| Indiana (State or other jurisdiction of incorporation or organization) |
26-1342272 (I.R.S. Employer Identification No) |
|
| One Batesville Boulevard Batesville, IN (Address of principal executive offices) |
47006 (Zip Code) |
Yes þ
|
No o |
Yes o
|
No o |
Large accelerated filer o
|
Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
Yes o
|
No þ |
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| 19-28 | ||||||||
| 29 | ||||||||
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| 30 | ||||||||
| 30 | ||||||||
| 30 | ||||||||
| 31 | ||||||||
| 32 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
2
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Net revenues |
$ | 158.7 | $ | 165.0 | $ | 496.0 | $ | 519.3 | ||||||||
Cost of goods sold |
92.7 | 98.6 | 285.9 | 302.8 | ||||||||||||
Gross profit |
66.0 | 66.4 | 210.1 | 216.5 | ||||||||||||
Operating expenses (including
separation costs; see Note 6) |
27.3 | 28.4 | 87.8 | 99.2 | ||||||||||||
Operating profit |
38.7 | 38.0 | 122.3 | 117.3 | ||||||||||||
Interest expense |
(0.3 | ) | (1.4 | ) | (1.8 | ) | (1.4 | ) | ||||||||
Investment income (loss) and other |
1.9 | 4.4 | 4.2 | 3.9 | ||||||||||||
Income before income taxes |
40.3 | 41.0 | 124.7 | 119.8 | ||||||||||||
Income tax expense |
14.9 | 14.3 | 45.0 | 45.8 | ||||||||||||
Net income |
$ | 25.4 | $ | 26.7 | $ | 79.7 | $ | 74.0 | ||||||||
Income per common share-basic and
diluted |
$ | 0.41 | $ | 0.42 | $ | 1.29 | $ | 1.18 | ||||||||
Dividends per common share* |
$ | 0.185 | $ | 0.1825 | $ | 0.555 | $ | 0.1825 | ||||||||
Average common shares outstanding —
basic and diluted |
61.7 | 62.5 | 61.8 | 62.5 | ||||||||||||
| * | Our first dividend as a stand-alone public company was paid June 30, 2008. |
3
| June 30, | September 30, | |||||||
| 2009 | 2008 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 28.8 | $ | 14.7 | ||||
Trade accounts receivable, net |
84.6 | 88.4 | ||||||
Inventories |
43.7 | 48.6 | ||||||
Deferred income taxes |
19.2 | 22.4 | ||||||
Other current assets |
10.7 | 7.5 | ||||||
Total current assets |
187.0 | 181.6 | ||||||
Property, net |
86.5 | 90.8 | ||||||
Intangible assets, net |
17.2 | 19.7 | ||||||
Auction rate securities and related Put right (Note 4) |
49.6 | 51.1 | ||||||
Note receivable from Forethought Financial Group, Inc. |
139.5 | 130.4 | ||||||
Investments |
18.5 | 25.2 | ||||||
Deferred income taxes |
20.9 | 19.7 | ||||||
Other assets |
21.4 | 26.8 | ||||||
Total Assets |
$ | 540.6 | $ | 545.3 | ||||
LIABILITIES |
||||||||
Current Liabilities |
||||||||
Revolving credit facility |
$ | 80.0 | $ | 100.0 | ||||
Trade accounts payable |
12.8 | 15.8 | ||||||
Accrued compensation |
23.7 | 24.6 | ||||||
Accrued customer rebates |
17.2 | 20.4 | ||||||
Other current liabilities |
15.8 | 20.8 | ||||||
Due to Hill-Rom Holdings, Inc. |
0.1 | 4.4 | ||||||
Total current liabilities |
149.6 | 186.0 | ||||||
Deferred compensation, long-term portion |
4.7 | 7.0 | ||||||
Accrued pension and postretirement healthcare, long-term portion |
27.5 | 33.5 | ||||||
Other long-term liabilities |
32.9 | 30.4 | ||||||
Total Liabilities |
214.7 | 256.9 | ||||||
Commitments and contingencies (Note 14) |
||||||||
SHAREHOLDERS’ EQUITY |
||||||||
Common stock, no par value, 199.0 shares authorized; 62.8 and
62.4 shares issued, 61.8 and 62.1 shares outstanding at June
30, 2009 and September 30, 2008, respectively |
— | — | ||||||
Additional paid-in-capital |
296.4 | 286.4 | ||||||
Retained earnings |
68.2 | 23.0 | ||||||
Treasury stock, at cost; 1.0 and 0.3 shares at June 30, 2009
and September 30, 2008, respectively |
(18.4 | ) | (6.2 | ) | ||||
Accumulated other comprehensive loss |
(20.3 | ) | (14.8 | ) | ||||
Total Shareholders’ Equity |
325.9 | 288.4 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 540.6 | $ | 545.3 | ||||
4
| Nine Months Ended | ||||||||
| June 30, | ||||||||
| 2009 | 2008 | |||||||
Operating Activities: |
||||||||
Net income |
$ | 79.7 | $ | 74.0 | ||||
Adjustments to reconcile net income to net cash flows from operating activities: |
||||||||
Depreciation and amortization |
13.8 | 14.1 | ||||||
(Benefit) provision for deferred income taxes |
(1.2 | ) | 1.0 | |||||
Net gain on disposal of property |
(0.1 | ) | (0.1 | ) | ||||
Interest income on note receivable from Forethought Financial Group, Inc. |
(9.1 | ) | (2.8 | ) | ||||
Equity in net (income) loss from affiliates |
5.7 | (0.4 | ) | |||||
Distribution of earnings from affiliates |
0.4 | — | ||||||
Stock based compensation |
5.5 | 0.5 | ||||||
Trade accounts receivable |
3.2 | 5.2 | ||||||
Inventories |
4.6 | (2.9 | ) | |||||
Other current assets |
2.1 | (3.8 | ) | |||||
Trade accounts payable |
(2.9 | ) | (4.2 | ) | ||||
Accrued expenses and other current liabilities |
(7.5 | ) | 4.1 | |||||
Income taxes prepaid or payable |
(2.8 | ) | 17.5 | |||||
Amounts due to/from Hill-Rom Holdings, Inc. |
— | (11.1 | ) | |||||
Defined benefit plan funding |
(9.0 | ) | (1.3 | ) | ||||
Deferred compensation |
(2.5 | ) | (0.5 | ) | ||||
Other, net |
5.0 | 1.5 | ||||||
Net cash provided by operating activities |
84.9 | 90.8 | ||||||
Investing Activities: |
||||||||
Capital expenditures |
(7.1 | ) | (6.1 | ) | ||||
Proceeds on disposal of property |
0.2 | 0.3 | ||||||
Payment for acquisition of business, net of cash acquired |
— | (0.4 | ) | |||||
Proceeds from sale or redemption of auction rate securities |
1.8 | 2.7 | ||||||
Capital contributions to affiliates |
(0.6 | ) | — | |||||
Return of investment capital from affiliates |
2.1 | 0.6 | ||||||
Net cash used in investing activities |
(3.6 | ) | (2.9 | ) | ||||
Financing Activities: |
||||||||
Proceeds from revolving credit facility |
40.0 | 250.0 | ||||||
Repayments on revolving credit facility |
(60.0 | ) | (140.0 | ) | ||||
Deferred financing costs and other |
(0.1 | ) | (0.9 | ) | ||||
Payment of dividends on common stock |
(34.2 | ) | (11.4 | ) | ||||
Purchase of common stock |
(12.5 | ) | — | |||||
Net change in advances to former parent |
— | (290.3 | ) | |||||
Cash received from parent in connection with separation |
— | 125.4 | ||||||
Proceeds on issuance of common stock |
— | 0.4 | ||||||
Net cash used in financing activities |
(66.8 | ) | (66.8 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
(0.4 | ) | — | |||||
Net cash flows |
14.1 | 21.1 | ||||||
Cash and cash equivalents: |
||||||||
At beginning of period |
14.7 | 11.9 | ||||||
At end of period |
$ | 28.8 | $ | 33.0 | ||||
5
| 1. | Background and Basis of Presentation |
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 a leader in the North American
death care 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 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, 2008.
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, 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. |
| 2. | Summary of Significant Accounting Policies |
The accounting policies used in preparing these
financial statements, unless otherwise noted, are
consistent with the accounting policies as described
in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2008. The following represent
additions to our significant accounting policies as
described in our previously filed Form 10-K: |
||
Performance Based Stock Compensation |
||
During the first quarter of fiscal year 2009, we began
granting performance based restricted stock and units
(collectively “PBUs”) instead of restricted stock
units (“RSUs”), which were historically contingent
upon continued employment and generally vest over a
period of five years. These PBUs are consistent with
our compensation program’s guiding principles and are
designed to (i) align management’s interests with
those of shareholders, (ii) motivate and provide
incentive to achieve superior results, (iii) maintain
a significant portion of at-risk compensation, (iv)
delineate clear accountabilities and (v) ensure
competitive compensation. We believe that this blend
of compensation components provides the Company’s
leadership team with the appropriate incentives to
create long-term value for shareholders while taking
thoughtful and prudent risks to grow the value of the
Company. The vesting of PBUs is contingent upon the
creation of shareholder value measured using a
discounted cash flow model during a cumulative
three-year time period and a corresponding service
requirement. The value of an award is based upon the
fair value of our common stock at the date of grant.
Based on the extent to which the performance criteria
are achieved, it is possible for none of the awards to
vest or for a range up to the maximum to vest, which
is reflected in the PBU table in Note 11. We record
expense associated with the awards on a straight-line
basis over the vesting period based upon an estimate
of projected performance. The actual performance of
the Company is evaluated quarterly, and the expense is
adjusted according to the new projection. As a result,
depending on the degree to which we achieve the
performance criteria, our expenses related to the PBUs
may become more volatile as we approach the final
performance measurement date at the end of the three
year period. |
6
Investments |
||
We use the equity method of accounting for
substantially all our private equity limited
partnerships, with earnings or losses reported within
the line item “Investment income (loss) and other” in
our consolidated statements of income, including our
portion of any unrealized gains or losses experienced
by these affiliates. Earnings and carrying values for
investments accounted for under the equity method are
determined based upon financial statements provided by
the investment companies. |
||
Recently Adopted Accounting Pronouncements |
||
In October 2008, the Financial Accounting Standards
Board (“FASB”) issued FASB Staff Position (“FSP”) No.
Financial Accounting Standard (“FAS”) 157-3,
Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active. The purpose
of FSP No. FAS 157-3 was to clarify the application of
Statement of Financial Accounting Standards (“SFAS”)
No. 157, Fair Value Measurements, for a market that is
not active. It also allows for the use of our internal
assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable
market data does not exist. FSP No. FAS 157-3 did not
change the objective of SFAS No. 157 which is to
determine the price that would be received in an
orderly transaction that is not a forced liquidation
or distressed sale at the measurement date. FSP No.
FAS 157-3 was effective upon issuance. Our adoption of
FSP No. FAS 157-3 did not have a material effect on
our financial position, results of operations, cash
flows or disclosures. |
||
In April 2009, the FASB issued FSP No. FAS 157-4,
Determining Whether a Market is Not Active and a
Transaction is Not Distressed. FSP No. FAS 157-4 does
not include any specific disclosure requirements, but
provides additional guidance to highlight and expand
on the factors that should be considered in estimating
fair value when there has been a significant decrease
in market activity for financial assets. This FSP is
effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. We elected to
early adopt FSP No. FAS 157-4 for the quarter ended
March 31, 2009. This adoption did not have a material
impact on our consolidated financial statements,
although it may impact the determination of fair value
of applicable instruments in future periods. |
||
In April 2009, the FASB issued FSP No. FAS 115-2 and
FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP amends the
other-than-temporary guidance in U.S. GAAP for debt
securities. The FSP changes the method for
determining whether an other-than-temporary impairment
exists for debt securities and the amount of the
impairment charge to be recorded in earnings.
Additionally, this FSP expands and increases the
disclosure requirements about other-than-temporary
impairments to include: a) the cost basis of
available-for-sale and held-to-maturity debt
securities by major security type, b) the methodology
and key inputs used to measure the portion of an
other-than-temporary impairment related to credit
losses by major security type and c) a schedule of
activity of amounts recognized in earnings for debt
securities for which an other-than-temporary
impairment has been recognized and the noncredit
portion of the other-than-temporary impairment
recognized in other comprehensive income. We elected
to early adopt FSP No. FAS 115-2 and FAS 124-2 for the
quarter ended March 31, 2009. This adoption did not
have a material impact on our consolidated financial
statements, although it may impact the amount of
other—than-temporary impairments, if any, recorded in
a future period. |
||
In April 2009, the FASB issued FSP No. FAS 107,
Interim Disclosures about Fair Value of Financial
Instruments, amending FAS 107, Disclosures about Fair
Value of Financial Instruments and requires public
companies to disclose the method(s) and significant
assumptions used to estimate the fair value of
financial instruments, in both interim and annual
financial statements. This FSP is effective for all
interim and annual periods ending after June 15, 2009.
We elected to early adopt FSP No. FAS 107 for the
quarter ended March 31, 2009. |
||
In May 2009, the FASB issued SFAS No. 165, Subsequent
Events. SFAS No. 165 establishes general standards of
accounting for, and disclosure of, events that occur
after the balance sheet date but before financial
statements are issued or are available to be issued.
In particular, this statement sets forth: (1) the
period after the balance sheet date during which
management should evaluate events or transactions that
may occur for potential recognition or disclosure in
the financial statements, (2) the circumstances under
which an entity should recognize events or
transactions occurring after the balance sheet date in
its financial statements and (3) the disclosures that
an entity should make about events or transactions
that occurred after the balance sheet date. SFAS No.
165 is effective for the interim or annual financial
periods ending after June 15, 2009. Further, in
connection with preparation of the consolidated
financial statements and in accordance with this
guidance, management completed its evaluation of
subsequent events through August 10, 2009. |
7
Recently Issued Accounting Pronouncements |
||
In April 2008, the FASB issued FSP No. FAS 142-3,
Determination of the Useful Life of Intangible Assets.
This statement applies to recognized intangible assets
that are accounted for pursuant to SFAS No. 142,
Goodwill and Other Intangible Assets. FSP No. FAS
142-3 requires an entity to consider its own
historical renewal or extension experience in
developing renewal or extension assumptions used in
determining the useful life of a recognized intangible
asset. In the absence of entity specific experience,
FSP No. FAS 142-3 requires an entity to consider
assumptions that a marketplace participant would use
about renewal or extension that are consistent with
the highest and best use of the asset by a marketplace
participant. The intent of this FSP is to improve the
consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of
the asset. FSP No. FAS 142-3 applies prospectively to
all intangible assets newly acquired during fiscal
years beginning after December 15, 2008, our fiscal
year ended September 30, 2010, and interim periods
within those fiscal years; early adoption is
prohibited. Additional disclosures are required for
all capitalized intangible assets as of the effective
date. We do not anticipate that the adoption of FSP
No. FAS 142-3 on October 1, 2009, will have a material
impact on our consolidated financial statements,
although it may impact the determination of the useful
life of intangible assets acquired after September 30,
2009. |
||
In December 2008, the FASB issued FSP No. FAS
132(R)-1, Employers’ Disclosures about Postretirement
Benefit Plan Assets, which provides guidance on
employers’ disclosures about the plan assets of
defined benefit plans, pensions or other
postretirement plans. The disclosures required by FSP
No. FAS 132(R)-1 include a description of how
investment allocation decisions are made, major
categories of plan assets, valuation techniques used
to measure fair value of plan assets, the impact of
measurements using significant unobservable inputs and
concentrations of risks within plan assets. The
disclosures required by this staff position are
effective for fiscal years ending after December 15,
2009, our fiscal 2010, with earlier application
permitted. We are currently evaluating the impact of
adoption of FSP No. FAS 132(R)-1, but do not
anticipate that the adoption of FSP No. FAS 132(R)-1
will have a material impact on our consolidated
financial statements. |
||
In April 2009, the FASB issued FSP No. FAS 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed
in a Business Combination that Arise from
Contingencies. FSP No. 141(R)-1 addresses the initial
recognition, measurement and subsequent accounting for
assets and liabilities arising from contingencies in a
business combination, and requires that assets
acquired or liabilities assumed be initially measured
at fair value at the acquisition date. When fair
value cannot be determined, the FSP requires using the
guidance under SFAS No. 5, Accounting for
Contingencies, and FASB interpretation No. 14,
Reasonable Estimation of the Amount of a Loss. The
disclosures required by this FSP are effective for
fiscal years ending after December 15, 2008. We will
adopt this FSP in connection with our adoption of SFAS
No. 141(R) on October 1, 2009, as outlined in our
previously filed Form 10-K. |
||
In June 2009, the FASB issued SFAS No. 168, The FASB
Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, completing
its accounting standards codification (the
“Codification”) as the single source of authoritative
U.S. accounting and reporting standards applicable for
all non-governmental entities, with the exception of
the SEC and its staff. The Codification, which changes
the referencing of financial standards, is effective
for interim or annual financial periods ending after
September 15, 2009. Therefore in our financial
statements to be filed on Form 10-K for the fiscal
year ended September 30, 2009, all references made to
U.S. GAAP will use the new Codification numbering
system prescribed by the FASB. As the Codification is
not intended to change or alter existing U.S. GAAP, it
will not have any impact on our consolidated financial
statements. |
8
| 3. | Supplemental Balance Sheet Information |
The following information pertains to significant
assets at June 30, 2009 and September 30, 2008,
respectively. |
| June 30, | September 30, | |||||||
| (amounts in millions) | 2009 | 2008 | ||||||
Allowance for possible losses and
discounts on trade accounts
receivable |
$ | 17.5 | $ | 16.1 | ||||
Inventories: |
||||||||
Raw materials and work in
process |
$ | 10.3 | $ | 10.5 | ||||
Finished products |
33.4 | 38.1 | ||||||
Total inventories |
$ | 43.7 | $ | 48.6 | ||||
Accumulated depreciation on property |
$ | 235.8 | $ | 227.2 | ||||
Accumulated amortization of
intangible assets |
$ | 24.2 | $ | 21.5 | ||||
| 4. | Auction Rate Securities (“ARS”) and Related Put Right |
In November 2008, we received an enforceable, non-transferable right (the “Put”) from UBS Financial Services (“UBS”) that allows us to sell to UBS $28.6 million (fair value at June 30, 2009) of our existing ARS at par value ($30.3
million at June 30, 2009) plus accrued interest. We may exercise this Put at anytime during the period of June 30, 2010, through July 2, 2012. Additionally, UBS may redeem these securities at par value plus accrued interest at any time
prior to expiration at their discretion. |
||
Since the Put has value, we are required to record it on our books as an asset. Therefore, in accordance with SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, we have elected to report the Put at its
estimated fair value and record related changes in fair value as a component of “Investment income (loss) and other” within the consolidated statements of income. Also, because we now intend to sell these securities to UBS at par
value, in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, we have elected to reclassify the ARS related to the Put from “available-for-sale” to “trading” securities. As trading
securities, the changes in fair value corresponding to the UBS related ARS (previously recorded as a component of accumulated other comprehensive loss) are now recorded as a component of “Investment income (loss) and other” within our
consolidated statements of income. We made these elections so that the effects of changes in the fair value of the UBS related ARS and the related Put would substantially offset within our statement of income, thereby limiting the
volatility we might otherwise experience. At June 30, 2009, $19.3 million of our ARS continue to be classified as available-for-sale. |
||
The following table presents the activity related to our ARS and the Put right: |
| ARS | Put | (Gain) | ||||||||||||||||||
| (amounts in millions) | A | B | Right C | AOCL D | Loss E | |||||||||||||||
Balance at September 30, 2008 |
$ | 51.1 | $ | — | $ | — | $ | 1.6 | ||||||||||||
Change in fair value (prior to receipt of Put right) |
(4.5 | ) | — | — | 4.5 | |||||||||||||||
Gain on receipt of Put right |
— | — | 3.7 | — | $ | (3.7 | ) | |||||||||||||
Transfer to trading securities |
(26.8 | ) | 26.8 | — | (3.8 | ) | 3.8 | |||||||||||||
Change in fair value (subsequent to receipt of Put right) |
1.0 | 2.1 | (2.0 | ) | (1.0 | ) | (0.1 | ) | ||||||||||||
Purchases |
— | — | — | — | — | |||||||||||||||
Sales or redemptions |
(1.5 | ) | (0.3 | ) | — | — | — | |||||||||||||
Balance at June 30, 2009 |
$ | 19.3 | $ | 28.6 | $ | 1.7 | $ | 1.3 | ||||||||||||
Net loss included within “Investment income
(loss) and other” during the nine months ended June 30, 2009 |
$ | — | ||||||||||||||||||
| A — | Auction rate securities; available-for-sale, at fair value |
|
| B — | Auction rate securities; trading, at fair value |
|
| C — | Put right; at fair value |
|
| D — | AOCL; amount included within accumulated other comprehensive loss (pre-tax) |
|
| E — | (Gain) loss included within “Investment income (loss) and other” (pre-tax) |
9
| 5. | Financing Agreement |
As of June 30, 2009, we (i) had $7.5 million 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 $312.5 million of remaining borrowing capacity available under the facility. During the three month and nine month periods ended June 30, 2009, the applicable weighted average interest rates were 0.8% and
1.7%, respectively. The availability of borrowings under the facility is subject to our ability at the time of borrowing to meet certain specified conditions. |
| 6. | Transactions with Hill-Rom Holdings, Inc. (“Hill-Rom”) |
Allocation of Corporate Expenses |
||
For the quarterly periods prior to April 1, 2008, the operating
expenses within our consolidated statements of income include
allocations from Hill-Rom, our former parent company, for certain
Hill-Rom retained corporate expenses including treasury, accounting,
tax, legal, internal audit, human resources, investor relations,
general management, board of directors, information technology,
other shared services, and certain severance costs. These
allocations were determined on bases that management considered to
be reasonable reflections of the utilization of services provided to
or the benefits received by us. The allocation methods were based on
revenues, headcount, square footage, actual utilization applied to
variable operating costs, and specific identification based upon
actual costs incurred when the nature of the item or charge was
specific to us. Hill-Rom allocated corporate costs included in our
consolidated statements of income for the nine month period ended
June 30, 2008 were $7.4 million. |
||
Separation Costs |
||
In addition to the allocated corporate expenses described above, we
incurred or were allocated costs related to the separation from
Hill-Rom. Separation costs recorded during the three months ended
June 30, 2009, were insignificant. Separation costs recorded during
the three months ended June 30, 2008 were $0.1 million. Separation
costs recorded during the nine months ended June 30, 2009 and 2008,
were $0.1 million and $14.2 million, respectively. These costs
consisted primarily of investment banking and advisory fees, legal,
accounting, recruiting, and consulting fees allocated based upon
revenue or specific identification. These costs also include the
modification and acceleration charges related to stock based
compensation described below. |
||
On March 14, 2008, the Board of Directors of Hill-Rom approved a
modification to Hill-Rom’s stock incentive plan that would
automatically ensure that participants neither gained nor lost value
purely as a result of the separation. As a result of the
modification, we recorded $1.1 million of stock based compensation
expense related to our employees as of that date. In addition, the
separation caused the acceleration of $3.2 million of stock based
compensation expense on previously unvested restricted stock units
now fully vested. See Note 11 for further information on our stock
based compensation programs. |
| 7. | Retirement and Postemployment Benefits |
Defined Benefit Plans |
||
Components of net pension costs were as follows: |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (amounts in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Service costs |
$ | 0.9 | $ | 0.9 | $ | 2.5 | $ | 3.1 | ||||||||
Interest costs |
3.2 | 3.1 | 9.5 | 8.2 | ||||||||||||
Expected return on plan assets |
(3.3 | ) | (3.3 | ) | (9.9 | ) | (9.1 | ) | ||||||||
Amortization of unrecognized prior
service costs, net |
0.2 | 0.2 | 0.6 | 0.5 | ||||||||||||
Net pension costs |
$ | 1.0 | $ | 0.9 | $ | 2.7 | $ | 2.7 | ||||||||
10
The net postretirement healthcare costs recorded during the three months ended June 30, 2009 and 2008, were $0.2
million and $0.3 million, respectively. The net postretirement healthcare costs recorded during the nine months
ended June 30, 2009 and 2008, were $0.8 million and $1.0 million, respectively.
|
||
During the quarter ended June 30, 2009, we made a discretionary contribution to our pension plan in the amount of
$7.8 million. |
||
Defined Contribution Plans |
||
For the three months ended June 30, 2009 and 2008, we recorded expenses related to our defined contribution plans in
the amounts of $1.3 million and $1.1 million, respectively. For the nine months ended June 30, 2009 and 2008, we
recorded expenses related to our defined contribution plans in the amounts of $3.7 million and $3.5 million,
respectively. |
| 8. | Income Taxes |
The effective tax rate for the three months ended June 30, 2009 and 2008, was 36.8% and 34.9%,
respectively and 36.1% and 38.2%, for the nine months ended June 30, 2009 and 2008, respectively.
The 1.9% increase in the quarterly effective tax rate was attributable to lower tax exempt
interest income and higher state income tax rates based on recently filed returns. The decrease
in the effective tax rates for the nine months period ended June 30, 2009, was primarily due to
the non-deductible separation costs we incurred during the prior fiscal year. |
||
The activity within our reserve for unrecognized tax benefits was as follows: |
| (amounts in millions) | ||||
Balance at September 30, 2008 |
$ | 6.0 | ||
Additions for tax positions related to the current year |
1.3 | |||
Additions for tax positions of prior years |
— | |||
Reductions for tax positions of prior years |
— | |||
Settlements |
— | |||
Balance at June 30, 2009 |
$ | 7.3 | ||
Other amount accrued at June 30, 2009 for interest and penalties |
$ | 1.5 | ||
| 9. | Income per Common Share |
The calculation of basic and diluted net income per common share and shares outstanding for the
periods presented prior to April 1, 2008, is based on the number of shares outstanding at March
31, 2008 (plus unissued fully vested common shares). There is no dilutive impact from common stock
equivalents for periods prior to April 1, 2008, as we had no dilutive equity awards outstanding.
The dilutive effects of our time based restricted stock units and stock option awards are included
in the computation of diluted net income per share in periods subsequent to March 31, 2008. At
June 30, 2009, potential dilutive effects of these securities representing approximately 2.1
million common shares 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 11 are included in the computation of diluted net income per share when the
related performance criteria are met. At June 30, 2009, potential dilutive effects of these
securities representing approximately 0.6 million common shares 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 and nine month periods ended June 30, 2009 and 2008. |
11
| 10. | Shareholders’ Equity |
During the nine months ended June 30, 2009, we paid cash dividends
of $34.2 million, purchased 0.7 million shares of our common stock
for $12.5 million, and issued 0.4 million shares of our common stock
pursuant to our stock incentive plans. |
| 11. | Stock Based Compensation |
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 June 30, 2009, options with respect to 2,245,276 shares were outstanding under these plans. In addition, a total of 883,723 RSUs and PBUs (both defined below) were
outstanding, and a total of 277,221 common shares have been either issued or utilized under these plans as of June 30, 2009. |
||
Compensation costs and the related income tax benefit charged against income (including the modification and acceleration charges recorded in connection with the separation during
fiscal 2008 previously discussed in Note 6) were as follows: |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (amounts in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Stock based compensation costs |
$ | 1.2 | $ | 0.5 | $ | 5.4 | $ | 6.4 | ||||||||
Income tax benefit |
0.4 | 0.2 | 2.0 | 2.4 | ||||||||||||
Stock based compensation costs,
net-of-tax |
$ | 0.8 | $ | 0.3 | $ | 3.4 | $ | 4.0 | ||||||||
Stock Options |
||
The following table provides a summary of outstanding stock option awards: |
| Weighted | ||||||||
| Average | ||||||||
| Number | Exercise | |||||||
| of Shares | Price | |||||||
Outstanding at September 30, 2008 |
1,886,033 | $ | 23.68 | |||||
Granted |
523,510 | 14.90 | ||||||
Exercised |
— | — | ||||||
Forfeited |
(13,671 | ) | 20.57 | |||||
Expired |
(150,596 | ) | 24.24 | |||||
Outstanding at June 30, 2009 |
2,245,276 | $ | 21.62 | |||||
Exercisable at June 30, 2009 |
1,317,189 | $ | 23.45 | |||||
As of June 30, 2009, approximately $2.3 million of unrecognized stock based compensation was associated with our unvested stock options expected to be recognized over a
weighted average period of 1.8 years. This unrecognized compensation expense includes a reduction for our estimate of potential forfeitures. As of June 30, 2009, the
average remaining life of the outstanding stock options was 6.5 years with an aggregate intrinsic value of $0.8 million. As of June 30, 2009, the average remaining life
of the exercisable stock options was 4.7 years with an aggregate intrinsic value of less than $0.1 million. |
12
Restricted Stock Units (RSUs) and Performance Based Restricted Stock Units (PBUs) |
||
The value of RSUs and PBUs in our common stock is the fair value at the date of grant. A summary of the unvested RSU and PBU activity presented below represents the
maximum number of shares that could be earned or vested: |
| Weighted | ||||||||
| Maximum | Average | |||||||
| Number of | Grant Date | |||||||
| Share Units | Fair Value | |||||||
Unvested RSUs at September 30, 2008 |
137,708 | $ | 22.96 | |||||
Granted |
46,592 | 18.66 | ||||||
Vested |
(96,253 | ) | 19.88 | |||||
Forfeited |
(3,504 | ) | 22.35 | |||||
Unvested RSUs at June 30, 2009 |
84,543 | $ | 24.12 | |||||
Unvested PBUs at September 30, 2008 |
16,755 | $ | 27.97 | |||||
Granted |
587,038 | 14.89 | ||||||
Vested |
— | — | ||||||
Forfeited |
(6,894 | ) | 14.89 | |||||
Unvested PBUs at June 30, 2009 |
596,899 | $ | 15.26 | |||||
As of June 30, 2009, approximately $1.4 million and $3.9 million of unrecognized stock based compensation was associated with our unvested RSUs and PBUs (based upon
projected performance to date), respectively. These costs are expected to be recognized over a weighted average period of 3.5 years and 2.0 years, respectively. This
unrecognized compensation expense includes a reduction for our estimate of potential forfeitures. As of June 30, 2009, the outstanding RSUs and PBUs had an aggregate
intrinsic value of $4.5 million and $9.9 million, respectively. |
||
Dividends payable in stock accrue on both RSUs and PBUs and are subject to the same specified terms as the original grants. As of June 30, 2009, a total of 18,161 stock
units had accumulated on unvested RSUs and PBUs due to dividend reinvestments and are excluded from the tables above. |
||
Vested Deferred Stock |
||
Past stock based compensation programs, like the current RSU and PBU programs, allowed deferrals after vesting to be set-up as deferred stock. As of June 30, 2009,
184,120 of our shares had been deferred, fully vested and payable in our common stock under our stock based compensation programs and are excluded from the tables
above. |
13
| 12. | Comprehensive Income and Accumulated Other Comprehensive Loss |
SFAS No. 130, Reporting Comprehensive Income, requires the net-of-tax effect of unrealized gains or losses on available-for-sale securities, foreign currency translation adjustments, changes in items not
recognized as a component of net pension and postretirement healthcare costs, and unrealized gains or losses on derivative instruments to be included in comprehensive income. |
||
The components of comprehensive income, each net of tax (corresponding to income tax rates from between 35% to 39%, excluding foreign currency translation adjustment), were as follows: |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (amounts in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Net income |
$ | 25.4 | $ | 26.7 | $ | 79.7 | $ | 74.0 | ||||||||
Foreign currency translation
adjustment |
1.4 | 0.5 | (1.4 | ) | 1.1 | |||||||||||
Changes in net unrealized gains on
derivative instruments |
(1.0 | ) | — | (0.6 | ) | 0.1 | ||||||||||
Changes in net unrealized gains on
available-for-sale securities |
0.2 | (1.0 | ) | 0.8 | (1.0 | ) | ||||||||||
Changes in items not recognized as
a component of net pension and
postretirement healthcare cost |
0.1 | 0.3 | 0.3 | (5.4 | ) | |||||||||||
Comprehensive income |
$ | 26.1 | $ | 26.5 | $ | 78.8 | $ | 68.8 | ||||||||
The components of accumulated other comprehensive loss, each net of tax (corresponding to income tax rates from between 35% to 39%, excluding cumulative foreign currency translation adjustment), were as follows: |
| June 30, | September 30, | |||||||
| (amounts in millions) | 2009 | 2008 | ||||||
Cumulative foreign currency translation adjustment |
$ | (4.0 | ) | $ | (2.6 | ) | ||
Net unrealized gain (loss) on derivative instruments |
(0.3 | ) | 0.3 | |||||
Net unrealized gain (loss) on available-for-sale securities |
(0.8 | ) | 3.0 | |||||
Items not recognized as a component of net pension and postretirement healthcare costs |
(15.2 | ) | (15.5 | ) | ||||
Accumulated other comprehensive loss |
$ | (20.3 | ) | $ | (14.8 | ) | ||
| 13. | Investment Income (Loss) and Other |
The components of investment income (loss) and other were as follows: |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (amounts in millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Interest income on cash and cash equivalents |
$ | 0.1 | $ | 0.5 | $ | 0.2 | $ | 0.6 | ||||||||
Interest income on note receivable from Forethought |
3.0 | 2.8 | 9.1 | 2.8 | ||||||||||||
Interest income on ARS |
0.1 | 0.5 | 0.8 | 0.5 | ||||||||||||
Equity in net income (loss) of affiliates |
(1.2 | ) | 0.4 | (5.7 | ) | 0.4 | ||||||||||
Foreign currency exchange income (loss) |
0.1 | 0.1 | — | (0.9 | ) | |||||||||||
Other, net |
(0.2 | ) | 0.1 | (0.2 | ) | 0.5 | ||||||||||
Investment income (loss) and other |
$ | 1.9 | $ | 4.4 | $ | 4.2 | $ | 3.9 | ||||||||
14
| 14. | Commitments and Contingencies |
Antitrust Litigation
|
||
Class certification hearings in the FCA Action and the Pioneer Valley Action were held before a Magistrate Judge in early
December 2006. As explained in our previously filed Form 10-K for the fiscal year ended September 30, 2008, 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 its former parent company, Hillenbrand Industries, Inc., now Hill-Rom Holdings, Inc., 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”). 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 the 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 generally seek monetary damages, 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 are seeking damages ranging from approximately $947.0 million 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, the FCA plaintiffs may continue to seek reversal of the Fifth Circuit’s
ruling
by filing for an appeal with the United States Supreme Court or though other procedural avenues. Should the FCA plaintiffs succeed in their efforts to obtain a
reversal of 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 trial, 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. As discussed in our previously filed Form 10-K, 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.
|
||
If the FCA plaintiffs do not succeed in reversing the District Court’s order denying class certification, they may, among other things, still seek to pursue their
individual injunctive or damages claims. Their individual damages claims would be 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.
|
||
To date, we have incurred approximately $22.3 million in legal and related costs associated with the FCA matter, of which $2.1 million were incurred in the nine months
ended June 30, 2009. |
15
Other Pending Litigation Matter |
||
On August 17, 2007, a lawsuit styled Vertie Staples v. Batesville Casket Company, Inc. was filed against us in the United States District Court for the Eastern District
of Arkansas. As amended, the case is a putative class action on behalf of the plaintiff and all others who purchased a Monoseal®, Monogard® or gasketed casket
manufactured by Batesville from a licensed funeral home located in Arkansas from January 1, 1989 to August 31, 2002. The complaint alleges that the warranties on which
the claims are predicated date from 1989 to 2002. The plaintiff claims that Monoseal®, Monogard® or gasketed caskets were marketed as completely resistant to the
entrance of air and water when they allegedly were not completely resistant. The plaintiff asserts causes of action under the Arkansas Deceptive Trade Practices Act and
for fraud, constructive fraud and breach of express and implied warranties. On January 9, 2008, the plaintiff filed an amended complaint that added another putative
class plaintiff, restated the pending claims, and added a claim for unjust enrichment. The claims of the original plaintiff were subsequently dismissed by the Court and
the case is now styled Garry Clayton v. Batesville Casket Company, Inc. In order to establish federal jurisdiction over the claims under the Class Action Fairness Act,
the plaintiff alleges that the amount in controversy exceeds $5.0 million. |
||
On February 26, 2009, the plaintiff filed a Motion for Class Certification advancing arguments only with respect to Batesville’s split-top gasketed caskets; thereby
narrowing the scope of his claims and effectively dropping claims pertaining to Batesville’s full top caskets. On August 10, 2009, the District Court denied class
certification in the case. The plaintiffs may seek to appeal the
class certification decision or may choose to pursue individual claims. Regardless, we believe the claims are without merit
and will continue to vigorously defend the case. It is not unusual to have multiple copycat class actions suits filed after an initial filing, and it is possible that
additional suits based on the same or similar allegations could be brought against us. One such suit, styled Robert Haught v. Batesville Casket Company, Inc., was filed
on August 4, 2009, in the United States District Court for the Middle District of Florida. We have not yet been able to evaluate that case. |
||
General |
||
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 million to $1.0 million 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. |
| 15. | Financial Instruments |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument 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 amount of the private equity limited partnerships, included as a component of “Investments” within our consolidated balance sheet,
was $14.9 million at June 30, 2009. The fair value of equity method investments is not readily available.
|
||
The carrying amount of other equity investments, included as a component of “Investments” within our consolidated balance sheet, was $3.6 million
at June 30, 2009, and approximates fair value. The fair value was determined using present value or other techniques appropriate for a particular
financial instrument. These techniques involve some degree of management judgment and as a result are not necessarily indicative of the amounts
the Company would realize in a current market exchange. |
16
Auction rate securities and the related Put right are carried at estimated fair value. We estimate the fair value of derivative financial
instruments based on the amount that we would receive or pay to terminate the agreements at the reporting date.
|
||
We estimate the fair value of the note receivable from Forethought based upon comparison to debt securities currently trading in an active market
with similar characteristics of yield, duration, and credit risk adjusted for liquidity considerations. Based upon market data available to us,
we estimate that the fair value of the note and accrued interest is approximately $100 million based upon an estimated yield to maturity of
approximately 16% as of June 30, 2009. This is approximately $39 million below its carrying value at June 30, 2009. An increase or decrease of 1%
in the discount rate utilized to estimate the fair value of the note (including interest receivable) would indicate a change in fair value of
approximately $6 million. |
||
The fair value of our credit facility is estimated based on internally developed models, using current market interest rate data for similar
issues as there is no active market for our debt. As of June 30, 2009, the fair value of our credit facility was estimated to be approximately
$73.3 million. |
| 16. | Fair Value Measurements |
The Company adopted SFAS No. 157 effective October 1, 2008. Under this standard, fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
As permitted by FSP No. FAS 157-2, Effective Date of FASB Statement No. 157, we deferred the adoption of SFAS No. 157 for all non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at fair value in the consolidated financial statements on a recurring
basis (at least annually), until October 1, 2010. The full adoption of SFAS No. 157 is not expected to have a material effect on our consolidated
financial statements. |
||
The hierarchy of those valuation approaches is broken down into three levels based on the reliability of inputs as follows: |
||
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the
measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing basis. |
||
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are
observable for the asset or liability ( e.g., interest rates and yield curves observable at commonly quoted intervals or current market) and
contractual prices for the underlying financial instrument, as well as other relevant economic measures. |
||
Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that
observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability
at the measurement date. Unobservable inputs shall reflect the reporting entity’s own assumptions about the assumptions that market participants
would use in pricing the asset or liability (including assumptions about risk). |
||
As of June 30, 2009, all significant assets or liabilities that are carried at fair value within our consolidated financial statements consist of
ARS ($47.9 million) and a related Put right ($1.7 million), which are valued based upon Level 3 inputs, and derivative instruments ($0.4 million)
which are valued based upon Level 2 inputs. We have no other significant assets or liabilities that are carried at fair value within our financial
statements (other than cash equivalents) as of June 30, 2009. In addition, we disclose in Note 15 the fair value of our note receivable from
Forethought, other equity investments, and credit facility, which are also based upon Level 3 inputs. |
17
While we continue to earn interest on the ARS at the contractual rate, these investments are not currently being bought and sold in an active
market and therefore do not have a readily determinable market value. At June 30, 2009, the Company’s investment advisors provided a valuation
based on Level 3 inputs for the ARS. The investment advisors utilized a discounted cash flow approach (an “Income” approach) to arrive at this
valuation, which was corroborated by separate and comparable discounted cash flow analysis prepared by us. The assumptions used in preparing the
discounted cash flow model include estimates of, based on data available as of June 30, 2009, interest rates, timing and amount of cash flows,
credit spread related yield and illiquidity premiums, and expected holding periods of the ARS. These assumptions are volatile and subject to
change as the underlying sources of these assumptions and market conditions change. We valued the Put right based upon the difference between the
par value and the fair value of ARS on a present value basis, as adjusted for any bearer risk associated with UBS’s financial ability to
repurchase the ARS beginning June 30, 2010. See the table in Note 4 for a reconciliation of the beginning to ending balances of these assets and
the related change in the fair value of these assets from September 30, 2008 to June 30, 2009. |
||
We estimate that the fair value of the note receivable from Forethought (and related interest receivable) has decreased from $105 million at
September 30, 2008 to $100 million at June 30, 2009. This change was caused by two components. The estimated fair value increased by
approximately $10 million due to the natural decline in the period to maturity (closer to the collection date). This increase was more than offset
by an increase of approximately 3% in the required yield to maturity (discount rate) observed in the marketplace on comparable debt instruments
(adjusted for a liquidity premium). |
18
| Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
intend
|
believe | plan | expect | may | goal | |||||
become
|
pursue | estimate | will | forecast | continue | |||||
targeted
|
anticipate | promise | improve | progress | potential |
19
| • | The first three quarters of this fiscal year have been very
volatile. While our first quarter revenues were reasonably
in line with our expectations (up 2.2% over the same period
last year), our second quarter results saw a significant
decrease in our revenues (down 10.8% over the same period
last year). Although a much milder pneumonia and influenza
season played a role in the second quarter decrease in the
number of deaths, we now believe that increased cremation
rates are playing a larger role in reducing casketed deaths
based upon information we have been able to gather in the
marketplace. This estimated increase in the cremation rate
may be a result of how consumers and our customers are
responding to recessionary pressures. It should be noted,
however, that the volatile economic environment is creating
a higher degree of uncertainty about our ability to
accurately estimate the rate at which consumers are
choosing cremations and the impact that cremations are
having on the number of burials. We believe these factors
increased competition for the remaining casket volume
causing our competitors to become more aggressive in their
pricing actions, particularly in lower priced areas of our
product offering. This market assessment and these
competitive dynamics appear consistent with the recent
public reports from our competitors and customers. We
took and continue to take actions to protect our market
position, including additional sales promotions,
readjustment of our production capacity, and the use of our
lean business expertise. |
||
During the third quarter our revenues decreased $6.3
million, or 3.8%, over the same period last year. Despite
the fact that the number of deaths is reported to be down
over the same period last year, our responses to market
conditions that developed during the second quarter appear
to have successfully regained our market position.
However, it is unclear whether the severity of the economic
recession will have a long-term effect on the buying
patterns of our customers or cremation rates. See our
analysis of recent results of operations below for further
discussion. |
|||
| • | We experienced cost decreases for commodities used in
manufacturing during the three months ended June 30, 2009,
over the same period last year. These cost decreases were
largely attributable to reduced prices paid for carbon and
stainless steel. While these commodity prices have come
down from their highs during fiscal 2008, during the nine
months ended June 30, 2009 we experienced higher prices for
commodities over the same period last year due to the
timing of when the prices we pay went into effect.
Although it is difficult to predict with certainty where
these prices will go over time, based on commodity prices
we experienced during the last quarter, we expect full year
commodity costs to be flat over last fiscal year. In
addition we expect the favorable effects from diesel fuel
prices we have experienced throughout fiscal 2009 as
compared to fiscal 2008 to continue in the near term. See
our analysis of recent results of operations below for
further discussion. |
||
| • | As previously reported, a self-styled consumer advocacy
group, the Funeral Consumers Alliance, and several
consumers who had purchased Batesville caskets had filed a
consolidated purported class-action lawsuit against
Batesville Casket Company, Hill-Rom Holdings, and three of
Batesville’s funeral home customers, alleging that the
defendants violated antitrust laws. A related lawsuit was
filed by four current and former independent casket
retailers, alleging similar violations. On March 26, 2009,
a United States District Judge in the Southern District of
Texas (Houston), denied class certification in both
lawsuits. After these rulings, the casket retailers
dismissed their case with prejudice, while the Funeral
Consumers Alliance plaintiffs filed a petition to appeal
the ruling in their case. The Fifth Circuit’s June 19, 2009
order denied that 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 the all
of the judges sitting on the Fifth Circuit Court of
appeals.) |
||
In addition to the above, Batesville Casket Company is
involved in a case in Arkansas, Garry Clayton v. Batesville
Casket Company, Inc., in which the plaintiffs are asserting
a number of claims related to Batesville’s warranties
related to our gasketed caskets. The plaintiffs were
seeking to have a state-wide class certified as to the
claims. On August 10, 2009, the District Court denied
class certification in that matter. |
|||
For a full discussion of these significant developments,
see Note 14 to our consolidated financial statements
included in Part I, Item 1 of this Form 10-Q. |
|||
| • | During the three and nine months ended June 30, 2009, we
recognized net losses of $1.2 million and $5.7 million from
the limited partnership investments, respectively, that
were transferred to us in connection with our separation
from Hill-Rom last year. These losses resulted from
decreases in the fair value of the investment portfolios of
the partnerships. We believe their losses are being caused
primarily by the current economic environment. |
||
| • | During the nine months ended June 30, 2009, our pension
assets declined in value by 9.4%, from $146.7 million to
$132.9 million (prior to our current year discretionary
contribution). During the three months ended June 30, 2009,
we made a discretionary contribution to our pension plans
in the amount of $7.8 million to improve our funding
levels. This significantly reduced net cash provided by
operating activities during this quarter. |
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| Three | Three | |||||||||||||||
| Months | Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (amounts in millions) | 2009 | % of Revenues | 2008 | % of Revenues | ||||||||||||
Net revenues |
$ | 158.7 | 100.0 | $ | 165.0 | 100.0 | ||||||||||
Cost of goods sold |
92.7 | 58.4 | 98.6 | 59.8 | ||||||||||||
Gross profit |
66.0 | 41.6 | 66.4 | 40.2 | ||||||||||||
Operating expenses |
27.3 | 17.2 | 28.3 | 17.2 | ||||||||||||
Separation costs |
— | — | 0.1 | — | ||||||||||||
Operating profit |
38.7 | 24.4 | 38.0 | 23.0 | ||||||||||||
Interest expense |
(0.3 | ) | (0.2 | ) | (1.4 | ) | (0.8 | ) | ||||||||
Investment income (loss) and other |
1.9 | 1.2 | 4.4 | 2.7 | ||||||||||||
Income before taxes |
40.3 | 25.4 | 41.0 | 24.9 | ||||||||||||
Income tax expense |
14.9 | 9.4 | 14.3 | 8.7 | ||||||||||||
Net income |
$ | 25.4 | 16.0 | $ | 26.7 | 16.2 | ||||||||||
21
| Nine | Nine | |||||||||||||||
| Months | Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (amounts in millions) | 2009 | % of Revenues | 2008 | % of Revenues | ||||||||||||
Net revenues |
$ | 496.0 | 100.0 | $ | 519.3 | 100.0 | ||||||||||
Cost of goods sold |
285.9 | 57.6 | 302.8 | 58.3 | ||||||||||||
Gross profit |
210.1 | 42.4 | 216.5 | 41.7 | ||||||||||||
Operating expenses |
87.7 | 17.7 | 85.0 | 16.4 | ||||||||||||
Separation costs |
0.1 | — | 14.2 | 2.7 | ||||||||||||
Operating profit |
122.3 | 24.7 | 117.3 | 22.6 | ||||||||||||
Interest expense |
(1.8 | ) | (0.4 | ) | (1.4 | ) | (0.3 | ) | ||||||||
Investment income (loss) and other |
4.2 | 0.9 | 3.9 | 0.8 | ||||||||||||
Income before taxes |
124.7 | 25.2 | 119.8 | 23.1 | ||||||||||||
Income tax expense |
45.0 | 9.1 | 45.8 | 8.9 | ||||||||||||
Net income |
$ | 79.7 | 16.1 | $ | 74.0 | 14.2 | ||||||||||
22
| Nine Months Ended | ||||||||
| June 30, | ||||||||
| (amounts in millions) | 2009 | 2008 | ||||||
Net cash flows provided by (used in): |
||||||||
Operating activities |
$ | 84.9 | $ | 90.8 | ||||
Investing activities |
(3.6 | ) | (2.9 | ) | ||||
Financing activities* |
(66.8 | ) | (66.8 | ) | ||||
Effect of exchange rate changes on cash |
(0.4 | ) | — | |||||
Increase in cash and cash equivalents |
$ | 14.1 | $ | 21.1 | ||||
| * | Also includes net cash and cash equivalents provided to our parent company
prior to separation on March 31, 2008. |
23
| • | We incurred $14.1 million more of separation costs in the
first nine months of last year compared to the same period
this year, substantially all of which were paid by the end
of that period. This reduced both our profitability and our
operating cash flow in the same period last year. |
||
| • | Cash payments for income taxes increased $10.4 million from
the same period last year, including amounts paid to
Hill-Rom to settle our pre-separation income tax
obligations. This change was the result of the timing
between when we had made these payments to Hill-Rom (prior
to separation) and the timing of when we now make them
directly to tax authorities as a separate company. |
||
| • | We made a $7.8 million discretionary contribution to our
pension plan in the first nine months of the current year
that we did not make during the same period last year. |
24
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| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
| Item 4T. | CONTROLS AND PROCEDURES |
29
| Item 1. | LEGAL PROCEEDINGS |
| Item 1A. | RISK FACTORS |
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
| Total | ||||||||||||||||
| Number of | Approximate | |||||||||||||||
| Shares | Dollar Value | |||||||||||||||
| Purchased as | of Shares | |||||||||||||||
| Part of | That May Yet | |||||||||||||||
| Average | Publicly | be Purchased | ||||||||||||||
| Total Number | Price Paid | Announced | Under the | |||||||||||||
| of Shares | Per | Plans or | Plans | |||||||||||||
| Period | Purchased | Share* | Programs** | or Programs | ||||||||||||
April 2009 |
— | $ | — | — | $ | 81,250,009 | ||||||||||
May 2009 |
— | — | — | 81,250,009 | ||||||||||||
June 2009 |
— | — | — | 81,250,009 | ||||||||||||
Total |
— | $ | — | — | $ | 81,250,009 | ||||||||||
| * | Includes commissions paid. |
|
| ** | On July 24, 2008, our Board of Directors approved the repurchase of $100 million of
common stock. As of June 30, 2009, we had repurchased approximately 1.0 million shares
for $18.7 million. The stock repurchase approval has no expiration date, and there was
no termination or expiration of the stock repurchase plan during the quarter ended June
30, 2009. |
30
| Item 6. | EXHIBITS |
| • | 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. |
31
| HILLENBRAND, INC. | ||||
DATE: August 12, 2009
|
BY: | /s/ Cynthia L. Lucchese | ||
| Cynthia L. Lucchese | ||||
| Senior Vice President and Chief Financial Officer | ||||
DATE: August 12, 2009
|
BY: | /s/ Theodore S. Haddad, Jr | ||
| Theodore S. Haddad, Jr | ||||
| Vice President, Controller and Chief Accounting Officer | ||||
32
| Exhibit 3.1 | Amended and Restated Code of By-laws of Hillenbrand, Inc.
(Incorporated by reference to Exhibit 3.2 to Current Report
on Form 8-K filed July 17, 2009) |
|
| Exhibit 31.1* | Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 |
|
| Exhibit 31.2* | Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 |
|
| 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 |
|
| 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 |
| * | Filed herewith. |
33