Nov 25, 2008
Executives
Mark R. Lanning - Vice President, Investor Relations and Treasurer Kenneth A.
Camp - President, Chief Executive Officer, Director Cynthia L. Lucchese - Chief Financial Officer, Senior Vice President
Analysts
[Clint Funley - Davenport] Jamie Clement - Sidoti & Company Jack Ripstein - Portrero Capital Steve O’Neil - Hilliard Lyons
Operator
Welcome to Hillenbrand’s earnings call for the fourth quarter 2008. Today’s conference is being recorded and will be available for replay through midnight Eastern Time December 5, 2008 domestically at 888-203-1112 and internationally at 719-457-0820.
For the replay callers will need to use confirmation code 5779184. If you are unable to listen to the live audio only webcast, it will be archived at www.hillenbrandinc.com through November 25, 2009.
If you choose to ask a question today, it will be included in any future use of this recording. Also note that any recording, transcript or other transmissions of the text or audio is not permitted without Hillenbrand’s written consent.
Now at this time it’s my pleasure to turn the conference over to Mark Lanning, Treasurer and Vice President of Investor Relations.
Mark R. Lanning
With me today are Ken Camp, Chief Executive Officer, and Cindy Lucchese, Chief Financial Officer. We would like to welcome you to our fourth quarter earnings call.
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 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 10K and 10Q. We do not undertake any obligation to update or correct any forward-looking statements.
Now let me provide some information regarding our call. We have scheduled one hour and will start with prepared remarks that should last approximately 20 minutes.
We will then move directly to Q&A. If you have follow-up questions after the call has ended, please don’t hesitate to phone me at 812-934-7256 or email me at [email protected].
As our first order of business I want to remind you about our analyst and investor conference which we announced at the end of October. The event is scheduled for Wednesday, December 3, at the Millennium Broadway Hotel on Times Square in New York City.
We’ll discuss our core business including progress on our 2008 strategic initiatives, our financial guidance for the new fiscal year and our plans for 2009. I know many of you have been interested in more information about our Hillenbrand growth strategy and we’ve worked closely with our Board to develop and refine the plan we’ll be sharing with you at the conference.
We hope you’ll be able to join us in person but for those who are unable to do so, please remember you can also attend our analyst and investor day via webcast. To register and get more details, go to our website at www.hillenbrandinc.com.
Now it is my pleasure to turn the call over to Ken Camp, the President and CEO of Hillenbrand, Inc.
Kenneth A. Camp
Thank you for joining our earnings call during this very busy holiday week. Before we get into the earnings and business update, I want to provide you with encouraging late-breaking news about the anti-trust litigation that has been reported in our previous public filings.
We learned last night that the magistrate judge in the Southern District of Texas has issued an order recommending denial of class certification in both the Funeral Consumers Alliance and Pioneer Valley cases. The order is awaiting acceptance and confirmation by the district judge.
We don’t have further details at this time but will keep you posted as we know more. Now let’s turn to the purpose of our call today.
We’ll be talking about a number of items starting with highlights of our performance for the fourth quarter and for fiscal year 2008 which ended September 30. I’ll give you an update regarding our progress on key initiatives followed by a brief overview of our results and how we’ve performed in the current economic climate.
Then I’ll turn the call over to Cindy Lucchese for details about our quarterly and annual financial results. I’ll then wrap up the prepared portion of this call with some closing thoughts and after that both Cindy and I will be available to take your questions.
In this morning’s press release we reported that Hillenbrand has once again posted solid results for the quarter and for our first fiscal year end as a stand-alone public company. In an economy that’s been particularly challenging in the past few months we’re pleased that we’ve been able to not only weather the financial storms but also to maintain consistent annual revenue and earnings.
Revenue for the fourth quarter was in line with 2007 as price realization helped offset the effects of a declining casket market and continued downward mixed pressure. Our relentless application of continuous improvement initiatives helped to partially offset increases in steel and fuel prices resulting in slightly higher gross margins.
At the bottom line we posted slight increases in net income and earnings per share. We’re pleased with our results for the fiscal year which were above the midpoint of our guidance.
Cindy will provide more details regarding our financial results a bit later in the call. You may recall that in July we announced that our Board had authorized a $100 million share repurchase program.
In September we repurchased just over 288,000 shares at a cost of $625 million. Along with cash dividends the share buy-back program reflects our commitment to return a meaningful portion of the company’s strong cash flow to shareholders.
In recent earnings calls we’ve also told you about four strategic initiatives to grow the Batesville Casket business. Each one is designed to help us generate profitable revenue in a market with flat volume and declining burials.
I’ll give you a very brief update on each initiative for the quarter and for the year. Let’s start with merchandising, one of our primary growth initiatives.
A strong merchandising plan generates powerful results for Batesville Casket Company, the funeral home and their client families. Our concentration is on helping funeral homes implement a complete merchandising and consumer information program.
It’s not a process that happens overnight, requiring a great deal of time and effort for both us and for our customers to implement. Funeral directors went into the profession to be caregivers, not sales people yet their business profitability is dependent upon their client families buying products and services.
So merchandising helps solve this problem by giving families valuable information to make an informed decision. As a result they often make selections with a higher margin increasing the value of the sale for the funeral home and consequently for us.
Just as important, families in this environment frequently report higher levels of satisfaction with their purchase. During the past quarter we heard directly from a number of funeral directors who chose to fully implement our merchandising system.
I’d like to share a couple of their comments with you. We heard from a funeral director in Tuscaloosa, Alabama who writes, “Family reaction has been fantastic.
With the introduction of the selection guide and video family members ask more questions than ever before. Once they enter our new selection room they just seem more comfortable.”
A funeral home owner in North Attleborough, Massachusetts had recently returned to us as a Batesville customer. He told us, “We never thought we would have seen families so interested in personalization, additional choices and the numerous options allowed.”
This customer said that “returning to Batesville has made a tremendous impact to our bottom line and our profitability has grown significantly.” On the other end of the country in Bakersfield, California a funeral director said that his families appreciate how easy it is to use the selection room and that the kiosk has an option for Spanish.
“But most of all,” he told us, “my staff loves working with it. Your system works.
Also I shouldn’t forget to mention that my average margin increased.” Those are just a sample of some of the powerful statements that we hear from our customers who have fully implemented the system.
Thanks to successes like these we remain encouraged about the value of merchandising and will continue on our multiyear plans to extend this powerful tool to more funeral homes. Another initiative to drive incremental growth is to make our sales efforts as effective as possible.
We continue to see success with our largest opportunity accounts which include large, independent accounts and regional consolidators. We expect to continue these efforts in 2009 as well as modestly increasing the number of field sales representatives to improve coverage in specific geographies especially among the smaller and rural funeral homes.
As many of you know, the slow but steady trend of increasing cremations reduces the number of burials. While the average cremation isn’t nearly as profitable for us as the average burial, cremation does present a growth opportunity for us.
We recently completed the formation of an expanded and dedicated team to thoroughly understand the evolving needs of cremation oriented consumers and to match our offerings with their needs. This team’s charter is to extend Batesville’s leadership position in cremation products with our option lines of urns, containers and related services.
In the fourth quarter this option seam introduced two new products that are unique to the cremation industry. The Spirit Tree is a patented biodegradable urn that allows families to mix their loved ones cremated remains with a tree seedling to grow a lasting living memorial.
This unique offering is particularly attractive to the growing segment of consumers who are environmentally conscious, often referred to as those with green interests. It complements our living memorial program where we plant a tree in a national forest for every casket purchased.
To date we’ve planted in excess of 11 million trees in the US and Canadian forests. The second options product, memorial appliqués, focuses on consumer preferences for personalization by engraving three-dimensional photographs on bronze earns and wooden memento chests.
Because so many families are not aware of all the product choices they have when they select cremation, our options team has developed a video and published a series of articles to help funeral directors better understand the alternatives they can present to their client families. We’ll continue this initiative in 2009 and will also enhance the stream of new products and services.
Our fourth strategic initiative revolves around our NorthStar line. As you may remember North Star is a line of casket products and parts which we sell to independent distributors and manufacturers.
These private label products have generally lower price points than our Batesville branded caskets and they don’t contain any of Batesville’s proprietary features. Increasing our sales penetration in this channel provides us with a growth opportunity as it helps us build relationships with these independent distributors.
Underpinning all these initiatives is an acceleration of the rate of new product development. We introduced nine new casket models at the National Funeral Director Association in October and we’re delighted by the customer response.
I’d like you all to come to our December conference in New York and you’ll see some of these new models in person. Finally, let me share a few thoughts about how the current global economic crisis has affected our business and that of our customers.
In short, the Batesville Casket business has remained resilient and stable in a very volatile economic climate. Our financial results for the quarter and the year have been solid and steady, and we’re pleased with that.
However I’d like to take a moment to talk about some of the issues that have affected our income statement in the past year. Raw material costs particularly relating to steel have increased approximately $7 million since last year.
Most of the steel increases came in the fourth quarter in the form of surcharges on top of existing contracts with our suppliers. In 2008 we chose to absorb those costs rather than pass them on to our customers who customarily prefer one annual price adjustment.
Although spot market steel has moderated in price somewhat since the surcharges were implemented, the market rate when we renegotiate with our suppliers in the second quarter will determine our costs for the balance of the year. This year we were also challenged by unprecedented fuel prices which totaled $4.1 million more than the previous year.
These costs peaked in the fourth quarter and diesel prices have fallen in recent weeks although not to the degree that gasoline prices have dropped. While we try to be selective in where and how we purchase diesel fuel and have fuel efficiency programs throughout the company, it is difficult to predict these costs for the remainder of our fiscal year.
And as if the year weren’t already exciting enough, several of our facilities were affected by the two hurricanes that tore through the Gulf Coast region in the fourth quarter. Fortunately all of our people weathered the storm without serious injury or loss of life or even significant property damage.
This was a challenging time for us and for many others, and I’m very proud of the way our associates reached out during those difficult weeks, not just to each other but to our customers as well. We have a tested emergency response process for such disasters which helped minimize business disruption for us and for our funeral home customers.
Of course, we really hope we won’t have to use this capability again for a very long time. In summary, despite the current uncertain economic times we believe that our company is much less susceptible to periods of volatility than many others.
Hillenbrand is well positioned to respond to opportunities and to moderate the downside risk of economic turmoil. We’ll share our plans in greater detail and the investor conference December 3 in New York.
Now I’d like to turn over the discussion to our CFO, Cindy Lucchese.
Cynthia L. Lucchese
I’d like to review some detail behind our fourth quarter results. Sales for the quarter were $158.8 million virtually unchanged from the $158.2 million in the same period a year ago.
This slightly positive revenue growth in an otherwise marginally declining burial market resulted primarily from price realization and foreign exchange rates. These positives were partially offset by declining volumes and a negative mix impact due to the introduction of units with lower price points and the continued downward trend in mix in some of our non-merchandise accounts.
Our gross profit margin percentage of 40.3% improved 50 basis points versus 39.8% a year ago. We’re pleased that we were able to improve our gross profit percentage despite some very adverse market conditions.
Although we experienced $2.6 million of material cost increases and $1.1 million of additional fuel costs in the quarter versus prior year, we were able to help offset the negative effect with good results from our continuous improvement efforts. We believe CI is a core competency for us and it helped drive almost $1.5 million of productivity improvement in the quarter.
Operating expenses decreased $2.3 million year-over-year to $31.7 million. Prior year results included $1.6 million in costs related to a terminated acquisition.
Excluding those costs, operating expenses fell slightly by $700,000. This decline was driven by lower legal fees offset in part by increased corporate costs to run our stand-alone public entity.
Legal fees related to our anti-trust lawsuit declined $1.3 million in the quarter versus prior year. The cost to operate as a stand-alone public company was approximately $3.2 million more than the prior year allocation from our former parent company.
Interest expense for the quarter was $0.8 million versus none in the prior year. Our average borrowings were $93.2 million for the quarter bearing an average interest rate of 2.9%.
Our outstanding borrowings at year end amounted to $100 million. Investment and other income was $2 million in the quarter versus $0.4 million in the prior year primarily reflecting income from the notes receivables from Forethought.
In addition we earned interest on cash balances and other investments including auction rate securities. Our tax rate for the quarter was 42.7% versus 36.5% a year ago.
The increase over the prior year quarter was due to limitations placed on the Section 199 domestic production activities deduction as a result of the separation transaction. The separation will not impact the deductibility of these costs in future years.
Net income for the fourth quarter was $19.2 million or $0.31 per diluted share. This compares with net income of $18.6 million or $0.30 per diluted share in the same period a year ago.
The 3.3% growth in EPS was dampened by the increased tax rate as our $4.2 million of increase in IBT was largely offset by a $3.6 million increase in income taxes. When the effects of non-recurring costs for separation and the anti-trust case are excluded, net income decreased $2.7 million or $0.04 per share versus one year ago.
This is primarily the result of increased costs to operate as a stand-alone public company as well as increased income taxes in the quarter. Now I’d like to turn to performance for fiscal year 2008.
Revenues for the year were $678.1 million versus $667.2 million in 2007 which was in the middle of our guidance range. The revenue increase of $10.9 million or 1.6% from the prior year was driven by $22.8 million in price realization offset in part by $5.5 million of net volume declines and $10.4 million of downward casket mix.
While we believe that our merchandising initiative is helping to slow this trend, our focus on growth opportunities in the lower end of the product spectrum will continue to put pressure on product mix. Fiscal 2008 net income of $93.2 million and diluted earnings per share of $1.49 were also above the midpoint of our guidance range.
On an as-adjusted basis excluding separation and anti-trust litigation costs, net income of $108.3 million and EPS of $1.73 were also slightly above the midpoint of our as-adjusted guidance. Gross profit margins were 41.4% compared to 41.8% in the prior year.
Although margins declined slightly for the year, we’re especially proud of our performance in these trying economic times as significant increases in steel and fuel costs were somewhat offset by productivity cost improvements and improved material recovery. Excluding separation and anti-trust costs of $18.9 million in fiscal 2008 and $12.9 million in 2007, operating expenses increased $2 million or 1.8% in fiscal 2008 compared to 2007.
The increase in operating expenses was due to $6 million of increased costs to run the separate public company offset by $8.7 million in one-time expenses in 2007 related to a terminated acquisition. Interest expense for the year was $2.2 million versus none in the prior year.
Our average borrowings were $127.8 million for the year bearing an average interest rate of 3%. Investment and other income was $5.9 million for the year versus $1.4 million in the prior year primarily reflecting income from the note receivable from Forethought.
Our tax rate for the year was 39.2% versus 36.6% a year ago. This increase is primarily due to the non-deductibility of certain separation costs.
We expect our tax rate for 2009 to be more in line with non-[SIN] years and will provide specific guidance at our investor and analyst conference. For the year we generated cash flow from operations of $101.8 million.
We continue to be very effective in turning revenues into cash and earnings. In terms of the balance sheet we ended the quarter with cash and cash equivalents of $14.7 million and auction rate securities of $51.1 million.
Although we collected $1.6 million of the auction rate securities in the quarter, the auction market remains challenged so we’ve classified these investments as long term. In terms of collectability our auction rate securities which we hold as available for sale securities are all AAA rated investments primarily in state student loan funds.
Despite these ratings we’ve provided for fair value reserve due to the liquidity challenges resulting from sales auctions. For approximately $30 million of these securities we have accepted a buy-back offer that requires the broker to repurchase these at PAR after June 2010.
As of September 30 we had outstanding borrowings on our $400 million revolving line of credit of $100 million. As Ken mentioned earlier, the global financial crisis has caused shock waves around the world and we have analyzed the potential impact to our business and have made effective and appropriate responses where necessary and where possible.
While we have experienced some negative effects such as exposure to AIG through our insurance program, we do not believe we have any significant risks related to the crisis, and in fact believe the recession resistant nature of our business along with our strong and predictable cash flow will help us fare better than many businesses and industries during these difficult times. We will of course continue to carefully monitor the situation and take action where appropriate.
Finally, I know many of you are interested in our financial guidance for fiscal 2009. We’re looking forward to sharing that with you at our investor and analyst conference in New York City on December 3.
Now I’d like to turn the call back to Ken for his concluding remarks.
Kenneth A. Camp
Last quarter I mentioned that we’ve been working with our Board to refine Hillenbrand’s growth strategy. At our analyst and investor meeting next week we’ll give you more information about how we intend to grow and increase long-term shareholder value.
This is an exciting time for us and we’re looking forward to sharing our vision with all of you. Thanks for joining us today and I hope we’ll get the opportunity to meet many of you in New York very soon.
In the meantime the Hillenbrand wishes you and your family a Happy Thanksgiving, and Cindy and I’ll be happy to take questions. Operator, will you please open the lines?
Operator
(Operator Instructions) Our first question comes from [Clint Funley - Davenport].
[Clint Funley - Davenport]
Good news here on the litigation development. Do you anticipate that this will have any near-term effect on the run rate for your litigation costs?
Kenneth A. Camp
That’s a great question. Since this hit last night very late, we haven’t had time to digest this at all.
At this point we have a lot of work yet to do and we’re not making any cost estimates going forward. As we do of course and it’s appropriate, we’ll let folks know.
[Clint Funley - Davenport]
I guess we just wait to see if there’s an appeal then within the next 10 days or so?
Kenneth A. Camp
A number of steps have to take place and we’ll let them play out, but we are cautiously optimistic.
[Clint Funley - Davenport]
Can you remind us what the penetration rate is on your merchandising systems?
Kenneth A. Camp
Far too low in my opinion. I don’t know that we’ve put out numbers on that to any great degree but remember there are several levels of the merchandising.
The first and most basic is where the funeral director does the analytic work, and he and our sales rep determine where the opportunities are and what the funeral director’s goals are. If you go up a level which involves a bit more, it’s just basic work we call the template plus the assist system.
That’s the multi-lingual touch screen that enables families to make their selections and in a way customize their choices. The third level is those two things plus the information center.
The penetration in the highest level takes a migration for customers to do one step and then adapt to the next. So after that preamble, the reality is if you look at the number of firms that have assist plans in place, you’re looking at somewhere of our 16,000 or so customers I think in the 10% to 15% range for those that have assist and a much smaller percentage for those that have migrated yet to the highest level.
[Clint Funley - Davenport]
So still lots of opportunity there then?
Kenneth A. Camp
As I remind our sales force on a regular basis.
[Clint Funley - Davenport]
Can you talk maybe for a minute on just how your price changes have been received? Obviously you’ve had a lot of costs that you’ve absorbed during the last year.
How might we expect the receptivity of some of the recent changes to be felt there?
Kenneth A. Camp
I can certainly give you some qualitative responses to that. No one likes to put a price increase in place and no one likes to receive one, but our customers I think are acutely aware of the cost increases that they incur in operating their daily business.
So we were very straight forward and forth coming with what we’ve done. Most of our customers know that we absorbed a lot of this last year as you already noted and we have a process where we actually track each customer and how they respond so that we can give them the right kind of answers and the right kind of responses.
I would characterize the process we use is probably similar to others in other businesses and in ours, and in fact I’d say the response has been good. No one is happy about it but they recognize the environmental conditions that we all face and our customers fortunately have long-term relationships with us and I think they know we take a long-term approach to our relationship with them, that this isn’t something we’re doing just to fatten things up.
They realize the reason for it. That said our job after passing along price increases is to make sure our customers and their families see a lot of value on what we do and what we provide to them.
[Clint Funley - Davenport]
Cindy based on your commentary and in the release we should not assume that the 42% tax rate is something that we should expect on a go-forward basis then?
Cynthia L. Lucchese
Definitely not. We expect it to be much more “normal” and we’ll give you an update on December 3 with what we estimate that to be for 2009.
Operator
Our next question comes from Jamie Clement - Sidoti & Company.
Jamie Clement - Sidoti & Company
Ken, I don’t know if you all have disclosed this number, but I will ask anyway. Approximately what percent of your revenue, whether it’s on the casket side or whether it’s merchandise, actually finds itself in the cremation market?
Kenneth A. Camp
I don’t know that we disclosed that finitely. I can get you fairly close to it.
Recognizing that the lines blur a little bit because in the cremation business there are a number of cases where a funeral director actually sells a full-size high-end casket for a cremation.
Jamie Clement - Sidoti & Company
That’s a good point. I guess what I’m kind of getting at is, and you alluded to this in your prepared remarks, obviously there’s a trend towards cremation.
You supply products that serve that market and it seems like the challenge for you guys and for your customers is to let families know what kind of products are available if they choose cremations as a means of disposition. In terms of you guys working with your customers on the funeral side, what kind of trends should we be looking for over the next year or two in terms of how you market those products, how you can get more per service if you will, etc.?
Kenneth A. Camp
At this point those are great questions. Let me make one comment about the difference between burials and cremations at the point of sale, the funeral home.
Virtually definitionally a burial means that a product has been purchased. It’s all but impossible to have a burial without having some type of container, usually a casket.
A cremation however can take place without the funeral director ever selling a product. One of the great opportunities for the future is to have funeral directors become more adept at helping families buy a product for every cremation.
There’s not an urn sold for every single cremation so it’s kind of a clear field if you will in that sense to help funeral directors explain things, show new products and so on. That said I think we’re going to share more about our cremation plans on December 3, and let me kind of hold the thunder till then if I may.
Operator
Our next question comes from Jack Ripstein - Portrero Capital.
Jack Ripstein - Portrero Capital
Two questions. One, can you talk a little bit about the investment in Forethought?
I think you said there was interest coming off of that. Can you tell us what rate?
The second is about your customers’ ability to get financing and their general health as you guys go selling into them?
Cynthia L. Lucchese
I’ll start with Forethought. With regard to Forethought basically it’s a 10-year note.
It was issued in 2004 so it’s not due till 2014. From 2004 through 2009 the interest rate is 6%; then it goes up to 8% for two years and then up to 10% thereafter.
And by the way, we have been accruing that in our income statement at an average 9.5% interest rate.
Jack Ripstein - Portrero Capital
They’re actually making cash payments on that as well as the accrual?
Cynthia L. Lucchese
No, they are not. They’re not scheduled yet.
They have four scheduled annual payments of $10 million and those will begin in 2010. Then there’s a balloon payment in 2014.
Jack Ripstein - Portrero Capital
What line of business is that? I’m not familiar with it.
Cynthia L. Lucchese
Forethought is an insurance company focused on pre-need.
Jack Ripstein - Portrero Capital
Any reason to believe that those payments won’t be made?
Cynthia L. Lucchese
That is a very important thing. As a matter of fact, as part of our quarterly review process we assess the risk on them because we have to determine the collectability.
We go through a very, very detailed review on a quarter-by-quarter basis and we see no issues at this time.
Jack Ripstein - Portrero Capital
And then given that you’re dealing with probably a decent amount of small businesses as well as some better capitalized ones at your end customer, what’s the state of their health and their ability to get financing to make purchases like inventory from you guys?
Kenneth A. Camp
That’s a good question. Most funeral homes are small, family-operated, 125 business transactions a year is the average and so on yet they operate pretty effectively as cash businesses.
Obviously the greatest expense other than labor that they have is the purchase of a casket. We’re very sensitive to the needs they have, stay in close touch with them both through our sales reps and our finance organization.
We recognize that these times can be difficult for our customers, although we have not yet seen signs where customers are struggling with their cash flow. But on occasion we recognize a customer is in a tight spot and we fortunately have the financial resources to work with them.
We think very long term in that relationship with our customers.
Operator
Our next question comes from Steve O’Neil - Hilliard Lyons.
Steve O’Neil - Hilliard Lyons
One quick question on the lower volumes due to the general decline in burials, I just wanted to quiz you on that. Is that some seasonality you’re seeing versus maybe some little bit stronger flu last year?
I just wondered if you could discuss the dynamics of the industry volume for a moment.
Kenneth A. Camp
It’s coming into that time when the dreaded flu discussion comes before all of us. The reality is when we talk about the declining market size if you will I’ll give you just a couple big numbers.
Deaths are essentially flat. Although demographics would indicate that should go up at some time in the future, predicting it is a real challenge; roughly 2.7 million deaths a year.
Cremations continue to grow at about 1.1% points a year and that means that there are lower burials. The big number there is that each year because with flat deaths as cremations rise, you’re looking at about 35,000 fewer burials each year for the industry.
When we apply our relative share to that that number we don’t divulge. There are fewer caskets each year already in the base if you will; things we have to go re-earn to get growth.
Steve O’Neil - Hilliard Lyons
Secondly, where does your foreign exchange exposure come from?
Cynthia L. Lucchese
It comes from Canada. Basically in terms of sales we do sell in a handful of other countries but Canada really is the big market for us.
That’s the largest amount of our foreign currency exposure.
Steve O’Neil - Hilliard Lyons
What was the tax impact on the $1.4 million of separation costs in the quarter or what tax would have applied to that figure?
Cynthia L. Lucchese
In general with the separation, many of those costs are not tax deductible because they’re related to consulting fees, investment banks, etc. Out of the $1.4 million, the vast majority was tax deductible.
The biggest chunk as you would have seen came through in Q2 and out of that I think about $10 million was not tax deductible.
Steve O’Neil - Hilliard Lyons
In your report I think you showed $15.6 million of separation costs for the year with taxes of $2.6 million applied to that, about a 16% tax rate. Is that a reasonable assumption?
Cynthia L. Lucchese
Yes.
Steve O’Neil - Hilliard Lyons
Finally, Cindy I have to admit I didn’t pay close enough attention to your reasoning on the higher tax rate. You explained that very well and I have to admit I didn’t get it written down, and I wondered if you would repeat it for me.
Cynthia L. Lucchese
Sure. Basically for the quarter it’s slightly a different story than for the year but overall the impact is from the separation.
We had two distinct things happening. One is there are separation costs, as I mentioned a big chunk of those of which are not deductible.
So that drives our rate up. The second thing was one of our big deductions is related to Section 199.
That’s the domestic manufacturing deduction. Just the way that that deduction works, in order to get it you have to actually have it go through a full year end.
Because we have a stub year from April through September we will not pass a calendar year end, and as a result just for that six-month period of time we’re unable to deduct those expenses. We will be able to do so going forward.
Operator
At this time I’m seeing no further questions in the queue. Mr.
Lanning, I’d like to turn the conference back over to you for any additional or closing remarks.
Mark L. Lanning
Again I’d like to thank everyone for joining us this morning and again would like to invite everyone to join us next Wednesday, December 3, in New York City for our analyst and investor conference. I think we have a great day planned from 8:30 to noon followed by a lunch.
We have our speakers, Ken Camp, Cindy Lucchese; and Joe Raver, the CEO of Batesville Casket will be joining us along with some other management. We also will be showcasing some of our new products that we briefly mentioned on this call.
We look forward to everyone being there and meeting everyone. In the meantime we hope everyone has a great Thanksgiving holiday season.
Have a great day. Thank you.
Operator
That concludes today’s conference. Thank you for your participation.