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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

 

For the quarterly period ended December 31, 2011

 

Commission File No. 001-33794

 

HILLENBRAND, INC.

(Exact name of registrant as specified in its charter)

 

 

Telephone:  (812) 934-7500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No  x

 

As of January 27, 2012, 62,473,962 shares of the registrant’s no par common stock were outstanding.

 

 

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HILLENBRAND, INC.

INDEX TO FORM 10-Q

 

		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Income for the Three Months Ended December 31, 2011 and 2010	3
	Consolidated Balance Sheets at December 31, 2011 and September 30, 2011	4
	Consolidated Statements of Cash Flow for the Three Months Ended December 31, 2011 and 2010	5
	Condensed Notes to Consolidated Financial Statements	6 – 14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 – 20
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	21
Item 4.	Controls and Procedures	21
	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	22
SIGNATURES		23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 101 Instance document
Exhibit 101 Schema document
Exhibit 101 Calculation linkbase document
Exhibit 101 Labels linkbase document
Exhibit 101 Presentation linkbase document
Exhibit 101 Definition linkbase document

 

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Item 1. FINANCIAL STATEMENTS

 

Hillenbrand, Inc.

Consolidated Statements of Income (Unaudited)

(in millions, except per share data)

 

		Three Months Ended
		December 31,
		2011			2010
Net revenue		$	231.6		$	211.0
Cost of goods sold		137.9			119.8
Gross profit		93.7			91.2
Operating expenses		60.3			49.1
Operating profit		33.4			42.1
Interest expense		(2.9		)	(2.8		)
Other income and expense		(0.5		)	3.0
Income before income taxes		30.0			42.3
Income tax (benefit) expense		(1.3		)	15.2
Net income		$	31.3		$	27.1
Earnings per share - basic and diluted		$	0.50		$	0.44
Weighted-average shares outstanding - basic and diluted		62.0			62.0
Cash dividends per share		$	0.1925		$	0.1900

 

See Condensed Notes to Consolidated Financial Statements

 

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Hillenbrand, Inc.

Consolidated Balance Sheets (Unaudited)

(in millions)

 

		December 31,			September 30,
		2011			2011
ASSETS
Current Assets
Cash and cash equivalents		$	122.5		$	115.5
Trade receivables, net		121.9			131.7
Inventories		90.0			83.7
Deferred income taxes		28.8			28.3
Other current assets		15.4			20.9
Total current assets		378.6			380.1
Property, plant and equipment, net		119.2			120.6
Intangible assets, net		324.1			332.8
Goodwill		297.6			300.0
Investments		15.6			17.4
Other assets		30.5			29.8
Total Assets		$	1,165.6		$	1,180.7
LIABILITIES
Current Liabilities
Trade accounts payable		$	26.1		$	30.5
Accrued compensation		19.7			36.6
Accrued customer rebates and advances		36.3			38.2
Other current liabilities		37.0			30.9
Total current liabilities		119.1			136.2
Long-term debt		431.5			431.5
Accrued pension and postretirement healthcare		110.3			108.5
Deferred income taxes		19.6			30.1
Other long-term liabilities		26.7			31.3
Total Liabilities		707.2			737.6
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Common stock, no par value, 63.2 and 63.4 shares issued, 62.5 and 62.5 shares outstanding, 0.6 and 0.6 restricted		—			—
Additional paid-in capital		318.6			317.0
Retained earnings		201.5			182.7
Treasury stock, 0.7 and 0.9 shares		(14.5		)	(17.1		)
Accumulated other comprehensive loss		(47.2		)	(39.5		)
Total Shareholders’ Equity		458.4			443.1
Total Liabilities and Shareholders’ Equity		$	1,165.6		$	1,180.7

 

See Condensed Notes to Consolidated Financial Statements

 

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Hillenbrand, Inc.

Consolidated Statements of Cash Flow (Unaudited)

(in millions)

 

		Three Months Ended
		December 31,
		2011			2010
Operating Activities
Net income		$	31.3		$	27.1
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		12.2			8.7
Deferred income taxes		(9.6		)	(1.5		)
Interest income on Forethought note		—			(2.8		)
(Gain) loss of equity method investments		0.1			(0.6		)
Share-based compensation		5.3			2.5
Trade accounts receivable		9.3			(4.6		)
Inventories		(6.7		)	(2.9		)
Other current assets		(1.5		)	2.6
Trade accounts payable		(4.2		)	(4.9		)
Accrued expenses and other current liabilities		(15.8		)	(11.9		)
Income taxes payable		5.6			14.9
Defined benefit plan funding		(0.6		)	(0.6		)
Defined benefit plan expense		3.1			2.2
Other, net		(1.5		)	(0.4		)
Net cash provided by operating activities		27.0			27.8
Investing Activities
Capital expenditures		(4.2		)	(3.5		)
Return of investment capital from affiliates		—			1.7
Net cash used in investing activities		(4.2		)	(1.8		)
Financing Activities
Proceeds from revolving credit facilities		—			20.0
Payment of dividends on common stock		(11.9		)	(11.7		)
Cash paid for minimum tax withholding on common stock issuance		(2.6		)	—
Other, net		0.9			—
Net cash (used in) provided by financing activities		(13.6		)	8.3
Effect of exchange rates on cash and cash equivalents		(2.2		)	3.3
Net cash flow		7.0			37.6
Cash and cash equivalents
At beginning of period		115.5			98.4
At end of period		$	122.5		$	136.0

 

See Condensed Notes to Consolidated Financial Statements

 

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Hillenbrand, Inc.

Condensed Notes to Consolidated Financial Statements (Unaudited)

(in millions, except share and per share data)

 

1.               Background and Basis of Presentation

 

Hillenbrand, Inc. is a global diversified industrial enterprise with two platforms that manufacture premium business-to-business products for a wide variety of industries.  Batesville is the leader in the North American funeral products industry, and Process Equipment Group is a recognized leader in the design and production of equipment and systems used in processing applications.  “Hillenbrand,” “the Company,” “we,” “us,” “our,” and similar words refer to Hillenbrand, Inc. and its subsidiaries.

 

The accompanying unaudited consolidated financial statements include the accounts of Hillenbrand, Inc. and its wholly owned subsidiaries.  These unaudited 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 United States (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, 2011.  Certain prior period balances have been reclassified to conform to the current presentation.  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 operations and cash flow as of the dates and for the periods presented.

 

The preparation of financial statements in conformity with 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 establishment of reserves related to customer rebates, allowance for doubtful accounts, warranties, early pay discounts, inventories, income taxes, accrued litigation, and self-insurance; and the estimation of progress toward performance criteria under the incentive compensation programs.

 

2.               Summary of Significant Accounting Policies

 

The accounting policies used in preparing these financial statements are consistent with the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, which was filed with the SEC on November 28, 2011.  The following represent additions and changes to significant accounting policies in the previously filed Form 10-K.

 

Recently Adopted and Issued Accounting Standards

 

In May 2011, the FASB issued Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Topic 820, Fair Value Measurement).  The new standard provides updates to measurement guidance and enhanced disclosure requirements.  The most significant change is an expansion of the information required for Level 3 measurements based on unobservable inputs.  The new disclosure requirements are effective for Hillenbrand in our second quarter beginning January 1, 2012.  We do not expect that the adoption of this standard will have a significant impact on our consolidated financial statements.

 

In June 2011, the FASB issued an accounting standards update titled Presentation of Comprehensive Income.  This update eliminates the current option to report other comprehensive income and its components in the statement of changes in equity.  An entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate consecutive statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, must be displayed under either alternative. The new disclosure requirements are effective for Hillenbrand in our fiscal year beginning October 1, 2012.

 

In September 2011, the FASB issued an accounting standards update titled Intangibles — Goodwill and Other:  Testing Goodwill for Impairment.  This update gives the option of performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and, in some cases, skip the two-step impairment test.  This standard is effective for Hillenbrand for our fiscal year beginning

 

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October 1, 2012, and early adoption is permitted.  We do not expect that the adoption of this standard will have a significant impact on our consolidated financial statements.

 

3.               Business Acquisitions

 

We completed the acquisition of Rotex Global, LLC on August 31, 2011.  We have completed a preliminary purchase price allocation, and we do not expect the final allocation adjustments (primarily deferred income taxes) to be material to our financial statements.  There were no significant changes to the preliminary purchase price allocation as of December 31, 2011.

 

The financial information in the table below summarizes the combined results of operations for the Company, including Rotex for the three months ended December 31, 2010, on a pro forma basis, as though the companies were combined as of the beginning of the period presented.  The pro forma financial information is presented for informational purposes only and may not be indicative of the results of operations if the acquisition had actually taken place at the beginning of the period presented and should not be considered representative of future consolidated results of operations.

 

		Three Months Ended December 31, 2010
Pro forma net revenue		$	230.7
Pro forma net income		29.8
Pro forma diluted earnings per share		0.48

 

4.               Supplemental Balance Sheet Information

 

		December 31,			September 30,
		2011			2011
Trade accounts receivable reserves		$	19.5		$	21.7
Accumulated depreciation on property		$	260.5		$	256.2
Other intangible assets		$	382.8		$	384.2
Accumulated amortization		(58.7		)	(51.4		)
Other intangibles, net		$	324.1		$	332.8
Inventories:
Raw materials and components		$	39.1		$	36.0
Work in process		12.2			10.8
Finished goods		38.7			36.9
Total inventories		$	90.0		$	83.7

 

5.               Financing Receivables and Allowances for Credit Losses

 

As of December 31, 2011, Batesville had $7.8 of customer notes receivable, primarily representing long-term payment plans negotiated to collect unpaid balances.  These notes generally carry repayment terms up to five years and have a weighted-average interest rate of 4.9% at December 31, 2011.  The current portion of these notes ($4.5) is included in trade receivables and the long-term portion ($3.3) is included in other assets in the consolidated balance sheets.

 

We evaluate the recoverability of each note receivable quarterly and record allowances based upon the customer’s credit score, historical experience, and individual customer collection experience.  As of December 31, 2011, $2.7 of customer notes receivable were over 31 days past due.  Accordingly, we have established an allowance of $0.7 related to these notes with a gross balance of $2.2 as of December 31, 2011.   There has not been a significant change in the reserve during the periods presented.  Each quarter we perform a detailed review of all notes upon which a reserve was established to determine whether any amounts should be charged off.  Amounts are charged off when they are deemed to no longer be collectible.

 

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6.               Financing Agreements

 

		December 31,			September 30,
		2011			2011
$400 revolving credit facility		$	283.0		$	283.0
$150 senior unsecured notes, due July 15, 2020, net of discount		148.5			148.5
Total long-term debt		$	431.5		$	431.5

 

As of December 31, 2011, we (i) had $6.7 outstanding letters of credit under the revolving credit facility, (ii) were in compliance with all covenants set forth in the credit agreement, and (iii) had $110.3 of remaining borrowing capacity available under the facility.  Under the Distribution Agreement with Hill-Rom Holdings, Inc., the ability to borrow against the facility for certain strategic transactions such as acquisitions may be limited.  The term of the revolving credit facility expires in March 2013.  During the three-month periods ended December 31, 2011 and 2010, the weighted average interest rates were 0.7%.

 

Our Swiss subsidiary maintains additional availability of $18.6 through local credit facilities collateralized by cash or real property.  As of December 31, 2011, there were no borrowings under these facilities, and availability was reduced by $5.2 for outstanding bank guarantees.  We had $12.0 additional outstanding letters of credit and bank guarantees with other financial institutions.

 

On July 9, 2010, we issued $150.0 fixed-rate senior unsecured notes due July 15, 2020 (the Notes).  The Notes bear interest at a fixed rate of 5.5%, payable semi-annually in arrears commencing January 15, 2011. The Notes were issued at an original issue discount of $1.6, which is being amortized to interest expense over the term of the Notes using the effective interest rate method, resulting in an annual interest rate of 5.65%. Deferred financing costs associated with the Notes of $2.1 are being amortized to interest expense over the term of the Notes.

 

7.               Retirement Benefits

 

Defined Benefit Plans

 

		Three Months Ended
		December 31,
		2011			2010
Service costs		$	1.5		$	1.3
Interest costs		3.2			3.2
Expected return on plan assets		(3.4		)	(3.8		)
Amortization of unrecognized prior service costs, net		0.2			0.2
Amortization of net loss		1.4			1.0
Net pension costs		$	2.9		$	1.9

 

Postretirement Healthcare Plans — Net postretirement healthcare costs were $0.2 and $0.3 for the three months ended December 31, 2011 and 2010.

 

Defined Contribution Plans — Expenses related to our defined contribution plans were $1.8 and $1.6 for the three months ended December 31, 2011 and 2010.

 

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8.               Income Taxes

 

The following is a reconciliation of the effective income tax rate with the U.S. federal statutory income tax rate:

 

		Three Months Ended December 31,
		2011		2010
Federal statutory rates		35.0	%	35.0	%
Adjustments resulting from the tax effect of:
Permanent reinvestment of unremitted earnings		(34.7	)	—
State and income taxes, net of federal benefit		2.7		3.4
Foreign income tax rate differential		(2.1	)	(0.9	)
Domestic manufacturer’s deduction		(2.5	)	(2.4	)
Unrecognized tax benefits		(3.6	)	0.4
Other, net		0.7		0.4
Effective income tax rate		(4.5	)%	35.9	%

 

In connection with the acquisition of K-Tron in April 2010, we recorded a deferred tax liability related to the historical earnings of its Swiss operations that would be subject to U.S. income taxes upon earnings repatriation.  With the acquisition of Rotex we identified the need to retain cash overseas to support the continued growth of the Process Equipment Group and we began developing a plan to integrate Rotex into our existing international structure.  As a result, during the three months ended December 31, 2011, we asserted the K-Tron historical earnings to be permanently reinvested.  Accordingly, a tax benefit of $10.4 was recognized during the period, representing the full release of the deferred tax liability.  As of December 31, 2011, U.S. federal and state income taxes have not been provided on accumulated undistributed earnings of substantially all of our foreign subsidiaries as these earnings are considered permanently reinvested.

 

The activity within our reserve for unrecognized tax benefits was:

 

Balance at September 30, 2011		$	7.3
Additions for tax positions of prior years		0.1
Reductions in tax positions of prior years		(1.0		)
Balance at December 31, 2011		$	6.4
Other amounts accrued at December 31, 2011, for interest and penalties		$	1.7

 

9.               Earnings per Share

 

At December 31, 2011 and 2010, potential dilutive effects of unvested time-based restricted stock units and stock options, representing approximately 2.2 million shares, were excluded from earnings per share as their effects were anti-dilutive. The dilutive effects of performance-based stock awards will be included in diluted net earnings per share when the related performance criteria are met.  At December 31, 2011 and 2010, potential dilutive effects representing approximately 1.8 million and 1.6 million shares were excluded from the computation of dilutive earnings per share as the related performance criteria were not met, although we expect to meet various levels of criteria in the future. There was no significant difference in basic and diluted earnings per share and average shares outstanding as a result of dilutive equity awards for the three- month periods ended December 31, 2011 and 2010.

 

10.         Shareholders’ Equity

 

During the three months ended December 31, 2011, we paid $11.9 of cash dividends and retired 0.2 million shares of stock.

 

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11.         Comprehensive Income and Accumulated Other Comprehensive Loss

 

The components of comprehensive income, net of tax, were:

 

		Three Months Ended
		December 31,
		2011			2010
Net income		$	31.3		$	27.1
Change in currency translation adjustment		(6.6		)	9.8
Change in pension and postretirement		0.1			0.8
Change in net unrealized gains (losses) on derivative instruments		(0.1		)	(0.1		)
Change in net unrealized gains (losses) on available-for-sale securities		(1.1		)	0.3
Comprehensive income		$	23.6		$	37.9

 

The components of accumulated other comprehensive loss, net of tax, were:

 

		December 31,			September 30,
		2011			2011
Currency translation adjustment		$	13.8		$	20.4
Pension and postretirement		(60.4		)	(60.5		)
Net unrealized loss on derivative instruments		0.1			0.2
Net unrealized gain on available-for-sale securities		(0.7		)	0.4
Accumulated other comprehensive loss		$	(47.2	)	$	(39.5	)

 

The cumulative foreign currency translation decrease was the result of the strengthening U.S. dollar compared to the Swiss Franc and Euro during the three months ended December 31, 2011.

 

12.         Share-Based Compensation

 

		Three Months Ended
		December 31,
		2011			2010
Share-based compensation costs		$	5.3		$	2.5
Income tax benefit		2.0			0.9
Share-based compensation costs, net of tax		$	3.3		$	1.6

 

During the three months ended December 31, 2011, we made the following grants:

 

		Number of Units
Stock options		504,440
Time-based stock awards		2,214
Performance-based stock awards (maximum that can be earned)		662,051

 

Stock options granted had a weighted average exercise price of $22.26, and our time-based stock awards and performance-based stock awards had a weighted average grant date fair value of $18.62 and $22.26 for the three-month period ended December 31, 2011.

 

13.         Commitments and Contingencies

 

Litigation

 

General

 

Like most companies we are involved on an ongoing basis in claims, lawsuits, and government proceedings relating to our operations, including environmental, antitrust, patent infringement, business practices, commercial transactions, product and general liability, workers’ compensation, auto liability, employment, and other matters. 

 

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The ultimate outcome of these matters 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.  If a loss is not considered probable and/or cannot be reasonably estimated, we are required to make a disclosure if there is at least a reasonable possibility that a material loss may have been incurred.  Legal fees associated with claims and lawsuits are generally expensed as incurred.

 

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 assist in establishing 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.

 

Antitrust Litigation

 

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 more detailed history of the litigation has been disclosed in previous filings.

 

The lawsuit claimed, among other things, that the Company’s maintenance and enforcement of, and alleged modifications to, its long-standing policy of selling caskets only to licensed funeral homes were the product of a conspiracy among the Company, the other defendants, and others to exclude “independent casket discounters,” resulting in suppressed competition in the alleged market for caskets and allegedly leading consumers to pay higher than competitive prices for caskets.

 

Plaintiffs in the FCA Action have generally sought monetary damages on behalf of a class of purchasers of Batesville caskets, 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 $1,460.0 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.

 

The Federal District Court for the Southern District of Texas denied class certification on March 26, 2009, and ultimately dismissed the lawsuit on September 24, 2010, concluding that “plaintiffs shall take nothing by their suit.”  Currently, the FCA Action is on appeal to the Fifth Circuit Court of Appeals.  Plaintiffs have appealed both the District Court’s order of dismissal and the order denying class certification.  The parties have submitted all appellate briefs, and the Court of Appeals heard oral argument from the parties on December 5, 2011.  The Court of Appeals has not yet issued its ruling affirming or reversing the District Court.

 

If plaintiffs succeed in overturning the judgment, reversing the District Court order denying class certification, and a class is subsequently 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 material adverse effect on our results of operations, financial condition, and cash flow.  In antitrust actions such as the FCA Action, the plaintiffs may elect to enforce any judgment against any or all of the co-defendants, 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.

 

The defendants are vigorously contesting both liability and the plaintiffs’ damages theories.

 

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As of December 31, 2011, we had incurred approximately $29.2 in cumulative legal and related costs associated with the FCA Action since its inception.

 

Matthews Litigation

 

In August 2010, the York Group, Inc., Milso Industries Corporation, and Matthews International Corporation (collectively the plaintiffs) filed a lawsuit against Scott Pontone and Batesville Casket Company, Inc. in the United States District Court, Western District of Pennsylvania, which was subsequently amended by the plaintiffs in February 2011 to include two additional defendants, Harry Pontone and Pontone Casket Company, LLC (the Litigation).  The Litigation arises, in part, as a result of a Marketing Consulting Agreement entered into between Batesville and Pontone Casket Company effective June 24, 2010, and Batesville’s hiring of two former employees of certain plaintiff entities in June 2010.  Scott Pontone provides consulting services to Batesville pursuant to the Marketing Consulting Agreement entered into between Batesville and Pontone Casket Company.  The plaintiffs allege that Scott Pontone and Harry Pontone breached contractual and business obligations with the plaintiffs and that Batesville induced certain of those breaches as part of its sales initiatives in the New York metropolitan area.

 

The plaintiffs claim that they have lost revenue and will lose future revenue in the New York metropolitan area, although the amount of those alleged damages is unspecified.  The plaintiffs seek to: (i) recover compensatory damages, punitive damages, attorneys’ fees and costs; and (ii) enjoin certain activities by Harry Pontone, Scott Pontone,  Pontone Casket Company, and Batesville and its employees in the New York metropolitan area.  The plaintiffs had originally moved for a preliminary injunction, but withdrew that request after expedited discovery.  No trial date has been set, and the parties are engaged in ongoing motions practice and discovery.   A hearing on a motion to dismiss for lack of subject matter jurisdiction filed by the Pontone defendants is scheduled for February 3, 2012.

 

The Company believes it acted lawfully and intends to defend this matter vigorously.  The Company does not believe, based on currently available information, that the outcome of this lawsuit will have a material adverse effect on the Company’s financial condition and liquidity.  If the plaintiffs prevail at trial, however, the outcome could be materially adverse to the Company’s operating results or cash flow for the particular period, depending, in part, upon the operating results or cash flow for such period.

 

14.         Fair Value Measurements

 

		Carrying
		Value at			Fair Value at December 31, 2011
		December 31,			Using Inputs Considered as:
		2011			Level 1			Level 2			Level 3
Assets:
Cash and cash equivalents		$	122.5		$	122.5		$	—		$	—
Equity investments		1.9			0.9			—			1.0
Investments in rabbi trust		5.4			5.4			—			—
Derivative instruments		0.1			—			0.1			—
Liabilities:
Revolving credit facility		283.0			—			278.8			—
$150 senior unsecured notes		148.5			155.7			—			—

 

There were no changes in the fair value of measurements using significant unobservable inputs during the quarter.

 

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15.         Segment and Geographical Information

 

While we report financial results in accordance with accounting principles generally accepted in the U.S. (GAAP), we also provide Earnings Before Interest, Income Tax, Depreciation, and Amortization (EBITDA).

 

		Three Months Ended December 31,
		2011			2010
Net revenue
Batesville		$	145.9		$	159.9
Process Equipment Group		85.7			51.1
Total		$	231.6		$	211.0
Gross profit
Batesville		$	57.8		$	68.4
Process Equipment Group		35.9			22.8
Total		$	93.7		$	91.2
Operating profit (loss)
Batesville		$	34.3		$	42.6
Process Equipment Group		8.1			6.9
Corporate		(9.0		)	(7.4		)
Total		$	33.4		$	42.1
EBITDA
Batesville		$	37.8		$	46.5
Process Equipment Group		16.0			10.5
Corporate		(8.9		)	(6.5		)
Total		$	44.9		$	50.5
Net revenue (1)
United States		$	199.3		$	178.7
Canada		11.2			11.3
Switzerland		17.8			18.3
All other foreign business units		3.3			2.7
Total		$	231.6		$	211.0

 

(1)          Revenue is attributed to a geography based upon the location of the business unit that consummated the external sale.

 

		December 31, 2011			September 30, 2011
Total assets
Batesville		$	240.3		$	246.5
Process Equipment Group		833.2			847.8
Corporate		92.1			86.4
Total		$	1,165.6		$	1,180.7
Tangible long-lived assets
United States		$	105.5		$	106.8
Switzerland		10.8			11.0
All other foreign business units		2.9			2.8
Total		$	119.2		$	120.6

 

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The following schedule reconciles consolidated EBITDA to consolidated net income.

 

		Three Months Ended December 31,
		2011			2010
GAAP net income		$	31.3		$	27.1
Interest income		(0.2		)	(3.3		)
Interest expense		2.9			2.8
Income tax expense		(1.3		)	15.2
Depreciation and amortization		12.2			8.7
EBITDA		$	44.9		$	50.5

 

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements and Factors That May Affect Future Results

 

Throughout this Form 10-Q, we make a number of “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  As the words imply, these are statements about future plans, objectives, beliefs, and expectations that might or might not happen in the future, as contrasted with historical information. Forward-looking statements are based on assumptions that we believe are reasonable, but by their very nature they are subject to a wide range of risks.

 

Accordingly, in this Form 10-Q, we may say something like,

 

“We expect that future revenue associated with Process Equipment Group will be influenced by order backlog.”

 

That is a forward-looking statement, as indicated by the word “expect” and by the clear meaning of the sentence.

 

Other words that could indicate we are making forward-looking statements include:

 

intend

believe

plan

expect

may

goal

would

become

pursue

estimate

will

forecast

continue

could

targeted

encourage

promise

improve

progress

potential

should

 

This is not an exhaustive list.  Our intent is to provide examples of how readers might identify forward-looking statements.  The absence of any of these words, however, does not mean that the statement is not forward-looking.

 

Here is the key point: Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those set forth in forward-looking statements.  Any number of factors — many of which are beyond our control — could cause our performance to differ significantly from what is described in the forward-looking statements.

 

For a discussion of factors that could cause actual results to differ from those contained in forward-looking statements, see the discussions under the heading “Risk Factors” in Item 1A of the Form 10-K for the year ended September 30, 2011, and Part II, Item 1A, of this Form 10-Q.  We assume no obligation to update or revise any forward-looking statements.

 

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Executive Overview

(in millions throughout Management’s Discussion and Analysis)

 

The following discussion compares our results for the three months ended December 31, 2011 to the three months ended December 31, 2010.  We begin the discussion at a consolidated level and provide separate detail about Batesville, Process Equipment Group, and Corporate.  These financial results are prepared in accordance with accounting principles generally accepted in the U.S. (GAAP).

 

We also provide certain non-GAAP operating performance measures.  These non-GAAP measures exclude the tax benefit of the international integration, long-term incentive compensation related to the international integration, backlog amortization, antitrust litigation, business acquisition costs, and sales tax adjustments, as well as the related income tax.  This non-GAAP information is provided as a supplement, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP.

 

We use this information internally to make operating decisions and believe it is helpful to investors because it allows more meaningful period-to-period comparisons of our ongoing operating results.  The information can also be used to perform trend analysis and to better identify operating trends that may otherwise be masked or distorted by these types of items.  Finally, the Company believes it provides a higher degree of transparency of certain items.

 

We have previously discussed our strategy to prudently acquire selected manufacturing businesses that have a record of success and could benefit from our core competencies to spur faster and more profitable growth.  Given that strategy, it is a natural consequence to incur related expenses such as amortization from acquired intangible assets and additional interest expense from debt-funded acquisitions.  Accordingly, we use EBITDA, among other measures, to monitor our business performance.

 

The non-GAAP operating performance measures are discussed on page 18.

 

Consolidated

 

		Three Months Ended December 31,
		2011					2010
		Amount			% of Revenue		Amount			% of Revenue
Net revenue		$	231.6		100.0		$	211.0		100.0
Gross profit		93.7			40.5		91.2			43.2
Operating expenses		60.3			26.0		49.1			23.3
Operating profit		33.4			14.4		42.1			20.0
Interest expense		(2.9		)	1.3		(2.8		)	1.3
Other income and expense		(0.5		)	0.2		3.0			1.4
Income taxes		(1.3		)	0.6		15.2			7.2
Net income		$	31.3				$	27.1

 

·                  Consolidated revenue increased 10% ($20.6) to $231.6, and 9% on a constant currency basis.  The revenue increase was largely due to the Rotex acquisition completed in August 2011, as well as an increase in existing Process Equipment Group revenue, offset by volume declines in the Batesville business platform.  Batesville’s revenue was $145.9, a decrease of $14.0 (9%).  Process Equipment Group’s revenue increased 68% ($34.6) to $85.7, and 65% on a constant currency basis.

·                  Gross profit margin was 40.5% compared to 43.2%, a decline of 270 basis points.

·                  Batesville’s gross profit margin was 39.6%, a 320 basis point decline, largely due to lower volume and to a lesser extent, the increased price of steel and fuel.

·                  Process Equipment Group’s gross profit margin was 41.9%, a 270 basis point decline. The decline was primarily due to higher large systems sales in the quarter, which typically include more outsourced components.  Additionally, the prior year’s quarter included a number of equipment upgrades as customers invested to improve efficiencies coming out of the economic downturn.

·                  Operating expenses as a percentage of sales increased to 26.0% from 23.3% in the prior year, almost entirely driven by the backlog amortization of $2.5 at Rotex and $2.2 of additional long-term incentive compensation

 

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related to the international integration (described more fully in Item 1, Note 8).  Absent these charges, our operating expense to sales ratio improved at both of the business platforms.

·                  The vesting of our long-term performance-based stock awards is contingent upon the creation of shareholder value as measured by the cumulative cash returns and final period net operating profit after tax compared to the established hurdle rate over a three-year period.  As such, the tax benefit from the international integration created $2.2 of additional expense related to performance-based stock awards.

·                  Other income and expense decreased $3.5 largely due to the full collection of the Forethought Note in April 2011.

·                  A tax benefit of $10.4 was recognized due to the determination that certain international earnings that were previously expected to be repatriated will now be permanently reinvested.  This resulted in a 4.5% tax benefit compared to 35.9% tax expense in the prior year.  (See Item 1, Note 8 for details.)

 

Batesville

 

		Three Months Ended December 31,
		2011					2010
		Amount			% of Revenue		Amount			% of Revenue
Net revenue		$	145.9		100.0		$	159.9		100.0
Gross profit		57.8			39.6		68.4			42.8
Operating expenses		23.5			16.1		25.8			16.1
Operating profit		34.3			23.5		42.6			26.6

 

·                  Revenue decreased by $14.0 (9%) largely due to an 11% decline ($14.6) in burial unit volume. We believe this volume decrease was largely attributable to lower total deaths and an above average increase in cremation rates resulting in fewer burials year over year.  Additionally, many customers chose to buy in advance of the annual price increase that became effective in October.  This volume decrease was partially offset by a modest increase in the average selling price that contributed $0.7 to revenue.

·                  Gross profit decreased $10.6 (15%) primarily due to volume (12%) and to a lesser extent by higher commodity costs (3%), particularly fuel and steel.

·                  Batesville’s ratio of operating expenses to sales was flat on a GAAP basis.  On an adjusted basis, the ratio improved by 100 basis points, from 16.3% in the prior year to 15.3%, given the impact of the long-term incentive compensation related to the international integration, sales tax recoveries in the prior year, and a modest increase in antitrust litigation expense.  Management continues to challenge its cost structure to offset declining volumes and effectively reduced compensation and benefit expenses by over $4 in the first quarter.

 

Process Equipment Group

 

		Three Months Ended December 31,
		2011					2010
		Amount			% of Revenue		Amount			% of Revenue
Net revenue		$	85.7		100.0		$	51.1		100.0
Gross profit		35.9			41.9		22.8			44.6
Operating expenses		27.8			32.4		15.9			31.1
Operating profit		8.1			9.5		6.9			13.5

 

·                  Revenue increased by 68% ($34.6) and 65% ($33.4) on a constant currency basis.  Revenue was positively impacted by the Rotex acquisition in August 2011, as well as growth in existing Process Equipment Group revenue.

·                  Future revenue associated with Process Equipment Group is influenced by order backlog.  There is a lead time involved in manufacturing specialized equipment and parts for customers.  Backlog can be an indicator of future revenue; however, it may not include many projects and parts orders that are booked and shipped within the same quarter.  The timing of order placement, size, and customer delivery dates can create unusual fluctuations in backlog and revenue.  Backlog is also affected by foreign exchange fluctuations for orders

 

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denominated in currencies other than U.S. dollars.  Based upon new orders accepted, less orders completed and shipped during the first quarter of 2012, Process Equipment Group’s backlog increased from $119.0 on September 30, 2011, to $128.5 on December 31, 2011.

·                  Process Equipment Group’s gross profit margin was 41.9%, a 270 basis point decline. The decline was primarily due to higher large systems sales in the quarter, which typically include more outsourced components.  Additionally, the prior year’s quarter included a number of equipment upgrades as customers invested to improve efficiencies coming out of the economic downturn.  For the balance of the year, we expect gross profit margins to be slightly below the prior year as revenue associated with systems sales continues to grow.

·                  Operating expenses as a percentage of sales increased by 130 basis points primarily due to $2.5 of backlog amortization and $1.2 of intangible amortization related to the Rotex acquisition.  The value of the backlog was recorded as an asset at the time of acquisition and subsequently expensed when the related revenue was recognized.  No further backlog amortization will be recognized related to the Rotex acquisition.  On an adjusted basis (excluding the impact of long-term incentive compensation related to the international integration and backlog amortization), the operating expense to sales ratio was 29.3%, a 160 basis point improvement over the prior year.

 

Corporate

 

		Three Months Ended December 31,
		2011					2010
		Amount			% of Revenue		Amount			% of Revenue
Operating expenses, excluding business acquisition costs and long-term incentive compensation related to the international integration		$	7.3		3.2		7.2			3.4
Long-term incentive compensation related to the international integration		1.2			0.5		—			—
Business acquisition costs		0.5			0.2		0.2			0.1
Operating expenses		$	9.0		3.9		$	7.4		3.5

 

Operating expenses excluding business acquisition costs and long-term incentive compensation related to the international integration increased $0.1 (1%) over the prior year.  Total corporate operating expenses as a percentage of sales increased from 3.5% to 3.9%.  Excluding the impact of business acquisition costs and long-term incentive compensation related to the international integration, the operating expense to sales ratio improved by 20 basis points to 3.2% from 3.4% in the prior year.

 

Non-GAAP Operating Performance Measures

 

The following are reconciliations from our GAAP net income, diluted earnings per share, and EBITDA to our non-GAAP adjusted net income, adjusted earnings per share, and adjusted EBITDA as well as a reconciliation from GAAP net income to EBITDA.  These non-GAAP measures exclude the tax benefit of the international integration, long-term incentive compensation related to the international integration, backlog amortization, antitrust litigation, business acquisition costs, and sales tax adjustments, as well as the related income tax.

 

		Three Months Ended
		December 31,
		2011			2010
GAAP net income		$	31.3		$	27.1
Tax benefit of the international integration		(10.4		)	—
Long-term incentive compensation related to the international integration		2.2			—
Backlog amortization		2.5			—
Antitrust litigation		0.4			0.3
Business acquisition		0.5			0.3
Sales tax adjustment		—			(0.6		)
Income tax on adjustments		(1.8		)	—
Net income — adjusted		$	24.7		$	27.1
EPS — adjusted		$	0.40		$	0.44
GAAP net income		$	31.3		$	27.1
Interest income		(0.2		)	(3.3		)
Interest expense		2.9			2.8
Income tax expense		(1.3		)	15.2
Depreciation and amortization		12.2			8.7
EBITDA		44.9			50.5
Long-term incentive compensation related to the international integration		2.2			—
Antitrust litigation		0.4			0.3
Business acquisition		0.5			0.3
Sales tax adjustment		—			(0.6		)
EBITDA - adjusted		$	48.0		$	50.5

 

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