e10vkza
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1 to Form 10-K)
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the fiscal year ended September 30, 2004
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Commission File No. 1-6651 |
HILLENBRAND INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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Indiana
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35-1160484 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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1069 State Route 46 East |
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Batesville, Indiana
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47006-8835 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (812) 934-7000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock, without par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act.
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 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 registrants 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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2).
State the aggregate market value of the common stock held by non-affiliates of the registrant.
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Common Stock, without par value $3,869,555,300 as of March 31, 2004 |
Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date.
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Common Stock, without par value 61,989,311 as of November 19, 2004. |
Documents incorporated by reference.
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Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders Part III. |
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K (Form 10-K/A) to our Annual Report on Form 10-K for the year
ended September 30, 2004, initially filed with the Securities and Exchange Commission (SEC) on
December 7, 2004 (Original Filing), reflects a restatement (Restatement) of the Consolidated
Financial Statements of Hillenbrand Industries, Inc. as discussed in Note 17 to the Consolidated
Financial Statements.
This Form 10-K/A only amends and restates Items 6, 7, 8 and 9A of Part II of the Original Filing
and we have revised language in these Items from the Original Filing to reflect the Restatement.
No other information in the Original Filing is amended hereby. The foregoing items have not been
updated to reflect other events occurring after the Original Filing or to modify or update those
disclosures affected by subsequent events. Other events occurring after the filing of the Original
Filing or other disclosures necessary to reflect subsequent events have been addressed in the
Companys reports filed with the SEC subsequent to the filing of the Original Filing, including the
Quarterly Reports on Form 10-Q for the periods ended December 31, 2004, March 31, 2005 and June 30,
2005, which have previously been filed. In addition, the exhibit list in Item 15 of Part IV has
not been updated except to reflect that an updated consent of our independent registered public
accounting firm and currently dated certifications from our Interim President and Chief Executive
Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act
of 2002, are filed with this Form 10-K/A as Exhibits 23, 31.1, 31.2, 32.1 and 32.2.
With this filing, the Company has amended the Original Filing. As such, the consolidated financial
statements as of and for the fiscal years ended September 30, 2004 and 2003, the quarterly periods
presented and the report of independent registered public accounting firm and related financial
information contained in the Original Filing should no longer be relied upon. In addition, the
fiscal 2005 and 2004 financial information contained in the Companys quarterly reports on Form
10-Q for the periods ended December 31, 2004, March 31, 2005 and June 30, 2005, as previously
filed, should no longer be relied upon.
2
HILLENBRAND INDUSTRIES, INC.
Amendment No. 1 to Annual Report on Form 10-K/A
September 30, 2004
TABLE OF CONTENTS
3
Item 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of Hillenbrand Industries, Inc.,
for the fiscal years ended September 30, 2004, September 30, 2003 and the ten month period ended
September 30, 2002. Fiscal years 2004 and 2003 have been restated pursuant to the items disclosed
in Note 17 to the Consolidated Financial Statements included in Item 8 of this Form 10-K/A. Fiscal
years 2000-2001 are presented based on our previous fiscal year-end of the Saturday nearest
November 30. Also presented are comparable unaudited data for the twelve-month periods ended
September 30, 2002 and 2001. Prior years financial data has been restated to reflect Forethought
as a discontinued operation.
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Fiscal |
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Fiscal |
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Ten Months |
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Year |
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Year |
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Twelve Months Ended |
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Ended |
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Fiscal Year Ended |
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Ended |
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Ended |
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September 30, |
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September 30, |
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December 1, |
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December 2, |
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2004 |
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2003 |
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2002 |
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2001 |
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2002 |
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2001 |
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2000 |
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(As |
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(As |
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(Unaudited) |
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(53 weeks) |
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Restated) |
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Restated) |
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(In millions except per
share data) |
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Net revenues (a) |
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$ |
1,829 |
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$ |
1,695 |
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$ |
1,736 |
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$ |
1,674 |
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$ |
1,393 |
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$ |
1,673 |
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$ |
1,637 |
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Income (loss) from
continuing
operations (a) |
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$ |
188 |
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$ |
181 |
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$ |
56 |
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$ |
130 |
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$ |
(17 |
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$ |
169 |
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$ |
130 |
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(Loss) income from
discontinued operations (a) |
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(45 |
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8 |
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(12 |
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23 |
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7 |
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1 |
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24 |
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Net income (loss) (a) |
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$ |
143 |
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$ |
189 |
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$ |
44 |
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$ |
153 |
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$ |
(10 |
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$ |
170 |
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$ |
154 |
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Income (loss) per share
from continuing
operations Basic (a) |
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$ |
3.02 |
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$ |
2.91 |
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$ |
0.90 |
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$ |
2.06 |
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$ |
(0.28 |
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$ |
2.70 |
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$ |
2.06 |
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(Loss) income per share
from discontinued
operations Basic (a) |
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(0.72 |
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0.14 |
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(0.20 |
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0.38 |
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0.12 |
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0.01 |
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0.38 |
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Net income (loss) per
share-Basic (a) |
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$ |
2.30 |
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$ |
3.05 |
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$ |
0.70 |
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$ |
2.44 |
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$ |
(0.16 |
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$ |
2.71 |
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$ |
2.44 |
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Income (loss) per share
from continuing
operations Diluted (a) |
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$ |
3.00 |
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$ |
2.90 |
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$ |
0.90 |
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$ |
2.05 |
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$ |
(0.28 |
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$ |
2.69 |
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$ |
2.06 |
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(Loss) income per share
from discontinued
operations Diluted (a) |
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(0.72 |
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0.14 |
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(0.20 |
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0.38 |
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0.12 |
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0.01 |
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0.38 |
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Net income (loss) per
share-Diluted (a) |
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$ |
2.28 |
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$ |
3.04 |
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$ |
0.70 |
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$ |
2.43 |
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$ |
(0.16 |
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$ |
2.70 |
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$ |
2.44 |
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Total assets |
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$ |
2,069 |
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$ |
5,475 |
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$ |
5,455 |
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$ |
4,949 |
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$ |
5,455 |
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$ |
5,072 |
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$ |
4,597 |
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Long-term debt |
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$ |
360 |
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$ |
155 |
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$ |
322 |
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$ |
302 |
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$ |
322 |
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$ |
305 |
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$ |
302 |
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Cash dividends per share |
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$ |
1.08 |
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$ |
1.00 |
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$ |
0.98 |
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$ |
0.83 |
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$ |
0.77 |
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$ |
0.84 |
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$ |
0.80 |
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Note: Certain per share amounts may not accurately add due to rounding.
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(a) |
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The selected financial data presented above includes a number of non-recurring and special
charges. Following is a summary of these charges, on a net-of-tax basis. The amounts are
summarized based upon the line items within the Statements of Consolidated Income (Loss)
impacted. Further discussion regarding these adjustments can be found in Managements
Discussion and Analysis of Financial Condition and Results of Operations. |
4
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Fiscal |
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Fiscal |
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Ten Months |
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Year |
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Year |
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Twelve Months Ended |
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Ended |
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Fiscal Year Ended |
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Ended |
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Ended |
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September 30, |
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September 30, |
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December 1, |
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December 2, |
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2004 |
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2003 |
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2002 |
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2001 |
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2002 |
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2001 |
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2000 |
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(As |
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(As |
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(Unaudited) |
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(53 weeks) |
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Restated) |
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Restated) |
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(In millions except per
share data) |
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Items Net-of-Tax: |
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Net Revenues |
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CMS claims resolution |
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(2 |
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Litigation Charge |
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Litigation charge |
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158 |
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158 |
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Special Charges |
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Severance and benefit
costs, asset impairments
and other realignment
activities |
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4 |
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6 |
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3 |
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18 |
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3 |
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14 |
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2 |
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Operating Expense |
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Write-off of technology asset |
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4 |
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4 |
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Other (Income) Expense, net |
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Net realized capital (gains)
losses and impairments |
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11 |
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7 |
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7 |
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Loss on extinguishment of debt |
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4 |
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11 |
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Income Taxes |
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Reversal of tax reserves
and adjustments to
valuation allowance |
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(32 |
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(6 |
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(26 |
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Impact on continuing
operations |
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$ |
8 |
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$ |
26 |
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$ |
140 |
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$ |
18 |
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$ |
166 |
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$ |
(12 |
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$ |
2 |
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital (gains)
losses and impairments |
|
$ |
(2 |
) |
|
$ |
21 |
|
|
$ |
30 |
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
20 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit
costs, asset impairments
and other realignment
activities |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on impairment of
discontinued operations |
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on discontinued
operations |
|
$ |
69 |
|
|
$ |
21 |
|
|
$ |
31 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
27 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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5
|
|
|
Item 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our audited
Consolidated Financial Statements and accompanying notes included under Item 8 of this Form 10-K/A.
This Form 10-K/A reflects a restatement (the Restatement) to our Annual Report on Form 10-K for
the years ended September 30, 2004 and 2003, initially filed with the Securities and Exchange
Commission (SEC) on December 7, 2004 (the Original Filing), as further discussed in Note 17 to
the Consolidated Financial Statements.
In the preparation of this Form 10-K/A, we have revised language within Managements Discussion and
Analysis of Financial Condition and Results of Operations from the Original Filing only to reflect
the Restatement. No other information has been amended or updated to reflect other events
occurring after the Original Filing or to modify or update those disclosures affected by subsequent
events. Information contained herein continues to speak as of the date of the Original Filing, and
the Company has not updated the disclosures contained herein to reflect events that occurred at a
later date.
OVERVIEW
Hillenbrand Industries is organized into two major operating companies serving the health care
and funeral services industries. Hill-Rom is a manufacturer of equipment for the health care
industry, a provider of associated systems for wound, pulmonary and circulatory care and a provider
of biomedical equipment rentals and other services to enhance the operational efficiency and asset
utilization of health care facilities. Batesville Casket serves the funeral services industry and
is a manufacturer of caskets and cremation-related products.
Over the course of the past four years, Hillenbrand Industries has embarked on a strategy to create
value for shareholders, customers, suppliers and employees. The cornerstone of this strategy is
our commitment to create and accelerate shareholder value and growth by identifying and
implementing initiatives that will help realize the potential of our existing portfolio of
businesses and position us for future growth, both organically and through acquisitions. The five
key elements of our strategy and its impact on the business are outlined as follows:
|
1. |
|
Profitable revenue growth: Profitable revenue growth is critical to our overall
commitment to build shareholder value. Actions taken to achieve this objective include
higher research and development spending, a more strategic approach to new product
development, an increased focus on higher margin products and a more profitable product
mix. These efforts have resulted in numerous product line extensions, new product
platforms, gross margin improvement and a foundation for future revenue growth. |
|
|
|
|
During the second quarter of fiscal 2004 we launched two new bed platforms in North America,
the VersaCareä and CareAssistä beds. The VersaCareä platform is a more
feature-rich replacement to our current Advantaä product offering, which is Hill-Roms
single largest product. The CareAssistä product is an entry-level offering at a lower
price point than the VersaCareä or Advantaä products, providing increased
flexibility to our customers that need fewer features on their bed platforms. While we
believe these products will be successful in the marketplace, their introduction had an
impact on the timing of orders and shipments as many customers delayed purchasing decisions
as they evaluated the new product offerings, resulting in lower revenues and gross profit
from health care in fiscal 2004. Hill-Rom also introduced the ComLinxÒ LPM wireless
locating and tracking system, the PrimeAireâ-ARS wound prevention surface and the
Vocera wireless hands-free nurse communication system during the first six months of |
6
|
|
|
2004. We also introduced new products in the architectural products, communications and
furniture lines during the last half of fiscal 2004, replacing outdated products and
enhancing workflow solutions. |
|
|
|
|
In 2004, Batesville Casket continued its focus on new product development by introducing
several new veneer products aimed at various price points in both the burial and cremation
markets, reintroducing select premium wood caskets under the MarsellusÔ brand name and
introducing the Dimensions by BatesvilleÒ product line in response to the growing
demand for caskets associated with the increasing size of Americans. In addition to these
items, Batesville Casket continued its focus on the increasing opportunity to personalize
funerals by introducing several new theme caskets, LifeSymbols corners and cap panels, along
with various columnar displays for these and other products used by our customers to show
products in their selection rooms. |
|
|
|
|
We are also committed to growth through selective health care acquisitions, such as the
acquisitions of ARI, Mediq and NaviCare. In October 2003 we completed the acquisition of
ARI, a manufacturer and distributor of non-invasive airway clearance products and systems.
ARI complements Hill-Roms existing pulmonary expertise, expands Hill-Roms home-care
product line, and provides opportunity for growth through leveraging of its clinical sales
force. In January 2004, we completed the acquisition of Mediq, a company that provides
peak-needs rentals and asset management of moveable biomedical equipment and services. This
acquisition expands Hill-Roms product and service offerings, strengthens its after-sales
service capabilities and should allow increased leverage of its global service center
network. Also in January 2004, we completed the acquisition of the remaining 84 percent
equity interest of NaviCare that we did not already own. NaviCare provides operations
management, resource optimization and dynamic workflow solutions for health care enterprises
and supplements Hill-Roms goal of offering products, services and solutions to enhance the
efficiency and effectiveness of the patient care environment. |
|
|
|
|
We have also entered into two important technology relationships that augment the benefits
of the Mediq and NaviCare acquisitions. First, in August 2003 we entered into a supply
agreement with Visonic Technologies Americas, Inc. and Elpas Electro-Optic Systems, Ltd. to
provide us with access to Visonics wireless locating technology. This technology supports
our recently introduced ComLinxÒ LPM wireless locating and tracking system, which
allows us to tag and track equipment and personnel in health care facilities. In January
2004 we entered into a distribution agreement with Vocera Communications, Inc. permitting
Hill-Rom to sell, service and support Voceras wireless voice communication solution, which
will allow wireless voice communication among health care facility workers throughout a
facility. These technology relationships, along with the Mediq and NaviCare acquisitions
provide the foundation for long-term growth and competitive advantage in Hill-Roms service
business. Our strategy for growth in this business is based on the recognition that health
care providers will face increasing demand in coming years as the baby boom generation ages
and at the same time will face continued pressure to control health care costs. In this
environment, we believe health care providers will need to increase patient throughput with
higher levels of utilization of existing assets. We believe we now can facilitate dramatic
improvements in asset utilization and in-patient flow, and we can provide flexibility to
health care providers in achieving those objectives by offering them capital purchases,
rental arrangements and comprehensive asset management programs across a broader range of
products. |
|
|
|
|
The ARI and Mediq acquisitions resulted in significant increases in health care rental
revenues and gross profit. The effect of the acquisitions on gross profit as a percentage
of revenue has been negative, as lower margin rates associated with Mediqs business more
than offset the higher margin rates at ARI. We used cash on hand to purchase |
7
|
|
|
ARI and NaviCare and borrowings under our revolving credit facilities to fund the majority
of the purchase price for Mediq, which were refinanced with a long-term borrowing in the
third quarter of fiscal 2004. |
|
|
|
During 2005 we plan to complete the integration of the acquisitions made in 2004. We also
plan to focus development efforts on filling remaining product line gaps relating to
connectivity and integration in the patient care environment, enhancement of operational
efficiency and asset utilization of health care facilities and non-invasive clinical
therapies that have a close relationship to our current strengths. |
|
|
2. |
|
Improved asset management: We continually strive to improve the efficiency and return
on our assets and capital. Key components of this effort include business process
simplification, asset rationalization and achieving an optimal sales structure.
Significant progress has been made in all these areas. In business process simplification,
we are continuing our efforts to move to a common technology platform with our Enterprise
Resource Planning implementations at Hill-Rom and Batesville Casket. |
|
|
|
|
The recent sale of our piped-medical gas business and infant care products business are
examples of the asset rationalization strategy. These businesses were selected for
divestiture as they no longer fit within our strategic portfolio because they had limited
future growth potential, possessed unique sales channels and research and development
requirements, had low profit margins and would have required significant investment to
achieve their limited growth potential. Additionally, in July we sold Forethought, a
specialty insurance holding company serving the pre-need financial services market.
Following a comprehensive review of strategic alternatives, we concluded that the best
interests of our shareholders, customers and employees would be served by the sale of
Forethought, allowing us to focus our resources on future growth opportunities in the health
care marketplace and maintain our longstanding commitment to Batesville Casket. Managing a
large insurance and financial services company is very different from managing companies
that manufacture products and provide related services. Additionally, a financial services
company is subject to a variety of outside influences, including exposure to financial
market volatility, that have made it difficult for our investors to compare and forecast our
operating performance at times in the past. Moreover, Forethoughts strategic priorities
and opportunities were inconsistent with those of Hillenbrand. Proceeds from the
disposition of these businesses have been reinvested as part of our acquisition growth
strategy. |
|
|
3. |
|
Lower cost structure: We are committed to increasing shareholder value through the
reduction of costs and waste in all areas of our business and the streamlining of processes
for higher performance. Strategic sourcing and supply arrangements with key suppliers have
resulted in significant reductions in raw material costs while maintaining quality over the
last several years. However, over the past six months, we have experienced some
significant pricing pressure with respect to steel, red metals, solid wood and fuel that
has negatively impacted our financial results during the 2004 fiscal year by approximately
$15 million and are anticipated to continue into 2005. The cost increases have been caused
by price increases and surcharges that have been implemented by our suppliers due to strong
worldwide demand, strained production capacity, a weak U.S. dollar and uncertain economic
conditions. If strong worldwide steel demand continues, the strained production capacity
could also pose a risk with respect to the timing and availability of steel deliveries from
our suppliers. We also continue to reduce operating expenses as a result of work force and
other realignment activities. |
|
|
|
|
With respect to non-operating expenses, we completed the repurchase of approximately $157
million and $47 million of our outstanding long-term debt in the fourth quarter of 2003 and
the third quarter of 2004, respectively. This debt carried interest rates |
8
|
|
|
ranging from 6.75 percent to 8.5 percent. We incurred charges of $16 million and $6
million, respectively, related to these repurchases. These repurchases will provide
approximately $8 million in annual interest rate savings. |
|
|
|
Moreover, in addition to previously announced restructurings, we announced a restructuring
in the fourth fiscal quarter of 2004, resulting in a charge of $7 million intended to better
align Hill-Roms financial and personnel resources to fully support its growth initiatives,
decrease overall costs, and improve performance in Europe. The charge included the
elimination of approximately 130 salaried positions in the U.S. and approximately 100
positions in Europe. These actions should result in an approximate $16 million annualized
gross benefit once the action is fully completed toward the end of our 2005 fiscal year. |
|
|
|
|
During 2005 we plan to pay for our investments to grow the business, offset material cost
increases and stabilize margins by continuing to cut costs and achieve increased
efficiencies. For example, as part of our ongoing strategic sourcing efforts, Hill-Rom
recently centralized its global supply chain to optimize its supply chain for manufacturing
operations and maximize purchasing power with suppliers, and, during 2005, Batesville Casket
plans to ramp up its Mexican manufacturing capability to expand its low-cost manufacturing
capabilities. |
|
|
4. |
|
Strategic portfolio management: We continue to manage our portfolio of operating
companies under a unified corporate structure. Under this approach, each operating company
plays a specific role in the fulfillment of our overall strategy. Batesville Casket is
responsible for developing management talent and providing earnings and cash flow to fund
Corporate growth. Hill-Roms role is to provide, in addition to cash flow and earnings,
profitable growth through new product innovation, expansion into new areas and acquisitions
in its respective adjacent health care businesses. |
|
|
5. |
|
Leadership excellence: We have continued the aggressive development of talent in the
organization through developmental assignments, inter-organizational transfers and special
executive development training experiences. In 2003 we launched a unique performance
development facility to enhance executive capabilities. During 2004, we continued to
incorporate new learning and processes to expand the capabilities of this facility to
individuals as well as team peak performance. During 2003, we performed comprehensive
evaluations of our compensation and benefit programs, which we continued to evaluate in
2004, to assure marketplace competitive programs and practices, as well as proper alignment
with our shareholder value creation objectives. |
The charges and expenditures incurred to implement these initiatives partially offset the achieved
benefits, but such benefits are expected to continue in future periods. We expect further benefits
to be achieved as we continue to pursue our strategy, with a primary focus on the following
elements of the strategy in 2005:
|
1. |
|
Increasing customer focus: We are committed to increasing customer focus by responding
to their needs, solving their problems, and providing the right products and services
better than anyone else. Resource allocation and investments in current businesses, new
products and acquisition targets will be driven by increasing our customer focus in each of
our businesses. Hill-Rom has made substantial progress towards its objectives of
increasing the number of sales representatives by approximately 50. Batesville Caskets
strategy to enhance the customer experience during 2005 will include an increased focus on
more uniquely serving the individual funeral homes through increasing delivery frequency
and flexibility, expanding the number of sales territories to increase our exposure with
individual accounts and funeral directors, enhancing product selection, strengthening
executive relationships with key accounts across the country and becoming easier and
simpler to do business with at all customer touch points and with all customer
interactions. |
9
|
2. |
|
Product quality, innovation and new product development: We are focused on our product
quality and new product development initiatives, increasing funding levels and the speed of
research and development and manufacturing cycle times. The ultimate goal of these
initiatives is to provide meaningful innovative solutions to customers. During 2004,
Hill-Rom introduced the BasicCareä, CareAssistä and VersaCareä bed frames
designed for a variety of medical/surgical applications, a premium furniture extension, the
Contour and Imagebuilder headwall systems, PrimeAire® ARS therapy surface, ComLinx® LPM
(which provides wireless tracking of equipment, patients, and caregivers) and Vocera® for
hands free voice communication. Additionally, in 2004, Batesville Casket continued its
roll-out of veneer products by introducing several new engineered wood casket products
manufactured under its revolutionary new process for veneers and completed the
reintroduction of select premium wood caskets under the Marsellus brand name to customers.
Batesville Casket is in the process of introducing its new Dimensions product line targeted
at the increasing population of overweight and obese individuals. |
|
|
3. |
|
Streamlining business for higher performance: We plan to continue to rationalize and
exit poor performing product lines and businesses and divest of under-performing assets.
Batesville Caskets Enterprise Resource Planning (ERP) system implementation, providing a
common technology platform aimed at speeding productivity gains and process improvements,
was completed during the 2004 fiscal year and is fully functional. Implementation efforts
related to the ERP system at Hill-Rom will continue, where three out of four phases were
complete at the end of fiscal 2004. Improving performance with the Hill-Rom EMEA business
will also be a focus in fiscal 2005. |
|
|
4. |
|
Accelerating top line growth through new business development: While organic growth is
important, we recognize that we will not be able to consistently meet our long-term
strategic objectives without the benefit of acquisitions. During 2005 we plan to complete
the integration of the acquisitions made in 2004. We also plan to focus development
efforts on filling remaining product line gaps relating to connectivity and integration in
the patient care environment, enhancement of operational efficiency and asset utilization
of health care facilities and non-invasive clinical therapies that have a close
relationship to our current strengths. |
In addition to the effects of the continued execution of our overall Corporate strategy, other
trends in our businesses which have impacted and may continue to impact performance are outlined
below.
The health care products industry is diverse and highly competitive. Over the long term,
patient demand for services is rising as a result of a number of factors, including an aging
population, increasing life expectancy, enlightened consumers and technological advances. These
long-term trends should create pressure for existing facilities to upgrade and increase efficiency,
caregiver safety and productivity in order to maintain profitability and meet demand in a period of
staffing shortages. Hill-Rom believes that in order for it to achieve its goals of revenue growth
and improved profitability, it will be required to continue to provide innovative, high quality
customer solutions on a cost-effective basis.
In addition, health care providers are under continued pressure to control costs. As a result,
purchasers of health care products and services such as those offered by our health care businesses
continue to demand more cost effective products and services that improve the quality and
efficiency of patient care and service. Specifically, the federal budget deficit is causing
increasing pressure to control costs in the Medicare and Medicaid programs, increasing the
likelihood of health care reform and changes in reimbursement practices. At the state level, while
some easing of budgetary pressures has been noted, fiscal challenges largely remain present with
Medicaid expenditures claiming increasing portions of state budgets. Additionally, health care
providers face cost control pressures due to increasing numbers of
10
uninsured patients and increasing supply costs. Premium increases to health care plans and the
rising uninsured population further exacerbate a difficult reimbursement and economic environment
for providers. In the aggregate, these cost control pressures can also impact the relative
industry-wide demand for sales versus rental options in various product segments, which in turn can
affect the sales versus rental mix of many products in our portfolio.
We continue to monitor implementation of the Medicare Modernization Act. While all of the
implications of this far-reaching law are not yet clear, our current assessment continues to be
that the Act is largely positive to Hill-Rom in the short term due to a variety of favorable
hospital reimbursement provisions. Moreover, increased cost projections associated with the
Medicare reform legislation, along with the growing federal deficit and other factors, could
combine to create what we believe to be conditions favorable to Medicare cost containment measures
in 2005 and beyond.
We derive significant revenues through GPOs. GPOs have come under increasing scrutiny regarding
contracting practices, which have included various Congressional hearings. Over the past year, in
response to Congressional inquiries, the industry had imposed numerous reforms contained in an
industry-designed code of conduct. Despite this effort, federal legislation has been proposed this
year that would direct the Department of Health and Human Services (HHS) to promulgate rules
further defining ethical conduct for GPOs. Observance of these rules, through a certification
process designed by HHS, would be a precondition for GPOs to accept administrative fees from
hospital suppliers. Additionally, those fees would be capped at 3 percent. We believe the
likelihood of passage this year is remote. However, the issue is likely to be revisited by the
next Congress. While it is not possible to determine the full impact of potential legislation,
based on our understanding of the bills intent, we do not anticipate a significant impact to our
business in the near future.
We have been subject to increasing competitive pressure in areas in which we have not brought
sufficient new products and features to market in the past. Hill-Roms increased commitment to new
product development is expected to generate additional growth opportunities in 2005 and beyond.
Fundamentally, Hill-Roms strategy is aimed at providing three value propositions that management
believes should directly address long-term customer needs: improving the operational efficiency of
health care facilities; providing improved patient outcomes, thereby reducing length of stay and
costs; and, improving caregiver safety and efficiency. Management believes substantial opportunity
exists to grow in these areas by utilizing Hill-Roms global rental service center network, its
clinical sales force and its strong position in capital equipment. The recently completed
acquisitions of ARI, Mediq and NaviCare aim to take advantage of these opportunities. Because of
our concentration in sales of capital equipment, we are susceptible to short-term demand
fluctuations resulting from economic and regulatory changes and the timing of new product
introductions. We intend to accelerate our efforts in non-capital products and services, which we
believe will provide a more stable revenue stream. Meanwhile, Hill-Rom continues to focus on
increasing its cost competitiveness in light of growing price pressures and low cost competitors,
particularly in low- to mid-range products.
Hill-Rom sales and profitability have historically been disproportionately weighted toward the
latter part of each quarter and generally weighted toward the latter part of each fiscal year, due
to a combination of sales incentives, which influence certain customers to accelerate purchases
otherwise planned for future periods, compensation practices and customer capital equipment buying
patterns. However, there is no assurance that these patterns will continue.
In the funeral services products industry, the demand for burial caskets in North America appears
to be gradually but steadily declining as the result of lower age-adjusted mortality rates and a
continued increase in the rate of cremations. The popularity of cremations continues to grow at a
rate of approximately one percentage point each year, now estimated at approximately one-third of
total deaths. Also, Batesville continues to participate in an
11
increasingly competitive environment where overcapacity exists and competitors respond with greater
price concessions (discounts) and more flexible service. Management expects each of these trends,
which have resulted in declines in the volume of casket sales for Batesville over the past three
years, to continue in the future. Although Batesville offers a broad line of cremation products,
these products result in lower revenue and carry overall lower margins than the average burial
product. Partially offsetting these negative trends is a growing demand for enhanced
personalization of funeral products and increased manufacturing and other operational efficiencies.
Based on these trends and factors, Batesvilles strategy to improve profitability in the funeral
services products industry will require Batesville to continue to differentiate its products on the
basis of customer service, quality, innovation and personalization, while at the same time
continuing to control costs through manufacturing efficiencies, strategic sourcing and other cost
reduction efforts.
RESULTS OF OPERATIONS
Effective for fiscal year 2002, we changed our fiscal year-end to September 30 from the
Saturday nearest November 30 of each year. As a result of this change, the Statements of
Consolidated Income (Loss), Statements of Consolidated Cash Flows and Statements of Consolidated
Shareholders Equity and Comprehensive Income presented in this Form 10-K/A reflect the Fiscal
Years Ended September 30, 2004 and 2003, and the Ten Months Ended September 30, 2002.
As a result of the change in fiscal year-end, for purposes of Managements Discussion and Analysis
of Financial Condition and Results of Operations, the following periods of operations are presented
and discussed:
|
|
|
Fiscal Year Ended September 30, 2004 compared to Fiscal Year Ended September 30, 2003 |
|
|
|
|
Fiscal Year Ended September 30, 2003 compared to the unaudited Twelve Months Ended
September 30, 2002 |
|
|
|
|
Fiscal Year Ended September 30, 2003 compared to Ten Months Ended September 30, 2002 |
The discussion of results for the Fiscal Year Ended September 30, 2003 to the unaudited Twelve
Months Ended September 30, 2002 is presented for comparative purposes only. Management considers
this to be a more meaningful presentation than the comparison of the Fiscal Year Ended September
30, 2003 to the Ten Months Ended September 30, 2002. As a result, the explanations related to the
comparative results of the Fiscal Year Ended September 30, 2003 to the Ten Months Ended September
30, 2002 are more abbreviated than for the other comparisons included herein. Unless otherwise
noted, the factors affecting the results for the Ten Months Ended September 30, 2002 are consistent
with those affecting the unaudited results for the twelve months ended on this same date.
Unless otherwise indicated, references to 2002 in the comparative discussions below correspond to
the periods set forth in the heading of each section. Further, the operating results for the
divestitures completed in 2004 (the infant care and piped-medical gas businesses of Hill-Rom as
well as Forethought) are presented as discontinued operations within our Consolidated Statement of
Income (Loss). Under this presentation, the revenues and variable costs associated with these
businesses are removed from the individual line items comprising the Consolidated Statement of
Income (Loss) and presented in a separate section entitled, Discontinued Operations. In
addition, fixed costs related to the businesses that were eliminated with the divestitures are also
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. Except as otherwise indicated, all discussions and presentations of financial results
within Managements Discussion and Analysis are presented based on our results from continuing
operations.
12
The following table presents comparative operating results for all periods discussed within Managements Discussion and Analysis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions except |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share data) |
|
Fiscal |
|
|
|
|
|
Fiscal |
|
|
|
Twelve |
|
|
|
Ten |
|
|
|
|
Year Ended |
|
|
|
|
|
Year Ended |
|
|
|
Months Ended |
|
|
|
Months Ended |
|
|
|
|
September 30, |
|
% of |
|
September 30, |
|
% of |
|
September 30, |
|
% of |
|
September 30, |
|
% of |
|
|
2004 |
|
Revenues |
|
2003 |
|
Revenues |
|
2002 |
|
Revenues |
|
2002 |
|
Revenues |
|
|
(As Restated) |
|
(As Restated) |
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
737 |
|
|
|
40.3 |
|
|
$ |
749 |
|
|
|
44.2 |
|
|
$ |
787 |
|
|
|
45.3 |
|
|
$ |
615 |
|
|
|
44.2 |
|
Health Care rentals |
|
|
452 |
|
|
|
24.7 |
|
|
|
318 |
|
|
|
18.8 |
|
|
|
328 |
|
|
|
18.9 |
|
|
|
268 |
|
|
|
19.2 |
|
Funeral Services sales |
|
|
640 |
|
|
|
35.0 |
|
|
|
628 |
|
|
|
37.0 |
|
|
|
621 |
|
|
|
35.8 |
|
|
|
510 |
|
|
|
36.6 |
|
|
Total Revenues |
|
$ |
1,829 |
|
|
|
100.0 |
|
|
$ |
1,695 |
|
|
|
100.0 |
|
|
$ |
1,736 |
|
|
|
100.0 |
|
|
$ |
1,393 |
|
|
|
100.0 |
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
355 |
|
|
|
48.2 |
|
|
$ |
379 |
|
|
|
50.6 |
|
|
$ |
394 |
|
|
|
50.1 |
|
|
$ |
304 |
|
|
|
49.4 |
|
Health Care rentals |
|
|
203 |
|
|
|
44.9 |
|
|
|
157 |
|
|
|
49.4 |
|
|
|
156 |
|
|
|
47.6 |
|
|
|
127 |
|
|
|
47.4 |
|
Funeral Services sales |
|
|
350 |
|
|
|
54.7 |
|
|
|
349 |
|
|
|
55.6 |
|
|
|
336 |
|
|
|
54.1 |
|
|
|
275 |
|
|
|
53.9 |
|
|
Total Gross Profit |
|
|
908 |
|
|
|
49.6 |
|
|
|
885 |
|
|
|
52.2 |
|
|
|
886 |
|
|
|
51.0 |
|
|
|
706 |
|
|
|
50.7 |
|
Other operating expenses |
|
|
582 |
|
|
|
31.8 |
|
|
|
544 |
|
|
|
32.1 |
|
|
|
585 |
|
|
|
33.7 |
|
|
|
485 |
|
|
|
34.8 |
|
Litigation charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
14.4 |
|
|
|
250 |
|
|
|
17.9 |
|
Special charges |
|
|
6 |
|
|
|
0.3 |
|
|
|
9 |
|
|
|
0.5 |
|
|
|
5 |
|
|
|
0.3 |
|
|
|
4 |
|
|
|
0.3 |
|
|
Operating Profit (Loss) |
|
|
320 |
|
|
|
17.5 |
|
|
|
332 |
|
|
|
19.6 |
|
|
|
46 |
|
|
|
2.6 |
|
|
|
(33 |
) |
|
|
(2.3 |
) |
Other income (expense), net |
|
|
(12 |
) |
|
|
(0.7 |
) |
|
|
(52 |
) |
|
|
(3.1 |
) |
|
|
(27 |
) |
|
|
(1.5 |
) |
|
|
(22 |
) |
|
|
(1.6 |
) |
|
Income (Loss) from
Continuing Operations
Before Income Taxes |
|
|
308 |
|
|
|
16.8 |
|
|
|
280 |
|
|
|
16.5 |
|
|
|
19 |
|
|
|
1.1 |
|
|
|
(55 |
) |
|
|
(3.9 |
) |
Income tax expense (benefit) |
|
|
120 |
|
|
|
6.5 |
|
|
|
99 |
|
|
|
5.8 |
|
|
|
(37 |
) |
|
|
(2.1 |
) |
|
|
(38 |
) |
|
|
(2.7 |
) |
|
Income (Loss) from
Continuing Operations |
|
|
188 |
|
|
|
10.3 |
|
|
|
181 |
|
|
|
10.7 |
|
|
|
56 |
|
|
|
3.2 |
|
|
|
(17 |
) |
|
|
(1.2 |
) |
(Loss) income from
discontinued operations |
|
|
(45 |
) |
|
|
(2.5 |
) |
|
|
8 |
|
|
|
0.5 |
|
|
|
(12 |
) |
|
|
(0.7 |
) |
|
|
7 |
|
|
|
0.5 |
|
|
Net Income (Loss) |
|
$ |
143 |
|
|
|
7.8 |
|
|
$ |
189 |
|
|
|
11.2 |
|
|
$ |
44 |
|
|
|
2.5 |
|
|
$ |
(10 |
) |
|
|
(0.7 |
) |
|
Income (loss) per common
share from continuing
operations |
|
$ |
3.00 |
|
|
|
N/A |
|
|
$ |
2.90 |
|
|
|
N/A |
|
|
$ |
0.90 |
|
|
|
N/A |
|
|
$ |
(0.28 |
) |
|
|
N/A |
|
(Loss) income per common
share from discontinued
operations |
|
|
(0.72 |
) |
|
|
N/A |
|
|
|
0.14 |
|
|
|
N/A |
|
|
|
(0.20 |
) |
|
|
N/A |
|
|
|
0.12 |
|
|
|
N/A |
|
|
Net Income (Loss) per
Common Share Diluted |
|
$ |
2.28 |
|
|
|
N/A |
|
|
$ |
3.04 |
|
|
|
N/A |
|
|
$ |
0.70 |
|
|
|
N/A |
|
|
$ |
(0.16 |
) |
|
|
N/A |
|
|
The financial results presented herein include a number of other items which impact the
comparability between periods. A summary of these items is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Fiscal Year |
|
Twelve Months |
|
Ten Months |
|
|
Ended |
|
Ended |
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
2002 |
|
2002 |
(Dollars in millions) |
|
(As Restated) |
|
(As Restated) |
|
|
|
|
|
|
|
|
|
Pre-tax Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMS claims resolution |
|
$ |
|
|
|
$ |
(3 |
) |
|
$ |
|
|
|
$ |
|
|
Litigation charge |
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
250 |
|
Special charges |
|
|
6 |
|
|
|
9 |
|
|
|
5 |
|
|
|
4 |
|
Operating Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-off of technology asset |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
Other (Income) Expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
|
6 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
Net realized capital (gains)
losses and impairments |
|
|
|
|
|
|
17 |
|
|
|
11 |
|
|
|
11 |
|
Income Taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of tax reserves and
adjustments to valuation
allowance |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items (net-of-tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital (gains)
losses and impairments |
|
|
(2 |
) |
|
|
21 |
|
|
|
30 |
|
|
|
11 |
|
Special charges |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
Loss on impairment
of discontinued operations |
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
13
In the following sections, we provide a high level summary of our consolidated results of
operations for the periods indicated. Immediately following each summary section is a more
comprehensive discussion of revenues and gross profit by operating company.
Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended
September 30, 2003
Summary
Consolidated revenues of $1,829 million in 2004 increased $134 million, or 7.9 percent, compared to
$1,695 million in 2003. The increase in revenue was predominantly related to the 2004
acquisitions, from which ARI and Mediq increased Health Care rental revenues by $61 million and $80
million, respectively, and Mediq and NaviCare increased Health Care sales by $15 million
collectively. Excluding acquisitions, Health Care sales decreased by $27 million and Health Care
rental revenues decreased by $7 million, but were partially offset in consolidation by the increase
in Funeral Services sales of $12 million. Health Care sales experienced declining volumes due to
product transitions, and pricing pressures further compounded the effect of lower volumes on
revenues. Funeral Services continued to experience declining volumes due to a lower death rate and
higher cremations along with unfavorable product line mix, but favorable price realization and
cremation and product accessory growth drove the year-over-year increase in revenues. 2003
revenues also benefited from the
resolution of outstanding claims with the Center for Medicare and Medicaid Services (CMS) related
to previously reserved past due receivables in the amount of approximately $3 million. In 2005,
Health Care sales should benefit from the 2004 new product introductions partially offset by
continued competitive pricing pressures. Health Care rentals are expected to increase resulting
from the full year inclusion of acquired businesses plus additional capital spending. Funeral
Services revenues are expected to continue to be effected by the 2004 items previously mentioned.
Consolidated gross profit increased $23 million or 2.6 percent over the prior year period, again
driven by the acquisitions in Health Care rentals. As a percentage of total revenues, consolidated
gross profit margins of 49.6 percent in 2004 decreased from 52.2 percent in 2003. The lower gross
margin as a percent of revenues was driven by a mix shift from higher margin capital products to
lower margin rental products, especially the MediqÒ product lines, lower volumes at both
Hill-Rom and Batesville Casket and significantly increased material costs driven by higher prices
for steel, red metals and solid woods. Excluding the acquired MediqÒ product lines, gross
profit margins in 2004 would have been 50.9%.
Other operating expenses increased 7.0 percent to $582 million in 2004 compared to $544 million in
2003. Other operating expenses consist of selling, marketing, distribution and general
administrative costs. The higher expense levels were essentially due to the acquisitions of ARI,
Mediq and NaviCare, which added operating expenses of $41 million. Operating expenses have also
increased in 2004 as a result of higher information technology costs associated with the continued
roll-out of our enterprise-wide technology platform, a higher foreign exchange impact on European
operating expenses, higher transportation fuel costs and legal fees. These increases were
partially offset by lower incentive compensation expense of $46 million in 2004 versus 2003 driven
by the results falling short of our targeted incentive levels, as well as realized compensation and
benefit savings associated with the third quarter 2003 Hill-Rom business realignment. In the
fourth quarter of 2003, a pension curtailment charge of approximately $3.5 million was recognized
related to a previously announced pension choice program. As a percentage of revenues, operating
expenses decreased to 31.8 percent in 2004 from 32.1 percent in 2003 as a result of the additional
revenues and synergies from acquired companies, and the lower compensation expense discussed above.
In 2005, other operating expenses are expected to increase resulting from a full year of acquired
business expenses, a higher level of information technology expenses and an increase in incentive
compensation expense. As in 2004, incentive compensation will depend on financial results in 2005.
These
14
increases are expected to be partially offset with continued synergies achieved from
acquisition integrations and lower compensation and benefit savings associated with the 2003 and
2004 Hill-Rom restructuring activities.
Special charges were recognized in both the 2004 and 2003 reporting periods. In 2004, a net
special charge of $6 million was recorded related to restructuring charges at Hill-Rom. In the
third quarter of 2003, a charge of $9 million was recorded related to severance and benefit-related
costs associated with a new business structure at Hill-Rom.
Other Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Fiscal Year |
|
|
|
|
Ended |
|
Ended |
|
|
|
|
September 30, |
|
September 30, |
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
% Change |
|
Interest expense |
|
$ |
(15 |
) |
|
$ |
(19 |
) |
|
|
21.1 |
|
Investment income |
|
|
9 |
|
|
|
9 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
(6 |
) |
|
|
(16 |
) |
|
|
62.5 |
|
Other |
|
|
|
|
|
|
(26 |
) |
|
|
100.0 |
|
|
Other Income (Expense), Net |
|
$ |
(12 |
) |
|
$ |
(52 |
) |
|
|
76.9 |
|
|
Interest expense decreased $4 million to $15 million in 2004 compared to $19 million in 2003.
This decrease resulted from debt actions taken during the 2003 and 2004 fiscal years. We
repurchased $157 million of debt, with interest rates ranging from 6.75 percent to 8.5 percent in
the fourth quarter of fiscal 2003, followed by the repurchase of an additional $47 million in the
third quarter of 2004. In July 2004, we issued $250 million of 4.5 percent debentures. The debt
repurchases described above resulted in charges for the extinguishment of debt of $6 million in
2004 and $16 million in 2003, primarily resulting from premiums paid on the repurchases, partially
offset by recognition of a portion of the deferred gains resulting from the termination of certain
interest rate swaps in 2003 on the associated debt. Other expenses decreased year over year,
primarily resulting from other investment write-downs in 2003, and the investment losses generated
by the private equity limited partnerships retained upon the sale of Forethought.
Income tax expense of $120 million was recognized in 2004 compared to income tax expense of $99
million in 2003. The effective tax rate for 2004 approximated 38.9 percent while in 2003 the tax
rate approximated 35.4 percent. The increase in 2004 resulted in part from the establishment of
valuation allowances on deferred tax assets due to both continued losses in France and capital
losses realized from the divestitures. This increase was also due to additional accruals related
to audit activity by the Internal Revenue Service and various states. These were partially offset
with the benefit from a strategy to restructure the French operations and the recognition of a
related deferred tax asset. The 2003 rate included the effect of a valuation allowance of
approximately $4 million provided in the fourth quarter. The allowance was provided in response to
concerns regarding the utilization of certain foreign deferred tax assets resulting from continued
deterioration in operating results and generally weak economic conditions in certain foreign tax
jurisdictions. Excluding the effect of this valuation allowance, the effective income tax rate for
2003 would have approximated 34 percent.
Income from continuing operations increased in 2004 to $188 million, or $3.00 per diluted share,
compared to $181 million, or $2.90 per diluted share in 2003. The increase related to the decrease
in other income and expense partially offset by the increase in income tax expense in 2004.
Considering the effect of the pre-tax items outlined in the table of unusual items, income from
continuing operations was adversely impacted by $12 million in 2004 and $39 million in 2003.
In February 2004, we entered into a definitive agreement for the sale of Forethought. At that time
an impairment on discontinued operations of $96 million, net of a $33 million income tax
15
benefit,
was recorded based on the terms of the deal. With the subsequent completion of the sale in the
fourth quarter, the net loss was adjusted to $89 million. The lower loss was the result of closing
adjustments associated primarily with an increase in proceeds related to an increase in the
statutory adjusted book value of Forethought, partially offset by additional acquisition costs. In
September 2003, we entered into a definitive agreement to sell the piped-medical gas business of
Hill-Rom. Also in September 2003, we announced an agreement to sell the Air-Shields infant care
business of Hill-Rom. The sale of the piped-medical gas business closed in October 2003 while the
sale of the infant care business closed in the third quarter of fiscal 2004. Net gains were
recognized on the divestitures of both businesses in the combined amount of $18 million.
As a result of these divestitures, and in accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we have
reported these businesses as discontinued operations for all years presented. The results from
discontinued operations reflect a net loss of $45 million in 2004 compared to net income of $8
million in the prior year. The net loss in 2004 included the $89 million loss (net-of-tax) on
impairment of discontinued operations related to Forethought, partially offset by the $18 million
in gains (net-of-tax) recognized on the dispositions of Hill-Roms piped-medical gas and infant
care businesses. The loss was further offset by income from operations at Forethought of $22
million (net-of-tax), which increased from the prior year due to an
improvement in net capital gains and losses recognized at Forethought, along with income from
operations for the piped-medical gas and infant care businesses of a combined $4 million
(net-of-tax). (See Note 3 to Consolidated Financial Statements for further details).
Operating Company Results of Operations
Health Care
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
(Dollars in millions) |
|
2004 |
|
|
2003 |
|
|
% Change |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
737 |
|
|
$ |
749 |
|
|
|
(1.6 |
) |
Health Care rentals |
|
$ |
452 |
|
|
$ |
318 |
|
|
|
42.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
382 |
|
|
$ |
370 |
|
|
|
3.2 |
|
Health Care rentals |
|
$ |
249 |
|
|
$ |
161 |
|
|
|
54.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
355 |
|
|
$ |
379 |
|
|
|
(6.3 |
) |
% of revenues |
|
|
48.2 |
% |
|
|
50.6 |
% |
|
|
|
|
Health Care rentals |
|
$ |
203 |
|
|
$ |
157 |
|
|
|
29.3 |
|
% of revenues |
|
|
44.9 |
% |
|
|
49.4 |
% |
|
|
|
|
Health Care Sales
Health Care sales decreased $12 million in 2004 compared to 2003. In Americas/Asia Pacific,
revenues were lower by $35 million, driven by the impact of lower volumes of $34 million and
unfavorable pricing of $16 million, partially offset by the favorable impact of the current year
acquisitions of Mediq and NaviCare of $15 million. EMEA revenues increased $23 million due to
favorable effects of exchange rates of $15 million and higher volumes.
16
In Americas/Asia Pacific, lower patient platform volumes partially resulted from market delays in
customer orders caused by the second quarter 2004 introduction of the VersaCareä bed
platform, which replaced our largest selling Advantaä platform with a more feature-rich
product. The patient platform order trends are improving and the backlog as of September 30, 2004
was 13 percent above prior year.
In addition to the disruptions resulting from the introduction of the VersaCare platform, we also
believe our platform revenues have been negatively impacted by competition across the product
range, particularly in the lower price range product lines. This is specifically the product range
in which the CareAssistä bed, which was also launched during the second quarter of 2004,
competes.
In our non-patient platform product offerings, we experienced lower volumes as a result of
non-differentiated products and sales constraints as a result of the focus and prioritization of
the new bed platform launches. In the third quarter, we introduced new headwall architectural
products and completed a new furniture supply agreement which was launched in the fourth quarter of
fiscal 2004. During the fourth quarter we also added sales personnel to further accelerate the
sales of recently introduced products.
EMEA results increased from favorable foreign exchange mentioned above and increased volumes of
approximately $9 million resulting from the relaunch of the new AvantGuard bed platform. Higher
revenues were experienced in all major European markets, with the exception of Germany and Austria.
The Middle East and Africa revenues declined $3 million from the prior year.
Gross profit from Health Care sales decreased $24 million from the prior year. As a percentage of
sales, gross profit was 48.2 percent in 2004 compared to 50.6 percent in 2003. The decrease in
gross profit dollars was primarily associated with lower volumes, along with a general decline in
margin rates compared to prior year, partially offset by a $4 million increase resulting from the
favorable effects of exchange rates. Contributing to the decline in margin rates were continued
pricing pressures, cost pressures in raw material pricing, inflationary wage and benefit expenses,
and unfavorable product mix. The mix of European revenues to total revenues was also higher in
2004 than in the prior year, negatively impacting overall margin rates, as European sales generate
lower margin rates.
Health Care Rentals
Health Care rental revenue increased $134 million. The overall increase in rental revenue was
attributable primarily to the ARI and Mediq acquisitions made during the first two quarters of
2004. ARI increased rental revenues by $61 million, while Mediq contributed $80 million.
Excluding the impact of recent acquisitions, the core rental business revenues in Americas/Asia
Pacific were down nearly $9 million compared to the prior year period due to lower units in use of
approximately $6 million and lower pricing of $3 million. Units in use were down in the wound
business segment primarily in low-end units that experienced increased competition and a shift from
rental to purchase, and the pulmonary market segment, resulting from a shift toward purchase of
pulmonary units, partially offset by increased units in the bariatric area. EMEA rental revenues
were up $2 million, driven by favorable effects of exchange rates amounting to $4 million partially
offset by lower units in use.
Health Care rental gross profit increased $46 million in 2004. The increase in gross profit
dollars was attributable to the acquisitions of ARI and Mediq, which contributed a combined $54
million to the improvement. Excluding acquisitions, the core business declined nearly $8 million
due to lower volumes and pricing, partially offset by an approximate $1 million increase resulting
from the favorable effects of exchange rates. As a percentage of sales, gross profit was 44.9
percent of revenues in 2004 compared to 49.4 percent of revenues in the prior year. Margin rate
declines resulted from higher sales and service costs on lower core volumes and
17
the lower margin
rates of the acquired Mediq® product lines. Only partially offsetting the impact of these items
was the generally higher margin rates experienced at ARI.
Health Care Operating Profit
Health Care sales and rentals combined for an operating profit of $173 million in 2004, which was a
$22 million decline from an operating profit of $195 million in 2003. The primary driver for the
decrease in operating profit was higher operating expenses, which increased by $48 million. The
acquisitions of ARI, Mediq and NaviCare added operating expenses of approximately $41 million.
Related integration costs totaled approximately $6 million for 2004. In addition, operating
expenses increased as a result of higher information technology depreciation costs and distribution
fuel costs. These increases were partially offset by a reduction of approximately 400 core
business positions (excluding the impact of acquisitions) resulting from the Hill-Rom business
restructuring in the third quarter of 2003, decreased incentive compensation expense and favorable
selling commissions. In addition, an increase in gross profit was provided by the acquisitions of
ARI and Mediq.
Health Care operating results in 2004 included net special charges of $6 million primarily related
to severance and benefit-related costs associated with a restructuring announced in the fourth
quarter 2004, as previously discussed. In 2003, Health Care operating results included a special
charge of $9 million related to severance and benefit-related costs associated with the new
business structure previously discussed. This charge was partially offset by the resolution of
outstanding claims with CMS of approximately $3 million.
Funeral Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Fiscal |
|
|
|
|
Year Ended |
|
Year Ended |
|
|
|
|
September 30, |
|
September 30, |
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
% Change |
|
Funeral Services |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
640 |
|
|
$ |
628 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues |
|
$ |
290 |
|
|
$ |
279 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
350 |
|
|
$ |
349 |
|
|
|
0.3 |
|
% of revenues |
|
|
54.7 |
% |
|
|
55.6 |
% |
|
|
|
|
Funeral Services product sales increased $12 million. Favorable price realization (that is, net
revenues after discounts) of $22 million and increased cremations products and other miscellaneous
product accessory revenues of $6 million were partially offset by a 2 percent or $6 million decline
in burial volume, along with $10 million in less favorable mix within product lines reflecting the
continuing broad industry-wide downward mix trend. We believe the decline in volume is primarily
attributable to a soft market due to lower death rates as indicated by preliminary Center for
Disease Control (CDC) death estimates along with the gradual year-over-year estimated increase in
cremations.
Funeral Services gross profit was essentially flat. The decrease in margin as a percent of revenue
was due to lower burial volumes, significantly higher material costs associated with steel, red
metal and solid wood, a gradual product mix shift to products carrying lower margin percentages,
increased fixed manufacturing costs, initial inefficiencies associated with expanding our
manufacturing capabilities in Mexico and higher benefit and insurance costs. These were partially
offset by improved price realization and a reduction of other variable manufacturing costs. Gross
profit percentages are exclusive of distribution costs of $86 million, up from $85 million in the
prior year period, but approximately 13.5 percent of revenues in each year. Despite the decline in
volume, distribution costs increased slightly due
18
primarily to increased fuel costs of
approximately $1 million. Such costs are included in Other operating expenses for all periods.
Funeral Services operating profit of $186 million in 2004 increased $4 million. This slight
year-over-year increase was driven by favorable price realization, manufacturing and production
cost productivity improvements and decreased operating expenses due primarily to lower incentive
compensation expense and lower bad debt expense resulting from the 2003 bankruptcy by one of our
customers. These favorable items were almost entirely offset by the lower burial volume,
unfavorable product line mix, higher material costs driven by significant commodity price increases
and higher operating expenses for customer visitation, ERP amortization, new product development,
fuel and legal costs for labor negotiations.
Fiscal Year Ended September 30, 2003 Compared to Twelve Months Ended
September 30, 2002
Summary
Consolidated revenues of $1,695 million in 2003 decreased $41 million compared to $1,736 million in
2002. The decline in revenue was due, in part, to the impact of the change in fiscal year-end to
September 30 from the Saturday nearest November 30 of each year. This change in year-end had an
adverse impact on the comparison of sales volume to the prior year, as we
had record monthly revenues in November 2001. Also contributing to the revenue decline was the
inclusion of an additional month of sales for certain foreign operations in 2002 as Hill-Rom
discontinued consolidating such operations on a one-month lag in September 2002. This change
benefited 2002 revenues by nearly $17 million. Partially offsetting the decline in revenues were
favorable movements in foreign currency exchange rates of approximately $24 million. 2003 revenues
also benefited from the resolution of outstanding claims with the Center for Medicare and Medicaid
Services (CMS) related to previously reserved past due receivables in the amount of approximately
$3 million.
Consolidated gross profit was flat in 2003 compared to the twelve months ended September 30, 2002.
As a percentage of total revenues, consolidated gross profit margins of 52.2 percent in 2003
increased from 51.0 percent in the twelve months ended September 30, 2002 resulting from favorable
price realization on funeral service revenues and improved manufacturing efficiencies.
Other operating expenses decreased 7.0 percent to $544 million in 2003 compared to $585 million in
2002. As a percentage of revenues, operating expenses decreased to 32.1 percent in 2003 from 33.7
percent in 2002. In the fourth quarter of 2003, a pension curtailment charge of approximately $3.5
million was recognized related to a previously announced pension choice program. Other
operating expenses consist of selling, marketing, distribution and general administrative costs.
The decrease in operating expenses is primarily attributable to lower incentive compensation, legal
and selling-related expenses. The decreased legal expenses are associated primarily with the
Kinetic Concepts, Inc. (KCI) antitrust litigation, which was settled in December 2002. These
decreases were partially offset by increased engineering and product development spending of $10
million in accordance with our business plan and strategy. In addition, a fourth quarter 2002
operating expense charge of $5 million was recognized related to the write-off of a separate
technology asset with no continuing value at Hill-Rom.
Special charges were recognized in both the 2003 and 2002 reporting periods. In the third quarter
of 2003, a charge of $9 million was recorded related to severance and benefit-related costs
associated with the new business structure at Hill-Rom. In 2002, a net special charge of $5
million was recorded related to continued streamlining efforts at all Hillenbrand companies. Also
affecting operating results in 2002 was the $250 million, $158 million net-of-tax, KCI antitrust
litigation charge.
19
Other Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Twelve Months |
|
|
|
|
Ended |
|
Ended |
|
|
|
|
September 30, |
|
September 30, |
|
% |
(Dollars in millions) |
|
2003 |
|
2002 |
|
Change |
|
Interest expense |
|
$ |
(19 |
) |
|
$ |
(18 |
) |
|
|
(5.6 |
) |
Investment income |
|
|
9 |
|
|
|
12 |
|
|
|
(25.0 |
) |
Loss on extinguishment of debt |
|
|
(16 |
) |
|
|
|
|
|
|
N/A |
|
Other |
|
|
(26 |
) |
|
|
(21 |
) |
|
|
(23.8 |
) |
|
Other Income (Expense), Net |
|
$ |
(52 |
) |
|
$ |
(27 |
) |
|
|
(92.6 |
) |
|
Interest expense increased $1 million to $19 million in 2003 compared to $18 million in 2002. This
increase was primarily related to the amortization of debt issuance costs and other expenses
associated with our revolving credit facilities and related amendments. We continued to realize
the benefits of interest rate swaps that converted $150 million of long-term debt from
fixed to variable interest rates as a result of the favorable interest rate environment. In late
June 2003, one of the interest rate swaps was terminated, with the remaining two swaps being
terminated in July 2003. Investment income of $9 million declined from $12 million in 2002, as a
result of lower cash and cash equivalents and the lower interest rate environment. The lower cash
and cash equivalents related primarily to the $175 million, $111 million net-of-tax, payment made
in January 2003 associated with the KCI settlement. As previously mentioned, we incurred a charge
in Other expense of approximately $16 million in conjunction with the completion of a bond tender
offer in the fourth quarter of 2003, which resulted in the retirement of approximately $157 million
of our long-term debt. This charge was composed primarily of the premium paid to repurchase the
outstanding bonds, partially offset by recognition of a portion of the gain associated with the
termination of the interest rate swaps. Other expenses increased year over year, primarily
resulting from other investment write-downs and the investment losses generated by the private
equity limited partnerships that we retained upon the sale of Forethought.
Income tax expense of $99 million was recognized in 2003 compared to an income tax benefit of $37
million in 2002. The effective tax rate for 2003 approximated 35.4 percent. This rate included
the effect of a valuation allowance of approximately $4 million provided in the fourth quarter.
The allowance was provided in response to concerns regarding the utilization of certain foreign
deferred tax assets resulting from continued deterioration in operating results and generally weak
economic conditions in certain foreign tax jurisdictions. Excluding the effect of this valuation
allowance, the effective income tax rate for 2003 would have approximated 34 percent. The tax
benefit in 2002 resulted from the loss recognized in 2002, resulting from the $250 million KCI
antitrust litigation charge, and the release of approximately $32 million of previously provided
tax reserves. These reserves were released as a result of the resolution of certain domestic and
foreign tax matters. Excluding the impact of the prior year KCI antitrust litigation charge and
the release of tax reserves, the effective tax rate in 2002 would have approximated 32.1 percent.
Income from continuing operations increased in 2003 to $181 million, or $2.90 on a diluted earnings
per share basis, compared to $56 million, or $0.90 on a diluted earnings per share basis in 2002.
The increase related primarily to the KCI litigation charge of $250 million, $158 million
net-of-tax, taken in 2002. In addition, 2003 income was adversely impacted by a charge of $16
million, $11 million net-of-tax, in Other expense associated with the completion of a bond tender
offer. Considering the effect of the pre-tax items outlined in the table of unusual items, income
from continuing operations was adversely impacted by $39 million in 2003 and $271 million in 2002.
Income in 2002 was favorably impacted by the release of approximately $32 million of previously
provided tax reserves.
We have reported divested businesses as discontinued operations for all years presented. The
results from discontinued operations reflect net income of $8 million in 2003 compared to a net
20
loss of $12 million in the prior year. The comparative results for discontinued operations were
favorably impacted by lower capital losses at Forethought in 2003 compared to 2002, $21 million
compared to $30 million, respectively, both on a net-of-tax basis, along with general improvements
in the underwriting business and higher investment income at Forethought. The reported loss in
2002 also included $7 million of special charges related to discontinued businesses, offset by a
favorable patent litigation settlement in the amount of approximately $6 million, both on a
net-of-tax basis. The fiscal 2002 loss was also impacted by a higher than normal effective tax
rate associated with the provision of approximately $5 million of deferred tax liability associated
with Forethoughts decision to surrender company-owned life insurance policies. (See Note 3 to
Consolidated Financial Statements for further details).
Operating Company Results of Operations
Health Care
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Twelve |
|
|
|
|
Year Ended |
|
Months Ended |
|
|
|
|
September 30, |
|
September 30, |
|
|
(Dollars in millions) |
|
2003 |
|
2002 |
|
% Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
749 |
|
|
$ |
787 |
|
|
|
(4.8 |
) |
Health Care rentals |
|
$ |
318 |
|
|
$ |
328 |
|
|
|
(3.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
370 |
|
|
$ |
393 |
|
|
|
(5.9 |
) |
Health Care rentals |
|
$ |
161 |
|
|
$ |
172 |
|
|
|
(6.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
379 |
|
|
$ |
394 |
|
|
|
(3.8 |
) |
% of revenues |
|
|
50.6 |
% |
|
|
50.1 |
% |
|
|
|
|
Health Care rentals |
|
$ |
157 |
|
|
$ |
156 |
|
|
|
0.6 |
|
% of revenues |
|
|
49.4 |
% |
|
|
47.6 |
% |
|
|
|
|
|
Health Care Sales
Health Care sales decreased $38 million, or 4.8 percent, in 2003, to $749 million from $787 million
in 2002. As briefly outlined above, the decline in revenues related primarily to lower volumes of
approximately $55 million, due in part to the change in year-end to September 30, and the inclusion
of a 13th month of sales in 2002 for certain foreign operations which increased capital sales an
estimated $15 million. During the fourth quarter of 2002 we discontinued consolidating such
operations on a one-month lag basis. The lower volumes included a year-over-year decline in North
American sales of $27 million, primarily associated with long-term care, maternal care and
architectural products, along with general declines in European volume levels in select markets of
$31 million, most notably in France and Germany. Pricing pressures also negatively impacted
revenues by approximately $3 million in 2003. These declines in revenue were partially offset by
the favorable impacts of foreign currency movements of approximately $20 million.
Gross profit from Health Care sales decreased to $379 million in 2003 from $394 million in the
prior year, a decrease of 3.8 percent. As a percentage of sales, gross profit was 50.6 percent in
2003 compared to 50.1 percent in 2002. The decrease in gross profit dollars was primarily
associated with lower volumes, due in part to the change in fiscal year-end as discussed above.
Lower volumes contributed to approximately $25 million of the decline in gross profit. Also
contributing to the decline were continued pricing pressures in low- to mid-range product
offerings. Lower costs resulting from continuing quality initiatives and improved
21
manufacturing
efficiencies resulted in the overall improvement in gross profit as a percentage of sales.
Health Care Rentals
Health Care rental revenue decreased $10 million, or 3.0 percent, to $318 million in 2003 compared
to $328 million in 2002. Negative experience in terms of realized rate of $13 million, most
notably in home care where prior year revenues were favorably impacted by the collection of certain
previously reserved receivables, was a key driver of the decline. This negative
experience in realized rate was net of the resolution of outstanding claims of approximately $3
million with CMS related to previously reserved past due receivables. The other key driver for the
decline in revenue was lower volume of $16 million. The additional month of revenues in 2002 for
certain foreign operations also had a negative impact on the year-over-year rental revenue
comparison of approximately $2 million. Offsetting these decreases was favorable product mix of
$14 million, resulting primarily from the planned transition from the Efica to the TotalCare rental
solution. Foreign currency movements also favorably impacted revenue by nearly $4 million.
Health Care rental gross profit remained relatively flat in 2003. As a percentage of sales, gross
profit was 49.4 percent of revenues in 2003 compared to 47.6 percent of revenues in the prior year.
The improvement in gross profit margin was attributable to continued improvements in overall field
service and selling costs and the fiscal fourth quarter resolution of outstanding claims of
approximately $3 million with CMS previously discussed, partially offset by the negative effect of
higher specific product warranties in 2003 than in 2002. Lower realized rate, most notably in home
care where the prior year included collections on receivables previously written off, along with
lower volumes partially offset the gross profit improvement.
Health Care Operating Profit
Health Care operating profit of $195 million in 2003 improved from an operating loss of $76 million
in 2002. The primary driver for the increase in operating profit was the prior year $250 million
KCI antitrust litigation charge previously mentioned. Also contributing to the increase were lower
operating expenses, which decreased by $46 million, primarily related to decreased incentive
compensation, legal, bad debt and selling-related costs. Partially offsetting the improvement in
operating expenses was the decline in Health Care sales gross profit, primarily the result of lower
volumes and continued pricing pressures, which more than offset the impact of other efficiencies
and the overall improvement in gross margin rates as a percentage of sales.
Health Care operating results in 2003 included a special charge of $9 million related to severance
and benefit-related costs associated with the new business structure previously discussed. This
charge was partially offset by the resolution of outstanding claims with CMS of approximately $3
million. Operating results in 2002 were impacted by the KCI antitrust litigation charge of $250
million, net special charge activity of essentially zero and a fourth quarter operating expense
charge related to the write-off of a separate technology asset of approximately $5 million. During
2002, a realignment action in Germany was essentially offset by the reversal of prior special
charge provisions in excess of actual requirements.
22
Funeral Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Twelve |
|
|
|
|
Year Ended |
|
Months Ended |
|
|
|
|
September 30, |
|
September 30, |
|
|
(Dollars in millions) |
|
2003 |
|
2002 |
|
% Change |
|
Funeral Services |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
628 |
|
|
$ |
621 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues |
|
$ |
279 |
|
|
$ |
285 |
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
349 |
|
|
$ |
336 |
|
|
|
3.9 |
|
% of revenues |
|
|
55.6 |
% |
|
|
54.1 |
% |
|
|
|
|
|
Funeral Services product sales increased $7 million to $628 million in 2003 from $621 million in
2002. Favorable price realization (that is, net revenues after discounts) of $24 million and
increased revenue from cremation products and other miscellaneous product accessory revenues of $6
million were partially offset by a decline in volume of nearly 5 percent across virtually all
product lines along with a slightly unfavorable product mix. The decline in volume was
attributable to continued lower death rates, an estimated one-point increase in cremation rates and
managements decision to exit some unprofitable product lines in Canada.
Funeral Services gross profit increased 3.9 percent from $336 million, or 54.1 percent of revenue,
in 2002 to $349 million, or 55.6 percent of revenue, in 2003. This increase was due to improved
price realization, continued efficiencies in manufacturing and production costs, savings on
purchased materials related to strategic sourcing efforts and lower inventory provisions related to
excess, obsolete and discontinued product lines than in the prior year. These benefits were
partially offset by lower volumes across essentially all product lines, expected inefficiencies due
to the introduction of a new product line at one of our plants and increased steel prices resulting
from the tariffs imposed by the U.S. government on steel imports in 2002. Gross profit percentages
are exclusive of distribution costs of $85 million, up from $84 million in the prior year period,
but approximately 13.5 percent of revenues in each year. Such costs are included in Other operating
expenses for all periods.
Funeral Services operating profit of $182 million in 2003 increased 7.8 percent as a result of
favorable price realization, continued efficiencies in manufacturing and production costs and
savings on purchased materials related to strategic sourcing efforts. These benefits were
partially offset by lower volumes of nearly 5 percent across essentially all product lines,
expected inefficiencies due to the introduction of a new product line at one of our plants and
increased steel prices resulting from the tariffs enacted in the prior year. Operating expenses
increased $4 million from the prior year, resulting from an increase in uncollectible accounts,
higher costs related to investments in new product development, increased distribution costs
related to higher fuel costs and amortization expense resulting from the acquisition of the
Marsellus intellectual property in 2003. Offsetting the increases in operating expenses were lower
selling costs driven by the lower burial volumes. In 2002, Batesville Casket incurred special
charges of $4 million, related to the closure of a wood casket manufacturing plant in Canada and an
employee reduction action in the United States.
23
Fiscal Year Ended September 30, 2003 Compared to Ten Months Ended September 30, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Ten Months Ended |
(Dollars in millions) |
|
September 30, 2003 |
|
September 30, 2002 |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
|
Revenues |
|
|
|
|
|
Revenues |
Net revenues |
|
$ |
1,695 |
|
|
|
100.0 |
|
|
$ |
1,393 |
|
|
|
100.0 |
|
Gross profit |
|
|
885 |
|
|
|
52.2 |
|
|
|
706 |
|
|
|
50.7 |
|
Operating expenses |
|
|
544 |
|
|
|
32.1 |
|
|
|
485 |
|
|
|
34.8 |
|
Operating profit/(loss) |
|
|
332 |
|
|
|
19.6 |
|
|
|
(33 |
) |
|
|
(2.3 |
) |
Summary
Consolidated revenues for the fiscal year ended September 30, 2003 totaled $1,695 million compared
to $1,393 million for the ten months ended September 30, 2002. Giving consideration to the
different time periods, overall revenues were somewhat higher in 2003 as a result of stronger
Health Care and Funeral Services sales. Benefiting overall Health Care sales were favorable
movements in foreign currency exchange rates of approximately $24 million. Offsetting the Health
Care sales improvement was nearly $17 million of additional revenue recorded in 2002 as a result of
the inclusion of an additional month of sales for certain foreign operations as Hill-Rom
discontinued consolidating such operations on a one-month lag basis in September 2002. 2003
revenues also benefited from the resolution of outstanding claims with the Center for Medicare and
Medicaid Services (CMS) related to previously reserved past due receivables in the amount of
approximately $3 million.
Consolidated gross profit increased to $885 million in 2003. As a percentage of total revenues,
consolidated gross profit margins of 52.2 percent in 2003 increased from 50.7 percent in the ten
months ended September 30, 2002, resulting primarily from favorable price realization in Funeral
Services, lower costs resulting from continued quality initiatives and improved manufacturing
efficiencies.
Other operating expenses decreased to 32.1 percent of revenues for fiscal year 2003 compared to
34.8 percent of revenues for the ten months ended September 30, 2002. In the fourth quarter of
2003, a pension curtailment charge of approximately $3.5 million was recognized related to a
previously announced pension choice program. Other operating expenses consist of selling,
marketing, distribution and general administrative costs. The decrease in operating expenses as a
percentage of revenues is consistent with the explanation previously provided in the comparison of
twelve-month results for September 30, 2003 and 2002. Operating results for the fiscal year ended
September 30, 2003 included net capital losses and impairment charges of $17 million generated by
the private equity limited partnerships retained upon the sale of Forethought compared to $11
million in 2002. Operating results in 2002 were negatively impacted by a $5 million
operating expense charge related to the write-off of a separate technology asset with no continuing
value at Hill-Rom.
Operating results in 2003 also included a special charge of $9 million related to severance and
benefit-related costs associated with the new business structure at Hill-Rom. Operating results in
2002 included the $250 million KCI antitrust litigation charge and a net special charge of $4
million. The net special charge was associated primarily with a realignment action by Hill-Rom in
Germany and the closure of a wood casket manufacturing plant in Canada and other
employee reduction actions in the United States by Batesville Casket. These charges were partially
offset by the reversal of prior special charge provisions in excess of actual requirements at
Hill-Rom.
An operating profit of $332 million, or 19.6 percent of revenues, was recognized for the 2003
fiscal year, compared to an operating loss of $33 million for the ten months ended September
24
30, 2002. The 2002 operating loss was primarily attributable to the $250 million KCI antitrust
litigation charge previously discussed. The improvement in operating profit as a percentage of
revenues over 2002, in addition to the impact of the KCI litigation charge, related to both higher
gross profit margins, which increased 153 basis points, and lower operating expenses as a
percentage of revenues. The improved gross profit margins resulted from improved product mix,
primarily in Health Care rentals, price realization in Funeral Services sales and the benefits of
cost reduction and realignment efforts throughout the Company. Lower operating expenses as a
percentage of revenues resulted predominantly from lower incentive compensation, legal and
selling-related expenses. The inclusion of an additional month of activity for certain foreign
operations of Hill-Rom had a minimal impact on 2002 operating income.
Other Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
Ten Months |
|
|
|
|
Ended |
|
|
|
|
|
Ended |
|
|
|
|
September 30, |
|
% of |
|
September 30, |
|
% of |
(Dollars in millions) |
|
2003 |
|
Revenues |
|
2002 |
|
Revenues |
|
Interest expense |
|
$ |
(19 |
) |
|
|
(1.1 |
) |
|
$ |
(14 |
) |
|
|
(1.0 |
) |
Investment income |
|
|
9 |
|
|
|
0.5 |
|
|
|
9 |
|
|
|
0.6 |
|
Loss on extinguishment of debt |
|
|
(16 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
(26 |
) |
|
|
(1.5 |
) |
|
|
(17 |
) |
|
|
(1.2 |
) |
|
Other Income (Expense),
Net |
|
$ |
(52 |
) |
|
|
(3.1 |
) |
|
$ |
(22 |
) |
|
|
(1.6 |
) |
|
Interest expense increased in fiscal year 2003 compared to the ten months ended September 30, 2002
as a result of the amortization of debt issuance costs and other expenses associated with our
revolving credit facilities and related amendments and the additional two months in 2003.
Investment income in 2003 was essentially unchanged compared to the ten months ended September 30,
2002, as the additional two months of income were offset by the effects of lower cash and cash
equivalents and the lower interest rate environment. We also recognized a $16 million charge in
Other expense related to the completion of a bond tender offer in the fourth quarter of 2003 as
previously discussed. Other expenses increased year-over-year, primarily as a result of other
investment write-downs in 2003 and the investment losses generated by the private equity limited
partnerships retained upon the sale of Forethought.
The effective income tax rate on income from continuing operations for fiscal year 2003 was
approximately 35.4 percent compared to 68.6 percent for the ten months ended September 30, 2002.
The effective tax rate for 2003 included the effect of a valuation allowance of approximately $4
million provided in the fourth quarter. The allowance was provided in response to concerns
regarding the utilization of certain foreign deferred tax assets resulting from continued
deterioration in operating results and generally weak economic conditions in certain foreign tax
jurisdictions. Excluding the effect of this valuation allowance, the effective tax rate for 2003
would have approximated 34 percent. Income taxes in 2002 were favorably impacted by the release of
previously provided tax reserves associated with the resolution of certain domestic and foreign tax
matters. The release of these reserves benefited income taxes
by $6 million in 2002. Excluding the impact of the KCI antitrust litigation charge and the release
of these reserves, the effective tax rate in 2002 would have approximated 31.5 percent.
Income from continuing operations of $181 million was recognized in 2003 compared to a net loss of
$17 million in 2002. The increase in income was related primarily to the KCI antitrust litigation
charge of $250 million, $158 million net-of-tax, along with the 2002 period including only ten
months.
The results from discontinued operations reflected net income of $8 million in 2003 compared to $7
million for the ten months ended September 30, 2002. Results in 2003 were favorably
25
impacted by the additional two months of earnings included in 2003 compared to the prior year period when we
changed our year-end to September 30, along with improved operating results at Forethought related
to higher underwriting and investment income. This favorability of $12 million was offset by the
negative effects of the higher net capital losses and impairments of $21 million recognized in 2003
compared to $11 in the 2002 period, both on a net-of-tax basis. The reported income for 2002 also
included a favorable patent litigation settlement in the amount of approximately $6 million,
net-of-tax, offset by a provision of approximately $5 million for deferred taxes associated with
Forethoughts decision to surrender company-owned life insurance policies. (See Note 3 to
Consolidated Financial Statement for further details).
Operating Company Results of Operations
Health Care
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Ten |
|
|
|
|
Year Ended |
|
Months Ended |
|
|
|
|
September 30, |
|
September 30, |
|
|
(Dollars in millions) |
|
2003 |
|
2002 |
|
% Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
749 |
|
|
$ |
615 |
|
|
|
21.8 |
|
Health Care rentals |
|
$ |
318 |
|
|
$ |
268 |
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
370 |
|
|
$ |
311 |
|
|
|
19.0 |
|
Health Care rentals |
|
$ |
161 |
|
|
$ |
141 |
|
|
|
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
379 |
|
|
$ |
304 |
|
|
|
24.7 |
|
% of revenues |
|
|
50.6 |
% |
|
|
49.4 |
% |
|
|
|
|
Health Care rentals |
|
$ |
157 |
|
|
$ |
127 |
|
|
|
23.6 |
|
% of revenues |
|
|
49.4 |
% |
|
|
47.4 |
% |
|
|
|
|
Health Care Sales
Health Care sales for the fiscal year ended September 30, 2003 were $749 million compared to $615
million for the ten months ended September 30, 2002. This increase in revenue resulted primarily
from the different time periods and the favorable impacts of foreign currency movements.
Negatively impacting the revenue comparison was the inclusion of an extra month of sales in 2002
for certain foreign operations, with an estimated impact of $15 million on capital sales. North
American sales volumes in the comparable portion of each reporting period demonstrated some
improvement, but this was generally offset by declines in European volumes. Downward pricing
pressure on low- to mid-range product offerings also negatively impacted Health Care sales.
Gross profit for Health Care sales increased to 50.6 percent of revenues for fiscal year 2003
compared to 49.4 percent of revenues for the ten months ended September 30, 2002. The increase in
gross profit percentage was due primarily to lower costs resulting from continuing quality
initiatives and improved manufacturing efficiencies.
Health Care Rentals
Health Care rental revenues were $318 million for fiscal year 2003 compared to $268 million for the
ten months ended September 30, 2002. The additional two months of rental revenue combined with
favorable foreign currency movements and favorable product mix drove the increase. This was offset
by generally lower units in use and lower rate realization for most
26
product lines, which put added
pressure on rental revenues. The extra month of sales in 2002 for certain foreign operations
previously mentioned increased 2002 Health Care rental revenues by approximately $2 million.
Health Care rental gross profit increased to 49.4 percent of revenues for fiscal year 2003 compared
to 47.4 percent of revenues for the ten months ended September 30, 2002. The improvement in gross
profit percentage was attributable to continued improvements in overall field service and selling
costs and the fiscal fourth quarter resolution of approximately $3 million of past due and fully
reserved receivables with CMS previously discussed, partially offset by the negative effect of
higher product warranties in 2003. Lower realized rate, most
notably in home care, where the prior year included collections on receivables previously written
off, along with lower volumes partially offset the gross profit improvement.
Health Care Operating Profit
Health Care operating profit of $195 million in 2003 increased from an operating loss of $136
million for the ten months ended September 30, 2002 primarily as a result of the $250 million KCI
antitrust litigation charge included in 2002 and the difference in the length of the time periods
under comparison. The improvement in operating profit was also favorably impacted by the increased
gross profit margins for both Health Care sales and Health Care rentals and the decline in
operating expenses as a percentage of revenues, as previously discussed.
Health Care operating results for fiscal year 2003 included a $9 million special charge related to
severance and benefit-related costs associated with the new business structure at Hill-Rom. This
was partially offset by the resolution of outstanding claims with CMS of approximately $3 million.
For the ten months ended September 30, 2002, operating results included the $250 million KCI
antitrust litigation charge and a net special charge of $1 million as a small realignment action in
Germany was partially offset by the reversal of prior special charge provisions in excess of actual
requirements. Operating results in 2002 also included an operating expense charge of $5 million
related to the write-off of a technology asset with no continuing value.
Funeral Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Ten |
|
|
|
|
Year Ended |
|
Months Ended |
|
|
|
|
September 30, |
|
September 30, |
|
|
(Dollars in millions) |
|
2003 |
|
2002 |
|
% Change |
|
Funeral Services |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
628 |
|
|
$ |
510 |
|
|
|
23.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues |
|
$ |
279 |
|
|
$ |
235 |
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
349 |
|
|
$ |
275 |
|
|
|
26.9 |
|
% of revenues |
|
|
55.6 |
% |
|
|
53.9 |
% |
|
|
|
|
Funeral Services product sales for fiscal year 2003 were $628 million compared to $510 million for
the ten months ended September 30, 2002. Overall, excluding the impact of different time periods,
volume declines across virtually all product lines were more than offset by improved price
realization and increased revenue from cremation products and other miscellaneous product accessory
revenues over the prior year. The decline in volume was attributable to lower death rates, an
estimated one-percentage point increase in cremation rates and managements decision to exit some
unprofitable product lines in Canada.
Funeral Services gross profit increased to 55.6 percent of revenues for fiscal year 2003 compared
to 53.9 percent of revenues for the ten months ended September 30, 2002. This increase is due to
favorable price realization, continued efficiencies in manufacturing and
27
production costs, savings
on purchased materials resulting from strategic sourcing efforts and lower inventory provisions
than in the prior year. These benefits were partially offset by expected inefficiencies due to the
introduction of a new product line at one of the Companys plants and increased steel prices
resulting from the tariffs enacted in the prior year. Gross profit percentages are exclusive of
distribution costs of 13.5 percent and 13.8 percent of revenues for 2003 and 2002, respectively,
which are included in Other operating expenses.
Funeral Services operating profit as a percentage of revenue improved nearly 175 basis points in
2003 compared to 2002, primarily as a result of the increased gross profit margins discussed above.
Operating expenses as a percentage of revenue increased slightly, resulting from the same factors
cited in the comparison of twelve months results for September 30, 2003 and 2002. In 2002
Batesville Casket incurred a special charge of $3 million for the closure of a wood casket
manufacturing plant in Canada along with other employee reduction actions in the United States.
LIQUIDITY AND CAPITAL RESOURCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Fiscal Year |
|
Ten Months |
|
|
Ended |
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
2002 |
(Dollars in millions) |
|
(As Restated) |
|
|
|
|
|
|
|
|
|
Cash Flows Provided By (Used In): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
348 |
|
|
$ |
366 |
|
|
$ |
318 |
|
Investing activities |
|
|
(511 |
) |
|
|
(164 |
) |
|
|
(300 |
) |
Financing activities |
|
|
135 |
|
|
|
(155 |
) |
|
|
(15 |
) |
Effect of exchange rate changes on cash |
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
(Decrease) Increase in Cash and Cash
Equivalents |
|
$ |
(27 |
) |
|
$ |
49 |
|
|
$ |
4 |
|
|
Net cash flows from operating activities and selected borrowings have represented our primary
sources of funds for growth of the business, including capital expenditures and acquisitions. We
have not used any off-balance sheet arrangements, other than routine operating leases. Our
financing agreements contain no restrictive provisions or conditions relating to dividend payments,
working capital or additional unsecured indebtedness (except to the extent that a dividend payment
or incurrence of additional unsecured indebtedness would result in a default under our financing
agreements), but there are limitations with respect to secured indebtedness. Our debt agreements
also contain no credit rating triggers. Credit rating changes can, however, impact the cost of
borrowings under our financing agreements.
Operating Activities
For the fiscal year ended September 30, 2004, net cash provided by operating activities totaled
$348 million compared to $366 million for the prior year. The operating cash flow was heavily
influenced by the 2004 loss on impairment of discontinued operations of $71 million, net-of-tax,
and the timing of payments made to KCI under the antitrust litigation settlement reached in 2002.
Payments of $175 million ($111 million net-of-tax) and $75 million ($47 million net-of-tax) were
made in January 2003 and December 2003, respectively.
Depreciation, amortization and the write-down of intangibles increased to $108 million in 2004 from
$75 million in 2003. The increase in depreciation and amortization in 2004 related primarily to
the acquisitions of ARI, Mediq and NaviCare during the current year. Amortization expense also
increased as a result of the continued rollout of our enterprise-wide technology platform.
28
Changes in working capital decreased cash from operations. The KCI antitrust litigation payment
referred to above was the primary driver of the decline. Accounts receivable increased over the
prior year, resulting from businesses acquired during the year and an increase in overall days
revenues outstanding. Our Hill-Rom collection operations were recently brought in-house, after
previous management by an outside vendor, in an effort to improve collections activity.
Inventories increased from the prior year-end as a result of increased raw material
costs at Hill-Rom and Batesville Casket, lower volumes and inventory build in response to labor
negotiations with the Steelworkers Union at Batesville Caskets Batesville location, which were
successfully concluded late in the fourth quarter, and inventory build for new product roll-outs
and lower volumes at Hill-Rom. Also contributing to the decline in working capital was a decrease
in accrued incentive compensation driven by results falling short of our targeted incentive levels,
partially offset by year-over-year salary increases. Although accounts payable increased slightly
over the prior year-end, we experienced an overall decline in the management of accounts payable,
as we acquired approximately $18 million of accounts payable in the ARI, Mediq and NaviCare
transactions. A reduction of deferred taxes, influenced by the timing of payments related to the
KCI antitrust litigation referred to above, provided a partial offset to the decline.
Investing Activities
Net cash used in investing activities for the fiscal year ended September 30, 2004 totaled $511
million compared to $164 million for the fiscal year ended September 30, 2003. Capital
expenditures in both periods included expenditures associated with our continuing efforts to move
to a single information technology platform, expenditures related to the introduction of new
products and the replacement of therapy units in the rental fleet. Fiscal year 2004 capital
expenditures also included capital expenditures at ARI, Mediq and NaviCare. Capital expenditures
in 2003 included the purchase by Batesville Casket of certain intellectual property related to the
former Marsellus Casket Company. The year-over-year increase in capital expenditures related
primarily to incremental requirements for the Mediq rental business. Investing activities in 2003
also included $14 million of minority investments made throughout the Company.
Investment activity in fiscal 2004 included $85 million of purchases and capital calls and $85
million provided from sales and maturities. We invest a portion of our excess cash from operations
into highly liquid auction rate municipal bonds. These liquid, current investments accounted for
$81 million of the purchases and $62 million of the sales for fiscal 2004, as they were utilized as
a treasury management strategy to earn better rates of return on available cash. In fiscal 2003,
current investment purchases were $110 million, with sales of $280 million.
On October 17, 2003, we completed our acquisition of ARI. The purchase price was $83 million, plus
an additional $2 million of acquisition costs incurred in relation to the transaction. This
purchase price was subject to certain working capital adjustments at the date of close not to
exceed $12 million, plus additional contingent payments not to exceed $20 million based on ARI
achieving certain net revenue targets. Upon closing, $73.3 million of the purchase price was paid
to the shareholders of ARI, with an additional $9.7 million deferred until a later date. Upon
final determination of the working capital adjustment in January 2004, an additional $11.8 million
was paid to the shareholders of ARI, along with $4 million of the originally deferred payments.
The remaining deferral of $5.7 million is outstanding and accrued in the Consolidated Balance Sheet
as of September 30, 2004. This acquisition was funded directly out of our cash on hand. The
additional payments, including the contingency payments, if any, will be payable no later than the
end of calendar 2005.
We completed our acquisition of Mediq on January 30, 2004. The purchase price and related
acquisition costs for Mediq were approximately $335 million, subject to certain adjustments based
upon the Mediq balance sheet at the date of close. The amount of the working capital adjustments
and all deferred payments were accrued in the Consolidated Balance Sheet as of
29
September 30, 2004.
The purchase was initially funded from cash on hand and from our revolving credit facilities. The
additional payments, including the contingency payments, if any, will be payable no later than the
end of calendar 2005.
In addition, on January 30, 2004, we completed the acquisition of the remaining 84 percent of the
equity of NaviCare that we did not own for approximately $14 million, including deferred
payments of approximately $2 million payable within one year. The purchase was funded from cash on
hand.
We received total cash of approximately $8 million in the acquisitions of ARI, Mediq and NaviCare
during 2004, which were reflected as a decrease in the acquisition price on the Statements of
Consolidated Cash Flows.
The divestiture of the piped-medical gas business was completed in October 2003 with the receipt of
gross proceeds of approximately $13 million. The divestiture of the infant care business was
completed in August 2004 with the receipt of gross proceeds of $31 million.
We also received approximately $105 million of cash proceeds from the disposition of Forethought,
which closed on July 1, 2004. Other consideration from the sale of Forethought included a $92
million seller note receivable, $20 million of FFS preferred stock, $1 million of FFS stock
warrants, $11 million debt service account, $6 million receivable due at the closing of Forethought
Federal Savings Bank, and the transfer of $31 million of private equity limited partnerships. See
Note 3 to the Consolidated Financial Statements for more detail on the Forethought divestiture.
On June 29, 2004, Forethought sold specific real estate partnerships that were part of their
investment portfolio and were originally expected to be retained by Hillenbrand at closing.
Forethought received $104 million in cash proceeds on the sale and recorded a capital loss on the
transaction of approximately $7 million. The loss realized as a result of this transaction is
included in discontinued operations for the year ended September 30, 2004. Included in the sale
were mortgage loans of $54 million related to two of the real estate properties. Accordingly, the
net impact of selling these partnerships resulted in Hillenbrand receiving an additional $50
million in cash proceeds from Forethoughts sale.
Financing Activities
Net cash provided by financing activities totaled $135 million for the fiscal year ended September
30, 2004 compared to net cash used in financing activities of $155 million for the fiscal year
ended September 30, 2003. Cash provided by financing activities in 2004 related to borrowings on
our revolver to initially finance the Mediq acquisition, and the subsequent issuance of $250
million of 4.5 percent coupon senior notes in June 2004, utilized to permanently finance the Mediq
acquisition described above. This increase in cash from financing activities was partially offset
by the open market repurchase of $47 million principal amount of longer maturity, high coupon debt
in June 2004 for approximately $55 million. During the fourth quarter of 2003, we completed a
tender offer to repurchase our outstanding long-term debt, resulting in the repurchase of $157
million of our debentures for $185 million. Partially offsetting the cash paid for the bond tender
was $27 million of proceeds received on the termination of interest rate swap agreements, which
were completed in the second half of 2003.
Cash dividends paid increased to $67 million in 2004, compared to $62 million in 2003. Quarterly
cash dividends per share were $0.27 in 2004, $0.25 in 2003 and $0.23 in 2002. With our change in
fiscal year-end to September 30 beginning in 2002, our Board of Directors approved a one-month
dividend of $0.0767 per share, which was paid in March 2002.
Our long-term debt-to-capital ratio was 23.4 percent at September 30, 2004 compared to 11.4 percent
at September 30, 2003. This increase was primarily due to the $250 million debt
30
issuance described
above. This increase was partially offset by the repurchase of $47 million of our debt in the
third quarter of fiscal 2004 and $157 million of our debt during the fourth quarter of fiscal 2003.
Other Liquidity Matters
As of September 30, 2004, cash and cash equivalents (excluding investments in insurance operations)
had decreased $27 million to $128 million from $155 million at September 30, 2003. Current
investments, which are highly liquid securities, increased $19 million to $52 million at September
30, 2004 from $33 million at September 30, 2003.
As outlined above, the primary reason for the decrease related to the acquisitions of ARI, Mediq
and NaviCare during the first six months of 2004, combined with the $75 million payment made in
December 2003 as part of the December 2002 settlement of the antitrust litigation with KCI and the
June 2004 repurchase of $47 million of debt. The impact of these payments was partially offset by
net borrowings from our credit facilities, the June 2004 issuance of $250 million of 4.5 percent
coupon senior notes, net cash flows generated from operations and proceeds received from
divestitures.
On July 28, 2004, we replaced our previously existing senior credit facilities with a $400 million
five-year senior revolving credit facility with a syndicate of banks led by Bank of America, N.A.
and Citigroup North America, Inc. The term of the five-year facility expires on June 1, 2009.
Borrowings under the credit facility bear interest at variable rates, as defined therein. The
availability of borrowings under the five-year facility is subject to our ability at the time of
borrowing to meet certain specified conditions. These conditions are similar to those under the
prior credit facilities, and include, without limitation, a maximum debt to capital ratio of 55
percent. The proceeds of the five-year facility shall be used: (i) for working capital, capital
expenditures, and other lawful corporate purposes; and (ii) to finance acquisitions.
As of September 30, 2004, we: (i) had $15 million of outstanding, undrawn letters of credit under
the five-year facility, (ii) were in compliance with all conditions set forth under the facility
and (iii) had complete access to the remaining $385 million of borrowing capacity available under
that facility.
We have additional uncommitted credit lines totaling $15 million that have no commitment fees,
compensating balance requirements or fixed expiration dates. As of September 30, 2004, we had $13
million of outstanding, undrawn letters of credit under these facilities.
We intend to continue to pursue acquisition candidates, but the timing, size or success of any
acquisition effort and the related potential capital commitments cannot be predicted. We expect to
fund future acquisitions primarily with cash on hand, cash flow from operations and borrowings,
including the unborrowed portion of the five-year credit facility, but we may also issue additional
debt and/or equity in connection with acquisitions.
In this regard, on July 14, 2003, we filed a universal shelf registration statement with the U.S.
Securities and Exchange Commission on Form S-3 for the potential sale of up to $1 billion in debt
and/or equity securities. The registration statement was declared effective and should provide us
with significant flexibility with respect to our access to the public markets. There can be no
assurance that additional financing under the universal shelf registration statement or elsewhere
will be available at terms acceptable to us. On June 7, 2004, we issued $250 million of senior
notes from this universal shelf registration statement, leaving $750 million of available capacity
under the universal registration statement.
During 2004, we repurchased 475,200 shares of our common stock in the open market. As of September
30, 2004, we had Board of Directors approval to repurchase 2,840,000 additional shares. We may
consider additional repurchases of shares if justified by the stock price or other considerations.
Repurchased shares are to be used for general business purposes.
31
We believe that cash on hand, marketable securities, cash generated from operations and amounts
available under our five-year credit facility along with amounts available from the capital
markets, will be sufficient to fund operations, working capital needs, capital expenditure
requirements and financing obligations. However, in connection with the Spartanburg antitrust
litigation, if a class is certified and the plaintiffs prevail at trial, potential damages
awarded the plaintiffs could have a material adverse effect on our financial condition and
liquidity.
Contractual Obligations and Contingent Liabilities and Commitments
To give a clear picture of matters potentially impacting our liquidity position, following are
tables of contractual obligations and commercial commitments as of September 30, 2004 (all amounts
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
Contractual |
|
|
|
|
|
Less than |
|
1 - 3 |
|
4 - 5 |
|
After 5 |
Obligations |
|
Total |
|
1 year |
|
years |
|
years |
|
years |
|
Long-Term Debt |
|
$ |
360 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
256 |
|
|
$ |
104 |
|
Interest Payments
Relating to Long-
Term Debt (1) |
|
$ |
161 |
|
|
$ |
19 |
|
|
$ |
37 |
|
|
$ |
37 |
|
|
$ |
68 |
|
Information
Technology
Infrastructure (2) |
|
$ |
159 |
|
|
$ |
27 |
|
|
$ |
54 |
|
|
$ |
52 |
|
|
$ |
26 |
|
Capital Lease
Obligations |
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
Operating Lease
Obligations |
|
$ |
75 |
|
|
$ |
22 |
|
|
$ |
30 |
|
|
$ |
20 |
|
|
$ |
3 |
|
Investment
Commitments (3) |
|
$ |
19 |
|
|
$ |
17 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
|
|
Minimum Pension
Funding (4) |
|
$ |
27 |
|
|
$ |
9 |
|
|
$ |
18 |
|
|
$ |
|
|
|
$ |
|
|
Purchase
Obligations (5) |
|
$ |
17 |
|
|
$ |
17 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total Contractual
Cash Obligations |
|
$ |
820 |
|
|
$ |
112 |
|
|
$ |
142 |
|
|
$ |
365 |
|
|
$ |
201 |
|
|
|
|
(1) |
|
Interest payments on our long-term debt is projected based on the contractual rates of those
debt securities including the $250 million 4.5 percent debt securities dated June 7, 2004.
However, $200 million of our 4.5 percent debt securities are subject to interest rate swap
agreements, effectively converting the securities from 4.5 percent fixed rate interest to
variable rate interest, calculated at LIBOR plus 0.15 percent. For the 2004 period in which
the interest rate swap agreements were outstanding, the average variable interest rate on debt
covered by the swaps approximated 1.7 percent. Since we are unable to project future LIBOR
rates we have opted to project interest payments based on the contractual rates of our debt. |
|
(2) |
|
We are in year two of an agreement with IBM to manage our global information structure
environment, which was announced near the end of the third quarter of fiscal 2003. The
original seven-year agreement had a cumulative estimated cost of $187 million, with a
remaining cumulative estimated cost of $153 million, which will continue to be incurred in
nearly equal amounts over the remaining term of the agreement. During the first year, we |
32
|
|
|
|
|
have on occasion, solicited IBM to perform services that are outside the scope of the original
base agreement. These services can result in a one-time fee or can result in additional
services received and costs incurred over the remaining term of the agreement. Currently, fees
related to out-of-scope services have a cumulative estimated cost of $6 million and are
primarily related to new projects and acquisition activities. These fees have been included and
will be incurred in nearly equal amounts over the remaining term of the agreement. In
conjunction with the recent divestiture of Forethought, the IBM agreement will be renegotiated
during fiscal 2005. We believe that our contractual obligation to IBM can be reduced based upon
the elimination of specific services related to Forethought. |
|
(3) |
|
The investment commitment amounts represent additional commitments to private equity limited
partnerships. The timing of these commitment calls has been estimated based on the current
status of each partnership. These commitments will be funded with existing cash and cash flow
from operations. |
|
(4) |
|
The minimum pension funding represents payments to comply with funding requirements. The
projected payments beyond fiscal 2007 are not currently determinable. |
|
(5) |
|
Purchase obligations represent contractual obligations under various take-or-pay arrangements
entered into as part of the normal course of business. These commitments represent future
purchases in line with expected usage to obtain favorable pricing. The amounts do not include
obligations related to other purchase obligations that are not take-or-pay arrangements. Such
purchase obligations are primarily reflected in purchase orders at fair value that are part of
normal operations, which we do not believe represent firm purchase commitments. We expect to
fund these commitments with operating cash flows. |
Unless a range of amounts is disclosed in the following table, the amounts disclosed represent the
total expected commitment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per |
|
|
|
|
|
|
Period |
|
|
Total |
|
|
|
|
|
|
|
|
Other Commercial |
|
Amounts |
|
Less than |
|
1 - 3 |
|
4 - 5 |
|
Over 5 |
Commitments |
|
Committed |
|
1 year |
|
years |
|
years |
|
years |
|
Standby Letters of
Credit |
|
$ |
28 |
|
|
$ |
28 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
In addition to the contractual obligations and commitments disclosed above, we also have a variety
of other agreements related to the procurement of materials and services and other commitments. We
are not subject to any contracts that commit us to material non-cancelable commitments. While many
of these agreements are long-term supply agreements, some of which are exclusive supply or complete
requirements-based contracts, we are not committed under these agreements to accept or pay for
requirements which are not needed to meet production needs.
In conjunction with the recent acquisition and divestiture activities, we have entered into certain
guarantees and indemnifications of performance with respect to the fulfillment of our commitments
under the respective 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 applicable contract. Those representations and warranties which
survive closing generally survive for periods up to five years or the expiration of the applicable
statutes of limitations. Potential losses under the indemnifications are generally limited to a
portion of the original transaction price, or to other lesser specific dollar amounts for certain
provisions. With respect to sale transactions, we also routinely enter into non-
33
competition
agreements for varying periods of time. Guarantees and indemnifications with respect to
acquisition and divestiture activities would not materially affect our financial condition or
results of operations.
With respect to capital expenditures, we expect capital spending in 2005 to approximate $160
million before consideration of additional capital requirements for new business acquisitions.
Shareholders Equity
Cumulative treasury stock acquired in open market and private transactions increased in 2004 to
21,449,067 shares. As of September 30, 2004, we had Board of Directors authorization to
repurchase up to a total of 2,840,000 additional shares of our common stock. Repurchased shares
are to be used for general business purposes. From the cumulative shares acquired, 620,619 shares,
net of shares converted to cash to pay withholding taxes, were reissued during fiscal 2004 under
provisions of our various stock-based compensation plans.
OTHER ISSUES
Special Charges
2004 Actions
During the fourth fiscal quarter of 2004, we announced a restructuring intended to better align
Hill-Roms financial and personnel resources to fully support its growth initiatives, decrease
overall costs, and improve performance in Europe. The plan includes the elimination of
approximately 130 salaried positions in the U.S. and approximately 100 positions in Europe and
resulted in a fourth quarter charge of approximately $7 million, associated with severance and
benefit-related costs. All obligations associated with this action will be settled in cash. Upon
completion, this action is expected to reduce net-operating costs by approximately $16 million
annually. We expect the restructuring to be completed during our 2005 fiscal year.
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 expected to eliminate approximately 300 salaried positions globally.
Hill-Rom also announced it expected to 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. As of September 30, 2004 this action is essentially complete, with less
than $1 million remaining in the reserve. During fiscal 2004 approximately $1 million of the
originally recorded reserve was also reversed. In excess of 280 salaried positions were eliminated
under the action, with over 60 of the original list of terminees being transferred to other
positions in line with Hill-Roms strategy. As of this same date, approximately 90 new positions
had been hired under the new business structure. This action is expected to be fully completed in
the second quarter of fiscal 2005, in combination with the completion of the enterprise-wide
technology platform integration.
2002 Actions
During the fourth 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
34
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
was associated with severance and other costs to be settled in cash while $1 million related to
asset impairments. All activities associated with these charges are now complete.
Other
In addition to the reserve balances outlined above, approximately $3 million of accrued liabilities
were outstanding at September 30, 2004 related to retirement obligations of W August Hillenbrand, a
former Chief Executive Officer of the Company. Mr. Hillenbrand retired in the fourth calendar
quarter of 2000.
CRITICAL ACCOUNTING POLICIES
Our accounting policies, including those described below, require management to make significant
estimates and assumptions using information available at the time the estimates are made. Such
estimates and assumptions significantly affect various reported amounts of assets, liabilities,
revenues and expenses. If future experience differs materially from these estimates and
assumptions, results of operations and financial condition could be affected. A more detailed
description of our accounting policies is included in the Notes to our Consolidated Financial
Statements included in this Form 10-K/A.
Revenue Recognition
Net revenues reflect gross revenues less sales discounts and allowances and customer returns for
product sales and a provision for uncollectible receivables for rentals. Revenue recognition for
product sales and rentals is evaluated under the following criteria:
|
|
Evidence of an arrangement: Revenue is recognized when there is
evidence of an agreement with the customer reflecting the terms
and conditions to deliver products or services. |
|
|
Delivery: For products, delivery is considered to occur upon
receipt by the customer and the transfer of title and risk of
loss. For rental services, delivery is considered to occur when
the services are rendered. |
|
|
Fixed or determinable price: The sales price is considered fixed
or determinable if it is not subject to refund or adjustment. |
|
|
Collection is deemed probable: At or prior to the time of a
transaction, credit reviews of each customer are performed to
determine the creditworthiness of the customer. Collection is
deemed probable if the customer is expected to be able to pay
amounts under the arrangement as those amounts become due. If
collection is not probable, revenue is recognized when collection
becomes probable, generally upon cash collection. |
As a general interpretation of the above guidelines, revenues for health care products in the
patient care environment and for casket and cremation products in the funeral services portion of
our business are generally recognized upon delivery of the products to the customer and their
assumption of risk of loss and other risks and rewards of ownership. Local business customs and
non-standard sales terms can sometimes result in deviations to this normal practice in certain
instances.
For non-invasive therapy products within our health care business, the majority of product
offerings are rental products for which revenues are recognized consistent with the rendering of
the service and use of products. These revenues are recorded net of a provision for uncollectible
receivables based upon historic payment and coverage patterns for the various products and paying
entities. For The VestÔ product, which was acquired in 2004 with the
35
acquisition of ARI,
revenue is generally recognized at the time of receipt of authorization for billing from the
applicable paying entity based on the specifics of the authorization and the period of product
usage by the patient.
For health care products and services aimed at improving operational efficiency and asset
utilization, various revenue recognition techniques are used, depending on the offering. Service
contract revenue is generally recognized ratably over the contract period, if applicable, or as
services are rendered. Product-related goods are generally recognized upon delivery to the
customer, similar to products in the patient care environment.
Based on estimated product returns and price concessions, a reserve for returns and allowances is
recorded at the time of the sale, resulting in a reduction of revenue. An allowance for doubtful
accounts is recorded based upon the estimated collectibility of receivables, and results in an
increase in operating expenses.
Liabilities for Loss Contingencies Related to Lawsuits
We are involved on an ongoing basis in claims and lawsuits relating to our operations, including
environmental, antitrust, patent infringement, business practices, commercial transactions and
other matters. The ultimate outcome of these lawsuits cannot be predicted with certainty. An
estimated loss from these contingencies is recognized when we believe it is probable that a loss
has been incurred and the amount of the loss can be reasonably estimated. However, it is difficult
to measure the actual loss that might be incurred related to litigation. The ultimate outcome of
these lawsuits could have a material adverse effect on our financial condition, results of
operations and cash flow.
We are also involved in other possible claims, including product liability, workers compensation,
auto liability and employment related matters. These have deductibles and self-insured retentions
ranging from $150 thousand to $1.5 million per occurrence or per claim, depending upon the type of
coverage and policy period.
Since December 1999, we have purchased deductible reimbursement policies from our wholly-owned
insurance company, Sycamore Insurance Company, Ltd., for the deductibles and self-insured
retentions associated with our product liability, workers compensation and auto liability programs.
Outside insurance company and third-party claims administrators establish individual claim
reserves and an independent outside actuary provides estimates of ultimate projected losses,
including incurred but not reported claims. The actuary also provides estimates for accruals for
losses incurred prior to December 1999.
Claim reserves for employment related matters are established based upon advice from internal and
external counsel and historical settlement information for claims and related fees.
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.
Goodwill and Intangible Assets
We adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of December
2, 2001. Under this Standard, goodwill and certain other indefinite-lived intangible assets are no
longer amortized, but instead are subject to periodic impairment evaluations. We made our initial
transition impairment assessment in 2002 and determined that there was no impairment with respect
to recorded intangible assets. The most recent update completed
during the third quarter of 2004 reconfirmed the lack of any impairment. With the exception of
goodwill, all of our intangible assets are subject to amortization. The majority of our goodwill
resides at Hill-Rom. If we had adopted this Standard as of October 1, 2001, the effect on net
income would not have been material as outlined at Note 1 to the Consolidated Financial Statements.
36
In performing periodic impairment tests, the fair value of the reporting unit is compared to the
carrying value, including goodwill and intangible assets. If the fair value exceeds the carrying
value, there is no impairment. If the carrying value exceeds the fair value, however, an
impairment condition exists. The impairment loss is determined based on the excess of the carrying
value of the goodwill or intangible asset to their respective implied or assigned fair values.
Impairment tests are required to be conducted at least annually, or when events or conditions occur
that might suggest a possible impairment. These events or conditions include, but are not limited
to, a change in the business environment, legal factors, regulatory changes, loss of key personnel,
sale or disposition of a significant portion of a reporting unit or a change in reporting
structure. The occurrence of one of these events or conditions could significantly impact an
impairment assessment, necessitating an impairment charge and adversely affecting our results of
operations.
Stock-Based Compensation
We apply 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 the stock on date
of grant. SFAS No. 123, Accounting for Stock-Based Compensation provides an alternative method
of accounting for stock options based on fair value concepts and the use of an option-pricing
model. Accounting for stock options in accordance with SFAS No. 123 would have reduced our
earnings as outlined in Note 1 to the Consolidated Financial Statements. The Financial Accounting
Standards Board (FASB) currently has a project underway to reconsider the accounting model for
stock-based compensation plans. In October 2004, the FASB deferred the effective date for public
companies of the proposed statement from fiscal years beginning after December 15, 2004 to interim
and annual periods beginning after June 15, 2005. The FASB expects to issue a final standard by
December 31, 2004. The new effective
date will require us to make the required changes in our fourth fiscal quarter of 2005. We will
monitor the progress of this project, assess the impact and make the required changes upon
finalization of the FASB project.
Retirement Plans
We sponsor retirement plans covering a majority of employees. Expense recognized in relation to
defined benefit retirement plans is based upon actuarial valuations and inherent in those
valuations are key assumptions including discount rates, expected returns on assets and projected
future salary rates. We are required to consider current market conditions, including changes in
interest rates, in setting these assumptions. Changes in retirement benefit expense and the
recognized obligation may occur in the future as a result of a number of factors, including changes
to these assumptions. Our expected rate of return on plan assets was 7.75 percent for fiscal years
2004 and 2003. The discount rate was reduced from 6.25 percent in 2003 to 6.00 percent in 2004 and
this 25 basis point change in the discount rate impacted pension expense by approximately $0.5
million. This impact could be positive or negative depending on the direction of the change in
rates. See Note 2 to the Consolidated Financial Statements, which statements are included under
Item 8, for key assumptions and other information regarding recent changes to our retirement plans.
Valuation Allowances Recorded Against Deferred Tax Assets and Allocated Tax Reserves
We have a variety of deferred tax assets in numerous tax jurisdictions. These deferred tax assets
are subject to periodic assessment as to recoverability and if it is determined that it is more
likely than not that the benefits will not be realized, valuation allowances are recognized.
We have recorded valuation allowances against certain of our deferred tax assets, primarily those
related to foreign tax attributes in countries with poor operating results and capital loss
carryforwards in the United States where future capital gains may not be available to realize the
benefit. In evaluating whether it is more likely than not that we would recover these
37
deferred tax
assets, future taxable income, the reversal of existing temporary differences and tax planning
strategies are considered.
We believe that our estimates for the valuation allowances recorded against deferred tax assets are
appropriate based on current facts and circumstances. We currently have $86 million of valuation
allowances on deferred tax assets, on a tax-effected basis, principally related to foreign
operating loss carryforwards and capital loss carryforwards.
Investments
The majority of investments previously reported were held at Forethought and are therefore no
longer part of the current year Consolidated Balance Sheet. In accordance with the provisions of
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, we have
classified our investments in debt and equity securities as available for sale and reported them
at fair value on the Consolidated Balance Sheets. Unrealized gains and losses are charged or
credited to accumulated other comprehensive income (loss) in shareholders equity and deferred
taxes are recorded for the income tax effect of such unrealized gains and losses. The fair value
of investments is predominantly based on market values provided by brokers/dealers or other external
investment advisors.
Upon the sale of Forethought, certain private equity limited partnerships previously held in the
insurance investment portfolio were retained. We continue to use the equity method of accounting,
with earnings or losses reported within Other income in the Statements of Consolidated Income
(Loss). Earnings and values for investments accounted for under the equity method are determined
based on audited financial statements provided by the investment companies. Other minority
investments made outside of the insurance business are accounted for on either a cost or equity
basis, dependent upon our level of influence over the investee.
We regularly evaluate all investments for possible impairment based on current economic conditions,
credit loss experience and other criteria. If there is a decline in a securitys net realizable
value that is other than temporary, the decline is recognized as a realized loss and the cost basis
of the security is reduced to its estimated fair value. Select criteria utilized in analyzing
individual securities for impairment include:
|
|
|
The extent and duration to which the market value of a security was below its cost; |
|
|
|
|
Downgrades in debt ratings; |
|
|
|
|
Significant declines in value, regardless of the length of time the market value was
below cost; |
|
|
|
|
The status of principal and interest payments on debt securities; |
|
|
|
|
Financial condition and recent events impacting companies underlying the securities; and |
|
|
|
|
General economic and industry conditions. |
The evaluation of investments for impairment requires significant judgments to be made including
(i) the identification of potentially impaired securities; (ii) the determination of their
estimated fair value; and (iii) assessment of whether any decline in estimated fair value was other
than temporary. If new information becomes available or the financial condition of the investee
changes, our judgment may change resulting in the recognition of an investment loss at that time.
At September 30, 2004 accumulated other comprehensive income included net unrealized gains on
investments of $12 million, which included unrealized losses of less than $1 million. These
unrealized losses are considered to be temporary.
Environmental Matters
We are committed to operating all of our businesses in a manner that protects the environment. In
the past year, we have been issued Notices of Violation alleging violation of certain
38
environmental
permit conditions. The Notices of Violation involved no fines or penalties. We, however, 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 to be incurred by us in which we are currently
involved is not expected to exceed $1 million. We believe we have provided adequate reserves in
our 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.
Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities. FIN 46 addresses the requirements for business enterprises to consolidate
related entities in which they are determined to be the primary economic beneficiary as a result of
their variable economic interests. In December 2003, the FASB released FIN 46R, that provided a
partial deferral of FIN 46 along with various other amendments. FIN 46R provides guidance related
to evaluating, identifying and reporting of variable interest entities (VIEs). We adopted the new
deferral provisions and amendments of FIN 46R as of the second quarter of fiscal 2004. The
adoption of FIN 46R required the consolidation of four real estate partnerships that were
previously not consolidated. On June 29, 2004, we sold the four real estate partnerships.
Therefore, the amounts previously reported in continuing operations for these four VIEs were
reclassed to discontinued operations for the year ended September 30, 2004. As of September 30,
2004, we no longer hold any investments that would be considered VIEs and require consolidation
under FIN 46R.
In December 2003, the FASB issued SFAS No. 132R, Employers Disclosures about Pensions and Other
Postretirement Benefits. This Statement retains the disclosure requirements contained in SFAS No.
132, which it replaces. SFAS No. 132R also requires additional disclosures about the assets,
obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. Those disclosures include information describing the types
of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and
components of net periodic benefit cost recognized during interim periods. This Statement is
effective for financial statements with fiscal years ending after December 15, 2003. We adopted
this Statement as of the second quarter of fiscal 2004.
In March 2004, the FASB ratified the Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF
03-1 provides guidelines on the meaning of other-than-temporary impairment and its application to
investments, in addition to requiring quantitative and qualitative disclosures in the financial
statements. The disclosure provisions of EITF 03-1 are effective for fiscal years ending after
December 15, 2003. The implementation of the disclosure provisions of EITF 03-1 did not have a
material impact on our Consolidated Financial Statements or results of operations. On September
30, 2004, FASB Staff Position EITF 03-1-1 was issued, which deferred the application of the
measurement provisions of EITF 03-1. The FASB determined that a delay in the effective date of
those provisions was necessary until it can issue additional guidance on the application of EITF
03-1.
39
RISK FACTORS
Our business involves risks. The following information about these risks should be considered
carefully together with the other information contained herein. The risks described below are not
the only risks we face. Additional risks not currently known or deemed immaterial also may result
in adverse effects on our business.
Failure to comply with the Food and Drug Administration (FDA) regulations and similar foreign
regulations applicable to our medical device products could expose us to enforcement actions or
other adverse consequences.
Our health care businesses design, manufacture, install and distribute medical devices that are
regulated by the FDA in the United States and similar agencies in other countries. Failure to
comply with applicable regulations could result in future product recalls, injunctions preventing
shipment of products or other enforcement actions that could have a material adverse effect on the
revenues and profitability of our health care businesses.
Capital equipment sales and rental revenues may be adversely affected by Medicare and state
government Medicaid funding cuts that could affect customers in every segment of our health care
business. We could be subject to substantial fines and possible exclusion from participation in
federal health care programs if we fail to comply with the laws and regulations applicable to our
business.
Medicare, Medicaid and managed care organizations, such as health maintenance organizations and
preferred provider organizations, traditional indemnity insurers and third-party administrators are
increasing pressure to both control health care utilization and to limit reimbursement. Historical
changes to Medicare payment programs from traditional cost-plus reimbursement to a prospective
payment system resulted in a significant change in how our health care customers acquire and
utilize our products. This has resulted in reduced utilization and downward pressure on prices.
Similarly, future revenues and profitability will be subject to the effect of possible changes in
the mix of our patients among Medicare, Medicaid and third-party payor categories, increases in
case management and review of services or reductions in coverage or reimbursement rates by such
payors. A rising uninsured population (estimated by the U.S. Census Bureau to be 45 million)
further exacerbates a challenging reimbursement environment for us. We are subject to stringent
laws and regulations at both the federal and state levels, requiring compliance with extensive and
complex billing, substantiation and record-keeping requirements. If we are deemed to have violated
these laws and regulations, we could be subject to substantial fines and possible exclusion from
participation in federal health care programs such as Medicare and Medicaid.
Continued declines and fluctuations in mortality rates and increased cremations may adversely
affect, as they have in recent years, the volume of Batesville Caskets sales of burial caskets.
As the population of the United States continues to age, the number of deaths in the United States
is expected to continue to increase slightly each year for at least the next couple of decades,
although all factors indicate we experienced a slight decline in fiscal 2004. The aging of the
baby boomer generation will not significantly impact the number of U.S. deaths for some years, as
the oldest of the boomers is currently 57 years of age. Offsetting the aging of the population is
the long-term trend of a decreasing age-adjusted death rate. The life
expectancy of U.S. citizens has increased steadily since the 1950s and is expected to continue to
do so for the foreseeable future.
Cremations as a percentage of total U.S. deaths have increased steadily since the 1960s, and are
also expected to continue to increase for the foreseeable future. The number of U.S. cremations is
currently growing faster than the increase in the number of U.S. deaths, resulting in a contraction
in the demand for burial caskets, which contributed to lower burial
40
casket sales volumes for Batesville Casket in the ten-month transition period ended September 30,
2002, fiscal year 2003 and fiscal year 2004.
Batesville Casket expects these trends to continue into the foreseeable future and Batesville
Caskets burial casket volumes will likely continue to be negatively impacted by these market
conditions. Finally, death rates can vary over short periods of time and among different
geographical areas. Such variations could cause Batesville Caskets sales of burial caskets to
fluctuate from quarter to quarter.
Future financial performance will depend in part on the successful introduction of new products
into the marketplace on a cost-effective basis. The financial success of new products could be
adversely impacted by competitors products, customer acceptance, difficulties in product
development and manufacturing, certain regulatory approvals and other factors.
Future financial performance will depend in part on our ability to influence, anticipate, identify
and respond to changing consumer preferences and needs. We cannot assure that our new products
will achieve the same degree of success that have been achieved historically by our products. We
may not correctly anticipate or identify trends in consumer preferences or needs, or may identify
them later than competitors do. Any strategies we may implement to address these trends may prove
incorrect or ineffective. In addition, difficulties in manufacturing or in obtaining regulatory
approvals may delay or prohibit introduction of new products into the marketplace. Further, we may
not be able to develop and produce new products at a cost that allows us to meet our goals for
profitability, particularly since downward pressure on health care product prices is expected to
continue. Failure to successfully introduce new products on a cost-effective basis, or delays in
customer purchasing decisions related to evaluation of new products, could cause us to lose market
share and could materially adversely affect our business, financial condition, results of
operations and cash flow.
Our health care and funeral services businesses are significantly dependent on several major
contracts with large national providers and group purchasing organizations. Our relationships with
these customers and organizations pose several risks.
In our health care and funeral services businesses, we have several large contracts with national
providers and group purchasing organizations that have varying degrees of purchasing leverage. A
significant portion of our sales in our health care and funeral services products businesses are
made under these contracts. If one or more of these national providers or group purchasing
organizations enters into an exclusive arrangement with another provider or if we otherwise lose
one or more of these contracts or customers for other
reasons, this loss could have an adverse effect on our business, financial condition, results of
operations and cash flow.
The hospital group purchasing organization industry is rapidly changing and facing significant
challenges as individual group purchasing organizations begin to modify their membership
requirements and contracting practices, including conversion of sole sourced agreements to
agreements with multiple suppliers, in response to recent Congressional hearings and public
criticism.
Over the past several years, there has been some industry concern regarding the overall financial
condition of several of the national funeral service providers, and one such customer of Batesville
filed for bankruptcy during the 2003 fiscal year. Although the bankruptcy of this customer did not
by itself materially adversely affect our results of operations should one or more additional
national funeral service providers that are customers of Batesville file for bankruptcy, become
insolvent or otherwise be unable to pay for Batesvilles products, our results of operations could
be materially adversely affected.
Additionally, while our contracts with large health care and funeral services providers and group
purchasing organizations provide important access to several of the largest purchasers of
41
health care and funeral services products, they generally obligate us to sell our products within
certain price parameters, therefore limiting our ability, in the short-term, to raise prices in
response to significant increases in raw material prices or other factors.
Increased prices for or unavailability of raw materials or finished goods used in our products
could adversely affect our profitability or revenues.
Our profitability is affected by the prices of the raw materials and finished goods used in the
manufacture of our products. These prices may fluctuate based on a number of factors beyond our
control, including changes in supply and demand, general economic conditions, labor costs,
competition, import duties, tariffs, currency exchange rates and, in some cases, government
regulation. Significant increases in the prices of raw materials or finished goods that could not
be recovered through increases in the prices of our products could adversely affect our results of
operations. For example, we experienced significantly higher prices in fiscal 2003 and 2004 than
we had in prior periods for steel, a principal raw material used in our funeral services products
business and, to a lesser degree, our health care products business. In addition to steel, we have
also experienced large price increases on other commodities used in the manufacture of our
products, including red metals, solid wood and fuel. Although Batesville has historically been
able to offset such price increases with increases in the prices of its products, there can be no
assurance that our customers will be willing to pay the higher prices or that such prices will
fully offset such price increases in the future. Any further increases in prices resulting from a
tightening supply of steel, and/or other materials could adversely affect our profitability. We
generally do not engage in hedging transactions with respect to raw material purchases, but do
enter into fixed price supply contracts at times. Our decision not to engage in hedging
transactions may result in increased price volatility, with resulting adverse effects on
profitability.
Our dependency upon regular deliveries of supplies from particular suppliers means that
interruptions or stoppages in such deliveries could adversely affect our operations until
arrangements with alternate suppliers could be made. Several of the raw materials and finished
goods used in the manufacture of our products currently are available only from a single source.
If any of these sole source suppliers were unable to deliver these materials for an extended period
of time as a result of financial difficulties, catastrophic events affecting their facilities or
other factors, or if we were unable to negotiate acceptable terms for the supply of materials with
these sole source suppliers, our business could suffer. We may not be able to find acceptable
alternatives, and any such alternatives could result in increased costs. Extended unavailability
of a necessary raw material or finished good could cause us to cease manufacturing one or more
products for a period of time.
We may not be successful in achieving expected operating efficiencies and operating cost reductions
associated with announced restructuring, realignment and cost reduction activities.
In recent periods, we have announced a number of restructuring, realignment and cost reduction
measures, including the significant reorganization of the Hill-Rom business structure announced in
the third quarter of fiscal 2003 followed by the recent fourth quarter 2004 restructuring. These
activities may not provide the full efficiency and cost reduction benefits we expected from these
activities. Further, such benefits may be realized later than expected, and the costs of
implementing these measures may be greater than anticipated. If these measures are not successful,
we may undertake additional realignment and cost reduction efforts, which could result in future
charges. Moreover, our ability to achieve our other strategic goals and business plans may be
adversely affected if our restructuring and realignment efforts prove ineffective.
42
Implementation of our Enterprise Resource Planning system could cause us to make unplanned
expenditures or could cause disruptions in our business.
We currently are in the process of implementing a comprehensive Enterprise Resource Planning (ERP)
business system at Hill-Rom. Although this effort, expected to be completed by mid-2005, was on
schedule and on budget as of September 30, 2004, there can be no assurance that the rollout of the
ERP system will be completed on time and without unplanned expenditures, or that it will not cause
significant disruptions of our business.
Product liability or other liability claims could expose us to adverse judgments or could affect
the sales of our products.
We are involved in the design, manufacture and sale of health care products, which face an inherent
risk of exposure to product liability claims if our products are alleged to have caused injury or
are found to be unsuitable for their intended use. Any such claims could negatively impact the
sales of products that are the subject of such claims or other products. We from time to time, and
currently, are a party to claims and lawsuits alleging that our products have caused injury or
death or are otherwise unsuitable. It is possible that we will receive adverse judgments in such
lawsuits, and any such adverse judgments could be material.
We are involved on an ongoing basis in claims and lawsuits relating to our operations, including
environmental, antitrust, patent infringement, business practices, commercial transactions, and
other matters.
The ultimate outcome of these lawsuits cannot be predicted with certainty but could have a material
adverse effect on our financial condition, results of operations and cash flow. 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 resulting in our assuming exposure for a layer
of coverage with respect to such claims.
Our funeral services business is facing increasing competition from a number of non-traditional
sources, including internet casket retailers, large retail discount stores, and caskets
manufactured abroad.
Non-traditional funeral services retailers could present more of a competitive threat to Batesville
than is currently anticipated. While some of these, like internet casket retailers and third-party
casket stores, have competed against Batesville for a number of years, large discount retailers
such as Costco, which has recently begun selling caskets, represent a more recent competitive
development. Also, we have learned that several manufacturers located in China are currently
manufacturing caskets with the intent to market those caskets in the United States. It is not
possible to quantify the financial impact that these competitors will have on Batesvilles
business, but these competitors will continue to place additional pricing and other competitive
pressures on Batesville that could have a negative impact on Batesvilles results of operations.
We may not be able to execute our growth strategy if we are unable to successfully acquire and
integrate other companies in the health care industry.
Our announced growth plans include acquiring other companies in the health care industry. We may
not be able to identify suitable acquisition candidates, negotiate acceptable terms for such
acquisitions or receive necessary financing for such acquisitions on acceptable terms. Moreover,
once an acquisition agreement is signed, various events or circumstances may either prevent the
successful consummation of the contemplated acquisition, or make it unadvisable. In addition, we
expect to compete against other companies for acquisitions. If we are able to consummate
acquisitions, such acquisitions could be dilutive to earnings, and we could overpay for such
acquisitions. Additionally, we may not be successful in our efforts to integrate
43
acquired companies. Integration of acquired companies will divert management and other resources
from other important matters, and we could experience delays or unusual expenses in the integration
process. Further, we may become responsible for liabilities associated with businesses that we
acquire to the extent they are not covered by indemnification from the sellers or by insurance.
Our success depends on our ability to retain our executive officers and other key personnel.
Our future performance depends in significant part upon the continued service of our executive
officers and other key personnel, many of whom we have hired recently as part of
our strategic initiative to ensure leadership excellence. The loss of the services of one or more
of our executive officers or other key employees could have a material adverse effect on our
business, prospects, financial condition and results of operations. This effect could be
exacerbated if any officers or other key personnel left as a group. Our success also depends on
our continuing ability to attract and retain highly qualified personnel. Competition for such
personnel is intense, and there can be no assurance that we can retain our key employees or
attract, assimilate and retain other highly qualified personnel in the future.
A substantial portion of our workforce is unionized, and we could face labor disruptions that would
interfere with our operations.
As of September 30, 2004, approximately 2,800, or 27 percent, of our employees were covered by
collective bargaining agreements. In the United States and Canada, the collective bargaining
agreements have expiration dates ranging from January 2005 to August 2010. In 2004, four contracts
were renewed including the Batesville Casket steelworkers contract in Batesville that became
effective in October 2004. We have four additional collective bargaining agreements in the United
States and Canada that will expire during the next twelve months. These agreements include three
at Batesville Casket and one at Hill-Rom. Outside of the United States and Canada negotiations
take place as determined by country level requirements, with some elements of employment being
negotiated annually. Although we have not experienced any significant work stoppages in the past
20 years as a result of labor disagreements, we cannot ensure that such a stoppage will not occur
in the future. Inability to negotiate satisfactory new agreements or a labor disturbance at one of
our principal facilities could have a material adverse effect on our operations.
Volatility of our investment portfolio could negatively impact earnings.
Volatility of our investment portfolio with a book value of approximately $79 million could
negatively impact earnings. The investment portfolio, which includes equity partnerships among
other investments, could be adversely affected by general economic conditions, changes in interest
rates, default on debt instruments and other factors, resulting in an adverse impact on financial
condition.
44
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page |
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Financial Statements: |
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46 |
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48 |
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49 |
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50 |
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52 |
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53 |
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54 |
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Financial Statement Schedule for the fiscal years ended September 30, 2004 and September 30, 2003 and the ten months ended September 30, 2002: |
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103 |
|
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
45
REPORT OF MANAGEMENT
(AS RESTATED)
Management of Hillenbrand Industries is responsible for the preparation, fairness and
integrity of our financial statements and other information included in this Form 10-K/A. The
financial statements have been prepared in accordance with generally accepted accounting principles
applied on a materially consistent basis. Where necessary, management has made informed judgments
and estimates as to the outcome of events and transactions, with due consideration given to
materiality.
Management is also responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting, as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934, as amended, is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting
principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements.
Management has revised its Report of Management as originally included in our Annual Report on Form
10-K filed on December 7, 2004. In that report, management concluded that our policies, procedures
and internal control systems provided reasonable assurance that assets were safeguarded and
transactions were properly recorded and executed in accordance with its authorization. Subsequent
to the filing of the Annual Report on Form 10-K, we identified errors in the 2004 and 2003
financial statements and have restated those annual financial statements in this filing on Form
10-K/A. With the identification of these errors, management concluded that the errors resulted
from control deficiencies that represented material weaknesses in internal control over financial
reporting in the areas of accounting for goodwill and income taxes, as further described below.
These errors, as outlined in Note 17 to the Consolidated Financial Statements, related to the
allocation of goodwill to businesses to be disposed of and the accounting for income taxes related
to such dispositions.
A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. As of September 30, 2004, the Company did not
maintain effective controls over (i) the accuracy of its
accounting for goodwill or (ii) the accuracy of its accounting for
income taxes, including the determination of income taxes payable, deferred income tax assets and
liabilities and the related income tax provision. Specifically, the
Company did not have effective controls to properly allocate goodwill
to the carrying value of businesses to be disposed of or effective
review controls over the differences between the income tax basis and the financial reporting basis
associated with the tax losses incurred on the disposition of
discontinued operations. Each of these control deficiencies resulted in the restatement of the Companys 2004 and 2003 annual consolidated
financial statements. Additionally, each of these control
deficiencies could result in a misstatement of the aforementioned
accounts and disclosures that would result in a material misstatement to
annual or interim financial statements that would not be prevented or detected. Accordingly,
management determined that each of these control deficiencies
constituted a material weakness.
46
Rolf A. Classon
Interim President and Chief Executive Officer
Gregory N. Miller
Senior Vice President and Chief Financial Officer
Richard G. Keller
Vice President Controller and Chief Accounting Officer
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 September 30, 2004 and 2003, and the results of their operations and their cash
flows for the fiscal years ended September 30, 2004 and 2003 and the ten months ended September 30,
2002 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 Companys 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 the
standards of the Public Company Accounting Oversight Board (United States). Those standards
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.
As discussed in Note 17 to the consolidated financial statements, the Company has restated its 2004
and 2003 consolidated financial statements and financial statement schedule.
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/s/ PricewaterhouseCoopers LLP
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PricewaterhouseCoopers LLP |
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Cincinnati, Ohio |
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December 3, 2004, except for the restatement discussed in |
Note 17, as to which the date is December 16, 2005 |
48
Hillenbrand Industries, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Dollars in millions except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As Restated |
|
(As Restated |
|
|
|
|
See Note 17) |
|
See Note 17) |
|
|
|
|
Fiscal Year |
|
Fiscal Year |
|
Ten Months |
|
|
Ended |
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
2002 |
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
737 |
|
|
$ |
749 |
|
|
$ |
615 |
|
Health Care rentals |
|
|
452 |
|
|
|
318 |
|
|
|
268 |
|
Funeral Services sales |
|
|
640 |
|
|
|
628 |
|
|
|
510 |
|
|
Total revenues |
|
|
1,829 |
|
|
|
1,695 |
|
|
|
1,393 |
|
|
Cost of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Health Care cost of goods sold |
|
|
382 |
|
|
|
370 |
|
|
|
311 |
|
Health Care rental expenses |
|
|
249 |
|
|
|
161 |
|
|
|
141 |
|
Funeral Services cost of goods sold |
|
|
290 |
|
|
|
279 |
|
|
|
235 |
|
|
Total cost of revenues |
|
|
921 |
|
|
|
810 |
|
|
|
687 |
|
|
Gross Profit |
|
|
908 |
|
|
|
885 |
|
|
|
706 |
|
Other operating expenses |
|
|
582 |
|
|
|
544 |
|
|
|
485 |
|
Litigation charge (Note 16) |
|
|
|
|
|
|
|
|
|
|
250 |
|
Special charges (Note 5) |
|
|
6 |
|
|
|
9 |
|
|
|
4 |
|
|
Operating Profit (Loss) |
|
|
320 |
|
|
|
332 |
|
|
|
(33 |
) |
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(15 |
) |
|
|
(19 |
) |
|
|
(14 |
) |
Investment income |
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
Loss on extinguishment of debt (Note 7) |
|
|
(6 |
) |
|
|
(16 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
(26 |
) |
|
|
(17 |
) |
|
Income (Loss) from Continuing Operations
Before Income Taxes |
|
|
308 |
|
|
|
280 |
|
|
|
(55 |
) |
Income tax expense (benefit) |
|
|
120 |
|
|
|
99 |
|
|
|
(38 |
) |
|
Income (Loss) from Continuing Operations |
|
|
188 |
|
|
|
181 |
|
|
|
(17 |
) |
Discontinued Operations (Note 3): |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
(including loss on impairment of
discontinued operations of $107, $0 and $0) |
|
|
(71 |
) |
|
|
13 |
|
|
|
20 |
|
Income tax (benefit) expense |
|
|
(26 |
) |
|
|
5 |
|
|
|
13 |
|
|
(Loss) income from discontinued operations |
|
|
(45 |
) |
|
|
8 |
|
|
|
7 |
|
|
Net Income (Loss) |
|
$ |
143 |
|
|
$ |
189 |
|
|
$ |
(10 |
) |
|
Income (loss) per common share from
continuing operations Basic |
|
$ |
3.02 |
|
|
$ |
2.91 |
|
|
$ |
(0.28 |
) |
(Loss) income per common share from
discontinued operations Basic |
|
|
(0.72 |
) |
|
|
0.14 |
|
|
|
0.12 |
|
|
Net Income (Loss) per Common Share Basic |
|
$ |
2.30 |
|
|
$ |
3.05 |
|
|
$ |
(0.16 |
) |
|
Income (loss) per common share from
continuing operations Diluted |
|
$ |
3.00 |
|
|
$ |
2.90 |
|
|
$ |
(0.28 |
) |
(Loss) income per common share from
discontinued operations Diluted |
|
|
(0.72 |
) |
|
|
0.14 |
|
|
|
0.12 |
|
|
Net Income (Loss) per Common Share Diluted |
|
$ |
2.28 |
|
|
$ |
3.04 |
|
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per Common Share |
|
$ |
1.08 |
|
|
$ |
1.00 |
|
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding Basic |
|
|
62,237,404 |
|
|
|
62,032,768 |
|
|
|
62,653,922 |
|
|
Average Common Shares Outstanding Diluted |
|
|
62,725,372 |
|
|
|
62,184,537 |
|
|
|
62,653,922 |
|
|
Note: Certain per share amounts may not accurately add due to rounding.
See Notes to Consolidated Financial Statements.
49
Hillenbrand Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
(As Restated |
|
(As Restated |
|
|
See Note 17) |
|
See Note 17) |
|
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
128 |
|
|
$ |
155 |
|
Current investments |
|
|
52 |
|
|
|
33 |
|
Trade accounts receivable, less allowances of
$31 in 2004 and $26 in 2003 (Note 1) |
|
|
417 |
|
|
|
361 |
|
Inventories (Note 1) |
|
|
122 |
|
|
|
92 |
|
Deferred income taxes (Notes 1 and 12) |
|
|
12 |
|
|
|
63 |
|
Other |
|
|
16 |
|
|
|
17 |
|
|
Total current assets |
|
|
747 |
|
|
|
721 |
|
|
|
|
|
|
|
|
|
|
|
Equipment Leased to Others (Note 1) |
|
|
325 |
|
|
|
200 |
|
Less accumulated depreciation |
|
|
174 |
|
|
|
143 |
|
|
Equipment leased to others, net |
|
|
151 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
Property (Note 1) |
|
|
679 |
|
|
|
655 |
|
Less accumulated depreciation |
|
|
458 |
|
|
|
448 |
|
|
Property, net |
|
|
221 |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
Investments (Note 1) |
|
|
79 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
|
|
|
|
|
|
Intangible assets: |
|
|
|
|
|
|
|
|
Goodwill (Notes 1 and 4) |
|
|
429 |
|
|
|
146 |
|
Software and other (Note 1) |
|
|
190 |
|
|
|
106 |
|
Notes receivable, net of discount (Note 6) |
|
|
105 |
|
|
|
|
|
Deferred charges and other assets |
|
|
49 |
|
|
|
41 |
|
|
Total other assets |
|
|
773 |
|
|
|
293 |
|
|
|
|
|
|
|
|
|
|
|
Assets of Discontinued Operations (Note 3) |
|
|
98 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
Insurance Assets (Note 14) |
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
3,334 |
|
Deferred acquisition costs |
|
|
|
|
|
|
695 |
|
Deferred income taxes |
|
|
|
|
|
|
6 |
|
Other |
|
|
|
|
|
|
64 |
|
|
Total insurance assets |
|
|
|
|
|
|
4,099 |
|
|
Total Assets |
|
$ |
2,069 |
|
|
$ |
5,475 |
|
|
50
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
93 |
|
|
$ |
87 |
|
Short-term borrowings |
|
|
11 |
|
|
|
5 |
|
Income taxes payable (Note 12) |
|
|
|
|
|
|
13 |
|
Accrued compensation |
|
|
87 |
|
|
|
104 |
|
Accrued litigation charge (Note 16) |
|
|
|
|
|
|
75 |
|
Accrued product warranties (Note 1) |
|
|
19 |
|
|
|
21 |
|
Accrued customer rebates |
|
|
22 |
|
|
|
22 |
|
Other |
|
|
76 |
|
|
|
52 |
|
|
Total current liabilities |
|
|
308 |
|
|
|
379 |
|
|
Long-Term Debt (Notes 7 and 10) |
|
|
360 |
|
|
|
155 |
|
|
Other Long-Term Liabilities |
|
|
124 |
|
|
|
116 |
|
|
Deferred Income Taxes (Notes 1 and 12) |
|
|
5 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Insurance Liabilities (Note 14) |
|
|
|
|
|
|
|
|
Benefit reserves |
|
|
|
|
|
|
2,728 |
|
Unearned revenue |
|
|
|
|
|
|
806 |
|
General liabilities |
|
|
|
|
|
|
68 |
|
|
Total insurance liabilities |
|
|
|
|
|
|
3,602 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities of Discontinued Operations (Note 3) |
|
|
92 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
889 |
|
|
|
4,265 |
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY (Notes 8 and 9) |
|
|
|
|
|
|
|
|
|
Common stock without par value: |
|
|
|
|
|
|
|
|
Authorized 199,000,000 shares
|
|
|
|
|
|
|
|
|
Issued 80,323,912 shares in 2004 and 2003 |
|
|
4 |
|
|
|
4 |
|
Additional paid-in capital |
|
|
62 |
|
|
|
47 |
|
Retained earnings |
|
|
1,659 |
|
|
|
1,583 |
|
Accumulated other comprehensive income (Note 1) |
|
|
6 |
|
|
|
118 |
|
Treasury stock, at cost: 2004 18,363,520 shares
2003 18,508,939 shares |
|
|
(551 |
) |
|
|
(542 |
) |
|
Total Shareholders Equity |
|
|
1,180 |
|
|
|
1,210 |
|
|
Total Liabilities and Shareholders Equity |
|
$ |
2,069 |
|
|
$ |
5,475 |
|
|
See Notes to Consolidated Financial Statements.
51
Hillenbrand Industries, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As Restated |
|
(As Restated |
|
|
|
|
See Note 17) |
|
See Note 17) |
|
|
|
|
Fiscal Year |
|
Fiscal Year |
|
Ten Months |
|
|
Ended |
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
2002 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
143 |
|
|
$ |
189 |
|
|
$ |
(10 |
) |
Adjustments to reconcile net income (loss) to
net cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and write-down of intangibles |
|
|
108 |
|
|
|
75 |
|
|
|
71 |
|
Accretion and capitalized interest on financing provided on divestiture |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
Net capital (gains) losses Insurance |
|
|
(4 |
) |
|
|
49 |
|
|
|
27 |
|
Litigation charge |
|
|
|
|
|
|
|
|
|
|
250 |
|
Provision for deferred income taxes from continuing operations |
|
|
37 |
|
|
|
71 |
|
|
|
(85 |
) |
Loss on divestiture of discontinued operations, net-of-tax |
|
|
71 |
|
|
|
|
|
|
|
|
|
Loss on disposal of fixed assets |
|
|
11 |
|
|
|
5 |
|
|
|
4 |
|
Loss on extinguishment of debt |
|
|
6 |
|
|
|
16 |
|
|
|
|
|
Change in working capital excluding cash, current
debt, acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(14 |
) |
|
|
(5 |
) |
|
|
34 |
|
Inventories |
|
|
(23 |
) |
|
|
(5 |
) |
|
|
|
|
Other current assets |
|
|
73 |
|
|
|
118 |
|
|
|
(20 |
) |
Trade accounts payable |
|
|
(12 |
) |
|
|
3 |
|
|
|
3 |
|
Accrued expenses and other liabilities |
|
|
(113 |
) |
|
|
(187 |
) |
|
|
(33 |
) |
Change in insurance deferred policy acquisition costs |
|
|
(1 |
) |
|
|
2 |
|
|
|
(24 |
) |
Change in insurance unearned revenue |
|
|
5 |
|
|
|
11 |
|
|
|
2 |
|
Increase in benefit reserves |
|
|
57 |
|
|
|
80 |
|
|
|
70 |
|
Change in other insurance items, net |
|
|
31 |
|
|
|
8 |
|
|
|
9 |
|
Other, net |
|
|
(23 |
) |
|
|
(64 |
) |
|
|
20 |
|
|
Net cash provided by operating activities |
|
|
348 |
|
|
|
366 |
|
|
|
318 |
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and purchase of intangibles |
|
|
(125 |
) |
|
|
(115 |
) |
|
|
(96 |
) |
Proceeds on disposal of property and equipment
leased to others |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
Other investments |
|
|
|
|
|
|
(14 |
) |
|
|
|
|
Proceeds on sales of businesses |
|
|
149 |
|
|
|
|
|
|
|
|
|
Payment for acquisitions of businesses, net of cash acquired |
|
|
(430 |
) |
|
|
|
|
|
|
|
|
Investment purchases and capital calls |
|
|
(85 |
) |
|
|
(110 |
) |
|
|
(89 |
) |
Proceeds on investment sales |
|
|
85 |
|
|
|
280 |
|
|
|
91 |
|
Insurance investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
(616 |
) |
|
|
(1,558 |
) |
|
|
(1,457 |
) |
Proceeds on maturities |
|
|
94 |
|
|
|
356 |
|
|
|
380 |
|
Proceeds on sales |
|
|
417 |
|
|
|
996 |
|
|
|
869 |
|
|
Net cash used in investing activities |
|
|
(511 |
) |
|
|
(164 |
) |
|
|
(300 |
) |
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from interest rate swap terminations |
|
|
|
|
|
|
27 |
|
|
|
|
|
Additions to short-term debt |
|
|
6 |
|
|
|
5 |
|
|
|
|
|
Borrowings of long-term debt |
|
|
541 |
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(346 |
) |
|
|
(185 |
) |
|
|
|
|
Debt issuance costs |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Payment of cash dividends |
|
|
(67 |
) |
|
|
(62 |
) |
|
|
(48 |
) |
Proceeds on exercise of options |
|
|
25 |
|
|
|
3 |
|
|
|
11 |
|
Treasury stock acquired |
|
|
(28 |
) |
|
|
|
|
|
|
(62 |
) |
Insurance deposits received |
|
|
228 |
|
|
|
329 |
|
|
|
314 |
|
Insurance benefits paid |
|
|
(221 |
) |
|
|
(272 |
) |
|
|
(230 |
) |
|
Net cash provided by (used in) financing activities |
|
|
135 |
|
|
|
(155 |
) |
|
|
(15 |
) |
|
Effect of Exchange Rate Changes on Cash |
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
Total Cash Flows |
|
|
(27 |
) |
|
|
49 |
|
|
|
4 |
|
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of period |
|
|
155 |
|
|
|
106 |
|
|
|
102 |
|
|
At end of period |
|
$ |
128 |
|
|
$ |
155 |
|
|
$ |
106 |
|
|
See Notes to Consolidated Financial Statements.
52
Hillenbrand Industries, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
Other |
|
Common Stock |
|
|
|
|
Shares |
|
|
|
|
|
Additional |
|
Retained |
|
Comprehensive |
|
in Treasury |
|
|
|
|
Outstanding |
|
Amount |
|
Paid-in-Capital |
|
Earnings |
|
Income (Loss) |
|
Shares |
|
Amount |
|
Total |
|
Balance at December 1, 2001 |
|
|
62,466,722 |
|
|
$ |
4 |
|
|
$ |
34 |
|
|
$ |
1,514 |
|
|
$ |
(34 |
) |
|
|
17,857,190 |
|
|
$ |
(492 |
) |
|
$ |
1,026 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
9 |
|
Net change in unrealized gain (loss) on
available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
66 |
|
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64 |
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48 |
) |
Treasury shares acquired |
|
|
(1,141,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,141,900 |
|
|
|
(62 |
) |
|
|
(62 |
) |
Stock awards and option exercises |
|
|
377,588 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
(377,588 |
) |
|
|
9 |
|
|
|
19 |
|
|
Balance at September 30, 2002 |
|
|
61,702,410 |
|
|
|
4 |
|
|
|
44 |
|
|
|
1,456 |
|
|
|
40 |
|
|
|
18,621,502 |
|
|
|
(545 |
) |
|
|
999 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (As restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Net change in unrealized gain (loss) on
available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267 |
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62 |
) |
Stock awards and option exercises |
|
|
112,563 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
(112,563 |
) |
|
|
3 |
|
|
|
6 |
|
|
Balance at September 30, 2003
(As Restated, See Note 17) |
|
|
61,814,973 |
|
|
|
4 |
|
|
|
47 |
|
|
|
1,583 |
|
|
|
118 |
|
|
|
18,508,939 |
|
|
|
(542 |
) |
|
|
1,210 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (As restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Net change in unrealized gain (loss) on
available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
(114 |
) |
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
Treasury shares acquired |
|
|
(475,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
475,200 |
|
|
|
(28 |
) |
|
|
(28 |
) |
Stock awards and option exercises |
|
|
620,619 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
(620,619 |
) |
|
|
19 |
|
|
|
34 |
|
|
Balance at September 30, 2004
(As Restated, See Note 17) |
|
|
61,960,392 |
|
|
$ |
4 |
|
|
$ |
62 |
|
|
$ |
1,659 |
|
|
$ |
6 |
|
|
|
18,363,520 |
|
|
$ |
(551 |
) |
|
$ |
1,180 |
|
|
See Notes to Consolidated Financial Statements.
53
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. Material intercompany accounts and transactions have been eliminated in
consolidation.
Change in Fiscal Year
Effective for fiscal year 2002, we changed our fiscal year-end to September 30 from the Saturday
nearest November 30 of each year. As a result of this change, the Statements of Consolidated
Income (Loss), Statements of Consolidated Cash Flows and Statements of Consolidated Shareholders
Equity and Comprehensive Income are presented for the fiscal years ended September 30, 2004 and
2003, and the ten-month period ended September 30, 2002.
Nature of Operations
Hillenbrand Industries is organized into two major operating companies serving the health care and
funeral services industries. Hill-Rom is a manufacturer of equipment for the health care industry,
a provider of associated systems for wound, pulmonary and circulatory care and provides biomedical
equipment rentals and other services to enhance the operational efficiency and asset utilization of
health care facilities. Its products and services are marketed to acute and long-term health care
facilities and home care patients primarily in North America and Europe. Hill-Rom generated 65
percent of Hillenbrands revenues from continuing operations for the fiscal year ended September
30, 2004. Batesville Casket serves the funeral services industry and produces 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 Casket generated 35 percent of Hillenbrands revenues from continuing operations for
the fiscal year ended September 30, 2004. Prior to July 1, 2004, Forethought was our third
operating company, and it marketed funeral plans funded by life insurance policies and trust
products.
We announced the planned divestitures of the infant care and piped-medical gas businesses of
Hill-Rom in the fourth quarter of fiscal 2003 and Forethought in the second quarter of 2004 and
closed the sale of each of those businesses in the first, third and fourth quarters, respectively,
of fiscal 2004, as further described in Note 3 below. These operations are presented as
discontinued operations within our Statements of Consolidated Income (Loss) 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 Statements of Consolidated Income
(Loss) and presented in a separate section entitled, Discontinued Operations. In addition, fixed
costs related to the businesses 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 Consolidated Balance Sheets, the assets and
liabilities of the discontinued operations are also presented separately beginning in the period in
which the businesses were discontinued. On the Statements of Consolidated Cash Flows, proceeds
from the sale of discontinued operations are classified as an investing cash inflow and any losses
are presented as a reconciling item in the reconciliation of net income and net cash provided from
operations. Year-to-date operating, investing and financing activities of the discontinued
operations are reflected within the respective captions of the Statements of Consolidated Cash
Flows up to the disposal date and consistent with previous periods. The remaining assets of
Discontinued operations on the 2004 Consolidated Balance
54
Sheets relate to Forethought Federal
Savings Bank, for which the sale is expected to close during the first half of our 2005 fiscal
year.
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.
Cash and Cash Equivalents
We consider 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 which
have no stated maturity are also considered cash equivalents. All of our marketable securities may
be freely traded.
Current Investments
At September 30, 2004 and 2003, we held $52 million and $33 million, respectively, of current
investments, which consist of auction rate municipal bonds classified as available-for-sale
securities. Our investments in these securities are recorded at cost, which approximates fair
market value due to their variable interest rates, which typically reset every 7 to 35 days, and,
despite the long-term nature of their stated contractual maturities, we have the ability to quickly
liquidate these securities. As a result, we had no cumulative gross unrealized holding gains
(losses) or gross realized gains (losses) from our current investments. All income generated from
these current investments was recorded as Investment income.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest, unless the
transaction is an installment sale with payment terms exceeding one year. The allowance for
doubtful accounts is our best estimate of the amount of probable credit losses in our existing
accounts receivable. We determine the allowance based on historical write-off experience by
industry and the reimbursement platform. We review our allowance for doubtful accounts monthly.
Past due balances in our Health Care and Funeral Services sales
categories are reviewed individually for collectibility. Health Care rental receivables are
reviewed on a pooled basis based on historical collection experience for each reimbursement type.
Account balances are charged against the allowance when we feel it is probable the receivable will
not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.
We generally hold our trade accounts receivable until they are paid. Certain long-term receivables
are occasionally sold to third parties, however, any recognized gain or loss on such sales has
historically not been material.
As of September 30, 2004 and 2003 we had $31 million and $26 million in the allowance for doubtful
accounts.
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 63 percent and 54 percent of our inventories at
September 30, 2004 and 2003, respectively. Costs for other inventories have been determined
principally by the first-in, first-out (FIFO) method. Inventories at the end of each period
consist of the following:
55
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
Finished products |
|
$ |
88 |
|
|
$ |
66 |
|
Work in process |
|
|
10 |
|
|
|
12 |
|
Raw materials |
|
|
24 |
|
|
|
14 |
|
|
Total |
|
$ |
122 |
|
|
$ |
92 |
|
|
If the FIFO method of inventory accounting, which approximates current cost, had been used for all
inventories, they would have been approximately $10 million and $8 million higher than reported at
September 30, 2004 and 2003, respectively.
Equipment Leased to Others
Equipment leased to others represents primarily rental units, which are recorded at cost and
depreciated on a straight-line basis over their estimated economic life, ranging from 2 to 7 years.
Total depreciation expense for fiscal years 2004 and 2003 and the ten months ended September 30,
2002 was $42 million, $21 million and $22 million, respectively. 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. Ranges of estimated useful lives are as follows:
|
|
|
|
|
|
Land improvements
|
|
15 25 years |
Buildings and building equipment
|
|
20 40 years |
Machinery and equipment
|
|
3 10 years |
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 accumulated depreciation
accounts, respectively. The difference, if any, between the net asset value and the proceeds on
sale are charged or credited to income. Total depreciation expense for fiscal years 2004 and 2003
and the ten months ended September 30, 2002 was $42 million, $39 million and $31 million,
respectively. The major components of property and the related accumulated depreciation at
September 30, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
Accumulated |
|
|
Cost |
|
Depreciation |
|
Cost |
|
Depreciation |
|
Land and land improvements |
|
$ |
15 |
|
|
$ |
6 |
|
|
$ |
15 |
|
|
$ |
5 |
|
Buildings and building equipment |
|
|
164 |
|
|
|
100 |
|
|
|
160 |
|
|
|
100 |
|
Machinery and equipment |
|
|
500 |
|
|
|
352 |
|
|
|
480 |
|
|
|
343 |
|
|
Total |
|
$ |
679 |
|
|
$ |
458 |
|
|
$ |
655 |
|
|
$ |
448 |
|
|
Goodwill and Intangible Assets
Intangible assets, consisting predominantly of patents, trademarks and software, are stated at cost
and amortized on a straight-line basis over periods generally ranging from 3 to 20 years. We
review intangible assets for impairment whenever events or changes in circumstances indicate that
the carrying value may not be recoverable or as required by professional standards. If an
intangible asset is considered impaired and the carrying value exceeds its estimated fair value, an
impairment loss is recognized in an amount equal to that excess.
As of December 2, 2001, we adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. This Standard addresses financial accounting and reporting
for acquired goodwill and other intangible assets upon their acquisition and after
56
they have been
initially recognized in the financial statements. Under this Standard, existing intangible assets
were evaluated for possible impairment at the date of transition, and then periodically thereafter
when conditions warrant, but at least annually. In addition, goodwill and certain other
indefinite-lived intangible assets are no longer amortized. We made our initial transition
impairment assessment in 2002 and determined that there was no impairment with respect to recorded
goodwill. The most recent annual test completed during the third quarter of 2004 reconfirmed the
lack of any impairment.
With the exception of goodwill, all of our intangible assets are subject to amortization.
Essentially all of our goodwill resides in the Hill-Rom Americas/Asia Pacific segment. A summary
of intangible assets and the related accumulated amortization as of September 30 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
Accumulated |
(As Restated) |
|
Cost |
|
Amortization |
|
Cost |
|
Amortization |
|
Goodwill |
|
$ |
467 |
|
|
$ |
38 |
|
|
$ |
184 |
|
|
$ |
38 |
|
Software |
|
|
140 |
|
|
|
40 |
|
|
|
126 |
|
|
|
35 |
|
Other |
|
|
168 |
|
|
|
78 |
|
|
|
85 |
|
|
|
70 |
|
|
Total |
|
$ |
775 |
|
|
$ |
156 |
|
|
$ |
395 |
|
|
$ |
143 |
|
|
Amortization expense for fiscal years 2004 and 2003 and the ten months ended September 30, 2002 was
$22 million, $13 million and $11 million, respectively. Intangible asset write-offs approximated
$5 million for the ten months ended September 30, 2002. Amortization expense for all intangibles
is expected to approximate the following for each of the next five fiscal years and thereafter:
$24 million in 2005, $22 million in 2006, $20 million in 2007, $20 million in 2008, $18 million in
2009 and $81 million thereafter.
Goodwill increased $283 million during 2004, resulting from the acquisitions of ARI, Mediq and
NaviCare, all within the Hill-Rom segment. This included $73 million and $197 million from the
acquisitions of ARI and Mediq, respectively. The $13 million of goodwill resulting from the
NaviCare acquisition included approximately $2 million representing the initial investment in
NaviCare made during 2003.
Internal Use Software
Costs associated with internal use software are recorded in accordance with American Institute of
Certified Public Accountants Statement of Position 98-1, Accounting for Costs of Computer Software
Developed or Obtained for Internal Use. Certain expenditures relating to the development of
software for internal use are capitalized in accordance with this Statement, including applicable
costs associated with our implementation of an Enterprise Resource Planning system. Unamortized
computer software costs, included within Intangible assets, were $100 million and $91 million at
September 30, 2004 and 2003, respectively. Capitalized software costs are amortized on a
straight-line basis over periods ranging from five to ten years once the software is ready for its
intended use. Amortization expense approximated $13 million for fiscal year 2004, $11 million for
fiscal year 2003 and $8 million for the ten months ended September 30, 2002.
Investments
The majority of investments previously reported were held at Forethought and are therefore no
longer part of the current year Consolidated Balance Sheet. In accordance with the provisions of
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, we have
classified our investments in debt and equity securities as available for sale and reported them
at fair value on the Consolidated Balance Sheets. Unrealized gains and losses are charged or
credited to accumulated other comprehensive income (loss) in shareholders equity and deferred
taxes are
57
recorded for the income tax effect of such unrealized gains and losses. The fair value
of investments is predominantly based on market values provided by brokers/dealers or other
external investment advisors.
Upon the sale of Forethought, certain private equity limited partnerships previously held in the
insurance investment portfolio were retained. We continue to use the equity method of
accounting for these investments, with earnings or losses reported within Other income in the
Statements of Consolidated Income (Loss). Earnings and values for investments accounted for under
the equity method are determined based on audited financial statements provided by the investment
companies. Other minority investments made outside of the insurance business are accounted for on
either a cost or equity basis, dependent upon our level of influence over the investee.
We regularly evaluate all investments for possible impairment based on current economic conditions,
credit loss experience and other criteria. If there is a decline in a securitys net realizable
value that is other-than-temporary, the decline is recognized as a realized loss and the cost basis
of the security is reduced to its estimated fair value.
The evaluation of investments for impairment requires significant judgments to be made including
(i) the identification of potentially impaired securities; (ii) the determination of their
estimated fair value; and (iii) the assessment of whether any decline in estimated fair value is
other-than-temporary.
Guarantees
We routinely grant limited warranties 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 have longer warranty periods. We recognize a reserve 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. A reconciliation of changes in our warranty reserve for
the fiscal years 2004 and 2003 and the ten months ended September 30, 2002 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
Balance at beginning of period |
|
$ |
21 |
|
|
$ |
23 |
|
|
$ |
22 |
|
|
Provision for warranties during the period |
|
|
14 |
|
|
|
23 |
|
|
|
20 |
|
|
Warranty reserves acquired |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Warranty claims during the period |
|
|
(18 |
) |
|
|
(25 |
) |
|
|
(19 |
) |
|
|
Balance at September 30 |
|
$ |
19 |
|
|
$ |
21 |
|
|
$ |
23 |
|
|
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.
58
In conjunction with our acquisition and divestiture activities, we have entered into select
guarantees and indemnifications of performance with respect to the fulfillment of our commitments
under the respective 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 applicable contract. For those representations and warranties which survive closing,
they generally survive for periods up to five years or the expiration of the applicable statutes of
limitations. Potential losses under the indemnifications are generally 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. Guarantees and indemnifications with respect to acquisition and
divestiture activities would not materially impact our financial condition or results of
operations.
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, 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 we will make payments toward the
remediation plan. We do 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 is
not significant and the estimated time frames to remediate sites are not believed to be lengthy.
Specific costs included in environmental expense include 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.
Self Insurance
We are self-insured up to certain limits for auto and general liability, workers compensation,
general product liability and certain employee health benefits including medical, drug and dental
with the related liabilities included in the accompanying financial statements. Our policy is to
estimate reserves based upon a number of factors including known claims, estimated incurred but not
reported claims and actuarial analysis, which are based on
historical information along with certain assumptions about future events. The estimated reserves
for self insurance are classified as Other current liabilities and Other Long-Term Liabilities
within the Consolidated Balance Sheets.
We carry external medical and disability insurance coverage for the remainder of our eligible
workforce not covered by self-insured plans. We also carry stop-loss insurance coverage to
mitigate severe losses under external and self-insured plans. Insurance benefits are not provided
to retired employees.
Revenue Recognition Sales and Rentals
Net revenues reflect gross revenues less sales discounts and allowances and customer returns for
product sales and a provision for uncollectible receivables for rentals. Revenue recognition for
product sales and rentals is evaluated under the following criteria:
59
|
|
Evidence of an arrangement: Revenue is recognized when there is
evidence of an agreement with the customer reflecting the terms
and conditions to deliver products or services. |
|
|
|
Delivery: For products, delivery is considered to occur upon
receipt by the customer and the transfer of title and risk of
loss. For rental services, delivery is considered to occur when
the services are rendered. |
|
|
|
Fixed or determinable price: The sales price is considered fixed
or determinable if it is not subject to refund or adjustment. |
|
|
|
Collection is deemed probable: At or prior to the time of a
transaction, credit reviews of each customer are performed to
determine the creditworthiness of the customer. Collection is
deemed probable if the customer is expected to be able to pay
amounts under the arrangement as those amounts become due. If
collection is not probable, revenue is recognized when collection
becomes probable, generally upon cash collection. |
As a general interpretation of the above guidelines, revenues for health care products in the
patient care environment and for casket and cremation products in the funeral services portion of
our business are generally recognized upon delivery of the products to the customer and their
assumption of risk of loss and other risks and rewards of ownership. Local business customs and
non-standard sales terms can sometimes result in deviations to this normal practice in certain
instances.
For non-invasive therapy products within our health care business, the majority of product
offerings are rental products for which revenues are recognized consistent with the rendering of
the service and use of products. These revenues are recorded net of a provision for uncollectible
receivables based upon historic payment and coverage patterns for the various products and paying
entities. For The VestÔ product, which was acquired in 2004 with the acquisition of ARI,
revenue is generally recognized at the time of receipt of authorization for billing from the
applicable paying entity based on the specifics of the authorization and the period of product
usage by the patient.
For health care products and services aimed at improving operational efficiency and asset
utilization, various revenue recognition techniques are used, depending on the offering. Service
contract revenue is generally recognized ratably over the contract period, if applicable, or as
services are rendered. Product-related goods are generally recognized upon delivery to the
customer, similar to products in the patient care environment.
Based on estimated product returns and price concessions, a reserve for returns and allowances is
recorded at the time of the sale, resulting in a reduction of revenue. An allowance for doubtful
accounts is recorded based upon the estimated collectibility of receivables, and results in an
increase in operating expenses.
Cost of Revenues
Cost of goods sold for product sales 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 our
rental units, service center facility and personnel costs, and regional sales expenses.
Research and Development Costs
Research and development costs are expensed as incurred and were $56 million and $59 million for
fiscal years 2004 and 2003, respectively, and $42 million for the ten months ended September 30,
2002.
60
Distribution Costs
Distribution costs consist of shipping and handling costs and are included in Other operating costs
in the Statements of Consolidated Income (Loss). Distribution costs were $110 million, $107
million and $90 million for fiscal year 2004, fiscal year 2003 and the ten months ended September
30, 2002, respectively.
Advertising Costs
Advertising costs are expensed as incurred and were $7 million, $6 million and $5 million for
fiscal year 2004, fiscal year 2003 and the ten months ended September 30, 2002, respectively.
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 unissued common shares related to stock-based employee compensation programs. For all
years presented, anti-dilutive stock options were excluded from the calculation of dilutive
earnings per share. Excluded shares were 198,190, 734,432 and 407,887 for fiscal year 2004, fiscal
year 2003 and the ten months ended September 30, 2002, respectively. Cumulative treasury stock
acquired, less cumulative shares reissued, have been excluded in determining the average number of
shares outstanding.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires the net-of-tax effect of unrealized gains
or losses on our available-for-sale securities, foreign currency translation adjustments and
minimum pension liability adjustments, which prior to adoption were reported separately in the
Statements of Consolidated Shareholders Equity, to be included in Comprehensive Income.
The composition of Accumulated other comprehensive income at September 30, 2004 and 2003 is the net
unrealized gains or losses on available-for-sale securities, which in 2003 mainly related to the
insurance portfolio, of $10 million and $124 million, foreign currency translation adjustments of
($2) million and ($5) million, and a minimum pension liability of ($2) million and ($1) million,
respectively.
Stock-Based Compensation
We apply the provisions of Accounting Principles Board (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 fiscal years 2004 and 2003 and the ten months ended
September 30, 2002. The fair value of stock option grants are estimated on the date of grant using
the Black-Scholes option-pricing model (See Note 8 for more details).
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
(As Restated) |
|
(As Restated) |
|
|
|
|
|
Net income (loss), as reported |
|
$ |
143 |
|
|
$ |
189 |
|
|
$ |
(10 |
) |
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation,
net of related tax effects, included in
net income (loss), as reported |
|
|
3 |
|
|
|
1 |
|
|
|
1 |
|
Deduct: |
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation,
net of related tax effects, assuming fair
value based method of accounting |
|
|
(8 |
) |
|
|
(6 |
) |
|
|
(4 |
) |
|
Pro forma net income (loss) |
|
$ |
138 |
|
|
$ |
184 |
|
|
$ |
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
2.30 |
|
|
$ |
3.05 |
|
|
$ |
(0.16 |
) |
Basic pro forma |
|
$ |
2.22 |
|
|
$ |
2.97 |
|
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
2.28 |
|
|
$ |
3.04 |
|
|
$ |
(0.16 |
) |
Diluted pro forma |
|
$ |
2.20 |
|
|
$ |
2.96 |
|
|
$ |
(0.21 |
) |
|
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 and reflect the net tax
effects of temporary differences between the financial reporting carrying amounts of assets and
liabilities and the corresponding income tax amounts.
Derivative Instruments and Hedging Activity
Derivative financial instruments are recognized on the Consolidated Balance Sheets as either assets
or liabilities and are measured at fair value. Changes in the fair value of derivatives are
recorded each period in earnings or Accumulated other comprehensive income, depending on whether a
derivative is designated and effective as part of a hedge transaction, and if it is, the type of
hedge transaction. Gains and losses on derivative instruments reported in Accumulated other
comprehensive income are subsequently included in earnings in the periods in which earnings are
affected by the hedged item. Our use of derivatives is generally limited to interest rate swaps,
which did not have a material effect on our financial position or results of operations.
Foreign Currency Translation
The functional currency of foreign operations is generally the local currency in the country of
domicile. 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 other comprehensive income. Foreign
currency gains and losses resulting from foreign currency transactions are included in results of
operations and are not material.
Insurance Liabilities, Recognition of Insurance Policy Income, and Related Benefits and Expenses
Forethoughts life insurance subsidiaries sold long-duration insurance contracts. Revenue was
recognized on amounts charged to the insurance liabilities for current benefits and expenses.
62
Premiums received in excess of the portion required to provide future benefits and current expenses
were deferred and also recognized as revenue over the actuarially determined life of the contract.
Benefit reserves equaled the cash surrender values provided in the contracts. Expenses were
recorded for interest credited to the benefit reserve, death benefits in excess of the benefit
reserve and amortization of deferred acquisition costs.
Deferred Acquisition Costs
Policy acquisition costs consisting of commissions, certain policy issue expenses and premium
taxes, varied with, and were primarily related to, the production of new business. These deferred
acquisition costs were being amortized consistently with unearned revenues. Amortization charged
to expense for fiscal years 2004 and 2003 and the ten months ended September 30, 2002 was $46
million, $61 million and $44 million, respectively.
Reclassification
Certain prior year amounts have been reclassified to conform to the current years presentation.
See Note 17 for further discussion.
Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities. FIN 46 addresses the requirements for
business enterprises to consolidate related entities in which they are determined to be the primary
economic beneficiary as a result of their variable economic interests. In December 2003, the FASB
released FIN 46R, that provided a partial deferral of FIN 46 along with various other amendments.
FIN 46R provides guidance related to evaluating, identifying and reporting of variable interest
entities (VIEs). We adopted the new deferral provisions and amendments of FIN 46R as of the second
quarter of fiscal 2004. The adoption of FIN 46R required the consolidation of four real estate
partnerships that were previously not consolidated. On June 29, 2004, we sold the four real estate
partnerships (see Note 3). Therefore, the amounts previously reported in continuing operations for
these four VIEs were reclassed to discontinued operations for the year ended September 30, 2004.
As of September 30, 2004, we no longer hold any investments that would be considered VIEs and
require consolidation under FIN 46R.
In December 2003, the FASB issued SFAS No. 132R, Employers Disclosures about Pensions and Other
Postretirement Benefits. This Statement retains the disclosure requirements contained in SFAS No.
132, which it replaces. SFAS No. 132R also requires additional disclosures about
the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans
and other defined benefit postretirement plans. Those disclosures include information describing
the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and
components of net periodic benefit cost recognized during interim periods. This Statement is
effective for financial statements with fiscal years ending after December 15, 2003. We adopted
this Statement as of the second quarter of fiscal 2004.
In March 2004, the FASB ratified the Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF
03-1 provides guidelines on the meaning of other-than-temporary impairment and its application to
investments, in addition to requiring quantitative and qualitative disclosures in the financial
statements. The disclosure provisions of EITF 03-1 are effective for fiscal years ending after
December 15, 2003. The implementation of the disclosure provisions of EITF 03-1 did not have a
material impact on our Consolidated Financial Statements or results of operations. On September
30, 2004, FASB Staff Position EITF 03-1-1 was issued, which deferred the application of the
measurement provisions of EITF 03-1. The FASB determined that a delay in the effective date of
those provisions was necessary until it can issue additional guidance on the application of EITF
03-1.
63
2. Retirement Plans
Hillenbrand and its subsidiaries have several defined benefit retirement plans covering the
majority of employees, including certain employees in foreign countries. We contribute 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 employees level of compensation during specific periods of employment. We
acquired Mediq on January 30, 2004, including its retirement plans. All of our plans have a
September 30 measurement date.
Effect on Operations
The components of net pension expense for defined benefit retirement plans in the United States for
fiscal year 2004 and 2003 and the ten months ended September 30, 2002 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
Service cost |
|
$ |
10 |
|
|
$ |
10 |
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
16 |
|
|
|
14 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
(16 |
) |
|
|
(14 |
) |
|
|
(12 |
) |
|
Amortization of unrecognized prior service cost, net |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Net periodic benefit cost |
|
|
11 |
|
|
|
11 |
|
|
|
9 |
|
|
|
Curtailment (gain) loss |
|
|
(2 |
) |
|
|
3 |
|
|
|
|
|
|
Net pension expense |
|
$ |
9 |
|
|
$ |
14 |
|
|
$ |
9 |
|
|
Obligations and Funded Status
The change in benefit obligations, plan assets and funded status, along with amounts recognized in
the Consolidated Balance Sheets for our domestic defined benefit retirement plans at September 30
were as follows (in millions):
64
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
230 |
|
|
$ |
205 |
|
Acquisition |
|
|
34 |
|
|
|
|
|
Service cost |
|
|
10 |
|
|
|
10 |
|
Interest cost |
|
|
16 |
|
|
|
14 |
|
Amendments |
|
|
1 |
|
|
|
|
|
Actuarial loss |
|
|
9 |
|
|
|
11 |
|
Curtailment |
|
|
(2 |
) |
|
|
(5 |
) |
Benefits paid |
|
|
(8 |
) |
|
|
(5 |
) |
|
Benefit obligation at end of year |
|
|
290 |
|
|
|
230 |
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
180 |
|
|
|
163 |
|
Acquisition |
|
|
23 |
|
|
|
|
|
Actual return on plan assets |
|
|
13 |
|
|
|
13 |
|
Employer contributions |
|
|
8 |
|
|
|
9 |
|
Benefits paid |
|
|
(8 |
) |
|
|
(5 |
) |
|
Fair value of plan assets at end of year |
|
|
216 |
|
|
|
180 |
|
|
Funded status: |
|
|
|
|
|
|
|
|
Plan assets less than benefit obligations |
|
|
(74 |
) |
|
|
(50 |
) |
Unrecognized net actuarial loss |
|
|
21 |
|
|
|
8 |
|
Unrecognized prior service cost |
|
|
12 |
|
|
|
13 |
|
|
Net amount recognized |
|
|
(41 |
) |
|
|
(29 |
) |
|
Amounts recorded in the Consolidated Balance Sheets: |
|
|
|
|
|
|
|
|
Accrued benefit costs |
|
|
(42 |
) |
|
|
(30 |
) |
Accumulated other comprehensive income |
|
|
1 |
|
|
|
1 |
|
|
Net amount recognized |
|
$ |
(41 |
) |
|
$ |
(29 |
) |
|
For all of our defined benefit retirement plans, the fair value of plan assets was less than the
accumulated benefit obligation as of September 30, 2004 and 2003, resulting in the recognition of
minimum pension liabilities of $2 million and $1 million, respectively.
Accumulated Benefit Obligation
The accumulated benefit obligation for all defined benefit pension plans was $255 million and $195
million at September 30, 2004 and 2003, respectively.
Selected information for our plans with accumulated benefit obligation in excess of plan assets at
September 30, 2004 and 2003, was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
Projected benefit obligation |
|
$ |
290 |
|
|
$ |
230 |
|
Accumulated benefit obligation |
|
|
255 |
|
|
|
195 |
|
Fair value of plan assets |
|
|
216 |
|
|
|
180 |
|
65
Actuarial Assumptions
The weighted average assumptions used in accounting for our domestic pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
Discount rate for obligation |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
Discount rate for expense |
|
|
6.25 |
% |
|
|
6.75 |
% |
|
|
7.25 |
% |
Expected rate of return on plan assets |
|
|
7.75 |
% |
|
|
7.75 |
% |
|
|
8.00 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
Plan Assets
The weighted-average asset allocations of our domestic defined benefit plans at September 30, 2004
and 2003, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
|
Target |
|
Actual |
|
Actual |
|
|
Allocation |
|
Allocation |
|
Allocation |
|
Equity securities |
|
|
49-62 |
% |
|
|
57 |
% |
|
|
56 |
% |
Fixed income securities |
|
|
38-48 |
|
|
|
42 |
|
|
|
43 |
|
Real estate |
|
|
1-2 |
|
|
|
1 |
|
|
|
1 |
|
Other |
|
|
0-1 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
The investment strategies and policies are set by the plans fiduciaries. Long-term strategic
investment objectives utilize a diversified mix of equity and fixed income securities to preserve
the funded status of the trusts and balance risk and return. The plan fiduciaries oversee the
investment allocation process, which includes selecting investment managers, setting long-term
strategic targets and monitoring asset allocations. Target allocation ranges are guidelines, not
limitations, and plan fiduciaries may occasionally approve allocations above or below a target
range.
Trust assets are invested subject to the following policy restrictions: short-term securities must
be rated A2/P2 or higher; all fixed-income securities shall have a credit quality rating BBB or
higher; investments in equities in any one company may not exceed 10 percent of the equity
portfolio. Hillenbrand common stock represented 6 percent and 7 percent of trust assets at
year-end 2004 and 2003, respectively and is subject to a statutory limit when it reaches 10 percent
of total trust assets. The overall expected long-term rate of return is based primarily on
historical returns, which are inflation adjusted and weighted for the expected return for each
component of the investment mix.
Cash Flows
We expect to contribute approximately $8 million to our domestic defined benefit plans in fiscal
year 2005.
66
Estimated Future Benefit Payments
The benefit payments, which reflect expected future service, are expected to be paid as follows (in
millions):
|
|
|
|
|
|
|
Pension Benefits |
|
2005 |
|
$ |
8 |
|
2006 |
|
|
9 |
|
2007 |
|
|
10 |
|
2008 |
|
|
11 |
|
2009 |
|
|
12 |
|
2010-2014 |
|
|
83 |
|
Other
Subsequent to the January 30, 2004 acquisition of Mediq, we amended the Mediq pension plan to
freeze all benefits effective April 30, 2004.
During fiscal year 2003, we amended the terms of one of our defined benefit pension plans for most
non-bargained employees. Under the amended plan, employees hired after June 30, 2003 are no longer
eligible for participation in the defined benefit plan, but participate in a new 401(k) retirement
program that began January 1, 2004. Current employees and those hired up to July 1, 2003 were
given the opportunity to choose to continue participating in the defined benefit pension plan and
the existing 401(k) plan or to participate in the new 401(k) retirement program. Elections were
completed as of September 30, 2003, and became effective January 1, 2004.
For those employees that elected to continue participation in the defined benefit pension plan,
there were no changes in benefits and all service is recognized as credited service under the plan.
For those who elected the new 401(k) retirement program, benefits under the defined benefit
pension plan were frozen and will be paid out in accordance with the plan provisions with future
service considered only under the new 401(k) retirement program. We recognized a curtailment loss
of approximately $3.5 million during the fourth fiscal quarter of 2003 as a result of this
amendment and the related reduction in future service under the defined benefit pension plan. This
loss was recognized as a component of Other operating expense in the Statement of Consolidated
Income (Loss).
In addition to the above plans, we have an unfunded liability for a defined benefit pension plan in
Germany. The unfunded benefit obligation of this plan, included in Other long-term liabilities,
was $12 million and $11 million at September 30, 2004 and 2003, respectively. Pension expense was
negligible in all reporting periods.
We also sponsor several defined contribution plans covering certain of our employees. Employer
contributions are made to these plans based on a percentage of employee compensation. The cost of
these defined contribution plans was $13 million for fiscal year 2004, $10 million for fiscal year
2003 and $8 million for the ten months ended September 30, 2002.
3. Discontinued Operations
On July 1, 2004, we closed the sale of Forethought Financial Services, Inc. to FFS Holdings, Inc.,
an acquisition vehicle formed by the Devlin Group, LLC., which acquired all the common stock of
Forethought and its subsidiaries for a combination of cash, seller financing, certain retained
assets of Forethought and stock warrants. Total nominal consideration for the transaction was
approximately $295 million, including the value of the partnership assets transferred to us and
excluding a dividend received by us in December 2003 from Forethought in the amount of
approximately $29 million made in anticipation of the transaction. Hillenbrand received cash
proceeds in the transaction of approximately $105 million, provided seller financing in various
forms with an estimated face value of $151 million, retained specific
67
investments in limited equity
partnership assets of Forethought with a book value of $31 million and received warrants to acquire
up to 5 percent of the common stock of FFS Holdings, Inc. An additional cash payment of
approximately $6 million is due upon the regulatory approval of the sale of Forethought Federal
Savings Bank, which is expected in the first half of fiscal 2005. The final consideration was
subject to adjustment based upon results through the close of the transaction. The seller
financing is subject to a discount of approximately $29 million to reflect a market rate of return
on the financing, which is expected to be recognized in future periods as accretion on the
underlying financial instruments.
The seller financing is in the form of a seller note with a face value of approximately $107
million. This note carries an increasing rate of interest over its ten-year term, with interest
accruing at 6 percent for the first five years. No payments are due under the note until year six
at which time annual payments of $10 million are required, with all remaining amounts, including
unpaid interest, due at maturity. The seller financing also includes preferred stock in the amount
of $29 million, which accrues cumulative dividends at the rate of 5 percent per annum. The
preferred stock is redeemable at any time at the option of FFS Holdings and must be redeemed by FFS
Holdings under specified circumstances. Additional financing was also provided in the form of a
$15 million debt service account associated with third party secured financing obtained by FFS
Holdings under the transaction. We are scheduled to receive payments from this account beginning
in year three with final repayment due in year eight. This account is not subject to interest
until year three.
The divestiture of Forethought resulted in an impairment loss. While this loss will generate
significant tax benefits, as a result of limitations on our ability to utilize capital losses
related to the transaction it is more likely than not that we will not realize these benefits and a
full valuation allowance has been provided. Therefore, tax benefits recognized in conjunction with
the sale will be generally limited to ordinary losses. Additional tax benefits may be recognized
in the future should we generate capital gains sufficient to utilize the resulting losses. In
conjunction with this divestiture, in the three months ended March 31, 2004 we realized a loss on
the impairment of the discontinued net assets of Forethought of $96 million, net-of-tax, consisting
of a $129 million pre-tax loss and a $33 million income tax benefit. In the fourth quarter of
2004, this loss was adjusted to $89 million, net-of-tax, as a result of the book value at the date
of close.
On June 29, 2004, Forethought sold specific real estate partnerships that were part of their
investment portfolio and were originally expected to be retained by Hillenbrand at closing.
Forethought received $104 million in cash proceeds on the sale and recorded a capital loss on the
transaction of approximately $7 million. The loss realized as a result of this transaction is
included in discontinued operations for the year ended September 30, 2004. Included in the sale
were mortgage loans of $54 million related to two of the real estate properties. Accordingly, the
net impact of selling these partnerships resulted in Hillenbrand receiving an additional $50
million in cash proceeds from Forethoughts sale. Our estimated maximum exposure to loss as a
result of continuing involvement with these real estate partnerships was approximately $88 million.
The maximum exposure to loss represented the sum of the carrying value of our investment balances,
the estimated amounts that we were committed to fund in the future for each of these potential
variable interest entities and the maximum amount of debt guaranteed under which we could have been
required to perform. In addition, we had other funding commitments with these real estate
partnerships, which were dependent upon the operating performance of the respective partnerships.
As a result of the sale of these real estate partnerships, the exposure to loss and funding
commitments have been eliminated.
In October 2003, Hill-Rom sold its piped-medical gas business to Beacon Medical Products LLC, for
$13 million, after final purchase price adjustments, resulting in a net gain of $5 million. The
piped-medical gas business provided medical gas delivery and management systems in acute care
facilities. Hill-Rom retained approximately $4 million of outstanding receivables and the land and
building upon close.
68
In the third fiscal quarter of 2004, Hill-Rom closed on the sale of its Air-Shields infant care
business to a subsidiary of Dräger Medical AG & Co. KGaA for approximately $26 million. Additional
proceeds of $5 million were received in the fourth quarter upon the final transfer of an
investment, bringing the total proceeds to $31 million and the net gain realized on the disposal to
$13 million. Air-Shields provides infant care warming therapy, incubators and other infant care
products. Hill-Rom retained approximately $9 million of outstanding receivables of the infant care
business at the date of close.
Upon approval of the Board of Directors and the signing of the definitive sale agreements, the
Hill-Rom infant care and piped-medical gas businesses and Forethought, a provider of pre-need
insurance to fund funeral and cemetery costs, were all treated as discontinued operations for all
periods presented within the Statements of Consolidated Income (Loss) in accordance with the
provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Operating results for the discontinued operations were as follows for fiscal years 2004 and 2003
and the ten months ended September 30, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Fiscal Year |
|
Ten Months |
|
|
Ended |
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
2002 |
(Dollars in millions) |
|
(As Restated) |
|
(As Restated) |
|
|
|
|
|
Investment income |
|
$ |
133 |
|
|
$ |
178 |
|
|
$ |
138 |
|
Earned revenue |
|
|
162 |
|
|
|
216 |
|
|
|
177 |
|
Net capital gains (losses) |
|
|
4 |
|
|
|
(32 |
) |
|
|
(16 |
) |
Other revenues |
|
|
47 |
|
|
|
102 |
|
|
|
75 |
|
|
Net revenues from discontinued
operations |
|
|
346 |
|
|
|
464 |
|
|
|
374 |
|
Benefits paid |
|
|
66 |
|
|
|
84 |
|
|
|
71 |
|
Credited interest |
|
|
134 |
|
|
|
183 |
|
|
|
148 |
|
Other costs of revenue |
|
|
77 |
|
|
|
132 |
|
|
|
103 |
|
Other operating expenses |
|
|
33 |
|
|
|
52 |
|
|
|
32 |
|
Loss on impairment of discontinued
operations |
|
|
107 |
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) income from discontinued
operations |
|
|
(71 |
) |
|
|
13 |
|
|
|
20 |
|
Income tax (benefit) expense |
|
|
(26 |
) |
|
|
5 |
|
|
|
13 |
|
|
(Loss) income from discontinued
operations |
|
$ |
(45 |
) |
|
$ |
8 |
|
|
$ |
7 |
|
|
The assets and liabilities of Forethought Federal Savings Bank are included in the assets and
liabilities of discontinued operations, which are presented in separate line items within the
Consolidated Balance Sheet as of September 30, 2004. The assets and the liabilities of the
piped-medical gas and infant care businesses, as applicable, are included in the assets and
liabilities of discontinued operations as of September 30, 2003. Components of assets and
liabilities of discontinued operations were as follows (Dollars in millions):
69
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
|
|
|
|
|
(As Restated) |
|
Current assets |
|
$ |
|
|
|
$ |
21 |
|
Property, plant and equipment, net |
|
|
|
|
|
|
6 |
|
Goodwill |
|
|
|
|
|
|
3 |
|
Insurance assets |
|
|
98 |
|
|
|
|
|
|
Assets of discontinued operations |
|
|
98 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
Insurance liabilities |
|
|
92 |
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
7 |
|
|
Liabilities of discontinued operations |
|
|
92 |
|
|
|
7 |
|
|
Net assets of discontinued operations |
|
$ |
6 |
|
|
$ |
23 |
|
|
In terms of operating cash flows, because Forethought operates in a regulated environment its cash
flows are generally neutral to Hillenbrand. Hillenbrand has also in the past made capital
contributions to and received dividends from Forethought, thereby impacting our overall cash
position. In the first quarter of fiscal 2004, we received a dividend of $29 million from
Forethought. Cash flows from the piped-medical gas and infant care businesses generally
approximate net income.
4. Acquisitions
During fiscal 2004, Hill-Rom completed the acquisitions of ARI, Mediq and NaviCare. The results of
these businesses have been included in the Consolidated Financial Statements since each
acquisitions date of close.
On October 17, 2003, Hill-Rom acquired 100 percent of the outstanding common shares of ARI, a
manufacturer and distributor of non-invasive airway clearance products and systems. The
acquisition of ARI complements Hill-Roms existing pulmonary expertise, expands its home-care
product line, offers growth potential and is aimed at allowing Hill-Rom to leverage its clinical
sales force. These benefits along with managements belief in the growth potential for the
business were key determinants in the valuation of the business.
The purchase price for the ARI acquisition was $83 million, plus an additional $2 million of
acquisition costs incurred in relation to the transaction. This purchase price was subject to
certain working capital adjustments at the date of close not to exceed $12 million, plus additional
contingent payments not to exceed $20 million based on ARI achieving certain net revenue targets.
Upon closing, $73.3 million of the purchase price was paid to the shareholders of ARI, with an
additional $9.7 million deferred until a later date. Upon final determination of the working
capital adjustment in January 2004, an additional $11.8 million was paid to the shareholders of
ARI, along with $4 million of the originally deferred payments. The remaining deferral of $5.7
million is outstanding and payable no later than the end of calendar 2005 and is accrued in the
Consolidated Balance Sheets as of September 30, 2004. Based on net revenues achieved in fiscal
2004, an additional purchase price of $9 million was accrued in September
2004, which is expected to be paid before the end of calendar 2004. Any additional contingent
purchase price is dependent upon ARI achieving certain net revenue targets over the next year. All
required contingency payments, including the $9 million recorded in September 2004, will increase
goodwill associated with the acquisition.
On January 30, 2004, Hill-Rom acquired Mediq, a company in the medical equipment outsourcing and
asset management business. This acquisition expands Hill-Roms product and service offerings,
strengthens after-sales service capabilities and allows increased leverage of Hill-Roms global
rental service center network.
70
The purchase price for Mediq was approximately $329 million, plus an additional $6 million of
acquisition costs incurred in relation to the transaction. This purchase price was subject to
certain adjustments based upon the Mediq balance sheet at the date of close. Subsequent to
year-end, we reached a final agreement with the representative of the former Mediq shareholders as
to the purchase price based upon reported assets and liabilities of Mediq as of the closing date,
resulting in the release of the $3 million deposited into an escrow account at the time of
purchase. In addition, there may be other potential adjustments to the purchase price, which
should be agreed upon by the end of the first quarter of fiscal 2006. This adjustment relates
primarily to the funded status of Mediqs defined benefit pension plan as of the end of the first
quarter of 2006, along with the occurrence of any issues associated with seller representations,
warranties and other matters. We deposited $20 million into an escrow account at the time of
purchase in connection with these possible adjustments, which will be held until final resolution
in fiscal 2006. The escrow amounts are included in the reported purchase price of Mediq. If any
adjustment differs in amount from the current escrow balances, the reported purchase price would be
increased or decreased by the amount of any valid claims against the escrow amounts, and the
reported amount of goodwill associated with the Mediq acquisition would be adjusted accordingly.
On January 30, 2004, we completed the acquisition of the remaining 84 percent of the equity of
NaviCare that we did not already own for approximately $14 million, including deferred payments of
approximately $2 million payable within one year. NaviCare provides operations management,
resource optimization and dynamic workflow solutions to health care enterprises. NaviCares
portfolio of communications and workflow products will become a key component of Hill-Roms
workflow solutions offerings.
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at their dates of acquisition. We are still in the process of finalizing the valuation of
certain of the assets and liabilities acquired and the purchase prices remain subject to adjustment
for the contingency payments outlined above; thus, the allocation of the purchase prices is subject
to refinement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARI |
|
Mediq |
|
NaviCare |
|
Current assets |
|
$ |
25 |
|
|
$ |
44 |
|
|
$ |
2 |
|
Property, plant and equipment |
|
|
6 |
|
|
|
99 |
|
|
|
|
|
Intangible assets |
|
|
9 |
|
|
|
69 |
|
|
|
4 |
|
Goodwill |
|
|
73 |
|
|
|
197 |
|
|
|
11 |
|
Other long-term assets |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
Total assets acquired |
|
|
114 |
|
|
|
410 |
|
|
|
17 |
|
Current liabilities |
|
|
(5 |
) |
|
|
(36 |
) |
|
|
(2 |
) |
Long-term liabilities |
|
|
(3 |
) |
|
|
(39 |
) |
|
|
(1 |
) |
|
Total liabilities assumed |
|
|
(8 |
) |
|
|
(75 |
) |
|
|
(3 |
) |
|
Net assets acquired |
|
$ |
106 |
|
|
$ |
335 |
|
|
$ |
14 |
|
|
The $9 million of acquired intangibles at ARI were assigned to technology assets, a five-year
non-compete agreement and a trademark, all of which will reside within the Clinical Division of
Hill-Rom. The $69 million of acquired intangibles at Mediq were assigned primarily to customer
relationship assets, which will reside predominantly within the Services Division of Hill-Rom, with
lesser amounts residing in the Clinical Division. The $4 million of acquired intangibles at
NaviCare were assigned to non-compete agreements, technology assets, customer relationship assets
and a trademark. These intangible assets, with the exception of the trademarks, are generally
subject to amortization over varied periods of time and none will be deductible for income tax
purposes.
If these acquisitions had been completed as of the beginning of each period presented, reported
results for the fiscal years ended September 30, 2004 and 2003 would have increased as follows
(Dollars in millions, except per share data, unaudited):
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2004 |
|
Year Ended September 30, 2003 |
|
|
ARI |
|
Mediq |
|
Total |
|
ARI |
|
Mediq |
|
Total |
|
Revenues |
|
$ |
|
|
|
$ |
49 |
|
|
$ |
49 |
|
|
$ |
48 |
|
|
$ |
157 |
|
|
$ |
205 |
|
|
Net income |
|
|
|
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
16 |
|
|
|
19 |
|
Diluted earnings per share |
|
$ |
|
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.25 |
|
|
$ |
0.30 |
|
The net income and diluted earnings per share amounts in all periods presented above include the
additional depreciation and amortization expense resulting from the purchase of property and
intangibles at fair value, but exclude the impact of financing costs associated with the Mediq
acquisition.
Based on the acquisition date of ARI and the timing of its inclusion in our Consolidated Financial
Statements, the acquisition of ARI as of the beginning of the 2004 fiscal year would not have
materially impacted our financial results for the year ended September 30, 2004. If the
acquisition of NaviCare had been completed as of the beginning of fiscal 2004 or 2003, the impact
to our revenues or results of operations would not have been material.
5. Special Charges
2004 Actions
During the fourth fiscal quarter of 2004, we announced a restructuring intended to better align
Hill-Roms financial and personnel resources to fully support its growth initiatives, decrease
overall costs, and improve performance in Europe. The plan includes the
elimination of approximately 130 salaried positions in the U.S. and approximately 100 positions in
Europe and resulted in a fourth quarter charge of approximately $7 million, associated with
severance and benefit-related costs. All obligations associated with this action will be settled
in cash. We expect the restructuring to be completed during our 2005 fiscal year.
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 expected to eliminate approximately 300 salaried positions globally.
Hill-Rom also announced it expected to 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. As of September 30, 2004 this action is essentially complete, with less
than $1 million remaining in the reserve. During fiscal 2004 approximately $1 million of the
originally recorded reserve was also reversed. In excess of 280 salaried positions were eliminated
under the action, with over 60 of the original list of terminees being transferred to other
positions in line with Hill-Roms strategy. As of this same date, approximately 90 new positions
had been hired under the new business structure. This action is expected to be fully completed in
the second quarter of fiscal 2005, in combination with the completion of the enterprise-wide
technology platform integration.
2002 Actions
During the fourth 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
72
action, which resulted in
the termination of 25 employees. Of the total charge recorded for the above actions, $4 million
was associated with severance and other costs to be settled in cash while $1 million related to
asset impairments. All activities associated with these charges are now complete.
Other
In addition to the reserve balances outlined above, approximately $3 million of accrued liabilities
were outstanding at September 30, 2004 related to retirement obligations of W August Hillenbrand, a
former Chief Executive Officer of the Company. Mr. Hillenbrand retired in the fourth calendar
quarter of 2000.
6. Notes Receivable
Notes receivable as of September 30, 2004 and 2003 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
Notes receivable gross |
|
$ |
109 |
|
|
$ |
|
|
Discount on note |
|
|
(15 |
) |
|
|
|
|
|
Net receivable |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt service account |
|
|
15 |
|
|
|
|
|
Discount on service account |
|
|
(4 |
) |
|
|
|
|
|
Net debt service account |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes receivable |
|
$ |
105 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Maturities at September 30 |
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
|
|
|
|
|
|
2006 |
|
$ |
|
|
|
|
|
|
2007 |
|
$ |
7 |
|
|
|
|
|
2008 |
|
$ |
2 |
|
|
|
|
|
2009 |
|
$ |
2 |
|
|
|
|
|
2010 and beyond |
|
$ |
94 |
|
|
|
|
|
On July 1, 2004 we closed the sale of Forethought to FFS Holdings. As part of the consideration
received in the transaction, we provided seller financing in the form of a note receivable with a
face value of approximately $107 million. This note carries an increasing rate of interest over
its ten-year term, with interest accruing at 6 percent for the first five years. Interest
compounds semi-annually, and the note receivable balance above includes $2 million of interest
accrued as of September 30, 2004. No payments are due under the note until year six at which time
annual payments of $10 million are required, with all remaining amounts, including unpaid interest,
due at maturity.
Additional financing was also provided in the form of a $15 million debt service account associated
with third party secured financing obtained by FFS Holdings under the transaction. We are
scheduled to receive payments from this account beginning in year three with final repayment due in
year eight. This account is not subject to interest until year three.
73
7. Financing Agreements
Long-term debt consists of the following (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
2004 |
|
2003 |
|
Unsecured 8 1/2% debentures due on December 1, 2011 |
|
$ |
54 |
|
|
$ |
55 |
|
|
|
|
|
|
|
|
|
|
Unsecured 7% debentures due on February 15, 2024 |
|
|
20 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
Unsecured 6 3/4% debentures due on December 15, 2027 |
|
|
30 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
Unsecured 4 1/2% debentures due on July 15, 2009 |
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
360 |
|
|
$ |
155 |
|
|
On July 14, 2003, we filed a universal shelf registration statement with the U.S. Securities and
Exchange Commission on Form S-3 for the potential future sale of up to $1 billion in debt and/or
equity securities. The registration statement was declared effective and should provide us with
significant flexibility with respect to our access to the public markets. There can be no
assurance that additional financing under the universal shelf registration statement or elsewhere
will be available at terms acceptable to us.
On June 7, 2004, we issued $250 million of 4.5 percent coupon senior notes due 2009 from this
universal shelf registration statement, leaving $750 million of available capacity under the
universal registration statement. The net proceeds from this borrowing were utilized to
permanently finance the Mediq acquisition.
Also in June 2004, we completed the open market repurchase of approximately $47 million principal
amount of longer maturity coupon debt for approximately $55 million.
Beginning in June 2004, $200 million of our debt securities were subject to interest rate swap
agreements. The interest rate swaps covered part of these debt securities maturing on June 15,
2009, effectively converting the securities from fixed to variable interest rates. For the 2004
period in which the interest rate swap agreements were outstanding, the average variable interest
rate on debt covered by the swaps approximated 1.7 percent.
Beginning in August 2001 and continuing through essentially the third quarter of 2003, $150 million
of our debt securities were subject to interest rate swap agreements. The interest rate swaps
covered all or part of the securities maturing on December 1, 2011 and February 15, 2024,
effectively converting the securities from fixed to variable interest rates.
Near the end of the third quarter of fiscal year 2003, we terminated our then outstanding interest
rate swap agreements, realizing cash proceeds and deferred gains of approximately $27 million. The
deferred gains on the termination of the swaps will be amortized and recognized as a reduction in
interest expense over the remaining term of the related debt.
With the gains from the swap agreements, the prospective effective interest rates will be lower
than the stated interest rates, but higher than the variable rates we had been subject to during
the period the swap agreements were in place. For the periods in which the interest rate swap
agreements were outstanding, the average variable interest rate on debt covered by the swaps
approximated 3.3 percent and 4.2 percent, respectively, for fiscal year 2003 and the ten months
ended September 30, 2002.
Upon completion of the open market debt repurchase previously discussed, approximately $2 million
of the deferred gains related to the termination of the interest rate swap agreements were
recognized, reducing the loss on repurchase of the debt to approximately $6 million,
74
including the write-off of approximately $1 million of debt issuance costs associated with the original debt
placement.
On July 28, 2004, we entered into a $400 million five-year senior revolving credit facility with a
syndicate of banks led by Bank of America, N.A. and Citigroup North America, Inc. The term of the
five-year facility expires on June 1, 2009. Borrowings under the credit facility bear interest at
variable rates, as defined therein. The availability of borrowing under the five-year facility is
subject to our ability at the time of borrowing to meet certain specified conditions. These
conditions include a maximum debt to capital ratio of 55 percent, absence of default under the
facility and continued accuracy of certain representations and warranties contained in the credit
facility. The proceeds of the five-year facility may be used: (i) for working capital, capital
expenditures, and other lawful corporate purposes; (ii) to finance acquisitions.
As of September 30, 2004, we: (i) had $15 million of outstanding, undrawn letters of credit, (ii)
were in compliance with all conditions set forth under the credit facility, and (iii) had complete
access to the remaining $385 million of borrowing capacity available under the credit facility.
We have additional uncommitted credit lines totaling $15 million that have no commitment fees,
compensating balance requirements or fixed expiration dates. As of September 30, 2004, we had $13
million of outstanding, undrawn letters of credit under these facilities.
8. Stock-Based Compensation
Over time, we have had various stock-based compensation programs, the key components of which are
further described below. Our primary active stock-based compensation program is the Stock
Incentive Plan. All stock-based compensation programs are administered by the full Board of
Directors or its Compensation and Management Development Committee.
The Stock Incentive Plan, which was approved at the 2002 annual meeting of shareholders, replaced
the 1996 Stock Option Plan. Common shares reserved for issuance under the Stock Incentive Plan
total 5 million, plus 294,611 shares previously authorized but unissued under the 1996 Stock Option
Plan. The Stock Incentive Plan provides for long-term performance compensation for key employees
and members of the Board of Directors. A variety of discretionary awards for employees and
non-employee directors are authorized under the plan, including incentive or non-qualified stock
options, stock appreciation rights, restricted stock, deferred stock and bonus stock. The vesting
of such awards may be conditioned upon either a specified period of time or the attainment of
specific performance goals as determined by the
administrator of the plan. The option price and term are also subject to determination by the
administrator with respect to each grant. Option prices are generally expected to be set at the
average fair market price at date of grant and option terms are not expected to exceed ten years.
Under the terms of the plan, each non-employee director was automatically granted an option to
purchase 4,000 shares of common stock each year on the first day following our annual meeting,
vesting on the first anniversary of the date of grant and exercisable over a ten year term.
Beginning in fiscal 2004, instead of options, each non-employee member of the Board of Directors
was granted restricted stock units (or deferred stock awards), which will vest on the later to
occur of the first anniversary of the date of grant or the six-month anniversary of the date that a
director ceases to be a member of our Board of Directors. In 2004, the annual grant consisted of
1,400 restricted stock units, to be increased to 1,800 in 2005, for each non-employee director.
The annual grant for the Chairman of the Board is 3,500 restricted stock units.
As of September 30, 2004, 1,461,250 option shares have been granted and 157,030 shares have been
cancelled under the Stock Incentive Plan. In addition, a total of 241,782 restricted stock units
have been granted under the Stock Incentive Plan, all of which are contingent upon continued
employment and vest over periods ranging from one to five years. The shares had a
75
fair value at
the date of grant ranging between $47.49 and $69.25 per share. Dividends, payable in stock, accrue
on the grants and are subject to the same specified terms as the original grants. As of September
30, 2004, a total of 186,860 restricted stock units, net of cancellations and dividends earned,
remain outstanding. A total of 3,757,359 shares remain available for future grants under all
aspects of the Stock Incentive Plan.
The fair value of option grants under our Stock Incentive Plan and the predecessor 1996 Stock
Option Plan are estimated on the date of grant using the Black-Scholes option-pricing model. The
weighted average fair value of options granted under each of these plans was $15.55, $12.74 and
$17.65 per share for fiscal years 2004 and 2003 and the ten months ended September 30, 2002,
respectively. The following assumptions were used in the determination of fair value in each
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
Risk-free interest rate |
|
|
3.73 |
% |
|
|
3.52 |
% |
|
|
4.70 |
% |
Dividend yield |
|
|
1.76 |
% |
|
|
1.60 |
% |
|
|
1.55 |
% |
Volatility factor |
|
|
.2634 |
|
|
|
.2629 |
|
|
|
.2637 |
|
Weighted average expected life |
|
6.00 years |
|
5.97 years |
|
5.92 years |
The following table summarizes transactions under our current and predecessor stock option plans
for fiscal years 2004 and 2003 and the ten months ended September 30, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
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 |
|
|
2,688,079 |
|
|
$ |
47.77 |
|
|
|
2,247,572 |
|
|
$ |
47.69 |
|
|
|
2,309,166 |
|
|
$ |
45.78 |
|
Options granted |
|
|
637,650 |
|
|
$ |
58.18 |
|
|
|
590,100 |
|
|
$ |
47.58 |
|
|
|
263,500 |
|
|
$ |
60.09 |
|
Options exercised |
|
|
(543,219 |
) |
|
$ |
46.54 |
|
|
|
(62,933 |
) |
|
$ |
39.86 |
|
|
|
(253,019 |
) |
|
$ |
43.49 |
|
Options canceled |
|
|
(93,859 |
) |
|
$ |
54.86 |
|
|
|
(86,660 |
) |
|
$ |
50.33 |
|
|
|
(72,075 |
) |
|
$ |
46.95 |
|
|
Unexercised options outstanding
end of year |
|
|
2,688,651 |
|
|
$ |
50.24 |
|
|
|
2,688,079 |
|
|
$ |
47.77 |
|
|
|
2,247,572 |
|
|
$ |
47.69 |
|
|
Exercisable options end of year |
|
|
1,655,687 |
|
|
$ |
47.61 |
|
|
|
1,606,408 |
|
|
$ |
46.53 |
|
|
|
1,188,640 |
|
|
$ |
45.27 |
|
|
The following table summarizes information about stock options outstanding at September 30,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-$45.34 |
|
|
591,411 |
|
|
|
5.14 |
|
|
$ |
39.81 |
|
|
|
591,411 |
|
|
$ |
39.81 |
|
$46.44-$48.64 |
|
|
594,998 |
|
|
|
7.57 |
|
|
$ |
47.65 |
|
|
|
312,905 |
|
|
$ |
47.78 |
|
$50.11-$52.16 |
|
|
683,661 |
|
|
|
5.53 |
|
|
$ |
51.06 |
|
|
|
560,360 |
|
|
$ |
51.26 |
|
$52.42-$57.44 |
|
|
69,666 |
|
|
|
6.56 |
|
|
$ |
56.04 |
|
|
|
41,667 |
|
|
$ |
56.56 |
|
$58.24-$69.25 |
|
|
748,915 |
|
|
|
8.57 |
|
|
$ |
59.23 |
|
|
|
149,344 |
|
|
$ |
61.93 |
|
|
$29.97-$69.25 |
|
|
2,688,651 |
|
|
|
6.77 |
|
|
$ |
50.24 |
|
|
|
1,655,687 |
|
|
$ |
47.61 |
|
|
Members of the Board of Directors may elect to defer fees earned and invest them in common
stock of the Company under the Hillenbrand Industries Directors Deferred Compensation Plan. A
total of 1,092 deferred shares are payable as of September 30, 2004 under this program.
We have historically had various other stock-based compensation programs, including a long-term
performance based plan. Shares granted under these predecessor programs were contingent upon
continued employment over specified terms, generally not exceeding three years,
76
and some required
the achievement of pre-established and approved financial objectives. As of September 30, 2004,
there are 249,567 shares which are deferred, but fully vested and payable.
9. Shareholders Equity
One million shares of preferred stock, without par value, have been authorized and none have been
issued.
As of September 30, 2004, the Board of Directors had authorized the repurchase, from time to time,
of up to 24,289,067 shares of the Companys stock. The purchased shares will be used for general
corporate purposes. As of September 30, 2004, a total of 21,449,067 shares had been purchased at
market trading prices, of which 18,363,520 shares remain in treasury.
10. Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments 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 carrying amounts of the private equity limited partnerships retained in the sale of Forethought
and the other minority investments were $79 million and $68 million at September 30, 2004 and 2003.
The fair value of equity method investments is not readily available and disclosure is not
required.
The fair value of notes receivable is estimated by using a discount rate that approximates the
current rate for comparable notes. At September 30, 2004, the aggregate fair value approximated
the carrying value of the notes.
The fair value of our debt is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to us for debt of the same remaining maturities. The
carrying value and estimated fair values of our long-term debt instruments were $360 million and
$369 million at September 30, 2004 and $155 million and $166 million at September 30, 2003,
respectively.
We have limited involvement with derivative financial instruments and do not use them for trading
purposes. They are used to manage well-defined interest rate and foreign currency risks. With
respect to foreign currency risks, forward contracts are sometimes utilized to hedge exposure to
adverse exchange risk related to specific assets and obligations denominated in foreign currencies.
As of September 30, 2004 and 2003, we had no outstanding forward contracts. During 2004, we
entered into interest rate swap agreements to effectively convert a portion of our fixed interest
rate long-term debt to variable rates. The notional amount of the interest rate swaps was $200
million. There is no hedge ineffectiveness as each swap meets the short-cut method requirements
under SFAS No. 133, Accounting for Derivatives and Hedging Activities. As a result, changes in
the fair value of the interest rate swap agreements during their term offset changes in the fair
value of the underlying debt, with no net gain or loss recognized in earnings. As of September 30,
2004, the interest rate swap agreements reflected a cumulative gain of $7 million. During 2003, we
terminated interest rate swap agreements covering a notional amount of $150 million of long-term
debt that were entered into in 2001. During the term of these swap agreements, there was no hedge
ineffectiveness as each swap met the short-cut method requirements under SFAS No. 133. With the
termination of the swap agreements and the completion of debt repurchases in the fourth quarter of
fiscal year 2003 and the third quarter of 2004, the remaining unrecognized deferred gains remain
classified as debt and will be amortized and recognized as a reduction of interest expense over the
remaining term of the debt securities.
77
11. Segment Reporting
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information requires
reporting of segment information that is consistent with the way in which management operates and
views the Company.
We are organized into two major operating companies serving the health care and funeral services
industries. Hill-Rom is a manufacturer of equipment for the health care industry, a provider of
associated systems for wound, pulmonary and circulatory care and a provider of biomedical equipment
rentals and other services to enhance the operational efficiency and asset utilization of health
care facilities. Batesville Casket serves the funeral services industry and manufactures and sells
a variety of metal and hardwood caskets and a line of urns and caskets used in cremation.
Batesvilles products are sold to licensed funeral professionals operating licensed funeral homes.
With the continued evolution of the prior year realignment of the Hill-Rom business structure,
changes were adopted in fiscal 2004 in terms of the way in which management views the business,
including reporting to our executive management team. With these changes, the prior Hill-Rom
reporting segment has now been 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 divisions 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. Essentially
all our goodwill resides in the Hill-Rom Americas/Asia Pacific segment.
The reporting segment of Batesville Casket is measured on the basis of income from continuing
operations before income taxes. Intersegment sales do not occur between Hill-Rom and Batesville
Casket. Forethought results, which were previously considered a reporting segment, are now being
presented in the results from discontinued operations as further discussed in Note 3 to the
Consolidated Financial Statements.
Corporate manages areas that affect all segments such as taxes, interest income and expense, debt,
legal, treasury, and business development. Nearly all interest expense amounts relate to
activities undertaken at Corporate to benefit the Company as a whole. Corporate, while not a
segment, is presented separately to aid in the reconciliation of segment information to that
reported in the Statements of Consolidated Income (Loss).
In analyzing segment performance, our management reviews income before income taxes and net income,
both before the impact of the litigation charge and before special charges.
78
Financial information regarding our reportable segments is presented below (Dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Functional |
|
|
|
|
|
|
|
|
|
|
Americas/ |
|
|
|
|
|
Costs and |
|
Total |
|
Batesville |
|
Corporate |
|
|
|
|
Asia Pacific |
|
EMEA |
|
Eliminations |
|
Hill-Rom |
|
Casket |
|
and Other |
|
Consolidated |
|
2004 (As Restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
1,002 |
|
|
$ |
187 |
|
|
$ |
|
|
|
$ |
1,189 |
|
|
$ |
640 |
|
|
$ |
|
|
|
$ |
1,829 |
|
Intersegment revenues |
|
$ |
27 |
|
|
$ |
8 |
|
|
$ |
(35 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional income (loss) |
|
$ |
299 |
|
|
$ |
(1 |
) |
|
$ |
(119 |
) |
|
$ |
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
and special charges (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
179 |
|
|
$ |
189 |
|
|
$ |
(54 |
) |
|
$ |
314 |
|
Special charges (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
308 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
188 |
|
Loss from discontinued operations (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
143 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,272 |
|
|
$ |
279 |
|
|
$ |
518 |
|
|
$ |
2,069 |
|
Capital expenditures and intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
98 |
|
|
$ |
17 |
|
|
$ |
10 |
|
|
$ |
125 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
81 |
|
|
$ |
19 |
|
|
$ |
8 |
|
|
$ |
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 (As Restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
898 |
|
|
$ |
169 |
|
|
$ |
|
|
|
$ |
1,067 |
|
|
$ |
628 |
|
|
$ |
|
|
|
$ |
1,695 |
|
Intersegment revenues |
|
$ |
49 |
|
|
$ |
|
|
|
$ |
(49 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional income |
|
$ |
298 |
|
|
$ |
|
|
|
$ |
(94 |
) |
|
$ |
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
and special charges (d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
203 |
|
|
$ |
185 |
|
|
$ |
(99 |
) |
|
$ |
289 |
|
Special charges (e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
280 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
181 |
|
Loss from discontinued operations (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
189 |
|
Assets (f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
751 |
|
|
$ |
281 |
|
|
$ |
4,443 |
|
|
$ |
5,475 |
|
Capital expenditures and intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
92 |
|
|
$ |
16 |
|
|
$ |
7 |
|
|
$ |
115 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
49 |
|
|
$ |
18 |
|
|
$ |
8 |
|
|
$ |
75 |
|
|
|
|
(a) |
|
Corporate and Other includes $6 million on the extinguishment of debt ($4 million after
tax) |
|
(b) |
|
Reflects a $6 million charge related to a realignment of financial and personnel
resources at Hill-Rom. |
|
(c) |
|
Reflects results of Forethought and Hill-Roms piped-medical gas and infant care
businesses classified as discontinued operations. Results for 2004 include the loss on
disposal of Forethought of $89 million (after tax) and a net gain on the dispositions of
the piped-medical gas and infant care businesses of a combined $18 million (after tax). |
|
(d) |
|
Corporate and Other includes a $16 million loss on the extinguishment of debt ($11
million after tax). |
|
(e) |
|
Reflects a $9 million charge related to a business structure realignment at Hill-Rom. |
|
(f) |
|
Corporate and Other includes $4 billion of the assets of Forethought classified as
discontinued operations. |
79
Prior to the fiscal 2003 realignment of the Hill-Rom business structure, Americas/Asia
Pacific and EMEA were combined in the Hill-Rom reporting segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Batesville |
|
Corporate |
|
|
|
|
Hill-Rom |
|
Casket |
|
and Other |
|
Consolidated |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
883 |
|
|
$ |
510 |
|
|
$ |
|
|
|
$ |
1,393 |
|
Income (loss) from continuing
operations before income taxes,
litigation charge and special charges |
|
$ |
116 |
|
|
$ |
143 |
|
|
$ |
(60 |
) |
|
$ |
199 |
|
Litigation charge (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
250 |
|
Special charges (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(55 |
) |
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(17 |
) |
Income from discontinued operations (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(10 |
) |
Assets (e) |
|
$ |
700 |
|
|
$ |
283 |
|
|
$ |
4,472 |
|
|
$ |
5,455 |
|
Capital expenditures and intangibles |
|
$ |
72 |
|
|
$ |
12 |
|
|
$ |
12 |
|
|
$ |
96 |
|
Depreciation and amortization (f) |
|
$ |
50 |
|
|
$ |
15 |
|
|
$ |
6 |
|
|
$ |
71 |
|
|
|
|
(a) |
|
Reflects antitrust litigation charge of $158 million (after tax) related to Hill-Rom. |
|
(b) |
|
Reflects $3 million (after tax) charge related to realignment of certain operations. |
|
(c) |
|
Reflects results of Forethought and the Hill-Rom piped-medical gas and infant care
businesses classified as discontinued operations. |
|
(d) |
|
Includes the reversal of $6 million of previously provided tax reserves for potential
disallowances and valuation allowances no longer considered necessary in 2002. |
|
(e) |
|
Corporate and Other includes $4 billion of the assets of Forethought classified as
discontinued operations. |
|
(f) |
|
Hill-Rom reflects a $5 million operating expense charge related to the write-off of a
technology asset with no continuing value. |
Geographic Information
Most of our 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 from continuing operations and long-lived assets (which consist
mainly of property, equipment leased to others and intangibles) for fiscal years 2004 and 2003 and
the ten months ended September 30, 2002 were as follows (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
(As Restated) |
|
(As Restated) |
|
|
|
|
|
Net revenues to unaffiliated
customers: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,586 |
|
|
$ |
1,472 |
|
|
$ |
1,203 |
|
Foreign |
|
|
243 |
|
|
|
223 |
|
|
|
190 |
|
|
Total revenues |
|
$ |
1,829 |
|
|
$ |
1,695 |
|
|
$ |
1,393 |
|
|
Long-lived assets: (b) |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
917 |
|
|
$ |
447 |
|
|
$ |
428 |
|
Foreign |
|
|
74 |
|
|
|
69 |
|
|
|
56 |
|
|
Total long-lived assets |
|
$ |
991 |
|
|
$ |
516 |
|
|
$ |
484 |
|
|
|
|
|
(a) |
|
Net revenues are attributed to geographic areas based on the location of the operation
making the sale. |
|
(b) |
|
Includes property, equipment leased to others and intangibles, including goodwill. |
80
12. Income Taxes
Income taxes are computed in accordance with SFAS No. 109. The significant components of income
(loss) from continuing operations before income taxes and the consolidated income tax provision
from continuing operations for fiscal years 2004 and 2003 and the ten months ended September 30,
2002 were as follows (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
Income (loss) from continuing operations
before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
323 |
|
|
$ |
287 |
|
|
$ |
(53 |
) |
Foreign |
|
|
(15 |
) |
|
|
(7 |
) |
|
|
(2 |
) |
|
Total |
|
$ |
308 |
|
|
$ |
280 |
|
|
$ |
(55 |
) |
|
Income tax expense (benefit) from
continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Current provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
80 |
|
|
$ |
22 |
|
|
$ |
38 |
|
State |
|
|
|
|
|
|
5 |
|
|
|
6 |
|
Foreign |
|
|
3 |
|
|
|
1 |
|
|
|
3 |
|
|
Total current provision |
|
|
83 |
|
|
|
28 |
|
|
|
47 |
|
|
Deferred provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
28 |
|
|
|
63 |
|
|
|
(76 |
) |
State |
|
|
4 |
|
|
|
7 |
|
|
|
(7 |
) |
Foreign |
|
|
5 |
|
|
|
1 |
|
|
|
(2 |
) |
|
Total deferred provision |
|
|
37 |
|
|
|
71 |
|
|
|
(85 |
) |
|
Income tax expense (benefit) from
continuing operations |
|
$ |
120 |
|
|
$ |
99 |
|
|
$ |
(38 |
) |
|
Differences between income tax expense (benefit) from continuing operations reported for financial
reporting purposes and that computed based upon the application of the statutory U.S. Federal tax
rate to the reported income (loss) from continuing operations before income taxes for fiscal years
2004 and 2003 and the ten months ended September 30, 2002 were as follows (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
|
Pretax |
|
|
|
|
|
Pretax |
|
|
|
|
|
Pretax |
|
|
Amount |
|
Income |
|
Amount |
|
Income |
|
Amount |
|
Loss |
|
Federal income tax (a) |
|
$ |
108 |
|
|
|
35.0 |
|
|
$ |
98 |
|
|
|
35.0 |
|
|
$ |
(19 |
) |
|
|
35.0 |
|
State income tax (b) |
|
|
3 |
|
|
|
1.0 |
|
|
|
7 |
|
|
|
2.5 |
|
|
|
(1 |
) |
|
|
1.2 |
|
Foreign income tax (c) |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
Utilization of tax credits |
|
|
(3 |
) |
|
|
(1.0 |
) |
|
|
(10 |
) |
|
|
(3.6 |
) |
|
|
(4 |
) |
|
|
7.2 |
|
Adjustment of estimated
income tax accruals |
|
|
11 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
7.2 |
|
Valuation of foreign net
operating losses and
other tax attributes |
|
|
17 |
|
|
|
5.6 |
|
|
|
4 |
|
|
|
1.4 |
|
|
|
(2 |
) |
|
|
3.5 |
|
Impact from foreign
restructuring |
|
|
(16 |
) |
|
|
(5.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(0.7 |
) |
|
|
(8 |
) |
|
|
14.5 |
|
|
Income tax expense (benefit)
from continuing operations |
|
$ |
120 |
|
|
|
38.9 |
|
|
$ |
99 |
|
|
|
35.4 |
|
|
$ |
(38 |
) |
|
|
68.6 |
|
|
|
|
|
(a) |
|
At statutory rate. |
|
(b) |
|
Net of Federal benefit. |
|
(c) |
|
Federal tax rate differential. |
81
The tax effects of temporary differences that gave rise to the deferred tax balance sheet
accounts were as follows (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004 |
|
September 30, 2003 |
|
|
(As Restated) |
|
(As Restated) |
|
|
|
Non-insurance |
|
Insurance |
|
Non-insurance |
|
Insurance |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
5 |
|
|
$ |
|
|
|
$ |
3 |
|
|
$ |
|
|
Employee benefit accruals |
|
|
6 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
Self insurance accruals |
|
|
1 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
Litigation accruals |
|
|
2 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
Other, net |
|
|
22 |
|
|
|
|
|
|
|
21 |
|
|
|
1 |
|
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee benefit accruals |
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Capital loss carryovers and
impairments |
|
|
64 |
|
|
|
|
|
|
|
2 |
|
|
|
37 |
|
Deferred policy revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282 |
|
Net operating loss carryforwards |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign restructuring |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign loss carryforwards
and other tax attributes |
|
|
27 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
Other, net |
|
|
20 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
Total assets |
|
|
181 |
|
|
|
|
|
|
|
101 |
|
|
|
321 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
40 |
|
|
|
|
|
|
|
29 |
|
|
|
1 |
|
Amortization |
|
|
23 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
Unrealized gain on investments |
|
|
5 |
|
|
|
|
|
|
|
2 |
|
|
|
65 |
|
Benefit reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
Accrued market discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Deferred acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218 |
|
Other, net |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
Total liabilities |
|
|
88 |
|
|
|
|
|
|
|
39 |
|
|
|
315 |
|
|
Less valuation allowance for capital losses,
foreign loss and other tax attributes |
|
|
(86 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
Net asset |
|
$ |
7 |
|
|
$ |
|
|
|
$ |
57 |
|
|
$ |
6 |
|
|
At September 30, 2004, we had $27 million of deferred tax assets related to operating loss
carryforwards and other tax attributes in foreign jurisdictions. These tax attributes are subject
to various carryforward periods ranging from 1 year to an unlimited period. We also had $64
million of deferred tax assets related to capital loss carryforwards, which expire between 2006 and
2009; and $7 million of deferred tax assets related to state operating loss carryforwards, which
expire between 2008 and 2023.
The gross deferred tax assets as of September 30, 2004 were reduced by valuation allowances of $86
million, principally relating to foreign operating loss carryforwards and capital loss
carryforwards as it is more likely than not that they will expire before being utilized. The
valuation allowance was increased by $81 million during fiscal 2004 principally due to continued
losses in France and capital losses realized from divestitures.
As of September 30, 2004, we have developed a strategy to restructure our French operations. The
restructuring involves the creation of a new French entity and the conversion of the existing
French entities into a new operating structure. This resulted in the recognition of a related
deferred tax asset of $16 million.
82
Our income tax return filings are subject to audit by various taxing authorities. In fiscal
2004, we recorded both benefits to income and additional accruals related to audit activity by the
Internal Revenue Service and various states. The net effect of these adjustments was the recording
of $11 million in expense for fiscal 2004.
In evaluating whether it is more likely than not that we would recover our deferred tax assets,
future taxable income, the reversal of existing temporary differences and tax planning strategies
were considered. We believe that our estimate for the valuation allowances recorded against
deferred tax assets are appropriate based on current facts and circumstances.
13. Supplementary Information
The following amounts were (charged) or credited to income from continuing operations for fiscal
year 2004, fiscal year 2003 and the ten months ended September 30, 2002 (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
Rental expense |
|
$ |
(25 |
) |
|
$ |
(18 |
) |
|
$ |
(14 |
) |
Research and
development costs |
|
$ |
(56 |
) |
|
$ |
(59 |
) |
|
$ |
(42 |
) |
Investment income (a) |
|
$ |
9 |
|
|
$ |
9 |
|
|
$ |
9 |
|
|
|
|
(a) |
|
Excludes insurance operations. |
The table below indicates the minimum annual rental commitments (excluding renewable periods)
aggregating $75 million, for manufacturing facilities, warehouse distribution centers, service
centers and sales offices, under noncancelable operating leases.
|
|
|
|
|
2005 |
|
$ |
22 |
|
2006 |
|
$ |
17 |
|
2007 |
|
$ |
13 |
|
2008 |
|
$ |
11 |
|
2009 |
|
$ |
9 |
|
2010 and beyond |
|
$ |
3 |
|
We are in year two of a seven-year agreement with IBM to manage our global information structure
environment, which was announced near the end of the third quarter of fiscal 2003. The original
seven-year agreement had a cumulative estimated cost of $187 million, with a remaining cumulative
estimated cost of $153 million, which will continue to be incurred in nearly equal amounts over the
remaining term of the agreement. During the first year, we have on occasion, solicited IBM to
perform services that are outside the scope of the original base agreement. These services can
result in a one-time fee or can result in costs which will be incurred over the remaining term of
the agreement. Currently, fees related to out-of-scope services have a cumulative estimated cost
of $6 million and are primarily related to new projects and acquisition activities. These fees
have been included and will be incurred in nearly equal amounts over the remaining term of the
agreement. In conjunction with the recent divestiture of Forethought, the IBM agreement will be
renegotiated during fiscal 2005. We believe that our contractual obligation to IBM can be reduced
based upon the elimination of specific services related to Forethought.
The table below provides supplemental information to the Statements of Consolidated Cash Flows for
fiscal year 2004, fiscal year 2003 and the ten months ended September 30, 2002 (Dollars in
millions):
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
84 |
|
|
$ |
7 |
|
|
$ |
97 |
|
Interest |
|
$ |
10 |
|
|
$ |
19 |
|
|
$ |
20 |
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock issued under
stock compensation plans |
|
$ |
17 |
|
|
$ |
3 |
|
|
$ |
8 |
|
Gain on interest rate swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
18 |
|
14. Financial Services
Forethought and its subsidiaries served funeral and cemetery planning professionals with life
insurance policies, trust products and marketing support for ForethoughtÒ funeral
planning.
Investments were predominantly U.S. Treasuries and agencies, high-grade corporate and foreign
bonds, with smaller investments in equities, commercial mortgage loans, high-yield corporate bonds
and limited partnerships. Investments were carried on the Consolidated Balance Sheets at fair
value. Forethoughts objective was to purchase investment securities with maturities that matched
the expected cash outflows of policy benefit payments. The investment portfolio was constantly
monitored to ensure assets matched the expected payment of the liabilities. Securities were also
sold in other circumstances, including concern about the credit quality of the issuer. Cash
(unrestricted as to use) was held for future investment.
The amortized cost and fair value of investment securities available for sale at September 30, 2003
were as follows (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
1,444 |
|
|
$ |
57 |
|
|
$ |
5 |
|
|
$ |
1,496 |
|
Corporate securities and
short-term investments |
|
|
1,434 |
|
|
|
133 |
|
|
|
5 |
|
|
|
1,562 |
|
Mutual funds, short-term
equities and cash |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
56 |
|
Preferred and common stocks,
limited partnerships,
mortgage loans and other |
|
|
215 |
|
|
|
5 |
|
|
|
|
|
|
|
220 |
|
|
Total |
|
$ |
3,149 |
|
|
$ |
195 |
|
|
$ |
10 |
|
|
$ |
3,334 |
|
|
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
and from write-downs associated with other-than-temporary declines in value (impairments) were as
follows for fiscal years 2004 and 2003 and the ten months ended September 30, 2002 (Dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
Proceeds |
|
$ |
417 |
|
|
$ |
996 |
|
|
$ |
869 |
|
Realized gross gains |
|
$ |
14 |
|
|
$ |
68 |
|
|
$ |
34 |
|
Realized gross losses |
|
$ |
10 |
|
|
$ |
117 |
|
|
$ |
61 |
|
84
Insurance liabilities consisted of the following at September 30, 2003 (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortality or |
|
Interest |
|
|
|
|
Withdrawal |
|
Morbidity |
|
Rate |
|
|
|
|
Assumptions |
|
Assumptions |
|
Assumptions |
|
2003 |
|
Life Insurance
Contracts
|
|
Varies by
age/plan/duration
SP: up to 0.2%
MP: up to 60%;
avg. 5%-10% in
duration 1
|
|
Varies by
age/plan/duration
using various
percentages of the
1979-81 US Census
Mortality Table
|
|
Varies by age
and issue year
3% to 5.5%
|
|
$ |
2,683 |
|
|
Annuity Contracts
|
|
Varies by
age/plan/duration
SP: up to 0.2%
MP: up to 60%;
avg. 5%-10% in
duration 1
|
|
Varies by
age/plan/duration
using various
percentages of the
1979-81 US Census
Mortality Table
|
|
Varies by age
and issue year
2% to 5%
|
|
|
45 |
|
|
Total Benefit
Liabilities
|
|
|
|
|
|
|
|
$ |
2,728 |
|
|
Statutory data at September 30, 2003 and 2002 (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
Net income (loss) |
|
$ |
22 |
|
|
$ |
(14 |
) |
Capital and surplus |
|
$ |
346 |
|
|
$ |
263 |
|
Forethoughts life insurance companies were restricted in the amount of dividends that they could
distribute to their shareholders without approval of the department of insurance in their
respective states of domicile. In December 2003, Forethought Life Insurance Company paid a
dividend of $29 million to Hillenbrand Industries, Inc.
15. Unaudited Quarterly Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
2004 Quarter Ended (a) (As Restated) |
|
12/31/03 |
|
3/31/04 |
|
6/30/04 |
|
9/30/04 |
|
9/30/04 |
|
Net revenues |
|
$ |
422 |
|
|
$ |
472 |
|
|
$ |
461 |
|
|
$ |
474 |
|
|
$ |
1,829 |
|
Gross profit |
|
|
219 |
|
|
|
239 |
|
|
|
223 |
|
|
|
227 |
|
|
|
908 |
|
Income from continuing operations (b) |
|
|
45 |
|
|
|
53 |
|
|
|
45 |
|
|
|
45 |
|
|
|
188 |
|
Income (loss) from discontinued operations (c) |
|
|
17 |
|
|
|
(88 |
) |
|
|
9 |
|
|
|
17 |
|
|
|
(45 |
) |
|
|
|
Net income (loss) |
|
|
62 |
|
|
|
(35 |
) |
|
|
54 |
|
|
|
62 |
|
|
|
143 |
|
Basic net income (loss) per common share |
|
$ |
1.00 |
|
|
$ |
(0.56 |
) |
|
$ |
0.87 |
|
|
$ |
0.99 |
|
|
$ |
2.30 |
|
Diluted net income (loss) per common share |
|
$ |
0.99 |
|
|
$ |
(0.55 |
) |
|
$ |
0.86 |
|
|
$ |
0.99 |
|
|
$ |
2.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
2003 Quarter Ended (a) (As Restated) |
|
12/31/02 |
|
3/31/03 |
|
6/30/03 |
|
9/30/03 |
|
9/30/03 |
|
Net revenues |
|
$ |
405 |
|
|
$ |
429 |
|
|
$ |
426 |
|
|
$ |
435 |
|
|
$ |
1,695 |
|
Gross profit |
|
|
207 |
|
|
|
222 |
|
|
|
227 |
|
|
|
229 |
|
|
|
885 |
|
Income from continuing operations (b) |
|
|
36 |
|
|
|
51 |
|
|
|
52 |
|
|
|
42 |
|
|
|
181 |
|
Income (loss) from discontinued operations |
|
|
(28 |
) |
|
|
11 |
|
|
|
10 |
|
|
|
15 |
|
|
|
8 |
|
|
|
|
Net income |
|
|
8 |
|
|
|
62 |
|
|
|
62 |
|
|
|
57 |
|
|
|
189 |
|
Basic net income per common share |
|
$ |
0.12 |
|
|
$ |
1.01 |
|
|
$ |
1.00 |
|
|
$ |
0.92 |
|
|
$ |
3.05 |
|
Diluted net income per common share |
|
$ |
0.12 |
|
|
$ |
1.00 |
|
|
$ |
1.00 |
|
|
$ |
0.91 |
|
|
$ |
3.04 |
|
85
|
|
|
(a) |
|
Quarter results for 2004 and 2003 have been adjusted to reflect the piped-medical gas and
infant care businesses of Hill-Rom and Forethought on a discontinued operations basis. |
|
(b) |
|
Reflects losses on the repurchases of debt of $4 million (after tax) and $11 million (after
tax) in the third quarter of 2004 and the fourth quarter of 2003, respectively. Fourth
quarter 2004 includes a special charge of $4 million (after tax) for the business realignment
at Hill-Rom. |
|
(c) |
|
Reflects a first quarter gain on the divestiture of the Hill-Rom piped-medical gas business
of $5 million (after tax) and a second quarter estimated loss on the divestiture of
Forethought of $96 million (after tax), which was adjusted down to $89 million in the fourth
quarter. Third quarter results included a gain on the divestiture of the Hill-Rom infant care
business of $8 million (after tax). This gain was increased in the fourth quarter by $5
million (after tax) upon final transfer of an investment and collection of related proceeds. |
16. Commitments and Contingencies
On June 30, 2003, Spartanburg Regional Healthcare System (the plaintiff) filed suit against
Hillenbrand and its Hill-Rom subsidiary, in the United States District Court for the District of
South Carolina. Plaintiff alleges violations of the federal antitrust laws, including attempted
monopolization and tying claims. Discovery is underway. The trial is anticipated to occur on or
after July 1, 2005.
Plaintiff is seeking certification of a class of all purchasers of Hill-Româ hospital beds
and other in-room products between 1999 and 2003 where there have been contracts between Hill-Rom
and such purchasers, either on behalf of themselves or through group purchasing organizations,
where those contracts conditioned discounts on Hill-Româ hospital beds and other in-room
products on commitments to rent or purchase specialty beds exclusively from Hill-Rom.
The hearing on class certification is anticipated to occur by mid to late January 2005. Plaintiff
seeks actual monetary damages on behalf of the purported class in excess of $100 million, trebling
of any such damages that may be awarded, recovery of attorneys fees and injunctive relief. If a
class is certified and if plaintiffs prevail at trial, potential trebled damages awarded the
plaintiffs could be substantial in excess of $100 million and have a material adverse effect on our
results of operations, financial condition, and liquidity. Therefore, we are aggressively
defending against Plaintiffs allegations and will assert what we believe to be meritorious
defenses to class certification and plaintiffs allegations and damage theories.
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
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 took a litigation charge
and established an accrual in the amount of $250 million in the fourth quarter of fiscal 2002.
Hillenbrand paid KCI $175 million out of its cash on hand in January
2003 with the additional $75 million paid in December 2003. Neither party admitted any liability
or fault in connection with the settlement.
In 2000, Hill-Rom, Inc. sued Ohmeda Medical and Datex-Ohmeda, Inc. (collectively, Ohmeda) in
Federal Court in Indianapolis, Indiana alleging patent infringement. Hill-Rom succeeded in
obtaining a preliminary injunction prohibiting Ohmeda from continuing efforts to make, import,
sell, or offer for sale its combination incubator and infant warmer, the Giraffeä
Omnibed, pending a jury trial on Hill-Roms patent infringement claim. A jury trial on this matter
was held in May 2002 with the jury finding on behalf of Hill-Rom. Prior to the holding of a
separate trial for determination of damages, the parties reached a settlement. While specific
terms of the settlement are confidential, the settlement granted cross-licensing of certain patents
and Hill-Rom also received a cash payment for past damages and a royalty on certain future product
sales. The settlement amount has been recognized as a component of Discontinued operations within
the Statements of Consolidated Income (Loss).
86
We are committed to operating all of our 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 fines or penalties. We have, however,
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 to be incurred by us in which we are currently involved is not
expected to exceed $1 million. We believe we have provided adequate reserves in our 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 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 liquidity.
We are also involved in other possible claims, including product liability, workers compensation,
auto liability and employment related matters. These have deductibles and self-insured retentions
ranging from $150 thousand to $1.5 million per occurrence or per claim, depending upon the type of
coverage and policy period.
Since December 1999, we have purchased deductible reimbursement policies from our wholly-owned
insurance company, Sycamore Insurance Company, Ltd., for the deductibles and self-insured
retentions associated with our product liability, workers compensation and auto liability programs.
Outside insurance company and third-party claims administrators establish individual claim
reserves and an independent outside actuary provides estimates of ultimate projected losses,
including incurred but not reported claims. The actuary also provides estimates for accruals for
losses incurred prior to December 1999.
Claim reserves for employment related matters are established based upon advice from internal and
external counsel and historical settlement information for claim and related fees.
The recorded amounts represent managements best estimate of the costs it will incur in relation to
such exposures, but it is possible that actual costs could differ from those estimates.
17. Restatement and Revised Classification of Consolidated Financial Statements
Restatement
During the fourth quarter of fiscal 2003, the Company entered into definitive agreements to sell
Hill-Roms piped-medical gas and infant care businesses and in the second quarter of fiscal 2004,
the Company entered into a definitive agreement to sell Forethought Financial Services, Inc. and
its subsidiaries (Forethought). The divestitures of these businesses were all finalized in
fiscal 2004 and all were accounted for as discontinued operations in the Companys consolidated
financial statements for all periods presented herein. While finalizing the fiscal 2004 U.S.
federal and state income tax returns, and during preparation of the subsequent tax
87
provision to income tax return reconciliations, management identified errors which understated the income tax
benefits associated with these discontinued operations. Further, while assessing the implications
of these errors, management determined that it had also made errors with respect to the Companys
allocation of goodwill to Hill-Roms piped-medical gas and infant care businesses for purposes of
determining both the impairment loss recognized in the fourth fiscal quarter of 2003 and the effect
of the dispositions recognized upon the closure of the transactions in fiscal 2004. As a result of
the identification of these errors, the Audit Committee of the Board of Directors concluded, after
consultation with management and a review of the pertinent facts, that it was necessary to restate
the previously issued financial statements for the fiscal years ended September 30, 2003 and 2004.
As part of this restatement, income from discontinued operations and net income in fiscal 2003
increased $51 million, or $0.82 per fully diluted share, and income from discontinued operations
and net income in fiscal 2004 increased $33 million, or $0.53 per fully diluted share. The effects
of this restatement on the income statement impacted only discontinued operations and had no impact
on income from continuing operations or cash flows. Hillenbrands balance sheets as of September
30, 2003 and all succeeding periods were also adjusted to reflect $69 million of additional goodwill
as a result of the restatement.
Specifics related to the errors identified for fiscal 2003 and 2004 are further outlined below:
Impairment Loss and Gain Recognition on Disposal of Piped-Medical Gas and Infant Care
Businesses
Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible
Assets, requires that all goodwill acquired in a business combination be assigned to one or more
reporting units. Upon adopting SFAS 142 in fiscal 2002, the net assets of Hill-Roms piped-medical
gas and infant care businesses were included in the Hill-Rom reporting unit. When a portion of a
reporting unit that constitutes a business is sold, SFAS 142 requires that the amount of goodwill
associated with that business be determined based on the relative fair values of the business to be
sold versus the portion of the reporting unit to be retained. SFAS 142 further provides, however,
that if a business to be disposed of was never integrated into the reporting unit after its
acquisition, the current carrying amount of acquired goodwill should be included in the carrying
amount of the business to be disposed of.
When the Company reached definitive agreements in the fourth quarter of fiscal 2003 to sell
Hill-Roms piped-medical gas and infant care businesses, the Company incorrectly conducted a SFAS
142 impairment assessment for these businesses as if they were non-integrated, separate,
stand-alone entities for which it was concluded that the benefits of the acquired goodwill
associated with these businesses had not been realized, and would not be realized in the future.
This impairment assessment included all the original non-amortized goodwill associated with the
acquisition of the businesses, other than a portion pertaining to a retained business, which led to
the recognition of an impairment loss of $50 million ($51 million, net-of-tax) in the fourth
quarter of fiscal 2003. No impairment loss should have been recorded based on the fair value of
the entire reporting unit that included the disposed businesses.
Had the Company appropriately applied the provisions of SFAS 142 and allocated goodwill to the
disposed businesses based on their relative fair values compared to the fair value of the reporting
unit, the carrying amounts of the disposed businesses would have been lower and no impairment loss
would have been recorded. Further, the Company would have recognized gains on the divestitures of
both businesses in fiscal 2004 of a combined $18 million, net-of-tax.
Accounting for Income Taxes
With respect to the accounting for income taxes related to discontinued operations, including the
dispositions of Hill-Roms piped-medical gas and infant care businesses and the pre-need
88
insurance business of Forethought, the Company made certain errors with respect to the recognition of income
tax benefits associated with these discontinued operations. These errors relate to the following:
|
|
Improper recognition of book and tax differences associated with
discounts applied to the seller financing provided by the Company
in the disposition of Forethought. The errors also impacted the
ordinary and capital loss components of the taxable gain/loss
calculation as well as the amount of the valuation allowance
required for capital loss carryforwards. The cumulative effect in
2004 was an understatement of net deferred tax assets and the tax
benefit associated with the disposition of the business by
approximately $8 million. |
|
|
|
Failure to identify necessary corrections to the recorded deferred
tax balances of Forethought. Such adjustments should have been
fully recorded with the disposition of Forethought, therefore
resulting in an understatement in 2004 of net deferred tax assets
and the recorded income tax benefit by approximately $1 million. |
|
|
|
Failure to fully consider the effects of certain K-1 partnership
returns on investments held by Forethought in the determination of
the income tax benefit associated with discontinued operations in
fiscal 2004. This omission overstated income taxes payable by $2
million and understated the recorded income tax benefit related to
discontinued operations by approximately $2 million. |
|
|
|
Improper calculation of the respective tax gain/loss associated
with the Companys dispositions of its piped-medical gas, infant
care and Forethought businesses primarily associated with the
improper treatment of certain disposition-related costs. The
impact of these errors in 2004 resulted in an understatement of
the recorded income tax benefit by approximately $4 million, along
with an understatement of net deferred tax assets of $2 million
and an overstatement of income taxes payable of $2 million. |
The impact of all the above noted errors resulted in an overstatement of the recorded loss from
discontinued operations of $51 million in the fourth quarter of fiscal 2003 and an
overstatement of the recorded loss from discontinued operations in the first, second and third
quarters of fiscal 2004 of $5 million, $13 million and $15 million, respectively. Further, in
terms of a breakdown between divestiture transactions, $13 million of the errors related to the
disposal of Forethought, while $5 million and $15 million related to the disposal of the Hill-Rom
piped-medical gas and infant care businesses, respectively.
The consolidated financial statements included herein have been adjusted to give effect to these
errors in fiscal 2004 and 2003, thus resulting in a restatement of our previously issued financial
statements (the Restatement).
Other Items
During the first quarter of fiscal 2005, we concluded that it was appropriate to classify our
auction rate municipal bonds as current investments. Previously, such investments had been
classified as cash equivalents. Accordingly, we have revised our classification to report these
securities as current investments in a separate line item on our Consolidated Balance Sheets for
all periods presented herein. We have also made corresponding adjustments to our Statements of
Consolidated Cash Flows for all periods presented to reflect the gross purchases and sales of these
securities as investing activities rather than as a component of cash and cash equivalents. This
change in classification does not affect previously reported cash flows from operations or from
financing activities in our previously reported Statements of Consolidated Cash Flows, or our
previously reported Statements of Consolidated Income (Loss) for any period.
As of September 30, 2004, 2003 and 2002, $52 million, $33 million and $203 million, respectively,
of these current investments were previously classified as cash and cash
89
equivalents on our Consolidated Balance Sheets. For the fiscal years ended September 30, 2004 and 2003 and for the
ten months ended September 30, 2002, net cash provided (used in) investing activities related to
these current investments of $(19) million, $170 million and $2 million, respectively, were
previously included in cash and cash equivalents in our Statements of Consolidated Cash Flows.
We have also made certain other limited changes to the previously issued financial statements to
reflect classification changes adopted in fiscal 2005 and to correct typographical errors made in
the prior year.
The impacts of the Restatement and Other Items on our Consolidated Balance Sheets as of September
30, 2004 and 2003, and our Statements of Consolidated Income (Loss), of Cash Flows and of Shareholders
Equity and Comprehensive Income (Loss) for the fiscal years ended September 30, 2004 and 2003, and on our
Unaudited Quarterly Financial Information for fiscal 2004 and 2003, are shown in the accompanying
tables below. We have also updated the disclosures in Notes 1, 3, 9, 11, 12 and 15 within these
Consolidated Financial Statements to give effect to the Restatement and Other Items, as required.
The impact of the Restatement on our Schedule II Valuation and Qualifying Accounts was to reduce
the additions charged to costs and expenses for the valuation allowance against deferred tax assets
for the year ended September 30, 2003 by $10 million and to reduce the valuation allowance balance
by $10 million at September 30, 2003. For the fiscal year ended September 30, 2004, the additions
charged to costs and expenses for the valuation allowance against deferred tax assets increased by
$9 million and the valuation allowance balance at September 30, 2004 was decreased by $1 million.
90
The following table presents the effect of the Restatement on the Statements of Consolidated Income
(Loss) for the fiscal years ended September 30, 2004 and 2003:
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Dollars in millions except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
September 30, 2004 |
|
September 30, 2003 |
|
|
|
|
|
|
(As Originally |
|
|
|
|
|
(As Originally |
|
|
(As Restated) |
|
Reported) |
|
(As Restated) |
|
Reported) |
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care sales |
|
$ |
737 |
|
|
$ |
737 |
|
|
$ |
749 |
|
|
$ |
749 |
|
Health Care rentals |
|
|
452 |
|
|
|
452 |
|
|
|
318 |
|
|
|
318 |
|
Funeral Services sales |
|
|
640 |
|
|
|
640 |
|
|
|
628 |
|
|
|
628 |
|
|
Total revenues |
|
|
1,829 |
|
|
|
1,829 |
|
|
|
1,695 |
|
|
|
1,695 |
|
|
Cost of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care cost of goods sold |
|
|
382 |
|
|
|
382 |
|
|
|
370 |
|
|
|
370 |
|
Health Care rental expenses |
|
|
249 |
|
|
|
249 |
|
|
|
161 |
|
|
|
161 |
|
Funeral Services cost of goods sold |
|
|
290 |
|
|
|
290 |
|
|
|
279 |
|
|
|
279 |
|
|
Total cost of revenues |
|
|
921 |
|
|
|
921 |
|
|
|
810 |
|
|
|
810 |
|
|
Gross Profit |
|
|
908 |
|
|
|
908 |
|
|
|
885 |
|
|
|
885 |
|
Other operating expenses |
|
|
582 |
|
|
|
582 |
|
|
|
544 |
|
|
|
544 |
|
Litigation charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges |
|
|
6 |
|
|
|
6 |
|
|
|
9 |
|
|
|
9 |
|
|
Operating Profit |
|
|
320 |
|
|
|
320 |
|
|
|
332 |
|
|
|
332 |
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(15 |
) |
|
|
(15 |
) |
|
|
(19 |
) |
|
|
(19 |
) |
Investment income |
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
Loss on extinguishment of debt |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
(16 |
) |
|
|
(16 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
(26 |
) |
|
|
(26 |
) |
|
Income
from Continuing Operations Before Income Taxes |
|
|
308 |
|
|
|
308 |
|
|
|
280 |
|
|
|
280 |
|
Income tax expense |
|
|
120 |
|
|
|
120 |
|
|
|
99 |
|
|
|
99 |
|
|
Income from Continuing Operations |
|
|
188 |
|
|
|
188 |
|
|
|
181 |
|
|
|
181 |
|
Discontinued Operations : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
(including loss on impairment of
discontinued operations of $107 and $0) |
|
|
(71 |
) |
|
|
(90 |
) |
|
|
13 |
|
|
|
(37 |
) |
Income tax (benefit) expense |
|
|
(26 |
) |
|
|
(12 |
) |
|
|
5 |
|
|
|
6 |
|
|
(Loss) income from discontinued operations |
|
|
(45 |
) |
|
|
(78 |
) |
|
|
8 |
|
|
|
(43 |
) |
|
Net Income |
|
$ |
143 |
|
|
$ |
110 |
|
|
$ |
189 |
|
|
$ |
138 |
|
|
Income per common share from
continuing operations Basic |
|
$ |
3.02 |
|
|
$ |
3.02 |
|
|
$ |
2.91 |
|
|
$ |
2.91 |
|
(Loss) income per common share from
discontinued operations Basic |
|
|
(0.72 |
) |
|
|
(1.26 |
) |
|
|
0.14 |
|
|
|
(0.68 |
) |
|
Net Income per Common Share Basic |
|
$ |
2.30 |
|
|
$ |
1.76 |
|
|
$ |
3.05 |
|
|
$ |
2.23 |
|
|
Income per common share from
continuing operations Diluted |
|
$ |
3.00 |
|
|
$ |
3.00 |
|
|
$ |
2.90 |
|
|
$ |
2.90 |
|
(Loss) income per common share from
discontinued operations Diluted |
|
|
(0.72 |
) |
|
|
(1.25 |
) |
|
|
0.14 |
|
|
|
(0.68 |
) |
|
Net Income per Common Share Diluted |
|
$ |
2.28 |
|
|
$ |
1.75 |
|
|
$ |
3.04 |
|
|
$ |
2.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per Common Share |
|
$ |
1.08 |
|
|
$ |
1.08 |
|
|
$ |
1.00 |
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding Basic |
|
|
62,237,404 |
|
|
|
62,237,404 |
|
|
|
62,032,768 |
|
|
|
62,032,768 |
|
|
Average Common Shares Outstanding Diluted |
|
|
62,725,372 |
|
|
|
62,725,372 |
|
|
|
62,184,537 |
|
|
|
62,184,537 |
|
|
91
The following table presents the effect of the Restatement on the Consolidated Balance Sheets as of
September 30, 2004 and 2003:
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004 |
|
September 30, 2003 |
|
|
|
|
|
|
(As Originally |
|
|
|
|
|
(As Originally |
|
|
(As Restated) |
|
Reported) |
|
(As Restated) |
|
Reported) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
128 |
|
|
$ |
180 |
|
|
$ |
155 |
|
|
$ |
188 |
|
Current investments |
|
|
52 |
|
|
|
|
|
|
|
33 |
|
|
|
|
|
Trade accounts receivable, less allowances of $31
in 2004 and $26 in 2003 |
|
|
417 |
|
|
|
417 |
|
|
|
361 |
|
|
|
361 |
|
Inventories |
|
|
122 |
|
|
|
122 |
|
|
|
92 |
|
|
|
92 |
|
Deferred income taxes |
|
|
12 |
|
|
|
4 |
|
|
|
63 |
|
|
|
63 |
|
Other |
|
|
16 |
|
|
|
16 |
|
|
|
17 |
|
|
|
17 |
|
|
Total current assets |
|
|
747 |
|
|
|
739 |
|
|
|
721 |
|
|
|
721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Leased to Others |
|
|
325 |
|
|
|
325 |
|
|
|
200 |
|
|
|
200 |
|
Less accumulated depreciation |
|
|
174 |
|
|
|
174 |
|
|
|
143 |
|
|
|
143 |
|
|
Equipment leased to others, net |
|
|
151 |
|
|
|
151 |
|
|
|
57 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
|
679 |
|
|
|
679 |
|
|
|
655 |
|
|
|
655 |
|
Less accumulated depreciation |
|
|
458 |
|
|
|
458 |
|
|
|
448 |
|
|
|
448 |
|
|
Property, net |
|
|
221 |
|
|
|
221 |
|
|
|
207 |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
79 |
|
|
|
79 |
|
|
|
68 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
429 |
|
|
|
360 |
|
|
|
146 |
|
|
|
77 |
|
Software and other |
|
|
190 |
|
|
|
190 |
|
|
|
106 |
|
|
|
106 |
|
Notes receivable, net of discount |
|
|
105 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
Deferred charges and other assets |
|
|
49 |
|
|
|
49 |
|
|
|
41 |
|
|
|
41 |
|
|
Total other assets |
|
|
773 |
|
|
|
704 |
|
|
|
293 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of Discontinued Operations |
|
|
98 |
|
|
|
98 |
|
|
|
30 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
3,334 |
|
|
|
3,334 |
|
Deferred acquisition costs |
|
|
|
|
|
|
|
|
|
|
695 |
|
|
|
695 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
Other |
|
|
|
|
|
|
|
|
|
|
64 |
|
|
|
64 |
|
|
Total insurance assets |
|
|
|
|
|
|
|
|
|
|
4,099 |
|
|
|
4,099 |
|
|
Total Assets |
|
$ |
2,069 |
|
|
$ |
1,992 |
|
|
$ |
5,475 |
|
|
$ |
5,425 |
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004 |
|
September 30, 2003 |
|
|
|
|
|
|
(As Originally |
|
|
|
|
|
(As Originally |
|
|
(As Restated) |
|
Reported) |
|
(As Restated) |
|
Reported) |
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
93 |
|
|
$ |
93 |
|
|
$ |
87 |
|
|
$ |
87 |
|
Short-term borrowings |
|
|
11 |
|
|
|
11 |
|
|
|
5 |
|
|
|
5 |
|
Income taxes payable |
|
|
|
|
|
|
5 |
|
|
|
13 |
|
|
|
14 |
|
Accrued compensation |
|
|
87 |
|
|
|
87 |
|
|
|
104 |
|
|
|
104 |
|
Accrued litigation charge |
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
75 |
|
Accrued product warranties |
|
|
19 |
|
|
|
19 |
|
|
|
21 |
|
|
|
21 |
|
Accrued customer rebates |
|
|
22 |
|
|
|
17 |
|
|
|
22 |
|
|
|
22 |
|
Other |
|
|
76 |
|
|
|
81 |
|
|
|
52 |
|
|
|
52 |
|
|
Total current liabilities |
|
|
308 |
|
|
|
313 |
|
|
|
379 |
|
|
|
380 |
|
|
Long-Term Debt |
|
|
360 |
|
|
|
360 |
|
|
|
155 |
|
|
|
155 |
|
|
Other Long-Term Liabilities |
|
|
124 |
|
|
|
124 |
|
|
|
116 |
|
|
|
116 |
|
|
Deferred Income Taxes |
|
|
5 |
|
|
|
7 |
|
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit reserves |
|
|
|
|
|
|
|
|
|
|
2,728 |
|
|
|
2,728 |
|
Unearned revenue |
|
|
|
|
|
|
|
|
|
|
806 |
|
|
|
806 |
|
General liabilities |
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
68 |
|
|
Total insurance liabilities |
|
|
|
|
|
|
|
|
|
|
3,602 |
|
|
|
3,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of Discontinued Operations |
|
|
92 |
|
|
|
92 |
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
889 |
|
|
|
896 |
|
|
|
4,265 |
|
|
|
4,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock without par value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 199,000,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued 80,323,912 shares in 2004 and 2003 |
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Additional paid-in capital |
|
|
62 |
|
|
|
62 |
|
|
|
47 |
|
|
|
47 |
|
Retained earnings |
|
|
1,659 |
|
|
|
1,575 |
|
|
|
1,583 |
|
|
|
1,532 |
|
Accumulated other comprehensive income |
|
|
6 |
|
|
|
6 |
|
|
|
118 |
|
|
|
118 |
|
Treasury stock, at cost: 2004-18,363,520 shares
2003 18,508,939 shares |
|
|
(551 |
) |
|
|
(551 |
) |
|
|
(542 |
) |
|
|
(542 |
) |
|
Total Shareholders Equity |
|
|
1,180 |
|
|
|
1,096 |
|
|
|
1,210 |
|
|
|
1,159 |
|
|
Total Liabilities and Shareholders Equity |
|
$ |
2,069 |
|
|
$ |
1,992 |
|
|
$ |
5,475 |
|
|
$ |
5,425 |
|
|
93
The following table presents the effect of the Restatement on the Statements of Consolidated Cash
Flows for the fiscal years ended September 30, 2004 and 2003:
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
September 30, 2004 |
|
September 30, 2003 |
|
|
|
|
|
|
(As Originally |
|
|
|
|
|
(As Originally |
|
|
(As Restated) |
|
Reported) |
|
(As Restated) |
|
Reported) |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
143 |
|
|
$ |
110 |
|
|
$ |
189 |
|
|
$ |
138 |
|
Adjustments to reconcile net income (loss) to
net cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and write-down of
intangibles |
|
|
108 |
|
|
|
108 |
|
|
|
75 |
|
|
|
75 |
|
Accretion and capitalized interest on financing
provided on divestiture |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
Net capital (gains) losses Insurance |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
49 |
|
|
|
49 |
|
Provision for deferred income taxes
from continuing operations |
|
|
37 |
|
|
|
37 |
|
|
|
71 |
|
|
|
71 |
|
Loss on divestiture of discontinued operations, net-of -tax |
|
|
71 |
|
|
|
105 |
|
|
|
|
|
|
|
51 |
|
Loss on disposal of fixed assets |
|
|
11 |
|
|
|
11 |
|
|
|
5 |
|
|
|
5 |
|
Loss on extinguishment of debt |
|
|
6 |
|
|
|
6 |
|
|
|
16 |
|
|
|
16 |
|
Change in working capital excluding cash, current
debt, acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(14 |
) |
|
|
(14 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
Inventories |
|
|
(23 |
) |
|
|
(23 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
Other current assets |
|
|
73 |
|
|
|
73 |
|
|
|
118 |
|
|
|
118 |
|
Trade accounts payable |
|
|
(12 |
) |
|
|
(12 |
) |
|
|
3 |
|
|
|
3 |
|
Accrued expenses and other liabilities |
|
|
(113 |
) |
|
|
(113 |
) |
|
|
(187 |
) |
|
|
(187 |
) |
Change in insurance deferred policy acquisition costs |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
2 |
|
|
|
2 |
|
Change in insurance unearned revenue |
|
|
5 |
|
|
|
5 |
|
|
|
11 |
|
|
|
11 |
|
Increase in benefit reserves |
|
|
57 |
|
|
|
57 |
|
|
|
80 |
|
|
|
80 |
|
Change in other insurance items, net |
|
|
31 |
|
|
|
31 |
|
|
|
8 |
|
|
|
8 |
|
Other, net |
|
|
(23 |
) |
|
|
(24 |
) |
|
|
(64 |
) |
|
|
(64 |
) |
|
Net cash provided by operating activities |
|
|
348 |
|
|
|
348 |
|
|
|
366 |
|
|
|
366 |
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and purchase of intangibles |
|
|
(125 |
) |
|
|
(125 |
) |
|
|
(115 |
) |
|
|
(115 |
) |
Proceeds on disposal of property and equipment
leased to others |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
Other investments |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
(14 |
) |
Proceeds on sales of businesses |
|
|
149 |
|
|
|
149 |
|
|
|
|
|
|
|
|
|
Payment for acquisitions of businesses,
net of cash acquired |
|
|
(430 |
) |
|
|
(430 |
) |
|
|
|
|
|
|
|
|
Investment purchases and capital calls |
|
|
(85 |
) |
|
|
(4 |
) |
|
|
(110 |
) |
|
|
|
|
Proceeds on investment sales |
|
|
85 |
|
|
|
23 |
|
|
|
280 |
|
|
|
|
|
Insurance investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
(616 |
) |
|
|
(616 |
) |
|
|
(1,558 |
) |
|
|
(1,558 |
) |
Proceeds on maturities |
|
|
94 |
|
|
|
94 |
|
|
|
356 |
|
|
|
356 |
|
Proceeds on sales |
|
|
417 |
|
|
|
417 |
|
|
|
996 |
|
|
|
996 |
|
|
Net cash used in investing activities |
|
|
(511 |
) |
|
|
(492 |
) |
|
|
(164 |
) |
|
|
(334 |
) |
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from interest rate swap terminations |
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
27 |
|
Additions to short-term debt |
|
|
6 |
|
|
|
6 |
|
|
|
5 |
|
|
|
5 |
|
Borrowings of long-term debt |
|
|
541 |
|
|
|
541 |
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(346 |
) |
|
|
(346 |
) |
|
|
(185 |
) |
|
|
(185 |
) |
Debt issuance costs |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Payment of cash dividends |
|
|
(67 |
) |
|
|
(67 |
) |
|
|
(62 |
) |
|
|
(62 |
) |
Proceeds on exercise of options |
|
|
25 |
|
|
|
25 |
|
|
|
3 |
|
|
|
3 |
|
Treasury stock acquired |
|
|
(28 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
Insurance deposits received |
|
|
228 |
|
|
|
228 |
|
|
|
329 |
|
|
|
329 |
|
Insurance benefits paid |
|
|
(221 |
) |
|
|
(221 |
) |
|
|
(272 |
) |
|
|
(272 |
) |
|
Net cash provided by (used in) financing activities |
|
|
135 |
|
|
|
135 |
|
|
|
(155 |
) |
|
|
(155 |
) |
|
Effect of Exchange Rate Changes on Cash |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
Total Cash Flows |
|
|
(27 |
) |
|
|
(8 |
) |
|
|
49 |
|
|
|
(121 |
) |
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of period |
|
|
155 |
|
|
|
188 |
|
|
|
106 |
|
|
|
309 |
|
At end of period |
|
$ |
128 |
|
|
$ |
180 |
|
|
$ |
155 |
|
|
$ |
188 |
|
|
94
The following table presents the effect of the Restatement on the Statements of Consolidated
Shareholders Equity and Comprehensive Income (Loss) for the fiscal years ended September 30, 2004
and 2003:
STATEMENTS OF CONSOLIDATED SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Common Stock |
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Additional |
|
|
Retained |
|
|
Comprehensive |
|
|
in Treasury |
|
|
|
|
(As Restated) |
|
Outstanding |
|
|
Amount |
|
|
Paid-in-Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
|
Balance at September 30, 2002 |
|
|
61,702,410 |
|
|
$ |
4 |
|
|
$ |
44 |
|
|
$ |
1,456 |
|
|
$ |
40 |
|
|
|
18,621,502 |
|
|
$ |
(545 |
) |
|
$ |
999 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (As restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Net change in unrealized gain (loss) on
available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267 |
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62 |
) |
Stock awards and option exercises |
|
|
112,563 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
(112,563 |
) |
|
|
3 |
|
|
|
6 |
|
|
Balance at September 30, 2003 |
|
|
61,814,973 |
|
|
|
4 |
|
|
|
47 |
|
|
|
1,583 |
|
|
|
118 |
|
|
|
18,508,939 |
|
|
|
(542 |
) |
|
|
1,210 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (As restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Net change in unrealized gain (loss) on
available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
(114 |
) |
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
Treasury shares acquired |
|
|
(475,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
475,200 |
|
|
|
(28 |
) |
|
|
(28 |
) |
Stock awards and option exercises |
|
|
620,619 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
(620,619 |
) |
|
|
19 |
|
|
|
34 |
|
|
Balance at September 30, 2004 |
|
|
61,960,392 |
|
|
$ |
4 |
|
|
$ |
62 |
|
|
$ |
1,659 |
|
|
$ |
6 |
|
|
|
18,363,520 |
|
|
$ |
(551 |
) |
|
$ |
1,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Common Stock |
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Additional |
|
|
Retained |
|
|
Comprehensive |
|
|
in Treasury |
|
|
|
|
(As Originally Reported) |
|
Outstanding |
|
|
Amount |
|
|
Paid-in-Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
|
Balance at September 30, 2002 |
|
|
61,702,410 |
|
|
$ |
4 |
|
|
$ |
44 |
|
|
$ |
1,456 |
|
|
$ |
40 |
|
|
|
18,621,502 |
|
|
$ |
(545 |
) |
|
$ |
999 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Net change in unrealized gain (loss) on
available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216 |
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62 |
) |
Stock awards and option exercises |
|
|
112,563 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
(112,563 |
) |
|
|
3 |
|
|
|
6 |
|
|
Balance at September 30, 2003 |
|
|
61,814,973 |
|
|
|
4 |
|
|
|
47 |
|
|
|
1,532 |
|
|
|
118 |
|
|
|
18,508,939 |
|
|
|
(542 |
) |
|
|
1,159 |
|
Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Net change in unrealized gain (loss) on
available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
(114 |
) |
Minimum pension liability |
|
|
|
|
|
|
|