UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 29, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ----------------------------------- -----------------------------------------
COMMON STOCK, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM
10-K OR ANY AMENDMENT TO THIS FORM 10-K. / /
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT.
Common Stock, without par value - $2,695,971,284 as of February 16, 1998
(excluding stock held by persons deemed affiliates).
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Common Stock, without par value - 67,526,880 as of February 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the 1998 Proxy Statement furnished to Shareholders -
Parts I, III and IV.
Portions of the 1992 Proxy Statement furnished to Shareholders -
Part IV.
HILLENBRAND INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
NOVEMBER 29, 1997
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote
of Security Holders 8
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 17
Item 8. Financial Statements and Supplementary
Data 19
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers
of the Registrant 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain
Beneficial Owners and Management 43
Item 13. Certain Relationships and Related
Transactions 43
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 43
SIGNATURES 46
PART I
ITEM 1. BUSINESS
Hillenbrand Industries, Inc., an Indiana corporation headquartered in
Batesville, Indiana, is a diversified, public holding company and the owner
of 100% of the capital stock of its four major operating companies. Unless
the context otherwise requires, the terms "Hillenbrand" and the "Company"
refer to Hillenbrand Industries, Inc., and its consolidated subsidiaries.
Hillenbrand is organized into two business segments: the Funeral Service
Group and the Health Care Group. The Funeral Service Group consists of
Batesville Casket Company, Inc., a manufacturer of caskets and other products
for the funeral industry, and Forethought Financial Services, Inc., a
provider of funeral planning financial products. The Health Care Group
consists of Hill-Rom, Inc., a manufacturer of equipment for the health care
market and provider of wound care and pulmonary/trauma management services;
and Medeco Security Locks, Inc., a manufacturer of high security locks and
access control products for commercial and residential use. (Medeco does not
directly serve the health care industry but is included in the Health Care
segment due to its relative size.) The assets of Block Medical, Inc., a
provider of home infusion therapy products, were sold to I-Flow Corporation
on July 22, 1996. Results for Block Medical, Inc. are included in the
Company's financial statements within the Health Care Group through that date.
FUNERAL SERVICE
Batesville Casket Company, Inc. ("Batesville"), an Indiana corporation
headquartered in Batesville, Indiana, was founded in 1884 and acquired by the
Hillenbrand family in 1906. Batesville manufactures and sells several types of
steel, copper, bronze, hardwood and cloth-covered caskets, including caskets and
containers for the cremation market. In addition to caskets, Batesville
manufactures and sells a line of urns used in cremations. All Batesville metal
caskets are protective caskets which are electrically welded and made resistant
to the entry of air, water and gravesite substances through the use of rubber
gaskets and a locking bar mechanism.
Batesville Monoseal-Registered Trademark- steel caskets also employ a
magnesium alloy bar to cathodically protect the casket from rust and
corrosion. The Company believes that this system of Cathodic Protection is
featured only on Batesville caskets.
Batesville hardwood caskets are made from walnut, mahogany, cherry,
maple, pine, oak, pecan and poplar. Except for a limited line of hardwood
caskets with a protective copper liner, the majority of hardwood caskets are
not protective. Batesville's cloth-covered caskets are constructed with a
patent pending process using cellular fiberboard construction.
The cremation line of caskets, containers, urns and memorialization
items are marketed by Batesville under the name of Options-Registered
Trademark- The caskets and containers are manufactured primarily of
hardwoods and fiberboard. The urns are made from bronze, hardwoods, marble
and cast acrylic. A line of cast bronze statuary art pieces used for
memorialization are also marketed.
Batesville offers several marketing programs to funeral directors for
both casket and cremation products. Batesville products are marketed by
Batesville's direct sales force to licensed funeral directors operating
licensed funeral homes throughout the United States, Australia, Canada,
Mexico and Puerto Rico. Batesville maintains inventory at 70 company-operated
Customer Service Centers in North America. Batesville caskets are delivered
in specially equipped vehicles owned by Batesville.
Batesville has small manufacturing and distribution facilities in Canada
and Mexico.
-1-
Forethought Financial Services, Inc. ("Forethought", formerly Forecorp,
Inc.), was founded in 1985. It, along with its principal subsidiaries,
Forethought Life Insurance Company, Forethought National TrustBank and The
Forethought Group, Inc., are headquartered in Batesville, Indiana. These
companies serve the country's largest network of funeral planning
professionals with marketing support for Forethought funeral plans funded by
life insurance policies, trust products and other financial vehicles. These
specialized funeral planning products are offered through funeral homes.
Customers choose the funeral home, type of service and merchandise they want.
The selected funeral home contracts to provide the funeral services and
merchandise when needed. With funds provided by one of Forethought's
financial products, the program offers financial protection by enabling the
funeral home to guarantee that the planned funeral will be available as
specified.
Forethought's life insurance policies are offered through a network of
over 4,000 independent, licensed funeral homes. Forethought Life Insurance
Company is licensed in 48 states, Alberta, Ontario, Manitoba, New Brunswick,
Newfoundland, Nova Scotia and Prince Edward Island, Canada, Puerto Rico and
the District of Columbia. Forethought signed a stock purchase agreement on
December 11, 1997 to purchase Chrysler Life Insurance Company.
Forethought entered the trust business in 1997 and currently has bank
charters in six states. Its trust products are offered through independent
funeral homes and national chains. It applied for a savings bank charter in
November 1997, which was being reviewed by the Office of Thrift Supervision
at the date of this report.
HEALTH CARE
Hill-Rom, Inc., with its subsidiaries (collectively, "Hill-Rom"), is a
leading producer of mechanically, electrically and hydraulically controlled
adjustable hospital beds, hospital procedural stretchers, hospital patient
room furniture and architectural systems specifically designed to meet the
needs of medical-surgical, critical care, long-term care, home-care and
perinatal providers. It has been in the hospital equipment business since
1929. It has been engaged in the manufacture, rental and service of therapy
beds and support surfaces in the wound care, pulmonary/trauma and
incontinence management markets since 1985.
The Hill-Rom line of electrically and manually adjustable hospital beds
includes models which, through sideguard controls, can be raised and lowered,
retracted and adjusted to varied orthopedic and therapeutic contours and
positions. Hill-Rom also produces beds for special departments such as
intensive care, emergency, perinatal, recovery rooms and labor and delivery
rooms. Other Hill-Rom products include nurse call systems, sideguard
communications, wood-finished bedside cabinets, adjustable-height overbed
tables, mattresses and wood upholstered chairs. Its architectural products
include customized, prefabricated modules, either wall-mounted or on
freestanding columns, enabling medical gases, communications and electrical
services to be distributed in patient rooms. Recently introduced products
include the TotalCare-TM- bed, TransStar-TM- strectcher, Procedural Recliner,
Stabilet-Registered Trademark- infant warmer and Versalet-TM- Care Center in
the acute care market and the Resident-TM- LTC bed in the long-term care
market. Hill-Rom also remanufactures hospital beds. Its process includes
disassembly, washing, sanding, painting and reassembly with new components.
Hill-Rom products are sold directly to acute and long-term health care
facilities throughout the United States and Canada by Hill-Rom account
executives. Most Hill-Rom products sold in the United States are delivered
by trucks owned by Hill-Rom. Hill-Rom also operates a Canadian division
which distributes Hill-Rom products, principally in Canada. Hill-Rom also
sells its domestically produced products through distributorships throughout
the world.
Hill-Rom operates hospital bed, therapy bed and patient room
manufacturing facilities in Germany and France. Their products are sold and
leased directly to hospitals and nursing homes throughout Europe.
-2-
Within the wound care and pulmonary/trauma management market,
CLINITRON-Registered Trademark- Air Fluidized Therapy is provided as a
therapeutic adjunct in the treatment of advanced pressure sores, flaps,
grafts and burns. The CLINITRON unit achieves its support characteristics
from the fluid effect created by forcing air up and through medical-grade
ceramic microspheres contained in the unit's fluidization chamber. Various
CLINITRON products are designed to meet the specific requirements of acute
care, long-term care and home care settings. Recent product introductions
utilizing this technology include the Clinitron-Registered Trademark-
Rite-Hite-Registered Trademark- Air Fluidized Therapy unit, designed to meet
the requirements of long-term care facilities and the Clinitron-Registered
Trademark- At-Home-Registered Trademark-, which was designed for delivery and
use in the home.
Hill-Rom's other wound care and pulmonary/trauma management technology,
low airloss therapy, consists of a sleep surface with air-filled cushions
separated into integrated zones. Air pressure is automatically adjusted
whenever the patient changes position. Micro air vents on the cushions allow
for the controlled release of air. This technology is applied to either an
integrated unit or as an overlay to an existing bed. Recently introduced low
airloss products include the Flexicair Eclipse-Registered Trademark-, a
portable, rental mattress replacement for the acute care market and the
Silkair-TM-, a low airloss overlay product for the home care market.
Clinical support for Hill-Rom's wound care and pulmonary/trauma
management products is provided by a sales force composed of nurses and
physician assistants. Technical support is made available by technicians and
service personnel who provide maintenance and technical assistance from
Hill-Rom Service Centers.
Hill-Rom therapy systems are made available to hospitals, long-term care
facilities and homes on a rental basis through more than 150 Service Centers
located in the United States, Canada and Western Europe.
On December 18, 1997, Hill-Rom acquired the stock of Air-Shields, Inc.,
a manufacturer and supplier of infant incubators and warmers, and certain
other businesses of Vickers PLC for a cash payment of $99 million. On
February 9, 1998, Hill-Rom acquired the stock of MEDAES Holdings, a
manufacturer of medical architectural systems, for a cash payment of $62
million. These acquisitions will not have a material effect on the Company's
results of operations in 1998.
Medeco Security Locks, Inc. ("Medeco"), founded in 1968, was purchased
by Hillenbrand in 1984. Medeco develops, manufactures and sells a wide
variety of deadbolts, padlocks, switch locks, camlocks, electro-mechanical
and other special purpose locks for the high-security market. Medeco's
double locking mechanism provides a higher level of security than is
achievable by more common, single-locking devices. Medeco locks are
primarily constructed of brass and hardened steel and are manufactured in its
Salem, Virginia plant.
Medeco also develops, manufactures and sells products for the electronic
high-security market. INSITE VLS-TM- replaces the thousands of mechanical
keys used in pay telephone collection. The DialGuard-TM- lock system fills
the same role in the automatic teller machine collection market, and the
DuraCam-TM-high-security lock serves the gaming industry. The INSITE
SITEKEY-TM- provides the state-of-the-art in electronic door security. An
electronic parking meter lock was introduced in 1997, and is presently in
field trials.
Beginning in the first quarter of 1997, Medeco converted to direct
distribution of its door security products to retail locksmith customers.
Medeco had previously sold through locksmith supply distributors. This
program has resulted in improved delivery times for both standard and
specialty items. Medeco products are also sold domestically and
internationally by its sales organization to original equipment manufacturers
and government agencies. Original equipment applications include vending
machines, pay telephones, safe and lock boxes, computer equipment,
coin-operated laundry machines and communications security devices.
Hill-Rom generates the predominant share of the Health Care segment's
revenues and operating profit. Medeco had an immaterial effect on the
operating results of this segment in 1995, 1996 and 1997.
BUSINESS SEGMENT INFORMATION
The amounts of net revenues, operating profit and identifiable assets
attributable to each of the industry segments of the Company are set forth in
tables relating to operations by business segment in Note 8 to Consolidated
Financial Statements, which statements are included under Item 8.
-3-
RAW MATERIALS
FUNERAL SERVICE
Batesville employs carbon and stainless steel, copper and bronze sheet,
wood, fabrics, finishing materials, rubber gaskets, zinc and magnesium alloy in
the manufacture of its caskets. These materials are available from several
sources.
HEALTH CARE
Principal materials used in Hill-Rom products include steel, aluminum,
stainless steel, wood, high-pressure laminates, fabrics, silicone-coated
soda-lime glass beads and other materials, substantially all of which are
available from several sources. Motors for electrically operated beds and
certain other components are purchased from one or more manufacturers.
Medeco uses brass, hardened steel, other metals and electronic components,
substantially all of which are available from several sources.
COMPETITION
FUNERAL SERVICE
Batesville believes its dollar volume of sales of finished caskets is
the largest in the United States. Batesville competes on the basis of
product quality, service to its customers and price, and believes that there
are approximately two (2) other companies that also manufacture and/or sell
caskets over a wide geographic area. There are, however, throughout the
United States many enterprises that manufacture, assemble, or distribute
caskets for sale within a limited geographic area. Forethought competes
on the basis of service to its customers and products offered. Forethought
Life Insurance Company sells its products in competition with other life
insurance companies. Forethought Life believes it is the leading provider of
insurance-funded pre-arranged funerals in the United States. Forethought
National TrustBank competes with local banks and master trusts offered
through state associations.
HEALTH CARE
Hill-Rom believes it is the U.S. market share leader in the sale of
electrically operated hospital beds, competing with approximately ten (10) other
manufacturers. In Europe, Hill-Rom competes with several other manufacturers
and believes that it is a market leader. In both the United States and Europe
there are other companies which provide low airloss and other methods of patient
support and patient relief.
Medeco competes on the basis of product quality and performance, and
service to its customers. Medeco believes it is the market share leader in the
mechanical high security lock market; however, other lock manufacturers produce
a broader product line and have larger financial resources. Medeco believes
that its patents are important to its business.
-4-
RESEARCH
Each of the Company's operating subsidiaries devotes research efforts to
develop and improve its products as well as its manufacturing and production
methods. All research and development expenses are Company sponsored.
Expenditures in the most recent three fiscal years were as follows:
1997 1996 1995
---- ---- ----
(millions)
New products and processes $40 $ 31 $28
Improvement of existing products and processes 9 11 11
PATENTS AND TRADEMARKS
The Company owns a number of patents on its products and manufacturing
processes which are of importance to it, but it does not believe that any
single patent or related group of patents are of material significance to the
business of the Company as a whole.
The Company also owns a number of trademarks and service marks relating
to its products and product services which are of importance to it, but it
does not believe that any single trademark or service mark is of material
significance to the business of the Company as a whole.
EMPLOYEES
As of February 16, 1998, the Company employed approximately 10,100
persons in its operations in North America and Europe.
ENVIRONMENTAL PROTECTION
Hillenbrand Industries, Inc. is committed to operating all of its
businesses in a way that protects the environment. 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.
These reserves have been determined without consideration of possible loss
recoveries from third parties. Compliance with other current governmental
provisions relating to protection of the environment also does not materially
affect the Company's capital expenditures, earnings or competitive position.
Recent 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.
FOREIGN OPERATIONS AND EXPORT SALES
Information about the Company's foreign operations is set forth in
tables relating to geographic information in Note 8 to Consolidated Financial
Statements, which statements are included under Item 8.
The Company's export revenues constituted less than 10% of consolidated
revenues in 1997 and prior years.
ORDER BACKLOG
Order backlogs are immaterial to the Company and there was no material
change in backlogs during 1997.
-5-
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected each year by the Board
of Directors at its first meeting following the Annual Meeting of
Shareholders to serve during the ensuing year and until their respective
successors are elected and qualify. There are no family relationships
between any of the executive officers of the Company. Following are the
executive officers of the Company as of February 16, 1998.
W August Hillenbrand, 57, was elected Chief Executive Officer of the
Company on April 11, 1989, and has been President since October 21, 1981.
Prior to that he had been a Vice President of the Company since 1972 and has
been employed by the Company throughout his business career.
Tom E. Brewer, 59, has been employed by the Company since May 16, 1983,
and was elected Senior Vice President and Chief Financial Officer on May 23,
1983. He had been employed by the Firestone Tire and Rubber Company for the
prior 22 years, where he served as Corporate Vice President and Treasurer.
George E. Brinkmoeller, 62, was elected Vice President, Corporate
Services on December 2, 1979, had been Director of Corporate Services since
January 1, 1975, and had been Manager of Affiliated Operations since January
1, 1971.
Michael L. Buettner, 40, has been employed by the Company since January
9, 1995, and was elected Vice President, Corporate Development on January 9,
1995. Prior to joining the Company, he was employed by Bausch & Lomb
Incorporated for 10 years in various corporate development and finance roles,
most recently as Staff Vice President, Corporate Development. He has also
served in various finance and marketing positions with Moog Automotive, Inc.
and Carboline Company.
Mark R. Lanning, 43, was elected Vice President and Treasurer on April 11,
1995. Prior to that he had been Assistant Treasurer since June, 1991. He
joined the Company on May 16, 1988, as Manager, Corporate Audit. Prior to
joining the Company he served in various capacities with the public accounting
firm of Ernst & Whinney (now Ernst & Young). He has been a licensed Certified
Public Accountant since 1979.
Mark R. Lindenmeyer, M.D., 51, was elected Vice President, General Counsel
and Secretary of the Company on October 7, 1991. He had been employed by the
Company since August 18, 1986, as Litigation Counsel. Prior to joining the
Company, Dr. Lindenmeyer served in the U.S. Army as a military trial attorney
and judge and was a partner in a Batesville, Indiana law firm. He has been a
licensed physician since 1986 and a practicing attorney since 1972.
J. Cameron Moss, 41, was elected Vice President, Corporate Planning on
January 2, 1996, and has been employed by the Company since January 2, 1996.
Prior to joining the Company, he was a senior manager with McKinsey & Company,
Inc., in its Cleveland, Ohio and Munich, Germany offices.
Robert J. Tennison, 51, has been employed by the Company since February 28,
1996, and was elected Vice President, Continuous Improvement on March 1, 1996.
Prior to joining the Company, he was Senior Vice President of Operations for
Donnelly Corporation, President of Hennessy Industries and Director of
Manufacturing for Sauer-Sundstrand. He began his career with General Motors.
James G. Thorne, 56, has been employed by the Company since June 14, 1993,
and was elected Vice President, Human Resources on April 5, 1994. Prior to
joining the Company, he was employed by Monsanto Company for 27 years where he
served as Vice President, Human Resources for Fisher Controls International,
Inc.
James D. Van De Velde, 51, was elected Vice President and Controller on May
13, 1991. He joined the Company on September 1, 1980 as Director, Taxes. Prior
to that he was employed by the public accounting firm of Price Waterhouse.
-6-
ITEM 2. PROPERTIES
The principal properties of the Company and its subsidiaries are listed
below, and are owned by the Company or its subsidiaries subject to no material
encumbrances except for those facilities (*) which were constructed with funds
obtained through government sponsored bonds (see Note 4 to the Consolidated
Financial Statements). All facilities are suitable for their intended purpose,
are being efficiently utilized and are believed to provide adequate capacity to
meet demand for the next several years.
LOCATION DESCRIPTION PRIMARY USE
HEALTH CARE AND OTHER:
Batesville, IN Manufacturing plant and Manufacture of health care
distribution facility equipment
Office facilities Administration
Charleston, SC Office facility and Administration and
assembly plant assembly of therapy units
Kempen, Germany Manufacturing plant and Manufacture of health care
office facilities equipment
Pluvigner, France Manufacturing plant and Manufacture of health care
office facility equipment
Salem, VA Manufacturing plant and Manufacture of mechanical
office facility and electronic locks
FUNERAL SERVICE:
Batesville, IN Manufacturing plants Manufacture of metal caskets
Office facilities Administration
Manchester, TN Manufacturing plants Manufacture of metal caskets
Campbellsville, KY Manufacturing plant Manufacture of metal caskets
Vicksburg, MS Kiln drying and lumber Drying and dimensioning
cutting plant lumber
* Batesville, MS Manufacturing plant Manufacture of hardwood caskets
Nashua, NH Manufacturing plant Manufacture of hardwood caskets
In addition to the foregoing, the Company leases or owns a number of
warehouse distribution centers, service centers and sales offices throughout
the United States, Canada and Europe.
ITEM 3. LEGAL PROCEEDINGS
On August 16, 1995, Kinetic Concepts, Inc., 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
defending itself aggressively against all allegations. Accordingly, it has
not recorded any loss provision relative to damages sought by the plaintiffs.
-7-
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 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.
On December 24, 1996, the Company filed a patent infringement action
against KCI in the U.S. District Court in Charleston, South Carolina, for
alleged infringement of its Effica-TM- therapeutic bed by KCI. Hill-Rom is
seeking both monetary damages and injunctive relief in this action.
There is no other pending litigation of a material nature in which the
Company or its subsidiaries are involved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended November 29, 1997.
PART II
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
From time to time, the Company makes oral and written statements that
may constitute "forward-looking statements" as defined in the PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (the "Act") or by the SEC in its
rules, regulations and releases. The Company desires to take advantage of
the "safe harbor" provisions in the Act for forward-looking statements made
from time to time, including, but not limited to, the forward-looking
statements relating to the future performance of the Company contained in
Management's Discussion and Analysis (under Items 7 and 7A on Form 10-K), and
Notes to Consolidated Financial Statements (under Item 8 on Form 10-K) and
other statements made in this Form 10-K and in other filings with the SEC.
The Company cautions readers that any such forward-looking statements
are based on assumptions that the Company believes are reasonable, but are
subject to a wide range of risks, and there is no assurance that actual
results may not differ materially. Important factors that could cause actual
results to differ include but are not limited to: differences in anticipated
and actual product introduction dates, the ultimate success of those products
in the marketplace, and the success of cost control and restructuring
efforts, among other things. Realization of the Company's objectives and
expected performance can also be adversely affected by the outcome of pending
litigation and rulings by the Internal Revenue Service on certain tax
positions taken by the Company.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
Hillenbrand Industries' common stock is traded on the New York Stock
Exchange under the ticker symbol "HB". The following table reflects the
range of high and low selling prices of the Company's common stock by quarter
for 1997 and 1996.
-8-
1997 1996
----------------- ----------------
HIGH LOW HIGH LOW
------- ------- ------- -------
First Quarter $39 5/8 $33 7/8 $34 1/8 $31 7/8
Second Quarter $47 1/2 $37 1/4 $40 1/4 $33 1/4
Third Quarter $48 5/8 $43 1/2 $39 $32
Fourth Quarter $46 9/16 $42 3/16 $38 5/8 $32
HOLDERS
On February 16, 1998, there were approximately 24,000 holders of the
Company's common stock.
DIVIDENDS
The Company has paid cash dividends on its common stock every quarter
since its first public offering in 1971, and those dividends have increased
each year since 1972. Dividends are paid near the end of February, May,
August and November to shareholders of record near the end of January, April,
July and October. Cash dividends of $.66 ($.165 per quarter) in 1997 and
$.62 ($.155 per quarter) in 1996 were paid on each share of common stock
outstanding. Cash dividends will be $.72 ($.18 per quarter) in 1998.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of
Hillenbrand Industries, Inc., for fiscal years 1993 through 1997.
1997 1996 1995 1994 (b) 1993
------ ------- ------ -------- -------
(IN MILLIONS EXCEPT PER SHARE DATA)
Net revenues $1,776 $1,684 $1,625 $1,577 $1,448
Income from continuing
operations (a) $ 157 $ 140 $ 90 $ 90 $ 132
Income from continuing
operations per share (a) $ 2.28 $ 2.02 $ 1.27 $ 1.26 $ 1.86
Total assets $3,828 $3,396 $3,070 $2,714 $2,291
Long-term debt $ 203 $ 204 $ 206 $ 209 $ 108
Cash dividends per share $ .66 $ .62 $ .60 $ .57 $ .45
(a) RESULTS IN 1996 REFLECT INCOME OF $8 MILLION ($.12 PER SHARE) RELATIVE TO
THE SALE OF BLOCK MEDICAL. RESULTS IN 1995 REFLECT UNUSUAL CHARGES
TOTALING $26 MILLION ($.37 PER SHARE) FOR THE WRITE-DOWN OF GOODWILL AND
CERTAIN ASSETS OF A MANUFACTURING FACILITY SOLD IN 1996. RESULTS IN 1994
REFLECT AN UNUSUAL CHARGE OF $52 MILLION ($.74 PER SHARE), AFTER INCOME
TAXES, FOR SETTLEMENT OF A PATENT INFRINGEMENT SUIT. RESULTS IN 1993
REFLECT AN UNUSUAL CHARGE OF $14 MILLION FOR THE WRITE-DOWN OF GOODWILL.
(b) FISCAL 1994 WAS A 53 WEEK YEAR.
-9-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and accompanying notes.
Hillenbrand Industries' four major operating companies are organized into two
business segments. The Health Care Group consists of Hill-Rom and Medeco
Security Locks, which is included in this segment due to Medeco's relatively
small size. Results for Block Medical, which was sold on July 22, 1996, are
included in this segment through that date. The Funeral Service Group
consists of Batesville Casket Company and Forethought Financial Services
(Forethought).
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
SUMMARY
Consolidated net revenues increased $92 million, or 5%, in 1997. Operating
profit of $264 million was up 12%, net income of $157 million was up 12% and
earnings per share of $2.28 increased 13%. Excluding the gain on the sale of
Block Medical ($8 million or $.12 per share) in the third quarter of 1996, net
income and earnings per share increased 19% and 20%, respectively, in 1997.
NET REVENUES
Health Care sales increased $20 million, or 4%, due to higher shipments of
Advance series beds, stretchers, architectural equipment and communications
products in Hill-Rom's U.S. acute care market and good market acceptance of the
Resident LTC bed in the long-term care market. In Hill-Rom's European markets,
lower shipments in Germany and unfavorable currency adjustments were partially
offset by increased shipments in France. The German market continues to be
negatively affected by health care reform and general economic conditions.
Sales at Medeco were up due to higher shipments of door security products,
partially offset by lower demand in route management (primarily pay telephone
business). Medeco and Block (for which eight months of sales were reflected in
1996 results) did not contribute significantly to the overall sales of the
Health Care Group.
Health Care rental revenue grew $5 million, or 1%. In the U.S. long-term
care market, increased units in use and higher rates were partially offset by
a shift toward greater use of lower cost products. In the U.S. home care
market, unit growth and increased rates generated from higher-featured new
products were partially offset by lower Medicare reimbursement rates. Acute
care rental revenues were down year over year due to cost and competitive
pressures and lower product mix, largely offset by increased units in use.
Rental revenues in Europe were down due to softness in the German therapy
market and unfavorable currency adjustments.
Funeral Service sales increased $21 million, or 4%. Unit volume growth of
traditional caskets and cremation products in an essentially flat death market
was partially offset by lower casket product mix. The effect of price increases
was mostly offset by rebates and discounts.
Insurance revenues were up $46 million, or 21%. Earned premium revenue
increased $22 million due primarily to increased policies in force year over
year. Interest income grew $16 million, reflecting a larger investment
portfolio, partially offset by marginally lower yields. Policy sales were up
over 16% in 1997. Since premium revenues are earned over the life of the policy
holder, current year sales will primarily affect revenues and earnings in future
years. Realized net gains on the sale of investments was $8 million in 1997
compared with a net of zero in 1996. The newly formed trust business did not
have a significant effect on Forethought's operations in 1997 and prior years.
-10-
GROSS PROFIT
Gross profit on Health Care sales of $266 million was up $32 million, or 14%,
reflecting the increased shipments in Hill-Rom's U.S. markets. As a percentage
of sales, gross profit improved from 41% in 1996 to 45% in 1997 due to increased
shipments of higher margin products, continued improvements in direct material,
labor and overhead costs and leveraging of fixed manufacturing expense in the
United States. Decreased shipments of lower margin European products also
contributed to the overall improvement in margins.
Gross profit on Health Care rentals increased $3 million, or 2%, to $143
million and, as a percentage of revenues, was essentially unchanged at 38%.
This comparison reflects the issues generating the year to year change in rental
revenues discussed above. Field service costs continued to improve.
Gross profit on Funeral Service sales of $264 million was up $18 million, or
7%, in 1997. As a percentage of sales, it increased from 47% in 1996 to 48% in
1997, reflecting productivity improvements and leveraging of fixed manufacturing
costs, partially offset by lower casket product mix.
Profit before other operating expenses in insurance operations increased
$19 million, or 51%, due to higher investment income (with minimal
corresponding direct cost), profits earned on the larger base of policies in
force, net gains on the sale of investments and continued control of direct
administrative expenses. These items were partially offset by an increase in
the crediting rate (the interest rate that Forethought uses to increase the
face amount on insurance policies to have the benefit grow).
OTHER OPERATING EXPENSES
These expenses, consisting of selling, marketing, distribution and general
administrative costs, increased $40 million, or 9%, in 1997. As a percentage of
consolidated revenues, they grew from 26% in 1996 to 27% in 1997. This growth
primarily reflected higher incentive compensation and commissions on improved
operating performance and costs associated with product and market development
efforts. Continued process improvements and cost control throughout the Company
mitigated the effect of these increases.
OPERATING PROFIT
Operating profit in the Health Care Group increased $23 million, or 21%, in 1997
due to higher shipments and profitability in Hill-Rom's U.S. markets, reduced
operating losses in Europe and marginal growth in rental revenue and profits.
Operating profit in the Funeral Service Group of $160 million was up $16
million, or 11%, from 1996. At Batesville Casket, growth in sales and gross
profit was partially offset by higher incentive compensation expense.
Forethought's operating profit growth was driven primarily by higher investment
income.
Consolidated operating profit of $264 million increased $28 million, or 12%.
The growth in the Health Care and Funeral Service Groups was partially offset by
higher corporate expenses.
OTHER INCOME AND EXPENSE
Interest expense was down slightly due to lower debt associated with European
operations. Interest income increased due to higher levels of cash and
equivalents, partially offset by lower interest earned on other investments.
Other income, net, in 1996 included the $3 million pre-tax gain on the sale of
Block Medical.
INCOME TAXES
The effective income tax rate in 1997 declined marginally to 39.4% from 39.9% in
1996. Excluding the tax benefit of $6 million on the book and tax differences
in the basis of Block, the effective rate was 42.5% in 1996. The lower rate in
1997 was due primarily to reduced operating losses in Europe.
-11-
1996 COMPARED WITH 1995
SUMMARY
Consolidated net revenues increased $59 million, or 4%, in 1996. Operating
profit of $236 million was up 32%, net income of $140 million was up 56% and
earnings per share of $2.02 increased 59%.
Third quarter 1996 results reflect income of $8 million, or $.12 per share,
relative to the sale of Block Medical (see Note 3). In the fourth quarter of
1995, the Company recorded charges totaling $26 million, or $.37 per share, to
reduce the carrying value of Block Medical goodwill and certain manufacturing
facilities in Europe held for disposal. Excluding these items, operating profit
increased 15%, net income increased 14% and earnings per share increased 16% in
1996.
NET REVENUES
Health Care sales increased $12 million, or 2%, due to higher unit volume of
Advance series beds and architectural and communications products in Hill-Rom's
U.S. acute care and long-term care markets. Order patterns for acute care
capital goods returned to a more normal pattern following two years of health
care provider restructuring and consolidation. These improvements were
partially offset by lower volume in Europe (France and Germany). Government
cost and price controls and general economic conditions hampered growth in
Europe. Sales at Medeco were down year over year. Route management (pay
telephone, vending, gaming and automatic teller machines) shipments were
negatively affected by the delay in obtaining contracts with other Bell
operating companies. This was driven in part by passage of the comprehensive
telecommunications act in Congress, which caused most telecommunications
companies to "wait and see" what the economic and technological fallout of the
new law would be. Door security shipments were up due to strong dealer demand
and institutional business. Medeco and Block (for which eight months of sales
were reflected in 1996 results) did not contribute significantly to the overall
sales of the Health Care segment.
Health Care rental revenue grew $5 million, or 1%. In the U.S. long-term
care market, units in use were up on the strength of increased market
penetration and higher average rental rates were generated from the introduction
of new, higher value products. In the U.S. home care market, unit growth
continued, but at a slower rate due primarily to Medicare's 1996 elimination of
reimbursement for low airloss therapy products used for the prevention of
pressure ulcers. Average rental rates were up marginally. Growth in these two
markets was largely offset by declining rental rates and units in use in the
U.S. acute care market. Rates were depressed by cost management in the acute
care setting and competitive pressures. Rental units in use were negatively
affected by increased sales of Hill-Rom beds providing low airloss therapy.
Rental revenues in Europe were unchanged year over year.
Funeral Service sales increased $9 million, or 2%, due to price increases,
growth in traditional casket unit volume and higher sales of Options cremation
products. Unit volume growth was achieved despite an essentially flat market
for casketed deaths in 1996.
Insurance revenues were up $33 million, or 18%. Interest income accounted
for $12 million of this increase, reflecting a larger investment portfolio,
partially offset by slightly lower yields. The growth in earned premium revenue
was due primarily to increased policies in force year over year. Policy sales
were up over 20% in 1996. Since premium revenues are earned over the life of
the policy holder, this increase will primarily affect revenues and earnings in
future years.
-12-
GROSS PROFIT
Gross profit on Health Care sales of $234 million was up $25 million, or 12%,
due primarily to higher shipments in Hill-Rom's U.S. acute care market. As a
percentage of sales, gross profit improved from 38% in 1995 to 41% in 1996.
Increased shipments of higher value products, improvements in direct material,
labor and overhead costs and leveraging of fixed manufacturing expenses in the
United States and decreased sales of lower margin European products were
responsible for this improvement.
Gross profit on Health Care rentals increased $18 million, or 15%, to $140
million and, as a percentage of revenues, improved from 33% to 38%. Increased
therapy unit utilization and the introduction of new, higher value products in
the long-term care and home care markets, improvements in field service costs
and lower acquisition related expenses were partially offset by higher therapy
unit depreciation and lower utilization and rental rates in the acute care
market.
Gross profit on Funeral Service sales of $246 million was up $9 million, or
4%, in 1996. As a percentage of sales, it increased from 46% in 1995 to 47% in
1996 due to improved material costs and leveraging of fixed manufacturing
expenses, partially offset by increased sales of lower margin caskets.
Profit before other operating expenses in insurance operations increased $9
million, or 32%, in 1996 due to higher investment income (with minimal
corresponding direct cost), profits earned on the larger base of policies in
force and control of direct administrative expenses. The crediting rate was
essentially unchanged year over year.
OTHER OPERATING EXPENSES
These expenses, consisting of selling, marketing, distribution and general
administrative costs, increased $7 million, or 2%, in 1996. Excluding unusual
charges of $26 million in 1995, they increased $33 million, or 8%, in 1996. As
a percentage of consolidated revenues, they were up slightly from 25% in 1995
(excluding unusual charges) to 26% in 1996. Higher incentive compensation and
commission expenses associated with improved performance and expenditures on
product and market development were partially offset by process improvements and
cost control throughout the Company.
OPERATING PROFIT
Operating profit in the Health Care Group, excluding unusual charges in 1995,
increased $23 million, or 26%, to $111 million in 1996. Increased sales of
higher value products in the U.S. acute care capital market, improved therapy
unit utilization and reduced manufacturing and acquisition costs were partially
offset by higher incentive compensation and commission expenses.
Operating profit in the Funeral Service Group of $144 million was up $10
million, or 7%, from 1995. At Batesville Casket, operating profit was
essentially flat year over year as increased casket and cremation unit volume
and improved material and manufacturing cost performance were offset by
increased sales of lower margin caskets and higher product and market
development expenses. At Forethought, higher investment income and policies in
force and control of fixed administrative expenses combined to generate a 71%
increase in operating profit.
Excluding the unusual charges in 1995, consolidated operating profit of $236
million increased $31 million, or 15%, in 1996. The increases in the operating
segments were partially offset by higher incentive compensation and legal
expenses at corporate.
OTHER INCOME AND EXPENSE
Interest expense increased $2 million, or 10%, due to increased debt associated
with Hill-Rom's European operations. Investment income was up $2 million, or
13%, due primarily to higher average levels of interest earning assets.
INCOME TAXES
The effective income tax rate in 1996 was 39.9% compared with 47.1% in 1995.
Excluding the tax benefit of approximately $6 million on the book and tax
differences in the basis of Block Medical recorded in 1996 and the $26 million
nondeductible unusual charge in 1995, the effective rate was 42.5% in 1996 and
40.9% in 1995.
-13-
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
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) grew from $266 million at the end of 1996
to $364 million at the end of 1997.
OPERATING ACTIVITIES
Net cash generated by operating activities of $246 million in 1997 compares with
$240 million in 1996. Higher earnings and increased current liabilities were
partially offset by an increase in accounts receivable.
The $46 million increase in accounts receivable was due primarily to strong
fourth quarter shipments at Hill-Rom and slower collections from Medicare
intermediaries, which was also responsible for an increase in days revenues
outstanding from 72 in 1996 to 80 in 1997. Hill-Rom believes that this trend is
endemic to the industry in general and is very aggressively managing these
accounts. In 1996, lower shipments in Europe reduced days outstanding to 72
from 80 in 1995. Increased current liabilities reflect the high production
levels in the fourth quarter and higher incentive compensation, stock purchase
and income tax accruals. Inventories declined $17 million in 1997 and $15
million in 1996 due to strong fourth quarter shipments in both years.
INVESTING ACTIVITIES
Net cash used in investing activities increased from $317 million in 1996 to
$339 million in 1997. Capital expenditures of $85 million were down $7 million
from $92 million in 1996 due to lower spending on therapy equipment at Hill-Rom
and various items at Batesville Casket.
Forethought's insurance operation invests the cash proceeds on insurance
premiums predominantly in U.S. treasuries and agencies and high-grade corporate
bonds with fixed maturities. The Company's objective is to purchase investment
securities with maturities that match the expected cash outflows of policy
benefit payments. The investment portfolio is periodically realigned to better
meet this objective, as reflected in the relatively large amount of sales prior
to maturity. Sales prior to maturity in 1997, 1996 and 1995 resulted in net
gains.
On December 18, 1997, subsequent to the end of fiscal year 1997, Hill-Rom
acquired the stock of Air-Shields, Inc., a manufacturer and supplier of infant
incubators and warmers, and certain other businesses of Vickers PLC for a cash
payment of $99 million. On February 9, 1998, Hill-Rom acquired the stock of
MEDAES Holdings, Inc., a manufacturer of medical architectural systems, for a
cash payment of $62 million.
FINANCING ACTIVITIES
The Company's long-term debt-to-equity ratio was 23% at year end 1997 compared
with 26% at year end 1996. This decline was due primarily to the increase in
equity during 1997. Payments on short-term debt were relative to European
operations including, in 1996, restructuring. On December 8, 1997, subsequent
to the end of fiscal year 1997, the Company issued $100 million of 6 3/4 %
debentures due in 2027. The proceeds will be used for general corporate
purposes. Additional debt capacity, existing cash and other working capital
afford the Company considerable flexibility in the funding of internal and
external growth.
Quarterly cash dividends per share were $.15 in 1995, $.155 in 1996 and $.165
in 1997. An additional increase to $.18 per quarter was approved in January
1998.
In 1997, the Company repurchased 290,395 shares of its common stock at a cost
of $13 million. In December 1997, subsequent to the end of fiscal year 1997,
990,000 shares were purchased for $42 million.
-14-
INSURANCE ASSETS AND LIABILITIES
Insurance assets of $2,501 million grew 16% over the past year. Cash and
invested assets of $1,934 million constitute 77% of the assets. The
investments are concentrated in U.S. treasuries and agencies and high-grade
corporate bonds. The invested assets are more than adequate to fund the
insurance reserves and other liabilities of $1,693 million. Statutory
reserves represent 61% of the face value of insurance in force. Forethought
Life Insurance Company declared a $12 million dividend to Hillenbrand
Industries in the fourth quarter of 1997, paid in December 1997, and made $11
million and $10 million dividend payments in 1996 and 1995, respectively.
The statutory capital and surplus as a percent of statutory liabilities of
Forethought Life Insurance Company was 8.0% at December 31, 1997 compared
with 8.3% at December 31, 1996. This drop reflects the dividend payment.
The non-current deferred tax benefit relative to insurance operations results
from differences in recognition of insurance policy revenues and expenses for
financial accounting and tax reporting purposes. Financial accounting rules
require ratable recognition of insurance product revenues over the lives of
the respective policy holder. These revenues are recognized in the year of
policy issue for tax purposes. This results in a deferred future tax
benefit. Insurance policy acquisition expenses must be capitalized and
amortized for both financial accounting and tax purposes. Financial
accounting rules require a greater amount to be capitalized and amortized
than for tax reporting. This results in a deferred future tax cost, which
partially offsets the deferred future tax benefit. Excluding the tax effect
of adjusting the investment portfolio to fair value, the net deferred future
tax benefit increased $6 million in 1997, compared to a $4 million increase
in 1996.
SHAREHOLDERS' EQUITY
Cumulative treasury stock acquired in open market transactions increased to
13,299,067 shares in 1997, up from 13,008,672 shares in 1996. The Company
currently has Board of Directors' authorization to repurchase up to a total
of 19,200,000 shares, including 5,000,000 incremental shares approved on
January 19, 1998. Repurchased shares are to be used for general business
purposes. From the cumulative shares acquired, 15,284 shares, net of shares
converted to cash to pay withholding taxes, were reissued in 1997 to
individuals under the provisions of the Company's various stock-based
compensation plans.
OTHER ISSUES
ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation," in October 1995. SFAS No. 123 encourages
companies to adopt a fair value approach to valuing stock-based compensation
that would require compensation cost to be recognized based on the fair value
of the stock-based instrument granted. The Company has elected, as permitted
by the standard, to continue to follow its intrinsic value based method of
accounting for its stock-based compensation plans consistent with the
provisions of Accounting Principles Board (APB) Opinion No. 25. Under the
intrinsic method, compensation cost for stock-based compensation is measured
as the excess, if any, of the quoted market price of the instrument at the
measurement date over the exercise price. The Company has provided the pro
forma disclosure provisions of SFAS No. 123 in Note 5 to the consolidated
financial statements.
SFAS No. 128, "Earnings per Share," was issued in February 1997. SFAS No.
128 requires disclosure of basic and diluted earnings per share in place of
primary and fully diluted earnings per share as required by APB 15. The Company
is required to adopt this standard in the first quarter of 1998 and does not
believe it will materially affect either its previously reported or future
earnings per share.
-15-
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997.
This standard requires that the Company disclose, either in the income
statement or in a separate financial statement, net income as currently
reported and other components of comprehensive income. Comprehensive income
is defined as the change in shareholders' equity during a period resulting
from transactions and other events and circumstances from non-owner sources.
The Company is required to adopt this standard not later than the first
quarter of 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This standard defines segments of an
enterprise as the components of the company whose operations are reviewed
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. It requires disclosures about
products and services, geographic areas and major customers. The Company is
required to adopt this standard not later than the issuance of its fiscal
1999 annual report.
ENVIRONMENTAL MATTERS
Hillenbrand Industries is committed to operating all of its businesses in a
way that protects the environment. 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. These reserves have been determined
without consideration of possible loss recoveries from third parties.
Compliance with other current governmental provisions relating to protection
of the environment also does not materially affect the Company's capital
expenditures, earnings or competitive position. Recent 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.
INFLATION
Inflation and changing prices had a negligible effect on results of
operations in 1997, 1996 and 1995. Improvements in manufacturing and
administrative efficiencies continue to minimize the effect of price
increases.
FACTORS THAT MAY AFFECT FUTURE RESULTS
New legislation to be phased in beginning July 1, 1998 establishes Resource
Utilization Groups for Medicare Part A patients. Reimbursement will be on a
prospective fee basis as opposed to the current cost plus basis. This change
will have a dampening effect on the Company's rental revenues in the
long-term care market. Restructuring and reform in the health care industry,
including consolidation of providers and payers, growth of managed care and
expansion of the home care and long-term care markets, continues. Growth in
the Company's acute care capital markets has improved dramatically over the
past two years and the order pattern entering the first quarter of 1998
remains strong. While continued growth is not a certainty, the Company
believes that its innovative products and services designed to improve
patient outcomes and reduce total delivery cost, will enable it to maintain
its leadership role in this and the other markets it serves. Although
operating losses in Europe declined in 1997 compared with 1996 and
operations in France became profitable in the fourth quarter, it is expected
that Europe will remain unprofitable overall in 1998.
The market for casketed deaths is expected to remain flat for the
foreseeable future. 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.
While Forethought's growth has slowed as its entry into targeted
jurisdictions winds down, it will work to maintain and strengthen its
leadership position in the life insurance-based funeral planning market
through on-going product enhancements. Its entry into the trust-based
funeral planning market is not expected to have a material effect on the
Company's financial results for the next several years.
-16-
Many existing computer programs use only two digits to identify years.
These programs were designed without consideration for the affect of the
upcoming change in century, and if not corrected, could fail or create
erroneous results by or at the year 2000. While the Company does not
believe that this issue is material to its business, it has developed action
plans to ensure that its operations will not be adversely affected by "Year
2000" software failures. Steps taken under these plans are intended to
identify, evaluate and implement changes to computer systems and
applications necessary to achieve a year 2000 date conversion with no effect
on customers or disruption to business operations. Major areas of potential
business impact have been identified and conversion efforts are underway.
The Company is communicating with suppliers, dealers, financial institutions
and others with which it does business to coordinate Year 2000 conversion.
The total cost of achieving Year 2000 compliance is not expected to exceed
$10 million over the cost of normal software upgrades and replacements and
will be incurred through fiscal year 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including fluctuations in
interest rates, mismatches in funding obligations and receipts and variability
in currency exchange rates. The Company has established policies, procedures
and internal processes governing its management of market risks and the use of
financial instruments to manage its exposure to such risks.
The Company's insurance operation is subject to fluctuations in interest
rates on its investment portfolio and, to a lesser extent, prepayment and
equity pricing risks. The investment portfolio is concentrated in high-grade
corporate bonds and U.S. agencies and treasuries with predominantly fixed
interest rates. The portfolio is managed in accordance with the Company's
objective to substantially match investment durations with policy liability
durations and within applicable insurance industry regulations. Investments
may be liquidated prior to maturity in order to meet the matching objective
and manage fluctuations in interest rates and prepayments. They are,
accordingly, classified as "available for sale" and are not purchased for
trading purposes. The Company uses various techniques, including duration
analysis, to assess the sensitivity of the investment portfolio to interest
rate fluctuations, prepayment activity, equity price changes and other risks.
The insurance operation also performs and reports results for asset adequacy
analysis as required by the National Association of Insurance Commissioners.
Based on the duration of the investment portfolio at November 29, 1997, a
hypothetical 10% increase in weighted average interest rates could reduce the
market value of the investment portfolio approximately $76 million over a
twelve-month period. The Company believes its investment policy minimizes
the risk of adverse fluctuation in surplus value. In addition, the long-term
fixed nature of portfolio assets reduces the effect of short-term interest
rate fluctuations on earnings.
The Company is subject to variability in foreign currency exchange rates
primarily in its European operations. Exposure to this variability is
managed primarily through the use of natural hedges, whereby funding
obligations and assets are both managed in the local currency. The Company,
from time to time, enters into currency exchange agreements to manage its
exposure arising from fluctuating exchange rates related to specific
transactions. The sensitivity of earning and cash flows to variability in
exchange rates is assessed by applying an appropriate range of potential rate
fluctuations to the Company's assets, obligations and projected results of
operations denominated in foreign currencies. Based on the Company's overall
currency rate exposure at November 29, 1997, movements in currency rates would
not materially affect the financial position of the Company.
-17-
- ----------------------------------------------------------------------------------------------------------------
KEY FINANCIAL DATA (A)
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
- ----------------------------------------------------------------------------------------------------------------
% Pretax, preinterest expense,
income to revenues 16 15 12 11 17
% Net income to revenues 9 8 6 6 10
% Income taxes to pretax income 39 40 47 38 40
- ----------------------------------------------------------------------------------------------------------------
BALANCE SHEET
- ----------------------------------------------------------------------------------------------------------------
% Long-term debt to total capital 19 21 22 23 14
% Total debt to total capital 24 28 26 26 26
Current assets/current liabilities (B) 2.3 2.2 2.1 2.2 1.9
Working capital turnover (B) 3.3 3.9 4.2 4.6 4.7
- ----------------------------------------------------------------------------------------------------------------
PROFITABILITY
- ----------------------------------------------------------------------------------------------------------------
% Return on total capital 14 14 9 10 20
% Return on average shareholders' equity 20 19 13 13 25
- ----------------------------------------------------------------------------------------------------------------
ASSET TURNOVER
- ----------------------------------------------------------------------------------------------------------------
Revenues/inventories (B) 19.1 15.3 12.9 13.7 14.7
Revenues/receivables (B) 4.5 5.1 4.6 4.7 5.2
- ----------------------------------------------------------------------------------------------------------------
STOCK MARKET
- ----------------------------------------------------------------------------------------------------------------
Year-end price/earnings (P/E) 20 18 25 23 20
Year-end price/book value 3.4 3.3 3.1 3.0 4.6
- ----------------------------------------------------------------------------------------------------------------
(A) RESTATED, WHERE APPLICABLE, TO EXCLUDE THE RESULTS OF THE DISCONTINUED OPERATION.
(B) EXCLUDES INSURANCE OPERATIONS.
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENT COMPARISON
- ----------------------------------------------------------------------------------------------------------------
Fiscal Year Percent Change
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1997 1996 1995 1997/96 1996/95 1995/94
- ----------------------------------------------------------------------------------------------------------------
Net revenues:
Health Care sales $ 588 $ 568 $ 556 4% 2% (6%)
Health Care rentals 378 373 368 1% 1% 11%
Funeral Service sales 545 524 515 4% 2% 3%
Insurance 265 219 186 21% 18% 21%
- ----------------------------------------------------------------------------------------------------------------
Total revenues $1,776 $1,684 $1,625 5% 4% 3%
- ----------------------------------------------------------------------------------------------------------------
Gross profit:
Health Care sales $ 266 $ 234 $ 209 14% 12% (18%)
Health Care rentals 143 140 122 2% 15% 8%
Funeral Service sales 264 246 237 7% 4% 3%
Insurance 72 57 45 26% 27% 13%
- ----------------------------------------------------------------------------------------------------------------
Total gross profit 745 677 613 10% 10% (4%)
Other operating expenses 481 441 408 9% 8% 3%
Unusual charges - - 26 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Operating profit 264 236 179 12% 32% 15%
Other expense, net (5) (3) (9) 67% (67%) (18%)
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 259 233 170 11% 37% 17%
Income taxes 102 93 80 10% 16% 45%
- ----------------------------------------------------------------------------------------------------------------
Net income $ 157 $ 140 $ 90 12% 56% -
- ----------------------------------------------------------------------------------------------------------------
-18-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Financial Statements:
Report of Independent Accountants 20
Statements of Consolidated Income for the three years ended
November 29, 1997 21
Consolidated Balance Sheets at November 29, 1997 and November 30, 1996 22
Statements of Consolidated Cash Flows for the three years ended
November 29, 1997 24
Statements of Consolidated Shareholders' Equity for the three years ended
November 29, 1997 25
Notes to Consolidated Financial Statements 26
Financial Statement Schedule for the three years ended November 29, 1997:
Schedule II - Valuation and Qualifying Accounts 45
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
-19-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Hillenbrand Industries, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Hillenbrand Industries, Inc. and its subsidiaries at November 29, 1997 and
November 30, 1996, and the results of their operations and their cash flows for
each of the three years in the period ended November 29, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Indianapolis, Indiana
January 12, 1998
-20-
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------
NOVEMBER 29, November 30, December 2,
Year Ended 1997 1996 1995
- ------------------------------------------------------------------------------------------------
NET REVENUES
Health Care sales $ 588 $ 568 $ 556
Health Care rentals 378 373 368
Funeral Service sales 545 524 515
Insurance revenues 265 219 186
- ------------------------------------------------------------------------------------------------
Total revenues 1,776 1,684 1,625
- ------------------------------------------------------------------------------------------------
COST OF REVENUES
Health Care cost of goods sold 322 334 347
Health Care rental expenses 235 233 246
Funeral Service cost of goods sold 281 278 278
Insurance cost of revenues 193 162 141
- ------------------------------------------------------------------------------------------------
Total cost of revenues 1,031 1,007 1,012
Other operating expenses 481 441 408
Unusual charges - - 26
- ------------------------------------------------------------------------------------------------
OPERATING PROFIT 264 236 179
Other income (expense), net:
Interest expense (21) (22) (20)
Investment income, net 18 17 15
Other (2) 2 (4)
- ------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 259 233 170
Income taxes 102 93 80
- ------------------------------------------------------------------------------------------------
NET INCOME $ 157 $ 140 $ 90
- ------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 2.28 $ 2.02 $1.27
- ------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .66 $ .62 $ .60
- ------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 68,796,439 69,474,266 70,757,868
- ------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-21-
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
- -------------------------------------------------------------------------------
NOVEMBER 29, November 30,
1997 1996
- -------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 364 $ 266
Trade accounts receivable, less allowances of
$25 in 1997 and $19 in 1996 333 287
Inventories 79 96
Other 45 45
- -------------------------------------------------------------------------------
Total current assets 821 694
- -------------------------------------------------------------------------------
EQUIPMENT LEASED TO OTHERS 280 278
Less accumulated depreciation 189 185
- -------------------------------------------------------------------------------
Equipment leased to others, net 91 93
- -------------------------------------------------------------------------------
PROPERTY 651 656
Less accumulated depreciation 413 403
- -------------------------------------------------------------------------------
Property, net 238 253
- -------------------------------------------------------------------------------
OTHER ASSETS
Intangible assets at amortized cost:
Patents and trademarks 19 24
Excess of cost over net asset values of
acquired companies 96 112
Other 11 13
Deferred charges and other assets 51 50
- -------------------------------------------------------------------------------
Total other assets 177 199
- -------------------------------------------------------------------------------
INSURANCE ASSETS (NOTE 11)
Investments 1,934 1,663
Deferred acquisition costs 473 406
Deferred income taxes 43 44
Other 51 44
- -------------------------------------------------------------------------------
Total insurance assets 2,501 2,157
- -------------------------------------------------------------------------------
TOTAL ASSETS $3,828 $3,396
- -------------------------------------------------------------------------------
-22-
- -------------------------------------------------------------------------------
NOVEMBER 29, November 30,
1997 1996
- -------------------------------------------------------------------------------
LIABILITIES
- -------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term debt (Notes 4 and 7) $ 60 $ 74
Current portion of long-term debt (Notes 4 and 7) 1 1
Trade accounts payable 71 50
Income taxes payable (Note 9) 27 21
Accrued compensation 63 58
Other (Note 13) 137 116
- -------------------------------------------------------------------------------
Total current liabilities 359 320
- -------------------------------------------------------------------------------
LONG-TERM DEBT (NOTES 4 AND 7) 203 204
- -------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES (NOTES 5 AND 13) 75 74
- -------------------------------------------------------------------------------
DEFERRED INCOME TAXES (NOTES 1 AND 9) 7 13
- -------------------------------------------------------------------------------
INSURANCE LIABILITIES (NOTE 11)
Benefit reserves 1,667 1,449
Unearned revenue 605 528
General liabilities 26 21
- -------------------------------------------------------------------------------
Total insurance liabilities 2,298 1,998
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 2,942 2,609
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 13)
- -------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes 5 and 6)
- -------------------------------------------------------------------------------
Common stock - without par value:
Authorized - 199,000,000 shares
Issued - 80,323,912 shares in 1997 and 1996 4 4
Additional paid-in capital 14 14
Retained earnings (Note 4) 1,085 973
Accumulated unrealized gain on investments 34 21
Foreign currency translation adjustment (3) 10
Treasury stock, at cost: 1997 - 11,812,743 shares;
1996 - 11,537,632 shares (248) (235)
- -------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 886 787
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,828 $3,396
- -------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-23-
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------------------
NOVEMBER 29, November 30, December 2,
Year Ended 1997 1996 1995
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $157 $140 $90
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation, amortization and write-down of goodwill 102 99 127
Change in noncurrent deferred income taxes (12) (6) (13)
Gain on sale of business - (3) -
Change in working capital excluding cash, current
debt, acquisitions and dispositions:
Trade accounts receivable (46) 24 (13)
Inventories 17 15 (6)
Other current assets - (1) (1)
Trade accounts payable 21 (21) 18
Accrued expenses and other liabilities 32 5 7
Change in insurance deferred policy acquisition costs (67) (67) (58)
Change in other insurance items, net 35 40 34
Other, net 7 15 (7)
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 246 240 178
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (85) (92) (103)
Proceeds on disposal of fixed assets and equipment
leased to others 1 2 2
Acquisitions of businesses, net of cash acquired - (6) (4)
Other investments (4) (3) -
Proceeds on sale of business - 15 -
Insurance investments:
Purchases (721) (437) (552)
Proceeds on maturities 112 78 65
Proceeds on sales prior to maturity 358 126 290
- --------------------------------------------------------------------------------------------
Net cash used in investing activities (339) (317) (302)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Additions to short-term debt 10 119 23
Reductions to short-term debt (15) (81) (8)
Reductions to long-term debt (2) (3) (2)
Payment of cash dividends (45) (43) (43)
Treasury stock acquired (13) (51) (23)
Insurance premiums received 514 459 428
Insurance benefits paid (256) (227) (201)
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 193 173 174
- --------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) (1) 1
- --------------------------------------------------------------------------------------------
TOTAL CASH FLOWS 98 95 51
CASH AND CASH EQUIVALENTS
At beginning of year 266 171 120
- --------------------------------------------------------------------------------------------
At end of year $364 $266 $171
- --------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-24-
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------------------
NOVEMBER 29, November 30, December 2,
Year Ended 1997 1996 1995
- --------------------------------------------------------------------------------------------
COMMON STOCK $ 4 $ 4 $ 4
- --------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Beginning of year 14 14 12
Fair market value over cost on
reissuance of treasury shares (1997 - 15,284;
1996 - 33,996; 1995 - 14,537) - - -
Other - - 2
- --------------------------------------------------------------------------------------------
End of year 14 14 14
- --------------------------------------------------------------------------------------------
RETAINED EARNINGS
Beginning of year 973 876 829
Net income 157 140 90
Dividends (45) (43) (43)
- --------------------------------------------------------------------------------------------
End of year 1,085 973 876
- --------------------------------------------------------------------------------------------
ACCUMULATED UNREALIZED GAIN ON INVESTMENTS
Beginning of year 21 23 -
Net unrealized holding gain (loss) 13 (2) 23
- --------------------------------------------------------------------------------------------
End of year 34 21 23
- --------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Beginning of year 10 14 10
Translation adjustment (13) (4) 4
- --------------------------------------------------------------------------------------------
End of year (3) 10 14
- --------------------------------------------------------------------------------------------
TREASURY STOCK
Beginning of year (235) (185) (162)
Shares acquired (1997 - 290,395;
1996 - 1,425,100; 1995 - 760,000) (13) (51) (23)
Shares reissued - 1 -
- --------------------------------------------------------------------------------------------
End of year (248) (235) (185)
- --------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 886 $ 787 $ 746
- --------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-25-
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies specific to insurance operations are summarized in Note 11.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, except for several small subsidiaries which
provide ancillary services to the Company and the public. These subsidiaries
are not consolidated because of their materiality and are accounted for by the
equity method. Their results of operations appear in the income statement, net
of income taxes, under the caption "Other income (expense), net." Material
intercompany accounts and transactions have been eliminated in consolidation.
The Company's fiscal year is the 52 or 53 week period ending the Saturday
nearest November 30.
ACCOUNTING STANDARDS
SFAS No. 128, "Earnings per Share," was issued in February 1997. This standard
requires disclosure of basic and diluted earnings per share in place of primary
and fully diluted earnings per share as required by Accounting Principles Board
(APB) Opinion No. 15. The Company is required to adopt this standard in the
first quarter of 1998 and does not believe it will materially affect either its
previously reported or future earnings per share.
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997.
This standard requires that the Company disclose, either in the income statement
or in a separate financial statement, net income as currently reported and other
components of comprehensive income. Comprehensive income is defined as the
change in shareholders' equity during a period resulting from transactions and
other events and circumstances from non-owner sources. The Company is required
to adopt this standard not later than the first quarter of 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This standard defines segments of an
enterprise as the components of the company whose operations are reviewed
regularly by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance. It requires disclosures about products
and services, geographic areas and major customers. The Company is required to
adopt this standard not later than the issuance of its 1999 annual report.
NATURE OF OPERATIONS
Hillenbrand Industries is organized into two segments - the Health Care Group
and the Funeral Service Group. The Health Care Group consists of Hill-Rom
Company and Medeco Security Locks (included in this segment for reporting
purposes only). Block Medical was included in this segment prior to its sale
in 1996. Hill-Rom generates the predominant share of this segment's revenue
and operating profit and is a leading manufacturer of patient care products
and leading provider of specialized rental therapy products designed to
assist in managing the complications of patient immobility. Its products and
services are marketed to acute and long-term health care facilities and home
care patients primarily in North America and Europe. The Health Care segment
generated 54% of Hillenbrand's revenues in 1997. The Funeral Service Group
consists of Batesville Casket Company and Forethought Financial Services
(Forethought). Batesville Casket Company is a leading producer of protective
metal and hardwood burial caskets, cremation urns and caskets and marketing
support services. Its products are marketed to licensed funeral directors
operating licensed funeral homes primarily in North America. Batesville
generated 31% of Hillenbrand's revenues in 1997. Forethought provides
funeral homes in 42 U.S. states, the District of Columbia, Puerto Rico and
six Canadian provinces with life insurance policies and marketing support for
preneed, inflation-protected funeral planning. It entered the preneed trust
market in 1997. Forethought generated 15% of Hillenbrand's revenues in 1997.
-26-
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates. Refer to Notes 9 and 13 for
discussion of certain significant estimates.
CASH AND CASH EQUIVALENTS
The Company considers investments in marketable securities and other highly
liquid instruments with a maturity of three months or less at date of purchase
to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method or first-in, first-out (FIFO) method for
the percentage of inventories indicated in the table below. The LIFO reserve
approximates the excess of the current cost of inventories over the stated LIFO
values.
- -------------------------------------------------------------------------------
NOVEMBER 29, November 30, December 2,
1997 1996 1995
- -------------------------------------------------------------------------------
LIFO method 71% 71% 65%
FIFO method 29% 29% 35%
LIFO reserve $10 $11 $12
- -------------------------------------------------------------------------------
EQUIPMENT LEASED TO OTHERS
Equipment leased to others represents therapy rental units, which are recorded
at cost and depreciated on a straight-line basis over their estimated economic
life. These units are leased on a day-to-day basis.
PROPERTY
Property is recorded at cost and depreciated over the estimated useful life of
the assets using principally the straight-line method for financial reporting
purposes. Generally, when property is retired from service or otherwise
disposed of, the cost and related amount of depreciation or amortization are
eliminated from the asset and reserve accounts, respectively. The difference,
if any, between the net asset value and the proceeds is charged or credited to
income. The major components of property at the end of 1997 and 1996 were:
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Land $ 22 $ 25
Buildings and building equipment 144 146
Machinery and equipment 485 485
- -------------------------------------------------------------------------------
Total $651 $656
- -------------------------------------------------------------------------------
-27-
INTANGIBLE AND OTHER NON-CURRENT ASSETS
Intangible assets are stated at cost and amortized on a straight-line basis
over periods ranging from 3 to 40 years. The Company reviews goodwill and
other non-current assets for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. If
the undiscounted expected future cash flows from use of the asset are less
than the carrying value, an impairment loss is recognized. The amount of the
impairment loss is determined by comparing the discounted expected future
cash flows (including terminal value) with the carrying value. Goodwill
related to Block Medical was written down $20 million in the fourth quarter
of 1995. Changes in market conditions, the performance of certain products
and increased competitive pressures resulted in a significant reduction in
management's expectations regarding Block's future cash flows. Block was
sold in 1996.
Certain assets relative to the acquisition of Arnold in 1994 that were
being held for disposal, were written down $6 million in the fourth quarter of
1995 to their estimated fair value less cost of disposition. These assets were
sold in 1996.
Accumulated amortization of intangible assets was $156 million and $145
million as of November 29, 1997, and November 30, 1996, respectively.
ENVIRONMENTAL LIABILITIES
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
A reserve is established when it is probable that a liability has been incurred
and the amount of the loss can be reasonably estimated. These reserves are
determined without consideration of possible loss recoveries from third parties.
More specifically, each quarter, financial management, in consultation with its
environmental engineer, estimates the range of liability based on current
interpretation of environmental laws and regulations. For each site in which a
Company unit is involved, a determination is made of the specific measures that
are believed to be required to remediate the site, the estimated total cost to
carry out the remediation plan and the periods in which the Company will make
payments toward the remediation plan. The Company does not make an estimate of
general or specific inflation for environmental matters since the number of
sites is small, the magnitude of costs to execute remediation plans are not
significant and the estimated time frames to remediate sites are not believed to
be lengthy.
Specific costs included in environmental expense are site assessment,
development of a remediation plan, clean-up costs, post-remediation
expenditures, monitoring, fines, penalties and legal fees. The reserve
represents the expected undiscounted future cash outflows.
Expenditures that relate to current operations are charged to expense.
REVENUE RECOGNITION
Sales are recognized upon shipment of products to customers. Rental revenues
are recognized when services are rendered.
COST OF REVENUES
Health Care and Funeral Service cost of goods sold consist primarily of
purchased material costs, fixed manufacturing expense, and variable direct labor
and overhead costs. Health Care rental expenses are those costs associated
directly with rental revenue, including depreciation and service of the
Company's therapy rental units, service center facility and personnel costs, and
regional sales expenses.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the average
number of shares outstanding during each year, including restricted shares
issued to employees. Common equivalent shares arising from shares awarded under
the Company's stock-based compensation plans have been excluded from the
computation because of their insignificant dilutive effect.
-28-
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation" in October 1995. SFAS No. 123 encourages companies
to adopt a fair value approach to valuing stock-based compensation that would
require compensation cost to be recognized based on the fair value of the
stock-based instrument granted. The Company has elected, as permitted by the
standard, to continue to follow its intrinsic value based method of
accounting for its stock-based compensation plans consistent with the
provisions of APB No. 25. Under the intrinsic method, compensation cost for
stock-based compensation is measured as the excess, if any, of the quoted
market price of the instrument at the measurement date over the exercise
price. The Company has provided the pro forma disclosure provisions of SFAS
No. 123 in Note 5.
RETIREMENT PLANS
The Company and its subsidiaries have several defined benefit retirement plans
covering the majority of employees, including certain employees in foreign
countries. The Company contributes funds to trusts as necessary to provide for
current service and for any unfunded projected future benefit obligation over a
reasonable period. The benefits for these plans are based primarily on years of
service and the employee's level of compensation during specific periods of
employment.
-29-
The components of net pension expense are as follows:
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Service expense-benefits earned during the year $ 8 $ 7 $ 6
Interest expense on projected benefit obligation 9 8 7
Actual return on plan assets (10) (7) (12)
Net amortization and deferral - (1) 4
- -------------------------------------------------------------------------------
Net pension expense $ 7 $ 7 $ 5
- -------------------------------------------------------------------------------
The funded status of the plans is shown in the table below:
- ---------------------------------------------------------------------------------------
NOVEMBER 29, November 30,
1997 1996
- ---------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $85 in 1997 and $79 in 1996 $ (91) $ (84)
- ---------------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date $(135) $(122)
Plan assets at fair value, primarily U.S. Government
obligations, corporate bonds and notes, and common
stock issued by the Company. The value of this common
stock at date of acquisition by the plans was $3
and the current market value was $20 in 1997 and
$17 in 1996. 124 110
- ---------------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (11) (12)
Unrecognized net gain from past experience different
from that assumed (15) (14)
Unrecognized prior service cost 2 2
Unrecognized net asset at year-end being recognized
over 14 to 22 years from the initial compliance date
of December 1, 1985 (1) (1)
- ---------------------------------------------------------------------------------------
Unfunded accrued expenses included in liabilities $ (25) $ (25)
- ---------------------------------------------------------------------------------------
The assumptions used in accounting for the plans are as follows:
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Discount rate used to determine the
projected benefit obligation 7.5% 7.5% 7.5%
Rate of increase in future compensation
levels used to determine the projected
benefit obligation 5.5% 5.5% 5.5%
Expected long-term rate of return on
assets used to determine net periodic
pension cost 8.0% 8.0% 8.0%
- -------------------------------------------------------------------------------
-30-
In addition to the above plans, the Company assumed the unfunded
liabilities of a defined benefit plan in the acquisition of Arnold in 1994. The
unfunded accumulated benefit obligation of this plan, included in accrued
expenses, was $11 million on November 29, 1997, $13 million on November 30,
1996, and $14 million on December 2, 1995. Pension expense was approximately
$1 million in 1997, 1996 and 1995.
The Company also sponsors several defined contribution plans covering
certain of its employees. Employer contributions are made to these plans based
on a percentage of employee compensation. The cost of these defined
contribution plans was $5 million each in 1997, 1996 and 1995.
INCOME TAXES
The Company and its eligible subsidiaries file a consolidated income tax return.
Deferred income taxes are computed in accordance with SFAS No. 109, "Accounting
for Income Taxes." Deferred income taxes reflect the net tax effects of
temporary differences between the financial reporting carrying amounts of assets
and liabilities and the income tax amounts.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are primarily translated into U.S.
dollars at year-end rates of exchange and the income statements are translated
at the average rates of exchange prevailing during the year. Adjustments
resulting from translation of the financial statements of foreign operations
into U.S. dollars are excluded from the determination of net income and included
as a separate caption in shareholders' equity. Foreign currency gains and
losses resulting from foreign currency transactions are included in results of
operations and are not material.
2. ACQUISITIONS
In 1996, the Company's subsidiaries, Batesville Casket and Hill-Rom, each
acquired two small companies. The combined purchase price was $6 million.
Batesville Casket, purchased two regional casket distributors in 1995 and
Hill-Rom purchased the remaining minority interest in a subsidiary of Arnold,
which was initially acquired in 1994. The total purchase price for these
businesses in 1995 was $4 million.
Acquisitions occurring subsequent to November 29, 1997 are discussed in
Note 14.
3. DISPOSITION
On July 22, 1996, the Company sold the assets of Block Medical for cash and
stock totaling $17 million. The Company recorded a gain on the sale of $3
million ($2 million after income taxes) and a related income tax benefit of
approximately $6 million which will be realized from book and tax differences in
the basis of the business.
4. FINANCING AGREEMENTS
The Company's various financing agreements contain no provisions or conditions
relating to dividend payments, working capital and additional indebtedness.
-31-
Long-term debt consists of the following:
- ---------------------------------------------------------------------------------------
NOVEMBER 29, November 30,
1997 1996
- ---------------------------------------------------------------------------------------
Unsecured 8 1/2% debentures due on December 1, 2011 $100 $100
Unsecured 7% debentures due on February 15, 2024 100 100
Government sponsored bond with an interest rate of 5.0%
and maturities to 2008 2 2
Other 2 3
- ---------------------------------------------------------------------------------------
Total 204 205
Less current portion 1 1
- ---------------------------------------------------------------------------------------
Total long-term debt $203 $204
- ---------------------------------------------------------------------------------------
The scheduled payments on the long-term debt as of November 29, 1997 total
less than $1 million in each of the years 1998 through 2002.
Short-term debt consists of various lines of credit maintained for foreign
subsidiaries. The weighted average interest rate on all short-term borrowings
outstanding as of November 29, 1997 and November 30, 1996 was 3.9%.
At November 29, 1997, the Company had uncommitted credit lines totaling
$118 million available for its operations. These agreements have no commitment
fees, compensating balance requirements or fixed expiration dates.
Debt issued subsequent to November 29, 1997 is described in Note 14.
5. STOCK-BASED COMPENSATION
At November 29, 1997, the Company has three active stock-based compensation
plans; the Senior Executive Compensation Program, the Performance Compensation
Plan, and the 1996 Stock Option Plan, which are described below. These three
plans are administered by the Compensation Committee of the Board of Directors.
All shares issued under these plans are valued at market trading prices. The
Company's Senior Executive Compensation Program, initiated in fiscal year 1978,
provides long-term performance share compensation, which contemplates annual
payments of common stock of the Company to participants contingent on their
continued employment and upon achievement of pre-established financial
objectives of the Company over succeeding three-year periods. A total of
1,104,899 shares of common stock of the Company remain reserved for issuance
under the program. Total tentative performance shares payable through November
29, 1997, were 240,561. In addition, the Senior Executive Compensation Program
provides for participants to defer payment of long-term performance share and
other compensation earned in prior years. A total of 173,811 deferred shares
are payable as of November 29, 1997.
On April 7, 1992, the shareholders of the Company approved the adoption of
the Performance Compensation Plan whereby key employees will be awarded
tentative performance shares based upon achievement of performance targets. A
total of 1,290,028 shares of common stock remain reserved for issuance under
this plan as of November 29, 1997. In 1993, 386,096 shares were earned based on
the Company's performance. A total of 1,111 deferred shares are payable as of
November 29, 1997 under this plan. The plan will terminate on November 30,
2001.
-32-
On April 8, 1997, the shareholders of the Company approved the adoption of
the 1996 Stock Option Plan whereby key employees and directors will be granted
the opportunity to acquire common stock, without par value, of the Company.
Under the terms of the plan, options may be either incentive or non-qualified.
Stock appreciation rights may be awarded in conjunction with either an incentive
stock option or non-qualified stock option. The exercise price per share shall
be the average fair market price of the common stock on the date of the grant.
Options granted to employees vest one-third on each of the first three
anniversaries of the date of grant. Options granted to directors vest entirely
on the first anniversary of the date of grant. All options have a maximum term
of ten years. Three million shares of common stock have been reserved for
issuance under this plan and options were initially granted in 1997. The fair
value for each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model. The following weighted average assumptions
were used in 1997:
Risk-free interest rate 6.83%
Dividend yield 1.44%
Volatility factor .1903
Weighted average expected life 5.97 years
The weighted average fair value of the options granted during 1997 was $13.22
per share. The following table summarizes the transactions of the Company's
stock option plan in 1997:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Unexercised options outstanding -
November 30, 1996 N/A N/A
Options granted 290,500 $44.3125
Options exercised N/A N/A
Options forfeited 7,000 $44.3125
Unexercised options outstanding -
November 29, 1997 283,500 $44.3125
Exercisable options - November 29, 1997 None N/A
On April 14, 1987, the shareholders of the Company approved the adoption of
a restricted stock plan whereby key employees may be granted restricted shares
of the Company's stock. The restrictions lapse after six years; or earlier if
certain financial goals are exceeded. A total of 2,000,000 shares of common
stock were designated for this plan. A total of 324,600 shares were awarded,
268,132 shares were distributed and/or deferred, and 56,468 shares were
forfeited as of November 29, 1997. No awards were made in fiscal 1997 and the
plan has been terminated.
The amount charged to expense for all stock-based compensation plans was $4
million, $2 million and less than $1 million in 1997, 1996 and 1995,
respectively.
The pro forma affect on net income for all stock-based compensation plans
if accounted for under SFAS No. 123 is less than $1 million each in 1997, 1996,
and 1995, respectively. There is a corresponding negligible effect on earnings
per share in each of those years.
Members of the Board of Directors may elect to defer fees earned and invest
them in common stock of the Company. A total of 9,266 deferred shares are
payable as of November 29, 1997 under this program.
-33-
6. SHAREHOLDERS' EQUITY
One million shares of preferred stock, without par value, have been authorized
and none have been issued.
The Board of Directors has authorized the repurchase, from time to time, of
up to 19,200,000 shares of the Company's stock in the open market. The
purchased shares will be used for general corporate purposes. As of November
29, 1997, a total of 13,299,067 shares had been purchased at market trading
prices, of which 11,812,743 shares remain in treasury.
See Note 14 for a discussion of significant changes in equity subsequent to
November 29, 1997.
7. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments (other than Insurance investments which are
described in Note 11) for which it is practicable to estimate that value:
The carrying amounts of cash and cash equivalents, trade accounts
receivable, other current assets, trade accounts payable, and accrued expenses
approximate fair value because of the short maturity of those instruments.
The fair value of the Company's debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The estimated fair
values of the Company's debt instruments are as follows:
- ----------------------------------------------------------------------------
NOVEMBER 29, 1997
- ----------------------------------------------------------------------------
Carrying Fair
Amount Value
- ----------------------------------------------------------------------------
Short-term debt $ 60 $ 60
Long-term debt $204 $224
- ----------------------------------------------------------------------------
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined foreign currency risks. The Company occasionally enters into
foreign currency forward contracts to hedge exposure to adverse exchange risk
related to certain assets and obligations denominated in foreign currencies.
The gains or losses arising from these contracts offset foreign exchange gains
or losses on the underlying assets or liabilities and are recognized as
offsetting adjustments to the carrying amounts. The Company had no material
derivative financial instruments on November 29, 1997 and November 30, 1996.
8. SEGMENT INFORMATION
INDUSTRY INFORMATION
The Health Care Group consists of Hill-Rom and Medeco Security Locks, which is
included in this segment due to its relative size. Block Medical was in this
segment prior to its sale in 1996. Hill-Rom produces and sells electric
hospital beds, patient room furniture and patient handling equipment designed to
meet the needs of acute care, long-term care, home care and perinatal providers.
It also provides rental therapy units to health care facilities and the home
care market for wound therapy, the management of pulmonary complications
associated with critically ill patients and incontinence management. Medeco
produces and sells high-security mechanical locks and lock cylinders and
electronic security systems for commercial, residential and government
applications.
-34-
The Funeral Service Group consists of Batesville Casket Company and
Forethought Financial Services. Batesville manufactures and sells a variety
of metal and hardwood caskets and a line of urns and caskets used in
cremation. Batesville's products are sold to licensed funeral directors
operating licensed funeral homes. Forethought Financial Services'
subsidiaries, Forethought Life Insurance Company, Forethought National
TrustBank and The Forethought Group, Inc., provide funeral planning
professionals with marketing support for Forethought-Registered Trademark-
funeral plans funded by life insurance policies and trust products. Note 11
contains additional information regarding financial services.
Product transfers between industry segments are not material.
Financial information regarding the Company's industry segments is presented
below:
- -------------------------------------------------------------------------------
NOVEMBER 29, November 30, December 2,
Year Ended 1997 1996 1995
- -------------------------------------------------------------------------------
Net revenues:
Health Care $966 $941 $924
Funeral Service 810 743 701
- -------------------------------------------------------------------------------
Consolidated $1,776 $1,684 $1,625
- -------------------------------------------------------------------------------
Operating profit:
Health Care (a) (b) $134 $111 $62
Funeral Service 160 144 134
Corporate and other (30) (19) (17)
- -------------------------------------------------------------------------------
Consolidated 264 236 179
Interest expense (21) (22) (20)
Investment income 18 17 15
Other income (expense), net (c) (2) 2 (4)
- -------------------------------------------------------------------------------
Income before income taxes $259 $233 $170
- -------------------------------------------------------------------------------
Identifiable assets:
Health Care (a) (b) $679 $647 $713
Funeral Service 2,750 2,421 2,120
Corporate and other 399 328 237
- -------------------------------------------------------------------------------
Consolidated $3,828 $3,396 $3,070
- -------------------------------------------------------------------------------
Capital expenditures:
Health Care $68 $69 $77
Funeral Service 15 21 24
Corporate and other 2 2 2
- -------------------------------------------------------------------------------
Consolidated $85 $92 $103
- -------------------------------------------------------------------------------
Depreciation and amortization:
Health Care (a) $76 $72 $100
Funeral Service 23 24 24
Corporate and other 3 3 3
- -------------------------------------------------------------------------------
Consolidated $102 $99 $127
- -------------------------------------------------------------------------------
(a) REFLECTS A $20 MILLION CHARGE IN 1995 FOR THE WRITE-DOWN OF BLOCK MEDICAL
GOODWILL.
(b) REFLECTS A $6 MILLION CHARGE IN 1995 FOR THE WRITE-DOWN OF CERTAIN ASSETS
OF A MANUFACTURING FACILITY SOLD IN 1996.
(c) REFLECTS A GAIN OF $3 MILLION IN 1996 ON THE SALE OF BLOCK MEDICAL.
-35-
GEOGRAPHIC INFORMATION
Sales between geographic area are at transfer prices, which are equivalent to
market value.
- -----------------------------------------------------------------------------------------------------------------------
United Other Corporate
States (a) Europe (b) International and Other Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
1997:
Net revenues:
To unaffiliated customers $1,560 $157 $59 $ - $ - $1,776
Transfers to other geographic areas 37 - - - (37) -
- -----------------------------------------------------------------------------------------------------------------------
Total net revenues $1,597 $157 $59 $ - $ (37) $1,776
- -----------------------------------------------------------------------------------------------------------------------
Operating profit (loss) $305 $(14) $ 3 $(30) $ - $ 264
- -----------------------------------------------------------------------------------------------------------------------
Identifiable assets $3,261 $298 $30 $399 $(160) $3,828
- -----------------------------------------------------------------------------------------------------------------------
1996:
Net revenues:
To unaffiliated customers $1,447 $188 $49 $ - $ - $1,684
Transfers to other geographic areas 37 - - - (37) -
- -----------------------------------------------------------------------------------------------------------------------
Total net revenues $1,484 $188 $49 $ - $ (37) $1,684
- -----------------------------------------------------------------------------------------------------------------------
Operating profit (loss) $284 $(31) $ 2 $(19) $ - $ 236
- -----------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,869 $355 $24 $328 $(180) $3,396
- -----------------------------------------------------------------------------------------------------------------------
1995:
Net revenues:
To unaffiliated customers $1,355 $221 $49 $ - $ - $1,625
Transfers to other geographic areas 37 - - - (37) -
- -----------------------------------------------------------------------------------------------------------------------
Total net revenues $1,392 $221 $49 $ - $ (37) $1,625
- -----------------------------------------------------------------------------------------------------------------------
Operating profit (loss) $225 $(30) $ - $(17) $ 1 $ 179
- -----------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,575 $377 $24 $237 $(143) $3,070
- -----------------------------------------------------------------------------------------------------------------------
(a) REFLECTS A $20 MILLION CHARGE IN 1995 FOR THE WRITE-DOWN OF BLOCK
MEDICAL GOODWILL.
(b) REFLECTS A $6 MILLION CHARGE IN 1995 FOR THE WRITE-DOWN OF CERTAIN ASSETS
OF A MANUFACTURING FACILITY SOLD IN 1996.
9. INCOME TAXES
Income taxes are computed in accordance with SFAS No. 109. The significant
components of the consolidated income tax provision are as follows:
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
Income (loss) before income taxes:
Domestic $272 $267 $207
Foreign (13) (34) (37)
- -----------------------------------------------------------------------------
Total $259 $233 $170
- -----------------------------------------------------------------------------
Provision for income taxes:
Current items:
Federal $99 $85 $83
State 13 13 12
Foreign 3 1 (1)
- -----------------------------------------------------------------------------
Total current items 115 99 94
- -----------------------------------------------------------------------------
Deferred items:
Federal (11) (6) (11)
State - - (2)
Foreign (2) - (1)
- -----------------------------------------------------------------------------
Total deferred items (13) (6) (14)
- -----------------------------------------------------------------------------
Provision for income taxes $102 $93 $80
- -----------------------------------------------------------------------------
-36-
The fiscal year differences between the amounts recorded for income taxes
for financial statement purposes and the amounts computed by applying the
Federal statutory tax rate to income before taxes are explained as follows:
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
% OF % of % of
PRETAX Pretax Pretax
AMOUNT INCOME Amount Income Amount Income
- --------------------------------------------------------------------------------
Federal income
tax (A) $90 35.0 $81 35.0 $59 35.0
State income
tax (B) 9 3.5 9 3.8 7 4.0
Foreign income
tax (C) 6 2.3 12 5.1 11 6.5
Goodwill write-down (A) - - - - 7 4.1
Sale of Block Medical (A) - - (6) (2.6) - -
Other, net (3) (1.4) (3) (1.4) (4) (2.5)
- -------------------------------------------------------------------------------
Provision for
income taxes $102 39.4 $93 39.9 $80 47.1
- -------------------------------------------------------------------------------
(A) AT STATUTORY RATE.
(B) NET OF FEDERAL BENEFIT.
(C) FEDERAL TAX RATE DIFFERENTIAL.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax balance sheet accounts were as follows:
- ---------------------------------------------------------------------------------------
NOVEMBER 29, 1997 November 30, 1996
- ---------------------------------------------------------------------------------------
NON-INSURANCE INSURANCE Non-insurance Insurance
- ---------------------------------------------------------------------------------------
Deferred tax assets:
Current:
Inventories $2 $- $4 $-
Employee benefit accruals 3 - 3 -
Self insurance accruals 10 - 10 -
Litigation accruals 3 - 1 -
Other, net 7 4 7 3
Long-term:
Employee benefit accruals 21 1 18 -
Deferred policy revenues - 212 - 185
Foreign loss carryforwards 67 - 66 -
Foreign acquisition reserves 2 - 4 -
Other, net 7 - 6 -
- ---------------------------------------------------------------------------------------
Total assets 122 217 119 188
- ---------------------------------------------------------------------------------------
Deferred tax liabilities:
Current:
Inventories 2 - 2 -
Other, net 2 - 2 -
Long-term:
Depreciation 34 - 35 -
Amortization - - 2 -
Unrealized gain on investments - 18 - 12
Benefit reserves - 11 - 9
Deferred acquisition costs - 140 - 119
Foreign asset step up 4 - 4 -
Other, net 1 5 - 4
- ---------------------------------------------------------------------------------------
Total liabilities 43 174 45 144
- ---------------------------------------------------------------------------------------
Less valuation allowance for
foreign loss carryforwards (65) - (66) -
- ---------------------------------------------------------------------------------------
Net asset $14 $43 $8 $ 44
- ---------------------------------------------------------------------------------------
-37-
Remaining unutilized foreign loss carryforwards were approximately $161
million and $162 million on November 29, 1997, and November 30, 1996,
respectively. There is not currently sufficient positive evidence as required
by SFAS No. 109 to substantiate recognition of net deferred tax assets in the
financial statements for those foreign subsidiaries in net operating loss
carryforward positions. Accordingly, a valuation allowance of $65 million has
been recorded. It is reasonably possible that sufficient positive evidence
could be generated in the near term at one or more of these foreign subsidiaries
to support a reduction in the valuation allowance and a resulting recognition of
net deferred tax assets. Included in the deferred tax valuation allowance is $5
million related to acquired German loss carryforward benefits. The future
reversal of this portion of the valuation allowance will not be recognized as an
adjustment in the income statement.
Income tax benefits recorded in years 1990 through 1997 relative to certain
expenses associated with the Company's corporate-owned life insurance program
have been reviewed by the Internal Revenue Service (IRS). At the date of this
report, the Company and the IRS are requesting technical advice from the IRS'
national office. The Company strongly believes such benefits were recorded in
full compliance with existing and prior tax law. However, it is reasonably
possible that the IRS may, in the near term, disallow the deductibility of some
of these expenses. The Company believes that the ultimate amount of tax
deductions disallowed, if any, will not have a material adverse effect on
financial condition or cash flows.
10. SUPPLEMENTARY INFORMATION
The following amounts were (charged) or credited to income in the year
indicated:
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
Rental expense $(16) $(16) $(17)
Research and
development costs $(49) $(42) $(39)
Investment income, net (A) $ 18 $ 17 $ 15
- ---------------------------------------------------------------------------
(A) EXCLUDES INSURANCE OPERATIONS.
The table below indicates the minimum annual rental commitments (excluding
renewable periods) aggregating $38 million, primarily for warehouses, under
noncancellable operating leases.
- -------------------------------------
1998 $12
1999 $9
2000 $6
2001 $4
2002 $3
2003 and beyond $4
- --------------------------------------
-38-
The table below provides supplemental information to the statements of
consolidated cash flows.
- ----------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------
Cash paid for:
Income taxes $109 $92 $90
Interest $ 23 $16 $20
Non-cash investing and
financing activities:
Liabilities assumed from/incurred
for the acquisition of businesses $ - $ 1 $ 5
Treasury stock issued under
stock compensation plans $ - $ 1 $ -
Accrued treasury stock acquisition $ 13 $ - $ -
- ----------------------------------------------------------------
11. FINANCIAL SERVICES
Forethought Financial Services, through its subsidiaries, Forethought Life
Insurance Company, Forethought National TrustBank and The Forethought
Group, Inc., serves funeral planning professionals with life insurance policies,
trust products and marketing support for Forethought-Registered Trademark-
funeral planning. Forethought entered the preneed trust market in 1997. This
business did not materially affect the financial results of Forethought or
Hillenbrand Industries in 1997. The life insurance policies are limited to
long-duration, whole-life policies, and, as such, are accounted for under SFAS
No. 97. The benefits under these policies increase based on external
inflationary indices. Premiums received are recorded as an increase to benefit
reserves or as unearned revenue. Unearned revenues are recognized over the
actuarial life of the contract. Policy acquisition costs, consisting of
commissions, policy issue expense and premium taxes, are deferred and amortized
consistently with unearned revenues. Liabilities equal to policy holder account
balances and amounts assessed against these balances for future insurance
charges are established on the insurance contracts issued by Forethought Life
Insurance Company.
Investments are predominantly U.S. treasuries and agencies and
high-grade corporate bonds with fixed maturities and are carried on the
balance sheet at fair value. The Company's objective is to purchase
investment securities with maturities that match the expected cash outflows
of policy benefit payments. The investment portfolio is periodically
realigned to better meet this objective. Securities are also sold in other
carefully constrained circumstances such as concern about the credit quality
of the issuer. Otherwise, it is management's intent that these investments be
held to maturity. Cash (unrestricted as to use) is held for future investment.
In accordance with the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the Company has
classified the investments in debt and equity securities of its insurance
subsidiary as "available for sale" and reported them at fair value on the
balance sheet with unrealized gains and losses charged or credited to a
separate component of shareholders' equity and the insurance deferred tax
asset adjusted for the income tax effect. The fair value of each security is
based on the market value provided by brokers/dealers.
The amortized cost and fair value of investment securities available for
sale at November 29, 1997 were as follows:
- -------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 645 $11 $6 $ 650
Corporate securities 1,129 40 5 1,164
Mutual funds 40 13 - 53
Preferred stocks 4 - - 4
- -------------------------------------------------------------------------------
Total (a) $1,818 $64 $11 $1,871
- -------------------------------------------------------------------------------
-39-
The amortized cost and fair value of investment securities available for sale
at November 30, 1996 were as follows:
- -------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 553 $ 8 $ 9 $ 552
Corporate securities 991 27 2 1,016
Mutual funds 56 9 - 65
- -------------------------------------------------------------------------------
Total (a) $1,600 $44 $11 $1,633
- -------------------------------------------------------------------------------
(A) DOES NOT INCLUDE THE AMORTIZED COST OF OTHER INVESTMENTS CARRIED ON THE
BALANCE SHEET IN THE AMOUNT OF $ 63 MILLION AT NOVEMBER 29, 1997, AND
$30 MILLION AT NOVEMBER 30, 1996, THE CARRYING VALUE OF WHICH APPROXIMATES
FAIR VALUE.
The amortized cost and fair value of investment securities available for
sale at November 29, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or repay obligations with or without call or
prepayment penalties.
- -------------------------------------------------------------------------------
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------
Due in one year or less $ 52 $ 52
Due after 1 year through 5 years 269 273
Due after 5 years through 10 years 281 284
Due after 10 years 589 619
Mortgage-backed securities 583 586
Mutual funds 40 53
Preferred stocks 4 4
- -------------------------------------------------------------------------------
Total $1,818 $1,871
- -------------------------------------------------------------------------------
The cost used to compute realized gains and losses is determined by
specific identification. Proceeds and realized gains and losses from the
sale of investment securities available for sale were as follows:
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Proceeds $358 $126 $290
Realized gross gains $ 12 $ 1 $ 5
Realized gross losses $ 4 $ 1 $ 4
- -------------------------------------------------------------------------------
Summarized financial information of insurance operations included in the
statement of consolidated income is as follows:
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Investment income $120 $104 $92
Earned premium revenue 137 115 93
Net gain on sale of investments 8 - 1
- -------------------------------------------------------------------------------
Total net revenues 265 219 186
Benefits paid 63 56 48
Credited interest 111 97 86
Deferred acquisition costs amortized 35 29 24
Other operating expenses 21 13 14
- -------------------------------------------------------------------------------
Income before income taxes $35 $24 $14
- -------------------------------------------------------------------------------
-40-
Statutory data at December 31 includes:
- -------------------------------------------------------------------------------
1997 (unaudited) 1996 1995
- -------------------------------------------------------------------------------
Net income $ 32 $ 29 $ 22
Capital and surplus $144 $129 $115
- -------------------------------------------------------------------------------
12. UNAUDITED QUARTERLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
TOTAL
1997 QUARTER ENDED 3/01/97 5/31/97 8/30/97 11/29/97 YEAR
- -------------------------------------------------------------------------------
Net revenues $ 446 $ 426 $ 429 $475 $1,776
Gross profit 184 177 179 205 745
Net income 39 37 35 46 157
Net income per common share .56 .54 .51 .67 2.28
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TOTAL
1996 QUARTER ENDED 3/02/96 6/01/96 8/31/96 11/30/96 YEAR
- -------------------------------------------------------------------------------
Net revenues $ 434 $ 424 $ 404 $ 422 $1,684
Gross profit 170 169 163 175 677
Net income (A) 33 34 34 39 140
Net income per common share (A) .48 .48 .50 .56 2.02
- -------------------------------------------------------------------------------
(A) REFLECTS INCOME OF $8 MILLION, OR $.12 PER SHARE, RELATIVE TO THE SALE OF
BLOCK MEDICAL IN THE THIRD QUARTER.
13. CONTINGENCIES
On August 16, 1995, Kinetic Concepts, Inc., 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 Kinetic Concepts, Inc. (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.
-41-
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. 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 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.
14. SUBSEQUENT EVENTS
On December 1, 1997, the Company purchased 990,000 shares of its common stock
from a trust established by a founder of the Company to facilitate the payment
of the trust's federal and state taxes upon the death of the founder's widow.
The purchase, totaling $42 million, was a private transaction at a discount from
market determined by an investment bank to be fair to the Company.
On December 8, 1997, the Company issued $100 million of 6 3/4% debentures
under a shelf registration statement filed with the Securities and Exchange
Commission in 1993. The debentures are due December 15, 2027 and are
redeemable, as a whole or in part, at the option of the Company at any time.
There are no sinking fund requirements. The debentures were priced at 99.184%
to yield 6.814% to maturity. Interest is payable semiannually on June 15 and
December 15 commencing June 15, 1998. Net proceeds to the Company of $98.309
million will be used for general corporate purposes, including working capital,
capital expenditures and possible future acquisitions.
On December 18, 1997, Hill-Rom acquired the stock of Air-Shields, Inc., a
manufacturer and supplier of infant incubators and warmers, and certain other
businesses of Vickers PLC for a cash payment of $99 million.
(Unaudited)
On February 9, 1998, Hill-Rom acquired the stock of MEDAES Holdings, Inc., a
manufacturer of medical architectural systems, for a cash payment of
$62 million. These acquisitions will not have a material effect on the
Company's results of operations in 1998.
On January 19, 1998, the Board of Directors increased by 5,000,000 shares
the Company's authorization to repurchase its stock under the Hillenbrand
Industries Stock Repurchase Program.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the independent accountants.
-42-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to executive officers is included in this report as
the last section of Item 1 under the caption "Executive Officers of the
Registrant." Information relating to the directors will appear in the section
entitled "Election of Directors" in the definitive Proxy Statement to be dated
February 27, 1998, and to be filed with the Commission relating to the Company's
1998 Annual Meeting of Shareholders, which section is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the definitive Proxy
Statement dated February 27, 1998, and to be filed with the Commission relating
to the Company's 1998 Annual Meeting of Shareholders, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The section entitled "Election of Directors" in the definitive Proxy
Statement to be dated February 27, 1998, and to be filed with the Commission
relating to the Company's 1998 Annual Meeting of Shareholders, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections entitled "About the Board of Directors" and "Compensation
Committee Interlocks and Insider Participation" in the definitive Proxy
Statement to be dated February 27, 1998, and to be filed with the Commission
relating to the Company's 1998 Annual Meeting of Shareholders, are incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents have been filed as a part of this report or,
where noted, incorporated by reference:
(1) Financial Statements
The financial statements of the Company and its consolidated
subsidiaries listed on the index to Consolidated Financial Statements
on page 19.
(2) Financial Statement Schedules
The financial statement schedule filed in response to Item 8 and
Item 14(d) of Form 10-K is listed on the index to Consolidated
Financial Statements on page 19.
-43-
(3) Exhibits
The following exhibits have been filed as part of this
report in response to Item 14(c) of Form 10-K:
3.1 Form of Restated Certificate of Incorporation of the
Registrant (Incorporated herein by reference to Exhibit 3 filed
with Form 10-K for the year ended November 28, 1992)
3.2 Form of Amended Bylaws of the Registrant (Incorporated
herein by reference to Exhibit 3 filed with Form 10-K for the
year ended November 30, 1996)
The following management contracts or compensatory plans or
arrangements are required to be filed as exhibits to this form
pursuant to Item 14 (c) of this report:
10.1 Hillenbrand Industries, Inc. Senior Executive Compensation
Program (Incorporated herein by reference to Exhibit 10 filed
with Form 10-K for the year ended December 3, 1994)
10.2 Hillenbrand Industries, Inc. Performance Compensation Plan
(Incorporated herein by reference to the definitive Proxy
Statement dated February 28, 1992, and filed with the Commission
relative to the Company's 1992 Annual Meeting of Shareholders)
10.3 Hillenbrand Industries, Inc. 1996 Stock Option Plan
(Incorporated herein by reference to the definitive Proxy
Statement dated February 28, 1997, and filed with the Commission
relative to the Company's 1997 Annual Meeting of Shareholders)
Other Exhibits
21 Subsidiaries of the Registrant
(b) There were no reports on Form 8-K filed during the quarter ended
November 29, 1997.
-44-
SCHEDULE II
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED NOVEMBER 29, 1997, NOVEMBER 30, 1996 AND DECEMBER 2, 1995
(DOLLARS IN MILLIONS)
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER NET OF AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (A) RECOVERIES(B) OF PERIOD
- ----------------------------- --------- ---------- ------------ ------------- ---------
Reserves deducted from assets
to which they apply:
Allowance for possible losses
and discounts
- accounts receivable:
Year Ended:
November 29, 1997 $19 $1 $8 $3 $25
--------- ---------- ------------ ---------- -------------
--------- ---------- ------------ ---------- -------------
November 30, 1996 $20 $1 $- $2 $19
--------- ---------- ------------ ---------- -------------
--------- ---------- ------------ ---------- -------------
December 2, 1995 $14 $4 $5 $3 $20
--------- ---------- ------------ ---------- -------------
--------- ---------- ------------ ---------- -------------
(A) REDUCTION OF GROSS REVENUES FOR CASH DISCOUNTS AND OTHER
ADJUSTMENTS IN DETERMINING NET REVENUE. ALSO INCLUDES THE EFFECT OF
ACQUISITION OF BUSINESSES.
(B) INCLUDES THE SALE OF BLOCK MEDICAL OPERATION IN 1996.
-45-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By: /S/ W AUGUST HILLENBRAND
------------------------------
W August Hillenbrand
Dated: January 19, 1998 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
/s/ Daniel A. Hillenbrand /s/ Leonard Granoff
- -------------------------------- -------------------------------
Daniel A. Hillenbrand Leonard Granoff
Chairman of the Board Director
/s/ Tom E. Brewer /s/ John C. Hancock
- -------------------------------- -------------------------------
Tom E. Brewer John C. Hancock
Chief Financial Officer Director
/s/ James D. Van De Velde /s/ W August Hillenbrand
- -------------------------------- -------------------------------
James D. Van De Velde W August Hillenbrand
Controller Director
/s/ Lawrence R. Burtschy /s/ George M. Hillenbrand II
- -------------------------------- -------------------------------
Lawrence R. Burtschy George M. Hillenbrand II
Director Director
/s/ Peter F. Coffaro /s/ John A. Hillenbrand II
- -------------------------------- -------------------------------
Peter F. Coffaro John A. Hillenbrand II
Director Director
/s/ Edward S. Davis /s/ Ray J. Hillenbrand
- -------------------------------- -------------------------------
Edward S. Davis Ray J. Hillenbrand
Director Director
Dated: January 19, 1998
-46-
HILLENBRAND INDUSTRIES, INC.
INDEX TO EXHIBITS
3.1 Form of Restated Certificate of Incorporation of the Registrant
(Incorporated herein by reference to Exhibit 3 filed with Form 10-K
for the year ended November 28, 1992)
3.2 Form of Amended Bylaws of the Registrant (Incorporated herein by
reference to Exhibit 3 filed with Form 10-K for the year ended
November 30, 1996)
10.1 Hillenbrand Industries, Inc. Senior Executive Compensation Program
(Incorporated herein by reference to Exhibit 10 filed with Form 10-K
for the year ended December 3, 1994)
10.2 Hillenbrand Industries, Inc. Performance Compensation Plan (Incorporated
herein by reference to the definitive Proxy Statement dated February 28,
1992, and filed with the Commission relative to the Company's 1992
Annual Meeting of Shareholders)
10.3 Hillenbrand Industries, Inc. 1996 Stock Option Plan (Incorporated herein
by reference to the definitive Proxy Statement dated February 28, 1997,
and filed with the Commission relative to the Company's 1997 Annual
Meeting of Shareholders)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
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