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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 27, 1999 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
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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 COMMON STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT.
Common Stock, without par value - $1,417,964,063 as of February 11,
2000 (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 - 62,751,733 as of February 11, 2000.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the 2000 Proxy Statement furnished to Shareholders - Parts
I and III.
Portions of the 1997 Proxy Statement furnished to Shareholders - Part
IV.
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HILLENBRAND INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
NOVEMBER 27, 1999
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 20
Item 8. Financial Statements and Supplementary
Data 22
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure 48
PART III
Item 10. Directors and Executive Officers
of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain
Beneficial Owners and Management 49
Item 13. Certain Relationships and Related
Transactions 49
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 49
SIGNATURES 53
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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 three major operating companies serving the
funeral services and health care industries. Unless the context otherwise
requires, the terms "Hillenbrand" and the "Company" refer to Hillenbrand
Industries, Inc., and its consolidated subsidiaries, and the terms "Hill-Rom
Company", "Batesville Casket Company" and "Forethought Financial Services", and
derivations thereof, refer to one or more of the subsidiary companies of
Hillenbrand that comprise those businesses. The Company's Health Care Group
consists of Hill-Rom Company, a manufacturer of equipment for the health care
market and provider of wound care and pulmonary/trauma management services. The
assets of Medeco Security Locks, Inc. ("Medeco"), a manufacturer of high
security locks and access control products for commercial and residential use,
were sold to Assa Abloy AB on July 1, 1998. Results for Medeco are included in
the Company's financial statements within the Health Care Group through that
date and had an immaterial effect on the operating results of this group.
Hillenbrand's Funeral Services Group consists of Batesville Casket Company, a
manufacturer of caskets and other products for the funeral industry, and
Forethought Financial Services, a provider of funeral planning financial
products.
HEALTH CARE
Hill-Rom Company is a recognized leader in the worldwide health care
community providing sales, rentals, service and support for products including
beds, therapy surfaces, stretchers, infant warmers, incubators, furniture,
communication systems, surgical columns, medical gas management systems, modular
headwalls, lighting systems and operating room equipment.
The Hill-Rom(R) line of electrically, hydraulically 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 manufactures beds for special departments
such as intensive care, emergency, perinatal, recovery rooms, neonatal and labor
and delivery rooms. Other Hill-Rom(R) 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. Products introduced and acquired
recently include the TotalCare(R) bed, Advanta(TM) bed, TransStar(R) stretcher,
Isolette(R) infant incubator, Resuscitaire(R) radiant warmer, MEDAES(R) medical
gas and vacuum systems and the AMATECH product line of surgical table
accessories and patient positioning devices for the operating room in the acute
care market and the Resident(R) and Osprey(TM) LTC beds in the long-term care
market. In addition to these new products the Company has continued to expand
its line of specialty accessories, to improve both patient comfort and
serviceability for the health care provider. Also, the Company continues to
focus on furnishing the total health care suite, which includes improved room
groupings to enhance the comfort of both the patient and family members.
Hill-Rom also remanufactures hospital beds. The remanufacturing process includes
disassembly, washing, sanding, painting and reassembly with new components.
Hill-Rom(R) products are sold directly to acute and long-term health care
facilities throughout the United States, Canada and Europe by Hill-Rom account
executives. Most Hill-Rom(R) products sold in the United States are delivered by
trucks owned by Hill-Rom. 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 France. These products are sold and leased directly to hospitals
and nursing homes throughout Europe.
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Within the wound care and trauma management market, CLINITRON(R) Air
Fluidized Therapy is provided as a therapeutic adjunct in the treatment of
advanced pressure sores, flaps, grafts and burns. The CLINITRON(R) 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(R) products are designed to meet the specific
requirements of acute care, long-term care and home-care settings. Other
products introduced recently utilizing this technology include the Clinitron(R)
Rite-Hite(R) Air Fluidized Therapy unit, designed to meet the requirements of
long-term care facilities and the Clinitron At-Home(R) unit, 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. Low airloss products include the
Flexicair Eclipse(R) mattress, a portable, rental mattress replacement for the
acute care market and the Silkair(R) mattress, a low airloss overlay product for
the home care market, and the V-Cue(TM) mattress, a rotational mattress for the
pulmonary market. In addition to the above products, the European operations
have introduced the Primo mattress, a modestly priced, low airloss product to
enhance the product line. In Europe, the Company also rents and sells the Duo
mattress, a pressure relieving and alternating pressure mattress.
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(R) 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 July 30, 1999 Hill-Rom purchased the assets of AMATECH Corporation, a
manufacturer and distributor of surgical table accessories and patient
positioning devices for the operating room.
FUNERAL SERVICES
Batesville Casket Company was founded in 1884 and acquired by the
Hillenbrand family in 1906. Batesville manufactures and sells several types of
caskets made of steel, copper, bronze, and hardwood. It also manufactures and
sells cloth-covered caskets and a line of urns and other memorialization
products for the cremation market. In addition, Batesville markets a line of
all-wood construction (orthodox) caskets and non-protective steel caskets.
Batesville also supplies selection room display fixturing through its Applied
Retail Systems division.
All Batesville-produced metal caskets are protective caskets that are
electronically welded and resistant to the entry of air, water and gravesite
substances through the use of rubber gaskets and a locking bar mechanism.
Batesville's Monoseal(R) 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 produced
caskets.
Batesville(R) 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 patented process
using cellular fiberboard construction.
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The Options by Batesville cremation division offers a complete cremation
marketing system for Funeral Services professionals. In addition to a broad line
of cremation caskets and urns, the system includes training, merchandising
support and marketing support materials. Cremation caskets and containers are
manufactured primarily of hardwoods and fiberboard. Options' wide assortment of
memorial urns are made from a variety of materials, including cast bronze, cast
acrylic, wood, sheet bronze, cloisonne' and marble.
Batesville offers several other marketing and merchandising programs to
funeral directors for both casket and cremation products. Batesville(R) caskets
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 80
company-operated Customer Service Centers (CSCs) and seven Rapid Deployment
Centers (RDC's) in North America. Batesville(R) caskets are delivered in
specially equipped vehicles owned by Batesville.
Batesville mainly manufactures and distributes products in the U.S. It also
has small manufacturing and distribution facilities in Canada and Mexico.
Forethought Financial Services was founded in 1985. It, along with its
principal subsidiaries, Forethought Life Insurance Company, Forethought Federal
Savings Bank, Forethought Investment Management, Inc., The Forethought Group,
Inc. and Arkansas National Life Insurance Company serve a network of funeral
planning professionals with marketing support for Forethought(R) funeral plans
funded by life insurance policies, trust products and other financial vehicles.
These specialized funeral planning products are offered through funeral homes.
Consumers 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 made available by a Forethought(R) financial
product, the funeral home agrees to guarantee the planned funeral will be
available as specified.
Forethought(R) life insurance policies are offered by over 5,000
independent funeral homes. Forethought Life Insurance Company is licensed in 49
states, nine Canadian provinces, Puerto Rico and the District of Columbia. On
December 31, 1998, Forethought Life Insurance Company, a wholly owned subsidiary
of Forethought Financial Services, Inc., acquired the stock of Arkansas National
Life Insurance Company.
Forethought entered the trust business in 1997 and offers trust products in
sixteen states. Its trust products are offered through independent funeral homes
and national chains. Forethought received a federal savings bank charter in July
1998. In November 1999, Forethought National Trust Bank was merged into
Forethought Federal Savings Bank, as required with the granting of the savings
bank charter.
BUSINESS SEGMENT INFORMATION
Net revenues, segment profitability, identifiable assets and other measures
of segment reporting for each reporting segment are set forth in Note 10 to the
Consolidated Financial Statements, which statements are included under Item 8.
While the Company serves two predominant industries, as denoted by its
Health Care and Funeral Services Groups, for segment reporting purposes each of
the Company's three major operating companies constitute a reporting segment.
The Company's three reporting segments are defined as Health Care ("Hill-Rom"),
Funeral Services Products ("Batesville") and Funeral Services Insurance
("Forethought").
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RAW MATERIALS
HEALTH CARE
Principal materials used in Hill-Rom(R) products include carbon 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 and
hydraulically operated beds and certain other components are purchased from one
or more manufacturers.
FUNERAL SERVICES
Batesville employs carbon and stainless steel, copper and bronze sheet,
wood and wood by-products, fabrics, finishing materials, rubber gaskets, zinc
and magnesium alloy in the manufacture of its caskets. These materials are
available from several sources.
COMPETITION
HEALTH CARE
Hill-Rom believes it is the U.S. market share leader in the sale of
electrically and hydraulically 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 the
products and services it provides. In both the United States and Europe there
are other companies which provide low airloss and other methods of patient
support and patient relief.
FUNERAL SERVICES
Batesville believes its 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 sells its products in competition with other life insurance
companies. Forethought believes it is the leading provider of insurance-funded
pre-arranged funerals in North America. Forethought Federal Savings Bank
competes with local banks and master trusts offered through industry trade or
state funeral director associations.
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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. 1997
includes approximately $8 million of research and development expenditures
related to a discontinued business. Expenditures in the most recent three fiscal
years were as follows:
(millions)
1999 1998 1997
---- ---- ----
Total research and development expenditures $47 $46 $49
PATENTS AND TRADEMARKS
The Company owns a number of patents on its products and manufacturing
processes which are of importance to it, but does not believe 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 does not
believe any single trademark or service mark is of material significance to the
business of the Company as a whole.
EMPLOYEES
As of February 11, 2000, the Company employed approximately 10,800 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 $5 million. The
Company has provided adequate reserves in its financial statements for these
matters. These reserves have been determined without consideration of possible
loss recoveries from third parties. Compliance with other current governmental
provisions relating to protection of the environment are not expected to
materially affect the Company's capital expenditures, earnings or competitive
position. Further changes in environmental law might affect the Company's future
operations, capital expenditures and earnings; however, the cost of complying
with these provisions, if any, 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 10 to the Consolidated Financial
Statements, which statements are included under Item 8.
The Company's export revenues constituted less than 10% of consolidated
revenues in 1999 and prior years.
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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 11, 2000.
W August Hillenbrand, 59, was elected Chief Executive Officer of the
Company on December 6, 1999. He had been President and Chief Executive Officer
since April 11, 1989 and President since October 21, 1981. Prior to being
President he had been a Vice President of the Company since 1972 and has been
employed by the Company throughout his business career.
Frederick W. Rockwood, 52, was elected President of the Company on December
6, 1999. He has been employed by the Company since 1977. Previous positions held
within the Company include President and Chief Executive Officer of Hillenbrand
Funeral Services Group, Inc., President and Chief Executive Officer of
Forethought Financial Services, Inc., Senior Vice President of Corporate
Planning and Director of Corporate Strategy.
Donald G. Barger, Jr., 57, has been employed by the Company since March 16,
1998, and was elected Vice President and Chief Financial Officer on March 16,
1998. Prior to joining the Company, he was Vice President and Chief Financial
Officer for Worthington Industries for the previous five years. He also served
in various finance positions with the B.F. Goodrich Company and Irwin
Management.
Michael L. Buettner, 42, 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. Lindenmeyer, M.D., 53, 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.
David L. Robertson, 54, has been employed by the Company since March 23,
1998, and was elected Vice President, Administration on December 8, 1999. He
previously served as Vice President, Human Resources from March 23, 1998 to
December 8, 1999. Prior to joining the Company, he was Senior Vice President,
Human Resources for Rubbermaid, Inc. in Wooster, Ohio. From 1982 to 1994 Mr.
Robertson served as Vice President, Human Resources for Hillenbrand Industries,
Inc.
James D. Van De Velde, 53, 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 (now
PricewaterhouseCoopers LLP).
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ITEM 2. PROPERTIES
The principal properties of the Company and its subsidiaries are listed
below, and are owned or leased 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 6 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:
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
Hatboro, PA Manufacturing plant and Administration and manufacture
office facility of infant-care equipment
Norcross, GA Office facility and Administration and assembly of
assembly plant medical architectural systems
Pluvigner, France Manufacturing plant and Administration and manufacture
office facility of health care equipment
FUNERAL SERVICES:
Batesville, IN Manufacturing plants Manufacture of metal caskets
Office facilities Administration and Insurance
Operations
Manchester, TN Manufacturing plants 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 other
manufacturing facilities, warehouse distribution centers, service centers and
sales offices throughout the United States, Canada and Western 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.
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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.
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 27, 1999.
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 the 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. Specifically, statements in
this filing that are not historical facts, including statements accompanied by
words such as "the Company believes" or "is expected", are intended to identify
forward-looking statements and convey the uncertainty of future events or
outcomes.
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,
changes in Medicare reimbursement trends, the success of cost control and
restructuring efforts, and the integration of acquisitions, 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
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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 1999
and 1998.
1999 1998
-------------- ----------------
High Low High Low
---- --- ---- ---
First Quarter 58 1/8 41 $57 $44 9/16
Second Quarter 49 1/8 40 15/16 $64 11/16 $55 11/16
Third Quarter 45 5/16 28 7/8 $62 15/16 $52 5/16
Fourth Quarter 37 3/8 26 1/8 $61 $48 3/16
HOLDERS
On February 11, 2000, there were approximately 22,900 shareholders of
record.
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 $.78 ($.195 per quarter) in 1999 and $.72 ($.18 per
quarter) in 1998 were paid on each share of common stock outstanding. Cash
dividends will be $.80 ($.20 per quarter) in 2000.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of
Hillenbrand Industries, Inc., for fiscal years 1995 through 1999.
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In millions except per share data)
Net revenues $ 2,047 $ 2,001 $ 1,776 $ 1,684 $ 1,625
Net income (a) $ 124 $ 184 $ 157 $ 140 $ 90
Basic and diluted
net income per share (a) $ 1.87 $ 2.73 $ 2.28 $ 2.02 $ 1.27
Total assets $ 4,433 $ 4,280 $ 3,828 $ 3,396 $ 3,070
Long-term debt $ 302 $ 303 $ 203 $ 204 $ 206
Cash dividends per share $ .78 $ .72 $ .66 $ .62 $ .60
(a) Results in 1999 reflect unusual charges incurred at all operating companies
of $24 million, net-of-tax, ($.36 per share). The charges include costs
related to work force reduction activities, facility closure costs, certain
asset impairment charges and other items. Results in 1998 include income of
$47 million, net-of-tax, ($.70 per share) relative to the sale of Medeco
Security Locks, Inc. The Company also recorded unusual charges totaling $42
million, net-of-tax, ($.62 per share). The charges include the write-off of
goodwill, other asset impairment charges and other closing costs related to
the discontinuance of manufacturing operations at Hill-Rom facilities in
Germany and Austria; tax benefits related to the write-off of the Company's
investments in Germany and Austria; and provisions for certain income tax
exposures. 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 $26 million, net-of-tax, ($.37 per share) for the
write-down of goodwill and certain assets of a manufacturing facility sold
in 1996.
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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 is organized into two business groups. The Health Care Group, which
is considered as one reporting segment, consists of Hill-Rom. Results for Medeco
Security Locks, Inc. (Medeco), which was sold on July 1, 1998, were included in
this group through this date. Medeco sales included in the Health Care Group
were $27 million and $46 million in 1998 and 1997, respectively. Unless
otherwise specifically identified, Medeco related activities are excluded from
amounts and explanations related to the Health Care Group throughout the
Management's Discussion and Analysis of Results of Operations. The Funeral
Services Group consists of two reporting segments, Funeral Services Products
(Batesville Casket Company - Batesville) and Funeral Services Insurance
(Forethought Financial Services - Forethought).
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
SUMMARY
Consolidated net revenues of $2,047 million increased $46 million, or 2%, in
1999. Operating profit decreased 7% to $211 million. Net income of $124 million
decreased 33%, and earnings per share decreased 32% to $1.87.
Excluding the unusual items discussed in the remainder of this paragraph,
operating profit decreased 15% and net income decreased 17%. 1999 results
reflect unusual charges of $24 million, net-of-tax, ($.36 per share) related to
work force reduction activities, facility closure costs, certain asset
impairment charges and other items. 1998 results reflect income of $47 million,
net-of-tax, ($.70 per share) related to the sale of Medeco. The Company also
recorded unusual charges in 1998 totaling $42 million, net-of-tax, ($.62 per
share). These charges included the write-off of goodwill, other asset impairment
charges and other closing costs related to the discontinuance of manufacturing
operations at Hill-Rom facilities in Germany and Austria; tax benefits related
to the write-off of the Company's investments in Germany and Austria; and
provisions for certain income tax exposures.
NET REVENUES
Health Care sales of $766 million increased $45 million, or 6%, due to continued
good market acceptance of the TotalCare(R) bed and increased shipments of
communications and procedural products in Hill-Rom's U.S. acute care market.
Hill-Rom also experienced increased shipments of the Resident(R) LTC bed as it
continued to have good market acceptance. North American sales decreased
compared to 1998 during the third and fourth quarters of 1999. The Company
believes these declines are attributable to some shipment delays and decreased
orders by our acute care customers as they respond to uncertainty and cuts in
Medicare reimbursements in their operations. European revenues decreased
slightly compared to 1998 primarily due to decreased sales in Germany and
Austria, which were impacted by the discontinuance of manufacturing in these
countries during fiscal 1999.
Health Care rental revenue was down $79 million, or 20%. Nearly all of the
decrease was in the U.S. long-term care market, which experienced lower rates,
product mix and volume as a result of changes in Medicare Part A patient
reimbursement practices effective July 1, 1998. U.S. acute care and European
rental revenues were slightly above 1998 levels. In the U.S. acute care market,
higher volume was offset by lower rates with very little change in product mix.
The U.S. home care market experienced lower revenues compared to 1998 as a
result of lower reimbursement experience partially offset by higher volume and
product mix.
Funeral Services sales grew $61 million, or 11%, to $602 million due to
increased unit volume across all product lines and an increase in product mix.
In 1999, Batesville was able to continue to increase unit volume in a market
that is currently flat for casketed deaths.
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Insurance revenues increased $46 million or 15% at Forethought. Earned
premium revenue increased approximately $24 million due primarily to increased
policies in-force year over year. Investment income grew about $19 million
because of the increased size of the investment portfolio. Realized net gains on
the sale of investments were approximately $3 million more than in 1998. Policy
sales were down nearly 13% in 1999 primarily due to several funeral home
consolidators recently acquiring or starting preneed insurance operations in
order to supply their customers policies. Since premium revenues are earned over
the life of the policyholder, current year sales will primarily affect revenues
and earnings in future years. The trust business did not have a significant
effect on Forethought's operations in 1999 and prior years.
GROSS PROFIT
Gross profit on Health Care sales of $314 million decreased $7 million, or 2%.
As a percentage of sales, gross profit was approximately 41% in 1999 versus 43%
in 1998. The decline in gross profit as a percentage of sales was primarily due
to increased warranty costs, product mix, increased provisions for inventory and
other items partially offset by increased volume. Continuous improvement
initiatives in the United States and Europe helped to partially offset the lower
gross profit margin.
Gross profit on Health Care rentals was down $74 million, or 46%, to $88
million. In addition, gross profit as a percentage of sales decreased to 27% in
1999 compared to 40% in 1998. This decline reflects the changes in Medicare Part
A reimbursement practices affecting the U.S. long-term care market and, to a
smaller extent, lower reimbursement experience within the U.S. home care market.
A slight increase in gross margin percentage in the acute care market partially
offset the impact of these other matters.
Funeral Services sales gross profit increased 12%, or $32 million, to $292
million in 1999. As a percentage of sales, Batesville's gross profit increased
one percentage point to 49% compared to 48% in 1998. This increase in gross
profit percentage reflects the increased unit volume experienced in 1999
combined with successful process improvements and cost controls.
Profit before other operating expenses and unusual charges in insurance
operations increased $6 million, or 8%, to $82 million in 1999 due to increased
profits earned on a larger base of policies in-force, higher investment income
(with minimal direct cost) and net gains on the sale of investments. Consistent
with prior years, these items were partially offset by an increase in death
benefits paid and reserved due to the larger base of policies in-force.
OTHER OPERATING EXPENSES
These expenses, consisting of selling, marketing, distribution and general
administrative costs, increased $3 million, or 1% in 1999. As a percentage of
consolidated revenues, these expenses remained essentially unchanged at 26%
compared to 1998. This is a result of continued cost control, process
improvement throughout the Company and lower incentive compensation.
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OPERATING PROFIT
Operating profit in Health Care decreased $23 million, or 29%, to $55 million.
This decrease was primarily due to a large decline in rental revenue and a $25
million unusual charge related to work force reduction activities, facility
closure costs, certain asset impairment charges and other items. The large
decrease in rental revenue was primarily due to changes in Medicare Part A
reimbursement practices affecting the U.S. long-term care market. 1998 operating
profit at Hill-Rom was negatively impacted by a $70 million charge for the
write-off of goodwill, other asset impairment charges and other closing costs
related to the discontinuance of manufacturing operations at facilities in
Germany and Austria. Excluding these charges in 1999 and 1998, operating profit
would have been $80 million in 1999 and $148 million in 1998, or a 46% decrease.
Operating profit in the Funeral Services Group of $173 million increased $3
million, or 2%, from 1998. At Batesville, operating profit increased
significantly in 1999 as a result of increased shipments and improved product
mix. During 1999, Batesville incurred a $9 million unusual charge related to the
closure of a manufacturing facility. Excluding this charge, Batesville's
operating profit would have increased approximately 15%. At Forethought, higher
investment income, increased earned premiums and higher capital gains were more
than offset by increased expenses, most of which were related to new business
development, and an unusual charge of $3 million related to an impaired asset.
Excluding the unusual charge incurred by Forethought, operating profit would
have decreased 15%. Excluding the unusual charges incurred by both Batesville
and Forethought in 1999, Funeral Services Group operating profit would have
increased about 9%.
Consolidated operating profit of $211 million decreased $17 million, or 7%.
Excluding the unusual charges discussed above and a $1 million unusual charge at
the consolidated company level, consolidated operating profit would have been
$249 million in 1999 compared to $298 million in 1998, a 16% decrease.
OTHER INCOME AND EXPENSE
Interest expense was unchanged compared to 1998 as the Company's level of
long-term debt was essentially constant. Investment income decreased $3 million
primarily due to a lower average balance of cash, cash equivalents and
short-term investments throughout 1999. Excluding the gain of $75 million on the
sale of Medeco in 1998, other income and expense, net decreased $3 million.
INCOME TAXES
The effective income tax rate was 36.7% for 1999 and 37.0% for 1998. The 1998
tax rate includes the recognition of a tax benefit associated with the
discontinuance of manufacturing operations in Germany and Austria. The decrease
in the tax rate for 1999 reflects a reduction in state taxes and lower operating
losses in Europe.
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RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
SUMMARY
Consolidated net revenues of $2,001 million increased $225 million, or 13%, in
1998. Operating profit of $228 million was down 14%. Net income increased 17% to
$184 million, and earnings per share increased 20% to $2.73.
Excluding the unusual items discussed in the remainder of this paragraph,
operating profit increased 13% and net income increased 14%. 1998 results
reflect income of $47 million, net-of-tax, ($.70 per share) relative to the sale
of Medeco. The Company also recorded unusual charges totaling $42 million,
net-of-tax, ($.62 per share). The charges include the write-off of goodwill,
other asset impairment charges and other closing costs related to the
discontinuance of manufacturing operations at Hill-Rom facilities in Germany and
Austria; tax benefits related to the write-off of the Company's investments in
Germany and Austria; and provisions for certain income tax exposures.
NET REVENUES
Health Care sales of $721 million increased $179 million, or 33%, due to the
effect of acquisitions and good market acceptance of the TotalCare(R) bed and
increased unit volume of architectural, communication, procedural and
maternal/infant care products in Hill-Rom's U.S. acute care market. Shipments of
the Resident(R) LTC bed also increased as it continued to experience good market
acceptance. Unit volume and revenues increased slightly in Hill-Rom's European
market, partially offset by unfavorable currency adjustments. Excluding the
sales effect from the purchase of Air-Shields, Inc. (Air-Shields) and MEDAES
Holdings, Inc. (MEDAES), sales increased 11%.
Health Care rental revenue grew $25 million, or 7%. In the U.S. long-term
care market, rental revenues were down slightly year over year mainly due to the
effect of a change in Medicare Part A patient reimbursement practices effective
July 1, 1998. Overall, higher volume was offset by lower rates and product mix
in the long-term care market. The U.S. home care market experienced slightly
higher revenues as unit growth from new and higher end products was partially
offset by lower overall rates. In the U.S. acute care market, rental revenues
were up year over year due to higher volume from new products which was
partially offset by lower rates and product mix. Rental revenues in Europe
increased slightly in nearly all markets, but were largely offset by unfavorable
currency adjustments.
Funeral Services sales decreased $4 million, or 1% due to lower product mix
partially offset by increased shipments of hardwood and cremation products.
Batesville's unit volume growth was accomplished in a market that is currently
flat for casketed deaths.
Insurance revenues grew $44 million or 17%. Investment income accounted for
approximately $18 million of the increase while earned premium revenue accounted
for about $14 million. Investment income grew mainly because of the increased
size of the investment portfolio. Earned premium revenue increased mainly due to
increased policies in-force year over year. Forethought's policy sales declined
nearly 9% in 1998 primarily due to several funeral home consolidators recently
acquiring or starting preneed insurance operations in order to supply their
customers policies. Since premium revenues are earned over the life of the
policyholder, current year sales will primarily affect revenues and earnings in
future years. Forethought's trust business did not have a significant revenue
impact in 1998 or in prior years.
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GROSS PROFIT
Gross profit on Health Care sales increased $62 million, or 25%, to $307
million, due primarily to increased shipments in Hill-Rom's U.S. markets. As a
percentage of sales, gross profit declined from 45% in 1997 to 43% in 1998
primarily due to the integration of Air-Shields and MEDAES which have lower
margins compared to other Health Care products. Shipments of higher value
products, continued improvements in direct material, labor and overhead costs,
leveraging of fixed manufacturing expenses in the United States and decreased
shipments of lower margin European products helped to partially offset the lower
gross profit margins of Air-Shields and MEDAES.
Gross profit on Health Care rentals of $162 million was up $19 million, or
13%. As a percentage of sales, gross profit improved to 40% in 1998 compared to
38% in 1997. This increase reflects the increased unit volume experienced in all
U.S. markets, continued process improvements and cost control.
Gross profit on Funeral Services sales of $260 million decreased $4
million, or 2%, in 1998. As a percentage of sales, gross profit remained
essentially unchanged at 48%. This comparison reflects the mix change in
Batesville's year to year sales discussed above. Even with increased unit volume
and lower overall pricing, gross profit as a percent of sales remained unchanged
due to process improvements and cost controls.
Profit before other operating expenses in insurance operations increased
$20 million, or 36%, to $76 million, in 1998 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 death benefits paid and reserved due to the larger base of policies in-force.
OTHER OPERATING EXPENSES
These expenses, consisting of selling, marketing, distribution and general
administrative costs, increased $59 million, or 13% in 1998. As a percentage of
consolidated revenues, these expenses remained essentially unchanged at 26% in
1997 and 1998. This is a result of continued cost control and process
improvement throughout the Company.
OPERATING PROFIT
Operating profit in Health Care decreased $52 million, or 40%, to $78 million.
This decrease is mainly due to a $70 million charge for the write-off of
goodwill, other asset impairment charges and other closing costs related to the
discontinuance of manufacturing operations at Hill-Rom facilities in Germany and
Austria. Excluding this charge, operating profit would have been $148 million in
1998, or a 14% increase, due to increased sales of higher value products in the
U.S. acute care market and an increase in rental revenues partially offset by
higher incentive compensation and commission expenses.
Operating profit in the Funeral Services Group of $170 million increased
$10 million, or 6%, from 1997. At Batesville, operating profit decreased
slightly in 1998 as increased casket and cremation volume was offset by lower
pricing on an unfavorable product mix. Operating expenses remained essentially
unchanged. At Forethought, higher investment income, increased capital gains and
cost controls helped to increase operating profit.
Consolidated operating profit of $228 million decreased $36 million, or
14%. Excluding the unusual charges discussed above, consolidated operating
profit would have been $298 million, a 13% increase. A decrease in corporate
expenses in 1998 contributed to the growth in operating profit.
OTHER INCOME AND EXPENSE
Interest expense increased due to additional long-term debt associated with the
addition of $100 million in debentures issued in December 1997. Investment
income grew slightly due to a higher earnings rate on investments partially
offset by lower levels of cash, cash equivalents and short-term investments.
Excluding the gain of $75 million on the sale of Medeco, other income and
expense, net was unchanged year to year.
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INCOME TAXES
The effective income tax rate was 37.0% for 1998 and 39.4% for 1997. The
recognition of a tax benefit relating to the discontinuance of manufacturing
operations in Germany and Austria contributed to the lower tax rate in 1998.
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, cash equivalents and short-term investments
(excluding investments of insurance operations) at November 27, 1999 decreased
$127 million to $170 million compared to November 28, 1998, mainly due to
business acquisitions, the purchase of treasury stock, capital expenditures,
repayment of loans totaling $44 million related to the Corporate-Owned Life
Insurance program and the payment of cash dividends partially offset by cash
generated from operating activities.
OPERATING ACTIVITIES
Net cash generated by operating activities of $150 million in 1999 decreased $23
million compared to the $173 million generated in 1998. Contributing to the
decrease were lower earnings, a decrease in depreciation, amortization and
write-down of intangibles and unfavorable movements in most components of
working capital.
The decrease in depreciation, amortization and write-down of intangibles is
due to the unusual charge of $43 million to write-off the goodwill associated
with the discontinuance of manufacturing facilities in Germany and Austria in
1998 combined with lower actual depreciation and amortization expense in 1999
resulting from the closure of these two facilities and a decrease in the
manufacture of new rental units. The adverse changes in working capital are
partially due to strong fourth quarter shipments at Batesville and slower
collections from Medicare intermediaries and insurance at Hill-Rom which
resulted in higher receivables. This also caused consolidated days revenues
outstanding to increase to 86 in 1999 compared to 76 in 1998. The increase in
other current assets is mainly due to increased deferred taxes and the decrease
in accrued expenses relates to lower incentive compensation in 1999.
INVESTING ACTIVITIES
Net cash used in investing activities decreased from $446 million to $287
million in 1999. This decrease is primarily due to fewer acquisitions in 1999,
lower capital expenditures and favorable effects of investment activities at
Forethought.
Forethought 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 1999, 1998 and 1997 resulted in net gains.
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FINANCING ACTIVITIES
The Company's long-term debt-to-total capital ratio was 26% at year-end 1999
compared with 24% at year-end 1998. This increase was primarily due to decreases
in the Company's equity resulting from the purchase of treasury stock, a
decrease in accumulated other comprehensive income and the payment of normal
dividends partially offset by current year earnings.
Quarterly cash dividends per share were $.165 in 1997, $.18 in 1998 and
$.195 in 1999. An additional increase to $.20 per quarter was approved by the
Board of Directors in January 2000.
INSURANCE ASSETS AND LIABILITIES
Insurance assets of $3,091 million grew 9.1% over the past year. Cash and
invested assets of $2,311 million constitute 74.8% 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 $2,132 million. Statutory reserves
represent 62% of the face value of insurance in-force. Forethought Life
Insurance Company made a $14 million dividend payment in 1998 to Hillenbrand
Industries. The statutory capital and surplus as a percent of statutory
liabilities of Forethought was 11% and 8% at December 31, 1999 and 1998,
respectively. 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 policyholder. These revenues are recognized in the
year of policy issue for tax purposes. This results in a deferred tax benefit.
Insurance policy acquisition expenses must be capitalized and amortized for both
financial accounting and tax purposes, although under different methods and
amounts. Financial accounting rules require a greater amount to be capitalized
and amortized than for tax reporting. This results in a deferred tax cost, which
partially offsets the deferred tax benefit. Excluding the tax effect of
adjusting the investment portfolio to fair value, the net deferred tax benefit
remained essentially unchanged in 1999 and 1998.
SHAREHOLDERS' EQUITY
Cumulative treasury stock acquired in open market and private transactions
increased to 18,322,467 shares in 1999, up from 15,067,167 shares in 1998. As of
year end the Company currently has Board of Directors' authorization to
repurchase up to a total of 19,289,067 shares. Repurchased shares are to be used
for general business purposes. From the cumulative shares acquired, 42,956
shares, net of shares converted to cash to pay withholding taxes, were reissued
in 1999 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. 133, "Accounting for
Derivative Instruments and Hedging Activities", in June 1998. This Standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities and requires that all derivatives be recognized on the
balance sheet at fair value. Changes in fair values of derivatives will be
accounted for based upon their intended use and designation. Since the Company's
holdings in such instruments are minimal, adoption of this Standard is not
expected to have a material effect on the Company's consolidated financial
statements. The Company is required to adopt the Standard not later than the
first quarter of fiscal 2001.
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UNUSUAL CHARGES
On November 23, 1999, the Company announced a plan to reduce the future
operating cost structure at Hill-Rom, to write-down the value of certain
impaired assets and to recognize a liability associated with the estimated cost
of a field corrective action for a previously acquired product line. The total
estimated cost of these actions necessitated an unusual charge of $29 million in
the fourth quarter of 1999, all of which is reflected within the Unusual charges
line of the Statement of Consolidated Income. As of year-end, essentially no
spending had occurred relative to the $19 million cash component of this charge.
Included in the cost-cutting actions announced at Hill-Rom was the
reduction of 350 employees, about 5% of its work force, in the United States and
Europe and the closure of select manufacturing and sales, service/distribution
facilities in the United States and Europe to eliminate redundant operations.
With respect to the employee head count reduction, most affected employees will
be administrative personnel and the actions will be completed within the next
nine months. The facility closures are also expected to occur on a similar
timeline, but certain aspects of the closure and disposal activities could take
longer. Estimated costs for the work force and facility closure actions are
estimated at $8 million and $3 million, respectively. These actions were
precipitated by adverse customer reaction to continued changes in Medicare
reimbursement practices which have resulted in the postponement or cancellation
of capital goods orders by many of Hill-Rom's customers.
The unusual charge also includes a total of $10 million relative to asset
impairments. This charge included the write-down of a small Hill-Rom investment
in a non-core business currently being held for sale and the write-off of
goodwill and other strategic investments which were significantly
underperforming original expectations or had essentially discontinued
operations. Asset impairment charges were determined based upon projected future
cash flows, independent appraisals and sales activities, market assessments and
management estimates of losses to be incurred upon disposition of the affected
assets.
The remaining component of the fourth quarter of 1999 unusual charge
relates to the estimated $8 million cost of a field corrective action to be
taken for a previously acquired product line. The action will involve the
replacement of certain key components of the product aimed at enhancing the
overall effectiveness and safety of the product. This action is expected to be
completed within the next six months, but could take longer depending on the
availability of necessary components and other requirements.
In March 1999, Batesville announced the planned closing of its
Campbellsville, Kentucky casket manufacturing plant. Approximately 200
production and administrative employees were affected. Production of
Campbellsville casket units was transferred to existing plants located in
Batesville, Indiana and Manchester, Tennessee.
The closure of the Campbellsville manufacturing plant necessitated a $9
million unusual charge in the second quarter of 1999. The non-cash component
consisted of a $5 million write-down of property, plant and equipment which was
determined based upon independent assessments, market appraisals and management
estimates of losses to be incurred upon the disposition of the Campbellsville
facility and surplus equipment. Property, plant and equipment to be disposed of
have an adjusted fair market value of approximately $5 million, not including
costs of disposal. Additional charges in the plan included $3 million for
severance and employee benefit costs and $1 million of other estimated plant
closing costs. This charge was reflected within the Unusual charges line of the
Statement of Consolidated Income.
As of November 27, 1999, manufacturing operations had been discontinued at
the plant and production successfully relocated. Nearly all severance and
employee benefit costs and estimated plant closing costs had been incurred, with
no adjustments being made to such reserves through year end. The disposition of
property, plant and equipment is targeted to be completed within the next six
months, but could take longer.
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In August 1998, the Company approved a plan to restructure Hill-Rom's
direct and support operations in Germany and Austria to permit the Company to
more efficiently meet the needs of its customers and improve profitability.
Under the plan, the Company reduced its fixed costs and aligned manufacturing,
distribution, sales and administrative functions with anticipated demand. These
actions resulted in the closure of manufacturing facilities in Germany and
Austria and the relocation of certain manufacturing and business processes to
other European locations.
The plan necessitated the provision of a $70 million asset impairment and
restructuring charge in 1998. The non-cash component of the charge included a
$43 million write-off of German subsidiary goodwill, $7 million for the
write-down of property, plant and equipment held for sale and $3 million for
obsolete inventory resulting from the realignment of operations. The plan also
included additional charges for severance and employee benefit costs of $10
million and other estimated plant closing costs of $7 million. This charge, with
the exception of the inventory component which was recorded in cost of goods
sold, was reflected within the Unusual charges line of the Statement of
Consolidated Income.
As of November 27, 1999, manufacturing operations have been discontinued in
Germany and Austria. Nearly all of the severance and employee benefit costs and
$5 million in other plant closing costs were incurred through 1999. During 1999,
approximately $2 million of the provision for other plant closing costs was
reversed to income within the Unusual charges line of the Statement of
Consolidated Income as actual costs were less than originally estimated.
The disposition of the plant in Germany is targeted to be completed within
the next three months, but could take longer. The disposition of excess and
discontinued inventories and production equipment from the German and Austrian
facilities is complete, and the facility in Austria was sold in December 1999.
In addition to costs accrued under the above outlined plans, approximately
$2 million of incremental costs related to the closure of manufacturing
facilities in Germany, Austria and Campbellsville were incurred. These
incremental costs include expenses such as travel, employee relocation and the
relocation of certain manufacturing and business processes. These costs were
expensed as incurred as required by generally accepted accounting principles and
are included within the Unusual charges line of the Statement of Consolidated
Income as such incremental costs were incurred directly in conjunction with the
execution of the respective plans.
The reserve balances for the above plans included in other current
liabilities approximated $21 million and $17 million as of November 27, 1999 and
November 28, 1998, respectively.
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 $5 million. The
Company has provided adequate reserves in its financial statements for these
matters. These reserves have been determined without consideration of possible
loss recoveries from third parties. Compliance with other current governmental
provisions relating to protection of the environment are not expected to
materially affect the Company's capital expenditures, earnings or competitive
position. Further changes in environmental law might affect the Company's future
operations, capital expenditures and earnings; however, the cost of complying
with these provisions, if any, is not known.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Legislative changes phased in beginning July 1, 1998 have had and will continue
to have a dampening effect on the Company's rental revenue derived from Medicare
patients in the long-term care market.
Cuts in Medicare funding mandated by the Balanced Budget Act of 1997 (BBA)
have had and could continue to have an adverse effect on the Company's health
care sales derived from the acute-care market.
The Company has been notified by the Health Care Financing Administration
(HCFA) that it may review the coding for some of the Company's Home Care rental
products. Depending on the outcome of any decision there could be a dampening
effect on the Company's future rental revenue derived from Medicare patients in
the home care market.
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.
YEAR 2000 DATE CONVERSION
Many computer programs used only two digits to identify years. These programs
were designed without consideration for the effect of the change in century, and
if not corrected, could have failed or created erroneous results at the year
2000. Essentially all of the Company's information technology-based systems, as
well as many non-information based systems, were potentially affected by the
Year 2000 issue.
In order to prepare for the Year 2000 issue, the Company implemented the
following remediation plan for technology-based systems:
1. Identification of all applications and hardware with potential Year 2000
issues.
2. For each item identified, perform an assessment to determine an appropriate
action plan and timetable for remediation of each item.
3. Implementation of the specific action plan.
4. Test each application upon completion.
5. Place the new process into production and conduct systems integration
testing.
The Company successfully implemented the above remediation plan for all
affected information technology-based systems and other remediation plans
related to non-Management Information Systems and to products sold before the
turn of the century. Following the arrival of the Year 2000, the Company has not
experienced any problems with devices and raw materials manufactured and/or
supplied by third parties. There was no interruption in the Company's ability to
build and deliver its products and transact business with its suppliers and
customers. The Company has received no notifications from customers regarding
Year 2000 issues related to products it has sold. The Company continues to
monitor its systems, suppliers and products for any unanticipated issues that
may not yet have manifested.
The total cost to the Company of achieving Year 2000 compliance is
estimated to be approximately $9 million. All costs related to achieving Year
2000 compliance are based on management's best estimates.
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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 27, 1999, and November 28,
1998, a hypothetical 10% increase in weighted average interest rates could
reduce the market value of the investment portfolio approximately $111 and $77
million, respectively, 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
earnings 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
27, 1999, movements in currency rates would not materially affect the financial
position of the Company.
20
23
- ---------------------------------------------------------------------------------------------------------------------------
KEY FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
- ---------------------------------------------------------------------------------------------------------------------------
% Pretax, preinterest expense,
income (EBIT) to revenues 11 16 16 15 12
% Pretax, preinterest expense,
pre-depreciation and amortization
expense, income (EBITDA) to
revenues (a) 16 23 22 21 20
% Net income to revenues 6 9 9 8 6
% Income taxes to pretax income 37 37 39 40 47
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------------------
% Long-term debt-to-total capital 26 24 19 21 22
% Total debt-to-total capital 31 29 24 28 26
Current assets/current liabilities (b) 2.1 2.3 2.3 2.2 2.1
Working capital turnover (b) (c) 7.0 9.1 15.4 13.6 8.6
- ---------------------------------------------------------------------------------------------------------------------------
PROFITABILITY
- ---------------------------------------------------------------------------------------------------------------------------
% Return on total capital 11 15 14 14 9
% Return on average shareholders' equity 13 21 20 19 13
- ---------------------------------------------------------------------------------------------------------------------------
ASSET TURNOVER
- ---------------------------------------------------------------------------------------------------------------------------
Revenues/inventories (b) 15.0 16.1 19.1 15.3 12.9
Revenues/receivables (b) 4.1 4.3 4.5 5.1 4.6
- ---------------------------------------------------------------------------------------------------------------------------
STOCK MARKET
- ---------------------------------------------------------------------------------------------------------------------------
Year-end price/earnings (P/E) 19 21 20 18 25
Year-end price/book value 2.8 4.1 3.4 3.3 3.1
- ---------------------------------------------------------------------------------------------------------------------------
(a) EBITDA is the sum of operating profit, investment income, other income and expense and depreciation and amortization
expense including the write-down of intangibles. The Company's EBITDA, which represents a non-GAAP measure of cash
flow, may not be comparable to other companies EBITDA due to differences in the calculation.
(b) Excludes insurance operations.
(c) Excludes cash.
===========================================================================================================================
CONSOLIDATED INCOME STATEMENT COMPARISON
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year Percent Change
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997 1999/98 1998/97 1997/96
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues:
Health Care sales $ 766 $ 748 $ 588 2% 27% 4%
Health Care rentals 324 403 378 (20%) 7% 1%
Funeral Services sales 602 541 545 11% (1%) 4%
Insurance revenues 355 309 265 15% 17% 21%
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,047 $ 2,001 $ 1,776 2% 13% 5%
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit:
Health Care sales $ 314 $ 320 $ 266 (2%) 20% 14%
Health Care rentals 88 162 143 (46%) 13% 2%
Funeral Services sales 292 260 264 12% (2%) 7%
Insurance revenues 82 76 56 8% 36% 51%
- ---------------------------------------------------------------------------------------------------------------------------
Total gross profit 776 818 729 (5%) 12% 11%
Other operating expenses 527 524 465 1% 13% 10%
Unusual charges (38) (66) - N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Operating profit 211 228 264 (7%) (14%) 12%
Other (expense) income, net (16) 65 (5) N/A N/A (67%)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 195 293 259 (33%) 13% 11%
Income taxes 71 109 102 (35%) 7% 10%
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 124 $ 184 $ 157 (33%) 17% 12%
- ---------------------------------------------------------------------------------------------------------------------------
21
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Financial Statements:
Report of Independent Accountants 23
Statements of Consolidated Income for the three years ended
November 27, 1999 24
Consolidated Balance Sheets at November 27, 1999 and November 28, 1998 25
Statements of Consolidated Cash Flows for the three years ended
November 27, 1999 27
Statements of Consolidated Shareholders' Equity for the three years ended
November 27, 1999 28
Notes to Consolidated Financial Statements 29
Financial Statement Schedule for the three years ended November 27, 1999:
Schedule II - Valuation and Qualifying Accounts 51
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or the
notes thereto.
22
25
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 27, 1999 and
November 28, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended November 27, 1999, in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
January 11, 2000
23
26
Hillenbrand Industries, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------------------------
NOVEMBER 27, November 28, November 29,
Year Ended 1999 1998 1997
- --------------------------------------------------------------------------------------------------
NET REVENUES
Health Care sales $ 766 $ 748 $ 588
Health Care rentals 324 403 378
Funeral Services sales 602 541 545
Insurance revenues 355 309 265
- --------------------------------------------------------------------------------------------------
Total revenues 2,047 2,001 1,776
- --------------------------------------------------------------------------------------------------
COST OF REVENUES
Health Care cost of goods sold 452 428 322
Health Care rental expenses 236 241 235
Funeral Services cost of goods sold 310 281 281
Insurance cost of revenues 273 233 209
- --------------------------------------------------------------------------------------------------
Total cost of revenues 1,271 1,183 1,047
Other operating expenses 527 524 465
Unusual charges (Note 5) (38) (66) -
- --------------------------------------------------------------------------------------------------
OPERATING PROFIT 211 228 264
Other income (expense), net:
Interest expense (27) (27) (21)
Investment income, net 16 19 18
Other (Note 4) (5) 73 (2)
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 195 293 259
Income taxes 71 109 102
- --------------------------------------------------------------------------------------------------
NET INCOME $ 124 $ 184 $ 157
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET INCOME PER COMMON SHARE $ 1.87 $ 2.73 $ 2.28
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .78 $ .72 $ .66
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 66,295,770 67,577,803 68,796,439
- --------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
24
27
Hillenbrand Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
- -----------------------------------------------------------------------------------
NOVEMBER 27, November 28,
1999 1998
- -----------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------
CURRENT ASSETS
Cash, cash equivalents and short-term investments $ 170 $ 297
Trade accounts receivable, less allowances of
$54 in 1999 and $29 in 1998 413 392
Inventories 113 105
Other 86 64
- -----------------------------------------------------------------------------------
Total current assets 782 858
- -----------------------------------------------------------------------------------
EQUIPMENT LEASED TO OTHERS 273 288
Less accumulated depreciation 204 207
- -----------------------------------------------------------------------------------
Equipment leased to others, net 69 81
- -----------------------------------------------------------------------------------
PROPERTY 624 662
Less accumulated depreciation 426 441
- -----------------------------------------------------------------------------------
Property, net 198 221
- -----------------------------------------------------------------------------------
OTHER ASSETS
Intangible assets at amortized cost:
Patents and trademarks 19 20
Excess of cost over net asset values of
acquired companies (Note 3) 159 164
Other 14 14
Deferred charges and other assets 101 89
- -----------------------------------------------------------------------------------
Total other assets 293 287
- -----------------------------------------------------------------------------------
INSURANCE ASSETS (NOTE 13)
Investments 2,311 2,204
Deferred acquisition costs 584 536
Deferred income taxes 79 34
Other 117 59
- -----------------------------------------------------------------------------------
Total insurance assets 3,091 2,833
- -----------------------------------------------------------------------------------
TOTAL ASSETS $4,433 $4,280
- -----------------------------------------------------------------------------------
25
28
- ------------------------------------------------------------------------------------
NOVEMBER 27, November 28,
1999 1998
- ------------------------------------------------------------------------------------
LIABILITIES
- ------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term debt (Notes 6 and 9) $ 52 $ 60
Current portion of long-term debt (Notes 6 and 9) - 1
Trade accounts payable 80 69
Income taxes payable (Note 11) 22 27
Accrued compensation 53 73
Other 164 145
- ------------------------------------------------------------------------------------
Total current liabilities 371 375
- ------------------------------------------------------------------------------------
LONG-TERM DEBT (NOTES 6 AND 9) 302 303
- ------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES (NOTE 7) 68 81
- ------------------------------------------------------------------------------------
DEFERRED INCOME TAXES (NOTES 1 AND 11) 3 4
- ------------------------------------------------------------------------------------
INSURANCE LIABILITIES (NOTE 13)
Benefit reserves 2,092 1,856
Unearned revenue 719 674
General liabilities 40 30
- ------------------------------------------------------------------------------------
Total insurance liabilities 2,851 2,560
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,595 3,323
- ------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
- ------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (NOTES 7 AND 8)
- ------------------------------------------------------------------------------------
Common stock - without par value:
Authorized - 199,000,000 shares
Issued - 80,323,912 shares in 1999 and 1998 4 4
Additional paid-in capital 24 20
Retained earnings (Note 6) 1,293 1,221
Accumulated other comprehensive (loss) income (Note 1) (38) 45
Treasury stock, at cost: 1999 - 16,777,137 shares;
1998 - 13,564,793 shares (445) (333)
- ------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 838 957
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,433 $ 4,280
- ------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
26
29
Hillenbrand Industries, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
- ------------------------------------------------------------------------------------------------------
NOVEMBER 27, November 28, November 29,
Year Ended 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 124 $ 184 $ 157
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation, amortization and write-down of intangibles 98 149 102
Change in noncurrent deferred income taxes (2) (3) (12)
Gain on sale of business - (75) -
Change in working capital excluding cash, current
debt, acquisitions and dispositions:
Trade accounts receivable (18) (36) (46)
Inventories (6) (2) 17
Other current assets (21) 2 -
Trade accounts payable 10 (12) 21
Accrued expenses and other liabilities (6) (14) 32
Change in insurance deferred policy acquisition costs (48) (63) (67)
Change in other insurance items, net 50 48 35
Other, net (31) (5) 7
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 150 173 246
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (79) (88) (85)
Proceeds on disposal of fixed assets and equipment
leased to others 4 10 1
Acquisitions of businesses, net of cash acquired (54) (188) -
Other investments (4) (11) (4)
Proceeds on sale of business - 64 -
Insurance investments:
Purchases (797) (746) (721)
Proceeds on maturities 177 168 112
Proceeds on sales 466 345 358
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (287) (446) (339)
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Additions to short-term debt 12 39 10
Reductions to short-term debt (13) (13) (15)
Additions to long-term debt - 101 -
Reductions to long-term debt (1) (1) (2)
Payment of cash dividends (52) (48) (45)
Treasury stock acquired (113) (85) (13)
Insurance premiums received 488 495 514
Insurance benefits paid (309) (282) (256)
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 12 206 193
- ------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (2) - (2)
- ------------------------------------------------------------------------------------------------------
TOTAL CASH FLOWS (127) (67) 98
CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
At beginning of year 297 364 266
- ------------------------------------------------------------------------------------------------------
At end of year $ 170 $ 297 $ 364
- ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
27
30
Hillenbrand Industries, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Additional Retained Comprehensive Treasury
Stock Paid-in-Capital Earnings (Loss) Income Stock Total
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 1, 1996 $ 4 $18 $ 973 $ 31 $(235) $ 791
Comprehensive Income
Net income - - 157 - - 157
Foreign currency translation adjustment - - - (13) - (13)
Net change in unrealized gain (loss) on
available for sale securities - - - 13 - 13
-----
Total comprehensive income 157
Dividends - - (45) - - (45)
Treasury shares acquired (290,395) - - - - (13) (13)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 29, 1997 4 18 1,085 31 (248) 890
Comprehensive Income
Net income - - 184 - - 184
Foreign currency translation adjustment - - - (4) - (4)
Net change in unrealized gain (loss) on
available for sale securities - - - 18 - 18
-----
Total comprehensive income 198
Dividends - - (48) - - (48)
Treasury shares acquired (1,768,100) - - - - (85) (85)
Other - 2 - - - 2
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 28, 1998 4 20 1,221 45 (333) 957
Comprehensive Income
Net income - - 124 - - 124
Foreign currency translation adjustment - - - (1) - (1)
Net change in unrealized gain (loss) on
available for sale securities - - - (82) - (82)
-----
Total comprehensive income 41
Dividends - - (52) - - (52)
Treasury shares acquired (3,255,300) - - - - (113) (113)
Other - 4 - - 1 5
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 27, 1999 $ 4 $24 $ 1,293 $(38) $(445) $ 838
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
28
31
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 13.
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. 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.
NATURE OF OPERATIONS
Hillenbrand Industries is organized into two groups - the Health Care Group and
the Funeral Services Group. The Health Care Group, which is considered a
separate reporting segment, consists of Hill-Rom. Medeco Security Locks, Inc.
was included in this group prior to its sale in 1998 based upon its relative
immateriality. Hill-Rom is a leading manufacturer of patient care products and a
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 53% of
Hillenbrand's revenues in 1999. The Funeral Services Group consists of two
reporting segments, Funeral Services Products (Batesville Casket Company -
Batesville) and Funeral Services Insurance (Forethought Financial Services -
Forethought). Batesville 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 30% of Hillenbrand's
revenues in 1999. Forethought provides funeral homes in 49 U.S. states, the
District of Columbia, Puerto Rico and nine 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 17% of Hillenbrand's revenues in 1999.
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.
29
32
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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. Investments with a maturity at the date of purchase
greater than three months or which have no stated maturity are considered
short-term investments. All of the Company's short-term investments contain put
options or may be freely traded. Cash, cash equivalents and short-term
investments at year end consist of the following:
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Cash and cash equivalents $ 26 $ 86
Short-term investments 144 211
- -------------------------------------------------------------------------------
Total $ 170 $ 297
- -------------------------------------------------------------------------------
INVENTORIES
Inventories are valued at the lower of cost or market. Inventory costs are
determined by the last-in, first-out (LIFO) method for approximately 52% and 56%
of the Company's inventories at November 27, 1999 and November 28, 1998,
respectively. Costs for other inventories have been determined principally by
the first-in, first-out (FIFO) method. Inventories at year end consist of the
following:
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Finished products $ 67 $ 58
Work in process 31 32
Raw materials 15 15
- -------------------------------------------------------------------------------
Total $ 113 $ 105
- -------------------------------------------------------------------------------
If the FIFO method of inventory accounting, which approximates current cost, had
been used for all inventories, they would have been approximately $7 million and
$9 million higher than reported at November 27, 1999 and November 28, 1998,
respectively.
EQUIPMENT LEASED TO OTHERS
Equipment leased to others primarily represents therapy rental units, which are
recorded at cost and depreciated on a straight-line basis over their estimated
economic life. The majority of 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. 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 1999 and 1998 were:
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Land $ 17 $ 18
Buildings and building equipment 148 152
Machinery and equipment 459 492
- -------------------------------------------------------------------------------
Total $ 624 $ 662
- -------------------------------------------------------------------------------
30
33
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 intangible 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 with the
carrying value.
Intangible write-offs approximated $3 million and $43 million in 1999 and
1998, respectively. See Note 5 for additional information.
Accumulated amortization of intangible assets was $156 million and $150
million as of November 27, 1999 and November 28, 1998, 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 Services 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
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," in the first quarter of 1998. SFAS No. 128 requires
disclosure of basic and diluted earnings per share. Basic earnings per share is
calculated based upon the weighted-average number of outstanding common shares
for the period, plus the effect of deferred vested shares. Diluted earnings per
share is calculated consistent with the basic earnings per share calculation
including the effect of dilutive potential common shares. For all years
presented, anti-dilutive stock options were excluded in the calculation of
dilutive earnings per share.
31
34
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in the first
quarter of 1999. The adoption of this Standard did not affect the Company's
financial position or results of operations. SFAS No. 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Due to this change, certain balance sheet reclassifications have been
made in order for previously reported amounts to conform to the SFAS No. 130
presentation.
The composition of accumulated other comprehensive (loss) income at
November 27, 1999 and November 28, 1998 is the cumulative adjustment for
unrealized losses or gains on available-for-sale securities, mainly relating to
the insurance portfolio, of ($30) and $52 million, respectively, and the foreign
currency translation adjustment of ($8) and ($7) million, respectively.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages companies to
adopt a fair-value approach to valuing stock-based compensation. 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
associated with SFAS No. 123 in Note 7.
INCOME TAXES
The Company and its eligible domestic subsidiaries file a consolidated U.S.
income tax return. Foreign operations file income tax returns in a number of
jurisdictions. 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 corresponding 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, but
included as a component of comprehensive income. Foreign currency gains and
losses resulting from foreign currency transactions are included in results of
operations and are not material.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," in June 1998. This standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities and requires that all derivatives be recognized on the
balance sheet at fair value. Changes in fair values of derivatives will be
accounted for based upon their intended use and designation. Since the Company's
holdings in such instruments are minimal, adoption of this Standard is not
expected to have a material effect on the Company's consolidated financial
statements. The Company is required to adopt the Standard not later than the
first quarter of fiscal 2001.
32
35
2. 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.
Effective November 27, 1999, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This Standard
revised disclosure requirements for employers' pensions and other retiree
benefits as presented below. Implementation of this Standard did not affect the
Company's financial position or results of operations.
The components of net pension expense in the United States are as follows:
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Service cost $ 11 $ 8 $ 8
Interest cost 11 10 9
Expected return on plan assets (11) (10) (10)
- -------------------------------------------------------------------------------
Net pension expense $ 11 $ 8 $ 7
- -------------------------------------------------------------------------------
The change in benefit obligation, change in plan assets, funded status and
amounts recognized in the consolidated balance sheets at November 27, 1999 and
November 28, 1998 for the Company's domestic defined benefit retirement plans
were as follows:
NOVEMBER 27, November 28,
1999 1998
- ------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $161 $135
Service cost 11 8
Interest cost 11 10
Amendments - 1
Actuarial (gain)/loss (18) 11
Benefits paid (4) (4)
--------------------------------------------------------------------------------------------
Benefit obligation at end of year 161 161
--------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 144 124
Actual (loss)/return on plan assets (9) 16
Employer contributions 9 8
Benefits paid (4) (4)
--------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 140 144
--------------------------------------------------------------------------------------------
Funded status (21) (17)
Unrecognized net actuarial gain (8) (11)
Unrecognized prior service cost 2 3
--------------------------------------------------------------------------------------------
Accrued benefit cost $(27) $(25)
--------------------------------------------------------------------------------------------
The weighted-average assumptions used in accounting for the domestic pension
plans are as follows:
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Discount rate 7.75% 7.25% 7.5%
Expected rate of return on plan assets 8.0% 8.0% 8.0%
Rate of compensation increase 5.5% 5.5% 5.5%
- -------------------------------------------------------------------------------
33
36
All of the Company's domestic pension plans had projected benefit
obligations in excess of plan assets as of November 27, 1999 and November 28,
1998.
In addition to the above plans, the Company assumed the unfunded
liabilities of a defined benefit plan in a German acquisition in 1994. The
unfunded benefit obligation of this plan, included in accrued expenses, was $10
million on November 27, 1999 and $11 million on November 28, 1998. Pension
expense was negligible in 1999 and 1998 and was $1 million in 1997.
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 in 1999, $6 million in 1998 and $5 million in 1997.
3. ACQUISITIONS
On July 30, 1999, Hill-Rom, a wholly owned subsidiary, purchased the assets of
AMATECH Corporation, a manufacturer and distributor of surgical table
accessories and patient positioning devices for the operating room, for
approximately $28 million, including costs of acquisition and the assumption of
certain liabilities totaling approximately $1 million. If the purchased entity
achieves certain financial milestones by the end of January 2003, the Company
could make additional payments. This acquisition has been accounted for as a
purchase, and the results of operations have been included in the consolidated
financial statements since the acquisition date. The excess of the purchase
price over the fair value of net assets acquired, based on the Company's
preliminary purchase price allocation, was approximately $23 million which is
being amortized on a straight-line basis over 20 years.
On December 31, 1998, Forethought Life Insurance Company, a wholly owned
subsidiary of Forethought Financial Services, Inc., acquired the stock of
Arkansas National Life Insurance Company for approximately $31 million,
including costs of acquisition. This acquisition has been accounted for as a
purchase, and the results of operations of the acquired business have been
included in the consolidated financial statements since the acquisition date.
The excess of the purchase price over the fair value of net assets acquired was
approximately $3 million which is being amortized on a straight-line basis over
20 years.
On June 4, 1998, Forethought Financial Services purchased Chrysler Life
Insurance Company for approximately $14 million, including costs of acquisition.
This acquisition has been accounted for as a purchase, and the results of
operations of the acquired business have been included in the consolidated
financial statements since the acquisition date. The excess of the purchase
price over the fair value of net assets acquired, which were primarily state
insurance licenses, was approximately $4 million which is being amortized on a
straight-line basis over 40 years.
On February 9, 1998, Hill-Rom acquired the stock of MEDAES Holdings, Inc.,
a manufacturer of medical architectural systems for $62 million, including costs
of acquisition, and the assumption of certain liabilities totaling $16 million.
This acquisition was accounted for as a purchase, and the results of operations
have been included in the consolidated financial statements since the date of
acquisition. The excess of the purchase price over the fair value of
net assets acquired was approximately $50 million which is being amortized on a
straight-line basis over 20 years.
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 $93 million, net of cash acquired and including
costs of acquisition, and the assumption of certain liabilities totaling $22
million. This acquisition has been accounted for as a purchase, and the results
of the operations of the acquired business have been included in the
consolidated financial statements since the date of acquisition. The excess of
the purchase price over the fair value of net assets acquired was approximately
$53 million which is being amortized on a straight-line basis over 20 years. In
the second quarter of 1999, the final purchase price for this acquisition was
negotiated, resulting in a $5 million reduction in the excess of the purchase
price over the fair value of net assets acquired.
34
37
Hill-Rom, Batesville and the Company each acquired one small company during
1998 in addition to those outlined above. The combined purchase price of these
companies was approximately $14 million, net of cash acquired.
Assuming the two fiscal 1999 acquisitions had occurred November 30, 1997,
and all fiscal 1998 acquisitions had occurred December 1, 1996, unaudited fiscal
1997 pro forma consolidated net revenue would have increased by approximately
$150 million, and net income and earnings per share would have decreased by less
than 5%. Unaudited fiscal 1998 and 1999 pro forma revenue, net income and
earnings per share would not have been materially different from reported
amounts. Such unaudited consolidated pro forma information is not necessarily
indicative of the combined results that would have occurred had the acquisitions
taken place on those dates, nor is it indicative of the results that may occur
in the future.
4. DISPOSITION
On July 1, 1998, the Company sold its high security and access control business,
Medeco Security Locks, Incorporated, to Assa Abloy AB. The Company recorded an
after-tax gain of approximately $47 million in the third quarter. Results for
Medeco were included in the Health Care Group through the date of disposition
and did not have a material effect on the results of that group or the Company's
consolidated earnings, cash flows and financial position. The gain on the sale
of Medeco is classified within the Other line under Other income (expense), net
in the Statement of Consolidated Income.
5. UNUSUAL CHARGES
On November 23, 1999, the Company announced a plan to reduce the future
operating cost structure at Hill-Rom, to write-down the value of certain
impaired assets and to recognize a liability associated with the estimated cost
of a field corrective action for a previously acquired product line. The total
estimated cost of these actions necessitated an unusual charge of $29 million in
the fourth quarter of 1999, all of which is reflected within the Unusual charges
line of the Statement of Consolidated Income. As of year-end, essentially no
spending had occurred relative to the $19 million cash component of this charge.
Included in the cost-cutting actions announced at Hill-Rom was the
reduction of 350 employees, about 5% of its work force, in the United States and
Europe and the closure of select manufacturing and sales, service/distribution
facilities in the United States and Europe to eliminate redundant operations.
With respect to the employee head count reduction, most affected employees will
be administrative personnel and the actions will be completed within the next
nine months. The facility closures are also expected to occur on a similar
timeline, but certain aspects of the closure and disposal activities could take
longer. Estimated costs for the work force and facility closure actions are
estimated at $8 million and $3 million, respectively. These actions were
precipitated by adverse customer reaction to continued changes in Medicare
reimbursement practices which have resulted in the postponement or cancellation
of capital goods orders by many of Hill-Rom's customers.
The unusual charge also includes a total of $10 million relative to asset
impairments. This charge included the write-down of a small Hill-Rom investment
in a non-core business currently being held for sale and the write-off of
goodwill and other strategic investments which were significantly
underperforming original expectations or had essentially discontinued
operations. Asset impairment charges were determined based upon projected future
cash flows, independent appraisals and sales activities, market assessments and
management estimates of losses to be incurred upon disposition of the affected
assets.
The remaining component of the fourth quarter of 1999 unusual charge
relates to the estimated $8 million cost of a field corrective action to be
taken for a previously acquired product line. The action will involve the
replacement of certain key components of the product aimed at enhancing the
overall effectiveness and safety of the product. This action is expected to be
completed within the next six months, but could take longer depending on the
availability of necessary components and other requirements.
35
38
In March 1999, Batesville announced the planned closing of its
Campbellsville, Kentucky casket manufacturing plant. Approximately 200
production and administrative employees were affected. Production of
Campbellsville casket units was transferred to existing plants located in
Batesville, Indiana and Manchester, Tennessee.
The closure of the Campbellsville manufacturing plant necessitated a $9
million unusual charge in the second quarter of 1999. The non-cash component
consisted of a $5 million write-down of property, plant and equipment which was
determined based upon independent assessments, market appraisals and management
estimates of losses to be incurred upon the disposition of the Campbellsville
facility and surplus equipment. Property, plant and equipment to be disposed of
have an adjusted fair market value of approximately $5 million, not including
costs of disposal. Additional charges in the plan included $3 million for
severance and employee benefit costs and $1 million of other estimated plant
closing costs. This charge was reflected within the Unusual charges line of the
Statement of Consolidated Income.
As of November 27, 1999, manufacturing operations had been discontinued at
the plant and production successfully relocated. Nearly all severance and
employee benefit costs and estimated plant closing costs had been incurred, with
no adjustments being made to such reserves through year end. The disposition of
property, plant and equipment is targeted to be completed within the next six
months, but could take longer.
In August 1998, the Company approved a plan to restructure Hill-Rom's
direct and support operations in Germany and Austria to permit the Company to
more efficiently meet the needs of its customers and improve profitability.
Under the plan, the Company reduced its fixed costs and aligned manufacturing,
distribution, sales and administrative functions with anticipated demand. These
actions resulted in the closure of manufacturing facilities in Germany and
Austria and the relocation of certain manufacturing and business processes to
other European locations.
The plan necessitated the provision of a $70 million asset impairment and
restructuring charge in 1998. The non-cash component of the charge included a
$43 million write-off of German subsidiary goodwill, $7 million for the
write-down of property, plant and equipment held for sale and $3 million for
obsolete inventory resulting from the realignment of operations. The plan also
included additional charges for severance and employee benefit costs of $10
million and other estimated plant closing costs of $7 million. This charge, with
the exception of the inventory component which was recorded in cost of goods
sold, was reflected within the Unusual charges line of the Statement of
Consolidated Income.
As of November 27, 1999, manufacturing operations have been discontinued in
Germany and Austria. Nearly all of the severance and employee benefit costs and
$5 million in other plant closing costs were incurred through 1999. During 1999,
approximately $2 million of the provision for other plant closing costs was
reversed to income within the Unusual charges line of the Statement of
Consolidated Income as actual costs were less than originally estimated.
The disposition of the plant in Germany is targeted to be completed within
the next three months, but could take longer. The disposition of excess and
discontinued inventories and production equipment from the German and Austrian
facilities is complete, and the facility in Austria was sold in December 1999.
In addition to costs accrued under the above outlined plans, approximately
$2 million of incremental costs related to the closure of manufacturing
facilities in Germany, Austria and Campbellsville were incurred. These
incremental costs include expenses such as travel, employee relocation and the
relocation of certain manufacturing and business processes. These costs were
expensed as incurred as required by generally accepted accounting principles and
are included within the Unusual charges line of the Statement of Consolidated
Income as such incremental costs were incurred directly in conjunction with the
execution of the respective plans.
The reserve balances for the above plans included in other current
liabilities approximated $21 million and $17 million as of November 27, 1999 and
November 28, 1998, respectively.
36
39
6. FINANCING AGREEMENTS
The Company's various financing agreements contain no restrictive provisions or
conditions relating to dividend payments, working capital or additional
indebtedness.
Long-term debt consists of the following:
- --------------------------------------------------------------------------------------
NOVEMBER 27, November 28,
1999 1998
- --------------------------------------------------------------------------------------
Unsecured 8 1/2% debentures due on December 1, 2011 $100 $100
Unsecured 7% debentures due on February 15, 2024 100 100
Unsecured 6 3/4% debentures due on December 15, 2027 100 100
Government-sponsored bond with an interest rate of 5.0%
and maturities to 2008 2 2
Other - 2
- --------------------------------------------------------------------------------------
Total 302 304
Less current portion - 1
- --------------------------------------------------------------------------------------
Total long-term debt $302 $303
- --------------------------------------------------------------------------------------
Scheduled payments on long-term debt as of November 27, 1999 total less
than $1 million in each of the years 2000 through 2004.
Short-term debt consists of borrowings under various lines of credit
maintained for foreign subsidiaries. The weighted average interest rate on all
short-term borrowings outstanding as of November 27, 1999 and November 28, 1998
was approximately 4.0%.
At November 27, 1999, the Company had uncommitted credit lines totaling $88
million available for its operations. These agreements have no commitment fees,
compensating balance requirements or fixed expiration dates.
7. STOCK-BASED COMPENSATION
At November 27, 1999, the Company has four active stock-based compensation
programs; the Senior Executive Compensation Program, the Performance
Compensation Plan, the 1996 Stock Option Plan and the Hillenbrand Industries
Stock Award Program which are described below. These programs are administered
by the Compensation Committee of the Board of Directors. All shares issued under
these programs 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
1,044,425 shares of common stock of the Company remain reserved for issuance
under the program. Total tentative performance shares payable through November
27, 1999, were 155,961. In addition, the Senior Executive Compensation Program
mandates and or provides for participants to defer payment of long-term
performance shares earned in prior years. A total of 239,777 shares are deferred
of which 210,381 are vested and payable as of November 27, 1999. The fair value
of common stock granted under this program was $57.94, $44.56 and $36.88 per
share in 1999, 1998 and 1997, respectively.
Under the Performance Compensation Plan, key employees are awarded
tentative performance shares based upon achievement of performance targets. A
total of 1,288,897 shares of common stock remain reserved for issuance under
this plan as of November 27, 1999. No shares have been awarded under this plan
since 1993. This plan will terminate on November 30, 2001.
37
40
Under the 1996 Stock Option Plan, key employees and directors are granted
the opportunity to acquire the Company's common stock. 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. As of November 27, 1999 there were
1,553,913 shares of common stock available for future grants. The fair value for
each option grant is estimated on the date of the grant using the Black-Scholes
option pricing model. The weighted average fair value of options granted was
$12.31, $14.19 and $13.22 per share in 1999, 1998 and 1997, respectively. The
following weighted average assumptions were used:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.23% 5.63% 6.83%
Dividend yield 1.68% 1.49% 1.44%
Volatility factor .2319 .1926 .1903
Weighted average expected life 5.98 YEARS 5.98 years 5.97 years
The following table summarizes the transactions of the Company's stock option
plan:
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
NUMBER OF EXERCISE Number of Exercise Number of Exercise
SHARES PRICE Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------
Unexercised options outstanding -
beginning of year 734,998 $50.0418 283,500 $44.3125 N/A N/A
Options granted 777,750 $44.2329 499,000 $52.9793 290,500 $44.3125
Options exercised (500) $44.3125 (10,339) $44.3125 N/A N/A
Options canceled (77,000) $50.9848 (37,163) $47.3729 (7,000) $44.3125
- -------------------------------------------------------------------------------------------------------------------------
Unexercised options outstanding -
end of year 1,435,248 $46.8454 734,998 $50.0418 283,500 $44.3125
- -------------------------------------------------------------------------------------------------------------------------
Exercisable options - end of year 355,566 $49.1576 94,867 $44.3125 None N/A
- -------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
November 27, 1999:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------
$29.9688 - $29.9688 265,750 9.74 $29.9688 0 $ -
$41.7813 - $46.4375 280,998 7.64 $44.5521 170,360 $44.3125
$52.1563 - $52.1563 834,500 8.64 $52.1563 155,205 $52.1563
$57.0938 - $59.2188 36,000 8.51 $58.0174 12,001 $58.0174
$63.2500 - $63.2500 18,000 8.36 $63.2500 18,000 $63.2500
- ------------------------------------------------------------------------------------------------------------
$29.9688 - $63.2500 1,435,248 8.64 $46.8454 355,566 $49.1576
- ------------------------------------------------------------------------------------------------------------
38
41
On October 5, 1999, key employees were awarded 45,000 shares of the
Company's common stock with a fair value of $27.75 per share under the
Hillenbrand Industries Stock Award Program. The stock awards are contingent upon
those employees continued employment until October 5, 2002. Dividends accrued
to-date of 253 additional shares are also contingent upon continued employment
until October 5, 2002.
Under a prior restricted stock plan, key employees were granted restricted
shares of the Company's stock. As of November 27, 1999 there were 10,205 shares
which remain deferred under this program. No awards were made in fiscal 1999 and
the plan has been terminated.
The amount charged to expense for all stock-based compensation plans was $4
million, $8 million and $4 million in 1999, 1998 and 1997, respectively.
The pro forma effect on net income for all stock-based compensation plans
if accounted for under SFAS No. 123 is $9 million additional compensation
expense or $.09 per share in 1999 and less than $1 million of additional expense
in 1998 and 1997, respectively.
Members of the Board of Directors may elect to defer fees earned and invest
them in common stock of the Company. A total of 11,410 deferred shares are
payable as of November 27, 1999 under this program.
8. SHAREHOLDERS' EQUITY
One million shares of preferred stock, without par value, have been authorized
and none have been issued.
As of November 27, 1999, the Board of Directors had authorized the
repurchase, from time to time, of up to 19,289,067 shares of the Company's
stock. The purchased shares will be used for general corporate purposes. As of
November 27, 1999, a total of 18,322,467 shares had been purchased at market
trading prices, of which 16,777,137 shares remain in treasury.
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.
9. 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 13) for which it is practicable to estimate that value:
The carrying amounts of cash, cash equivalents and short-term investments,
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 27, 1999
- -------------------------------------------------------------------------------
Carrying Fair
Amount Value
- -------------------------------------------------------------------------------
Short-term debt $ 52 $ 52
Long-term debt $ 302 $ 294
- -------------------------------------------------------------------------------
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 27, 1999 and November 28, 1998.
39
42
10. SEGMENT REPORTING
Effective November 27, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes previously issued segment reporting disclosure rules and requires
reporting of segment information that is consistent with the way in which
management operates and views the Company. The adoption of SFAS No. 131 did not
affect the Company's financial position or results of operations. The segment
disclosures for prior years have been restated to conform with the presentation
adopted for the current year.
The Company is organized into two groups - the Health Care Group and the
Funeral Services Group. The Health Care Group, which is considered a separate
reporting segment, consists of Hill-Rom. Hill-Rom produces, sells and rents
mechanically, electrically and hydraulically adjustable hospital beds, infant
incubators and warmers, hospital procedural stretchers, hospital patient room
furniture, medical gas and vacuum systems, architectural systems and wound care
and trauma management products designed to meet the needs of medical-surgical,
critical care, long-term care, home care and perinatal providers.
The Funeral Services Group consists of two reporting segments, Funeral
Services Products (Batesville Casket Company - Batesville) and Funeral Services
Insurance (Forethought Financial Services - Forethought). Batesville Casket
Company 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 and its subsidiaries provide funeral planning professionals
with marketing support for Forethought(R) funeral plans funded by life insurance
policies and trust products.
Corporate manages areas that affect all segments such as taxes, interest
income and expense, debt, legal, treasury, continuous improvement and business
development. Nearly all interest expense, investment income and other income and
expense amounts relate to activities undertaken at Corporate to benefit the
Company as a whole.
In analyzing segment performance, the Company's management reviews income
before income taxes, unusual items, and capital charges and segment income
(income before income taxes and unusual items). The capital charge is an
estimate of the cost of capital a segment would incur if not a part of
Hillenbrand Industries, and the resulting segment income is used as a measure of
segment profitability.
Based on criteria established in SFAS No. 131, the Company's reporting
segments are Health Care, Funeral Services Products and Funeral Services
Insurance. Corporate, while not a segment, is presented separately to aid in the
reconciliation of segment information to that reported in the Consolidated
Financial Statements.
40
43
Financial information regarding the Company's reportable segments is presented
below:
- --------------------------------------------------------------------------------------------------------------
Corporate
Health Funeral Services and Other
----------------
Care Products Insurance Other (a) Expense Consolidated
- --------------------------------------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------------------------------------
Net revenues $ 1,090 $ 602 $ 355 $ - $ - $ 2,047
Income before income taxes,
unusual items and capital
charges $ 83 $ 142 $ 45 $ - $ (37) $ 233
Capital charges (47) (17) - - 64 -
------------------------------------------------------------------------
Segment income $ 36 $ 125 $ 45 $ - $ 27 $ 233
Unusual items (b) $ (25) $ (9) $ (3) $ - $ (1) 38
-------
Income before income taxes $ 195
Assets $ 794 $ 245 $ 3,028 $ - $ 366 $ 4,433
Capital expenditures $ 62 $ 9 $ 6 $ - $ 2 $ 79
Depreciation and amortization (c) $ 73 $ 18 $ 5 $ - $ 2 $ 98
- --------------------------------------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------------------------------------
Net revenues $ 1,124 $ 541 $ 309 $ 27 $ - $ 2,001
Income before income taxes,
unusual items and capital
charges $ 156 $ 124 $ 52 $ 3 $ (47) $ 288
Capital charges (43) (17) - (1) 61 -
------------------------------------------------------------------------
Segment income $ 113 $ 107 $ 52 $ 2 $ 14 $ 288
Unusual items (d) (e) $ (70) $ -- $ -- $ 75 $ -- 5
-------
Income before income taxes $ 293
Assets $ 801 $ 254 $ 2,833 $ -- $ 392 $ 4,280
Capital expenditures $ 53 $ 20 $ 9 $ -- $ 6 $ 88
Depreciation and amortization (f) $ 124 $ 21 $ 1 $ 1 $ 2 $ 149
- --------------------------------------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------------------------------------
Net revenues $ 920 $ 545 $ 265 $ 46 $ -- $ 1,776
Income before income taxes
and capital charges $ 143 $ 131 $ 36 $ 4 $ (55) $ 259
Capital charges (39) (18) -- (1) 58 --
------------------------------------------------------------------------
Segment income $ 104 $ 113 $ 36 $ 3 $ 3 $ 259
Assets $ 658 $ 249 $ 2,501 $ 21 $ 399 $ 3,828
Capital expenditures $ 66 $ 14 $ 1 $ 2 $ 2 $ 85
Depreciation and amortization $ 74 $ 22 $ 1 $ 2 $ 3 $ 102
- --------------------------------------------------------------------------------------------------------------
(a) All Other consists of Medeco Security Locks, Inc., which was sold in July
1998.
(b) Health Care reflects a $25 million charge for work force reduction
activities, facility closure costs, certain asset impairment charges and
other items. Funeral Services Products reflects a $9 million charge for the
closure of a manufacturing facility. Funeral Services Insurance and
Corporate and Other Expense reflect certain asset impairment charges.
(c) Funeral Services Insurance reflects a $3 million write-off of goodwill
related to an asset impairment.
(d) Health Care reflects a $70 million charge for the write-off of goodwill,
other asset impairment charges and other closing costs related to the
discontinuance of manufacturing operations at facilities in Germany and
Austria.
(e) Other reflects a gain of $75 million on the sale of Medeco Security Locks,
Inc.
(f) Health Care reflects a $43 million write-off of goodwill related to the
discontinuance of manufacturing operations at Hill-Rom facilities in
Germany.
41
44
GEOGRAPHIC INFORMATION
Most of the Company's operations outside the United States are in Europe and
consist of the manufacturing, selling and renting of Health Care products.
Geographic data for net revenues and long-lived assets (which consist mainly of
property, plant, equipment and intangibles) were as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues to unaffiliated
customers: (a)
United States $1,816 $1,758 $1,560
Foreign 231 243 216
- --------------------------------------------------------------------------------
Total revenues $2,047 $2,001 $1,776
- --------------------------------------------------------------------------------
Long-lived assets:
United States $ 391 $ 417 $ 314
Foreign 68 83 141
- --------------------------------------------------------------------------------
Total long-lived assets $ 459 $ 500 $ 455
- --------------------------------------------------------------------------------
(a) Net revenues are attributed to geographic areas based on the location of
the operation making the sale.
11. INCOME TAXES
Income taxes are computed in accordance with SFAS No. 109. The significant
components of income (loss) before income taxes and the consolidated income tax
provision are as follows:
- -----------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------
Income (loss) before income taxes:
Domestic $ 201 $ 370 $ 272
Foreign (6) (77) (13)
- -----------------------------------------------------------------------------
Total $ 195 $ 293 $ 259
- -----------------------------------------------------------------------------
Provision for income taxes:
Current provision:
Federal $ 79 $ 90 $ 99
State 11 19 13
Foreign 3 4 3
- -----------------------------------------------------------------------------
Total current provision 93 113 115
- -----------------------------------------------------------------------------
Deferred provision:
Federal (20) (4) (11)
State (5) -- --
Foreign 3 -- (2)
- -----------------------------------------------------------------------------
Total deferred provision (22) (4) (13)
- -----------------------------------------------------------------------------
Provision for income taxes $ 71 $ 109 $ 102
- -----------------------------------------------------------------------------
Differences between the provision for income taxes reported for
financial reporting purposes and that computed based upon the application of the
statutory U.S. Federal tax rate to reported income before income taxes is as
follows:
42
45
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
% OF % of % of
PRETAX Pretax Pretax
AMOUNT INCOME Amount Income Amount Income
- --------------------------------------------------------------------------------
Federal income tax (a) $ 68 35.0 $ 103 35.0 $ 90 35.0
State income tax (b) 4 2.1 12 4.1 9 3.5
Foreign income tax (c) 8 4.2 30 10.3 6 2.3
Adjustment of estimated
income tax accruals 9 4.6 19 6.5 -- --
Utilization of foreign net
operating losses (9) (4.6) (47) (16.1) -- --
Other, net (9) (4.6) (8) (2.8) (3) (1.4)
- --------------------------------------------------------------------------------
Provision for income taxes $ 71 36.7 $ 109 37.0 $ 102 39.4
- --------------------------------------------------------------------------------
(a) At statutory rate.
(b) Net of Federal benefit.
(c) Federal tax rate differential.
With the 1998 announcement of the discontinuance of manufacturing
operations in Germany and Austria, the Company recognized tax benefits for the
majority of operating losses available in such countries, approximating $47
million. During 1999, with the substantial completion of those restructuring
activities and the resolution of other related matters, an additional $9 million
of tax benefit was recognized.
The tax effect of temporary differences that give rise to the deferred tax
balance sheet accounts are as follows:
- --------------------------------------------------------------------------------------------------------------------------------
NOVEMBER 27, 1999 November 28, 1998
- --------------------------------------------------------------------------------------------------------------------------------
NON-INSURANCE INSURANCE Non-insurance Insurance
- --------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Current:
Inventories $ 6 $ - $ 3 $ -
Employee benefit accruals 3 - 3 -
Self insurance accruals 9 - 10 -
Litigation accruals 2 - 2 -
Other, net 48 5 20 5
Long-term:
Employee benefit accruals 24 1 23 1
Amortization - 1 - -
Unrealized loss on investments - 17 - -
Deferred policy revenues - 251 - 236
Foreign loss carryforwards
and other tax attributes 11 - 9 -
Other, net 11 - 9 -
- --------------------------------------------------------------------------------------------------------------------------------
Total assets 114 275 79 242
- --------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Current:
Inventories 2 - 2 -
Other, net 3 - 2 -
Long-term:
Depreciation 33 3 34 3
Amortization 2 - 2 -
Unrealized gain on investments - - - 28
Benefit reserves - 14 - 12
Deferred acquisition costs - 175 - 160
Other, net 1 4 - 5
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 41 196 40 208
- --------------------------------------------------------------------------------------------------------------------------------
Less valuation allowance for foreign
loss and other tax attributes (11) - (9) -
- --------------------------------------------------------------------------------------------------------------------------------
Net asset $ 62 $ 79 $ 30 $ 34
- --------------------------------------------------------------------------------------------------------------------------------
43
46
As of November 27, 1999, the Company has available foreign loss
carryforwards and other tax attributes of approximately $11 million on a
tax-effected basis. The loss carryforwards are subject to varying carryforward
periods.
Realization of deferred tax assets for the operating loss carryforwards and
other tax attributes is dependent upon the generation of sufficient taxable
income within the carryback and carryforward periods available in each of the
respective foreign tax jurisdictions. There is not currently sufficient positive
evidence to support financial statement recognition of the benefits available in
the Company's foreign operations. Accordingly, a full valuation allowance of $11
million has been recorded relative to these available tax benefits. It is
reasonably possible that sufficient positive evidence may be generated in the
near term at one or more of the Company's foreign operations to allow
recognition of certain of the available tax benefits.
In conjunction with a routine audit by the Internal Revenue Service (IRS)
of the Company's 1990-1995 federal income tax returns, the IRS has disallowed
significant portions of the deductions associated with the Company's
corporate-owned life insurance (COLI) program. The Company continues to believe
all tax benefits relative to this program were taken in full compliance with
existing and prior year tax laws. During 1999 the Company made a deposit
against the IRS' assessed liability for COLI to preclude the continuing
assessment of interest charges.
The Company is currently undergoing a routine audit cycle by the IRS
relative to the 1996 to 1998 tax years. The Company does not believe that the
outcome of tax positions taken by the Company during this period, or those
related to the COLI program, will have a materially adverse effect on its
financial condition, results of operations or cash flows.
12. SUPPLEMENTARY INFORMATION
The following amounts were (charged) or credited to income in the year
indicated:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Rental expense $ (21) $ (21) $ (16)
Research and
development costs (a) $ (47) $ (46) $ (49)
Investment income, net (b) $ 16 $ 19 $ 18
- --------------------------------------------------------------------------------
(a) Approximately $8 million of research and development costs in 1997 relate
to a discontinued business.
(b) Excludes insurance operations.
The table below indicates the minimum annual rental commitments (excluding
renewable periods) aggregating $51 million, for manufacturing facilities,
warehouse distribution centers, service centers and sales offices, under
noncancelable operating leases.
- --------------------------------------------------------------------------------
2000 $ 17
2001 $ 12
2002 $ 8
2003 $ 6
2004 $ 3
2005 and beyond $ 5
- --------------------------------------------------------------------------------
The table below provides supplemental information to the Statements of
Consolidated Cash flows.
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash paid for:
Income taxes $ 106 $ 113 $ 109
Interest $ 27 $ 24 $ 23
Non-cash investing and financing activities:
Liabilities assumed from/incurred
for the acquisition of businesses $ 1 $ 39 $ -
Treasury stock issued under
stock compensation plans $ 2 $ 1 $ -
Accrued treasury stock acquisition $ - $ - $ 13
- ---------------------------------------------------------------------------------------------------------------------------
44
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13. FINANCIAL SERVICES
Forethought Financial Services, through its subsidiaries, Forethought Life
Insurance Company, Forethought Federal Savings Bank, Forethought Life Assurance
Company, Arkansas National Life Insurance Company and The Forethought Group,
Inc., serves funeral planning professionals with life insurance policies, trust
products and marketing support for Forethought(R) 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 1999 or
in prior years. In November 1999, Forethought National TrustBank was merged into
Forethought Federal Savings Bank, as required with the granting of the savings
bank charter. The life insurance policies sold by Forethought Life Insurance
Company are limited to certain long-duration policies, and, as such, are
accounted for under SFAS No. 97. The benefits under these policies increase
based on management's discretion and external inflationary indices. Premiums
received are allocated to benefit reserves and unearned revenue. Unearned
revenues are recognized over the actuarially determined 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 policyholder 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 constantly monitored to insure assets match the expected
payment of the liabilities. Securities are also sold in other carefully
constrained circumstances such as concern about the credit quality of the
issuer. 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", Forethought has classified its
investments in debt and equity securities as "available for sale" and reported
them at fair value on the balance sheet. Unrealized gains and losses are charged
or credited to accumulated other comprehensive (loss)/income in shareholders'
equity and insurance deferred tax assets are adjusted for the income tax effect
of such unrealized gains and losses. The fair value of each security is based on
the market value provided by brokers/dealers or estimates made by management in
situations where no quoted price is available.
The amortized cost and fair value of investment securities available for
sale at November 27, 1999 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 $ 846 $ 5 $ 41 $ 810
Corporate securities 1,329 2 24 1,307
Mutual funds 24 9 - 33
Preferred stocks 20 5 1 24
- ---------------------------------------------------------------------------------------------------------------------------
Total (a) $ 2,219 $ 21 $ 66 $ 2,174
- ---------------------------------------------------------------------------------------------------------------------------
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48
The amortized cost and fair value of investment securities available for
sale at November 28, 1998 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 $ 639 $ 17 $ 5 $ 651
Corporate securities 1,274 69 13 1,330
Mutual funds 37 13 - 50
Preferred stocks 3 - - 3
- ---------------------------------------------------------------------------------------------------------------------------
Total (a) $ 1,953 $ 99 $ 18 $ 2,034
- ---------------------------------------------------------------------------------------------------------------------------
(a) Does not include the amortized cost of other investments carried on the
balance sheet in the amount of $137 million at November 27, 1999, and $170
million at November 28, 1998, the carrying value of which approximates fair
value.
The amortized cost and fair value of investment securities available for
sale at November 27, 1999, 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 $ 49 $ 49
Due after 1 year through 5 years 230 226
Due after 5 years through 10 years 382 374
Due after 10 years 928 904
Mortgage-backed securities 586 564
Mutual funds 24 33
Preferred stocks 20 24
- --------------------------------------------------------------------------------
Total $ 2,219 $ 2,174
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Proceeds $ 466 $ 345 $ 358
Realized gross gains $ 26 $ 24 $ 12
Realized gross losses $ 3 $ 4 $ 4
- --------------------------------------------------------------------------------
Summarized financial information of insurance operations included in the
Statement of Consolidated Income is as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Investment income $ 156 $ 138 $ 120
Earned premium revenue 176 151 137
Net gain on sale of investments 23 20 8
- --------------------------------------------------------------------------------
Total net revenues 355 309 265
Benefits paid 81 71 63
Credited interest 145 123 111
Deferred acquisition costs amortized 47 39 35
Unusual charges 3 - -
Other operating expenses 37 23 21
- --------------------------------------------------------------------------------
Income before income taxes $ 42 $ 53 $ 35
- --------------------------------------------------------------------------------
46
49
Statutory data at December 31 includes:
- --------------------------------------------------------------------------------
1999 (unaudited) 1998 1997
- --------------------------------------------------------------------------------
Net income $ 38 $ 35 $ 32
Capital and surplus $ 234 $ 153 $ 144
- --------------------------------------------------------------------------------
14. UNAUDITED QUARTERLY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
TOTAL
1999 Quarter Ended 2/27/99 5/29/99 8/28/99 11/27/99 YEAR
- --------------------------------------------------------------------------------
Net revenues $ 516 $ 524 $ 481 $ 526 $2,047
Gross profit 204 204 175 193 776
Net income 45 35 23 21 124
Basic and diluted
net income per common share .67 .53 .35 .32 1.87
- --------------------------------------------------------------------------------
Total
1998 Quarter Ended 2/28/98 5/30/98 8/29/98 11/28/98 Year
- --------------------------------------------------------------------------------
Net revenues $ 479 $ 508 $ 483 $ 531 $2,001
Gross profit 193 208 189 228 818
Net income 43 45 42 54 184
Basic and diluted
net income per common share .64 .66 .63 .80 2.73
15. 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.
The Company has voluntarily entered into remediation agreements with
environmental authorities, and has been issued Notices of Violation alleging
violations of certain permit conditions. Accordingly, the Company is in the
process of implementing plans of abatement in compliance with agreements and
regulations. The Company has also been notified as a potentially responsible
party in investigations of certain offsite disposal facilities. The cost of all
plans of abatement and waste-site cleanups in which the Company is currently
involved is not expected to exceed $5 million. The Company has provided adequate
reserves in its financial statements for these matters. These reserves have been
determined without consideration of possible loss recoveries from third parties.
Changes in environmental law might affect the Company's future operations,
capital expenditures and earnings. The cost of complying with these provisions,
if any, is not known.
47
50
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.
16. SUBSEQUENT EVENT
On January 18, 2000, the Company's Board of Directors authorized the purchase on
the open market and in privately negotiated transactions, of up to an additional
5,000,000 shares of its common stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with the independent accountants.
48
51
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
March 3, 2000, and to be filed with the Commission relating to the Company's
2000 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 to be dated March 3, 2000, and to be filed with the Commission
relating to the Company's 2000 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 March 3, 2000, and to be filed with the Commission
relating to the Company's 2000 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 March 3, 2000, and to be filed with the Commission
relating to the Company's 2000 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 22.
(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 22.
49
52
(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
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 and as amended
and filed with Form 10-Q for the quarter ended
February 27, 1999)
10.2 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 and as amended and
filed with Form 10-Q for the quarter ended February
27, 1999)
10.3 Hillenbrand Industries, Inc. Split Dollar Life
Insurance Plan
10.4 Form of Stock Award granted to certain executive
officers.
Other Exhibits
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
(b) There were no reports on Form 8-K filed during the quarter ended
November 27, 1999.
50
53
SCHEDULE II
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED NOVEMBER 27, 1999, NOVEMBER 28, 1998 AND NOVEMBER 29, 1997
(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 OF PERIOD
- ------------------------------------ --------- -------- ------------ ---------- ---------
Reserves deducted from assets
to which they apply:
Allowance for possible losses
and discounts
- accounts receivable:
Year Ended:
November 27, 1999 $ 29 $ 10 $ 27 $ 12 $ 54
========== ========== ========= ========== ==========
November 28, 1998 $ 25 $ 1 $ 13 $ 10 $ 29
========== ========== ========= ========== ==========
November 29, 1997 $ 19 $ 1 $ 8 $ 3 $ 25
========== ========== ========= ========== ==========
(a) Reduction of gross revenues for cash discounts and other adjustments in
determining net revenue. Also includes the effect of acquisition of
businesses.
51
54
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER NET OF AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RECOVERIES OF PERIOD
- ------------------------------------ ------------ ------------ ----------- ------------ ----------
Allowances for unusual charges:
Year Ended:
November 27, 1999
Inventory $ 3 $ - $ - $ 3 $ -
Severance and
Employee Benefit
Costs $ 10 $ 11 $ - $ 12 $ 9
Other Plant
Closing Costs $ 7 $ 4 $ - $ 7 $ 4
Field Corrective Action $ - $ 8 $ - $ - $ 8
---------- ---------- --------- ---------- ----------
$ 20 $ 23 $ - $ 22 $ 21
========== ========== ========= ========== ==========
November 28, 1998
Inventory $ - $ 3 $ - $ - $ 3
Severance and
Employee Benefit
Costs $ - $ 11 $ - $ 1 $ 10
Other Plant
Closing Costs $ - $ 9 $ - $ 2 $ 7
---------- ---------- --------- ---------- ---------
$ - $ 23 $ - $ 3 $ 20
========== ========== ========= ========== =========
52
55
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
Chief Executive Officer
Dated: January 18, 2000
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/ Donald G. Barger, Jr. /s/ John C. Hancock
- ---------------------------------------------------------- ----------------------------------------------------------
Donald G. Barger, Jr. John C. Hancock
Vice President and Chief Financial Officer Director
/s/ James D. Van De Velde /s/ W August Hillenbrand
- ---------------------------------------------------------- ----------------------------------------------------------
James D. Van De Velde W August Hillenbrand
Vice President and 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
/s/ Frederick W. Rockwood
----------------------------------------------------------
Frederick W. Rockwood
Director
Dated: January 18, 2000
53
56
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
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 and as amended and filed
with Form 10-Q for the quarter ended February 27,
1999.)
10.2 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 and as amended and
filed with Form 10-Q for the quarter ended February
27, 1999.)
10.3 Hillenbrand Industries, Inc. Split Dollar Life
Insurance Plan
10.4 Form of Stock Award granted to certain executive
officers.
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
54