Net revenues

Cost of goods sold

 

Gross profit

Operating expenses (including business acquisition costs of $2.8 during the three months ended December 31, 2009)

 

Operating profit

Interest expense

Investment income (loss) and other

 

Income before income taxes

Income tax expense

 

Net income

 

 

Income per common share-basic and diluted

Dividends per common share

 

Average common shares outstanding — basic and diluted

Cash and cash equivalents

Trade receivables, net

Inventories

Auction rate securities and related Put right

Interest receivable from Forethought Financial Group, Inc.

Deferred income taxes

Other current assets

 

Total current assets

Property, net

Intangible assets, net

Auction rate securities

Note and interest receivable from Forethought Financial Group, Inc., long-term portion

Investments

Deferred income taxes

Other assets

 

 

 

Revolving credit facility

Trade accounts payable

Accrued compensation

Accrued customer rebates

Other current liabilities

 

Total current liabilities

Accrued pension and postretirement healthcare, long-term portion

Other long-term liabilities

 

 

 

Commitments and contingencies (Notes 13 and 15)

Common stock, no par value, 199.0 shares authorized; 63.1 and 62.8 shares issued, 62.2 and 61.9 shares outstanding, of which 0.6 and 0.3 are restricted at December 31, 2009, and September 30, 2009, respectively

Additional paid-in-capital

Retained earnings

Treasury stock, at cost; 0.9 shares at both December 31, 2009 and September 30, 2009

Accumulated other comprehensive loss

 

 

 

 

Net income

Adjustments to reconcile net income to net cash flows from operating activities:

Depreciation and amortization

(Benefit) provision for deferred income taxes

Net (gain) on disposal of property

Net (gain) loss on auction rate securities, related Put right, and investments in common stock (Note 4)

Interest income on Forethought Financial Group, Inc. note receivable

Equity in net income from affiliates

Stock-based compensation

Trade accounts receivable

Inventories

Other current assets

Trade accounts payable

Accrued expenses and other current liabilities

Income taxes prepaid or payable

Defined benefit plan funding

Defined benefit plan expense

Other, net

 

Net cash provided by operating activities

 

 

Capital expenditures, both tangible and intangible

Proceeds on disposal of property

Proceeds from redemption and sales of auction rate securities and investments

Capital contributions to affiliates

Return of investment capital from affiliates

 

Net cash provided by investing activities

 

 

Proceeds from revolving credit facility

Repayments on revolving credit facility

Payment of dividends on common stock

Purchase of common stock

Proceeds on issuance of common stock

Financing costs

 

Net cash used in financing activities

 

 

 

 

 

At beginning of period

 

At end of period

 

Hillenbrand, Inc. (“we,” “us,” the “Company,” or “Hillenbrand”) is the parent holding company of its wholly-owned subsidiary, Batesville Services, Inc. (“Batesville Casket” or “Batesville”). Through Batesville Casket, we are the leader in the North American death care products industry. We manufacture, distribute, and sell funeral service products to licensed funeral directors who operate licensed funeral homes. Our Batesville Casket branded products consist primarily of burial caskets but also include cremation caskets, containers and urns, selection room display fixturing for funeral homes, and other personalization and memorialization products and services, including web based applications and the creation and hosting of websites for licensed funeral homes.

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements and therefore do not include all information required in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The unaudited consolidated financial statements have been prepared on the same basis as the consolidated financial statements as of and for the fiscal year ended September 30, 2009. In the opinion of management, these financial statements reflect all normal and recurring adjustments considered necessary to present fairly the Company’s consolidated financial position and the consolidated results of our operations and our cash flows as of the dates and for the periods presented.

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosures of contingent assets and liabilities as of the dates presented. Actual results could differ from those estimates. Examples of such estimates include, but are not limited to, the collectability of our note receivable from Forethought Financial Group, Inc. (“Forethought”), the establishment of reserves related to our customer rebates, allowance for doubtful accounts and early pay discounts, inventories, income taxes, accrued litigation, self insurance reserves, the estimation of progress towards performance criteria under our incentive compensation programs, and the estimation of fair value associated with our auction rate securities (“ARS”) and investments in various equity securities.

During the three months ended December 31, 2009, we discovered that we over-remitted sales tax in certain jurisdictions and have recorded a $4.1 sales tax receivable related to these overpayments, the effect of which lowered our operating expenses compared to the same period prior year. The sales tax receivable relates to overpayments that have accumulated over a period of approximately four years. In addition to this item, we recorded income tax benefits of $0.6 during the three months ended December 31, 2009, that relate to prior period adjustments identified in reconciling our income tax returns to our provision for income taxes. No prior or current annual periods were materially affected by these errors. The sales tax receivable is expected to be collected over the next 12 months. The sales tax overpayments had no impact on the prior billings to our customers.

The following information pertains to significant assets and liabilities:

Allowance for possible losses and discounts on trade accounts receivable

 

 

Inventories:

Raw materials and work in process

Finished products

 

Total inventories

 

 

Accumulated depreciation on property

 

 

Accumulated amortization of intangible assets

 

 

Other current liabilities:

Income taxes payable

Other

 

Total other current liabilities

 

The following table presents the activity related to our ARS and the Put right:

Balance at September 30, 2009

Change in fair value

Purchases

Sales and redemptions

 

Balance at December 31, 2009

 

As of December 31, 2009, we (i) had $6.7 in outstanding undrawn letters of credit under our revolving credit facility, (ii) were in compliance with all covenants set forth in the credit agreement, and (iii) had $393.3 of remaining borrowing capacity available under the facility. During the three month periods ended December 31, 2009 and 2008, the applicable weighted average interest rates were 0.7% and 3.3%, respectively. The availability of borrowings under the facility is subject to our ability at the time of borrowing to meet certain specified conditions. During January 2010, we borrowed $15.0 on the credit facility.

Components of net pension costs were as follows:

Service costs

Interest costs

Expected return on plan assets

Amortization of unrecognized prior service costs, net

Amortization of net loss

 

Net pension costs

 

The effective tax rates for the three months ended December 31, 2009 and 2008 were 33.9% and 35.9%, respectively. The decrease in the December 31, 2009 effective tax rate was primarily attributable to a favorable adjustment of $0.6 recorded as a result of periodic reconciliation of our income tax accounts to filed income tax returns.

The activity within our reserve for unrecognized tax benefits was as follows:

Balance at beginning of period

Additions for tax positions related to the current year

Additions for tax positions of prior years

Reductions for tax positions of prior years

Settlements

 

Balance at end of period

 

 

Other amounts accrued for interest and penalties at end of period

 

At December 31, 2009 and 2008, potential dilutive effects of our time-based restricted stock units and stock option awards representing approximately 1.7 million and 1.8 million common shares, respectively, were excluded from the computation of income per common share as their effects were anti-dilutive. The dilutive effects of our performance based stock awards more fully described in Note 10 are included in the computation of diluted net income per share when the related performance criteria are met. At December 31, 2009 and 2008, potential dilutive effects of these securities representing approximately 1.1 million and 0.6 million common shares, respectively, were excluded from the computation of income per common share as the related performance criteria had not been met, although they may be met in future periods. There is no significant difference in basic and diluted net income per share and average common shares outstanding as a result of dilutive equity awards for the three month periods ended December 31, 2009 and 2008.

During the three months ended December 31, 2009, we paid cash dividends of $11.5, and issued 0.3 million shares of our common stock pursuant to our stock incentive plans.

We have stock-based compensation plans (including the Stock Incentive Plan, the Board of Directors Deferred Compensation Plan, and the Executive Deferred Compensation Program) under which 4,785,436 common shares are registered and available for issuance. These programs are administered by our Board of Directors and its Compensation and Management Development Committee. As of December 31, 2009, options with respect to 2,574,035 shares were outstanding under these plans. In addition, a total of 1,338,321 RSUs and PBUs (both defined below) were outstanding, and a total of 355,330 common shares have been either issued or utilized under these plans as of December 31, 2009.

Compensation costs and the related income tax benefit charged against income were as follows:

Stock-based compensation costs

Income tax benefit

 

Stock-based compensation costs, net-of-tax

 

Outstanding at September 30, 2009

Granted

Exercised

Forfeited

Expired

 

Outstanding at December 31, 2009

 

Exercisable at December 31, 2009

 

Nonvested RSUs at September 30, 2009

Granted

Vested

Forfeited

 

Nonvested RSUs at December 31, 2009

 

Nonvested PBUs at September 30, 2009

Granted

Vested

Forfeited

 

Nonvested PBUs at December 31, 2009

 

The components of comprehensive income, each net of tax (corresponding to income tax rates from between 35.3% to 38.8%, excluding foreign currency translation adjustment), were as follows:

Net income

Foreign currency translation adjustment

Change in items not recognized as a component of net pension and postretirement healthcare costs

Changes in net unrealized gains on derivative instruments

Changes in net unrealized (loss) on available-for-sale securities

 

Comprehensive income

 

Cumulative foreign currency translation adjustment

Items not recognized as a component of net pension and postretirement healthcare costs

Net unrealized (loss) on derivative instruments

Net unrealized (loss) on available-for-sale securities

 

Accumulated other comprehensive loss

 

The components of investment income (loss) and other were as follows:

Interest income on cash and cash equivalents

Interest income on note receivable from Forethought

Interest income on ARS

Equity in net income from affiliates

Realized gain on sale of investments

Realized (loss) on sale of ARS (Note 4)

Net (loss) on ARS and related Put right (Note 4)

Foreign currency exchange loss

Other, net

 

Investment income (loss) and other

 

In 2005 the Funeral Consumers Alliance, Inc. (“FCA”) and a number of individual consumer casket purchasers filed a purported class action antitrust lawsuit on behalf of certain consumer purchasers of Batesville^® caskets against the Company and our former parent company, Hillenbrand Industries, Inc., now Hill-Rom Holdings, Inc. (“Hill-Rom”), and three national funeral home businesses (the “FCA Action”). A similar purported antitrust class action lawsuit was later filed by Pioneer Valley Casket Co. and several so-called “independent casket distributors” on behalf of casket sellers who were unaffiliated with any licensed funeral home (the “Pioneer Valley Action”). Class certification hearings in the FCA Action and the Pioneer Valley Action were held before a Magistrate Judge in early December 2006. On November 24, 2008, the Magistrate Judge recommended that the plaintiffs’ motions for class certification in both cases be denied. On March 26, 2009, the District Judge adopted the memoranda and recommendations of the Magistrate Judge and denied class certification in both cases. On April 9, 2009, the plaintiffs in the FCA case filed a petition with the United States Court of Appeals for the Fifth Circuit for leave to file an appeal of the Court’s order denying class certification. On June 19, a three-judge panel of the Fifth Circuit denied the FCA plaintiffs’ petition. On July 9, 2009, the FCA plaintiffs filed a request for reconsideration of the denial of their petition. On July 29, 2009, a three-judge panel of the Fifth Circuit denied the FCA plaintiffs’ motion for reconsideration and their alternative motion for leave to file a petition for rehearing en banc (by all of the judges sitting on the Fifth Circuit Court of Appeals.)

The Pioneer Valley plaintiffs did not appeal the District Court’s order denying class certification, and on April 29, 2009, pursuant to a stipulation among the parties, the District Court dismissed the Pioneer Valley Action with prejudice (i.e., Pioneer Valley cannot appeal or otherwise reinstitute the case). Neither the Company nor Hill-Rom provided any payment or consideration for the plaintiffs to dismiss this case, other than agreeing to bear their own costs, rather than pursuing plaintiffs for costs.

Plaintiffs in the FCA Action have generally sought monetary damages on behalf of a class, trebling of any such damages that may be awarded, recovery of attorneys’ fees and costs, and injunctive relief. The plaintiffs in the FCA Action filed a report indicating that they were seeking damages ranging from approximately $947.0 to approximately $1.46 billion before trebling on behalf of the purported class of consumers they seek to represent, based on approximately one million casket purchases by the purported class members.

Because Batesville continues to adhere to its long-standing policy of selling Batesville caskets only to licensed funeral homes, a policy that it continues to believe is appropriate and lawful, if the case goes to trial the plaintiffs are likely to claim additional alleged damages for periods between their reports and the time of trial. At this point, it is not possible to estimate the amount of any additional alleged damage claims that they may make. The defendants are vigorously contesting both liability and the plaintiffs’ damages theories.

Despite the July 29, 2009 ruling denying class certification, the FCA plaintiffs have indicated that they intend to pursue their individual injunctive and damages claims. Their individual damages claims are limited to the alleged overcharges on the plaintiffs’ individual casket purchases (the complaint currently alleges a total of ten casket purchases by the individual plaintiffs), which would be trebled, plus reasonable attorneys fees and costs. On January 27, 2010, the District Court issued an order stating that no summary judgment motions would be entertained and that the trial of the FCA plaintiffs’ remaining individual claims may begin as early as the week of June 7, 2010.

After the district court renders a final judgment as to the individual claims, the FCA plaintiffs may file an appeal, which could include an appeal of the District Court’s order denying class certification. If they succeeded in reversing the district court order denying class certification and a class is certified in the FCA Action filed against Hill-Rom and Batesville and if the plaintiffs prevail at a trial of the class action, the damages awarded to the plaintiffs, which would be trebled as a matter of law, could have a significant material adverse effect on our results of operations, financial condition and/or liquidity. In antitrust actions such as the FCA Action the plaintiffs may elect to enforce any judgment against any or all of the codefendants, who have no statutory contribution rights against each other. We and Hill-Rom have entered into a judgment sharing agreement that apportions the costs and any potential liabilities associated with this litigation between us and Hill-Rom. See Note 6 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

As of December 31, 2009, we had incurred approximately $22.7 in cumulative legal and related costs associated with the FCA matter.

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.

Legal fees associated with claims and lawsuits are generally expensed as incurred. Upon recognition of an estimated loss resulting from a settlement, an estimate of legal fees to complete the settlement is also included in the amount of the loss recognized.

We are also involved in other possible claims, including product and general liability, workers compensation, auto liability, and employment related matters. Claims other than employment and related matters have deductibles and self-insured retentions ranging from $0.5 to $1.0 per occurrence or per claim, depending upon the type of coverage and policy period. Outside insurance companies 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, which are used to establish reserves for losses. 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, when such amounts are considered probable of payment.

The recorded amounts represent our best estimate of the costs we will incur in relation to such exposures, but it is virtually certain that actual costs will differ from those estimates.

Our fair value measurements are classified into one of three categories as defined in Note 14 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. The following table summarizes our financial assets and liabilities:

Assets:

Cash & cash equivalents

ARS and Put right

Forethought note receivable

Equity investments

Liabilities:

Revolving credit facility

Derivative instruments

Beginning balance at September 30, 2009

Total gains or (losses) (realized and unrealized):

Included in earnings

Included in other comprehensive income

Change in fair value, disclosure only

Purchases, issuances and settlements

Transfers in and/or out of Level 3

 

Ending balance at December 31, 2009

 

In preparing our consolidated financial statements for the period ended December 31, 2009, we have evaluated subsequent events through February 1, 2010. Except as noted below, we have determined that there are no other subsequent events requiring disclosure.

On January 8, 2010, we entered into a definitive material merger agreement with K-Tron, pursuant to which we will acquire all the outstanding shares of K-Tron for a total purchase price of approximately $435.0 and K-Tron will become a wholly-owned subsidiary of us. The significant components of the merger agreement are summarized below.

Upon the completion of the merger, K-Tron will become a wholly-owned subsidiary of us and each share of K-Tron common stock (and other common stock equivalents) will be converted into the right to receive $150.00 per share in cash (as may be adjusted as described further below).

In the event the closing has not occurred by April 30, 2010 as a consequence of our inability to pay the merger consideration (essentially the purchase price as described in the merger agreement) as of such date and K-Tron has satisfied all conditions to closing to be performed or satisfied by it as of such date, the per share merger consideration will be increased by $0.05 per share for each day from May 1, 2010 through the date of closing.

We and K-Tron have made customary representations, warranties, and covenants in the merger agreement, including, among others, covenants that K-Tron will conduct its business in the ordinary course during the period between the execution of the merger agreement and the effective time of the merger, and subject to certain limited exceptions, that the Board of Directors of K-Tron will recommend adoption of the merger agreement by its shareholders and will not solicit alternative business combination transactions.

The completion of the merger is subject to the receipt of the affirmative vote of at least two-thirds of all votes cast at a special meeting of K-Tron shareholders to approve the merger, regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions.

The merger agreement contains certain termination rights for both us and K-Tron and further provides that, upon termination of the merger agreement under specified circumstances, K-Tron may be required to pay us a termination fee of $12.0. If the merger agreement is terminated by us due to K-Tron’s willful breach of the merger agreement at a time when a competing takeover proposal of K-Tron is pending, K-Tron will be required to pay us our expenses incurred in connection with the transaction, up to a maximum amount of $10.0.

In connection with the merger, we entered into a voting agreement with the Chairman and Chief Executive Officer of K-Tron, and certain other directors and executive officers of K-Tron. Under the agreement the individuals have agreed to vote their shares of K-Tron stock in favor of the merger. Collectively, the agreement with the Chairman and Chief Executive Officer and the other directors and executive officers relates to approximately 10% of K-Tron’s outstanding shares of common stock.

intend

 

become

 

targeted

Net revenues

Cost of goods sold

 

Gross profit

Operating expenses (excluding business acquisition costs)

Business acquisition costs

 

Operating profit

Interest expense

Investment income and other

 

Income before taxes

Income tax expense

 

Net income

 

Cash flows provided by (used in):

Operating activities

Investing activities

Financing activities

Effect of exchange rate changes on cash

 

(Decrease) increase in cash and cash equivalents

 

Should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

may have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

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