Hillenbrand Inc (HI) 2010 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Hillenbrand earnings call for the third quarter of 2010.

A replay of the call will be available until midnight Eastern time Thursday, August 19, 2010, by dialing 1-888-203-1112 in the United States, or 1-719-457-0820 internationally. Callers will need to use the replay passcode of 7407175. If you are unable to listen to the live webcast, it will be archived at www.HillenbrandInc.com through August 4, 2011.

If you ask a question today, it will be included in any future use of this recording. Also note that any recording, transcript, or any 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 Mr. Mark Lanning, Treasurer and Vice President of Investor Relations. Mr. Lanning, please go ahead, sir.

Thank you, Michelle, and good morning, everyone. Welcome to our earnings call for the third quarter of 2010, which ended June 30 of 2010.

On the call today are Hillenbrand President and Chief Executive Officer Ken Camp, Batesville Casket President Joe Raver, and Hillenbrand Chief Financial Officer Cindy Lucchese. For the question-and-answer session at the end of the call, we will also be joined by Lukas Guenthardt, Senior Vice President of K-Tron corporate development.

As a result of some busy travel schedules this summer, we are not all in the same room for today's call, so you may hear differences in audio quality between speakers or delays before a speaker begins.

During the course of today's conference call and the Q&A 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 financial performance of the Company. We caution you that these statements are only our view of the future, and that actual results may differ materially.

We also alert you to the risks 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 obligations to update or correct any forward-looking statements.

Now let me provide some information regarding our call. We've scheduled one hour, and we will start with prepared remarks from Ken, Joe, and Cindy that should last approximately 25 minutes. We will then move directly to Q&A. 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's my pleasure to turn the call over to Ken Camp, Hillenbrand's President and CEO. Ken?

Thanks, Mark. And to all who are on the call, good morning and thank you for joining us today.

I'm sure you saw our press release earlier this morning, which is also posted on our website. Revenue was up almost 30% over the third quarter of 2009, primarily as a result of revenue generated by K-Tron since the acquisition April 1.

Cindy will cover the results in detail later, but at a high level, the 30% increase in the Company's net revenue was driven by an increase in K-Tron revenue, compared to the prior year, and a modest -- roughly 2% -- revenue decline at Batesville Casket. We believe Batesville's results are consistent with what other significant players in the industry have reported as a result of a decreased number of burials during the most recent quarter.

Because this is the first time we are including K-Tron's results in our reporting, I want to give you an indication of how we plan to talk about the K-Tron business. In short, we'll report K-Tron as a single segment -- a bulk, dry solid materials handling business -- in the same that K-Tron reported when they were a stand-alone public company.

To help you better understand the drivers of this well-established but new to us business, and how we think about the elements of their future results, we will periodically give you some color around the different product lines, but for the consolidated segment, we will provide only revenue, gross profit margin, and operating expense.

Since everyone is still getting acclimated to understanding K-Tron, I'd like to take a few minutes today to update you on the progress we've made since we closed the K-Tron deal April 1.

Overall, the transition has been progressing at the pace we planned, and if anything, it is slightly ahead of schedule. The plan we are following is to first ensure that the K-Tron leadership team is concentrating on running their business, taking care of their customers, and capitalizing on business opportunities that come from global economic recovery.

With that as a foundation, we will introduce the following four major elements at an appropriately deliberate pace over the first year.

The first priority is to ensure that we have effective financial processes to provide the right levels of controls and to yield timely and accurate financial reporting. K-Tron has had a long history of effective financial reporting, and this is primarily a matter of linking the respective systems for seamless financial management. We are very pleased at the way this has all come together, and we have a high degree of confidence that the integration of financial reporting is of Sarbanes-Oxley quality.

The second transition priority has been implementing the Hillenbrand strategy management process in the K-Tron business. This process involves three major elements -- a candid assessment of the competitive arena, the formulation of strategic initiatives which will yield positive business results, and finally, the effective application of our financial and human resources, so we focus on those actions that will generate the desired results.

The strategy process, the way we use it, sets the stage for all of the organization's efforts, and the K-Tron leadership team has coupled their deep industry experience with this process to create a business plan which will enable them to drive results in 2011 and beyond. We are pleased with their progress and we look forward to sharing more with you during our next earnings call as we then give guidance for the upcoming 2011 fiscal year.

Now that the business plan is nearly complete, we are beginning to introduce lean business concepts to the K-Tron leadership team so they'll be able to hit the ground running at the start of the fiscal year. As we move into 2011, the K-Tron team will use its business plan as a guideline to search for and prioritize lean or continuous improvement opportunities.

We will start with some of the low-hanging fruit, such as defining and implementing standard work, and identifying natural competencies within K-Tron and how the leadership can be optimized throughout the K-Tron organization.

Sometimes this subject is not especially glamorous or exciting to many. However, as many of our investors know, for a very long time we have used these very same methods to continuously improve the profitability and cash generation of Batesville.

The fourth of the elements that I referred to earlier to be introduced to the K-Tron team is the Hillenbrand talent-development process.

K-Tron has been a very successful company, and their industry knowledge and the capability of their people is remarkable. However, we believe an important driver of sustainable business results is having and effectively deploying the best talent possible.

By consciously working on recruiting and developing talent, the business will be better able to generate near-term results and will be prepared to more effectively capitalize on acquisition opportunities. We will also be able to develop new products better and faster than ever before, and, perhaps most importantly, to match the best people with the highest value initiatives. We expect to fully incorporate K-Tron into our talent management process throughout 2011.

As we've said before, we acquired K-Tron for the long haul. So as we assess how the transition process is progressing, the speed of new initiatives must be determined by the pace at which various parts of K-Tron can absorb the new learning while still running and growing a historically successful company.

K-Tron's success is reflected in the strong revenue results of $51 million for Q3. While this was only a modest increase of about 2% over the third quarter of 2009, it was K-Tron's best quarter over the past 12-month period. Even more significantly, it was a 34% increase over the quarter that ended in March, just prior to the acquisition.

I'd like to take a moment to tell you how we think about this business. Unlike the casket business, where products are ordered and shipped on a daily basis, this is primarily a capital equipment business that has two major elements -- consumable parts and capital equipment sales.

Generally in K-Tron, we see about 40% of revenue coming from the sale of parts that are consumed in the normal use of our equipment. These parts are typically ordered and shipped in a very short timeframe, so they don't have a significant impact on backlogs, which we'll talk about more in a few minutes. Consumable parts generally have higher margin percentages than capital equipment, and they tend to be less susceptible to economic volatility.

The second element, representing the bulk of K-Tron's revenue, about 60%, is the sale of capital equipment. The equipment we make can have leadtimes that vary from as little as a month to a year or more, although typically the average is about a three-month lead time.

An important metric in this part of the business is backlog, which represents firm orders received from customers but which have not yet shipped. While this can yield insight into future performance, backlog can be volatile on a quarterly basis, depending on the timing of order placement, the size, and the required customer delivery dates. In this business, they refer to this as lumpiness, which I'm learning is a technical term used by capital equipment manufacturers.

For example, K-Tron's backlog balance at the end of December was $51 million. The timing of order delivery caused backlog to spike in the second quarter to $61 million as new orders came on board and some customers delayed projects. Then, as these orders were shipped in the third quarter, the backlog balance returned to $55 million.

The economic uncertainty of 2009 exacerbated the lumpiness that K-Tron normally sees. Consumers dramatically stopped their spending, and our customers had less need for production, including the production of energy. As a result, their needs for our equipment and replacement parts diminished.

Because K-Tron's revenue usually lags market conditions by some six to nine months, this yielded a low point in Q2 of 2010. However, during the last few quarters, we're seeing encouraging signs of increased sales of replacement parts and some improvement in backlog.

Back in May, we also mentioned that the Purchasing Managers Index was a strong indicator of capital equipment spending, particularly for the K-Tron Process Group. A PMI index of 50% or more indicates that manufacturing is expanding. With percentages above the mark for 11 straight months, as reported in June, what it indicates is that manufacturers are beginning to ramp up some production lines that may have been slow or shut down completely. Other countries have similar indices that are showing modest signs of improvement as well.

In the Size Reduction Group, a key economic indicator is U.S. energy consumption, which showed that coal-fired power generation is in its fourth consecutive month of year-over-year improvement. We anticipate that trend will continue as the particularly hot summer months increase demand for electricity. That improvement typically shows up in the Size Reduction Group's orders about six months later.

In short, we believe there are signs that the worst of the economic recession may be behind us. We all have to be mindful, however, of the potential fragility of the world economy and recognize that some encouraging short-term trends do not necessarily predict a full recovery.

We are pleased with K-Tron's results in its first quarter as part of the Hillenbrand family and we are encouraged by both the internal and external indicators that K-Tron's performance will continue to improve along with or somewhat better than the economy.

Now I'll turn the call over to Joe Raver for a look at Batesville's third quarter. Joe?

Thanks, Ken, and good morning, everyone.

First, I will give an overview of some of the broader trends in the death care market and how they have affected us. Then I will briefly cover some of our key strategic initiatives before handing the call over to Cindy to review the financials in more detail.

We've been getting a pretty consistent picture of the market over the past few quarters, and that didn't change much in the third quarter. Once again, the number of North American deaths is down year over year. Mortality in the general population continues to be low, and the World Health Organization is soon expected to declare the official end of the H1N1 flu epidemic, which, as you know, turned out to have a negligible impact on our industry this year.

As a result of the lower mortality and the continuing rise in the cremation rate, there were fewer burials this quarter compared to the same quarter a year ago. We believe our results were in line with the overall market size, and that was a primary driver of our 2.4% decline in year-over-year revenue.

Average selling price for the quarter was relatively flat, compared to the prior year. We view this as a positive; however, we did see price pressure increase, particularly at the lower end of the product line, throughout the quarter as competitors scrambled for volume in response to the lower overall burial market.

We responded by implementing selling programs mid-quarter and are pleased with the results thus far. Given the low demand during this time of the year and the decreasing number of burials, we expect competition in the low end of the product line to remain fairly intense in the fourth quarter.

Although we are never happy to see a decline in year-over-year revenue, we've remained relatively stable in an industry facing a very difficult demand in [some ways]. We attribute this to several important initiatives. First, we are a high-touch company who helps funeral homes create more meaningful funerals for the families they serve. We do this through innovative products and services that connect with families and support them as they move through the grieving process.

The majority of new product introductions in our casket, cremation, and online businesses are aimed at creating lasting memories for families by authentically reflecting a life that was lived. Recent examples include LifeView and LifeStories caskets; ObitLink and TributeLink, which are our online memorialization product; and a number of new urn product introductions. Memorializing the lives of people who are important to us is a basic human need and an important part of healthy grieving.

Improving funeral home profitability, while simultaneously increasing family satisfaction, is also an important part of what we do. Customers who embrace our merchandising programs have experienced improved business results. These merchandising efforts also extend to our Options cremation products, where we are helping funeral homes promote the value of a service with each cremation, along with personalized products and additional memorialization opportunities after the service is concluded.

(Technical difficulty) talked last time about investments in our business to keep it growing, and we've made a key investment in the third quarter with the acquisition of Memorial Solutions from Polaris Graphics. This website provider is well known in our industry, and it's a natural fit for our Batesville interactive connectivity suite. It will allow us to offer funeral homes even more ways to customize their websites so they can increase online visibility (technical difficulty) compelling story to families looking for funeral services.

We are pleased that the principals at Memorial Solutions are continuing to work with us to grow our online offering.

Taken altogether, these initiatives help our funeral home customers provide better products and services to their client families, and this results in greater customer satisfaction, which translates into additional revenue opportunities and profitability for the funeral homes. When funeral homes are successful, we are successful.

As always, we continue to work to improve our cost structure. Our dedication to lean business principles helps us improve quality and eliminate waste. During the quarter, our gross profit margin increased 30 basis points, compared to the prior year. We continue to see improved efficiencies in our distribution and service network, despite higher fuel costs. Improved routing and more accurately matching labor requirements to customer demand have helped us drive fewer miles and enhance productivity while maintaining our high levels of customer service.

During the first three quarters of the year, commodities, especially steel, had a favorable impact on our cost of goods sold. However, during the third quarter, we actually paid higher prices than we did in the prior year, and as we've discussed on previous calls, it takes a couple of months for the higher-priced steel to work through our system. So we will begin seeing increased steel costs in the fourth quarter. We expect the higher year-over-year steel costs to continue into the next fiscal year.

Operating expenses increased in the third quarter, and I wanted to call your attention to a few items. Most of the increase is related to increased variable and incentive compensation, compared to the prior year, which we've talked about in previous calls.

Also increased spending due to the FCA lawsuit, which is slated to go to trial soon. These legal costs are difficult to predict and are likely to continue until the FCA matter is resolved.

Finally, we continue to invest in an effort to grow our non-casket-related product lines, such as Options and e-Business.

In summary, our focus continues to be on providing high quality, innovative products and services that help our funeral home customers serve their client families better. As I mentioned earlier, we know that when our customers are successful, we are successful.

Now I'd like to turn the call over to our Chief Financial Officer, Cindy Lucchese. Cindy?

Thank you, Joe.

Net revenue for the quarter were $206 million, a 30% increase over the same period in the prior year. Now let's start with Batesville Casket sales, which were $155 million, down just under 2.5%, or roughly $3.5 million, over the same period in 2009.

Lower burial unit volume continues to be the primary reason for the decrease in revenue, resulting in a nearly $7 million decline in the quarter. This is mostly related to fewer deaths and an increase in cremations year over year.

During the same period, Batesville's average selling price was slightly higher than in the prior year by nearly $2 million.

We continued to experience the favorable impact of currency fluctuations from the weakening U.S. dollar, mainly compared to the Canadian dollar, resulting in increased revenue of just over $1 million, compared with the same period in the prior year.

K-Tron's revenue of $51 million was approximately a 2% increase over last year. Keep in mind that our quarter periods and accounting bases don't align precisely with K-Tron pre-acquisition periods.

These results were also significantly impacted by the nonrecurring effects of fair value adjustments on K-Tron's inventories in backlog, required by acquisition accounting, all of which took place in the third quarter, reducing both gross profit and operating income below normal operating levels.

At approximately 37%, our overall gross profit margin decreased 490 basis points over the third quarter of 2009, primarily due to business acquisition costs and acquisition accounting adjustments. At Batesville, the gross profit margin percentage increased 30 basis points to nearly 42%, which was mostly driven by lower commodity costs.

Batesville's commodity costs -- most notably steel -- were down for the quarter by $1 million. However, as Joe mentioned earlier, we expect to see steel prices go up in the remainder of the year.

In our distribution operations, costs were relatively stable compared to 2009, with savings from efficiencies offset by a roughly equal increase in fuel prices.

Excluding the impact of acquisition accounting, K-Tron's gross margin is in line with historical results, and the Company continues to hold its pricing. As I mentioned earlier, the one-time fair value adjustments on inventory had an impact on the margin, reducing it by $12 million.

Operating expenses in the third quarter were $56 million, compared with $27 million in the same period last year. This is due principally to the K-Tron acquisition, including acquisition costs of $6 million and K-Tron's typical operating expenses of $15 million.

Batesville Casket's operating expenses increased just over $4 million, or approximately 19%. In previous calls, we've talked about funding incentive compensation for the year at 100%, which accounts for more than half of this increase.

Batesville also had higher spending for antitrust litigation in preparation for the trial this month, and made growth investments in the business.

K-Tron's operating expenses increased approximately 36% over the same period in 2009, again driven primarily by acquisition accounting effects, most of which will continue in the form of higher amortization expense.

Interest expense for the quarter increased about $1 million compared to the prior year, due to borrowings on our revolving credit facility.

As of June 30, we had $18 million in remaining borrowing capacity on our $400 million revolving line of credit. After issuing $150 million of 10-year senior bonds, we repaid $100 million toward the revolver, leaving $118 million in borrowing capacity.

We recorded nearly $4 million in investment income and other for the quarter, an increase of almost $2 million over the same quarter in 2009. This is primarily due to higher earnings from limited partnership investments in the current year.

This increase was partially offset by decreased interest income on our auction-rate securities.

Our tax rate for the second quarter was 41%, up from roughly 36.5% in the prior year. The increase is primarily related to nondeductible business acquisition costs.

Summarizing the previous numbers, net income for the quarter was $13 million, a decrease of more than 47% over the same period in 2009. Earnings per share also decreased more than 46%, from $0.41 per share in 2009 to $0.22 in 2010.

If you exclude antitrust litigation costs of just under $1 million, nonrecurring acquisition accounting effects of more than $8.5 million, and business-acquisition cost of just over $5 million, our adjusted net income was slightly over $28 million.

Adjusted earnings are $0.45 per share, so both adjusted net income and EPS increased nearly 10% over the prior year.

Cash flow from operations was $28 million in the third quarter, down approximately 16% from the prior year. This decrease was generated primarily by the payment of business acquisition costs and K-Tron's pre-transaction liabilities, along with the timing of disbursements for accounts payable.

This was offset by the timing of payments for income taxes, and the effect of the sale of the acquired K-Tron inventory.

Finally, related to our capital structure, I'd like to give you a quick overview of last month's bond offering. On July 6, we issued $150 million of 5.5%, 10-year senior bonds due July 15, 2020. They have an effective yield of 5.645%. The offering closed July 9, and we were very pleased with the market's response.

The cash proceeds have been used to repay $100 million of the outstanding borrowings on our revolver that were used to fund the K-Tron acquisition. We retain $48 million for working capital purposes.

Finally, for the financial update, we are reaffirming the guidance that we announced on May 6.

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

Thanks, Cindy. Our first acquisition outside the death-care industry has been a substantial one, and we believe it's an excellent acquisition. I can honestly say that there isn't a single significant area where we believe we got less than we thought we were buying.

We still face a number of challenges during difficult economic times. Batesville remains a very stable source of revenue, earnings, and cash flow, and while unit volume there is highly dependent on short-term death rates and the growth of cremation, Batesville constantly finds creative ways to maintain their market leadership, improve gross profit margin, and to be a predictable source of cash.

As we've described, the nature of K-Tron's business involves less predictability than the casket business. However, even during the most challenging times of the recent economic cycle, K-Tron operations have remained nicely profitable and continued to generate free cash flow in every quarter. We anticipate future increases in this very solid performance as the economy improves and we execute our strategic initiatives.

On our year-end call in November, we will wrap up our fiscal year and will give you a look at what we anticipate for 2011.

Thanks to everyone for joining us today. Now I'd like to welcome Lukas Guenthardt to the call. Lukas Guenthardt is the Senior Vice President of Business Development for K-Tron, and he will be available to help Joe, Cindy, Mark, and me answer any questions you might have.

Operator?

(Operator Instructions). Clint Fendley, Davenport & Company.

Thank you. Good morning, guys. First question here, on the guidance. I wondered, why is the guidance range still so wide, given that we're only one quarter out from the end of the year? I mean, it would appear that you guys are fairly safely at the top end of the range that you've set forth?

Clint, it's Cindy. I think the way to think about it -- first off, our range is fairly tight. If you look at how we do give guidance, we did tighten the range the last time, so we are now in a relatively, I think, tight range as it is.

To change it anymore would, I think, almost be giving a precise estimate of where they are. We're very comfortable that we'll be somewhere within that range, and I think that's our practice and what we'll continue to do.

Okay. And when you were reiterating the guidance, did that also include the guidance that you had set for K-Tron for the low single to low double-digit revenue growth there for them in the second half?

Correct, and that was off their base of $97 million for that same period in 2009.

Okay. And Cindy, have you guys received the $10 million Forethought receivable? I believe that was due in July, I think.

Yes, we received that July 1.

Okay, excellent. And just a last question, but more broadly, industry question here, possibly Ken or Joe. I wondered if you guys could discuss just the burial vault market, and how that market may be changing with some of the new products that are available, and just the longer-term opportunity that that presents for Batesville.

Joe, it's Ken. Do you want me to take a shot at that from a high-level and (multiple speakers)

Sure.

The burial vault market is -- has been characterized for a long time by very little change in the types of products that are offered, and that's the way it exists today.

It also, as you can well imagine, is directly tied to the number of burials. So in the sense that that market has any movement in it, whatever are the effects of social decisions by families on do they bury or do they cremate, that affects the burial market. That said -- or, I'm sorry, the vault market.

That said, it's been very steady and stable just as the casket business is. That's how we look at the market dynamics there.

If there's one difference in the burial vault market, it's that it has distribution challenges because vaults -- the most common form of vault is a concrete liner that is very heavy and expensive and not very easy to transport by long distances. So, I would characterize that as a fairly fragmented market from a supplier point of view.

Joe, any thoughts on that?

I think that captures the market pretty well.

Okay, and is there -- I guess, maybe, if you could talk a bit about just what you've done since maybe the purchase of the -- some of the intellectual property from Goria, and do you think that the market will always stay as fragmented, given some of the newer and lighter weight products that may be coming in the future?

Clint, this is Joe.

First, I'd just like to say I think one of the things we're always trying to do is be the innovation leader in the industry, and I think we are widely viewed in the industry as the innovation leader. So as the industry unfolds or changes, as you mentioned the Goria intellectual property purchase that we made several months ago, we are in the exploratory phase.

We really don't -- it's our practice not to comment on really any new products until those products are launched. And at this phase, we really would stay with that practice and not comment too much until we're ready to launch our product if that time comes.

Great. Thanks, guys. Nice quarter.

Jamie Clement, Sidoti & Company.

Two questions, if I may. Let's start with caskets, and then move on to K-Tron, if that is okay.

You all -- Ken, I believe it was in your prepared remarks -- you talked about some pricing pressure towards the low end of the market. I mean, it seems like that is something you guys have been discussing for, I think, at least a year and a half, and I think that trend has been going on for a while.

Leaving that out of the equation, can you talk qualitatively about what you are seeing from business mix and average price points kind of across the spectrum a little bit? Like, in other words, is the death-care consumer starting to spend a little bit more money? What are your thoughts?

Jamie, this is Joe. Great question. You know, if you had asked that question -- and you may have -- at this time last year, I think the answer was quite different. And we saw a more severe mix down in the industry as consumers (multiple speakers)

Of course.

-- choose less valuable products. We've really seen that stabilize this year, so while there is some pressure at the lower end of the product line, we believe that the industry mix of products sold has stabilized and returned to more of an historic trend. So we've been pleased with that thus far this year.

Joe, would you sort of say that -- I don't know how to exactly phrase this, but it seemed like people in your industry that what people saw from a family spending perspective was really, really unusually low. I mean, are we back to more sort of [less] -- average recessionary consumer behavior in your industry? Is that kind of how you'd describe it, or are you actually starting to see -- are you actually seeing some improvements? I mean, it sounds like you are using the word stability, so is that more the right word here?

I think that's exactly right. I believe that consumers are still watching their pennies, as many people are, and that our industry is no exception to that. But it's certainly not the tightening that we were experiencing about last year. So I think stability is a great word to describe what we believe is happening in the industry.

Okay, great. And now, just moving on to K-Tron, if I could ask a question there, Ken. You know, I guess you're not going to be -- you're going to be reporting your numbers going forward, kind of how K-Tron did before, but I think you said it was -- and I think my math is right here -- about a 34% sequential revenue increase at the combined business.

Yes.

And reading between the lines of your comments, it sounds like the bulk of that was on the handling side, rather than on the crushing side of the business. I mean, is that accurate?

No, I wouldn't say that's accurate. I would say it was fairly balanced.

Okay. Ken, the reason I ask the question is just, like, I would I think click would you -- I would assume that the handling business would start to come back more than the -- ahead of the crushing business from kind of a cyclical timeframe. Is that -- so if that's -- do you think, A, that's the case, and if that's not the case, then is the crushing business better than you thought it was going to be?

I think -- remember, these are early signs and I have to put the caveats in that --

Sure.

-- it's actually hard to figure out what's happening globally.

Both of those businesses operate globally, and if I would say, one of the things that we've seen, for example, in the crushing business -- remember, they have a higher percentage of consumables (multiple speakers)

Consumables, right.

I would say that because there are other parts of the world have increasing energy demands compared to what they've historically had -- the U.S. has been pretty stable -- I think the U.S. energy demands were down 12% (multiple speakers) during the depth of the economic trough here.

But what we're seeing are, from a worldwide demand point of view, more coming from Asia, but that's more -- it might be more an indicator of just, A, how they've managed the economic downturn in China and some of the other Asian (multiple speakers) economies, but we don't know that for sure. But in the crushing business, there is some -- a bit more of an Asian mix to what we're seeing right now (multiple speakers) than was historically the case.

Okay, fair enough. Thank you very much for your time.

Steve O'Neil, Hilliard Lyons.

Good morning. I just wanted to check on some of the nonrecurring items. The $13.3 million pretax for nonrecurring acquisition accounting effects, is that all in cost of goods sold?

Not all of it, but a big chunk of it is, yes.

And then, I guess, the remainder, then, would be in SG&A?

Yes.

And the $6.2 million business-acquisition cost, is that all in SG&A?

Yes.

And my adjustment is not going to be quite right if all of the $13.3 million is not in cost of goods sold, but roughly speaking, if I take out the $13.3 million, I come up with a gross profit of $88 million -- actually, I had $88.9 million, or it might be a little bit less than that.

If the Hillenbrand gross profit went up 30 basis points to about 41.9%, if I back that out, it looks like K-Tron's gross profit, adjusted for the inventory adjustment, was in 45%, 46%. Is that a reasonable number?

Yes, that is, Steve.

And also, the Memorial Solutions, I hadn't heard of that. Can you describe that just a little bit, please?

Joe, do you want to do that?

Sure. Hi, Steve, it's Joe. As you know, we provide a number of online products and services to our funeral-home customers, primarily websites. And Memorial Solutions is a website -- primarily a website provider in the funeral service space.

They have an excellent product and some talented folks there. So during the quarter, we acquired Memorial Solutions and we will integrate that into our offering. And what that company does for us, or that new product line does for us, it gives us a very customizable website solution for funeral homes, and we are also pleased that we've reached an agreement with the principals of that company that they will continue to work with us to continue to develop not only that product, but other new products and services around our online business offering.

What are the rough annual revenues for Memorial Solutions?

Well, I don't have that my fingertips. Cindy, was that --

I'm assuming it is fairly small.

Yes, it's not a huge amount, Steve. This is more of a strategic acquisition than it is one where you should expect big increases in revenue.

Okay, then lastly, it looks like the adjusted tax rate, once again if I adjust for the nonrecurring items, was about 35.4%. Just wondering what we should assume for the fourth quarter.

For sure, we won't have as big an impact from the nondeductible business acquisition cost, so that's one thing you should think about. It will be more normal.

Clearly now that we have K-Tron in there, it's going to be a blended rate. 25% of our revenues will come from K-Tron, the other 75% from Batesville. So if you looked back and you sort of did a blended rate over what K-Tron has run historically and what Batesville has run historically, you'd come pretty close.

Okay, great. Thank you very much.

(Operator Instructions). Michael Corelli, Barry Vogel & Associates.

Just a question, you talked about the steel costs, how you get impacted on a [ragged] basis. And you also talked about that -- this pretty intense pricing competition in the casket area. So do you think you're going to be able to use some pricing to offset the steel costs squeeze or is that something that is going to end up taking an impact on the margins?

This is Joe. Typically, we do a price increase once a year, and stay with that price increase throughout the year. So we have a history of taking an annual price increase in early October and tend not to adjust our pricing for the balance of the year. And we would anticipate that going forward, unless there is something very, very unusual that would happen.

And historically, we have been able to raise prices when commodity prices increase, and we don't really talk a lot about what we're going to do with pricing going forward, but looking backwards, we've been able to capture some portion of commodity costs with price increases over the last several years.

Okay, so it looks like maybe for a quarter here that it could squeeze you somewhat before you get to the point of where you would increase prices annually?

Yes. We will -- we are likely to see higher steel costs in the fourth quarter, compared to the prior year. And, again, you're right -- we will not do a price increase until our normal time in October.

Okay, thank you.

We do have a follow-up question from Steve O'Neil with Hilliard Lyons.

I wonder if you could give me the depreciation and amortization and capital expenditures for the quarter, please.

Yes, Steve, the depreciation and amortization for the quarter is $10.5 million, and CapEx, I don't have handy here, but I know we're going to be talking with you later today. I can give you that number at that time.

Okay, great, thank you.

And at this time, we have no further questions. I would like to turn the call back over to Mr. Mark Lanning for final comments.

Thank you, Michelle. On behalf of Ken, Cindy, Joe, and Lukas, and myself, I'd like to thank everyone for joining us this morning, and appreciate your questions. And if you have any further questions or follow-ups, please don't hesitate to give us a call. So we hope everyone has a great day. Thank you very much.

Thank you, everyone. That does conclude today's conference. Thank you for your participation.