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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2013

 

Commission File No. 001-33794

 

HILLENBRAND, INC.

(Exact name of registrant as specified in its charter)

 

Indiana (State of incorporation)		26-1342272 (I.R.S. Employer Identification No.)
One Batesville Boulevard
Batesville, IN		47006
(Address of principal executive offices)		(Zip Code)

 

(812) 934-7500

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

 

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

 

The registrant had 62,823,347 shares of common stock, no par value per share, outstanding as of July 29, 2013.

 

 

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HILLENBRAND, INC.

INDEX TO FORM 10-Q

 

		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Income for the Three and Nine Months Ended June 30, 2013 and 2012	3
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2013 and 2012	4
	Consolidated Balance Sheets at June 30, 2013 and September 30, 2012	5
	Consolidated Statements of Cash Flow for the Nine Months Ended June 30, 2013 and 2012	6
	Condensed Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6.	Exhibits	44
SIGNATURES

 

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PART I — FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

Hillenbrand, Inc.

Consolidated Statements of Income (Unaudited)

( in millions, except per share data )

 

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Net revenue		$	408.8		$	238.4		$	1,112.5		$	729.7
Cost of goods sold		273.7			147.6			730.2			440.9
Gross profit		135.1			90.8			382.3			288.8
Operating expenses		109.4			57.8			306.9			178.6
Operating profit		25.7			33.0			75.4			110.2
Interest expense		5.9			3.0			17.2			8.8
Other income (expense), net		(0.3		)	(0.1		)	0.3			(0.8		)
Income before income taxes		19.5			29.9			58.5			100.6
Income tax expense		5.8			8.6			17.0			20.6
Consolidated net income		13.7			21.3			41.5			80.0
Less: Net income attributable to noncontrolling interests		0.4			—			1.2			—
Net income(1)		$	13.3		$	21.3		$	40.3		$	80.0
Net income(1)  — per share of common stock:
Basic earnings per share		$	0.21		$	0.34		$	0.64		$	1.29
Diluted earnings per share		$	0.21		$	0.34		$	0.64		$	1.28
Weighted average shares outstanding — basic		62.8			62.3			62.7			62.1
Weighted average shares outstanding — diluted		63.2			62.5			63.0			62.4
Cash dividends per share		$	0.1950		$	0.1925		$	0.5850		$	0.5775

 

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(1) Net income attributable to Hillenbrand

 

See Condensed Notes to Consolidated Financial Statements

 

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Hillenbrand, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(in millions)

 

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Consolidated net income		$	13.7		$	21.3		$	41.5		$	80.0
Other comprehensive income (loss), net of tax
Currency translation adjustment		5.2			(8.7		)	(3.8		)	(7.4		)
Pension and postretirement benefit plan adjustments		1.7			1.0			3.0			2.2
Change in net unrealized loss on derivative instruments		0.2			0.2			(0.5		)	(0.2		)
Change in net unrealized gain (loss) on available-for-sale securities		—			0.5			(0.2		)	(0.4		)
Total other comprehensive income (loss), net of tax		7.1			(7.0		)	(1.5		)	(5.8		)
Consolidated comprehensive income (loss)		20.8			14.3			40.0			74.2
Less: Comprehensive income attributable to noncontrolling interests		0.4			—			1.2			—
Comprehensive income (loss)(2)		$	20.4		$	14.3		$	38.8		$	74.2

 

(2) Comprehensive income (loss) attributable to Hillenbrand

 

See Condensed Notes to Consolidated Financial Statements

 

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Hillenbrand, Inc.

Consolidated Balance Sheets (Unaudited)

( in millions )

 

		June 30,			September 30,
		2013			2012
ASSETS
Current Assets
Cash and cash equivalents		$	41.1		$	20.2
Trade receivables, net		183.6			150.7
Unbilled receivables from long-term manufacturing contracts		138.1			—
Inventories		185.9			90.0
Deferred income taxes		29.6			19.6
Prepaid expense		37.2			15.1
Other current assets		23.8			9.7
Total current assets		639.3			305.3
Property, plant, and equipment, net		168.0			117.9
Intangible assets, net		558.5			313.9
Goodwill		535.9			303.7
Other assets		55.2			46.7
Total Assets		$	1,956.9		$	1,087.5
LIABILITIES
Current Liabilities
Trade accounts payable		$	178.8		$	35.3
Liabilities from long-term manufacturing contracts and advances		72.0			15.9
Current portion of long-term debt		10.0			—
Accrued compensation		24.9			29.3
Deferred income taxes		18.8			0.9
Other current liabilities		132.5			70.4
Total current liabilities		437.0			151.8
Long-term debt		701.3			271.6
Accrued pension and postretirement healthcare		228.0			111.8
Deferred income taxes		30.2			21.7
Other long-term liabilities		40.5			24.3
Total Liabilities		1,437.0			581.2
Commitments and contingencies
EQUITY
Common stock, no par value, 63.1 and 63.2 shares issued, 62.8 and 62.6 shares outstanding, 0.3 and 0.3 shares restricted		—			—
Additional paid-in capital		317.6			321.9
Retained earnings		241.4			238.3
Treasury stock, 0.3 and 0.6 shares		(2.5		)	(11.5		)
Accumulated other comprehensive loss		(43.9		)	(42.4		)
Total Hillenbrand Shareholders’ Equity		512.6			506.3
Noncontrolling interests		7.3			—
Total Equity		519.9			506.3
Total Liabilities and Equity		$	1,956.9		$	1,087.5

 

See Condensed Notes to Consolidated Financial Statements

 

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Hillenbrand, Inc.

Consolidated Statements of Cash Flow (Unaudited)

( in millions )

 

		Nine Months Ended
		June 30,
		2013			2012
Operating Activities
Consolidated net income		$	41.5		$	80.0
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		70.3			31.0
Deferred income taxes		(20.4		)	(6.8		)
Equity in net (gain) loss from affiliates		0.8			(1.4		)
Share-based compensation		5.0			7.1
Trade accounts receivable and receivables on long-term manufacturing contracts		(10.0		)	12.2
Inventories		11.3			(10.8		)
Prepaid expense and other current assets		(26.4		)	(7.0		)
Trade accounts payable		(1.2		)	3.6
Accrued expenses and other current liabilities		(38.2		)	(3.6		)
Income taxes payable		16.2			(2.1		)
Defined benefit plan funding		(15.4		)	(2.1		)
Defined benefit plan expense		13.1			9.5
Other, net		4.2			—
Net cash provided by operating activities		50.8			109.6
Investing Activities
Capital expenditures		(19.1		)	(14.0		)
Proceeds on sales of property, plant, and equipment		1.3			—
Proceeds from sales of investments		1.7			—
Acquisition of business, net of cash acquired		(415.7		)	—
Return of investment capital from affiliates		1.0			0.4
Net cash used in investing activities		(430.8		)	(13.6		)
Financing Activities
Proceeds from term loan		200.0			—
Repayments on term loan		(7.5		)	—
Proceeds from revolving credit facilities, net of financing costs		648.9			150.0
Repayments on revolving credit facilities		(404.1		)	(308.0		)
Payment of dividends on common stock		(36.5		)	(35.8		)
Other, net		(0.9		)	(0.2		)
Net cash provided by (used in) financing activities		399.9			(194.0		)
Effect of exchange rates on cash and cash equivalents		1.0			(1.5		)
Net cash flow		20.9			(99.5		)
Cash and cash equivalents
At beginning of period		20.2			115.5
At end of period		$	41.1		16.0

 

See Condensed Notes to Consolidated Financial Statements

 

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Hillenbrand, Inc.

Condensed Notes to Consolidated Financial Statements (Unaudited)

( financial amounts in millions, except share and per share data )

 

1.               Background and Basis of Presentation

 

Hillenbrand, Inc. (“Hillenbrand”) is a global diversified industrial company that makes and sells premium business-to-business products and services for a wide variety of industries.  We pursue profitable growth and meaningful dividends for our shareholders by leveraging our leading brands, robust cash generation capabilities and strong core competencies.  Hillenbrand has two business platforms:  the Process Equipment Group and Batesville.  The Process Equipment Group is a recognized leader in the design and production of equipment and systems used in processing applications, and Batesville ®  is a recognized leader in the North American funeral products industry.  “Hillenbrand,” “the Company,” “we,” “us,” “our,” and similar words refer to Hillenbrand and its subsidiaries.

 

The accompanying unaudited consolidated financial statements include the accounts of Hillenbrand and its subsidiaries, including Coperion Capital GmbH (“Coperion”), which was acquired on December 1, 2012.  The acquisition of Coperion included a few small subsidiaries where the ownership percentage is less than 100% .  These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements and therefore do not include all information required in accordance with accounting principles generally accepted in the United States (“GAAP ”).  The unaudited consolidated financial statements have been prepared on the same basis as , and should be read in conjunction with, the audited consolidated financial statements and notes thereto included in our latest Annual Report on Form 10-K for the fiscal year ended September 30, 2012, as filed with the SEC.  Certain prior period balances have been reclassified to conform to the current presentation.  In the opinion of management, these financial statements reflect all adjustments, consisting of normal recurring adjustments except as discussed below, necessary to present a fair statement of the Company’s consolidated financial position and the consolidated results of operations and cash flow as of the dates and for the periods presented.

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the period.  Actual results could differ from those estimates.  Examples of such estimates include, but are not limited to, revenue recognition under the percentage-of-completion method, the establishment of reserves related to customer rebates, doubtful accounts, warranties, early-pay discounts, inventories, income taxes, litigation, self-insurance, and progress toward achievement of performance criteria under the incentive compensation programs.

 

Correction of Errors

 

During the third quarter of fiscal year 2013, we recorded an adjustment to cost of goods sold and operating expenses to correct errors related to certain accrued liabilities at Coperion.  The impact of the adjustment increased cost of goods sold in the third quarter by $1.3, which should have been recorded in the second quarter of fiscal year 2013.  In addition, the adjustment decreased operating expenses in the third quarter by $0.3, which should have been recorded as an increase in the second quarter ($1.0) and a decrease in the first quarter ($1.3).  There is no impact on any prior annual periods.  We believe the impact of these errors and the cumulative net adjustment to correct the errors was immaterial to our interim consolidated financial statements for the current and prior periods.

 

2.               Summary of Significant Accounting Policies

 

The significant accounting policies used in preparing these financial statements are consistent with the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.  The following represent additions to our accounting policies due to the acquisition of Coperion.

 

Revenue Recognition

 

With the acquisition of Coperion, a portion of the Company’s revenue is derived from long-term manufacturing contracts.  The majority of this revenue is recognized based on the percentage-of-completion method.  Under this method, revenue is recognized based upon the costs incurred to date as compared to the total estimated cost of the project and are included in net revenues on the consolidated income statement.  Revenues in excess of billings are

 

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presented as unbilled receivables from long-term manufacturing contracts, and deposits in excess of billings are presented as liabilities from long-term manufacturing contracts on the consolidated balance sheet.  Approximately 25% and 20% of the Company’s revenue was attributable to these long-term manufacturing contracts for the three and nine months ended June 30, 2013.  Revenue for components, replacement parts, and service is recognized on a completed contract basis when title and risk of loss passes to the customer.

 

Derivative Financial Instruments

 

We use derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates.  These include foreign currency exchange forward contracts, which generally have terms from one to 24 months.  The aggregate notional amount of these derivative instruments was $125.0 at June 30, 2013, and $46.0 at September 30, 2012.

 

We measure all derivative instruments at fair value and report them on our consolidated balance sheets as assets or liabilities.  Derivative instruments designated as hedges for customer orders or intercompany purchases have an offsetting tax-adjusted amount in accumulated other comprehensive gain (loss).  Derivative instruments designated to hedge foreign currency exposures within our balance sheet have an offsetting amount recorded in other income or expense.  The carrying value of all of these contracts, at fair value, resulted in assets of $0.7 and $0.0, included in other current assets at June 30, 2013, and September 30, 2012, and liabilities of $1.6 and $0.4, included in other current liabilities at June 30, 2013, and September 30, 2012.  See Note 13 for additional information on the fair value of our derivative instruments.

 

Changes in the fair value of derivatives are accounted for depending on the intended use of the derivative, designation of the hedging relationship, and whether or not the criteria to apply hedge accounting has been satisfied.  Gains and losses on derivative instruments reported in accumulated other comprehensive gain (loss) are subsequently included in earnings in the periods in which earnings are affected by the hedged item.  The amounts recognized in accumulated other comprehensive income (loss) and subsequently through earnings were not material for the three or nine months ended June 30, 2013 and 2012.  Net gains and losses on all derivative instruments were substantially offset by foreign exchange effects on the hedged items.

 

Recently Adopted and Issued Accounting Standards

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update titled Presentation of Comprehensive Income.  This update eliminates the current option to report other comprehensive income and its components in the statement of changes in equity.  An entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate consecutive statements.  Each component of net income and other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, must be displayed under either alternative. The new disclosure requirements became effective and were adopted as of October 1, 2012.  As the new standard relates to presentation only, the adoption of this standard did not have a significant impact on our consolidated financial statements.

 

In January 2013, the FASB issued an accounting standards update titled Balance Sheet: Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities .  This standard limits the scope of an accounting standards update titled Balance Sheet , issued in December 2011, to derivatives, repurchase agreements, and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement.  The disclosure requirements shall be applied retrospectively for all periods presented and will be effective for our fiscal year beginning October 1, 2013.  We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.

 

In February 2013, the FASB issued an accounting standards update titled Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income .  This standard is intended to improve the reporting of reclassifications out of accumulated other comprehensive income of various components.  An entity is required to present significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification.  The new disclosure requirements will be effective for our fiscal year beginning October 1, 2013.  As the new standard relates to disclosure only, we do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.

 

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In March 2013, the FASB issued an accounting standard update titled Foreign Currency Matters — Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity .  This update specifies that a cumulative translation adjustment should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity.  The guidance will be effective for our fiscal year beginning October 1, 2014.  We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.

 

In April 2013, the FASB issued an accounting standard update titled Presentation of Financial Statements — Liquidation Basis of Accounting .  This update requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent, and will be effective for our fiscal year beginning October 1, 2014.  We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.

 

In July 2013, the FASB issued an accounting standard update titled Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists .  The new standard requires the netting of unrecognized tax benefits (“UTBs”) against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions.  Under the new standard, UTBs will be netted against all available same—jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs.  The standard will be effective for our fiscal year beginning October 1, 2014.  We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.

 

3.               Business Acquisitions

 

We completed the acquisition of Coperion on December 1, 2012, in a transaction valued at $540.7.  The aggregate purchase consideration consisted of $269.1 of cash, net of cash acquired, and the assumption of $146.0 of debt and $125.6 of pension liabilities.  We utilized $426.3 of borrowings under our revolving credit facility and cash on hand to finance the acquisition, including the repayment of $146.0 of debt outstanding under Coperion’s prior financing arrangements.

 

Based in Stuttgart, Germany, Coperion is a global leader in the manufacture of compounding, extrusion, and bulk material handling equipment used in a broad range of industries, including plastics, chemicals, food processing, pharmaceutical, and aluminum.  Coperion has been in business since 1879, and has nine manufacturing sites in Germany, the United States (“U.S.”), China, and India, and sales offices in approximately 30 locations in the Americas, Europe, and Asia.  Coperion had approximately 2,000 employees worldwide as of June 30, 2013.  Approximately 30% of Coperion’s revenue is derived from replacement parts and service, generating a large portion of recurring business due to its well-positioned service network and active installed base of equipment across the world.

 

Coperion revenues consist of large system sales, equipment, components, replacement parts, and service.  Large system sales are fulfilled over 12 to 18 months on average, whereby customers generally pay a deposit and make progress payments before and during the manufacture of the order.  Working capital requirements for Coperion have ranged from an optimal negative working capital position, where cash received from customers is more heavily weighted toward the beginning of the project, to our current position where a larger portion of the cash will be received in later stages of manufacturing.

 

The Coperion business model includes large system projects, where strong application and processing engineering expertise is used to create an entire system for customers.  These system projects include Coperion-manufactured proprietary equipment, such as extruders and compounders, as well as components manufactured by third parties, such as gears and motors.  Coperion earns attractive gross profit margins similar to the rest of the Process Equipment Group on their proprietary equipment and replacement parts and service (approximately 2/3 of their revenue).  About 1/3 of their revenue is generated from third-party-sourced products that carry only a small up-charge, resulting in low single-digit gross profit margins on these products. 

 

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Hillenbrand believes that selling these complete systems provides a significant competitive advantage and increases margin dollars.

 

This acquisition is the largest in the Company’s history and represents an important step in the execution of our strategic plans to further diversify Hillenbrand and accelerate the growth of the Process Equipment Group business platform.  The integration of Coperion with the Process Equipment Group will be a key initiative for the next 12 to 18 months.  Combining our product offerings to provide a more complete system solution is our highest priority from an integration perspective.  In addition, we believe leveraging Coperion’s global infrastructure will enable the existing businesses within the Process Equipment Group platform to enter new global markets more quickly.  We also expect the Process Equipment Group’s existing strong U.S. sales network will enhance Coperion’s expansion in North America.  Finally, the application of the Company’s lean tools and other core competencies to Coperion’s operations is expected to contribute to improved margins and increased customer satisfaction.

 

The following table summarizes preliminary estimates of fair values of the assets acquired and liabilities assumed in the Coperion acquisition:

 

		December 1, 2012
Cash and cash equivalents		$	32.8
Inventory		109.1
Current assets, excluding cash and cash equivalents and inventory		179.9
Property, plant, and equipment		54.4
Identifiable intangible assets		291.8
Goodwill		234.0
Other assets		2.1
Total assets acquired		904.1
Current liabilities		284.0
Accrued pension obligations		125.6
Deferred income taxes		33.4
Other long-term liabilities		6.7
Total liabilities assumed		449.7
Noncontrolling interest assumed		6.5
Aggregate purchase price		$	447.9

 

The estimation of fair value of Coperion’s assets and liabilities is preliminary and subject to adjustment based on finalization of the closing balance sheet, including deferred tax balances.

 

Goodwill is not deductible for tax purposes and was allocated entirely to our Process Equipment Group.  Excluding the acquisition of Coperion, the change in goodwill during the nine months ended June 30, 2013, was due to fluctuation in foreign currency rates.

 

Fair value amounts assigned to identifiable definite-lived intangible assets are being amortized on a straight-line basis over their estimated useful lives. The amounts and useful lives assigned to each asset type at the time of acquisition were:

 

		Fair Values			Estimated Useful Lives (years)
Trade names		$	55.6		Indefinite
Customer relationships		157.7			20
Technology, including patents		44.2			12
Backlog		34.3			<1
Total identifiable intangible assets		$	291.8

 

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The unaudited pro forma information for the periods set forth below gives effect to the Coperion acquisition as if it had occurred at the beginning of the earliest period presented.  It includes adjustments for additional interest expense, depreciation, and amortization.  The unaudited pro forma information for the three and nine months ended June 30, 2012, includes acquisition costs of $2.8 and $13.5 as well as backlog amortization and inventory step-up costs of $14.4 and $56.6.  Acquisition costs, backlog amortization, and inventory step-up costs are not included in the pro forma information for the three and nine months ended June 30, 2013.  The unaudited pro forma information is presented for informational purposes only and does not necessarily reflect the results of operations that would actually have been achieved had the acquisition been consummated as of that time.

 

		Three Months Ended June 30,						Nine Months Ended June 30,
		2013			2012			2013			2012
Pro forma net revenue		$	408.8		$	389.5		$	1,227.7		$	1,249.4
Pro forma net income(1)		29.9			5.6			87.9			37.9
Pro forma basic earnings per share		$	0.48		$	0.09		$	1.40		$	0.61
Pro forma diluted earnings per share		$	0.47		0.09			$	1.40		0.61

 

(1) Pro forma net income attributable to Hillenbrand

 

We incurred $2.8 and $13.5 of net business acquisition costs associated with the acquisition during the three and nine months ended June 30, 2013.  These costs consist of $2.5 and $13.4 of operating expenses and $0.5 and $1.1 of interest expense for the three and nine months ended June 30, 2013, partially offset by $0.2 and $1.0 of other income for the three and nine months.

 

Coperion ’ s results are included in our Process Equipment Group results.  The acquisition of Coperion included a few small subsidiaries where the ownership percentage is less than 100% .  The portion of the business that is not owned by the Company is presented as noncontrolling interests within equity in the Consolidated Balance Sheets. Income attributable to the noncontrolling interests was $0.4 and $1.2 for the three and nine months ended June 30, 2013, is separately reported within the Consolidated Statements of Income, and is also excluded from Total Hillenbrand Shareholder’s Equity.

 

4.               Supplemental Balance Sheet Information

 

		June 30,			September 30,
		2013			2012
Trade accounts receivable reserves		$	17.5		$	16.5
Accumulated depreciation on property, plant, and equipment		$	269.0		$	263.9
Accumulated amortization on intangible assets		$	113.1		$	69.4
Inventories:
Raw materials and components		$	55.3		$	39.1
Work in process		78.5			13.9
Finished goods		52.1			37.0
Total inventories		$	185.9		$	90.0

 

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5.               Financing Agreements

 

		June 30,			September 30,
		2013			2012
$700 revolving credit facility (excludes outstanding letters of credit)		$	370.0		$	123.0
$200 term loan		192.5			—
$150 senior unsecured notes, due July 15, 2020, net of discount		148.8			148.6
Total debt		711.3			271.6
Less: current portion of term loan		10.0			—
Total long-term debt		$	701.3		$	271.6

 

In November 2012, we fully exercised the $300 accordion feature under our revolving credit facility to increase our financing capacity.  This increase consisted of a $200 term loan and a $100 increase in our borrowing capacity under our revolving credit facility, to $700.  The Company also has the potential, under certain circumstances and with the lenders’ approval, to increase the total borrowing capacity under the revolving credit facility by an additional $300.  Deferred financing costs of $3.8 are being amortized to interest expense over the term of the revolving credit facility.

 

As of June 30, 2013, we (i) had $25.1 in outstanding letters of credit issued under our $700 revolving credit facility, (ii) were in compliance with all covenants set forth in the credit agreement for the revolving credit facility, and (iii) had $304.9 of remaining borrowing capacity available under the revolving credit facility.  The weighted-average interest rates on borrowings under the revolving credit facility were 1.37% for the three- and nine-month periods ended June 30, 2013, and 0.68% and 0.70% for the three- and nine-month periods ended June 30, 2012.  The weighted average interest rates on the term loan were 1.70% and 1.73% for the three- and nine-month periods ended June 30, 2013.

 

In the normal course of business, the Process Equipment Group provides to certain customers bank guarantees and other credit arrangements in support of performance, warranty, advance payment, and other contract obligations.  This form of trade finance is customary in the industry and, as a result, we are required to maintain adequate capacity to provide the guarantees. As of June 30, 2013, we had credit arrangements totaling $286.6 under which $192.0 was utilized for this purpose. This includes the 150.0 euro Syndicated Letter of Guarantee Facility entered into on June 3, 2013, under which unsecured letters of credit, bank guarantees, or other surety bonds may be issued.  There were no direct borrowings under these credit arrangements.

 

We had restricted cash of $1.2 at June 30, 2013.

 

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

 

6.               Retirement Benefits

 

In connection with the Coperion acquisition, we acquired the Coperion defined benefit pension plans based in Germany and the U.S., which were recorded at fair value on the acquisition date.  The aggregate fair value of the total projected benefit obligations acquired was $141.6 and the plan assets at fair value totaled $16.0, resulting in an assumed liability of $125.6 at December 1, 2012.  We estimate we will be required to make minimum contributions of $2.3 during the remainder of fiscal year 2013 related to these Coperion defined benefit pension plans, although we may make additional discretionary contributions.

 

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Defined Benefit Plans

 

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Service costs		$	1.6		$	1.5		$	4.8		$	4.5
Interest costs		4.3			3.2			12.2			9.5
Expected return on plan assets		(3.5		)	(3.4		)	(10.4		)	(10.1		)
Amortization of unrecognized prior service costs, net		0.3			0.2			0.7			0.6
Amortization of net loss		1.8			1.4			5.4			4.3
Net pension costs		$	4.5		$	2.9		$	12.7		$	8.8

 

Postretirement Healthcare Plans — Net postretirement healthcare costs were $0.1 and $0.3 for the three months ended June 30, 2013 and 2012, and $0.4 and $0.7 for the nine months ended June 30, 2013 and 2012.

 

Defined Contribution Plans — E xpenses related to our defined contribution plans were $2.1 and $2.2 for the three months ended June 30, 2013 and 2012, and $6.2 and $6.1 for the nine months ended June 30, 2013 and 2012.

 

7.               Income Taxes

 

The effective tax rates for the three months ended June 30, 2013 and 2012 were 29.8% and 28.8%.  The period over period increase in the effective tax rate was largely due to the favorable resolution of uncertain tax positions for the three months ended June 30, 2012, partially offset by a larger percentage of income from foreign sources in lower tax rate jurisdictions due to the acquisition of Coperion. The effective tax rates for the nine months ended June 30, 2013 and 2012 were 29.1% and 20.5%.  The change in the effective tax rates between these nine-month periods was largely due to the $10.4 reduction of income tax expense in the first quarter of fiscal year 2012, attributable to the permanent reinvestment assertion on historical earnings of certain Swiss operations.

 

8.               Earnings Per Share

 

At June 30, 2013 and 2012, potential dilutive effects of 2.0 million and 1.8 million shares relating to unvested performance-based stock awards were excluded from the computation of diluted earnings per share as the related performance period is not yet complete.  The effects of these performance-based shares will be dilutive in the future to the extent various levels of performance criteria are met.

 

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Net income(1)		$	13.3		$	21.3		$	40.3		$	80.0
Weighted average shares outstanding — basic (millions)		62.8			62.3			62.7			62.1
Effect of dilutive stock options and unvested time-based restricted stock awards (millions)		0.4			0.2			0.3			0.3
Weighted average shares outstanding — diluted (millions)		63.2			62.5			63.0			62.4
Earnings per share — basic		$	0.21		$	0.34		$	0.64		$	1.29
Earnings per share — diluted		$	0.21		$	0.34		$	0.64		$	1.28
Anti-dilutive effect of stock options and unvested time-based restricted stock awards excluded from the computation of diluted earnings per share (millions)		1.8			2.0			1.7			2.0

 

(1) Net income attributable to Hillenbrand

 

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9.               Shareholders’ Equity

 

During the nine months ended June 30, 2013, we paid $36.5 of cash dividends.  The decline in treasury stock is primarily the result of the distribution of vested awards during the first quarter of fiscal year 2013.

 

10.        Share-Based Compensation

 

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Share-based compensation costs		$	(1.0	)	$	0.2		$	5.0		$	7.1
Less impact of income tax		0.4			0.1			1.8			2.6
Share-based compensation costs, net of tax		$	(0.6	)	$	0.1		$	3.2		$	4.5

 

Share-based compensation related to our long-term performance-based stock awards is contingent upon the creation of shareholder value as measured by the cumulative cash returns and final period net operating profit after tax compared to the performance-based targets for each grant over a three-year period.  Related accruals are adjusted each quarter based upon actual results to date and any changes to forecasted information on each of the three separate grants.  The decrease in share-based compensation expense from the prior year for both the three- and nine-month periods ending June 30, 2013, was driven by these adjustments.

 

During the nine months ended June 30, 2013, we made the following grants:

 

		Number of Units
Stock options		508,650
Time-based stock awards		81,780
Performance-based stock awards (maximum that can be earned)		778,942

 

Stock options granted had a weighted-average exercise price of $20.78 and a weighted-average grant date fair value of $4.91.  Our time-based stock awards and performance-based stock awards had a weighted-average grant date fair value of $22.70 and $20.76.

 

11.        Other Income and Expense, Net

 

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Equity in net income (loss) of affiliates		$	(0.2	)	$	1.0		$	(0.8	)	$	1.4
Foreign currency exchange gain (loss)		(0.2		)	(0.1		)	0.9			(0.3		)
Business acquisition costs, net		0.2			—			1.0			—
Other, net		(0.1		)	(0.9		)	(0.8		)	(1.9		)
Other income and expense, net		$	(0.3	)	$	—		$	0.3		$	(0.8	)

 

The acquisition of Coperion, which occurred in the first quarter of fiscal 2013, was transacted in euros.  Business acquisition costs, net within other income and expense, net represent the foreign exchange gain recognized on euro-denominated cash required to fund the acquisition, offset by the costs of derivative contracts that hedged currency exposure on the funds required to close the transaction.

 

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12.       Commitments and Contingencies

 

Lease Commitments — We lease certain manufacturing facilities, warehouse distribution centers, service centers, and sales offices under operating leases.  The aggregate future minimum lease payments for noncancellable operating leases, including those lease obligations assumed through our Coperion acquisition, as of June 30, 2013, were as follows:

 

		Amount
2013 (remaining three months)		$	6.4
2014		12.7
2015		12.6
2016		10.7
2017		10.5
Thereafter		53.6
		$	106.5

 

Litigation

 

General

 

Like most companies, we are involved on an ongoing basis in claims, lawsuits, and government proceedings relating to our operations, including environmental, antitrust, patent infringement, business practices, commercial transactions, product and general liability, workers’ compensation, auto liability, employment, and other matters.  The ultimate outcome of these matters cannot be predicted with certainty.  An estimated loss from these contingencies is recognized when we believe it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated; however, it is difficult to measure the actual loss that might be incurred related to litigation.  If a loss is not considered probable and/or cannot be reasonably estimated, we are required to make a disclosure if there is at least a reasonable possibility that a material loss may have been incurred.  Legal fees associated with claims and lawsuits are generally expensed as incurred.

 

Claims other than employment and related matters have deductibles and self-insured retentions ranging from $0.5 to $1.0 per occurrence or per claim, depending upon the type of coverage and policy period.  Outside insurance companies and third-party claims administrators assist in establishing individual claim reserves, and an independent outside actuary provides estimates of ultimate projected losses, including incurred but not reported claims, which are used to establish reserves for losses.  Claim reserves for employment-related matters are established based upon advice from internal and external counsel and historical settlement information for claims and related fees, when such amounts are considered probable of payment.

 

The recorded amounts represent our best estimate of the costs we will incur in relation to such exposures, but it is possible that actual costs will differ from those estimates.

 

Matthews Litigation

 

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

 

Matthews claims that it has lost revenue and will lose future revenue in the New York metropolitan area, although the amount of those alleged damages is unspecified.  Matthews seeks to: (i) recover compensatory damages,

 

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punitive damages, attorneys’ fees and costs; and (ii) enjoin certain activities by Harry Pontone, Scott Pontone, Pontone Casket Company, and Batesville and its employees in the New York metropolitan area.  Although Matthews originally moved for a preliminary injunction, that request was withdrawn.  Discovery has closed.  Batesville has moved for summary judgment on Matthews’ claims.  No trial date has been set.

 

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

 

Horstmann Litigation

 

On March 18, 2013, a joint and several judgment was entered by the Higher Regional Court (OLG) Hamm, Germany, in favor of plaintiff, Jürgen Horstmann, and against defendants, Atlas-Vermögensverwaltungs GmbH, ThyssenKrupp Technologies Beteiligungen (“ThyssenKrupp”), and Hillenbrand subsidiary, Coperion, in the amount of €10.3, plus interest, for a total estimated judgment of €18.5 to €19.6 (the “Horstmann Litigation”).  In the Horstmann Litigation, the plaintiff alleged numerous claims relating to its purchase from ThyssenKrupp of a former ThyssenKrupp business in 1996.  This judgment reversed a ruling on September 1, 2010, by the Court of First Instance that previously dismissed these claims.

 

Pursuant to a Framework Agreement entered into in 2000 between ThyssenKrupp and Admini Zweiundsiebzig (“Admini”) (predecessor to Coperion), ThyssenKrupp agreed to indemnify Coperion for all liability associated with the Horstmann Litigation.  Additionally, pursuant to the Share Purchase Agreement by which the Company acquired Coperion, the sellers are required to indemnify Hillenbrand in the event ThyssenKrupp does not fulfill its indemnification obligations, subject to the terms and conditions of such Share Purchase Agreement.

 

Defendants in the Horstmann Litigation are currently considering an appeal of the March 18 judgment.  Hillenbrand believes it would be fully indemnified with respect to the Horstmann Litigation and does not believe that the outcome of this lawsuit will have a material adverse effect on the Company’s financial condition or liquidity.  Hillenbrand’s balance sheet at June 30, 2013, includes a long-term liability and a corresponding indemnification receivable, recorded in other assets, for $8.2.

 

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13.        Fair Value Measurements

 

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.  The authoritative guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are from sources independent of the Company.  Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances.  The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The hierarchy is broken down into three levels:

 

Level 1:	Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2:	Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.
Level 3:	Inputs are unobservable for the asset or liability.

 

		Carrying
		Value at			Fair Value at June 30, 2013
		June 30,			Using Inputs Considered as:
		2013			Level 1			Level 2			Level 3
Assets:
Cash and cash equivalents		$	41.1		$	41.1		$	—		$	—
Equity investments		1.0			—			—			1.0
Investments in rabbi trust		5.3			5.3			—			—
Derivative instruments		0.7			—			0.7			—
Liabilities:
$150 senior unsecured notes		148.8			161.4			—			—
Revolving credit facility		370.0			—			370.0			—
Term loan		192.5			—			192.5			—
Derivative instruments		1.6			—			1.6			—

 

The fair values of the revolving credit facility and term loan approximated book value at June 30, 2013.  The fair values of the revolving credit facility and term loan are estimated based on internally-developed models, using current market interest rate data for similar issues, as there is no active market for our revolving credit facility and term loan.

 

We estimate the fair value of our foreign currency derivatives using industry accepted models.  The significant Level 2 inputs used in the valuation of our derivatives include spot rates, forward rates, and volatility.  These inputs are obtained from pricing services, broker quotes, and other sources.

 

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14.        Segment and Geographical Information

 

The acquisition of Coperion on December 1, 2012, resulted in the addition of Coperion to the Process Equipment Group segment.  

 

		Three Months Ended June 30,						Nine Months Ended June 30,
		2013			2012			2013			2012
Net revenue
Process Equipment Group		$	260.8		$	92.7		$	641.9		$	274.6
Batesville		148.0			145.7			470.6			455.1
Total		$	408.8		$	238.4		$	1,112.5		$	729.7
Adjusted EBITDA
Process Equipment Group		$	33.3		$	18.4		$	78.5		$	55.8
Batesville		36.7			30.8			123.6			114.3
Corporate		(6.3		)	(4.5		)	(22.8		)	(19.2		)
Net revenue (1)
United States		$	223.1		$	198.6		$	663.3		$	605.9
International		185.7			39.8			449.2			123.8
Total		$	408.8		$	238.4		$	1,112.5		$	729.7

 

(1)          We attribute revenue to a geography based upon the location of the business unit that consummates the external sale.

 

		June 30, 2013			September 30, 2012
Total assets
Process Equipment Group		$	1,659.8		$	769.7
Batesville		231.2			236.2
Corporate		65.9			81.6
Total		$	1,956.9		$	1,087.5
Tangible long-lived assets
United States		$	103.0		$	100.4
International		65.0			17.5
Total		$	168.0		$	117.9

 

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