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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2003     Commission File No. 1-6651

HILLENBRAND INDUSTRIES, INC.

(812) 934-7000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, without par value – 62,001,094 shares as of January 30, 2004.

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HILLENBRAND INDUSTRIES, INC.

INDEX TO FORM 10-Q

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (Unaudited)

Hillenbrand Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in millions except per share data)

See Notes to Condensed Consolidated Financial Statements

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Hillenbrand Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions)

See Notes to Condensed Consolidated Financial Statements

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Hillenbrand Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in millions)

See Notes to Condensed Consolidated Financial Statements

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Hillenbrand Industries, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in millions except per share data)

1.		Basis of Presentation
		The unaudited, condensed consolidated financial statements appearing in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission. Unless the context otherwise requires, the terms “Hillenbrand”, the “Company”, “we”, “our” and “us” refer to Hillenbrand Industries, Inc. and its consolidated subsidiaries, and the terms “Hill-Rom Company” or “HRC”, “Batesville Casket Company” or “BCC”, and “Forethought Financial Services” or “FFS”, and derivations thereof, refer to one or more of the subsidiary companies of Hillenbrand that comprise those respective business units. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of management, the financial statements herein include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented. Quarterly results are not necessarily indicative of annual results.
		With the announced divestitures of the infant care and piped-medical gas businesses of Hill-Rom in the fourth quarter of fiscal 2003, as further described in Note 3 below, these operations are presented as discontinued operations within our Condensed Consolidated Statements of Income for all periods presented. Under this presentation, the revenues and variable costs associated with the businesses have been removed from the individual line items comprising the Condensed Consolidated Statements of Income and presented in a separate section entitled, “Discontinued Operations”. In addition, fixed costs related to the businesses that will be eliminated with the divestitures have also been included as a component of discontinued operations. The results of discontinued operations are not necessarily indicative of the results of the businesses if they had been operated on a stand-alone basis. On the Condensed Consolidated Balance Sheets, the assets and liabilities of the discontinued operations are also presented separately.

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2.		Supplementary Balance Sheet Information
		The following information pertains to non-insurance assets and consolidated shareholders’ equity:

3.		Discontinued Operations
		In September 2003, Hill-Rom entered into definitive agreements to dispose of two non-strategic businesses:

	•		On September 24, 2003, Hill-Rom signed a definitive agreement to sell its piped-medical gas business to Beacon Medical Products LLC, for $14 million, subject to working capital conditions existing at the date of closing. The piped-medical gas business was a leading provider of medical gas delivery and management systems in acute care facilities.
	•		On September 15, 2003, Hill-Rom signed a definitive agreement to sell its Air-Shields infant care business to Dräger Medical AG & Co. KGaA for approximately $31 million, subject to adjustment for certain conditions existing at closing. Air-Shields is a leading provider of infant care warming therapy, incubators and other infant care products. Hill-Rom will retain the outstanding receivables of the infant care business at the date of close, which are estimated to approximate $9 million.

The divestiture of the piped-medical gas business closed in late October 2003. The sale of the Air-Shields infant care business is still pending, with regulatory review currently underway in various European countries. This

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		sale is intended to close in the third quarter of fiscal 2004. Upon approval of the Board of Directors and the signing of the definitive sale agreements, both the infant care and piped-medical gas businesses were treated as discontinued operations for all periods presented within the Condensed Consolidated Statements of Income in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. In conjunction with the announced divestitures in the fourth quarter of fiscal 2003, an estimated loss was recognized on the disposal of the businesses of $51 million, net-of-tax, consisting of a $50 million pre-tax loss and a $1 million income tax provision. The loss on disposal was related to $72 million of goodwill specifically assigned to the carrying value of the respective businesses. In evaluating the divestitures, it was determined that the benefits of the acquired goodwill associated with these businesses had not been realized, and would not be realized in the future, by the continuing Hill-Rom operations since they were not fully integrated. As such, all goodwill related to the previously acquired infant care and piped-medical gas businesses, other than a portion related to a retained product line that was integrated into Hill-Rom, was assigned to the respective businesses and fully considered in recognition of the estimated loss on the divestitures. The tax provision recorded on the loss resulted from the book and tax basis differentials associated with the businesses and our inability to readily utilize the net capital losses expected to be generated as a result of the divestitures.
		Operating results for the discontinued operations were as follows for the quarterly periods ended December 31, 2003 and 2002:

Assets and liabilities of the discontinued operations, which are presented in separate line items within the Condensed Consolidated Balance Sheets as of December 31 and September 30, 2003, were as follows:

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4.		Earnings per Common Share
		Basic earnings per share were 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 were calculated consistent with the basic earnings per share calculation including the effect of dilutive unissued common shares related to stock-based employee compensation programs. For all periods presented, anti-dilutive stock options were excluded in the calculation of diluted earnings per share. Cumulative treasury stock acquired, less cumulative shares reissued, have been excluded in determining the average number of shares outstanding.
		Earnings per share is calculated as follows:

5.		Comprehensive Income
		Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income”, requires unrealized gains or losses on available-for-sale securities, foreign currency translation adjustments and minimum pension liability adjustments to be included in accumulated other comprehensive income.

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The components of comprehensive income are as follows (in millions):

		The composition of accumulated other comprehensive income at December 31, 2003 and September 30, 2003 was the cumulative adjustment for unrealized gains on available-for-sale securities of $107 and $124 million, respectively, foreign currency translation adjustments of $0 and ($5) million, respectively, and a minimum pension liability adjustment of ($1) million for each period.
6.		Guarantees
		Limited warranties are routinely granted on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year, however, certain components and products, including those of the recently acquired Advanced Respiratory, Inc. (ARI), have substantially longer warranty periods. A reserve is recognized with respect to these obligations at the time of product sale, with subsequent warranty claims recorded directly against the reserve. The amount of the warranty reserve is determined based on historical trend experience for the covered products. For more significant warranty-related matters which might require a broad-based correction, separate reserves are established when such events are identified and the cost of correction can be reasonably estimated. Warranty reserves are classified as Other current liabilities within the Condensed Consolidated Balance Sheets. A reconciliation of changes in the warranty reserve for the periods covered in this report is as follows:

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		In the normal course of business we enter into various other guarantees and indemnities in our relationships with suppliers, service providers, customers, business partners and others. Examples of these arrangements would include guarantees of product performance, indemnifications to service providers and indemnifications of our actions to business partners. These guarantees and indemnifications would not materially impact our financial condition or results of operations, although indemnifications associated with our actions generally have no dollar limitations.
		In conjunction with recent acquisition and divestiture activities, we have entered into select guarantees and indemnifications of performance with respect to the fulfillment of commitments under applicable purchase and sale agreements. The arrangements generally indemnify the buyer or seller for damages associated with breach of contract, inaccuracies in representations and warranties surviving the closing date and satisfaction of liabilities and commitments retained under the respective contract. For those representations and warranties which survive closing, they generally survive for periods up to two years or the expiration of the applicable statutes of limitations, but some may survive longer. Potential losses under the indemnifications are, in most cases, limited to a portion of the original transaction price, or to other lesser specific dollar amounts for select provisions. With respect to sale transactions, we also routinely enter into non-competition agreements for varying periods of time. We are not aware of any circumstances that would materially impact our financial condition, results of operations or cash flows in connection with guarantees and indemnities entered into with respect to acquisition and divestiture activities.
7.		Commitments and Contingencies
		On August 16, 1995, Kinetic Concepts, Inc. (KCI), and one of its affiliates (collectively, the “plaintiffs”), filed suit against Hillenbrand and its Hill-Rom subsidiary in the United States District Court for the Western District of Texas, San Antonio Division (the Court). The plaintiffs alleged violation of various antitrust laws, including illegal bundling of products, predatory

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		pricing, refusal to deal and attempting to monopolize the hospital bed industry. On December 31, 2002, we entered into a comprehensive settlement agreement relating to the longstanding antitrust litigation with the plaintiffs. At the request of the parties, on January 2, 2003, the Court dismissed the lawsuit with prejudice. Upon dismissal of the lawsuit, we recorded a litigation charge and established an accrual in the amount of $250 million in the fourth quarter of fiscal 2002. Neither party admitted any liability or fault in connection with the settlement. Hillenbrand paid KCI $175 million out of its cash on hand in January 2003 and paid the final installment under the settlement of $75 million in December 2003.
		Hillenbrand is committed to operating all of its businesses in a manner that protects the environment. In the past year, we have been issued Notices of Violation alleging violation of certain environmental permit conditions. The Notices of Violation involved no or only minor fines or penalties and we have successfully implemented measures to abate such conditions in compliance with the underlying agreements and/or regulations. In the past, we have voluntarily entered into remediation agreements with various environmental authorities to address onsite and offsite environmental impacts. The remaining voluntary remediation activities are nearing completion. We have also been notified as a potentially responsible party in investigations of certain offsite disposal facilities. Based on the nature and volume of materials involved, the cost of such onsite and offsite remediation activities at sites in which we are currently involved is not expected to exceed $1 million. Hillenbrand believes it has provided adequate reserves in its financial statements for all of these matters, which have been determined without consideration of possible loss recoveries from third parties. Future events or changes in existing laws and regulations or their interpretation may require us to make additional expenditures in the future. The cost or need for any such additional expenditures is not known.
		We are also subject to various other claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, patent infringement, business practices, antitrust, 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 possible that some litigation matters for which reserves have not been established could be decided unfavorably to us, and that any such unfavorable decision could have a material adverse effect on our financial condition, results of operations and cash flows.
		We are also involved in other possible claims, including product liability, workers compensation, employment related matters and auto liability. While insurance is maintained for such exposures, the policies in place are high-deductible policies under which we assume a layer of coverage between $150 thousand and $1.5 million varying with policy year and type

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		of coverage. Accruals for such claims are established based upon advice from internal and external counsel and historical settlement information for claims, related fees and for claims incurred but not reported. We utilize actuarial techniques and routinely consult with external actuaries in determining our accrual requirements. Historical patterns of claim loss information are used to arrive at claim factors which are then applied to loss estimates under the actuarial techniques. The recorded amounts represent our best estimate of the costs we will incur in relation to such exposures, but it is possible that actual costs could differ from those estimates.
8.		Special Charges
		2003 Actions
		During the third fiscal quarter of 2003, we announced a new business structure at Hill-Rom to accelerate the execution of its strategy and strengthen its core businesses. As a result of this action, Hill-Rom announced it would eliminate approximately 300 salaried positions globally. Hill-Rom also announced it would hire approximately 100 new personnel with the skills and experience necessary to execute its business strategy. A fiscal 2003 third quarter charge of $9 million was recognized with respect to this action, essentially all related to severance and benefit-related costs. Upon completion, this action is expected to reduce net operating costs between $12 and $14 million annually. We began to experience some benefit during the first fiscal quarter of 2004, however, significant benefits are not expected to be realized until the beginning of calendar 2004. As of December 31, 2003, approximately 205 personnel had been terminated, resulting in the utilization of $6 million of the originally recorded accrual. As of this same date, approximately 68 new personnel had been hired under the new business structure. This action is expected to be completed no later than March 2004.
		2002 Actions
		During the fourth fiscal quarter of 2002, we announced realignment actions at Batesville Casket and Hill-Rom. The actions at Batesville Casket included the closure of a wood casket plant in Canada along with other employee reduction actions in the United States. These combined actions resulted in the reduction of approximately 100 employees. A charge of $3 million was recorded in relation to these actions for severance and other facility closing costs. In addition, during the fourth quarter of fiscal 2002 Hill-Rom announced an action in Germany to downsize its field service operations and to relocate its sales and other administrative functions. A charge of $2 million was recorded for severance and other facility costs associated with this action, which resulted in the termination of 25 employees. Of the total charge recorded for the above actions, $4 million

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		was associated with severance and other costs to be settled in cash while $1 million related to asset impairments. The remaining accrual for these actions is approximately $1 million, which is expected to be fully utilized no later than March 2004.
9.		Income Taxes
		The effective income tax rate for the first quarter of 2004 approximated 35.7 percent compared to 34 percent for the first quarter of 2003. The higher rate in 2004 relates to higher levels of expected income in 2004 and the diminishing impact of select tax credits which have benefited our effective tax rate in prior years. We will continue to pursue opportunities to reduce our effective tax rate in future periods.
10.		Stock-Based Compensation
		Hillenbrand applies the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, in accounting for stock-based compensation. As a result, no compensation expense is recognized for stock options granted with exercise prices equivalent to the fair market value of stock on date of grant. Compensation expense is recognized on other forms of stock-based compensation, including stock and performance-based awards and units.
		The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to all stock-based employee compensation for the periods covered in this report:

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11.		Segment Reporting
		Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information”, requires reporting of segment information that is consistent with the way in which management operates and views the business. In analyzing segment performance, management has historically reviewed income before income taxes and special items and net income before special items for each of its reporting segments. These reporting segments included Hill-Rom, Batesville Casket and Forethought.
		With the continued evolution of the prior year realignment of the Hill-Rom business structure, changes have recently been adopted in terms of the way in which management views the business, including reporting to our executive management team. With these changes, the Hill-Rom reporting segment will now be split into Americas/Asia Pacific and EMEA (Europe, Middle East and Africa) reporting segments, with performance measured on a divisional income basis before special items. Intersegment sales between the Americas/Asia Pacific and EMEA are generally accounted for at current market value or cost plus markup. Divisional income represents the division’s gross profit less their direct operating costs. Functional costs and eliminations include common costs, such as administration, finance and non-divisional legal and human resource costs, intercompany eliminations and other charges not directly attributable to the segments. Functional costs and eliminations, while not considered a segment, will be presented separately to aid in the reconciliation of segment information to consolidated Hill-Rom financial information.
		The reporting segments of Batesville Casket and Forethought will continue to be measured on the basis of income before income taxes and special items, however, the net income before special items measure will be discontinued. Intersegment sales do not occur between Hill-Rom, Batesville Casket and Forethought. Corporate, while not a segment, will also continue to be presented separately to aid in the reconciliation of segment information to that reported in the Condensed Consolidated Statements of Income.

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Financial information regarding our reportable segments is presented below: