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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 MAY 31, 1997 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 - 68,796,966 as of July 8, 1997.
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1
HILLENBRAND INDUSTRIES, INC.
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Income for the Three Months and Six Months 3
Ended 5/31/97 and 6/1/96
Consolidated Balance Sheets, 4
5/31/97 and 11/30/96
Consolidated Cash Flows for the Six Months 5
Ended 5/31/97 and 6/1/96
Notes to Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote
of Security Holders 11
Item 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Income
Three Months Ended Six Months Ended
--------------------- ---------------------
05/31/97 06/01/96 05/31/97 06/01/96
---------- --------- -------- --------
(In Millions Except Per Share Data)
Net revenues:
Health Care sales . . . . . . . . . . . . . . . . $ 133 $ 144 $ 272 $ 293
Health Care rentals . . . . . . . . . . . . . . . 93 94 189 189
Funeral Services . . . . . . . . . . . . . . . . 135 133 282 270
Insurance . . . . . . . . . . . . . . . . . . . . 65 53 129 106
------- ------ ------- -------
Total revenues. . . . . . . . . . . . . . . . . . 426 424 872 858
Cost of revenues:
Health Care cost of goods sold . . . . . . . . . 76 84 154 175
Health Care rental expenses . . . . . . . . . . . 55 60 116 119
Funeral Services. . . . . . . . . . . . . . . . . 70 71 146 144
Insurance . . . . . . . . . . . . . . . . . . . . 48 40 95 81
------- ------ ------- -------
Total cost of revenues. . . . . . . . . . . . . . 249 255 511 519
Other operating expenses. . . . . . . . . . . . . . 114 109 232 220
------- ------ ------- -------
Operating profit. . . . . . . . . . . . . . . . . . 63 60 129 119
Interest expense. . . . . . . . . . . . . . . . . . (5) (6) (11) (12)
Other income, net . . . . . . . . . . . . . . . . . 3 2 7 5
------- ------ ------- -------
Income before income taxes. . . . . . . . . . . . . 61 56 125 112
Income taxes. . . . . . . . . . . . . . . . . . . . 24 22 49 45
------- ------ ------- -------
Net income . . . . . . . . . . . . . . . . . . . . $ 37 $ 34 $ 76 $ 67
------- ------ ------- -------
------- ------ ------- -------
Net income per common share . . . . . . . . . . . $ .54 $ .48 $ 1.10 $ .96
------- ------ ------- -------
------- ------ ------- -------
Dividends per common share . . . . . . . . . . . . $ .165 $ .155 $ .33 $ .31
------- ------ ------- -------
------- ------ ------- -------
Average shares outstanding (thousands) 68,797 69,783 68,795 69,957
------- ------ ------- -------
------- ------ ------- -------
See Notes to Consolidated Financial Statements
3
Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Balance Sheet
ASSETS 05/31/97 11/30/96
-------- --------
(In Millions)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 312 $ 266
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . 293 287
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 87 96
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 45
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . 739 694
Equipment leased to others, net . . . . . . . . . . . . . . . . . 89 93
Property, net . . . . . . . . . . . . . . . . . . . . . . . . . . 240 253
Other assets:
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . 130 149
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 54 50
-------- --------
Total other assets . . . . . . . . . . . . . . . . . . . . . . 184 199
Insurance assets:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 1,738 1,663
Deferred policy acquisition costs . . . . . . . . . . . . . . 440 406
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 62 44
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 44
-------- --------
Total insurance assets . . . . . . . . . . . . . . . . . . . . 2,290 2,157
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,542 $ 3,396
-------- --------
-------- --------
LIABILITIES
Current liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . $ 61 $ 74
Current portion of long-term debt . . . . . . . . . . . . . . . 1 1
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . 48 50
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 195
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . 288 320
Other liabilities:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 204 204
Other long-term liabilities . . . . . . . . . . . . . . . . . . 80 74
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 12 13
-------- --------
Total other liabilities. . . . . . . . . . . . . . . . . . . . 296 291
Insurance liabilities:
Benefit reserves. . . . . . . . . . . . . . . . . . . . . . . . 1,559 1,449
Unearned revenue. . . . . . . . . . . . . . . . . . . . . . . . 569 528
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 21
-------- --------
Total insurance liabilities. . . . . . . . . . . . . . . . . . 2,156 1,998
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 2,740 2,609
-------- --------
Commitments and contingencies (Note 4)
SHAREHOLDERS' EQUITY
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . 4 4
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 14 14
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 1,026 973
Accumulated unrealized gain (loss) on
investments. . . . . . . . . . . . . . . . . . . . . . . . . . (5) 21
Foreign currency translation adjustment . . . . . . . . . . . . (2) 10
Treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . (235) (235)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . 802 787
-------- --------
Total liabilities and
shareholders' equity . . . . . . . . . . . . . . . . . . . . . . $ 3,542 $ 3,396
-------- --------
-------- --------
See Notes to Consolidated Financial Statements
4
Hillenbrand Industries, Inc. and Subsidiaries
Consolidated Cash Flows
Six Months Ended
-----------------------
05/31/97 06/01/96
-------- --------
(In Millions)
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76 $ 67
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 54 53
Change in noncurrent deferred
income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (1)
Change in net working capital
excluding cash, current debt,
acquisitions and dispositions . . . . . . . . . . . . . . . . . . . (18) 9
Change in insurance items:
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . (35) (29)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 21
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (3)
----- -----
Net cash provided by operating activities . . . . . . . . . . . . . . . . 99 117
----- -----
Investing activities:
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . . . (38) (50)
Acquisitions of businesses . . . . . . . . . . . . . . . . . . . . . . . - (2)
Other investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (3)
Insurance investments:
Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (424) (224)
Proceeds on maturities . . . . . . . . . . . . . . . . . . . . . . . . 64 44
Proceeds on sales prior to maturity. . . . . . . . . . . . . . . . . . 246 87
----- -----
Net cash used in investing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (157) (148)
----- -----
Financing activities:
Additions (reductions) to debt, net. . . . . . . . . . . . . . . . . . . (6) 18
Payment of cash dividends. . . . . . . . . . . . . . . . . . . . . . . . (23) (22)
Treasury stock acquisitions. . . . . . . . . . . . . . . . . . . . . . . - (31)
Insurance premiums received . . . . . . . . . . . . . . . . . . . . . . 267 213
Insurance benefits paid . . . . . . . . . . . . . . . . . . . . . . . . (134) (118)
----- -----
Net cash provided by financing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 60
----- -----
Total cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 29
Cash and cash equivalents:
At beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . 266 171
----- -----
At end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 312 $ 200
----- -----
----- -----
See Notes to Consolidated Financial Statements
5
Hillenbrand Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions)
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 necessary to
present fairly the financial position, results of operations, and cash
flows, for the interim periods.
2. Supplementary Balance Sheet Information
The following information pertains to non-insurance assets and consolidated
shareholders' equity:
05/31/97 11/30/96
-------- --------
Allowance for possible losses and
discounts on trade receivables.............. $ 18 $ 19
Accumulated depreciation of equipment
leased to others and property............... $609 $588
Accumulated amortization of intangible
assets...................................... $149 $145
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
3. Earnings per Common Share
Earnings per common share were computed by dividing net income ($36,953
thousand for the three months of 1997; $75,457 thousand for the six months
of 1997; $33,638 thousand for the three months of 1996; and $66,976
thousand for the six months of 1996) by the average number of common shares
outstanding during each period (68,796,966 for the three months of 1997;
68,794,808 for the six months of 1997; 69,782,956 for the three months of
1996; and 69,957,023 for the six months of 1996). Under a program begun in
1983, the Company has acquired to date 13,008,672 shares of common stock of
which 1,561,675 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 and various deferred share
equivalents have also been excluded from the computation because of their
insignificant dilutive effect.
4. Contingencies
As discussed under Item 3 of the Company's Annual Report on Form 10-K for
the fiscal year ended November 30, 1996, Hillenbrand Industries, Inc., and
its subsidiary Hill-Rom Company, Inc., are the subject of an antitrust suit
brought by a competitor in the health care equipment market. The plaintiff
seeks monetary damages totaling in excess of $269 million, trebling of any
damages that may be allowed by the court, and injunctions to prevent
further alleged unlawful activities. The Company believes that the claims
are without merit and is aggressively defending itself against all
allegations. Accordingly, it has not recorded any loss provision
relative to damages sought by the plaintiffs. There was no material change
in the status of this litigation during the quarter ended May 31, 1997.
On November 20, 1996, the Company filed a Counterclaim to the above action
against Kinetic Concepts, Inc. (KCI) in the U.S. District Court in San
Antonio, Texas. The Counterclaim alleges that KCI has attempted to
monopolize the therapeutic bed market and to interfere with the Company's
and Hill-Rom's business relationships by conducting a campaign of
anticompetitive conduct. It further alleges that KCI abused the legal
process for its own advantage, interfered with existing Hill-Rom
contractual relationships, interfered with Hill-Rom's prospective
contractual and business relationships, commercially disparaged the Company
and Hill-Rom by uttering and publishing false statements to customers and
prospective customers not to do business with the Company and Hill-Rom, and
committed libel and slander in statements made both orally and published by
KCI that the Company and Hill-Rom were providing illegal discounts. The
Company alleges that KCI's intent is to eliminate legal competitive
marketplace activity. There was no material change in the status of this
litigation during the quarter ended May 31, 1997.
7
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 $10
million. The Company has provided adequate reserves in its financial
statements for these matters. Changes in environmental law might affect
the Company's future operations, capital expenditures and earnings. The
cost of complying with these provisions is not known.
The Company is subject to various other claims and contingencies arising
out of the normal course of business, including those relating to
commercial transactions, product liability, safety, health, taxes,
environmental and other matters. Management believes that the ultimate
liability, if any, in excess of amounts already provided or covered by
insurance, is not likely to have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SECOND QUARTER 1997 COMPARED WITH SECOND QUARTER 1996
Consolidated net revenues of $426 million were up $2 million. Health Care sales
declined $11 million or 8% due to a mix down in products sold in the North
America acute care market, unfavorable foreign currency adjustments and lower
shipments in Europe (sales were down in Germany and up in France) and the
disposition of Block Medical, the revenues of which were included in second
quarter 1996 results. These shortfalls were partially offset by increased bed
sales in the North America long-term care market. Sales at Medeco Security
Locks were essentially flat year over year. Health Care rental revenues of $93
million were down $1 million from the second quarter of 1996 as increased units
in use in the North America acute care, long-term care and home care markets
were offset by a shift down in product mix and price pressures. Average rental
rates were down in acute care and long-term care and up slightly in home care.
Rental revenues in Europe were marginally lower. Funeral Services sales
increased $2 million or 2% due to higher traditional casket unit volume. This
growth reflected increased market share as deaths were down versus the second
quarter of 1996. Cremation product sales grew at double digit rates. These
increases were partially offset by an overall shift down in product mix.
8
Insurance revenues grew $12 million or 23%. Investment income was up due to the
larger investment portfolio and higher yields. Earned premium revenue increased
due to a greater number of policies in force year over year.
Gross profit on Health Care sales of $57 million was down $3 million or 5% and
as a percentage of sales improved from 42% to 43%. This improvement was due
primarily to reduced sales of lower-margin European products and the favorable
effect of ongoing cost and process improvements. Gross profit on rental
revenues increased $4 million or 12% and as a percentage of revenues grew from
36% to 41% due to improved therapy unit service costs in the second quarter.
Gross profit on Funeral Services sales increased $3 million or 5% and as a
percentage of sales improved from 47% to 48%. These increases were due to
higher sales volume and productivity improvements.
Insurance operating profit (which is net of other operating expenses) increased
from $5 million in the second quarter of 1996 to $9 million in 1997 due to
higher investment income, increased levels of insurance in force and control of
operating expenses.
Other operating expenses (including those associated with insurance operations)
increased $5 million or 5% and as a percentage of revenues were up slightly from
26% to 27%. Costs associated with Medeco's direct distribution system
(implemented in the fourth quarter of 1996) and higher new product development
and compensation expenses were offset by reduced fixed costs in Europe and cost
control and process improvements in all operations.
The Company's consolidated effective income tax rate of 39% was essentially
unchanged from the second quarter of 1996.
SIX MONTHS ENDED MAY 31, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 1, 1996
Except as noted below, the factors affecting second quarter comparisons also
affected year to date comparisons.
Consolidated net revenues were up $14 million or 2%. Health Care sales declined
$21 million or 7% due to lower sales in Europe (primarily Germany), unfavorable
foreign currency adjustments, the disposition of Block Medical and a mix down in
products sold in the North America acute care market. Bed sales were higher
year to date in the North America long-term care market. Sales at Medeco
Security Locks were down slightly. Health Care rental revenues of $189 million
were equal to the comparable period in 1996. In North America, revenues were
up in home care and long-term care and down in acute care and units in use were
higher in all markets. Average rental rates were down in acute care and long-
term care due to a shift down in product mix and price pressures; rates were up
in the home care market. Rental revenues in Europe were down versus 1996.
Funeral Services sales increased $12 million or 4% due to higher traditional
casket unit volume, reflecting increased market share against lower deaths.
Cremation product sales were also up. An overall shift down in product mix
partially offset these improvements. Insurance revenues grew $23 million or
22% due to the growth in investment income and earned premium revenue.
9
Gross profit on Health Care sales of $118 million was unchanged from 1996 and as
a percentage of sales improved from 40% to 43%. Lower shipments in North
America in the second quarter and in Europe in the first and second quarters
were offset by decreased sales of lower-margin European products and cost and
process improvements. Gross profit on rental revenues increased $3 million or
4% and as a percentage of revenues improved from 37% to 39%. Lower therapy
service costs in the second quarter offset slightly higher costs in the first
quarter. Gross profit on Funeral Services sales increased $10 million or 8% and
as a percentage of sales improved from 47% to 48%.
Insurance operating profit doubled from $8 million in 1996 to $16 million in
1997.
Other operating expenses increased $12 million or 5% and as a percentage of
revenues were 27% versus 26% in 1996.
The consolidated effective income tax rate of 39% was down slightly from 40% in
1996 due to lower losses in Hill-Rom's European operations.
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 and cash equivalents (excluding the
investments of insurance operations) increased from $266 million at the end of
1996 to $312 million at the end of the second quarter. Cash flows from operating
activities of $99 million were down $18 million versus the first six months of
1996 due to an increase in working capital from year end, partially offset by
higher earnings. Higher accounts receivable (primarily reflecting lower
prepayments and higher Medicare receivables at Hill-Rom) and lower accrued
expenses were partially offset by lower inventories at Hill-Rom. Accounts
receivable days sales outstanding were 72 at both the end of the second quarter
and the end of 1996. Annualized inventory turns improved to 12.7 from 11.4 in
fiscal 1996 due primarily to strong first quarter shipments at Batesville
Casket.
Capital spending of $38 million was down $12 million due to lower therapy rental
unit production and avoidance of expenditures on improvement of European
operations in 1996. The Forethought Group continues to liquidate and redeploy
portions of its investment portfolio in order to match maturities with expected
benefit payments and maximize yields within statutory and management
constraints.
FACTORS THAT MAY AFFECT FUTURE RESULTS
While the Company has managed to reduce the losses on its operations in Europe
year over year through consolidation of operations and other process
improvements, there has not yet been a measurable improvement in the European
health care capital sales or therapy rental markets.
10
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
The Company held its Annual Meeting of shareholders on April 8, 1997. Matters
voted upon by proxy were: the election of four directors nominated for three
year terms expiring in 2000, approval of the Company's 1996 Stock Option Plan
and the ratification of the Board of Directors' appointment of Price Waterhouse
LLP as independent auditors of the Company.
Voted Broker
For Withheld Non-Vote
--- --------- --------
Election of directors in Class I for
terms expiring in 2000:
Peter F. Coffaro 60,335,869 781,979 0
Edward S. Davis 60,340,937 776,911 0
Leonard Granoff 60,335,380 782,468 0
W August Hillenbrand 60,350,737 767,111 0
Messrs. Lawrence R. Burtschy, Daniel A. Hillenbrand and Ray J. Hillenbrand will
continue to serve as Class II directors, and Messrs. John C. Hancock, George M.
Hillenbrand II and John A. Hillenbrand II will continue to serve as Class III
directors.
Voted Voted Broker
For Against Abstained Non-Vote
--- ------- --------- --------
Proposal to approve the Company's
1996 Stock Option Plan: 59,274,370 1,616,480 218,991 0
Proposal to ratify Price Waterhouse LLP
as the Company's independent
auditors 60,972,111 68,929 76,817 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit No. Description
----------- -----------
27 Financial Data Schedule
B. Reports on Form 8-K
There were no reports filed on Form 8-K during the second quarter
ended May 31, 1997.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILLENBRAND INDUSTRIES, INC.
DATE: July 11, 1997 BY: /S/ Tom E. Brewer
---------------------------------
Tom E. Brewer
Chief Financial Officer
DATE: July 11, 1997 BY: /S/ James D. Van De Velde
---------------------------------
James D. Van De Velde
Controller
12