Amended Quarterly Report
Table of Contents
of the Securities Exchange Act of 1934
|
Indiana
(State or other jurisdiction of incorporation or organization) |
35-1160484
(I.R.S. Employer Identification No.) |
|
700 State Route 46 East
Batesville, Indiana (Address of principal executive offices) |
47006-8835
(Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former
fiscal year, if changed since last report)
Table of Contents
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3
Table of Contents
(Dollars in millions except per share data)
| Quarterly | ||||||||
| Period Ended | ||||||||
| (As Restated, | ||||||||
| See Note 13) | ||||||||
| 12/31/04 | 12/31/03 | |||||||
|
Net Revenues
|
||||||||
|
Health Care sales
|
$ | 196 | $ | 165 | ||||
|
Health Care rentals
|
120 | 93 | ||||||
|
Funeral Services sales
|
159 | 164 | ||||||
|
|
||||||||
|
Total revenues
|
475 | 422 | ||||||
|
|
||||||||
|
Cost of Revenues
|
||||||||
|
Health Care cost of goods sold
|
108 | 86 | ||||||
|
Health Care rental expenses
|
72 | 43 | ||||||
|
Funeral Services cost of goods sold
|
75 | 74 | ||||||
|
|
||||||||
|
Total cost of revenues
|
255 | 203 | ||||||
|
|
||||||||
|
|
||||||||
|
Gross Profit
|
220 | 219 | ||||||
|
|
||||||||
|
Other operating expenses
|
154 | 146 | ||||||
|
|
||||||||
|
|
||||||||
|
Operating Profit
|
66 | 73 | ||||||
|
|
||||||||
|
Other income (expense), net:
|
||||||||
|
Interest expense
|
(4 | ) | (3 | ) | ||||
|
Investment income
|
7 | 1 | ||||||
|
Other
|
— | (1 | ) | |||||
|
|
||||||||
|
Income from Continuing Operations Before Income Taxes
|
69 | 70 | ||||||
|
|
||||||||
|
Income tax expense (Note 11)
|
25 | 25 | ||||||
|
|
||||||||
|
|
||||||||
|
Income from Continuing Operations
|
44 | 45 | ||||||
|
|
||||||||
|
Discontinued Operations (Note 4):
|
||||||||
|
|
||||||||
|
Income from discontinued operations before income taxes (including
gain on divestiture of discontinued operations of $0 and $3)
|
— | 22 | ||||||
|
Income tax expense
|
— | 5 | ||||||
|
|
||||||||
|
Income from discontinued operations
|
— | 17 | ||||||
|
|
||||||||
|
|
||||||||
|
Net Income
|
$ | 44 | $ | 62 | ||||
|
|
||||||||
|
|
||||||||
|
Income per common share from continuing operations
— Basic (Note 5)
|
$ | 0.70 | $ | 0.72 | ||||
|
Income per common share from discontinued operations
— Basic (Note 5)
|
— | 0.28 | ||||||
|
|
||||||||
|
Net Income per Common Share — Basic
|
$ | 0.70 | $ | 1.00 | ||||
|
|
||||||||
|
|
||||||||
|
Income per common share from continuing operations
— Diluted (Note 5)
|
$ | 0.69 | $ | 0.72 | ||||
|
Income per common share from discontinued operations
— Diluted (Note 5)
|
— | 0.28 | ||||||
|
|
||||||||
|
Net Income per Common Share — Diluted
|
$ | 0.70 | $ | 0.99 | ||||
|
|
||||||||
|
|
||||||||
|
Dividends per Common Share
|
$ | 0.28 | $ | 0.27 | ||||
|
|
||||||||
|
|
||||||||
|
Average Common Shares Outstanding — Basic (thousands
)
|
62,263 | 62,131 | ||||||
|
|
||||||||
|
|
||||||||
|
Average Common Shares Outstanding — Diluted (thousands
)
|
62,689 | 62,432 | ||||||
|
|
||||||||
4
Table of Contents
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
(Dollars in millions)
(As Restated – See Note 13)
12/31/04
9/30/04
$
126
$
128
82
52
420
417
116
122
23
12
14
16
781
747
160
151
216
221
80
79
427
429
188
190
108
105
43
49
766
773
100
98
$
2,103
$
2,069
$
84
$
93
11
11
83
87
19
19
100
98
297
308
356
360
124
124
21
5
93
92
891
889
4
4
63
62
1,685
1,659
10
6
(550
)
(551
)
1,212
1,180
$
2,103
$
2,069
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(Dollars in millions)
Year-to-Date Period Ended
(As Restated,
See Note 13)
12/31/04
12/31/03
$
44
$
62
29
20
(3
)
—
—
(10
)
9
32
—
(5
)
1
1
(27
)
(144
)
—
19
—
21
25
(18
)
78
(22
)
(30
)
(20
)
—
14
(8
)
(68
)
(55
)
(26
)
27
59
—
(287
)
—
96
—
183
(66
)
(49
)
(18
)
(17
)
3
3
—
76
—
(71
)
(15
)
(9
)
1
1
(2
)
(79
)
128
155
$
126
$
76
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(Dollars in millions except per share data)
1.
Summary of Significant Accounting Policies
Basis of Presentation
The unaudited, condensed consolidated financial statements appearing in this quarterly
report on Form 10-Q/A should be read in conjunction with the financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2004 as amended and filed with the U.S. Securities and Exchange Commission.
Unless the context otherwise requires, the terms “Hillenbrand”, the “Company”, “we”, “our”
and “us” refer to Hillenbrand Industries, Inc. and its consolidated subsidiaries, and the
terms “Hill-Rom Company”, “Batesville Casket Company”, and derivations thereof, refer to
one or more of the subsidiary companies of Hillenbrand that comprise those respective
business units. Prior to July 1, 2004, Forethought Financial Services (“Forethought”) was
our third operating company. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In the opinion of management, the financial
statements herein include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial position, results of operations, and cash flows for
the interim periods presented. Quarterly results are not necessarily indicative of annual
results.
We completed the divestitures of the piped-medical gas and infant care businesses of
Hill-Rom and of Forethought in the first, third and fourth quarters, respectively, of
fiscal 2004, as further described in Note 4 below. These operations are presented as
discontinued operations within our Condensed Consolidated Statements of Income for all
periods presented. Under this presentation, the revenues and variable costs associated
with the businesses have been removed from the individual line items comprising the
Condensed Consolidated Statements of Income and are 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
Condensed 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 Condensed Consolidated Statements of 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 by (used in) operations. Year-to-date operating, investing and financing
activities of the discontinued operations are reflected within the respective captions of
the Condensed Consolidated Statements of Cash Flows up to the disposal date and consistent
with previous periods.
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.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year’s
presentation, including the reclassification of Forethought to results from discontinued
operations in the prior year first quarter.
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Revision in the Classification of Certain Securities
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 and cash equivalents. Accordingly, we have revised the
classification to report these securities as current investments in a separate line item on
our Condensed Consolidated Balance Sheet as of September 30, 2004. We have also made
corresponding adjustments to our Condensed Consolidated Statement of Cash Flows for the
period ended December 31, 2003, 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 Consolidated Statements of Cash Flows,
or our previously reported Consolidated Statements of Income for any period.
As of September 30, 2003, $33.4 million of these current investments were classified as cash
and cash equivalents on our Consolidated Balance Sheet.
For the fiscal years ended September 30, 2004 and 2003 and for the ten months ended
September 30, 2002, net cash provided by (used in) investing activities related to these
current investments of ($19.1) million, $169.5 million and $1.8 million, respectively, were
included in cash and cash equivalents in our Consolidated Statements of Cash Flows.
Current Investments
At December 31, 2004 and September 30, 2004, we held $82 million and $52 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 interest income.
Investments
We use the equity method of accounting for certain private equity limited partnership
investments, with earnings or losses reported within Investment income in the Condensed
Consolidated Statements of Income. Other minority investments are accounted for on either a
cost or equity basis, dependent upon our level of influence over the investee.
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 Statement of Financial Accounting Standards
(SFAS) No. 123, “Accounting for Stock-Based Compensation”, to all stock-based employee
compensation for the periods covered in this report. The fair value of stock option grants
are estimated on the date of grant. Prior to fiscal year 2005 we used the Black-Scholes
option-pricing model, but all stock options granted in fiscal year 2005 are valued with the
Binomial option-pricing model for pro forma expense purposes only. Our Binomial model
incorporates the possibility of early exercise of options into the valuation, as well as our
historical exercise and termination experience to determine the option value. For these
reasons, we believe the
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Binomial model provides a fair value that is more representative of actual historical
experience than the value calculated under the Black-Scholes model.
The weighted average fair value of options granted in the first quarter of fiscal 2005 was
$10.42 under the Binomial model using the following assumptions: (i) risk-free interest
rates of 2.64-4.09 percent; (ii) expected dividend yields of 1.70-2.02 percent; (iii)
expected volatility factors of 0.2023-0.2592; (iv) exercise factor of 39 percent; and (v)
post-vesting termination rate of 30 percent.
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2.
Supplementary Balance Sheet Information
The following information pertains to assets and consolidated shareholders’ equity:
3.
Acquisitions
During fiscal 2004, Hill-Rom completed the acquisitions of Advanced Respiratory, Inc.
(“ARI”), Mediq, Incorporated (“Mediq”) and NaviCare Systems, Inc. (“NaviCare”). The results
of these businesses have been included in the Condensed Consolidated Financial Statements
since each acquisition’s date of close.
On October 17, 2003, Hill-Rom acquired ARI, a manufacturer and distributor of non-invasive
airway clearance products and systems, for approximately $103 million, plus an additional $2
million of acquisition costs incurred in relation to the transaction. This purchase price
included a first quarter 2005 payment of $8 million resulting from net revenues achieved in
fiscal 2004. An additional deferred payment of $5.7 million is outstanding and payable no
later than the end of calendar 2005 and is accrued in the Condensed Consolidated Balance
Sheets as of December 31, 2004 and September 30, 2004. An additional contingent payment,
which could also be payable by the end of calendar 2005, is dependent upon ARI achieving
certain net revenue targets over the next year. Any such contingent payment 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, for approximately $329 million, plus an additional $6 million
of acquisition costs incurred in relation to the transaction. This purchase price included
$23 million deposited in an escrow account, of which $20 million remained at December 31,
2004, related to potential adjustments resulting primarily from the funded status of Mediq’s
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. The escrow amount has been included in the allocation of purchase price outlined
below. Final resolution of the remaining amount in escrow is expected in fiscal 2006. If
any adjustment differs in amount from the current escrow balance, the reported purchase
price would be 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.
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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, all of which has been paid as of January 2005.
The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at their dates of acquisition. During the first quarter of fiscal 2005,
we reduced goodwill by approximately $2 million to reflect the true-up of deferred taxes for
opening balance sheet adjustments on ARI and NaviCare and a reduction to the previously
accrued contingent payment made to ARI in the first quarter of 2005. The purchase prices
remain subject to adjustment for the contingent payments outlined above; thus, the
allocation of the purchase prices is subject to refinement.
4.
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, which included the value of the partnership
assets transferred to us. This consideration excluded 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. 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 to occur in the
last half of fiscal 2005.
In October 2003, Hill-Rom sold its piped-medical gas business to Beacon Medical
Products LLC, for $13 million, after final purchase price adjustments.
In August 2004, Hill-Rom completed the sale of its Air-Shields infant care business to a
subsidiary of Dräger Medical AG & Co. KGaA for approximately $31 million.
These businesses have been treated as discontinued operations for all periods presented
within the Condensed Consolidated Statements of Income in accordance with the provisions of
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.
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Operating results for the discontinued operations were as follows for the quarters ended
December 31, 2004 and 2003:
12/31/04
9/30/04
$
99
$
97
1
1
$
100
98
93
92
$
7
$
6
5.
Earnings per Common Share
Basic earnings per share were calculated based upon the weighted-average number of
outstanding common shares for the period, plus the effect of deferred vested shares.
Diluted earnings per share were calculated consistent with the basic earnings per share
calculation including the effect of dilutive unissued common shares related to stock-based
employee compensation programs. For all periods presented, anti-dilutive stock options
were excluded in the calculation of diluted earnings per share. Excluded shares were
902,444 for the three months ended December 31, 2004 and 404,433 for the three months
ended December 31, 2003. Cumulative treasury stock acquired, less cumulative shares
reissued, has been excluded in determining the average number of shares outstanding.
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Earnings per share are calculated as follows:
6.
Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income”, requires unrealized gains or losses on
available-for-sale securities, foreign currency translation adjustments and minimum pension
liability adjustments to be included in accumulated other comprehensive income.
The components of comprehensive income are as follows:
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7.
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 employee’s level of compensation during specific
periods of employment. We also sponsor nonqualified, unfunded defined benefit pension plans
for certain members of management.
The components of net pension expense for defined benefit retirement plans in the United
States for the quarterly periods ended December 31, 2004 and 2003 were as follows:
Quarterly
Period Ended
12/31/04
12/31/03
$
3
$
3
5
4
(5
)
(4
)
$
3
$
3
8.
Guarantees
Limited warranties are routinely granted on our products with respect to defects in material
and workmanship. The terms of these warranties are generally one year, however, certain
components and products have substantially longer warranty periods. A reserve is recognized
with respect to these obligations at the time of product sale, with subsequent warranty
claims recorded directly against the reserve. The amount of the warranty reserve is
determined based on historical trend experience for the covered products. For more
significant warranty-related matters which might require a broad-based correction, separate
reserves are established when such events are identified and the cost of correction can be
reasonably estimated. A reconciliation of changes in the warranty reserve for the periods
covered in this report is as follows:
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9.
Commitments and Contingencies
On June 30, 2003, Spartanburg Regional Healthcare System (the “Plaintiff”) filed an
antitrust suit against Hillenbrand and its Hill-Rom subsidiary, in the United States
District Court for the District of South Carolina, as described in the Annual Report on Form
10-K for the period ended September 30, 2004. The trial is anticipated to occur on or after
September 26, 2005. The hearing on class certification is anticipated to occur by mid to
late March or April 2005.
On December 30, 2004, Plaintiff filed its Motion for Leave to File a Second Amended
Complaint, which has not yet been ruled on by the Court, seeking to extend the period for
which it seeks damages, from 1990 through the present, and add a new allegation of monopoly
maintenance of an alleged standard hospital bed market. Plaintiff is also seeking to
broaden the proposed class definition to include all purchasers of Hill-Rom
Ò
standard
and/or specialty hospital beds and/or architectural and in-room products from 1990 to the
present where there have been contracts between Hill-Rom and such purchasers, either on
behalf of themselves or through purchasing organizations, where those contracts conditioned
discounts on Hill-Rom
Ò
hospital beds and other architectural and in-room products on
commitments to rent or purchase a very high percentage of specialty beds from Hill-Rom. We
are vigorously opposing Plaintiff’s motion on various grounds, including the significant
passage of time since the deadline for amending pleadings.
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10.
Special Charges
2004 Actions
During the fourth fiscal quarter of 2004, we announced a restructuring intended to better
align Hill-Rom’s financial and personnel resources to fully support its growth initiatives,
decrease overall costs, and improve performance in Europe. The plan included the expected
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. As of December 31, 2004, approximately
140 positions have been eliminated with a small number of the original list of terminees
being transferred to other positions. As of this same date, there was approximately $5
million remaining in the reserve, after cash payments of $2 million during the quarter ended
December 31, 2004. All obligations associated with this action, which is expected to be
completed in fiscal 2005, will be settled in cash.
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 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. During fiscal 2004,
approximately $1 million of the originally recorded reserve was reversed. As of December
31, 2004 this action was complete. 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-Rom’s strategy. In addition, approximately 90 new positions
were hired under the new business structure.
11.
Income Taxes
The effective income tax rate for the first quarter of 2005 was 37.0 percent compared to
35.7 percent for the first quarter of 2004. The higher rate in 2005 is due primarily to an
increase in the valuation allowance for continued losses in France. Although these loss
carryforwards have no expiration date, current operating results and economic conditions
have made it difficult to predict full recoverability of these tax assets. Therefore a full
valuation allowance has been established. We will continue to pursue opportunities to
reduce our effective tax rate in future periods.
12.
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 business.
With the continued evolution of the prior year realignment of the Hill-Rom business
structure, changes were adopted in fiscal 2004 and 2005 in terms of the way in which
management views the business, including reporting to our executive management team. With
these changes, in fiscal 2004 the prior Hill-Rom reporting segment was 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. Divisional income
under this approach was defined as the division’s gross profit less their direct operating
costs. This measure excluded a number of functional costs which were managed on an overall
Hill-Rom basis, including finance, information technology, human resources, legal and
regulatory and strategy. In fiscal 2005, a change was made to the definition of divisional
income. Beginning in the first quarter of 2005, divisional income now includes functional
costs previously excluded from the measure. Functional costs directly related to a specific
division are now borne directly by such division based on the Hill-Rom annual
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plan. For functional costs not directly tied to a specific division, the costs have been
allocated to the respective divisions on the basis of various allocation methodologies, also
based on the Hill-Rom annual plan. Management now evaluates divisional performance on this
new basis. Segment data for 2004 has been restated to conform with this new presentation.
Intersegment sales between the Americas/Asia Pacific and EMEA are generally accounted for at
current market value or cost plus markup. Eliminations, net of allocations, while not
considered a segment, will be presented separately to aid in the reconciliation of segment
information to consolidated Hill-Rom financial information.
The reporting 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 4 to the Condensed Consolidated Financial Statements. Corporate, while
not a segment, is presented separately to aid in the reconciliation of segment information
to that reported in the Condensed Consolidated Statements of Income.
Financial information regarding our reportable segments is presented below:
(a)
Reflects results of Forethought, including Forethought Federal Savings Bank, and the
Hill-Rom piped-medical gas and infant care businesses classified as discontinued
operations.
13.
Restatement and Revised Classification of Condensed Consolidated Financial Statements
Restatement
During the fourth quarter of fiscal 2003, we entered into definitive agreements to sell
Hill-Rom’s piped-medical gas and infant care businesses and in the second quarter of fiscal
2004, we 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 our
Condensed 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 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
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determined that it had also made errors with respect to the allocation of goodwill to
Hill-Rom’s 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 “Restatement”) the previously issued financial statements for the
fiscal years ended September 30, 2003 and 2004 and for all interim periods in 2004 and the
Condensed Consolidated Balance Sheets for the interim periods of 2005.
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.
Hillenbrand’s 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-Rom’s 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 we reached definitive agreements in the fourth quarter of fiscal 2003 to sell
Hill-Rom’s piped-medical gas and infant care businesses, we 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 we 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, we would have recognized a gain on the
divestiture of the piped-medical gas business in the first quarter of fiscal 2004 of $5
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-Rom’s piped-medical gas and infant care businesses and
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the pre-need insurance business of Forethought, we made certain errors with respect to the
recognition of income tax benefits associated with these discontinued operations in each of
the first three quarters of fiscal 2004. These errors related 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 combined effect of these items in the second quarter of fiscal 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 the second quarter of fiscal
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 the second quarter of 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 our
dispositions of the piped-medical gas, infant care and Forethought businesses primarily
associated with the improper treatment of certain disposition-related costs.
The effect of these errors by quarter is as follows:
Overstatement/(Understatement)
Income Tax Benefit
Deferred Tax Assets
Income Taxes Payable
$
(2
)
$
—
$
2
(2
)
(2
)
—
$
(4
)
$
(2
)
$
2
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(Dollars in millions except per share data)
Quarterly
Period Ended
(As Originally
(As Restated)
Reported)
12/31/03
12/31/03
$
165
$
165
93
93
164
164
422
422
86
86
43
43
74
74
203
203
219
219
146
146
73
73
(3
)
(3
)
1
1
(1
)
(1
)
70
70
25
25
45
45
22
19
5
7
17
12
$
62
$
57
$
0.72
$
0.72
0.28
0.19
$
1.00
$
0.91
$
0.72
$
0.72
0.28
0.19
$
0.99
$
0.91
$
0.27
$
0.27
62,131
62,131
62,432
62,432
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(Dollars in millions)
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(Dollars in millions)
12/31/03
(As
(As Originally
Restated)
Reported)
$
62
$
57
20
20
—
—
(10
)
(10
)
32
32
(5
)
—
1
1
(144
)
(144
)
19
19
21
21
(18
)
(18
)
(22
)
(22
)
(20
)
(20
)
14
14
(68
)
(68
)
(26
)
(26
)
59
59
(287
)
(287
)
96
96
183
183
(49
)
(49
)
(17
)
(17
)
3
3
76
76
(71
)
(71
)
(9
)
(9
)
1
1
(79
)
(79
)
155
155
$
76
$
76
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Three Months Ended
Three Months Ended
December 31, 2004
December 31, 2003
Percent of
Percent of
(Dollars in millions)
Revenues
Revenues
$
88
44.9
$
79
47.9
48
40.0
50
53.8
84
52.8
90
54.9
$
220
46.3
$
219
51.9
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Three Months Ended
December 31,
(Dollars in millions)
2004
2003
$
78
$
(22
)
(66
)
(49
)
(15
)
(9
)
1
1
$
(2
)
$
(79
)
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•
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.
•
Continued declines and fluctuations in mortality rates and increased cremations may adversely affect, as they have in
recent years, the volume of Batesville Casket’s sales of burial caskets.
•
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. The introduction of new products may cause customers to defer purchases of existing products, which could
have an adverse effect on sales.
•
Our health care and funeral services businesses are significantly dependent on several major contracts with large
national providers and group purchasing organizations.
•
Increased prices for or unavailability of raw materials or finished goods used in our products could adversely affect
profitability or revenues.
•
We may not be successful in achieving expected operating efficiencies and operating cost reductions associated with
announced restructuring, realignment and cost reduction activities.
•
Implementation of our Enterprise Resource Planning system could cause us to make unplanned expenditures or could cause
disruptions in our business. A significant implementation is scheduled for calendar 2005 at Hill-Rom.
•
Product liability or other liability claims could expose us to adverse judgments or could affect the sales of our
products.
•
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.
•
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 and imported into North
America.
•
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 success depends on our ability to retain our executive officers and other key personnel.
•
A substantial portion of our workforce is unionized, and we could face labor disruptions that would interfere with our
operations.
•
Volatility of our investment portfolio could negatively impact earnings.
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•
Changes in personnel have increased the skill and experience level of senior
financial management related to the understanding and application of generally accepted
accounting principles.
•
Continued accurate reporting unit identification and annual goodwill impairment
assessments under Statement of Financial Accounting Standards No. 142 (“SFAS 142”),
Goodwill and Other Intangible Assets, demonstrates our understanding and compliance
with appropriate authoritative literature.
•
Goodwill related to recent acquisitions has been properly accounted for and
allocated to the respective reporting units based on the requirements of SFAS 142.
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•
Another realignment in reporting structure in fiscal 2006 and the successful
integration of recently acquired businesses clearly defines the reporting unit as the
lowest level at which goodwill can be assessed in future periods.
•
The addition of a Director of Tax specializing in the accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes.
•
The addition of other key personnel and skill sets, including additions in specialty
and compliance areas.
•
Development of definitive procedures for the detailed documentation and
reconciliations supporting the income tax payable, deferred income tax and tax
provision balances and amounts, including the review and approval of related journal
entries by appropriate subject matter experts.
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Form of Director Stock Award granted to non employee directors under the Stock
Incentive Plan*
Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002**
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002**
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
*
Filed with original filing of the Form 10-Q for the quarterly period ended December 31, 2004.
**
Filed with this Form 10-Q/A.
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HILLENBRAND INDUSTRIES, INC.
BY:
/S/
Gregory N. Miller
Gregory N. Miller
Senior Vice President and
Chief Financial Officer
BY:
/S/
Richard G. Keller
Richard G. Keller
Vice President — Controller and
Chief Accounting Officer
EXHIBIT 31.1
CERTIFICATIONS
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Rolf A. Classon, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Hillenbrand Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: January 23, 2006 /S/ Rolf A. Classon -------------------------- Rolf A. Classon Interim President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATIONS
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Gregory N. Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Hillenbrand Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: January 23, 2006 /S/ Gregory N. Miller ------------------------------- Gregory N. Miller Senior Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hillenbrand Industries, Inc. (the "Company") on Form 10-Q/A for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Rolf A. Classon, Interim President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/S/ Rolf A. Classon ----------------------- Rolf A. Classon Interim President and Chief Executive Officer January 23, 2006 |
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO HILLENBRAND INDUSTRIES, INC. AND WILL BE RETAINED BY HILLENBRAND INDUSTRIES, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hillenbrand Industries, Inc. (the
"Company") on Form 10-Q/A for the period ending December 31, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Gregory N. Miller, Senior Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/S/ Gregory N. Miller --------------------------- Gregory N. Miller Senior Vice President and Chief Financial Officer January 23, 2006 |
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO HILLENBRAND INDUSTRIES, INC. AND WILL BE RETAINED BY HILLENBRAND INDUSTRIES, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
End of Filing
