30.9% compared with 31.4% in 1993.
Revenue growth in the first and third quarters, lower incentive compensation
expense and prudent management of all expenses offset the higher European,
acquisition, product development and integration costs.
The Company's 1994 year to date effective income tax rate of 37.9% compares with
38.8% in 1993 and reflects the implementation of certain state tax planning
strategies.
Management believes that changes in the health care delivery system continue
to affect the order patterns for capital products of Hill-Rom's customers.
There has been no fundamental change in the Company's operations or market
share.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 19, 1994, subsequent to trial on the issues, the Company
settled a patent infringement suit brought by Kinetic Concepts, Inc.
("KCI") against Support Systems International, Inc. and SSI Medical
Services, Inc., wholly owned subsidiaries of the Comapnay, for a cash
payment of $84.8 million (KINETIC CONCEPTS, INC. V. SUPPORT
SYSTEMS INTERNATIONAL, INC. and SSI MEDICAL SERVICES, INC., U.S
District Court, Western District of Texas, originally filed
September 6, 1991). KCI alleged that SSI's RESTCUE AND RESTCUE CC
therapy units infringed certain patents owned by KCI. KCI sought an
award of actual damages and sought to enjoin SSI from marketing the
RESTCUE units. Before the trial, the RESTCUE products had been
replaced by a next generation therapy product. From the date of the
initial claim until the trial commencing August 29, 1994, the Company
believed that the outcome of a trial or any settlement of the matter
would not have a significant effect on the Company's financial
condition or results of operations.The settlement of the patent
infringement suit will not affect future operating results. The
settlement amount was reflected in third quarter results as an
unusual charge and payment was made in the fourth quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The unaudited, condensed consolidated financial statements for
the third quarter ended August 27, 1994 are attached hereto as
Exhibit 1.
B. Reports on Form 8-K
There were no reports filed on Form 8-K during the third quarter
ended August 27, 1994.
8
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 10, 1994 BY: /s/ Tom E. Brewer
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Tom E. Brewer
Senior Vice President
and Chief Financial Officer
DATE: October 10, 1994 BY: /s/ James D. Van De Velde
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James D. Van De Velde
Vice President - Controller
9