TABLE OF CONTENTS
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| Item 1.01 |
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Entry into a Material Definitive Agreement. |
On
June 30, 2010, Hillenbrand, Inc. (the “Company”, “we,” “us,” and “our”),
the lenders
named therein (the “Lenders”), Citibank, N.A., as resigning agent (“Citibank”), and JPMorgan Chase
Bank, N.A., as successor agent for the Lenders (“JPMorgan Chase Bank”), entered into a second
amendment (the “Amendment”) to that Credit Agreement, dated as of March 28, 2008, among the
Company, the Lenders, and Citibank, as amended by Letter Amendment No. 1, dated as of December 16,
2009 (as may be further amended, supplemented, or otherwise modified from time to time, the “Credit
Agreement”).
Under the Amendment, Citibank resigned as the agent for the Credit Agreement, and JPMorgan
Chase Bank agreed to be, and was, appointed as the successor agent for all purposes under the
Credit Agreement. The Amendment also added defaulting lender provisions and modified the
definition of Alternate Base Rate. In addition, the Credit Agreement was amended to permit us to
incur indebtedness in connection with an offering of debt securities registered under the
Securities Act of 1933, as amended, or exempt therefrom in reliance upon Rule 144A thereunder, or a
private placement of debt securities to institutional investors (collectively, “Specified
Indebtedness”) that contains a negative pledge covenant or a covenant requiring us to secure the
Specified Indebtedness on a pari passu basis if we secure any other indebtedness.
The foregoing description of the Amendment is qualified in its entirety by reference to the
text of the Amendment, a copy of which is filed as Exhibit 10.1 to this Current Report on Form 8-K
and is incorporated herein by reference.
Risks
Relating to Our Business
The
following are updates to certain risk factors set forth under
“Risks Related to Our Business” in Item 1A of our
annual report on Form 10-K for the year ended September 30,
2009. Except as set forth below, there have been no material changes
to the risk factors discussed in our annual report on Form 10-K
for the fiscal year ended September 30, 2009.
Our growth strategy involves the potential for future
significant acquisitions, some of which may be outside our
current industry. We may not be able to achieve some or all of
the benefits that we expect to achieve from these acquisitions.
If an acquisition were to perform unfavorably, it could have an
adverse impact on our value.
One component of our strategy contemplates our making selected
acquisitions. All acquisitions involve inherent uncertainties,
some of which include, among other things, our ability to:
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successfully identify targets for acquisition,
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negotiate reasonable terms for any particular deal,
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properly perform due diligence and determine all the significant
risks associated with a particular acquisition,
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properly evaluate target company management capabilities, and
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successfully transition the acquired company into our business
and achieve the desired performance.
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We also may acquire businesses with unknown or contingent
liabilities, including liabilities for failure to comply with
potential industry or environmental regulations or tax
contingencies. We have plans and procedures to conduct reviews
of potential acquisition candidates for compliance with
applicable regulations and laws prior to the acquisition and
will also generally seek indemnification from sellers covering
these matters. Despite these efforts, we may incur material
liabilities for past activities of acquired businesses.
In the event that we acquire a business that operates outside of
our current industry, we may not achieve the intended benefits
of the acquisition and our business could be materially
adversely impacted. Under such circumstances, management could
be required to spend significant amounts of time and resources
in the transition of the business of the acquired entity due to
the lack of experience in the industry of the acquired business.
In addition, any benefits we anticipate from application of our
lean manufacturing and lean business expertise may not be fully
realized. Also, if we acquire a company that operates in an
industry that is different from the one in which we operate, our
lack of experience with that company’s industry could have
a material adverse impact on our ability to manage that business
and realize the benefits of that acquisition.
Collection risk associated with our note receivable from
Forethought Financial Group, Inc. (“Forethought”)
could have a material adverse impact on our earnings.
As described in our annual report on
Form 10-K
for the year ended September 30, 2009, we hold a
significant non-operating asset in the form of a note receivable
and related interest receivable from Forethought. This asset was
transferred to us at the time of separation of Hillenbrand
Industries, Inc. (now known as “Hill-Rom Holdings,
Inc.” or “Hill-Rom”) into two separate publicly
traded companies, Hillenbrand and
Hill-Rom. As
of March 31, 2010, this note receivable had an aggregate
carrying value of $149.0 million. This note receivable
primarily represents seller provided financing to Forethought,
the entity that purchased Hill-Rom’s former Forethought
Financial Services, Inc. subsidiary. Forethought, through its
subsidiaries, provides insurance and financial solutions for
families managing retirement and
end-of-life
needs.
Should Forethought fail to perform consistently with the
original expectations set forth by Forethought or underperform
to an extent that it cannot meet its financial obligations, the
note could become impaired, causing an impairment charge that could
result in a material adverse impact on our financial condition
and results of operations. Payments under the note are due in
annual $10 million installments beginning on July 1,
2010 through July 1, 2014, at which time the balance of the
note is due and payable (unless otherwise deferred in accordance
with its terms).
Volatility in
our investment portfolio could negatively
impact earnings. Also, if we are unable to convert our portfolio
of auction rate securities to cash at reasonable terms, our
earnings could be adversely affected.
In connection with our separation from Hill-Rom, ownership in
certain investments in private partnerships were transferred to
us that had an aggregate carrying value of $14.7 million as
of March 31, 2010. Volatility in that investment portfolio
negatively or positively impacts earnings. These investments
could be adversely affected by general economic conditions,
changes in interest rates, default on debt instruments, and
other factors, resulting in an adverse impact on our results
from operations.
In addition, we received a portfolio of auction rate securities
(consisting of highly rated tax exempt state and municipal
securities, the majority of which are collateralized by student
loans guaranteed by the U.S. government under the Federal Family
Education Loan Program) that Hill-Rom was not able to liquidate
prior to the separation due to the market conditions and auction
failures. In November 2008, we received an enforceable,
non-transferable right (the “Put”) from UBS
Financial Services that allows us to sell approximately
$29.7 million of our existing auction rate securities
(carrying value at March 31, 2010, including the Put) at
par value plus accrued interest. We exercised the Put on
June 30, 2010 and received the proceeds on July 1, 2010. For our remaining auction rate securities
(carrying value of $13.6 million at March 31, 2010),
if conditions do not improve or worsen, we may not be able to
convert these securities to cash for the foreseeable future,
these assets could become impaired, and our earnings could be
adversely affected.
Risk
Relating to the K-Tron Acquisition
As previously disclosed, on April 1, 2010, we completed our acquisition of K-Tron
International, Inc. (“K-Tron”). Below are additional risk factors facing us as a result of the
K-Tron acquisition:
We may not realize the expected benefits of the K-Tron acquisition because of transition
difficulties and other challenges.
The success of the K-Tron acquisition will depend, in part, on our ability to transition
K-Tron from being a stand-alone public company to our subsidiary. The transition process may be
more complex, costly and time-consuming than we anticipate at this time. The difficulties of
successfully implementing this transition include, among others:
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failure to implement our business plan for the combined business; |
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unanticipated changes in applicable laws and regulations; |
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failure to retain key employees; |
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operating risks inherent in K-Tron’s business and our business; and |
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unanticipated issues, expenses and liabilities. |
We may not accomplish the transition of K-Tron smoothly, successfully or within the
anticipated costs or timeframe. The diversion of the attention of management from our current
operations to the transition effort could prevent us from realizing the full benefits anticipated
to result from the K-Tron acquisition and could adversely affect our business.
K-Tron
operates in an industry that is different than ours and in which we
have no prior experience.
K-Tron, as a designer, producer,
marketer and servicer of material handling equipment and systems, does not operate within the death care products industry. As such, we may not achieve the intended benefits of our acquisition of K-Tron, we may not manage K-Tron effectively and our business could be materially adversely impacted. In addition, management is currently
significantly dependent on the existing management of K-Tron in order to enable us to achieve the
intended benefits of the acquisition.
Our increased debt obligations upon closing of the K-Tron acquisition could adversely affect
our business and limit our ability to plan for or respond to changes in our business.
As of March 31, 2010, our long-term debt, after giving effect to the acquisition on a pro
forma basis, would have been approximately $375.0 million. As of May 31, 2010, we had $397.7
million of total indebtedness outstanding (excluding $14.8 million of outstanding letters of
credit). This level of debt could have important consequences to our business. For example:
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we may be more vulnerable to general adverse economic and industry conditions; |
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we will be required to dedicate a larger portion of our cash flow from operations
to payments on our indebtedness, thereby reducing the availability of our cash flow
for other purposes, including business development efforts and mergers and
acquisitions; |
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we will continue to be exposed to the risk of increased interest rates because a
portion of our borrowings is at variable rates of interest; and |
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our flexibility in planning for, or reacting to, changes in our businesses and the
industries in which we operate may be limited, thereby placing us at a competitive
disadvantage compared to competitors that have less indebtedness. |
For information regarding the other risks we face, see the discussion under “Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the year ended September 30, 2009 and the discussion
under “Item 1A. Risk Factors” in K-Tron’s Annual Report on Form 10-K for the year ended December
31, 2009.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for
K-Tron for the Three Months Ended April 1, 2010
The below sets forth Management’s Discussion and Analysis of Financial Condition and Results
of Operations (“MD&A”) for the three months ended April 1, 2010 for K-Tron as a stand-alone public
company, prior to the closing of the acquisition. This MD&A should be read in conjunction with the
historical consolidated statements of financial position of K-Tron as of April 1, 2010
(unaudited) and January 2, 2010 (audited), and the unaudited consolidated results of operations and cash flows for the three months
ended April 1, 2010 and April 4, 2009, included in our current report on Form 8-K/A filed on May
28, 2010.
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Total revenues decreased by $11,730,000 or 23.6% in the first quarter of 2010 compared to the
same period in 2009. The lingering global economic crisis continued to impact K-Tron’s sales and
operations. The decrease in K-Tron’s revenues in the first quarter of 2010 compared to the same
period in 2009 was primarily due to lower equipment sales to customers in the size reduction
business line, especially to customers in the energy and coal mining industries. Total revenue
also decreased due to lower sales to plastic resin and compounding customers in the process
business line, especially in Europe. This was partially offset by the positive effect of a weaker
U.S. dollar in the first quarter of 2010, compared with the same period in 2009, on the translation
of the revenue of K-Tron’s foreign operations into U.S. dollars.
Gross profit as a percentage of K-Tron’s total revenue increased to 44.1% in the first quarter
of 2010 from 40.6% for the same period in 2009. This increase primarily reflected a change in the
sales mix of the products and services sold by K-Tron’s two business lines during these periods.
Sales of replacement parts, which generally carry a higher gross margin than sales of equipment,
were a higher percentage of revenue due to lower equipment sales.
Selling, general and administrative (“SG&A”) expense decreased by $439,000 or 3.5% in the
first quarter of 2010 compared to the same period in 2009. This decrease was primarily due to
decreased commissions and selling expenses related to lower revenue, along with cost control
efforts undertaken to reduce expenses as a result of the weak economy. These efforts included
reduced staffing and work schedules and reduced discretionary spending, which are expected to
continue until the economy rebounds.
Offsetting the decreases were increases for the unfavorable effect of a weaker U.S. dollar on
the translation of foreign costs into U.S. dollars and unfavorable effects of foreign exchange on
sales in foreign currencies at our Swiss subsidiary. As a percentage of K-Tron’s revenue, SG&A
increased to 32.1% in the first three months of 2010 compared to 25.4% in the first three months of
2009 due mostly to the impact of lower revenues and the substantially fixed nature of many of these
expenses.
Research and development (“R&D”) expense increased by $21,000 or 3.7% in the first quarter of
2010 compared to the same period in 2009, primarily due to the effect of a weaker U.S. dollar in
the first quarter of 2010 on the translation into U.S. dollars of R&D expenses incurred in
Switzerland.
Interest expense, net of interest income, decreased by $238,000 or 76.3% in the first quarter
of 2010 compared to the same period in 2009. This decrease was primarily due to the effect of
lower debt levels.
Income before income taxes decreased to ($6,185,000) in the first quarter of 2010 compared to
$6,661,000 for the same period in 2009. This quarter-over-quarter decrease of $12,846,000 was
primarily the result of $10,081,000 in non-recurring transaction costs associated with our
acquisition of K-Tron on April 1, 2010, along with the impact of lower revenue in the first quarter
of 2010.
The income tax (benefit) provisions for the first quarters of 2010 and 2009 were ($769,000)
and $2,214,000, respectively, and the overall effective income tax rates were a 12.4%
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