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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 December 2, 2000 Commission File No. 1-6651
HILLENBRAND INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1160484
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 State Route 46 East
Batesville, Indiana 47006-8835
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (812) 934-7000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ---------------------------------- -------------------------------------------
Common Stock, without par value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the securities exchange act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part iii of this form 10-K or any
amendment to this form 10-K. [ ]
State the aggregate market value of the common stock held by non-affiliates
of the registrant.
Common Stock, without par value - $2,323,707,084 as of February 13,
2001 (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 - 62,444,763 as of February 13, 2001.
Documents incorporated by reference.
Portions of the 2001 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
December 2, 2000
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 19
Item 8. Financial Statements and Supplementary
Data 21
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure 47
PART III
Item 10. Directors and Executive Officers
of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain
Beneficial Owners and Management 48
Item 13. Certain Relationships and Related
Transactions 48
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 48
SIGNATURES 52
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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 Affinity(R) Three birthing bed, TotalCare(R) bed,
Advanta(TM) bed, and the Amatech product line of surgical table accessories and
patient positioning devices for the operating room in the acute care market. The
Company continues to expand its line of specialty accessories to improve both
patient comfort and serviceability for the health care provider. Also, the
Company focuses 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 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(R)
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 175 Service Centers
located in the United States, Canada and Western Europe.
Funeral Services
Batesville Casket Company was founded in 1884 and acquired by the
Hillenbrand family in 1906. Batesville manufactures and sells caskets made of
stainless steel, copper, bronze, and hardwood. It also manufactures and sells
cloth-covered caskets, all wood construction (orthodox) caskets and a line of
urns and other memorialization products for the cremation market. In addition,
Batesville markets a line of 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, cremation containers 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, the United
Kingdom, Australia, Canada, Mexico and Puerto Rico. Batesville maintains
inventory at 80 company-operated Customer Service Centers (CSCs) and seven Rapid
Deployment Centers (RDCs) 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, 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 and trust
products. These specialized funeral planning products are offered through
funeral homes and cemeteries. Consumers choose the funeral home, type of service
and merchandise they want. The selected funeral home contracts with the consumer
to provide the funeral services and merchandise when needed. With funds made
available by a Forethought(R) financial product, the funeral home agrees to
provide the planned funeral 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.
Forethought entered the trust business in 1997 and offers trust products in
twenty-three states. Its trust products are offered through funeral homes and
cemeteries. 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 are 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 services to its customers and products
offered. Forethought sells its products in competition with other life insurance
companies and banks. 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.
Expenditures in the most recent three fiscal years were as follows:
(millions)
2000 1999 1998
---- ---- ----
Total research and development expenditures $45 $47 $46
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 13, 2001, the Company employed approximately 10,800 persons
in its operations.
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 2000 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 13, 2001.
Frederick W. Rockwood, 53, was elected Chief Executive Officer and
President of the Company on December 3, 2000 after being President since
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.
Michael L. Buettner, 43, 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., 54, 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, 55, has been employed by the Company since March 23,
1998, and was elected Vice President, Executive Leadership Development on June
26, 2000. He previously served as Vice President, Administration from December
8, 1999 to June 26, 2000 and 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.
Chris Ruberg, 42, was elected Vice President of Strategic Planning on March
13, 2000 and has been employed by the Company since 1985. Previous positions
held within the Company include Vice President of Strategic Planning at Hill-Rom
Company, Vice President of Strategy and Development at Hillenbrand Funeral
Services Group, Inc. and Vice President of Strategic Planning at Forethought
Financial Services, Inc.
James D. Van De Velde, 54, 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
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 of
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, Western Europe and Mexico.
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.
The original claims by the plaintiffs against Hillenbrand Industries and
the counterclaims by the Company against KCI are currently scheduled to go to
trial in late 2001.
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 December 2, 2000.
PART II
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K contain
forward-looking statements within the meanings of the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the Securities and Exchange
Commission (SEC) in its rules, regulations and releases regarding the Company's
future plans, objectives and expected performance. 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," "may
continue," "could continue," "is expected" or "expects," are intended to
identify forward-looking statements and convey the uncertainty of future events
or outcomes, but their absence does not mean that the statement is not
forward-looking.
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: outlook for health care customers, demand for
products, actual and anticipated death rates, 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 2000
and 1999.
2000 1999
------------------- ---------------------
High Low High Low
---- --- ---- ---
First Quarter $38 3/8 $29 5/8 $58 1/8 $41
Second Quarter $34 7/16 $28 3/4 $49 1/8 $40 15/16
Third Quarter $34 3/4 $29 3/4 $45 5/16 $28 7/8
Fourth Quarter $51 1/2 $33 3/4 $37 3/8 $26 1/8
Holders
On February 13, 2001, there were approximately 18,100 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 $.80 ($.20 per quarter) in 2000 and $.78 ($.195 per
quarter) in 1999 were paid on each share of common stock outstanding. Cash
dividends will be $.21 in the first quarter of 2001.
Item 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of
Hillenbrand Industries, Inc., for fiscal years 1996 through 2000.
2000 (53 weeks) 1999 1998 1997 1996
---- ---- ---- ---- -----
(In millions except per share data)
Net revenues $ 2,096 $ 2,047 $ 2,001 $ 1,776 $ 1,684
Net income (a) $ 154 $ 124 $ 184 $ 157 $ 140
Basic and diluted
net income per share (a) $ 2.44 $ 1.87 $ 2.73 $ 2.28 $ 2.02
Total assets $ 4,597 $ 4,433 $ 4,280 $ 3,828 $ 3,396
Long-term debt $ 302 $ 302 $ 303 $ 203 $ 204
Cash dividends per share $ .80 $ .78 $ .72 $ .66 $ .62
(a) Results in 2000 include unusual charges of $2 million, net-of-tax, ($.03
per share) related to the retirement of the Company's Chief Executive
Officer, the gain on dispositions of facilities idled as a part of prior
unusual charges, the reversal of certain prior unusual charge provisions as
actual costs were less than originally estimated and other items. Results
in 1999 reflect unusual charges 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.
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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 in 1998. 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
2000 Compared with 1999
Summary
Consolidated net revenues of $2,096 million increased 2%, or $49 million, in
2000. Approximately $15 million of this increase can be attributed to the 53rd
week in fiscal 2000. Fiscal 1999 was, and fiscal 2001 will be, 52-week years.
Operating profit increased $33 million, or 16%, to $244 million. Net income of
$154 million increased $30 million, or 24%, over 1999 and earnings per share
increased 30% to $2.44.
Excluding unusual items discussed below, operating profit decreased 1% and
net income increased 5%. 2000 results include net unusual charges of $2 million,
net-of-tax, ($.03 per share) related to the retirement of the Company's former
Chief Executive Officer; gains from the disposition of facilities idled as part
of prior unusual charges; the reversal of certain accruals provided for in prior
unusual charges due to actual costs being less than originally estimated; and
other items. 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.
Net Revenues
Health Care sales increased $34 million, or 4%, to $800 million due to
strengthening sales in U.S. acute care, Europe and international exports,
partially offset by decreased sales in the long-term care market and the
negative impact of currency fluctuations. The increase of approximately 5% in
U.S. acute care market sales was due to the mid-1999 acquisition of AMATECH and
increased shipments in ambulatory, operating room, infant care, and hospital
beds and furniture partially offset by decreases in communications and the
piped-medical gas portion of architectural products. The Company believes that
the recent uncertainty experienced by our U.S. acute care customers is beginning
to subside as they continue to react to cuts in Medicare reimbursements in their
operations. Europe experienced increased sales mainly in the United Kingdom and
the Netherlands. Excluding the impact of currency fluctuations, European sales
were up approximately 26% compared to 1999. The decrease in long-term care sales
was due to several large shipments occurring in 1999 that did not repeat in
2000.
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Health Care rental revenue of $312 million decreased $12 million, or 4%,
compared to 1999 due to declines in home care, long-term care and Europe,
partially offset by an increase in acute care. Rental revenue in the home care
market dropped nearly 40% as a result of continued lower Medicare reimbursement
experience despite a large increase in unit volume and mix. The U.S. long-term
care market also experienced decreased revenue due to declines in volume and
mix, partially offset by an increase in rate as this market's customers continue
to adjust to changes in Medicare Part A patient reimbursement practices.
European rental revenues also fell during the year, but on a local currency
basis were flat with 1999. These reductions were partially offset by a 7%
increase in acute care rental revenue, that was due to increased volume
partially offset by a decrease in mix and rate.
Funeral Services sales grew $15 million, or 2%, to $617 million due to
increased unit volume across certain product lines and an improvement in product
mix. Batesville Casket Company was once again able to increase unit volume in a
market that is flat for casketed deaths.
Insurance revenues of $367 million were up 3%, or $12 million, compared to
$355 million in 1999 despite $24 million less in capital gains in 2000 than in
1999. Excluding capital gains in both years, revenues would have increased
approximately 11%. Investment income grew approximately $20 million due to the
increased size of the investment portfolio and earned premium revenue increased
approximately $16 million mainly due to increased policies in-force year over
year. 2000 policy sales were up approximately 6% over 1999 as Forethought
continues to recover from the loss of policy sales from funeral home
consolidators that acquired or started preneed insurance operations 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 2000 or in prior years.
Gross Profit
Gross profit on Health Care sales of $368 million increased $54 million, or 17%,
over 1999 and as a percentage of sales was 46% in 2000 compared to 41% in 1999.
The significant increase in gross profit and gross profit as a percentage of
sales is due to productivity improvements from cost alignment efforts and lower
warranty costs and provisions for inventory in 2000.
Health Care rental gross profit declined $2 million, or 2%, to $86 million.
Gross profit as a percentage of sales increased to 28% compared to 27% in 1999.
This slight increase was primarily due to higher volume in acute care and home
care and productivity improvements largely offset by lower Medicare
reimbursement experience within the U.S. home care market.
Funeral Services sales gross profit of $305 million increased $13 million,
or 4%, compared to $292 million in 1999. As a percentage of sales, Batesville
Casket's gross profit was 49%, which is comparable to 1999.
Profit before other operating expenses and unusual charges in insurance
operations decreased $15 million, or 18%, to $67 million in 2000. This decrease
was primarily due to $24 million less in capital gains and an increase in death
benefits paid and reserved due to the larger base of policies in-force,
partially offset by increased profits earned on a larger base of policies
in-force and higher investment income (with minimal direct cost).
Other Operating Expenses
Other operating expenses, consisting of selling, marketing, distribution and
general administrative costs, increased $52 million, or 10% in 2000. As a
percentage of consolidated revenues, these expenses increased from 26% in 1999
to 28% in 2000 primarily due to increased incentive compensation and
company-wide investments in new business development opportunities, offset in
part by improved productivity and better cost alignment.
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Operating Profit
Health Care operating profit increased $61 million to $116 million. This
increase was largely due to an increase in Health Care sales gross profit,
resulting from increased Health Care sales and an improvement in gross profit as
a percentage of sales. The improvement in gross profit percentage is primarily
due to productivity improvements from cost alignment efforts and lower warranty
costs and provisions for inventory in 2000. Health Care operating profit was
also impacted by a $25 million unusual charge in 1999 related to work force
reduction activities, facility closure costs, certain asset impairment charges
and other items, while $5 million of income was classified as unusual in 2000.
The income recognized in 2000 relates to gains on the sale of facilities idled
as part of prior unusual charges and the reversal of accruals provided for in
previous unusual charges due to actual costs being less than originally
estimated. Excluding unusual charges in 2000 and 1999, operating profit would
have been $111 million in 2000 and $80 million in 1999, a 39% increase.
Operating profit in the Funeral Services Group of $182 million increased $9
million, or 5%, compared to 1999. At Batesville Casket, operating profit
increased approximately 14% as a result of increased shipments, improved product
mix and improved productivity. During 1999, Batesville incurred a $9 million
unusual charge related to the closure of a manufacturing facility. Excluding
this unusual charge, Batesville's operating profit would have increased
approximately 6% in 2000. At Forethought, a $24 million decrease in capital
gains was partially offset by higher investment income, increased earned
premiums and a decrease in operating expenses, which resulted in a 22% decrease
in operating profit. In 2000 and 1999, Forethought incurred unusual charges of
$1 million related to the realignment of certain operations and $3 million
related to an impaired asset, respectively. Excluding these unusual charges,
operating profit would have decreased approximately 25% in 2000.
Consolidated operating profit of $244 million increased $33 million, or
16%. Excluding the unusual charges discussed above as well as a $7 million and
$1 million unusual charge in 2000 and 1999, respectively, at the consolidated
company level, consolidated operating profit would have been $247 million, a 1%
decrease compared to 1999. The unusual charges at the consolidated company level
related to the retirement of the Company's former Chief Executive Officer,
partially offset by a gain on the sale of a facility idled as part of a prior
unusual charge in 2000 and an impaired asset in 1999.
Other Income and Expense
Interest expense of $27 million remained unchanged compared to 1999 as the
Company's level of debt was essentially constant until near the end of the year.
Investment income increased $8 million primarily from the gain on the sale of an
investment.
Income Taxes
The effective income tax rate was 36.1% in 2000 compared to 36.7% in 1999. The
decrease in the effective tax rate was primarily due to tax initiatives
undertaken by the Company and the profitability of Europe.
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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 were attributable to some shipment delays and decreased
orders by our acute care customers as they responded 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.
Insurance revenues increased $46 million or 15% at Forethought. Earned
premium revenue increased approximately $25 million due primarily to increased
policies in-force year over year. Investment income grew about $18 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 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.
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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.
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.
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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.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash flows from operating activities and selected borrowings represent the
Company's primary source 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 December 2, 2000 decreased
$38 million to $132 million compared to November 27, 1999, mainly due to capital
expenditures, the purchase of treasury stock, the repayment of short-term debt
totaling $56 million and the payment of cash dividends partially offset by cash
generated from operating activities.
Operating Activities
Net cash generated by operating activities of $296 million increased $112
million compared to 1999. Contributing to the improvement were increased
earnings and favorable movements in most components of working capital.
The decrease in depreciation, amortization and write-down of intangibles is
due to a 1999 unusual charge of $3 million consisting of a write-off of goodwill
related to an asset impairment and a decrease in the manufacture of new rental
units in 2000. The favorable changes in working capital are due to good working
capital management. Consolidated days revenues outstanding in accounts
receivable decreased to 80 in 2000 compared to 86 in 1999 as a result of
company-wide efforts to decrease this measure in 2000 along with increased
provisions for unrecoverable receivables in the Health Care rental business.
Accrued expenses and other liabilities decreased in 2000 due to a reduction in
income taxes payable, along with reduced accruals related to unusual charges and
warranty related matters.
Investing Activities
Net cash used in investing activities increased to $321 million compared to $266
million in 1999. This increase was due to $27 million in additional capital
expenditures in 2000, along with unfavorable effects from 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 resulted in a net loss in 2000 and net gains in 1999 and 1998.
Financing Activities
The Company's long-term debt-to-capital ratio was 27% at year-end 2000 compared
to 26% at year-end 1999. This slight increase was primarily due to a $7 million
decrease in the Company's equity resulting from the purchase of treasury stock,
a decrease in accumulated other comprehensive (loss) income and the payment of
normal dividends partially offset by current year earnings.
During the fourth quarter of fiscal 2000, the Company repaid $52 million of
short-term debt denominated in Euros.
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Quarterly cash dividends per share were $.18 in 1998, $.195 in 1999 and
$.20 in 2000. An additional increase to $.21 per share was approved by the Board
of Directors in January 2001 for the first quarter of 2001.
Insurance Assets and Liabilities
Insurance assets of $3,314 million grew 7% over the past year. Cash and invested
assets of $2,465 million constitute 74% of the assets. The investments are
concentrated in U.S. Treasuries and agencies and high-grade corporate bonds,
with smaller investments in equities and foreign denominated securities. The
invested assets are more than adequate to fund the insurance reserves and other
liabilities of $2,336 million. Statutory reserves represent 62% of the face
value of insurance in-force. Forethought Life Insurance Company made dividend
payments to Hillenbrand Industries of $24 million and $14 million in January
2001 and in 1998, respectively. The statutory capital and surplus as a
percentage of statutory liabilities of Forethought was 12% and 11% at December
31, 2000 and 1999, 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 2000 and 1999.
Shareholders' Equity
Cumulative treasury stock acquired in open market and private transactions
increased to 19,502,767 shares in 2000, up from 18,322,467 shares in 1999. The
Company currently has Board of Directors' authorization to repurchase up to a
total of 24,289,067 shares. Repurchased shares are to be used for general
business purposes. From the cumulative shares acquired, 45,185 shares, net of
shares converted to cash to pay withholding taxes, were reissued in 2000 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, as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities and requires that all derivatives be
recognized on the balance sheet at fair value. As the Company is not active in
the use of derivative products or arrangements, adoption of this Standard will
not have a material effect on the Company's consolidated financial statements.
The Company will adopt the Standard in the first quarter of fiscal 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101) "Revenue Recognition in Financial
Statements." The Company is currently studying the impact of adopting SAB No.
101, as amended, which is required to be adopted no later than the fourth
quarter of fiscal 2001, but believes its effect will be immaterial.
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Unusual Charges
2000 Actions
On October 11, 2000, the Company announced that W August Hillenbrand, Chief
Executive Officer, would retire effective December 2, 2000. In relation to Mr.
Hillenbrand's retirement, the Company incurred a charge of $8 million related to
future payments and other compensation related items under the terms of the
retirement agreement. This charge is reflected within the Unusual charges line
of the Statement of Consolidated Income.
In November 2000, Forethought announced the realignment of certain of its
operations. Forethought incurred an unusual charge of $1 million in relation to
this realignment.
1999 Actions
In November 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. The cash component of this charge was $19 million.
Included in the cost-cutting actions announced at Hill-Rom was the
reduction of 350 employees in the United States and Europe and the closure of
select manufacturing and sales, service/distribution facilities in the United
States and Europe. Estimated costs for the work force and facility closure
actions were $8 million and $3 million, respectively.
The unusual charge also included $10 million relative to asset impairments
for a small Hill-Rom investment that has been liquidated and the write-off of
other strategic investments which have discontinued operations.
The remaining component of the 1999 fourth quarter unusual charge related
to an $8 million field corrective action taken relative to a previously acquired
product line.
As of December 2, 2000, approximately $7 million in work force reduction
costs, $2 million in facility closure costs and $4 million related to the field
corrective action have been incurred. The Company expects substantially all
employee-related costs to be completed within the next three months as the
payments to previously eliminated employees are completed. The facility closures
are near completion and the field corrective action is expected to be completed
by the end of the third quarter of 2001.
During 2000, approximately $2 million of the original 1999 provision was
reversed to income within the Unusual charges line of the Statement of
Consolidated Income as actual costs incurred were favorable to those originally
expected.
In March 1999, Batesville Casket Company announced the planned closing of
its Campbellsville, Kentucky casket manufacturing plant. Approximately 200
employees were affected and the closure necessitated a $9 million unusual charge
in the second quarter of 1999. Production of Campbellsville casket units was
transferred to existing plants located in Batesville, Indiana and Manchester,
Tennessee. All accrued costs related to this action have been incurred. The
idled facility was sold in October 2000 for a gain of $1 million which is
reflected within the Unusual charges line of the Statement of Consolidated
Income.
1998 Actions
In August 1998, the Company approved a plan to close all manufacturing
facilities in Germany and Austria. The plan necessitated the provision of a $70
million asset impairment and restructuring charge including a non-cash charge of
$53 million for the write-off of goodwill and other asset impairments. The plan
also included additional charges for severance and employee benefit costs of $10
million and other estimated plant closing costs of $7 million.
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Manufacturing operations were discontinued in Germany and Austria by the
second quarter of 1999 and all actions required under the plan have been
completed. During 2000 and 1999, approximately $1 million and $2 million of the
originally recorded provisions were 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 facility in Austria was completed in December 1999
for a gain of $2 million and the facility in Germany was sold in November 2000
for a gain of $1 million. These gains are reflected within the Unusual charges
line of the Statement of Consolidated Income.
Other
In addition to costs accrued under the above outlined plans, approximately $1
million and $2 million of incremental costs were incurred in relation to these
actions in 2000 and 1999, respectively. These incremental 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 $8 million and $21 million as of December 2, 2000 and
November 27, 1999, respectively. The reserve balance included in other long-term
liabilities for the retirement of the Company's CEO is approximately $7 million
as of December 2, 2000.
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.
Factors That May Affect Future Results
Legislative changes phased in beginning July 1, 1998 have had, and may continue
to have, a dampening effect on the Company's rental revenue derived from
Medicare patients in the long-term care market.
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. However, based on recent order
patterns, the Company does believe the acute-care market is starting to adapt to
these cuts in Medicare funding.
The Company is experiencing, and may continue to experience, pressure on
reimbursement rates related to its home care rental business.
On January 22, 2001, the Company announced that it would realign its home
care and long-term care businesses. Due to this action, the Company expects
rental revenues to decrease over the near-term and, on an annual basis, to
reduce fixed expenses between $18 million and $20 million.
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.
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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,
foreign and U.S. agency and Treasury bonds 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 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
December 2, 2000 and November 27, 1999, a hypothetical 10% increase in weighted
average interest rates could reduce the market value of the investment portfolio
approximately $121 and $111 million, respectively, over a 12-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
periodically 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 December 2, 2000, movements in currency rates would
not materially affect the financial position of the Company.
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Key Financial Data
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2000 1999 1998 1997 1996
(53 weeks)
- ---------------------------------------------------------------------------------------------------------------------------------
Income Statement
- ---------------------------------------------------------------------------------------------------------------------------------
% Pretax, preinterest expense,
income (EBIT) to revenues 13 11 16 16 15
% Pretax, preinterest expense,
pre-depreciation and amortization
expense, income (EBITDA) to
revenues (a) 17 16 23 22 21
% Net income to revenues 7 6 9 9 8
% Income taxes to pretax income 36 37 37 39 40
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Balance Sheet
- ---------------------------------------------------------------------------------------------------------------------------------
% Long-term debt-to-total capital 27 26 24 19 21
% Total debt-to-total capital 27 31 29 24 28
Current assets/current liabilities (b) 2.6 2.1 2.3 2.3 2.2
Working capital turnover (b) (c) 5.6 7.0 9.1 15.4 13.6
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Profitability
- ---------------------------------------------------------------------------------------------------------------------------------
% Return on total capital 14 11 15 14 14
% Return on average shareholders' equity 19 13 21 20 19
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Asset Turnover
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues/inventories (b) 15.4 15.0 16.1 19.1 15.3
Revenues/receivables (b) 4.2 4.1 4.3 4.5 5.1
- ---------------------------------------------------------------------------------------------------------------------------------
Stock Market
- ---------------------------------------------------------------------------------------------------------------------------------
Year-end price/earnings (P/E) 21 19 21 20 18
Year-end price/book value 3.8 2.8 4.1 3.4 3.3
- ---------------------------------------------------------------------------------------------------------------------------------
(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.
=================================================================================================================================
Statement of Consolidated Income Comparison
- ---------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Percent Change
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2000 1999 1998 2000/99 1999/98 1998/97
(53 WEEKS)
- ---------------------------------------------------------------------------------------------------------------------------------
Net revenues:
Health Care sales $ 800 $ 766 $ 748 4% 2% 27%
Health Care rentals 312 324 403 (4%) (20%) 7%
Funeral Services sales 617 602 541 2% 11% (1%)
Insurance revenues 367 355 309 3% 15% 17%
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,096 $ 2,047 $ 2,001 2% 2% 13%
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit:
Health Care sales $ 368 $ 314 $ 320 17% (2%) 20%
Health Care rentals 86 88 162 (2%) (46%) 13%
Funeral Services sales 305 292 260 4% 12% (2%)
Insurance revenues 67 82 76 (18%) 8% 36%
- ---------------------------------------------------------------------------------------------------------------------------------
Total gross profit 826 776 818 6% (5%) 12%
Other operating expenses 579 527 524 10% 1% 13%
Unusual charges (3) (38) (66) N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Operating profit 244 211 228 16% (7%) (14%)
Other income (expense), net (4) (16) 65 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 240 195 293 23% (33%) 13%
Income taxes 86 71 109 21% (35%) 7%
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 154 $ 124 $ 184 24% (33%) 17%
- ---------------------------------------------------------------------------------------------------------------------------------
20
23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Financial Statements:
Report of Independent Accountants 22
Statements of Consolidated Income for the three years ended
December 2, 2000 23
Consolidated Balance Sheets at December 2, 2000 and November 27, 1999 24
Statements of Consolidated Cash Flows for the three years ended
December 2, 2000 26
Statements of Consolidated Shareholders' Equity for the three years ended
December 2, 2000 27
Notes to Consolidated Financial Statements 28
Financial Statement Schedule for the three years ended December 2, 2000:
Schedule II - Valuation and Qualifying Accounts 50
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or the
notes thereto.
21
24
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 December 2, 2000 and
November 27, 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 2, 2000, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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 our opinion.
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
January 12, 2001, except as to Note 16,
which is as of January 22, 2001
22
25
Hillenbrand Industries, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 2, November 27, November 28,
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(53 weeks)
- --------------------------------------------------------------------------------------------------------------------
Net Revenues
Health Care sales $ 800 $ 766 $ 748
Health Care rentals 312 324 403
Funeral Services sales 617 602 541
Insurance revenues 367 355 309
- --------------------------------------------------------------------------------------------------------------------
Total revenues 2,096 2,047 2,001
- --------------------------------------------------------------------------------------------------------------------
Cost of Revenues
Health Care cost of goods sold 432 452 428
Health Care rental expenses 226 236 241
Funeral Services cost of goods sold 312 310 281
Insurance cost of revenues 300 273 233
- --------------------------------------------------------------------------------------------------------------------
Total cost of revenues 1,270 1,271 1,183
- --------------------------------------------------------------------------------------------------------------------
Gross Profit 826 776 818
Other operating expenses 579 527 524
Unusual charges (Note 5) (3) (38) (66)
- --------------------------------------------------------------------------------------------------------------------
Operating Profit 244 211 228
Other income (expense), net:
Interest expense (27) (27) (27)
Investment income, net 24 16 19
Other (Note 4) (1) (5) 73
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 240 195 293
Income taxes 86 71 109
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 154 $ 124 $ 184
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Basic and Diluted Net Income Per Common Share $ 2.44 $ 1.87 $ 2.73
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Dividends Per Common Share $ .80 $ .78 $ .72
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Average Number of Common Shares Outstanding 62,912,909 66,295,770 67,577,803
- --------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
23
26
Hillenbrand Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
- -----------------------------------------------------------------------------------------------------
December 2, November 27,
2000 1999
- -----------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------
Current Assets
Cash, cash equivalents and short-term investments $ 132 $ 170
Trade accounts receivable, less allowances of
$61 in 2000 and $54 in 1999 407 413
Inventories (Note 1) 112 113
Other 73 86
- -----------------------------------------------------------------------------------------------------
Total current assets 724 782
- -----------------------------------------------------------------------------------------------------
Equipment Leased to Others (Note 1) 244 273
Less accumulated depreciation 177 204
- -----------------------------------------------------------------------------------------------------
Equipment leased to others, net 67 69
- -----------------------------------------------------------------------------------------------------
Property (Note 1) 617 624
Less accumulated depreciation 412 426
- -----------------------------------------------------------------------------------------------------
Property, net 205 198
- -----------------------------------------------------------------------------------------------------
Other Assets
Intangible assets at amortized cost:
Patents and trademarks 14 19
Excess of cost over net asset values of
acquired companies (Note 3) 145 159
Other 22 14
Deferred charges and other assets 106 101
- -----------------------------------------------------------------------------------------------------
Total other assets 287 293
- -----------------------------------------------------------------------------------------------------
Insurance Assets (Note 13)
Investments 2,465 2,311
Deferred acquisition costs 636 584
Deferred income taxes 100 79
Other 113 117
- -----------------------------------------------------------------------------------------------------
Total insurance assets 3,314 3,091
- -----------------------------------------------------------------------------------------------------
Total Assets $ 4,597 $ 4,433
- -----------------------------------------------------------------------------------------------------
24
27
- --------------------------------------------------------------------------------------------------
December 2, November 27,
2000 1999
- --------------------------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term debt (Notes 6 and 9) $ - $ 52
Trade accounts payable 68 80
Income taxes payable (Note 11) 16 22
Accrued compensation 89 53
Other 109 164
- --------------------------------------------------------------------------------------------------
Total current liabilities 282 371
- --------------------------------------------------------------------------------------------------
Long-term Debt (Notes 6 and 9) 302 302
- --------------------------------------------------------------------------------------------------
Other Long-term Liabilities (Note 7) 85 68
- --------------------------------------------------------------------------------------------------
Deferred Income Taxes (Notes 1 and 11) 3 3
- --------------------------------------------------------------------------------------------------
Insurance Liabilities (Note 13)
Benefit reserves 2,276 2,092
Unearned revenue 758 719
General liabilities 60 40
- --------------------------------------------------------------------------------------------------
Total insurance liabilities 3,094 2,851
- --------------------------------------------------------------------------------------------------
Total Liabilities 3,766 3,595
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
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 2000 and 1999 4 4
Additional paid-in capital 24 24
Retained earnings (Note 6) 1,397 1,293
Accumulated other comprehensive loss (Note 1) (108) (38)
Treasury stock, at cost: 2000 - 17,919,611 shares;
1999 - 16,777,137 shares (486) (445)
- --------------------------------------------------------------------------------------------------
Total Shareholders' Equity 831 838
- --------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 4,597 $ 4,433
- --------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
25
28
Hillenbrand Industries, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended DECEMBER 2, November 27, November 28,
2000 1999 1998
(53 WEEKS)
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 154 $ 124 $ 184
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation, amortization and write-down of intangibles 89 98 149
Change in noncurrent deferred income taxes 6 (2) (3)
Gain on sale of business - - (75)
Change in working capital excluding cash, current
debt, acquisitions and dispositions:
Trade accounts receivable 6 (18) (36)
Inventories 1 (6) (2)
Other current assets 12 (21) 2
Trade accounts payable (12) 10 (12)
Accrued expenses and other liabilities (25) (6) (14)
Change in insurance deferred policy acquisition costs (52) (48) (63)
Change in insurance unearned revenue 39 45 69
Change in other insurance items, net 82 39 28
Other, net (4) (31) (5)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 296 184 222
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (106) (79) (88)
Proceeds on disposal of property and equipment
leased to others 13 4 10
Acquisitions of businesses, net of cash acquired - (54) (188)
Other investments (3) (4) (11)
Proceeds on sale of business - - 64
Insurance investments:
Purchases (814) (797) (746)
Proceeds on maturities 161 177 168
Proceeds on sales 428 487 364
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (321) (266) (427)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Additions to short-term debt 14 12 39
Reductions to short-term debt (56) (13) (13)
Additions to long-term debt 1 - 101
Reductions to long-term debt - (1) (1)
Payment of cash dividends (50) (52) (48)
Treasury stock acquired (42) (113) (85)
Insurance deposits received 375 361 355
Insurance benefits paid (251) (237) (210)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (9) (43) 138
- ---------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (4) (2) -
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CASH FLOWS (38) (127) (67)
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
At beginning of year 170 297 364
- ---------------------------------------------------------------------------------------------------------------------------
At end of year $ 132 $ 170 $ 297
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
26
29
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 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
Comprehensive Income
Net income - - 154 - - 154
Foreign currency translation adjustment - - - (20) - (20)
Net change in unrealized gain (loss) on
available for sale securities - - - (50) - (50)
------
Total comprehensive income 84
Dividends - - (50) - - (50)
Treasury shares acquired (1,180,300) - - - - (42) (42)
Other - - - - 1 1
- ----------------------------------------------------------------------------------------------------------------------------
Balance At December 2, 2000 $ 4 $ 24 $ 1,397 $ (108) $ (486) $ 831
- ----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
27
30
Hillenbrand Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 2000. 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 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 29% of Hillenbrand's revenues
in 2000. Forethought provides funeral homes in 49 U.S. states, the District of
Columbia, Puerto Rico and nine Canadian provinces with marketing support for
Forethought(R) funeral plans funded by life insurance policies and trust
products. It entered the preneed trust market in 1997. Forethought generated 18%
of Hillenbrand's revenues in 2000.
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.
28
31
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:
- ------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------
Cash and cash equivalents $ 43 $ 26
Short-term investments 89 144
- ------------------------------------------------------------------------
Total $ 132 $ 170
- ------------------------------------------------------------------------
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 59% and 52%
of the Company's inventories at December 2, 2000 and November 27, 1999,
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:
- ------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------
Finished products $ 73 $ 67
Work in process 26 31
Raw materials 13 15
- ------------------------------------------------------------------------
Total $ 112 $ 113
- ------------------------------------------------------------------------
If the FIFO method of inventory accounting, which approximates current cost, had
been used for all inventories, they would have been approximately $7 million
higher than reported at December 2, 2000 and November 27, 1999, 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 2000 and 1999 were:
- ------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------
Land $ 15 $ 17
Buildings and building equipment 132 148
Machinery and equipment 470 459
- ------------------------------------------------------------------------
Total $ 617 $ 624
- ------------------------------------------------------------------------
29
32
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 asset 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 $108 million and $99
million as of December 2, 2000 and November 27, 1999, respectively.
Investments
In accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company 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
deferred taxes are recorded 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.
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 delivery of products to customers for Funeral Services
products and upon shipment of products to customers for Health Care products.
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.
30
33
Earnings Per Common 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.
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.
The composition of accumulated other comprehensive (loss) income at
December 2, 2000 and November 27, 1999 is the cumulative adjustment for
unrealized losses or gains on available-for-sale securities, mainly relating to
the insurance portfolio, of ($80) million and ($30) million, respectively, and
the foreign currency translation adjustment of ($28) million and ($8) 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 disclosures, required
by 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.
31
34
Insurance Liabilities, Recognition of Insurance Policy Income, and Related
Benefits and Expenses
Forethought Life Insurance Company, Forethought Life Assurance Company and
Arkansas National Life Insurance Company sell certain long duration contracts.
Revenue is recognized on traditional limited pay life insurance contracts when
due. Premiums received in excess of the portion required to provide for all
benefits and expenses is deferred and recognized in income in a constant
relationship with the actuarially determined life of the contract. Benefit
reserves for these life insurance contracts are calculated using the
net-level-premium method, based on assumptions as to investment yields,
mortality, withdrawals and credited interest. These assumptions are made at the
time the contract is issued.
For annuity contracts, the companies record premium deposits or benefit
payments as increases or decreases to the insurance liability, rather than as
revenue and expense. Revenue is recognized on amounts charged against the
liability account such as, cost of insurance, administration fees and surrender
penalties. Expenses are recorded for any interest credited to the account and
any benefit payments that exceed the contract liabilities.
Deferred Acquisition Costs
Policy acquisition costs, consisting of commissions, certain policy issue
expenses and premium taxes, vary with, and are primarily related to, the
production of new business. These deferred acquisition costs are being amortized
consistently with unearned revenues. Amortization charged to expense for the
years ended December 2, 2000 and November 27, 1999 was $45 million and $42
million, respectively.
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, as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities and requires that all derivatives be
recognized on the balance sheet at fair value. As the Company is not active in
the use of derivative products or arrangements, adoption of this Standard will
not have a material effect on the Company's consolidated financial statements.
The Company will adopt the Standard in the first quarter of fiscal 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101) "Revenue Recognition in Financial
Statements." The Company is currently studying the impact of adopting SAB No.
101, as amended, which is required to be adopted no later than the fourth
quarter of fiscal 2001, but believes its effect will be immaterial.
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.
32
35
The components of net pension expense in the United States are as follows:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Service cost $ 9 $ 11 $ 8
Interest cost 12 11 10
Expected return on plan assets (12) (11) (10)
Recognized net gain (1) - -
- --------------------------------------------------------------------------------
Net pension expense $ 8 $ 11 $ 8
- --------------------------------------------------------------------------------
The change in benefit obligation, change in plan assets, funded status and
amounts recognized in the consolidated balance sheets at December 2, 2000 and
November 27, 1999 for the Company's domestic defined benefit retirement plans
were as follows:
DECEMBER 2, November 27,
2000 1999
- ---------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year................ $161 $161
Service cost........................................... 9 11
Interest cost.......................................... 12 11
Amendments............................................. 1 -
Actuarial gain......................................... (8) (18)
Benefits paid.......................................... (5) (4)
-------------------------------
Benefit obligation at end of year...................... 170 161
-------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year......... 140 144
Actual return/(loss) on plan assets.................... 14 (9)
Employer contributions................................. 9 9
Benefits paid.......................................... (5) (4)
-------------------------------
Fair value of plan assets at end of year............... 158 140
-------------------------------
Funded status.......................................... (12) (21)
Unrecognized net actuarial gain........................ (16) (8)
Unrecognized prior service cost........................ 2 2
-------------------------------
Accrued benefit cost................................... $(26) $(27)
-------------------------------
The weighted-average assumptions used in accounting for the domestic pension
plans are as follows:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Discount rate 7.75% 7.75% 7.25%
Expected rate of return on plan assets 8.0% 8.0% 8.0%
Rate of compensation increase 5.5% 5.5% 5.5%
- --------------------------------------------------------------------------------
For all of the Company's domestic pension plans, the fair value of plan
assets exceeded the accumulated benefit obligation as of December 2, 2000 and
November 27, 1999.
In addition to the above plans, the Company has an unfunded liability for a
defined benefit plan in Germany. The unfunded benefit obligation of this plan,
included in accrued expenses, was $8 million on December 2, 2000 and $10 million
on November 27, 1999. Pension expense was negligible in 2000, 1999 and 1998.
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 $6 million in 2000, $5 million in 1999 and $6 million in 1998.
33
36
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
purchase price allocation, including payments of $3 million made in 2000 for the
achievement of certain financial milestones, is approximately $26 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.
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 and all fiscal 1998 acquisitions
had occurred November 30, 1997, unaudited fiscal 1998 and 1999 pro forma
revenue, net income and earnings per share would not have been materially
different from reported amounts.
34
37
4. Disposition
On July 1, 1998, the Company sold its high security and access control business,
Medeco Security Locks, Inc., to Assa Abloy AB for approximately $92 million. The
Company recorded an after-tax gain of approximately $47 million in the third
quarter of 1998. 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
2000 Actions
On October 11, 2000, the Company announced that W August Hillenbrand, Chief
Executive Officer, would retire effective December 2, 2000. In relation to Mr.
Hillenbrand's retirement, the Company incurred a charge of $8 million related to
future payments and other compensation related items under the terms of the
retirement agreement. This charge is reflected within the Unusual charges line
of the Statement of Consolidated Income.
In November 2000, Forethought announced the realignment of certain of its
operations. Forethought incurred an unusual charge of $1 million in relation to
this realignment.
1999 Actions
In November 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. The cash component of this charge was $19 million.
Included in the cost-cutting actions announced at Hill-Rom was the
reduction of 350 employees in the United States and Europe and the closure of
select manufacturing and sales, service/distribution facilities in the United
States and Europe. Estimated costs for the work force and facility closure
actions were $8 million and $3 million, respectively.
The unusual charge also included $10 million relative to asset impairments
for a small Hill-Rom investment that has been liquidated and the write-off of
other strategic investments which have discontinued operations.
The remaining component of the 1999 fourth quarter unusual charge related
to an $8 million field corrective action taken relative to a previously acquired
product line.
As of December 2, 2000, approximately $7 million in work force reduction
costs, $2 million in facility closure costs and $4 million related to the field
corrective action have been incurred. The Company expects substantially all
employee related costs to be completed within the next three months as the
payments to previously eliminated employees are completed. The facility closures
are near completion and the field corrective action is expected to be completed
by the end of the third quarter of 2001.
During 2000, approximately $2 million of the original 1999 provision was
reversed to income within the Unusual charges line of the Statement of
Consolidated Income as actual costs incurred were favorable to those originally
expected.
In March 1999, Batesville Casket Company announced the planned closing of
its Campbellsville, Kentucky casket manufacturing plant. Approximately 200
employees were affected and the closure necessitated a $9 million unusual charge
in the second quarter of 1999. Production of Campbellsville casket units was
transferred to existing plants located in Batesville, Indiana and Manchester,
Tennessee. All accrued costs related to this action have been incurred. The
idled facility was sold in October 2000 for a gain of $1 million which is
reflected within the Unusual charges line of the Statement of Consolidated
Income.
35
38
1998 Actions
In August 1998, the Company approved a plan to close all manufacturing
facilities in Germany and Austria. The plan necessitated the provision of a $70
million asset impairment and restructuring charge including a non-cash charge of
$53 million for the write-off of goodwill and other asset impairments. The plan
also included additional charges for severance and employee benefit costs of $10
million and other estimated plant closing costs of $7 million.
Manufacturing operations were discontinued in Germany and Austria by the
second quarter of 1999 and all actions required under the plan have been
completed. During 2000 and 1999, approximately $1 million and $2 million of the
originally recorded provisions were 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 facility in Austria was completed in December 1999
for a gain of $2 million and the facility in Germany was sold in November 2000
for a gain of $1 million. These gains are reflected within the Unusual charges
line of the Statement of Consolidated Income.
Other
In addition to costs accrued under the above outlined plans, approximately $1
million and $2 million of incremental costs were incurred in relation to those
actions in 2000 and 1999, respectively. These incremental 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 $8 million and $21 million as of December 2, 2000 and
November 27, 1999, respectively. The reserve balance included in other long-term
liabilities for the retirement of the Company's CEO is approximately $7 million
as of December 2, 2000.
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:
- -----------------------------------------------------------------------------------------
December 2, November 27,
2000 1999
- -----------------------------------------------------------------------------------------
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 1 2
Other 1 -
- -----------------------------------------------------------------------------------------
Total long-term debt $ 302 $ 302
- -----------------------------------------------------------------------------------------
Scheduled payments on long-term debt as of December 2, 2000 total less than
$1 million in each of the years 2001 through 2005.
Short-term debt in 1999 consisted of borrowings under various lines of
credit maintained for foreign subsidiaries. There were no short-term borrowings
outstanding at December 2, 2000. The weighted average interest rate on all
short-term borrowings outstanding as of November 27, 1999 was approximately
4.0%.
At December 2, 2000, the Company had uncommitted credit lines totaling $95
million available for its operations. These agreements have no commitment fees,
compensating balance requirements or fixed expiration dates.
36
39
7. Stock-based Compensation
At December 2, 2000, 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 share awards to participants contingent on their continued employment and
the achievement of pre-established financial objectives of the Company over
succeeding three-year periods. A total of 2,500,000 shares of common stock of
the Company remains reserved for issuance under the program. Total tentative
performance shares payable through December 2, 2000, were 176,264. 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 253,486 shares are deferred of which 234,490 are vested and
payable as of December 2, 2000. The fair value of common stock granted under
this program was $34.81, $57.94 and $44.56 per share in 2000, 1999 and 1998,
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 December 2, 2000. No shares have been awarded under this plan
since 1993. This plan will terminate on November 30, 2001.
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 December 2, 2000 there were
1,126,995 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
$12.41, $12.31 and $14.19 per share in 2000, 1999 and 1998, respectively. The
following weighted average assumptions were used:
2000 1999 1998
---- ---- ----
Risk-free interest rate 6.52% 5.23% 5.63%
Dividend yield 1.62% 1.68% 1.49%
Volatility factor .2418 .2319 .1926
Weighted average expected life 5.81 years 5.98 years 5.98 years
The following table summarizes the transactions of the Company's stock option
plan:
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
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 1,435,248 $46.85 734,998 $50.04 283,500 $44.31
Options granted 554,000 $35.99 777,750 $44.23 499,000 $52.98
Options exercised (20,968) $38.41 (500) $44.31 (10,339) $44.31
Options canceled (127,082) $47.62 (77,000) $50.98 (37,163) $47.37
- -------------------------------------------------------------------------------------------------------------------------
Unexercised options outstanding -
end of year 1,841,198 $43.62 1,435,248 $46.85 734,998 $50.04
- -------------------------------------------------------------------------------------------------------------------------
Exercisable options - end of year 873,484 $47.41 355,566 $49.16 94,867 $44.31
- -------------------------------------------------------------------------------------------------------------------------
37
40
The following table summarizes information about stock options outstanding at
December 2, 2000:
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
- --------------------------------------------------------------------------------------------------------------------
$29.97-$33.84 293,199 8.81 $30.27 79,067 $29.97
$36.31-$36.31 496,500 9.13 $36.31 60,000 $36.31
$42.81-$46.44 243,665 6.65 $44.60 235,667 $44.58
$52.16-$52.16 753,834 7.62 $52.16 456,748 $52.16
$57.09-$63.25 54,000 7.44 $59.76 42,002 $60.26
- --------------------------------------------------------------------------------------------------------------------
$29.97-$63.25 1,841,198 8.08 $43.62 873,484 $47.41
- --------------------------------------------------------------------------------------------------------------------
On October 5, 1999, key employees were awarded 40,000 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 1,160 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 December 2, 2000 there were 6,923 shares
which remain deferred under this program. No awards were made in fiscal 2000 and
the plan has been terminated.
The amount of income/(expense) recognized for all stock-based compensation
plans was ($4) million in 2000, $4 million in 1999 and ($8) million in 1998.
The pro forma effect on net income for all stock-based compensation plans,
if accounted for under SFAS No. 123, is $6 million and $9 million additional
compensation expense or $.06 and $.09 per share in 2000 and 1999, respectively,
and less than $1 million additional expense in 1998.
Members of the Board of Directors may elect to defer fees earned and invest
them in common stock of the Company. A total of 12,966 deferred shares are
payable as of December 2, 2000 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 December 2, 2000, the Board of Directors had authorized the
repurchase, from time to time, of up to 24,289,067 shares of the Company's
stock. The purchased shares will be used for general corporate purposes. As of
December 2, 2000, a total of 19,502,767 shares had been purchased at market
trading prices, of which 17,919,611 shares remain in treasury.
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 current assets and liabilities 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 carrying value and
estimated fair values of the Company's long-term debt instruments were $302
million and $292 million at December 2, 2000 and $302 million and $294 million
at November 27, 1999, respectively.
38
41
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 and equity risks. The Company occasionally enters
into foreign currency forward contracts and equity options to hedge exposure to
adverse exchange risk related to certain assets and obligations denominated in
foreign currencies and price fluctuations related to certain equity investments.
The gains or losses arising from these contracts offset 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 outstanding on December 2, 2000 and November 27, 1999.
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 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 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.
39
42
Financial information regarding the Company's reportable segments is
presented below:
- ----------------------------------------------------------------------------------------------------------------------
Funeral Services Corporate
Health ---------------- and Other
Care Products Insurance Other (a) Expense Consolidated
- ----------------------------------------------------------------------------------------------------------------------
2000
- ----------------------------------------------------------------------------------------------------------------------
Net revenues $ 1,112 $ 617 $ 367 $ - $ - $ 2,096
Income before income taxes,
unusual items and capital
charges $ 123 $ 152 $ 33 $ - $ (65) $ 243
Capital charges (45) (18) - - 63 -
-----------------------------------------------------------------------------
Segment income $ 78 $ 134 $ 33 $ - $ (2) $ 243
Unusual items (b) $ 5 $ - $ (1) $ - $ (7) (3)
------------
Income before income taxes $ 240
Assets $ 758 $ 276 $ 3,257 $ - $ 306 $ 4,597
Capital expenditures $ 67 $ 30 $ 5 $ - $ 4 $ 106
Depreciation and amortization $ 69 $ 15 $ 3 $ - $ 2 $ 89
- ----------------------------------------------------------------------------------------------------------------------
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 (c) $ (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 (d) $ 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 (e) (f) $ (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 (g) $ 124 $ 21 $ 1 $ 1 $ 2 $ 149
- ----------------------------------------------------------------------------------------------------------------------
(a) All Other consists of Medeco Security Locks, Inc., which was sold in July
1998.
(b) Health Care reflects $5 million in income for gains from the disposition of
facilities idled as part of prior unusual charges and the reversal of
accruals provided for in previous unusual charges due to actual costs being
less than originally estimated. Funeral Services Insurance reflects a $1
million charge related to the realignment of certain operations. Corporate
and Other Expense reflects a $7 million charge related to the retirement of
the Company's former Chief Executive Officer partially offset by a gain
from the disposition of a facility idled as part of a prior unusual charge.
(c) 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.
(d) Funeral Services Insurance reflects a $3 million write-off of goodwill
related to an asset impairment.
(e) 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.
(f) Other reflects a gain of $75 million on the sale of Medeco Security Locks,
Inc.
(g) Health Care reflects a $43 million write-off of goodwill related to the
discontinuance of manufacturing operations at Hill-Rom facilities in
Germany.
40
43
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:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Net revenues to unaffiliated
customers: (a)
United States $ 1,846 $ 1,816 $ 1,758
Foreign 250 231 243
- --------------------------------------------------------------------------------
Total revenues $ 2,096 $ 2,047 $ 2,001
- --------------------------------------------------------------------------------
Long-lived assets:
United States $ 400 $ 391 $ 417
Foreign 53 68 83
- --------------------------------------------------------------------------------
Total long-lived assets $ 453 $ 459 $ 500
- --------------------------------------------------------------------------------
(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:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Income (loss) before income taxes:
Domestic $ 222 $ 201 $ 370
Foreign 18 (6) (77)
- --------------------------------------------------------------------------------
Total $ 240 $ 195 $ 293
- --------------------------------------------------------------------------------
Provision for income taxes:
Current provision:
Federal $ 53 $ 79 $ 90
State 7 11 19
Foreign 6 3 4
- --------------------------------------------------------------------------------
Total current provision 66 93 113
- --------------------------------------------------------------------------------
Deferred provision:
Federal 20 (20) (4)
State (1) (5) -
Foreign 1 3 -
- --------------------------------------------------------------------------------
Total deferred provision 20 (22) (4)
- --------------------------------------------------------------------------------
Provision for income taxes $ 86 $ 71 $ 109
- --------------------------------------------------------------------------------
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:
41
44
- --------------------------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
- --------------------------------------------------------------------------------------------------
Federal income tax (a) $84 35.0 $68 35.0 $103 35.0
State income tax (b) 4 1.7 4 2.1 12 4.1
Foreign income tax (c) - - 8 4.2 30 10.3
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 (2) (0.6) (9) (4.6) (8) (2.8)
- --------------------------------------------------------------------------------------------------
Provision for income taxes $86 36.1 $71 36.7 $109 37.0
- --------------------------------------------------------------------------------------------------
(a) At statutory rate.
(b) Net of Federal benefit.
(c) Federal tax rate differential.
With the 1998 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 effects of temporary differences that give rise to the deferred tax
balance sheet accounts are as follows:
- ------------------------------------------------------------------------------------------------------------
December 2, 2000 November 27, 1999
- ------------------------------------------------------------------------------------------------------------
Non-insurance Insurance Non-insurance Insurance
- ------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Current:
Inventories $ 4 $ - $ 6 $ -
Employee benefit accruals 4 - 3 -
Self insurance accruals 7 - 9 -
Litigation accruals 2 - 2 -
Other, net 35 7 48 5
Long-term:
Employee benefit accruals 25 1 24 1
Amortization - 1 - 1
Unrealized loss on investments - 44 - 17
Deferred policy revenues - 264 - 251
Foreign loss carryforwards
and other tax attributes 11 - 11 -
Other, net 5 1 11 -
- ------------------------------------------------------------------------------------------------------------
Total assets 93 318 114 275
- ------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Current:
Inventories 1 - 2 -
Other, net 3 - 3 -
Long-term:
Depreciation 32 2 33 3
Amortization - - 2 -
Benefit reserves - 17 - 14
Deferred acquisition costs - 194 - 175
Other, net 1 5 1 4
- ------------------------------------------------------------------------------------------------------------
Total liabilities 37 218 41 196
- ------------------------------------------------------------------------------------------------------------
Less valuation allowance for foreign
loss and other tax attributes (11) - (11) -
- ------------------------------------------------------------------------------------------------------------
Net asset $ 45 $ 100 $ 62 $ 79
- ------------------------------------------------------------------------------------------------------------
42
45
As of December 2, 2000, 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. The Company has made deposits against the IRS'
assessed liability for COLI to preclude the continuing assessment of interest
charges while this matter continues to be disputed.
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:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Rental expense $ (20) $ (21) $ (21)
Research and
development costs $ (44) $ (47) $ (46)
Investment income, net (a) $ 24 $ 16 $ 19
- --------------------------------------------------------------------------------
(a) Excludes insurance operations.
The table below indicates the minimum annual rental commitments (excluding
renewable periods) aggregating $54 million, for manufacturing facilities,
warehouse distribution centers, service centers and sales offices, under
noncancelable operating leases.
- --------------------------------------------------------------------------------
2001 $ 19
2002 $ 14
2003 $ 9
2004 $ 5
2005 $ 3
2006 and beyond $ 4
- --------------------------------------------------------------------------------
The table below provides supplemental information to the Statements of
Consolidated Cash Flows.
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Cash paid for:
Income taxes $ 81 $ 106 $ 113
Interest $ 32 $ 27 $ 24
Non-cash investing and financing activities:
Liabilities assumed from/incurred
for the acquisition of businesses $ - $ 1 $ 39
Treasury stock issued under
stock compensation plans $ 1 $ 2 $ 1
- --------------------------------------------------------------------------------
43
46
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 2000 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.
Investments are predominantly U.S. Treasuries and agencies and high-grade
corporate bonds, with smaller investments in equities and foreign denominated
securities. Investments 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 ensure 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.
The amortized cost and fair value of investment securities available for
sale at December 2, 2000 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,
Canada and other countries $ 584 $ 7 $ 13 $ 578
Corporate securities and
short term investments 1,723 8 127 1,604
Mutual funds and
short term equities 85 - 4 81
Preferred and common stocks 50 11 4 57
- -------------------------------------------------------------------------------------------------------------------
Total (a) $ 2,442 $ 26 $ 148 $ 2,320
- -------------------------------------------------------------------------------------------------------------------
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,
Canada and other countries $ 846 $ 5 $ 41 $ 810
Corporate securities and
short term investments 1,329 2 24 1,307
Mutual funds and
short term equities 24 9 - 33
Preferred and common stocks 20 5 1 24
- -------------------------------------------------------------------------------------------------------------------
Total (a) $ 2,219 $ 21 $ 66 $ 2,174
- -------------------------------------------------------------------------------------------------------------------
(a) Does not include the amortized cost of other investments carried on the
balance sheet in the amount of $145 million at December 2, 2000 and $137
million at November 27, 1999. The carrying value of which approximates fair
value.
The amortized cost and fair value of investment securities available for
sale at December 2, 2000, 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.
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- --------------------------------------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 109 $ 108
Due after 1 year through 5 years 254 247
Due after 5 years through 10 years 465 425
Due after 10 years 902 825
Mortgage-backed securities 577 577
Mutual funds and short term equities 85 81
Preferred and common stocks 50 57
- --------------------------------------------------------------------------------
Total $ 2,442 $ 2,320
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Proceeds $ 428 $ 487 $ 364
Realized gross gains $ 13 $ 26 $ 24
Realized gross losses $ 14 $ 3 $ 4
- --------------------------------------------------------------------------------
Summarized financial information of insurance operations included in the
Statement of Consolidated Income is as follows:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Investment income $ 176 $ 156 $ 138
Earned premium revenue 192 176 151
Net (loss) gain on sale of investments (1) 23 20
- --------------------------------------------------------------------------------
Total net revenues 367 355 309
Benefits paid 87 81 71
Credited interest 153 145 123
Other costs of revenue 60 47 39
Unusual charges 1 3 -
Other operating expenses 33 37 23
- --------------------------------------------------------------------------------
Income before income taxes $ 33 $ 42 $ 53
- --------------------------------------------------------------------------------
Insurance liabilities consisted of the following:
- --------------------------------------------------------------------------------------------------------------------
Mortality or Interest
Withdrawal Morbidity Rate
Assumptions Assumptions Assumptions 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Life Insurance Varies by Varies by Varies by age $2,231 $2,051
Contracts age/plan/duration age/plan/duration and issue year
SP: up to 0.2% 1979-81 US Census
MP: up to 60%; Mortality Table 3% to 5.5%
avg. 5%-10% in Equals ultimate;
duration 1 Select = % of
1979-81 table
- --------------------------------------------------------------------------------------------------------------------
Annuity Contracts Varies by Varies by Varies by age 45 41
age/plan/duration age/plan/duration and issue year
SP: up to 0.2% 1979-81 US Census
MP: up to 60%; Mortality Table 4% to 8.75%
avg. 5%-10% in Equals ultimate;
duration 1 Select = % of
1979-81 table
- --------------------------------------------------------------------------------------------------------------------
Total Benefit $2,276 $2,092
Liabilities
- --------------------------------------------------------------------------------------------------------------------
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Statutory data at December 31 includes:
- --------------------------------------------------------------------------------
2000 (unaudited) 1999 1998
- --------------------------------------------------------------------------------
Net income $ 33 $ 38 $ 35
Capital and surplus $ 276 $ 234 $ 153
- --------------------------------------------------------------------------------
Forethought Life Insurance Company (FLIC), Forethought Life Assurance
Company (FLAC), and Arkansas National Life Insurance Company (ANLIC) are
restricted in the amount of dividends that they can distribute to their
shareholders without approval of the department of insurance in their respective
states of domicile. On January 2, 2001 Forethought Life Insurance Company paid a
dividend of $24 million to Hillenbrand Industries, Inc. The remaining amount of
dividends that can be paid in fiscal year 2001 without approval is $1 million
for FLIC and FLAC, respectively, and $2 million for ANLIC.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted
Codification of Statutory Accounting Principles guidance, which replaces the
current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting as of January 1, 2001. The Codification
provides guidance for areas where statutory accounting has been silent and
changes current statutory accounting in some areas; e.g. deferred income taxes
are recorded.
The State of Indiana has adopted the Codification guidance, effective
January 1, 2001. The effect of adoption on the Company's statutory surplus is
not expected to have a material effect on surplus.
14. Unaudited Quarterly Financial Information
- -------------------------------------------------------------------------------------------------------
Total
2000 Quarter Ended 2/26/00 5/27/00 8/26/00 12/02/00 Year
(53 weeks)
- -------------------------------------------------------------------------------------------------------
Net revenues $514 $503 $492 $587 $2,096
Gross profit 195 193 192 246 826
Net income 36 36 34 48 154
Basic and diluted
net income per common share .58 .56 .54 .76 2.44
- -------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------
15. Contingencies
On August 16, 1995, Kinetic Concepts, Inc. (KCI), and Medical Retro Design, Inc.
(collectively, the "plaintiffs"), filed suit against Hillenbrand Industries,
Inc., and its subsidiary Hill-Rom Company, Inc., in the United States District
Court for the Western District of Texas, San Antonio Division. The plaintiffs
allege violation of various antitrust laws, including illegal bundling of
products, predatory pricing, refusal to deal and attempting to monopolize the
hospital bed industry. They seek monetary damages totaling in excess of $269
million, trebling of any damages that may be allowed by the court, and
injunctions to prevent further alleged unlawful activities. The Company believes
that the claims are without merit and is aggressively defending itself against
all allegations. Accordingly, it has not recorded any loss provision relative to
damages sought by the plaintiffs.
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49
On November 20, 1996, the Company filed a Counterclaim to the above action
against KCI in the U.S. District Court in San Antonio, Texas. The Counterclaim
alleges, among other things, that KCI has attempted to monopolize the
therapeutic bed market, interfere with the Company's and Hill-Rom's business
relationships by conducting a campaign of anticompetitive conduct, and abused
the legal process for its own advantage.
The original claims by the plaintiffs against Hillenbrand Industries and
the counterclaims by the Company against KCI are currently scheduled to go to
trial in late 2001.
The Company is subject to various other claims and contingencies arising
out of the normal course of business, including those relating to commercial
transactions, product liability, employee related matters, safety, health,
taxes, environmental and other matters. Litigation is subject to many
uncertainties, and the outcome of individual litigated matters is not
predictable with assurance. It is reasonably possible that some litigation
matters for which reserves have not been established could be decided
unfavorably to the Company. Management believes, however, that the ultimate
liability, if any, in excess of amounts already provided or covered by
insurance, is not likely to have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
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.
16. Subsequent Event
On January 22, 2001, Hill-Rom announced that it would realign its home care and
long-term care businesses. As a result, the Company expects to take a charge of
between $9 million and $12 million in the first quarter of 2001.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with the independent accountants.
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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 2, 2001, and to be filed with the Commission relating to the Company's
2001 Annual Meeting of Shareholders, which section is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the definitive Proxy
Statement dated March 2, 2001, and to be filed with the Commission relating to
the Company's 2001 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 2, 2001, and to be filed with the Commission
relating to the Company's 2001 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 2, 2001, and to be filed with the Commission
relating to the Company's 2001 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 21.
(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 21.
48
51
(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
(Incorporated herein by reference to Exhibit 10 filed with
Form 10-K for the year ended November 27, 1999)
10.4 Form of Stock Award granted to certain executive officers.
(Incorporated herein by reference to Exhibit 10 filed with
Form 10-K for the year ended November 27, 1999)
10.5 Agreement between W August Hillenbrand and Hillenbrand
Industries, Inc.
10.6 Hillenbrand Industries, Inc. Director Indemnity Agreement
Other Exhibits
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
(b) Reports on Form 8-K
During the quarter ended December 2, 2000, the Company filed two
reports on Form 8-K.
The Form 8-K dated October 11, 2000 reported under "Item 5. Other
Events" the Company's announcement that W August Hillenbrand, Chief
Executive Officer of Hillenbrand Industries, Inc., had announced his
retirement effective December 2, 2000.
The Form 8-K dated November 13, 2000 reported under "Item 5. Other
Events" the Company's announcement that Donald G. Barger, Jr., Vice
President and Chief Financial Officer, had accepted a position with
another company.
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52
SCHEDULE II
HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
For The Years Ended December 2, 2000, November 27, 1999 and November 28, 1998
(Dollars in millions)
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER NET OF AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (A) RECOVERIES (B) OF PERIOD
- ------------------------------- --------- -------- ------------ -------------- ---------
Reserves deducted from assets
to which they apply:
Allowance for possible losses
and discounts
- accounts receivable:
Year Ended:
December 2, 2000 $ 54 $ 3 $ 44 $ 40 $ 61
========== ========== ========= ========== ==========
November 27, 1999 $ 29 $ 10 $ 27 $ 12 $ 54
========== ========== ========= ========== ==========
November 28, 1998 $ 25 $ 1 $ 13 $ 10 $ 29
========== ========== ========= ========== ==========
(a) Reduction of gross revenues for uncollectable health care rental
reimbursements, cash discounts and other adjustments in determining net
revenue. Also includes the effect of acquisition of businesses.
(b) Generally reflects the write-off of specific receivables against recorded
reserves.
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53
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:
December 2, 2000
Severance and
Employee Benefit
Costs $ 9 $ 1 $ - $ 8 $ 2
Other Plant
Closing Costs $ 4 $ - $ - $ 3 $ 1
Field Corrective Action $ 8 $ - $ - $ 4 $ 4
Retirement of CEO $ - $ 8 $ - $ - $ 8
---------- ---------- --------- ---------- ----------
$ 21 $ 9 $ - $ 15 $ 15
========== ========== ========= ========== ==========
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
========== ========== ========= ========== ==========
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54
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/ Frederick W. Rockwood
-----------------------------------------
Frederick W. Rockwood
President and Chief Executive Officer
Dated: February 19, 2001
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/ Ray J. Hillenbrand /S/ John C. Hancock
- -------------------------------------- ------------------------------------
Ray J. Hillenbrand John C. Hancock
Chairman of the Board Director
/S/ James D. Van De Velde /S/ Daniel A. Hillenbrand
- -------------------------------------- ------------------------------------
James D. Van De Velde Daniel A. Hillenbrand
Vice President and Controller Chairman Emeritus and 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/ W August Hillenbrand
- -------------------------------------- ------------------------------------
Edward S. Davis W August Hillenbrand
Director Director
/S/ Leonard Granoff /S/ Frederick W. Rockwood
- -------------------------------------- ------------------------------------
Leonard Granoff Frederick W. Rockwood
Director Director
Dated: February 19, 2001
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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 (Incorporated herein by reference to
Exhibit 10 filed with Form 10-K for the year ended
November 27, 1999)
10.4 Form of Stock Award granted to certain executive
officers. (Incorporated herein by reference to
Exhibit 10 filed with Form 10-K for the year ended
November 27, 1999)
10.5 Agreement between W August Hillenbrand and
Hillenbrand Industries, Inc.
10.6 Hillenbrand Industries, Inc. Director Indemnity
Agreement
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
53