Hillenbrand Inc (HI) 2010 Q2 法說會逐字稿

Good morning everyone and welcome to Hillenbrand earnings call for the second quarter of 2010. A replay of the call will be available until midnight Eastern Time Thursday, May 20, 2010 by dialing 1-888-203-1112 in the United States or for international at 1-8719-457-0820. For the replay callers will need to use confirmation code 481-5830. If you are unable to listen to the live webcast it will be archived at www.HillenbrandInc.com through May 6, 2011.

If you ask a question today it will be included in any future use of this recording. Also please note that any recording, transcript or other transmission of the text or audio is not permitted without Hillenbrand's written consent.

Now, at this time it is my pleasure to turn the conference over to Mark Lanning, Treasurer and Vice President of Investor Relations. Mr. Lanning, please go ahead.

Thank you and good morning everyone. Welcome to our earnings call for the second quarter of 2010 which ended March 31. With me today are Hillenbrand's President and Chief Executive Officer, Ken Camp; Batesville Casket President, Joe Raver; and Hillenbrand's Chief Financial Officer, Cindy Lucchese.

During the course of today's conference call and the question and answer session that follows we may make projections or other forward-looking statements that are subject to the Safe Harbor provisions of the securities laws regarding future events or the future financial performance of the company. We caution you that these statements are only our view of the future and that the actual results may differ materially. We also alert you to the risk described in the documents we file with the Securities and Exchange Commission such as our annual and quarterly reports on Forms 10-K and 10-Q. We do not undertake any obligation to update or correct any of these forward-looking statements.

Now, let me provide some information regarding our call. We have scheduled one hour and we will start with prepared remarks that should last approximately 25 minutes. We will then move directly to question and answers. If you have any follow-up questions after the call has ended please don't hesitate to call me at 812-934-7256 or e-mail me at MRLanning@Hillenbrand.com.

Now it is my pleasure to turn the call over to Ken Camp, Hillenbrand's President and CEO. Ken?

Thanks Mark. Good morning and thanks to all of you for joining us today. I'm sure you've all read our press release that came out this morning and we'll use that to be the basis for our quarter call here which we will expand upon -- which will be expanded upon by the various presenters.

Because we've quite a bit to cover today, I will soon turn the call over to Joe Raver who will provide you with greater insight into the Batesville business and the funeral services industry in general. Cindy Lucchese will then provide details about our quarterly financial results and revised annual guidance, including the effects of the K-Tron businesses on our expected results in the second half of the fiscal year. I will conclude our prepared remarks by sharing some of the actions we're taking as part of the K-Tron transition process.

And then after the prepared portion of the call Joe, Cindy, Mark and I will be available to take your questions. Joe, let's get started.

Thanks Ken and good morning everyone. First I will give an overview of some of the broader trends in the deathcare market and how they affected us in the quarter. Then I will briefly cover some of our key strategic initiatives before handing the call over to Cindy to review the financials.

From an overall market perspective the number of North American deaths is down year-over-year for the second straight year. There was not much of a flu season this year and mortality in the general population is down as well.

That lower mortality, combined with ever rising cremation rates, resulted in fewer burials and therefore fewer caskets sold during the quarter. The smaller burial market is the primary driver of our modest decline in revenue.

Our average selling price is slightly favorable compared to the prior year, which we view as positive and a sign that consumer spending in the funeral industry has stabilized. Competition for the lower number of burials, however, remains fairly intense and we're seeing some price pressure particularly at the lower end of our product line and concentrated in certain geographies. And while there is some price pressure, we're not seeing the widespread aggressive price promotions and programs or the deep discounting that were prevalent in the same period of 2009.

So in general, I would say that the environment today is much more stable than it was a year ago, but that competitive pressures remain fairly intense as companies struggle to retain and grow volume in such a soft burial market.

One of the reasons we continue to post stable results in the second quarter is that we're committed to investing in our business even in this challenging economic and demand environment. In fact, we think is more important than ever to look for ways to improve performance, as growing casket volumes organically has been an industrywide challenge recently.

We focused on a couple of areas for investment. First, we continue to improve our cost structure without sacrificing any of the quality and service our customers expect. We use lean business practices to help us improve quality and at the same time help us drive waste and cost out of our processes.

Over the past several quarters our distribution and service organization has performed above our expectation. We continue to drive efficiencies by constantly improving the configuration of our workforce and vehicle fleet, effectively managing warehouse space and improving our routing algorithms as demand changes from day to day and over longer periods of time. As we've done for many years, we will continue to invest our time and talent to creatively find ways to improve quality and reduce costs.

Our emphasis on cost structure improvement has helped us maintain and even grow our gross profit margin percentage. In the second quarter the margin was up 180 basis points over the prior year. That wasn't unexpected because the second quarter is typically our best for gross profit margin and steel prices were lower than in the same period a year ago.

We anticipate gross margin percentages in the second half of the year to be more in line with the prior year. This is really due to the fact that historically we see lower volumes in the third and fourth quarters as deaths trend down during the summer months. And we're beginning to see higher steel and fuel prices as we move into the second half of the year.

We continue to focus a number of our investments in areas that drive new revenue growth for Batesville and also contribute to the overall health of our funeral home customers. On our last earnings call I talked with you about some of the strategic investments and I would like to update you on just a couple of those today.

New product introductions continue to be important in supporting our customers' needs. Many of the consumer driven features we introduced in the first quarter were focused on helping funeral directors make a service more meaningful to the family by incorporating mementos and keepsakes into the casket. LifeStories caskets, with their bronze keepsake medallions and LifeView caskets that help customize the service with personal photos, are performing very well.

When these products are placed on the selection floor of the funeral home, they resonate very well to families. And then as a result of that connection with the family, the products turn more often and we see more reorders. In addition, families often purchase extra keepsakes for the extended family and friends of friends of the deceased. We expect to see these product platforms continue to perform well for years to come.

Another way we support funeral homes is by providing merchandising services to help funeral directors present families with meaningful products and funeral service choices. Many of our customers are continuing to move from an awareness of our merchandising options to the selection and use of these tools with their client families.

When an effective merchandising system is in place at a funeral home, we experience a positive impact on average selling price and have better customer retention. The funeral homes also have a positive experience in terms of increased family satisfaction and overall profitability. These effects are positive not just in the short run but also in the long run.

Merchandising isn't just reserved for burial caskets. It's also beginning to play a significant role for our cremation product line. All of the positive effects we've seen on the casket side of the business can also be applied on the cremation side. We continue to invest more resources into helping our customers serve their cremation families more profitably and with higher family satisfaction levels.

So, in summary, despite the difficult economic and competitive environment, we have been able to maintain our market position and post solid financial results for the quarter. We will continue to focus on lean business practices to drive quality up and cost down. We will continue to investing key initiatives aimed to helping our customers improve their businesses, which in turn improves our business.

Now, I would like to turn the call over to our CFO, Cindy Lucchese.

Thank you Joe. Today I would like to start by sharing some further detail and perspective around our second-quarter financial results. Net income for the quarter was a stable $169.9 million, a slight decrease of about 0.5% or $900,000 from the same period in the prior year.

Lower burial volume continues to be the primary reason for the decrease in revenue, resulting in about $4 million decline in the quarter. Now this is mostly related to fewer deaths and an increase in cremation year-over-year.

Additionally during this quarter, our average selling price was slightly higher than in the prior year resulting in an increase of nearly $1 million. This is traditionally the best quarter for our average selling price. And finally we again experienced a favorable impact of currency fluctuations during the quarter from the weakening US dollar, mainly compared to the Canadian dollar, which resulted in an increase of about $2 million over the same period in the prior year.

At approximately 45%, our gross profit margin percentage improved 180 basis points over the second quarter of 2009. Now, commodity prices, mostly steel, were down for the quarter by $3.6 million. In the second half of the year, it is important to note that we don't expect this favorability to continue mainly because of the decline we saw as a result of the economy largely stabilized by this time last year.

Therefore commodity prices for steel, copper and bronze will likely be in line with or even possibly more expensive than they were last year.

In our distribution operations our focus on continuous improvement resulted in decreased costs of $1.4 million from carrier and workforce efficiencies as well as other distribution related cost reductions. This was partially offset by an increase in diesel fuel prices of $700,000 over last year.

Operating expenses in the second quarter increased $4.2 million or about 14% from the same period one year ago, excluding business acquisition costs of about $1 million. This increase is primarily the result of incentive and variable sales compensation and pension expense.

Interest expense for the quarter was essentially flat compared to last year mostly due to the lower average principal balance. As of March 31, we had $393 million in remaining borrowing capacity on our $400 million revolving line of credit. We also entered into a credit line agreement with UBS during the quarter that provides us up to about $30 million in connection with our previously disclosed put rights on auction rate securities.

On April 1 we borrowed $375 million on our revolver to complete the acquisition of K-Tron, leaving about $18 million of availability left on the line.

We recorded $4.4 million in investment and other income for the quarter, an increase of $5.7 million over the same quarter in 2009. This is primarily due to earnings from investments and limited partnerships contracted with a write down on these same investments one year ago. I will remind you, however, that these portfolios do remain volatile.

Our tax rate for the second quarter was just under 36.5%, up more than one full percentage point from the prior year. This increase is primarily related to lower tax-exempt income and higher state income tax rate based on recently filed returns.

Net income for the quarter was $29.4 million, an increase of nearly 6% over the same period in 2009. Earnings per share increased more than 4% in the second quarter from $0.45 per share in 2009 to $0.47 in 2010.

Excluding $1 million in acquisition costs and $300,000 related to antitrust litigation costs, adjusted net income for the quarter was $30.2 million. Now this represents an increase of $1.6 million or about 6% compared to 2009.

Adjusted earnings per share increased 6.5% from $0.46 in 2009 to $0.49 in the second quarter of 2010. Cash flow from operations was strong in the second quarter at $52.6 million, up nearly 86% from $28.3 million in the prior year. Now most of this difference is driven by the timing of the payment of income taxes and accounts payable, and this effect will reverse over the balance of the fiscal year.

Now I would like to turn to guidance for the remainder of our fiscal year. As you saw in our press release this morning, we've issued revised guidance largely reflecting a narrowing of our expected range for Batesville Casket as well as the addition of K-Tron for the latter half of the year. Next I would like to give you some perspective on how we arrived at these ranges.

Let me start with revenues for Batesville Casket. We begin the year with a fairly wide revenue and earnings guidance range. You may recall given the uncertainties the economy imposed on virtually all companies, and certainly we were no exception, visibility to our near-term results was more clouded than in years past. Now with half the year behind us, we have a better sense of the market and the impact the economy is having on our business.

This year deaths have been lower than we were expecting. In fact they were lower by nearly 2% and the lowest they've been in the past decade. Now, it's certainly difficult to know exactly what has driven this increase in death, but improved overall healthcare has been a key factor. In addition, the Centers for Disease Control done a good job matching the flu vaccines to the active strains, which contributed to the mild flu season we experienced of this year.

Now, we have seen signs that the economy is recovering. For example, the rate of increase in cremations as a percentage of death appears to be returning to historical levels after the spike we experienced last year. The lower deaths, however, combined with the cremation rate are resulting in fewer burials this year. As a result of these factors and considering that our second quarter, which is historically the most volatile quarter, is behind us we're narrowing the range for Batesville Casket revenue.

Now, I will turn to our expectations regarding our recent acquisition of K-Tron. We will be including their results in the last six months of our fiscal year. And although K-Tron was a public company with a substantial amount of information available, this may be a new industry for you. So for this reason we would like to begin with a few introductory comments before providing guidance.

K-Tron is a material handling equipment and systems manufacturer with two main business lines -- the Size Reduction Group and the Process Group. They serve a variety of industries and most of these are cyclical to some degree.

During periods of economic expansion when capital spending tends to increase, we generally benefit from a greater demand for K-Tron's equipment, systems, parts and service. And of course, then, during periods of economic contraction when capital spending normally decreases, we see the adverse effect in declining demand for these products and services.

These business lines are affected at different times in the economic cycle. The Process Group, which is heavily impacted by demand for capital equipment, will generally experience the negative impact of an economic contraction fairly early in the economic cycle. In contrast, the Size Reduction Group is heavily impacted by the demand for electricity and typically feels the economic effect six months later.

Now this also means that the Process Group experiences the positive effects of an economic expansion earlier than does our Size Reduction Group. We are seeing some signs that both businesses are beginning to rebound from the lows they experienced during the recent economic downturn.

But first let's discuss the K-Tron Size Reduction business. This business serves a number of industries including power generation, coal and mineral mining, pulp and paper, wood and forest products, and biomass energy generation.

Normally the majority of the revenue and profit, actually upwards of about 60%, are generated from consumable replacement parts sales rather than from the sale of new equipment. So a large portion of the revenue comes from parts sold in the coal reduction side the business as parts are consumed in the process of creating electricity. Therefore, this part of the business is driven heavily by the consumption of electricity in the US.

During the recession in 2008 and 2009 electrical consumption declined by about 6% from the pre-recession peak. Based on recent reports, as we see an economic recovery we are seeing an increase in energy consumption, which should translate into a pickup in orders in the Size Reduction business.

Now let's turn to the K-Tron Process business. This business line designs, produces, markets, sells and services both seating and pneumatic conveying equipment. Market includes plastic compounding, base resin production, food, chemicals and also pharmaceuticals.

The plastics compounding and base resin production markets represent the largest markets for the Process Group. And they are generally sensitive to changes in the US and global economies, especially if they relate to the use of plastic in housing and automotive products. The food and pharmaceutical markets tend to be less cyclical than plastics and base resins.

Now the majority or about 75% of the revenue and profit of our Process business line are generated by equipment and systems sales with a lesser amount attributable to service parts and repairs. Because they make equipment specifically for manufacturing, the Purchasing Managers' Index can be a good indicator prospects for capital equipment spending particularly in the US.

So the Purchasing Managers' Index is often shortened as PMI. A PMI index of 50% or more indicates that manufacturing is expanding, which suggests for demand for manufacturing equipment in general is growing.

Now here, too, we're beginning to see the signs of a recovery and a better quarter pattern than over the past several months. The PMI has been above 50 since August 2009 and more recently it's been reported at more than 60% and is currently experiencing the fastest rate of growth since June of 2004.

In summary, macroeconomic factors on both sides of the business indicate the prospects are gradually improving.

We're also able to get a sense of how the business is performing by looking at internal factors. Backlog, which represents firm orders we receive from customers, is a strong predictor of sales for the next few quarters. We saw a decline in backlog during 2009 as the economic recession was in full swing. We've just begun to see this trend reverse and backlog is beginning to increase, which suggests the worst of the economic recession may be behind us.

While K-Tron was not part of our company in fiscal 2009, I would like to give you some perspective on how they performed during the latter half of the fiscal year and how we're thinking about their results for the same period in 2010.

K-Tron posted revenue of $97 million during Q3 and Q4 of our fiscal year 2009. Given the positive internal and external economic signs we're seeing, we believe revenues will increase in the low to mid-single digits on the low end then on the low double-digit range on the high end.

In summary, as a result of all of these considerations, we're raising our revenue guidance for 2010 to a higher overall range of $740 million to $770 million from a prior range of $630 million to $670 million, which is an increase of 15 to 17%.

Now, turning to income before tax, Batesville Casket typically experiences its strongest margins in the first half of our fiscal year. And this seasonal variation, combined with increasing steel and fuel prices, should result in lower margins in the second half of the year. Batesville will continue to benefit from improvements in logistics modeling which has reduced logistics costs without impacting service to our customers.

Overall, we expect our 2010 margin to be in line with last year's gross margin.

Now K-Tron's margin percentages have historically been in the low 40s, which is comparable to those at Batesville Casket. From an operational perspective we expect continued strong margins along these lines.

However, in the near-term, several purchase accounting adjustments will push those margin percentages down into the lower 30s. We expect this will continue until all the related inventory and backlog that was on hand at the acquisition date is sold.

From an operating expense point of view, Batesville, K-Tron and our corporate center all do a very nice job in managing costs and meeting business plans. We expect these trends to continue in the second half of the year.

In addition, as we mentioned in our guidance discussions last November, Batesville is investing about $5 million in new business development initiatives this year, which remain on track as the year unfolds.

I would also like to reiterate that defined benefit expenses will be about $4 million higher this year compared to 2009 due to the effects of lower discount rates. Secondly, as we also discussed last November, we anticipate additional variable compensation expense in 2010 of approximately $10 million because we anticipate achieving our objectives and paying at target levels, whereas last year we fell short of our goal. We expect a continuation of these trends in the second half of this year.

Extraordinary legal costs for the fiscal year now estimated to range from $4 million to $6 million whereas the range was $3 million to $5 million in our prior guidance. This increase is due to the expected expense to prepare for the trial of the first individual cases expected to happen in August 2010.

Also included in our operating expense for 2010 is an estimated $11 million to $12 million in K-Tron acquisition costs which were not included in our earlier guidance.

Now, let's focus on other income and expenses. As a result of borrowing $375 million on our revolver to fund the K-Tron acquisition, we're expecting an increase in interest expense for the second half of the year compared to the first half of the year, when we were essentially debt-free. The revolver borrowings are at LIBOR +55 basis points all in. In the third quarter we're anticipating terming out $150 million of our revolver debt into longer duration borrowings which will carry higher rates of interest.

We've updated our estimated effective tax rate to be in a range of 36% to a little more than 37% for the year. This change is attributable to the unfavorable impact of nondeductible transaction costs, which is partially offset by other discrete items.

GAAP net income is being lowered to a range of $82 million to $96 million from a prior range of $86 million to $103 million. The decline is principally due to the cost of the K-Tron acquisition and its related nonrecurring purchase accounting adjustments.

Turning to as adjusted net income, as you can see in our earnings release we've called out several items included in our guidance that are not operational in nature. We previously mentioned that our antitrust litigation costs are now estimated to be $4 million the $6 million for the year. Also in our first quarter we recorded a $4.1 million benefit on our sales tax overpayment that is not expected to recur.

And finally, we previously mentioned the estimated $11 million to $12 million in acquisition cost for the year.

We've included estimated nonrecurring purchase accounting adjustments of $11 million to $14 million in our results for 2010. As we mentioned in our press release, we viewed preliminary studies to estimate the effects of the acquisition in accounting. And the final study and valuation could differ significantly from these initial estimates.

Excluding the impact of these items, net income as adjusted is being raised to a range of $102 million to $113 million. This compares to our range of $89 million to $105 million prior, which is an increase of 8 to 15%. This is consistent with our strategic goal of acquiring companies that will be immediately accretive, excluding acquisitions and nonrecurring purchase accounting adjustments.

Now I will turn the call back to Ken for his concluding remarks.

Thanks. Because Batesville Casket Company still the largest generator of revenue, profit and cash for Hillenbrand, number of deaths and burials will continue to be a foundational factor in our results. Despite the current somewhat soft demand for caskets, Batesville's performance remains stable at the top line and continues to show attractive results in gross margin attainment, earnings and cash flow.

As we've noted through previous public communications, our strategy has been to continue to invest appropriately in the casket business to create new products and services which our funeral home customers and their client families find valuable. We will make opportunistic acquisitions in the funeral product segment when good deals become available and where regulatory approval is not a barrier.

With the acquisition of K-Tron International April 1 of this year, we took a major step forward in the second element of our strategy to add future growth opportunity through the acquisition of well-run businesses where our core competencies can add long-term shareholder value. Thus far, every indication is clearly that we're getting exactly what we bargained for in the K-Tron acquisition.

There are many great competencies in the K-Tron businesses. But what has been most notable is the quality, experience and commitment of the K-Tron people at all levels. In the past couple of months I've personally met more than 90% of the K-Tron Associates and I have found their response to the acquisition to be not only better than I expected, it is even better than I had hoped for.

Today, Cindy has provided you with the high-level elements of our guidance increase including those factors related to K-Tron. Beginning with our next call which is tentatively scheduled for August 4, we will be able to report on the K-Tron business in more detail in much of the same way we report on the Batesville business.

In the past two years of public filings, earnings calls, investor conferences we worked to be highly transparent with investors by describing not only our results but also how we think about the business and how we make decisions. In that spirit, I would like to conclude today's call with just a few highlights about the areas where we were concentrating in the early months of our K-Tron relationship.

First and foremost, the existing K-Tron leadership team has remained in place and they're running their businesses with the same level of energy and expertise as before the acquisition. They are a growth oriented organization and are currently focused on capitalizing on what appear to be the first signs of economic improvement in the various industries they serve.

Simultaneously, the Hillenbrand team is working on several areas we believe can help add to the K-Tron results in the future. The first of those areas and our highest priority is to ensure that our financial controls and combined public reporting are effective, accurate and timely. This requires a significant amount of cooperation and time on the part of the finance and IT teams for both companies and we expect to incorporate K-Tron into our software compliance.

Our second transition priority is to introduce the K-Tron's leadership team into our strategy management process. This discipline has been the foundation of Batesville's leadership position and we believe that will enable the experienced K-Tron leaders to better quantify and evaluate the market opportunities they see, especially as we emerge from the economic trough that most of the world has been facing.

The strategy process will also enable us at Hillenbrand to learn more about the K-Tron businesses so that we can make effective capital allocation decisions to support profitable growth. We currently have an experienced Hillenbrand team working with K-Tron as they work through each step of the strategy development cycle.

It's very important that we strike the right balance over the next two quarters between the timely adoption of the financial controls and strategy management processes, and the all-important need for the K-Tron leadership team to run their businesses. A substantial amount of my time and energy will be committed to maintaining that balance to achieve our goal of obtaining profitable growth from the K-Tron businesses.

Once we accomplish the aforementioned objectives, we will introduce various areas within K-Tron to the practice of lean business. This will begin the long journey to further increase their ability to produce their products better, faster and at lower cost. This will take time to become part of the K-Tron culture just as it took time to become part of Batesville. Our plan for lean business that K-Tron is to go slow to go fast, a method which will yield the greatest results.

Finally, there's a lot of runway ahead for us and we're very excited about our prospects for the future. We're pleased with the response that investors have shown for the K-Tron acquisition through their support of our stock of the last few months. Although I'm sure not everything will be as smooth as we would like, it rarely is in life.

We're committed to increasing shareholder value far into the future. Thanks everyone for joining us on the call today. Now Joe, Cindy, Mark and I will be glad to take questions. Operator?

(Operator Instructions) Jamie Clement, Sidoti & Company.

Two questions if I may, first on the Batesville side and then on the K-Tron side. I think you mentioned your estimate during the quarter of about a 2% decline in the national death rate. From a cascaded death rate perspective would that translate into a minus 4 or 5% number nationally? What is your estimate of that?

It's Joe. We have pretty good algorithms on the number of deaths in North America, so we're pretty confident in the death number. The one thing that is a little bit more difficult for us to track is the actual cremation rate increase year-over-year. As you know we saw a big spike last year and this year it has moderated back more towards normal levels.

So with all of that said, I think at the low end you're talking about 3, 3.5%. At the high end you're probably talking about 4.5, 5.5% reduction in burials. I'll tell you where we have it pegged today is right at about 4.5%. There is variability there based on whatever the cremation rate is out there in the quarter.

Absolutely. I was just curious for what your take on the estimate was. Switching gears, Cindy I think this was in your prepared remarks. I was getting the timing a little screwed up because of fiscal versus calendar year. But the revenue growth numbers that you were referring to in the K-Tron business were those, from a Hillenbrand perspective, the low to mid-single digit revenue estimate increased the low end of your expectation, was that second half? Was that June quarter/September quarter of last year to June quarter/September quarter of this year? Or was that sequential first-half to second half?

Yes, I was actually referring to the same quarter that would be in our fiscal year for Q3 and Q4. So April 1, 2009 through September 30, 2009.

Okay, so in other words six months sequentially.

Exactly.

From an operating income perspective, excluding purchase accounting and all of that, would your anticipation be that their profitability increase would be commensurate with the revenue increase, wherever that comes in?

Yes. We would. I don't think there's any reason to think the profitability would change. We did mention their margins have -- they've maintained those actually even through the downturn in the economy. We expect those to stay relatively where they are.

As I also mentioned in the call, their operating expenses have been very stable, much like Batesville Casket.

Sure. Sure. Okay. From a modeling perspective, if we look back at kind of what they have been reporting of the last couple of quarters, we make an assumption on the revenue growth and that should kind of flow down is what it sounds like.

Yes it should.

John Sullivan, Olstein Capital Management.

Just two quick questions. First, the timing of tax payments you guys talked about in the cash flows, is that lumped into the other current liabilities or does it jump there on the balance sheet? And I was wondering if that piece was in there.

Yes. And actually what happened there is we were conserving cash for our K-Tron acquisition which happened on April 1.

Great. Secondly, the (inaudible) receivable we thought we were supposed to be getting in this quarter or by the end of the quarter, I didn't see any mention of it, aside from that something on the balance sheet as a receivable. And there was supposed to be a charge you guys were going to be taking. Did that just not happen? Or is it something is going to happen in the third quarter?

This is a long-term PIC note that has been in place since Forethought was sold. Forethought was looking for an opportunity to redeem that and we agreed to a certain price. And it had a time limit to it; they opted to let that time limit expire without redeeming it.

So, we are at this point back to the original plan. Although they have the option and I think the interest to come back to us at some point, simply because the way that note was originally structured the interest continues to accelerate in terms of the rate they have to pay. Finally -- so that is really their call to come back to us or not, but we remain open to that. And we have a $10 million cash interest payment due.

July 1.

July 1, which was also part of the original agreement.

Okay, thank you.

Clinton Fendley, Davenport.

First question for Joe on the Batesville side. Obviously last fall there was quite a bit of press around alternative channels for selling caskets from new competitors on the Internet and such. How have their efforts fared today based on your assessment?

As you know and as you can imagine, we scrounge around for every piece of data we can find. We've talked to customers; we talked to our sales reps. We watch the product offerings on various websites that are out there. We've also done some primary research to try to understand what is going on in those third-party sales.

And to tell you the truth there is a little but of activity there, but there's just a lot more press around it than there is actual use by consumers. It doesn't mean we're taking it lightly. Obviously we're working on product innovations and other sorts of things to continue to drive differentiation in the funeral home channel. But I will tell you, we have it pegged at -- less than 2% of the total volume of caskets in North America are running through that kind of third-party channel. Does that make sense?

It totally does. And I guess on a related note, as far as the foreign competitors, has their share shifted substantially from that sort of less than 2% sort of range in the last few months?

We try to track what comes into our ports and it's pretty flat. It's been slightly declining but pretty flat for the last couple of years and we haven't seen a big movement either way in that trend. So there seems to be some stability and I think it's about 3.5% or so of the products sold in North America coming from foreign sources, particularly China.

The one thing that has happened is that they have shifted -- there are fewer and fewer funeral homes importing them directly. And it is really becoming a source of product for kind of traditional distributors in the market (multiple speakers) so pretty flat.

Final question here, on the $150 million and longer duration borrowings, I know when we were trying to calculate the accretiveness of the K-Tron deal it was contingent on some of the interest costs. Should we be confident that you guys can still maintain the accretiveness of the deal in light of the longer duration debt here?

Absolutely. What will happen is, I did mention we paid 55 basis points over LIBOR on our credit facility, so you can model that and take $150 million out fixed for 5 to 10 years. What you will see is it will impact. There is a cost in the near-term. Obviously in the longer-term we would expect that to be different, but we will still be very accretive.

Thank you guys.

(Operator Instructions) Steve O'Neill, Hilliard Lyons.

I wondered if you could give me depreciation, amortization and CapEx for the quarter.

Depreciation, amortization and CapEx for the quarter -- again, Steve we'll have that ready to go here. Is there another question while we're pulling that up?

Actually that was only question at this time. I have some stuff off-line but I won't take up your time with it now.

Hang on second here. We're getting that.

Actually while you are doing that, what's your anticipated rate on the $150 million of long-term debt?

Say that again?

The unanticipated anticipated interest rate on the $150 million of debt?

Probably in the 5 to 6% range would be good to think about.

What is the current rate of the revolver? I don't have LIBOR in front of me.

This is Mark. It's around 0.8%. For the six months, depreciation and amortization was $9 million and CapEx was $7 million. And we'll track down the quarter here in a second.

I can get it from you later if that's okay. (multiple speakers) Thank you.

At this time, we have no further questions. I would like to turn things back to Mr. Lanning for any closing or additional remarks.

We appreciate everyone dialing in this morning and listening on the webcast. And if you have further questions or need additional information, please don't hesitate to contact us. We hope everyone has a great day. Thank you very much.

Once again ladies and gentlemen that concludes our conference. Thank you all for your participation.