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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 JUNE 2, 2001 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
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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 - 62,590,780 as of July 3, 2001.
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HILLENBRAND INDUSTRIES, INC.
INDEX TO FORM 10-Q
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Statements of Consolidated Income 3
for the Three Months And Six Months
Ended 6/02/01 and 5/27/00
Condensed Consolidated Balance Sheets at 4
6/02/01 and 12/02/00
Condensed Statements of Consolidated Cash Flows 5
for the Six Months Ended 6/02/01 and 5/27/00
Notes to Condensed Consolidated Financial Statements 6-12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-20
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 6 - Exhibits and Reports on Form 8-K 21
SIGNATURES 22
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Hillenbrand Industries, Inc. and Subsidiaries
Statements of Consolidated Income
Three Months Ended Six Months Ended
---------------------- ----------------------
06/02/01 05/27/00 06/02/01 05/27/00
-------- -------- -------- --------
(In Millions Except Per Share Data)
Net revenues:
Health Care sales ...................... $ 193 $ 187 $ 372 $ 360
Health Care rentals .................... 85 77 171 161
Funeral Services sales ................. 153 148 316 316
Insurance revenues ..................... 94 91 191 180
-------- -------- -------- --------
Total revenues ......................... 525 503 1,050 1,017
Cost of revenues:
Health Care cost of goods sold ......... 106 106 207 204
Health Care rental expenses ............ 55 56 111 113
Funeral Services cost of goods sold .... 73 75 153 161
Insurance cost of revenue .............. 77 73 161 151
-------- -------- -------- --------
Total cost of revenues ................. 311 310 632 629
Gross profit ................................ 214 193 418 388
Other operating expenses .................... 147 135 288 273
Unusual charges (expense), net .............. - - (20) 2
-------- -------- -------- --------
Operating profit ............................ 67 58 110 117
Interest expense ............................ (6) (6) (12) (13)
Investment income ........................... 4 5 7 9
Other income (expense), net ................. (1) (1) (2) -
-------- -------- -------- --------
Income before income taxes .................. 64 56 103 113
Income taxes ................................ 23 20 37 41
-------- -------- -------- --------
Net income .................................. $ 41 $ 36 $ 66 $ 72
======== ======== ======== ========
Basic and diluted earnings
per common share (Note 3) ................. $ .65 $ .56 $ 1.05 $ 1.14
======== ======== ======== ========
Dividends per common share .................. $ .21 $ .20 $ .42 $ .40
======== ======== ======== ========
Average shares outstanding (thousands) ...... 62,734 62,885 62,709 63,069
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
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Hillenbrand Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
ASSETS 06/02/01 12/02/00
-------- --------
(In Millions)
Current assets:
Cash, cash equivalents and short-term investments ........ $ 227 $ 132
Trade receivables ........................................ 353 407
Inventories .............................................. 115 112
Other .................................................... 84 73
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Total current assets .................................... 779 724
Equipment leased to others, net ............................ 66 67
Property, net .............................................. 210 205
Other assets:
Intangible assets, net ................................... 174 181
Other .................................................... 98 106
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Total other assets ...................................... 272 287
Insurance assets:
Investments .............................................. 2,595 2,465
Deferred policy acquisition costs ........................ 655 636
Deferred income taxes .................................... 92 100
Other .................................................... 115 113
------- -------
Total insurance assets .................................. 3,457 3,314
------- -------
Total assets ............................................... $ 4,784 $ 4,597
======= =======
LIABILITIES
Current liabilities:
Trade accounts payable ................................... 64 68
Other .................................................... 226 214
------- -------
Total current liabilities ............................... 290 282
Other liabilities:
Long-term debt ........................................... 302 302
Other long-term liabilities .............................. 102 85
Deferred income taxes .................................... - 3
------- -------
Total other liabilities ................................. 404 390
Insurance liabilities:
Benefit reserves ......................................... 2,350 2,276
Unearned revenue ......................................... 778 758
Other .................................................... 59 60
------- -------
Total insurance liabilities ............................. 3,187 3,094
------- -------
Total liabilities .......................................... 3,881 3,766
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Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common stock ............................................. 4 4
Additional paid-in capital ............................... 25 24
Retained earnings ........................................ 1,436 1,397
Accumulated other comprehensive income (loss) (Note 4) ... (79) (108)
Treasury stock ........................................... (483) (486)
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Total shareholders' equity .............................. 903 831
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Total liabilities and
shareholders' equity ...................................... $ 4,784 $ 4,597
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See Notes to Condensed Consolidated Financial Statements
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Hillenbrand Industries, Inc. and Subsidiaries
Condensed Statements of Consolidated Cash Flows
Six Months Ended
06/02/01 05/27/00
-------- --------
(In Millions)
Net income .......................................... $ 66 $ 72
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation, amortization and
write-down of intangibles ....................... 51 46
Change in noncurrent deferred income taxes ........ (6) -
Change in net working capital excluding cash
and current debt ................................ 48 35
Change in insurance items:
Deferred policy acquisition costs ................ (20) (25)
Unearned revenue ................................. 20 19
Other insurance items, net ....................... 27 42
Other, net ........................................ 37 (5)
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Net cash provided by operating activities ............. 223 184
----- -----
Investing activities:
Capital expenditures ................................ (44) (46)
Proceeds on disposal of fixed assets and
equipment leased to others ........................ 4 6
Other investments ................................... - (1)
Insurance investments:
Purchases ......................................... (853) (265)
Proceeds on maturities ............................ 125 99
Proceeds on sales ................................. 624 60
----- -----
Net cash used in investing activities ................. (144) (147)
----- -----
Financing activities:
Additions to debt, net .............................. - 12
Payment of cash dividends ........................... (26) (25)
Treasury stock acquisitions ......................... - (36)
Insurance deposits received ......................... 179 183
Insurance benefits paid ............................. (138) (133)
----- -----
Net cash provided by financing activities ............. 15 1
----- -----
Effect of exchange rate changes on cash ............... 1 (2)
----- -----
Total cash flows ...................................... 95 36
Cash, cash equivalents and short-term investments:
At beginning of period ............................... 132 170
----- -----
At end of period ..................................... $ 227 $ 206
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See Notes to Condensed Consolidated Financial Statements
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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:
06/02/01 12/02/00
-------- --------
Allowance for possible losses and
discounts on trade receivables .... $ 55 $ 61
Inventories
Finished Products ................. $ 78 $ 73
Work in Process ................... 25 26
Raw Materials ..................... 12 13
---- ----
Total Inventory ................. $115 $112
==== ====
Accumulated depreciation of equipment
leased to others and property ..... $589 $589
Accumulated amortization of intangible
assets ............................ $118 $108
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
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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 (in thousands except per share
data):
Three Months Ended Six Months Ended
06/02/01 05/27/00 06/02/01 05/27/00
-------- -------- -------- --------
Net income $40,710 $35,271 $65,945 $71,790
Average shares outstanding 62,734 62,885 62,709 63,069
Basic and diluted earnings per
common share $ .65 $ .56 $ 1.05 $ 1.14
4. Comprehensive Income (Loss)
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", 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 Six Months Ended
06/02/01 05/27/00 06/02/01 05/27/00
-------- -------- -------- --------
Net income $ 41 $ 36 $ 66 $ 72
Net change in unrealized gain
(loss) on available-for-sale
securities (36) (38) 20 (85)
Foreign currency translation
adjustment (1) (4) 9 (6)
---- ---- ---- ----
Comprehensive income (loss) $ 4 $ (6) $ 95 $(19)
==== ==== ==== ====
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The composition of accumulated other comprehensive income (loss) at June 2,
2001 and December 2, 2000 is the cumulative adjustment for unrealized gains
or (losses) on available-for-sale securities of ($60) and ($80) million,
respectively, and the foreign currency translation adjustment of ($19) and
($28) million, respectively.
5. Contingencies
On August 16, 1995, Kinetic Concepts, Inc. (KCI), and Medical Retro Design,
Inc. (collectively, the "plaintiffs"), filed suit against Hillenbrand
Industries, Inc., and its subsidiary Hill-Rom Company, Inc., in the United
States District Court for the Western District of Texas, San Antonio
Division. The plaintiffs allege violation of various antitrust laws,
including illegal bundling of products, predatory pricing, refusal to deal
and attempting to monopolize the hospital bed industry. They seek 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.
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, among other things, that KCI has attempted to
monopolize the therapeutic bed market, interfere with the Company's and
Hill-Rom's business relationships by conducting a campaign of
anticompetitive conduct, and abused the legal process for its own
advantage.
The original claims by the plaintiffs against Hillenbrand Industries and
the counterclaims by the Company against KCI are currently scheduled to go
to trial in early to mid 2002.
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, employee related matters,
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 reasonably possible that
some litigation matters for which reserves have not been established could
be decided unfavorably to the Company. Management believes, however, 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.
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The Company's healthcare businesses manufacture medical devices that are
regulated by the U.S. Food and Drug Administration ("FDA"). The Company
continuously improves its quality systems in response to evolving federal
regulations and customer information, and the FDA routinely inspects the
Company's manufacturing facilities to ensure compliance with those
regulations. The Company has responded to previous inspection findings by
further strengthening its quality system and hiring additional qualified
staff and will continue to work with the FDA to address any findings where
further improvement is required.
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.
6. Unusual Charges
2001 Actions
In the first quarter of 2001, Hill-Rom announced realignment efforts in its
home care and long term care businesses along with an organizational
streamlining effort to capture efficiencies, enhance productivity and
better serve customers. Hill-Rom also wrote-down certain assets associated
with an underperforming, non-core Hill-Rom product line. The total
estimated cost of these actions was $20 million, which was recorded as an
unusual charge in the Statement of Consolidated Income. The cash component
of this charge will approximate $12 million.
Included in the realignment and streamlining plan was the reduction of
approximately 400 employees in the United States and Europe with an
estimated cost of $12 million. The unusual charge also included $8 million
related to the write-down of certain assets associated with an
underperforming, non-core product line and a small amount of assets related
to the realignment plan.
As of June 2, 2001, $5 million of the employee reduction costs have been
incurred. The Company expects substantially all employee reduction costs to
be incurred by the end of fiscal 2001.
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2000 Actions
In October 2000, the Company announced the retirement of W August
Hillenbrand, Chief Executive Officer. In relation to Mr. Hillenbrand's
retirement, the Company incurred a charge of $8 million related to future
payments and other compensation related items under the terms of his
retirement agreement.
In November 2000, Forethought announced a realignment of certain
operations, incurring an unusual charge of $1 million.
1999 Actions
In November 1999, the Company announced a plan to reduce the 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 estimated
cost of these actions necessitated an unusual charge of $29 million. The
cash component of this charge was $19 million.
Included in the cost-cutting actions was the reduction of 350 employees in
the United States and Europe and the closure of select manufacturing and
other facilities in the United States and Europe. Estimated costs for the
work force and facility closure actions were $8 million and $3 million,
respectively. The unusual charge also included $10 million relative to
asset impairments for a Hill-Rom investment that has since been liquidated
and the write-off of other strategic investments which have discontinued
operations. The remaining component of the 1999 unusual charge related to
an $8 million field corrective action taken relative to a previously
acquired product line.
As of June 2, 2001, all work force reduction and facility closure costs and
$6 million related to the field corrective action have been incurred. The
field corrective action is expected to be completed by the end of the
fourth quarter of 2001.
During the fourth quarter of 2000, approximately $2 million of the original
provision was reversed to income within the Unusual charges line of the
Statement of Consolidated Income as actual costs incurred were favorable to
those originally expected.
Other
Dispositions of idled facilities under prior actions were completed in
December 1999 and November 2000, resulting in gains of $2 million and $1
million, respectively. These gains were reflected within the Unusual
charges line of the Statement of Consolidated Income.
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The reserve balances for the above plans included in other current
liabilities approximated $11 million and $8 million as of June 2, 2001 and
December 2, 2000, respectively. The reserve balance included in other
long-term liabilities for certain retirement obligations is approximately
$5 million as of June 2, 2001.
7. Segment Reporting
Statement of Financial Accounting Standards (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. In the first quarter of 2001,
the Company changed its method of analyzing segment performance. Whereas
prior methods of segment evaluation were based upon pretax measures, the
Company will now also utilize net income before unusual charges to evaluate
segment performance. Prior period information has been restated to conform
to the current year's presentation.
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:
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Funeral Services Corporate
Health ---------------- and Other
Care Products Insurance Expense Consolidated
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THREE MONTHS ENDED
JUNE 2, 2001
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Net revenues $ 278 $ 153 $ 94 $ - $ 525
Income before income taxes $ 32 $ 41 $ 9 $ (18) $ 64
Net income $ 20 $ 26 $ 6 $ (11) $ 41
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THREE MONTHS ENDED
MAY 27, 2000
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Net revenues $ 264 $ 148 $ 91 $ - $ 503
Income before income taxes $ 21 $ 34 $ 11 $ (10) $ 56
Net income $ 14 $ 22 $ 7 $ (7) $ 36
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Funeral Services Corporate
Health ---------------- and Other
Care Products Insurance Expense Consolidated
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SIX MONTHS ENDED
JUNE 2, 2001
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Net revenues $ 543 $ 316 $ 191 $ - $ 1,050
Income before income taxes
and unusual items $ 59 $ 84 $ 14 $ (34) $ 123
Net income before unusual items $ 38 $ 54 $ 9 $ (22) $ 79
Unusual items (after taxes) (a) $ (13)
-----------
Net income $ 66
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SIX MONTHS ENDED
MAY 27, 2000
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Net revenues $ 521 $ 316 $ 180 $ - $ 1,017
Income before income taxes
and unusual items $ 43 $ 76 $ 12 $ (20) $ 111
Net income before unusual items $ 27 $ 49 $ 8 $ (13) $ 71
Unusual items (after taxes) (b) $ 1
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Net income $ 72
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(a) Reflects a $13 million (after tax) charge for business realignment and
work force reduction activities and certain asset impairments.
(b) Reflects a gain on the sale of an idled facility, which was closed as
part of a prior unusual charge.
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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).
SECOND QUARTER 2001 COMPARED WITH SECOND QUARTER 2000
Consolidated revenues of $525 million increased 4.4%, or $22 million, compared
to the second quarter of 2000. Operating profit increased 15.5%, or $9 million,
to $67 million. Net income of $41 million increased 13.9%, or $5 million, and
earnings per share increased 16.1% to $.65 compared to $.56 in 2000.
Health Care sales in the second quarter were $193 million compared to $187
million last year, a 3.2% increase, despite a $2.8 million negative currency
impact. Excluding this negative currency impact, sales would have increased
4.7%. Growth in health care sales is primarily due to increased shipments to
domestic acute care customers and European shipments partially offset by
decreased shipments in the long-term care and U.S. export markets. Health Care
rental revenues increased 10.4%, or $8 million, to $85 million due to increased
units in use by acute care customers and improvements in home care, partially
offset by lower revenue in Europe, decreased units in use by our long-term care
customers and unfavorable mix in the acute care and home care markets. Overall,
acute care rental revenues increased approximately 12.8%. Funeral Services sales
increased $5 million, or 3.4%, to $153 million compared to the second quarter of
2000 due to increased rates, volume and improved mix. Insurance revenues of $94
million increased 3.3%, or $3 million, compared to last year. Earned premiums
rose due to increased policies in-force year over year and capital gains, net of
$13 million of recorded impairment charges in the Company's high yield bond
portfolio, increased slightly. Investment income was relatively flat with the
prior year due primarily to weakness in the Company's high yield bond portfolio.
Gross profit on Health Care sales of $87 million increased 7.4% compared to the
second quarter of 2000 and as a percentage of sales increased to 45.1% compared
to 43.3% last year. This increase was due to increased volume and favorable
factory performance. Gross profit on rental revenues grew 42.9%, or $9 million,
to $30 million. As a percentage of sales, gross profit improved to 35.3%
compared to 27.3% in the second quarter of 2000. This increase is due to an
overall better-realized rate and increased volume. Funeral Services gross profit
rose 9.6% to $80 million and as a percentage of sales was 300 basis points above
last year at 52.3%. Increased volume combined with continued operating
efficiencies resulted in this increase.
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Funeral Services insurance operating profit decreased $1 million to $9 million
compared to the second quarter of 2000 primarily due to flat investment income
due to some weakness and impairments in the high yield bond portfolio combined
with the increased cost of insurance due to an increase in policies.
Other operating expenses (including insurance operations) increased 8.9%, or $12
million, to $147 million and also increased as a percentage of revenues to 28.0%
compared to 26.8% in the second quarter of 2000. The increase was attributable
to additional investments in business development and process transformation
activities and increased incentive compensation, partially offset by reduced
costs resulting from current and prior year realignment and streamlining
activities at Hill-Rom.
Interest expense was flat with last year. Investment income decreased $1 million
due to lower rates and the partial sale of an investment in 2000.
The effective income tax rate was 36.0% in the second quarter of 2001 compared
to 36.4% in 2000. The decrease in the tax rate was primarily due to tax
initiatives undertaken by the Company and the continuing profitability in
Europe.
SIX MONTHS 2001 COMPARED TO SIX MONTHS 2000
Except as noted below, the factors affecting the second quarter comparisons also
affected the year-to-date comparison.
Consolidated revenues of $1,050 million increased 3.2%, or $33 million, compared
to $1,017 in 2000. Operating profit decreased $7 million, or 6.0%, to $110
million and net income decreased 8.3%, or $6 million, to $66 million. Earnings
per share of $1.05 decreased 7.9% compared to $1.14 through the first six months
of 2000.
Results for the first six months of 2001 include a $20 million charge related to
the realignment of home care and long-term care businesses and an organizational
streamlining effort at Hill-Rom. 2000 results include a $2 million gain on the
sale of an idled facility which was closed as part of a prior unusual charge.
The 2001 charge and 2000 gain are included in the Unusual charges line of the
Statement of Consolidated Income. Excluding the unusual items mentioned above,
2001 operating profit increased 13.0%, net income increased approximately 11.3%
and earnings per share increased 13.5% from 2000 levels.
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Health Care sales grew 3.3%, or $12 million, to $372 million despite a $6.9
million negative currency impact. Excluding this negative currency impact,
health care sales would have increased 5.3%. The increase of $12 million is
primarily due to increased shipments in the U.S. acute care, long-term care and
export markets and in Europe. Health Care rental revenues increased $10 million,
or 6.2%, to $171 million compared to last year mainly due to increased units in
use and improved rates in the acute care and home care markets combined with
improved mix in long-term care. These increases were partially offset by lower
rental revenue in Europe, an unfavorable mix in acute care and home care and
decreased units in use by long-term care customers. Overall, acute care rental
revenues were up 10.8%. Funeral Services sales were flat with last year as
decreased volume was offset by increased prices. Funeral Services insurance
revenues increased $11 million, or 6.1%, to $191 million. Earned premiums and
investment income both increased as a result of higher policies in-force and the
increased size of the investment portfolio. Capital gains, net of impairment
losses of $20 million in the Company's high yield bond portfolio, increased
nearly $3 million over last year.
Consolidated gross profit of $418 million increased 7.7%, or $30 million. Gross
profit from Health Care sales was $165 million, a 5.8% increase, despite only a
3.3% increase in sales. As a percentage of sales gross profit improved 100 basis
points to 44.4%. Health Care rental gross profit grew 25% to $60 million and was
35.1% of revenues compared to 29.8% in 2000. 2000 gross profit was negatively
impacted by low Medicare reimbursement experience in the home care market. Gross
profit on Funeral Services sales was $163 million, an increase of 5.2% on flat
sales. As a percentage of sales, Funeral Services gross profit increased to
51.6% compared to 49.1% in 2000.
Insurance operating profit of $14 million was $2 million above the 2000 level of
$12 million due to decreased operating expenses and increased net capital gains.
Other operating expenses increased 5.5%, or $15 million, to $288 million and
also increased as a percentage of sales to 27.4% compared to 26.8% in the first
six months of 2000.
Investment income decreased $2 million due to decreased interest rates and the
partial sale of an investment in 2000.
The effective income tax rate was 36.0% in 2001 compared to 36.4% in 2000.
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 June 2, 2001 increased $95
million to $227 million compared to December 2, 2000.
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Net cash generated from operating activities increased $39 million to $223
million compared to $184 million generated in the first six months of 2000.
Operating cash flows were positively impacted by strong collections of
receivables, increased other current liabilities, and favorable changes in other
assets and other long-term liabilities. Partially offsetting these favorable
items were increases in inventory, other current assets and a decrease in
accounts payable.
Net cash used in investing activities decreased $3 million to $144 million
primarily as a result of decreased capital expenditures and proceeds on disposal
of fixed assets and equipment leased to others.
Net cash provided by financing activities increased $14 million to $15 million
primarily due to treasury stock acquisitions in the prior year partially offset
by the negative net effect of insurance deposits received and benefits paid at
Forethought along with debt borrowings in 2000 that did not recur in 2001.
UNUSUAL CHARGES
2001 Actions
In the first quarter of 2001, Hill-Rom announced realignment efforts in its home
care and long term care businesses along with an organizational streamlining
effort to capture efficiencies, enhance productivity and better serve customers.
Hill-Rom also wrote-down certain assets associated with an underperforming,
non-core Hill-Rom product line. The total estimated cost of these actions was
$20 million, which was recorded as an unusual charge in the Statement of
Consolidated Income. The cash component of this charge will approximate $12
million.
Included in the realignment and streamlining plan was the reduction of
approximately 400 employees in the United States and Europe with an estimated
cost of $12 million. The unusual charge also included $8 million related to the
write-down of certain assets associated with an underperforming, non-core
product line and a small amount of assets related to the realignment plan.
As of June 2, 2001, $5 million of the employee reduction costs have been
incurred. The Company expects substantially all employee reduction costs to be
incurred by the end of fiscal 2001.
2000 Actions
In October 2000, the Company announced the retirement of W August Hillenbrand,
Chief Executive Officer. In relation to Mr. Hillenbrand's retirement, the
Company incurred a charge of $8 million related to future payments and other
compensation related items under the terms of his retirement agreement.
In November 2000, Forethought announced a realignment of certain operations,
incurring an unusual charge of $1 million.
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1999 Actions
In November 1999, the Company announced a plan to reduce the 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 estimated cost of these
actions necessitated an unusual charge of $29 million. The cash component of
this charge was $19 million.
Included in the cost-cutting actions was the reduction of 350 employees in the
United States and Europe and the closure of select manufacturing and other
facilities in the United States and Europe. Estimated costs for the work force
and facility closure actions were $8 million and $3 million, respectively. The
unusual charge also included $10 million relative to asset impairments for a
Hill-Rom investment that has since been liquidated and the write-off of other
strategic investments which have discontinued operations. The remaining
component of the 1999 unusual charge related to an $8 million field corrective
action taken relative to a previously acquired product line.
As of June 2, 2001, all work force reduction and facility closure costs and $6
million related to the field corrective action have been incurred. The field
corrective action is expected to be completed by the end of the fourth quarter
of 2001.
During the fourth quarter of 2000, approximately $2 million of the original
provision was reversed to income within the Unusual charges line of the
Statement of Consolidated Income as actual costs incurred were favorable to
those originally expected.
Other
Dispositions of idled facilities under prior actions were completed in December
1999 and November 2000, resulting in gains of $2 million and $1 million,
respectively. These gains were reflected within the Unusual charges line of the
Statement of Consolidated Income.
The reserve balances for the above plans included in other current liabilities
approximated $11 million and $8 million as of June 2, 2001 and December 2, 2000,
respectively. The reserve balance included in other long-term liabilities for
certain retirement obligations is approximately $5 million as of June 2, 2001.
EURO CONVERSION
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency, known as the Euro. It is planned that by July 1, 2002 the
participating countries will withdraw all currencies and use the Euro
exclusively.
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The Company has committed resources to conduct assessments and to take
corrective actions to ensure it is prepared for the introduction of the Euro.
The Company is actively addressing the many areas involved with the introduction
of the Euro, including information management, finance and legal. This review
includes the conversion of information technology, business and financial
systems, and the effect on the Company's financial instruments, as well as the
impact on the pricing and distribution of Company products by January 1, 2002.
The Company believes the effect of introduction of the Euro, as well as any
related cost of conversion, will not have a material impact on the results of
operations, financial condition and cash flows.
ACCOUNTING STANDARDS
As of December 3, 2000, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The adoption of this Standard did not materially affect the
Company's financial position or results of operations. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments and
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.
As of December 3, 2000, the Company adopted Staff Accounting Bulletin No. 101
(SAB No. 101), "Revenue Recognition in Financial Statements", issued by the
Securities and Exchange Commission. Adoption of this Staff Accounting Bulletin
did not materially affect the Company's financial position or results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the Securities and Exchange
Commission (SEC) in its rules, regulations and releases, readers of this
document are advised that the document contains both statements of historical
facts and forward-looking statements. Forward-looking statements are subject to
certain risks and uncertainties, which could cause actual results to differ
materially from those indicated by the forward-looking statements.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. The Company has tried, wherever
possible, to identify these forward-looking statements by using words such as
"believes," "continue," "expects," or other words of similar meaning.
Forward-looking statements give the Company's expectations or predictions of
future conditions, events or results. They are not guarantees of future
performance. By their nature, forward-looking statements are subject to risks
and uncertainties. There are a number of factors -many of which are beyond the
Company's control- that could cause actual conditions, events or results to
differ significantly from those described in the forward-looking statements.
Forward-looking statements speak only as of the date they are made. The Company
does not undertake to update forward-looking statements to reflect circumstances
or events that occur after the date the forward-looking statements are made.
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Some of these factors are described below. There are other factors besides those
described or incorporated in this report and in other documents filed with the
SEC that could cause actual conditions, events or results to differ from those
in the forward-looking statements.
- - The Company's business and earnings are sensitive to general business and
economic conditions of its customers, including funeral homes, hospitals,
long-term care facilities and others, in the United States and abroad. A
downturn in health care capital spending or the market for pre-need
insurance products could adversely affect the demand for these products and
the Company's financial operations.
- - Our death care business is susceptible to changes in death rates mainly in
the United States. Death rates are difficult to predict with great
certainty for any financial period.
- - Future financial performance will depend on the successful introduction of
new products into the marketplace. The financial success of new products
could be impacted by competitor's products, customer acceptance,
difficulties in manufacturing, certain regulatory approvals and other
factors.
- - Many of Hill-Rom's acute care, long-term care and home care customers are
impacted by changes in Medicare reimbursement trends. 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 healthcare sales
derived from the acute-care market. Legislative changes phased in beginning
July 1, 1998 have had, and may continue to have, a dampening effect on the
Company's rental revenue derived from Medicare patients in the long-term
care market. The Company is also experiencing, and may continue to
experience, pressure on reimbursement rates related to its home care rental
business.
- - The Company has undertaken several realignment and cost reduction
activities in the past three years to become more efficient, enhance
productivity and better serve customers. While management believes these
activities will be successful and will increase shareholder value, there is
always the possibility that these initiatives could take longer than
expected and cost reductions not materialize as anticipated.
- - Legal factors including unanticipated litigation of product liability or
other liability claims; antitrust litigation; environmental matters; and
patent disputes that could preclude introduction of products into the
market place or negatively affect the profitability of products.
- - Changes in tax laws, including laws related to the remittance of foreign
earnings or investments in foreign countries with favorable tax rates and
settlements of federal, state and foreign tax audits.
- - Compliance with the regulations and certification requirements of domestic
and foreign authorities may delay or prevent new product introductions or
affect the production and marketing of existing products.
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- - Unexpected negative performance of the insurance investment portfolio could
negatively impact the earnings of the Company. The investment portfolio
could be affected by general economic conditions, changes in interest
rates, default on debt instruments and other factors.
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 10, 2001. Matters
voted upon by proxy were: The election of three directors nominated for three
year terms expiring in 2004 and the ratification of the Board of Director's
appointment of PricewaterhouseCoopers LLP as independent accountants of the
Company.
Voted
For Withheld
----- --------
Election of directors in Class II
for terms expiring in 2004:
Lawrence R. Burtschy 51,611,724 2,486,220
Daniel A. Hillenbrand 51,361,774 2,736,169
Ray J. Hillenbrand 51,846,288 2,251,655
Messrs. Peter F. Coffaro, Edward S. Davis, Leonard Granoff and W August
Hillenbrand will continue to serve as Class I directors and Messrs. John C.
Hancock, George M. Hillenbrand II, John A. Hillenbrand II and Frederick W.
Rockwood will continue to serve as Class III directors.
Voted Voted
For Against Abstained
----- ------- ---------
Proposal to ratify
PricewaterhouseCoopers LLP
as the Company's
independent accountants 53,686,822 371,658 39,466
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 3.2 Form of Amended Bylaws of the Registrant
Exhibit 10.1 Hillenbrand Industries, Inc. Senior
Executive Compensation Program as
amended
Exhibit 10.7 Form of Change in Control Agreement
between Hillenbrand Industries, Inc. and
Frederick W. Rockwood
Exhibit 10.8 Form of Change in Control Agreement
between Hillenbrand Industries, Inc. and
certain executive officers
Exhibit 10.9 Form of Indemnity Agreement between
Hillenbrand Industries, Inc. and certain
executive officers
Exhibit 10.10 Hillenbrand Industries, Inc. Board of
Directors' Deferred Compensation Plan
Exhibit 10.11 Hillenbrand Industries, Inc. Director
Phantom Stock Plan and form of award
B. Reports on Form 8-K
There were no reports filed on Form 8-K during the second quarter ended
June 2, 2001.
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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 3, 2001 BY: /s/ Scott K. Sorensen
-------------------------
Scott K. Sorensen
Vice President and
Chief Financial Officer
DATE: July 3, 2001 BY: /s/ James D. Van De Velde
-------------------------
James D. Van De Velde
Vice President and Controller
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HILLENBRAND INDUSTRIES, INC.
INDEX TO EXHIBITS
3.2 Form of Amended Bylaws of the Registrant
10.1 Hillenbrand Industries, Inc. Senior
Executive Compensation Program as
amended
10.7 Form of Change in Control Agreement
between Hillenbrand Industries, Inc. and
Frederick W. Rockwood
10.8 Form of Change in Control Agreement
between Hillenbrand Industries, Inc. and
certain executive officers
10.9 Form of Indemnity Agreement between
Hillenbrand Industries, Inc. and certain
executive officers
10.10 Hillenbrand Industries, Inc. Board of
Directors' Deferred Compensation Plan
10.11 Hillenbrand Industries, Inc. Director
Phantom Stock Plan and form of award