HILLENBRAND, INC., 10-K filed on 11/19/2014
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Sep. 30, 2014
Nov. 12, 2014
Mar. 31, 2014
Document and Entity Information
 
 
 
Entity Registrant Name
Hillenbrand, Inc. 
 
 
Entity Central Index Key
0001417398 
 
 
Document Type
10-K 
 
 
Document Period End Date
Sep. 30, 2014 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--09-30 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 2,030,482,643 
Entity Common Stock, Shares Outstanding
 
62,759,134 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2012
Consolidated Statements of Income
 
 
 
Net revenue
$ 1,667.2 
$ 1,553.4 
$ 983.2 
Cost of goods sold
1,078.0 
1,034.7 
594.3 
Gross profit
589.2 
518.7 
388.9 
Operating expenses
414.7 
400.6 
240.1 
Operating profit
174.5 
118.1 
148.8 
Interest expense
23.3 
24.0 
12.4 
Other income (expense), net
8.7 
(0.4)
(1.5)
Income before income taxes
159.9 
93.7 
134.9 
Income tax expense
48.7 
28.3 
30.1 
Consolidated net income
111.2 
65.4 
104.8 
Less: Net income attributable to noncontrolling interests
1.5 
2.0 
 
Net income
$ 109.7 1
$ 63.4 1
$ 104.8 1
Net income - per share of common stock:
 
 
 
Basic earnings per share (in dollars per share)
$ 1.74 
$ 1.01 
$ 1.68 
Diluted earnings per share (in dollars per share)
$ 1.72 
$ 1.01 
$ 1.68 
Weighted-average shares outstanding-basic (in shares)
63.2 
62.7 
62.2 
Weighted-average shares outstanding-diluted (in shares)
63.8 
63.0 
62.4 
Cash dividends per share (in dollars per share)
$ 0.79 
$ 0.78 
$ 0.77 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
12 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2012
Consolidated Statements of Comprehensive Income
 
 
 
Consolidated net income
$ 111.2 
$ 65.4 
$ 104.8 
Other comprehensive (loss) income , net of tax
 
 
 
Currency translation
(36.4)
14.7 
(4.2)
Pension and postretirement (net of tax of $6.5 , $15.2, and $2.0)
(13.0)
25.5 
2.0 
Net unrealized (loss) gain on derivative instruments (net of tax of $0.1, $0.2, and $0.2)
(1.5)
0.5 
(0.5)
Net unrealized gain (loss) on available-for-sale securities (net of tax of $-, $0.1, and $0.1)
 
(0.2)
(0.2)
Total other comprehensive (loss) income, net of tax
(50.9)
40.5 
(2.9)
Consolidated comprehensive income
60.3 
105.9 
101.9 
Less: Comprehensive income attributable to noncontrolling interests
1.4 
1.5 
 
Comprehensive income
$ 58.9 1
$ 104.4 1
$ 101.9 1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2012
Consolidated Statements of Comprehensive Income
 
 
 
Pension and postretirement, tax
$ 6.5 
$ 15.2 
$ 2.0 
Net unrealized (loss) gain on derivative instruments
0.1 
0.2 
0.2 
Change in net unrealized gain (loss) on available-for-sale securities, tax
 
$ 0.1 
$ 0.1 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Sep. 30, 2014
Sep. 30, 2013
Current Assets
 
 
Cash and cash equivalents
$ 58.0 
$ 42.7 
Trade receivables, net
191.0 
213.4 
Unbilled receivables from long-term manufacturing contracts
149.3 
142.1 
Inventories
168.5 
177.5 
Deferred income taxes
30.5 
22.3 
Prepaid expenses
19.0 
20.4 
Other current assets
21.5 
21.0 
Total current assets
637.8 
639.4 
Property, plant, and equipment, net
159.5 
171.9 
Intangible assets, net
510.5 
558.6 
Goodwill
570.7 
585.8 
Other assets
40.0 
47.5 
Total Assets
1,918.5 
2,003.2 
Current Liabilities
 
 
Trade accounts payable
192.6 
183.2 
Liabilities from long-term manufacturing contracts and advances
76.1 
80.9 
Current portion of long-term debt
15.0 
10.0 
Accrued compensation
69.6 
59.6 
Deferred income taxes
20.7 
12.1 
Other current liabilities
117.1 
119.7 
Total current liabilities
491.1 
465.5 
Long-term debt
543.5 
654.3 
Accrued pension and postretirement healthcare
200.9 
190.3 
Deferred income taxes
55.4 
75.4 
Other long-term liabilities
33.8 
41.4 
Total Liabilities
1,324.7 
1,426.9 
Commitments and contingencies
   
   
SHAREHOLDERS' EQUITY
 
 
Common stock, no par value (63.5 and 63.1 shares issued, 62.9 and 62.9 shares outstanding)
   
   
Additional paid-in capital
342.1 
321.7 
Retained earnings
311.7 
252.2 
Treasury stock (0.6 and 0.2 shares)
(18.3)
(4.2)
Accumulated other comprehensive loss
(52.2)
(1.4)
Hillenbrand Shareholders' Equity
583.3 
568.3 
Noncontrolling interests
10.5 
8.0 
Total Shareholders' Equity
593.8 
576.3 
Total Liabilities and Equity
$ 1,918.5 
$ 2,003.2 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Per Share data, unless otherwise specified
Sep. 30, 2014
Sep. 30, 2013
Consolidated Balance Sheets
 
 
Common stock, par value (in dollars per share)
$ 0 
$ 0 
Common stock, shares issued
63.5 
63.1 
Common stock, shares outstanding
62.9 
62.9 
Treasury stock, shares
0.6 
0.2 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2012
Operating Activities
 
 
 
Consolidated net income
$ 111.2 
$ 65.4 
$ 104.8 
Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
58.4 
89.4 
40.4 
Deferred income taxes
(8.2)
(23.6)
(5.0)
Net (gain) loss on disposal or impairment of property
(1.1)
1.4 
3.3 
Net gain on investments
(5.2)
(0.3)
(0.2)
Equity in net (income) loss from affiliates
(2.8)
1.3 
(1.6)
Share-based compensation
7.5 
6.4 
8.7 
Trade accounts receivable and receivables on long-term manufacturing contracts
1.0 
(38.9)
(18.5)
Inventories
3.3 
26.5 
(6.2)
Prepaid expenses and other current assets
(0.6)
(4.5)
(7.7)
Trade accounts payable
18.3 
0.1 
4.9 
Accrued expenses and other current liabilities
29.1 
(24.8)
8.6 
Income taxes payable
(23.3)
27.9 
(0.1)
Defined benefit plan funding
(20.1)
(20.8)
(4.0)
Defined benefit plan expense
14.5 
17.7 
12.5 
Other, net
(2.4)
4.0 
(1.7)
Net cash provided by operating activities
179.6 
127.2 
138.2 
Investing Activities
 
 
 
Capital expenditures
(23.6)
(29.9)
(20.9)
Proceeds from sales of property, plant, and equipment
7.5 
1.6 
 
Acquisition of businesses, net of cash acquired
 
(415.7)
(4.4)
Proceeds from sales of investments
5.8 
1.7 
0.8 
Return of investment capital from affiliates
2.0 
1.3 
2.0 
Net cash used in investing activities
(8.3)
(441.0)
(22.5)
Financing Activities
 
 
 
Proceeds from term loan
 
200.0 
 
Repayments on term loan
(10.0)
(10.0)
 
Proceeds from revolving credit facilities, net of financing costs
316.6 
710.3 
545.7 
Repayments on revolving credit facilities
(410.7)
(514.7)
(708.0)
Payment of dividends on common stock
(49.7)
(48.7)
(47.6)
Repurchases of common stock
(16.5)
 
 
Net proceeds (payments) on stock plans
14.6 
(0.4)
(1.2)
Other, net
0.2 
 
 
Net cash (used in) provided by financing activities
(155.5)
336.5 
(211.1)
Effect of exchange rate changes on cash and cash equivalents
(0.5)
(0.2)
0.1 
Net cash flows
15.3 
22.5 
(95.3)
Cash and cash equivalents:
 
 
 
At beginning of period
42.7 
20.2 
115.5 
At end of period
58.0 
42.7 
20.2 
Cash paid for interest
21.0 
21.7 
11.3 
Cash paid for income taxes
$ 80.2 
$ 24.4 
$ 35.3 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Millions, except Share data, unless otherwise specified
Common Stock [Member]
Additional Paid In Capital [Member]
USD ($)
Retained Earnings [Member]
USD ($)
Treasury Stock [Member]
USD ($)
Accumulated Other Comprehensive Income [Member]
USD ($)
Noncontrolling Interest [Member]
USD ($)
Total
USD ($)
Balance at Sep. 30, 2011
 
$ 317.0 
$ 182.7 
$ (17.1)
$ (39.5)
 
$ 443.1 
Balance (in shares) at Sep. 30, 2011
63,400,000 
 
 
900,000 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Total other comprehensive income (loss), net of tax
 
 
 
 
(2.9)
 
(2.9)
Net income
 
 
104.8 
 
 
 
104.8 
Issuance/retirement of stock for stock awards/options
 
(6.7)
 
5.6 
 
 
(1.1)
Issuance/retirement of stock for stock awards/options (in shares)
(200,000)
 
 
(300,000)
 
 
 
Share-based compensation
 
8.7 
 
 
 
 
8.7 
Dividends
 
1.2 
(48.8)
 
 
 
(47.6)
Other
 
1.7 
(0.4)
 
 
 
1.3 
Balance at Sep. 30, 2012
 
321.9 
238.3 
(11.5)
(42.4)
 
506.3 
Balance (in shares) at Sep. 30, 2012
63,200,000 
 
 
600,000 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Acquisition of noncontrolling interests
 
 
 
 
 
6.5 
6.5 
Total other comprehensive income (loss), net of tax
 
 
 
 
41.0 
(0.5)
40.5 
Net income
 
 
63.4 
 
 
2.0 
65.4 
Issuance/retirement of stock for stock awards/options
 
(7.8)
 
7.3 
 
 
(0.5)
Issuance/retirement of stock for stock awards/options (in shares)
(100,000)
 
 
(400,000)
 
 
400,000 
Share-based compensation
 
6.4 
 
 
 
 
6.4 
Dividends
 
0.8 
(49.5)
 
 
 
(48.7)
Other
 
0.4 
 
 
 
 
0.4 
Balance at Sep. 30, 2013
 
321.7 
252.2 
(4.2)
(1.4)
8.0 
576.3 
Balance (in shares) at Sep. 30, 2013
63,100,000 
 
 
200,000 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Total other comprehensive income (loss), net of tax
 
 
 
 
(50.8)
(0.1)
(50.9)
Net income
 
 
109.7 
 
 
1.5 
111.2 
Issuance/retirement of stock for stock awards/options
 
12.2 
 
2.4 
 
 
14.6 
Issuance/retirement of stock for stock awards/options (in shares)
400,000 
 
 
(100,000)
 
 
100,000 
Share-based compensation
 
7.5 
 
 
 
 
7.5 
Purchases of common stock
 
 
 
(16.5)
 
 
(16.5)
Purchases of common stock (in shares)
 
 
 
500,000 
 
 
1,727,000 
Dividends
 
1.0 
(50.5)
 
 
(0.2)
(49.7)
Other
 
(0.3)
0.3 
 
 
1.3 
1.3 
Balance at Sep. 30, 2014
 
$ 342.1 
$ 311.7 
$ (18.3)
$ (52.2)
$ 10.5 
$ 593.8 
Balance (in shares) at Sep. 30, 2014
63,500,000 
 
 
600,000 
 
 
 
Background and Basis of Presentation
Background and Basis of Presentation

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 segments:  the Process Equipment Group and Batesville®.  The Process Equipment Group has multiple market-leading brands of process and material handling equipment and systems serving a wide variety of industries across the globe.  Batesville is a recognized leader in the North American death care industry.  Hillenbrand was incorporated on November 1, 2007, in the state of Indiana and began trading on the New York Stock Exchange under the symbol “HI” on April 1, 2008.  “Hillenbrand,” “the Company,” “we,” “us,” “our,” and similar words refer to Hillenbrand and its subsidiaries.

 

Correction of Errors

During the first quarter of 2014, we recorded an adjustment to operating expenses to correct errors related to the accounting for sales commissions at Coperion in 2013.  The adjustment reduced operating expenses in the first quarter of 2014 by $2.0, which should have been recorded in 2013.  In connection with this same issue, we identified a classification error of $8.5 between operating expenses and cost of goods sold in 2013.  These corrections decreased operating expenses and increased cost of goods sold by $8.5 for the year ended September 30, 2013.  We believe the impact of these income statement classification errors and the $2.0 adjustment to correct a prior period error was immaterial to our consolidated financial statements for the current and prior periods.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2.Summary of Significant Accounting Policies

 

Basis of presentation — The consolidated financial statements include the accounts of Hillenbrand and its subsidiaries, including Coperion Capital GmbH (“Coperion”), which was acquired in December 2012.  The acquisition of Coperion included a few small subsidiaries where Coperion’s ownership percentage was less than 100%The portion of the business that is not owned by the Company is presented as noncontrolling interests within equity in the balance sheets.  Income attributable to the noncontrolling interests is separately reported within the statements of income.  All significant intercompany accounts and transactions have been eliminated.  Certain prior period amounts have been reclassified to conform to the 2014 presentation.

 

Use of estimates — We prepared the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”).  GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Foreign currency translation — The financial statements of our foreign subsidiaries are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for operating results.  Unrealized translation gains and losses are included in accumulated other comprehensive loss in shareholders’ equity.  When a transaction is denominated in a currency other than the subsidiary’s functional currency, we recognize a transaction gain or loss in “other income (expense), net” when the transaction is settled.

 

Cash and cash equivalents include short-term investments with original maturities of three months or less.  The carrying amounts reported in the balance sheet for cash and cash equivalents are valued at cost, which approximates their fair value.

 

Trade receivables are recorded at the invoiced amount and generally do not bear interest, unless they become past due.  The allowance for doubtful accounts is a best estimate of the amount of probable credit losses and collection risk in the existing accounts receivable portfolio.  The allowance for cash discounts and sales returns reserve are based upon historical experience and trends.  Account balances are charged against the allowance when we believe it is probable the receivable will not be recovered.   We generally hold trade accounts receivable until they are collected.  At September 30, 2014 and 2013, we had reserves against trade receivables of $19.2 and $19.3.

 

Inventories are valued at the lower of cost or market.  Inventory costs are determined by the last-in, first-out (“LIFO”) method for approximately 26% and 25% of inventories at September 30, 2014 and 2013.  Costs of remaining inventories have been determined principally by the first-in, first-out (“FIFO”) and average cost methods.  If the FIFO method of inventory accounting, which approximates current cost, had been used for inventory accounted for using the LIFO method, they would have been approximately $14.4 and $13.7 higher than reported at September 30, 2014 and 2013.

 

 

 

September 30,

 

 

 

2014

 

2013

 

Raw materials and components

 

$

53.2 

 

$

58.3 

 

Work in process

 

73.3 

 

74.8 

 

Finished goods

 

42.0 

 

44.4 

 

Total inventories

 

$

168.5 

 

$

177.5 

 

 

Property, plant, and equipment are carried at cost less accumulated depreciation. Depreciation is computed using principally the straight-line method based on estimated useful lives of five to 40 years for buildings and improvements and three to 10 years for machinery and equipment. Maintenance and repairs are expensed as incurred. Upon disposal or retirement, the cost and accumulated depreciation of assets are eliminated. Any gain or loss is reflected in the Company’s income from operations. We review these assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than its carrying amount. The impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value. Total depreciation expense for 2014, 2013, and 2012 was $26.8, $25.3, and $18.7.

 

 

 

September 30, 2014

 

September 30, 2013

 

 

 

Cost

 

Accumulated
Depreciation

 

Cost

 

Accumulated
Depreciation

 

Land and land improvements

 

$

15.5

 

$

(3.5

)

$

17.0

 

$

(3.5

)

Buildings and building equipment

 

99.4

 

(58.4

)

101.8

 

(57.6

)

Machinery and equipment

 

322.9

 

(216.4

)

316.8

 

(202.6

)

Total

 

$

437.8

 

$

(278.3

)

$

435.6

 

$

(263.7

)

 

Intangible assets are stated at the lower of cost or fair value.  With the exception of trade names, intangible assets are amortized on a straight-line basis over periods ranging from three to 22 years, representing the period over which we expect to receive future economic benefits from these assets.  We assess the carrying value of trade names annually, or more often if events or changes in circumstances indicate there may be impairment.  Total amortization expense for 2014, 2013, and 2012 was $31.6, $64.1, and $21.7.  Estimated amortization expense related to intangible assets for the next five years is: $29.4 in 2015, $26.9 in 2016, $26.6 in 2017, $25.9 in 2018, and $24.9 in 2019.

 

 

 

September 30, 2014

 

September 30, 2013

 

 

 

Cost

 

Accumulated
Amortization

 

Cost

 

Accumulated
Amortization

 

Finite-lived assets:

 

 

 

 

 

 

 

 

 

Trade names

 

$

6.1

 

$

(5.9

)

$

6.1

 

$

(5.9

)

Customer relationships

 

393.3

 

(64.5

)

405.1

 

(45.1

)

Technology, including patents

 

67.3

 

(23.6

)

70.6

 

(16.3

)

Software

 

40.4

 

(33.0

)

41.3

 

(31.9

)

Other

 

0.6

 

(0.4

)

0.6

 

(0.4

)

 

 

507.7

 

(127.4

)

523.7

 

(99.6

)

Indefinite-lived assets:

 

 

 

 

 

 

 

 

 

Trade names

 

130.2

 

 

134.5

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

637.9

 

$

(127.4

)

$

658.2

 

$

(99.6

)

 

Goodwill is not amortized, but is subject to annual impairment tests.  Goodwill has been assigned to reporting units.  We assess the carrying value of goodwill annually, or more often if events or changes in circumstances indicate there may be impairment.  Impairment testing is performed at a reporting unit level.

 

 

 

Process
Equipment
Group

 

Batesville

 

Total

 

 

 

 

 

 

 

 

 

Balance September 30, 2012

 

$

298.0

 

$

5.7

 

$

303.7

 

Acquisitions

 

267.8

 

2.6

 

270.4

 

Foreign currency adjustments

 

11.7

 

 

11.7

 

Balance September 30, 2013

 

577.5

 

8.3

 

585.8

 

Adjustments

 

6.0

 

 

6.0

 

Foreign currency adjustments

 

(21.1

)

 

(21.1

)

Balance September 30, 2014

 

$

562.4

 

$

8.3

 

$

570.7

 

 

Investments — Our investment portfolio consists of investments in private equity limited partnerships.  The carrying value of the portfolio was $12.1 and $11.3 at September 30, 2014 and 2013 and is included in other assets on the balance sheets.  At September 30, 2013, the balance included $1.0 of warrants to purchase the common stock of Forethought Financial Group, Inc., which was acquired by a third-party in 2014.  These warrants were exercised in 2014 for $6.2 resulting in a $5.2 gain.  We use the equity method of accounting for substantially all private equity limited partnerships, with earnings or losses reported in “other income (expense), net” in the income statements.  Certain of these investments require commitments by us to provide additional funding of up to $1.6.  The timing of funding is uncertain, but is expected to occur over the next three to five years.  We regularly evaluate all investments for possible impairment.

 

Environmental liabilities — Expenditures that relate to an existing condition caused by past operations which do not contribute to current or future revenue generation are expensed.  A reserve is established when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  These reserves are determined without consideration of possible loss recoveries.  Based on consultations with an environmental engineer, the range of liability is estimated based on current interpretations of environmental laws and regulations.  A determination is made of the specific measures that are believed to be required to remediate the site, the estimated total cost to carry out the remediation plan, and the periods in which we will make payments toward the remediation plan.  We do not make an estimate of inflation for environmental matters because the number of sites is small, the magnitude of costs to execute remediation plans is not significant, and the estimated time frames to remediate sites are not believed to be lengthy.

 

Specific costs included in environmental expense and reserves include site assessment, remediation plan development, clean-up costs, post-remediation expenditures, monitoring, fines, penalties, and legal fees.  The amount reserved represents the expected undiscounted future cash outflows associated with such plans and actions and is not significant to Hillenbrand.

 

Self-insurance — We are self-funded up to certain limits for product and general liability, workers compensation, and auto liability insurance programs, as well as certain employee health benefits including medical, drug, and dental.  These policies have deductibles and self-funded retentions up to $0.5 per occurrence, depending upon the type of coverage and policy period.  Our policy is to estimate reserves based upon a number of factors, including known claims, estimated incurred but not reported claims, and outside actuarial analysis.  The outside actuarial analysis is based on historical information along with certain assumptions about future events.  These reserves are classified as other current and other long-term liabilities within the balance sheets.

 

Treasury stock consists of our common shares that have been issued, but subsequently reacquired.  We account for treasury stock purchases under the cost method.  When these shares are reissued, we use an average-cost method to determine cost.  Proceeds in excess of cost are credited to additional paid-in capital.

 

On July 24, 2008, our Board of Directors approved the repurchase of up to $100.0 of common stock.  The program has no expiration date, but may be terminated by the Board of Directors at any time.  As of September 30, 2014, we had repurchased approximately 1,727,000 shares for $39.0, which were classified as treasury stock.  During 2014, approximately 527,000 shares were repurchased, for a cost of $16.5.  In 2014 and 2013, approximately 100,000 shares and 400,000 shares were issued from treasury stock under our stock compensation programs.  At September 30, 2014, we had $61.0 remaining for share repurchases under the existing Board authorization.

 

Preferred stock — The Company has authorized 1,000,000 shares of preferred stock (no par value), of which no shares were issued at September 30, 2014 and 2013.

 

Accumulated other comprehensive loss included all changes in Hillenbrand shareholders’ equity during a period except those that resulted from investments by or distributions to our shareholders.

 

 

 

September 30,

 

 

 

2014

 

2013

 

Currency translation

 

$

(4.9

)

$

31.4

 

Pension and postretirement (net of taxes of $26.4 and $19.7)

 

(46.0

)

(33.0

)

Unrealized (loss) gain on derivative instruments (net of taxes of $0.6 and $0.1)

 

(1.3

)

0.2

 

Accumulated other comprehensive loss

 

$

(52.2

)

$

(1.4

)

 

Revenue recognition — Net revenue includes gross revenue less sales discounts, customer rebates, sales incentives, and product returns, all of which require us to make estimates for the portion of these allowances that have yet to be credited or paid to our customers.  We estimate these allowances based upon historical rates and projections of customer purchases toward contractual rebate thresholds.

 

Following the acquisition of Coperion, a portion of Hillenbrand’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 project costs.  Approximately 25% of Hillenbrand’s revenue was attributable to these long-term manufacturing contracts for 2014.

 

Accounting for these contracts involves management judgment in estimating total contract revenue and cost.  Contract revenues are largely determined by negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, and incentive and award provisions associated with technical performance clauses.  Contract costs are incurred over longer periods of time and, accordingly, the estimation of these costs requires management judgment.  Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends, and other economic projections.  Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements.  Revenue and cost estimates are regularly monitored and revised based on changes in circumstances.  Anticipated losses on long-term contracts are recognized immediately when such losses become evident.  We maintain financial controls over the customer qualification, contract pricing, and estimation processes to reduce the risk of contract losses.

 

Revenue for components, replacement parts, and service is recognized on a completed contract basis when title and risk of loss passes to the customer.

 

Cost of goods sold consists primarily of purchased material costs, fixed manufacturing expense, variable direct labor, and overhead costs.  It also includes costs associated with the distribution and delivery of products.

 

Research and development costs are expensed as incurred as a component of operating expenses and were $14.4, $12.2, and $5.2 for 2014, 2013, and 2012.

 

Warranty costs — We provide for the estimated warranty cost of a product at the time revenue is recognized.  Warranty expense is accrued based upon historical information and may also include specific provisions for known conditions.  Warranty obligations are affected by actual product performance and by material usage and service costs incurred in making product corrections.  Our warranty provision takes into account the best estimate of amounts necessary to settle future and existing claims on products sold.  The Process Equipment Group generally offers a one to two-year warranty on a majority of its products.  It engages in extensive product quality programs and processes in an effort to minimize warranty obligations, including active monitoring and evaluation of the quality of component suppliers.  Warranty reserves were $18.4 and $17.4 for 2014 and 2013.  Warranty costs were $4.5, $4.0, and $2.6 for 2014, 2013, and 2012.

 

Income taxes — We establish deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.  Deferred tax assets and liabilities are determined based on the differences between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.  The majority of the cash at our foreign subsidiaries represents earnings considered to be permanently reinvested for which deferred taxes have not been provided.

 

We have a variety of deferred income tax assets in numerous tax jurisdictions.  The recoverability of these deferred income tax assets is assessed periodically and valuation allowances are recognized if it is determined that it is more likely than not that the benefits will not be realized.  When performing this assessment, we consider future taxable income, the reversal of existing temporary differences, and tax planning strategies.  We account for accrued interest and penalties related to unrecognized tax benefits in income tax expense.

 

Derivative financial instruments — The Company has hedging programs in place to manage its currency exposures.  The objectives of our hedging programs are to mitigate exposures in gross margin and non-functional-currency-denominated assets and liabilities.   Under these programs, 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 $123.3 and $165.8 at September 30, 2014 and 2013.

 

We measure all derivative instruments at fair value and report them on our 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 (expense), net”.  The carrying value of all of these contracts at fair value resulted in assets of $1.2 and $1.5 (included in other current assets) and liabilities of $4.1 and $0.5 (included in other current liabilities) at September 30, 2014 and 2013.  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 significant for 2014 and 2013.  Net gains and losses on all derivative instruments were substantially offset by foreign exchange effects on the hedged items.

 

The Company does not enter into derivative contracts for purposes of speculation.

 

Business acquisitions and related business acquisition and transition costs  —  Assets and liabilities associated with business acquisitions are recorded at fair value, using the acquisition method of accounting.  We allocate the purchase price of acquisitions based upon the fair value of each component, which may be derived from observable or unobservable inputs and assumptions.  We may utilize third-party valuation specialists to assist us in this allocation.  Initial purchase price allocations are preliminary and subject to revision within the measurement period, generally not to exceed one year from the date of acquisition.

 

Business acquisition and transition costs are expensed as incurred, and are reported as a component of cost of goods sold, operating expenses, interest expense, and “other income (expense), net”.  We define these costs to include finder’s fees, advisory, legal, accounting, valuation, and other professional or consulting fees, as well as travel associated with the evaluation and effort to acquire specific businesses.  Business acquisition and transition costs also include costs associated with acquisition tax planning, retention bonuses, and related integration costs.  These costs exclude the ongoing expenses of our business development department.

 

Restructuring costs may occur when we take action to exit or significantly curtail a part of our operations or change the deployment of assets or personnel.  A restructuring charge can consist of an impairment or accelerated depreciation of effected assets, severance costs associated with reductions to the workforce, and charges for legal obligations for which no future benefit will be derived.

 

Recently adopted accounting standards — In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  ASU 2013-02 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 affected by the reclassification.  The new disclosure requirements became effective and were adopted for our fiscal year beginning October 1, 2013.  The adoption of this disclosure-only guidance did not have an impact on our consolidated financial statements.

 

Recently issued accounting standards — In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  ASU 2013-11 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 ASU 2013-11, 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.  ASU 2013-11 will be effective for our fiscal year beginning October 1, 2014.  We do not expect the adoption of ASU 2013-11 to have a significant impact on our consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which includes amendments that change the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations.  Under ASU 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations.  ASU 2014-08 will be effective for our fiscal year beginning October 1, 2015.  We do not expect the adoption of ASU 2014-08 to have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.  ASU 2014-09 will be effective for our fiscal year beginning October 1, 2017, including interim periods within that reporting period, and allows for either full retrospective adoption or modified retrospective adoption, with early adoption not permitted.  We are currently evaluating the impact that ASU 2014-09 will have on our consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.  ASU 2014-12 states that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition.  ASU 2014-12 will be effective for our fiscal year beginning October 1, 2016, with early adoption permitted.  We are currently evaluating the impact that ASU 2014-12 will have on our consolidated financial statements.

Business Acquisitions
Business Acquisitions

3.Business Acquisitions

 

Coperion

 

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 $129.9 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 material handling equipment used in a broad range of industries, including plastics, chemicals, food processing, and pharmaceutical.  Coperion has been in business since 1879, and operates nine manufacturing sites in Germany, the United States (“U.S.”), China, and India, and has sales offices in approximately 30 locations in the Americas, Europe, and Asia.  Coperion had approximately 2,000 employees worldwide as of September 30, 2014.  Approximately one-third 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.

 

This acquisition was the largest in the Company’s history and represented an important step in the execution of our strategic plans to further diversify Hillenbrand and accelerate the growth of the Process Equipment Group.  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 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 expertise and other core competencies to Coperion’s operations is expected to contribute to improved margins and increased customer satisfaction.

 

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

 

 

 

December 1, 2012

 

Cash and cash equivalents

 

$

32.8 

 

Inventory

 

112.4 

 

Current assets, excluding cash and cash equivalents and inventory

 

180.0 

 

Property, plant, and equipment

 

54.4 

 

Identifiable intangible assets

 

291.8 

 

Goodwill

 

273.8 

 

Other assets

 

2.1 

 

Total assets

 

947.3 

 

 

 

 

 

Current liabilities

 

287.3 

 

Accrued pension obligations

 

129.9 

 

Deferred income taxes

 

67.3 

 

Other long-term liabilities

 

6.7 

 

Total liabilities

 

491.2 

 

 

 

 

 

Noncontrolling interests

 

8.2 

 

 

 

 

 

Aggregate purchase price

 

$

447.9 

 

 

Final purchase accounting adjustments were made in 2014 that increased the accrued pension obligations ($4.3) based on finalization of the actuarial analysis for Coperion’s defined benefit plans.  In addition, adjustments were made to increase current liabilities ($1.3) and noncontrolling interests ($1.7) and decrease deferred income taxes ($1.3).  Total purchase accounting adjustments increased goodwill by $6.0 in 2014.  These adjustments are reflected in the table above.

 

Goodwill is not deductible for tax purposes and was allocated entirely to the Process Equipment Group.  Fair value amounts assigned to identifiable finite-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 

 

 

 

 

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 2012.  It included adjustments for additional interest expense, depreciation, and amortization.  Acquisition costs of $16.6 and backlog amortization and inventory step-up costs of $56.3 are not included in the pro forma information for 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.

 

 

 

Fiscal Year Ended

 

 

 

September 30, 2013

 

Pro forma net revenue

 

$

1,668.6 

 

Pro forma net income(1)

 

118.4 

 

Pro forma basic earnings per share

 

1.89 

 

Pro forma diluted earnings per share

 

1.88 

 

 

 

(1)Pro forma net income attributable to Hillenbrand

 

Other Acquisitions

 

Batesville completed an acquisition in 2012 with a net purchase price of $5.9.  Final estimation of the fair value resulted in $2.6 of goodwill.

 

We incurred $8.4 of business acquisition and integration costs during 2014 recorded in operating expenses.

Financing Agreements
Financing Agreements

4.Financing Agreements

 

 

 

September 30,

 

 

 

2014

 

2013

 

$700 revolving credit facility (excluded outstanding letters of credit)

 

$

229.6 

 

$

325.5 

 

$200 term loan

 

180.0 

 

190.0 

 

$150 senior unsecured notes, net of discount

 

148.9 

 

148.8 

 

Total debt

 

558.5 

 

664.3 

 

Less: current portion

 

15.0 

 

10.0 

 

Total long-term debt

 

$

543.5 

 

$

654.3 

 

 

The following table summarizes the scheduled maturities of long-term debt for 2015 through 2019:

 

 

 

Amount

 

2015

 

$

15.0 

 

2016

 

20.0 

 

2017

 

374.6 

 

2018

 

 

2019

 

 

 

The Company has a senior unsecured credit facility (the “Facility”) which matures in July 2017.  The Facility provides for revolving loans of up to $700.0, plus a term loan in the amount of $200.0.  Borrowings under the Facility bear interest at variable rates plus a margin amount based upon our leverage.  There is also a facility fee based upon our leverage.  All amounts due under the Facility mature upon expiration.  The term loan will amortize so that 35% of the principal will be repaid over approximately a five-year term, with the balance due at maturity.  The Company also has the ability, under certain circumstances and with the lenders’ approval, to increase the total borrowing capacity under the Facility by $300.0.  Deferred financing costs of $3.8 are being amortized to interest expense over the term of the Facility.  These borrowings are classified as long-term, with the exception of the term loan, where payments due within the next 12 months are classified as current.

 

With respect to the Facility, as of September 30, 2014, we had $14.5 in outstanding letters of credit issued and $455.9 of maximum borrowing capacity.  $380.6 of borrowing capacity is immediately available based on our leverage covenant at September 30, 2014, with additional amounts available in the event of a qualifying acquisition.  The weighted-average interest rates on borrowings under the Facility were 1.33% and 1.37% for 2014 and 2013.  The weighted-average interest rate on the term loan was 1.61% for 2014.

 

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 contractual 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 September 30, 2014, we had credit arrangements totaling $246.1, under which $188.1 was utilized for this purpose.  These arrangements included a €150.0 Syndicated Letter of Guarantee Facility (“LG Facility”) entered into in June 2013, under which unsecured letters of credit, bank guarantees, or other surety bonds may be issued.  The LG Facility matures in June 2018, or earlier, should we elect to discontinue or fail to replace our primary credit facility, which expires in July 2017.  The Company has the potential, under certain circumstances and with the lenders’ approval, to increase the total capacity under the LG facility by an additional €70.0.  Guarantees provided under the LG Facility are priced at tiered rates based upon our leverage and charges for unused capacity are assessed at 0.35% of the applicable guarantee rate (1.00% at September 30, 2014).  Deferred financing costs of $1.9 are being amortized to interest expense over the term of the LG Facility.  There were no direct borrowings associated with the LG Facility.

 

The availability of borrowings under the Facility and the LG Facility is subject to our ability to meet certain conditions including compliance with covenants, absence of default, and continued accuracy of certain representations and warranties.  Financial covenants include a maximum ratio of Indebtedness to EBITDA (as defined in the agreements) of 3.5 to 1.0 and a minimum ratio of EBITDA (as defined in the agreements) to interest expense of 3.5 to 1.0.  As of September 30, 2014, we were in compliance with all covenants.

 

We had restricted cash of $0.4 and $1.3 at September 30, 2014 and 2013.

 

In July 2010, we issued $150 of senior unsecured notes (“Notes”) due July 2020.  The Notes bear interest at a fixed rate of 5.5% per year, payable semi-annually in arrears beginning January 2011.  The Notes were issued at a discount of $1.6, resulting in an initial carrying value of $148.4.  We are amortizing the discount to interest expense over the term of the Notes using the effective interest rate method, resulting in an annual interest rate of 5.65%.  Deferred financing costs associated with the Notes of $2.1 are being amortized to interest expense on a straight-line basis over the term of the Notes.  The Notes are unsubordinated obligations of Hillenbrand and rank equally in right of payment with all of our other existing and future unsubordinated obligations.

 

The indenture governing the Notes does not limit our ability to incur additional indebtedness.  It does, however, contain certain covenants that restrict our ability to incur secured debt and to engage in certain sale and leaseback transactions.  The indenture provides holders of debt securities with remedies if we fail to perform specific obligations.  In the event of a “Change of Control Triggering Event,” each holder of the Notes has the right to require us to purchase all or a portion of their Notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest.  The Notes are redeemable with prior notice.

Retirement Benefits
Retirement Benefits

5.Retirement Benefits

 

Defined Benefit Retirement Plans — Approximately 42% of our employees participate in one of four defined benefit retirement programs, including the master defined benefit retirement plan, the defined benefit plans of our German and Swiss subsidiaries, and the supplemental executive defined benefit retirement plan.  We fund the pension trusts in compliance with ERISA or local funding requirements and as necessary to provide for current service and for any unfunded projected future benefit obligations over a reasonable period.  The benefits for these plans are based primarily on years of service and the employee’s level of compensation during specific periods of employment.  All pension plans have a September 30 measurement date.

 

Effect on Operations — The components of net pension costs under defined benefit retirement plans were:

 

 

 

U.S. Pension Benefits

 

Non-U.S. Pension Benefits

 

 

 

Year Ended September 30,

 

Year Ended September 30,

 

 

 

2014

 

2013

 

2012

 

2014

 

2013

 

2012

 

Service cost

 

$

4.0

 

$

4.7

 

$

4.5

 

$

1.6

 

$

1.6

 

$

1.3

 

Interest cost

 

14.5

 

12.7

 

12.1

 

4.2

 

3.9

 

0.7

 

Expected return on plan assets

 

(14.0

)

(12.9

)

(12.7

)

(1.0

)

(1.0

)

(1.0

)

Amortization of unrecognized prior service cost, net

 

0.9

 

0.9

 

0.9

 

 

 

 

Amortization of actuarial loss

 

3.8

 

7.2

 

5.7

 

 

 

 

Net pension costs

 

$

9.2

 

$

12.6

 

$

10.5

 

$

4.8

 

$

4.5

 

$

1.0

 

 

Obligations and Funded Status  — The change in benefit obligation and funded status of the Company’s defined benefit retirement plans were:

 

 

 

U.S. Pension Benefits

 

Non-U.S. Pension Benefits

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Change in benefit obligation:

 

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of year

 

$

307.4

 

$

300.4

 

$

140.0

 

$

28.4

 

Projected benefit obligation attributable to acquisitions

 

 

31.5

 

1.9

 

110.1

 

Service cost

 

4.0

 

4.7

 

1.6

 

1.6

 

Interest cost

 

14.5

 

12.7

 

4.2

 

3.9

 

Actuarial (gain) loss

 

26.5

 

(29.2

)

12.8

 

1.1

 

Benefits paid

 

(13.9

)

(12.7

)

(8.8

)

(11.3

)

Employee contributions

 

 

 

0.7

 

0.8

 

Effect of exchange rates on projected benefit obligation

 

 

 

(9.5

)

5.4

 

Projected benefit obligation at end of year

 

338.5

 

307.4

 

142.9

 

140.0

 

 

 

 

 

 

 

 

 

 

 

Change in plan assets:

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

228.1

 

197.2

 

28.6

 

29.1

 

Fair value of pension assets attributable to acquisitions

 

 

16.0

 

 

 

Actual return on plan assets

 

26.6

 

16.4

 

1.0

 

0.9

 

Employee and employer contributions

 

10.2

 

12.1

 

10.4

 

8.8

 

Benefits paid

 

(13.9

)

(12.8

)

(8.8

)

(11.3

)

Administrative expenses paid

 

(1.3

)

(0.8

)

 

 

Effect of exchange rates on plan assets

 

 

 

(1.8

)

1.1

 

Fair value of plan assets at end of year

 

249.7

 

228.1

 

29.4

 

28.6

 

 

 

 

 

 

 

 

 

 

 

Funded status:

 

 

 

 

 

 

 

 

 

Plan assets less than benefit obligations

 

$

(88.8

)

$

(79.3

)

$

(113.5

)

$

(111.4

)

 

 

 

 

 

 

 

 

 

 

Amounts recorded in the consolidated balance sheets:

 

 

 

 

 

 

 

 

 

Other assets

 

$

 

 

$

0.1

 

$

1.1

 

Accrued pension costs, current portion

 

(1.8

)

(2.0

)

(7.9

)

(8.5

)

Accrued pension costs, long-term portion

 

(87.0

)

(77.3

)

(105.7

)

(104.0

)

Plan assets less than benefit obligations

 

$

(88.8

)

$

(79.3

)

$

(113.5

)

$

(111.4

)

 

Net actuarial losses ($75.8) and prior service costs ($2.4), less an aggregate tax effect ($28.0), are included as components of accumulated other comprehensive loss at September 30, 2014.  Net actuarial losses ($54.2) and prior service costs ($3.4), less an aggregate tax effect ($21.5), are included as components of accumulated other comprehensive loss at September 30, 2013.  The amount that will be amortized from accumulated other comprehensive loss into net pension costs in 2015 is expected to be $6.3.

 

Accumulated Benefit Obligation — The accumulated benefit obligation for all defined benefit retirement plans was $463.8 and $430.8 at September 30, 2014 and 2013.  Selected information for plans with accumulated benefit obligations in excess of plan assets was:

 

 

 

U.S. Pension Benefits

 

Non-U.S. Pension Benefits

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Projected benefit obligation

 

$

338.5 

 

$

307.4 

 

$

113.6 

 

$

112.5 

 

Accumulated benefit obligation

 

324.0 

 

293.3 

 

113.6 

 

112.5 

 

Fair value of plan assets

 

249.7 

 

228.1 

 

 

 

 

The weighted-average assumptions used in accounting for defined benefit retirement plans were:

 

 

 

U.S. Pension Benefits

 

Non-U.S. Pension Benefits

 

 

 

Year Ended September 30,

 

Year Ended September 30,

 

 

 

2014

 

2013

 

2012

 

2014

 

2013

 

2012

 

Discount rate for obligation, end of year

 

4.4 

%

4.9 

%

4.0 

%

2.3 

%

3.5 

%

2.3 

%

Discount rate for expense, during the year

 

4.9 

%

4.0 

%

4.5 

%

3.0 

%

3.3 

%

2.3 

%

Expected rate of return on plan assets

 

6.6 

%

6.6 

%

6.6 

%

3.5 

%

3.5 

%

3.5 

%

Rate of compensation increase

 

3.0 

%

2.6 

%

2.5 

%

0.2 

%

0.2 

%

1.5 

%

 

The discount rates are evaluated annually based on current market conditions.  In setting these rates, we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, then make adjustments to the indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected outflow of pension obligations.  The overall expected long-term rate of return is based on historical and expected future returns, which are inflation-adjusted and weighted for the expected return for each component of the investment portfolio.  The rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments in recent years.

 

U.S. Pension Plan Assets — Long-term strategic investment objectives utilize a diversified mix of equity and fixed income securities to preserve the funded status of the trusts, and balance risk and return.  The primary investment strategy is a dynamic target allocation method that periodically rebalances among various investment categories depending on the current funded position.  This program is designed to actively move from return-seeking investments (such as equities) toward liability-hedging investments (such as long-duration fixed income) as funding levels improve.  The investment in return-seeking assets is not to exceed 60% of total domestic plan assets. Plan assets are invested by the plans’ fiduciaries, which direct investments according to specific policies.  Those policies subject investments to the following restrictions in our domestic plan: short-term securities must be rated A2/P2 or higher, liability-hedging fixed income securities must have an average quality credit rating of investment grade and investments in equities in any one company may not exceed 10% of the equity portfolio.

 

Non-U.S. Pension Plan Assets — Long-term strategic investment objectives utilize a diversified mix of suitable assets of appropriate liquidity to generate income and capital growth that, together with contributions from participants and Hillenbrand, will meet the cost of the current and future benefits that the plan provides.  Long-term strategic investment objectives also seek to limit the risk of the assets failing to meet the liabilities over the long term.

 

None of Hillenbrand’s common stock was directly owned by the pension plan trusts at September 30, 2014.

 

The tables below provide the fair value of our pension plan assets by asset category at September 30, 2014 and 2013.  The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2, and 3).  See Note 13 for definitions.

 

Fair values are determined as follows:

 

·

Cash equivalents are stated at the carrying amount, which approximates fair value, or at the fund’s net asset value.

·

Equity securities are stated at the last reported sales price on the day of valuation.

·

Corporate bonds actively traded are stated at the closing price reported in the active markets in which the bonds are traded.

·

Government index funds are stated at the closing price reported in the active market in which the fund is traded.

·

Corporate bond funds and equity mutual funds are stated at the closing price in the active markets in which the underlying securities of the funds are traded.

·

Real estate is stated based on a discounted cash flow approach, which includes future rental receipts, expenses, and residual values as the highest and best use of the real estate from a market participant view as rental property.

 

 

 

Fair Value at September 30, 2014 Using Inputs Considered as:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

U.S. Pension Plans

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

4.5 

 

$

 

$

4.5 

 

$

 

Equity securities

 

 

 

 

 

Corporate bonds

 

 

 

 

 

Other types of investments:

 

 

 

 

 

 

 

 

 

Government index funds

 

 

 

 

 

Equity mutual funds

 

113.9 

 

 

113.9 

 

 

Corporate bond funds

 

131.3 

 

 

131.3 

 

 

Real estate and real estate funds

 

 

 

 

 

Total U.S. pension plan assets

 

$

249.7 

 

$

 

$

249.7 

 

$

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. Pension Plans

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

5.4 

 

$

5.4 

 

$

 

$

 

Equity securities

 

7.3 

 

7.3 

 

 

 

Corporate bonds

 

9.0 

 

9.0 

 

 

 

Other types of investments:

 

 

 

 

 

 

 

 

 

Government index funds

 

5.7 

 

5.7 

 

 

 

Equity mutual funds

 

 

 

 

 

Corporate bond funds

 

 

 

 

 

Real estate and real estate funds

 

2.0 

 

 

 

2.0 

 

Total Non-U.S. pension plan assets

 

$

29.4 

 

$

27.4 

 

$

 

$

2.0 

 

 

 

 

Fair Value at September 30, 2013 Using Inputs Considered as:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

U.S. Pension Plans

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

4.0 

 

$

 

$

4.0 

 

$

 

Equity securities

 

 

 

 

 

Corporate bonds

 

 

 

 

 

Other types of investments:

 

 

 

 

 

 

 

 

 

Government index funds

 

 

 

 

 

Equity mutual funds

 

103.1 

 

 

103.1 

 

 

Corporate bond funds

 

121.0 

 

 

121.0 

 

 

Real estate and real estate funds

 

 

 

 

 

Total U.S. pension plan assets

 

$

228.1 

 

$

 

$

228.1 

 

$

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. Pension Plans

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

2.8 

 

$

2.8 

 

$

 

$

 

Equity securities

 

8.5 

 

8.5 

 

 

 

Corporate bonds

 

9.8 

 

9.8 

 

 

 

Other types of investments:

 

 

 

 

 

 

 

 

 

Government index funds

 

5.5 

 

5.5 

 

 

 

Equity mutual funds

 

 

 

 

 

Corporate bond funds

 

 

 

 

 

Real estate and real estate funds

 

2.0 

 

 

 

2.0 

 

Total Non-U.S. pension plan assets

 

$

28.6 

 

$

26.6 

 

$

 

$

2.0 

 

 

Cash Flows — During 2014, 2013, and 2012 we contributed cash of $19.9, $20.1, and $3.1, to our defined benefit retirement plans.  The increase in contributions in 2013 was a result of the Coperion acquisition.  We expect to make estimated contributions of $16.0 in 2015, although we may make additional discretionary contributions.  We will evaluate business conditions and capital and equity market volatility to determine whether we will make discretionary contributions.

 

Estimated Future Benefit Payments — The following represents estimated future benefit payments, including expected future service, which are expected to be paid from plan assets or Company contributions as necessary:

 

 

 

U.S. Pension Plans

 

Non-U.S Pension Plans

 

 

 

Projected Pension
Benefits Payout

 

Projected Pension
Benefits Payout

 

2015

 

$

15.1 

 

$

8.3 

 

2016

 

16.5 

 

8.1 

 

2017

 

16.9 

 

7.9 

 

2018

 

17.8 

 

7.7 

 

2019

 

18.7 

 

7.4 

 

2020 - 2024

 

103.6 

 

36.1 

 

 

Defined Contribution Plans — We sponsor a number of defined contribution plans.  Depending on the plan, we may make contributions up to 4% of an employee’s compensation and matching contributions up to 6% of compensation.  Company contributions generally vest over a period of zero to five years.  Expenses related to our defined contribution plans were $8.7, $8.2, and $8.0 for 2014, 2013, and 2012.

 

Postretirement Healthcare Plan — The Company offers a domestic postretirement healthcare plan that provides healthcare benefits to eligible qualified retirees and their spouses.  The plan includes retiree cost-sharing provisions and generally extends retiree coverage for medical, prescription, and dental benefits beyond the COBRA continuation period to the date of Medicare eligibility.  We use a measurement date of September 30.  The net postretirement healthcare benefit cost for 2014, 2013, and 2012 was $0.5, $0.6, and $1.0.

 

 

 

September 30,

 

 

 

2014

 

2013

 

Benefit obligation at beginning of year

 

$

9.8

 

$

10.9

 

Interest cost

 

0.3

 

0.4

 

Service cost

 

0.4

 

0.5

 

Plan amendments

 

 

(0.8

)

Actuarial gain (loss)

 

(1.4

)

(0.5

)

Net benefits paid

 

(0.2

)

(0.7

)

Benefit obligation at end of year

 

$

8.9

 

$

9.8

 

 

 

 

 

 

 

Amounts recorded in the balance sheets:

 

 

 

 

 

Accrued postretirement benefits, current portion

 

$

0.7

 

$

0.8

 

Accrued postretirement benefits, long-term portion

 

8.2

 

9.0

 

Net amount recognized

 

$

8.9

 

$

9.8

 

 

The weighted-average assumptions used in revaluing our obligation under the postretirement healthcare plan were:

 

 

 

Year Ended September 30,

 

 

 

2014

 

2013

 

2012

 

Discount rate for obligation

 

3.7 

%

3.5 

%

3.4 

%

Healthcare cost rate assumed for next year

 

7.2 

%

7.7 

%

7.9 

%

Ultimate trend rate

 

5.0 

%

5.0 

%

5.0 

%

 

Net actuarial gains of $5.8 and $4.9, less tax of $1.6 and $1.8, were included as a component of accumulated other comprehensive loss at September 30, 2014 and 2013.  The estimated amount that will be amortized from accumulated other comprehensive loss as a reduction to postretirement healthcare costs in 2015 is $0.6.  A one percentage-point increase/decrease in the assumed healthcare cost trend rates as of September 30, 2014, would cause an increase/decrease in service and interest costs of $0.1, along with an increase/decrease in the benefit obligation of $0.7.

 

We fund the postretirement healthcare plan as benefits are paid.  Current plan benefits are expected to require net Company contributions for retirees of $0.8 per year for the foreseeable future.

Other Long-Term Liabilities
Other Long-Term Liabilities

6.Other Long-Term Liabilities

 

 

September 30,

 

 

 

2014

 

2013

 

Casket pricing obligation

 

$

5.7

 

$

6.7

 

Self-insurance loss reserves

 

15.5

 

14.7

 

Horstmann litigation liability

 

 

8.7

 

Other

 

17.2

 

16.7

 

 

 

38.4

 

46.8

 

Less current portion

 

(4.6

)

(5.4

)

Total long-term portion

 

$

33.8

 

$

41.4

 

 

The casket pricing obligation is associated with a program for the future sale of caskets made in connection with prearranged funerals and was discontinued for arrangements made after December 31, 2004.  The remaining liability under the program is being recognized as a component of revenue as casket sales subject to the program are delivered and the obligation is satisfied.

 

The Horstmann litigation liability was offset by a corresponding indemnification receivable recorded in other assets for $8.7 at September 30, 2013.  This liability and corresponding indemnification receivable were reversed from the consolidated balance sheet in 2014.  See Note 11 for additional information.

Income Taxes
Income Taxes

7.Income Taxes

 

 

 

Year Ended September 30,

 

 

 

2014

 

2013

 

2012

 

Domestic

 

$

104.7

 

$

108.0

 

$

116.3

 

Foreign

 

55.2

 

(14.3

)

18.6

 

Total earnings before income taxes

 

$

159.9

 

$

93.7

 

$

134.9

 

 

 

 

 

 

 

 

 

Income tax expense:

 

 

 

 

 

 

 

Current provision:

 

 

 

 

 

 

 

Federal

 

$

39.0

 

$

37.0

 

$

27.1

 

State

 

6.2

 

5.5

 

4.0

 

Foreign

 

11.7

 

9.4

 

4.0

 

Total current provision

 

56.9

 

51.9

 

35.1

 

 

 

 

 

 

 

 

 

Deferred provision (benefit):

 

 

 

 

 

 

 

Federal

 

(6.1

)

(2.9

)

(4.1

)

State

 

1.3

 

(0.5

)

0.3

 

Foreign

 

(3.4

)

(20.2

)

(1.2

)

Total deferred provision (benefit)

 

(8.2

)

(23.6

)

(5.0

)

Income tax expense

 

$

48.7

 

$

28.3

 

$

30.1

 

 

 

 

Year Ended September 30,

 

 

 

2014

 

2013

 

2012

 

Federal statutory rates

 

35.0

%

35.0

%

35.0

%

Adjustments resulting from the tax effect of:

 

 

 

 

 

 

 

Permanent reinvestment of unremitted earnings

 

 

 

(8.1

)

State income taxes, net of federal benefit

 

3.2

 

3.5

 

2.6

 

Foreign income tax rate differential

 

(7.2

)

(7.0

)

(3.1

)

Domestic manufacturer’s deduction

 

(2.3

)

(4.0

)

(2.6

)

Non-deductible acquisition costs

 

 

1.4

 

 

Valuation allowance

 

0.3

 

0.8

 

 

Other, net

 

1.5

 

0.5

 

(1.5

)

Effective income tax rate

 

30.5

%

30.2

%

22.3

%

 

 

 

September 30,

 

 

 

2014

 

2013

 

Deferred tax assets:

 

 

 

 

 

Employee benefit accruals

 

$

71.8

 

$

63.9

 

Loss and tax credit carryforwards

 

39.3

 

39.6

 

Rebates and other discounts

 

4.8

 

5.5

 

Self-insurance reserves

 

6.3

 

6.4

 

Casket pricing obligation

 

2.3

 

2.7

 

Allowance for doubtful accounts

 

1.6

 

1.2

 

Inventory

 

2.1

 

2.0

 

Other, net

 

18.7

 

8.3

 

Total deferred tax assets before valuation allowance

 

146.9

 

129.6

 

Less valuation allowance

 

(2.5

)

(2.5

)

Total deferred tax assets, net

 

144.4

 

127.1

 

Deferred tax liabilities:

 

 

 

 

 

Depreciation

 

(17.1

)

(20.9

)

Amortization

 

(146.2

)

(152.1

)

Long-term contracts and customer prepayments

 

(23.3

)

(14.6

)

Unremitted earnings of foreign operations

 

(0.2

)

(0.2

)

Other, net

 

(2.9

)

(3.8

)

Total deferred tax liabilities

 

(189.7

)

(191.6

)

Deferred tax assets and liabilities, net

 

$

(45.3

)

$

(64.5

)

 

 

 

 

 

 

Amounts recorded in the balance sheets:

 

 

 

 

 

Deferred taxes, current

 

$

9.8

 

$

10.2

 

Deferred taxes, long-term

 

(55.1

)

(74.7

)

Deferred tax assets and liabilities, net

 

$

(45.3

)

$

(64.5

)

 

At September 30, 2014, we had $6.2 of deferred tax assets related to U.S. federal and state tax credit carryforwards, which began to expire in 2014, and $33.1 of deferred tax assets related to foreign net operating loss carryforwards, which will begin to expire in 2016.    Gross deferred tax assets of $39.3 as of September 30, 2014 were reduced by a valuation allowance of $2.5 relating to foreign net operating loss carryforwards.  At September 30, 2014 and 2013, we had $2.1 and $28.5 of current income tax payable classified as other current liabilities on our balance sheets.

 

We have established a valuation allowance for deferred tax assets when it has been determined that the amount of expected future taxable income is not likely to support the use of the deduction or credit.

 

As of September 30, 2014 and 2013, U.S. federal and state income taxes have not been provided on accumulated undistributed earnings of substantially all our foreign subsidiaries, as these earnings were considered permanently reinvested.  The total permanently reinvested earnings were $84.0 and $41.7 for 2014 and 2013.  These amounts represent book earnings translated at historical rates. It is not practicable to estimate the tax liabilities that would be incurred upon full repatriation of undistributed earnings due to foreign tax credit limitation uncertainty and uncertainty on applicable withholding tax rate on certain foreign to foreign distributions.

 

In connection with the acquisition of K-Tron in April 2010, we recorded a deferred tax liability related to the historical earnings of its Swiss operations that would be subject to U.S. income taxes upon earnings repatriation.  With the acquisition of Rotex, we identified the need to retain cash overseas to support the continued growth of the Process Equipment Group and began developing a plan to integrate Rotex into our existing international structure.  As a result, in 2012 we asserted K-Tron historical earnings to be permanently reinvested.  Accordingly, a tax benefit of $11.0 was recognized, representing the release of the deferred tax liability.  During 2012, we completed the integration of Rotex into our international structure.

 

A reconciliation of the unrecognized tax benefits is as follows:

 

 

 

September 30,

 

 

 

2014

 

2013

 

2012

 

Balance at September 30

 

$

6.4

 

$

2.9

 

$

7.3

 

Additions for tax positions related to the current year

 

2.5

 

0.2

 

0.2

 

Additions for tax positions of prior years

 

 

1.5

 

1.0

 

Reductions for tax positions of prior years

 

(0.3

)

(1.2

)

(2.5

)

Settlements

 

(0.2

)

(1.3

)

(3.5

)

Balance attributable to acquisition of Coperion

 

 

4.3

 

 

Balance attributable to pre-spin added in current year

 

 

 

0.4

 

Balance at September 30

 

$

8.4

 

$

6.4

 

$

2.9

 

 

The gross unrecognized tax benefit included $7.6 and $5.8 at September 30, 2014 and 2013 that if recognized, would impact the effective tax rate in future periods.

 

We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense.  During 2014 and 2013, we recognized $0.4 and $0.1 in additional interest and penalties.  Excluded from the reconciliation were $0.8 and $0.5 of accrued interest and penalties at September 30, 2014 and 2013.

 

We operate in multiple income tax jurisdictions both inside and outside the U.S. and are currently under examination in various federal, state, and foreign jurisdictions. Specifically, we are currently under examination in the U.S. for 2013 and under examination in Germany for 2004 through 2008. In addition, there are other ongoing audits in various stages of completion in several state and foreign jurisdictions.

 

It is possible that the liability associated with the unrecognized tax benefits will increase or decrease within the next 12 months.  These changes may be the result of ongoing audits or the expiration of statutes of limitations and could range up to $3.1 based on current estimates.  Audit outcomes and the timing of audit settlements are subject to significant uncertainty.  Although we believe that adequate provision has been made for such issues, it is possible that their ultimate resolution could affect our earnings.  Conversely, if these issues are resolved favorably in the future, the related provision would be reduced and yield a positive impact on earnings.  We do not expect that the outcome of these audits will significantly impact the financial statements.

Earnings Per Share
Earnings Per Share

8.Earnings per Share

 

The dilutive effects of performance-based stock awards described in Note 9 are included in the computation of diluted earnings per share at the level the related performance criteria are met through the respective balance sheet date.  At September 30, 2014, 2013, and 2012, potential dilutive effects, representing 1,900,000, 2,100,000, and 1,300,000 shares were excluded from the computation of diluted earnings per share as the related performance criteria were not yet met, although we expect to meet various levels of criteria in the future.

 

 

Year Ended September 30,

 

 

 

2014

 

2013

 

2012

 

Net income(1)

 

$

109.7 

 

$

63.4 

 

$

104.8 

 

Weighted average shares outstanding — basic (in millions)

 

63.2 

 

62.7 

 

62.2 

 

Effect of dilutive stock options and unvested time-based restricted stock (in millions)

 

0.6 

 

0.3 

 

0.2 

 

Weighted average shares outstanding — diluted (in millions)

 

63.8 

 

63.0 

 

62.4 

 

 

 

 

 

 

 

 

 

Earnings per share — basic

 

$

1.74 

 

$

1.01 

 

$

1.68 

 

Earnings per share — diluted

 

$

1.72 

 

$

1.01 

 

$

1.68 

 

 

 

 

 

 

 

 

 

Anti-dilutive effect of stock options and unvested time-based restricted stock excluded from the computation of diluted earnings per share (millions)

 

0.4 

 

1.3 

 

2.0 

 

 

 

(1) Net income attributable to Hillenbrand

Share-Based Compensation
Share-Based Compensation

9.Share-Based Compensation

 

We have share-based compensation plans under which 12,685,436 shares were initially registered and available for issuance.  As of September 30, 2014, 4,166,230 shares were outstanding under these plans and 3,730,889 shares had been issued, leaving 4,788,317 shares available for future issuance.  This included our primary plan, the Hillenbrand, Inc. Stock Incentive Plan, which provides for long-term performance compensation for key employees and members of the Board of Directors.  It also included our Supplemental Retirement Plan.  A variety of discretionary awards for employees and non-employee directors are authorized, including incentive or non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, and bonus stock.  These programs are administered by the Board of Directors and its Compensation and Management Development Committee.

 

 

 

Year Ended September 30,

 

 

 

2014

 

2013

 

2012

 

Stock-based compensation cost

 

$

7.5 

 

$

6.4 

 

$

8.7 

 

Less impact of income tax

 

2.8 

 

2.3 

 

3.2 

 

Stock-based compensation cost, net of tax

 

$

4.7 

 

$

4.1 

 

$

5.5 

 

 

The Company realized current tax benefits of $3.7 from the exercise of stock options and the payment of stock awards during 2014.

 

Stock Options — The fair values of option grants under the Hillenbrand, Inc. Stock Incentive Plan are estimated on the date of grant using the binomial option-pricing model, which incorporates the possibility of early exercise of options into the valuation as well as our historical exercise and termination experience to determine the option value.  The grants are contingent upon continued employment and generally vest over a three-year period.  Option terms generally do not exceed 10 years.  The weighted-average fair value of options granted was $6.97, $4.91, and $5.88 per share for 2014, 2013, and 2012.  The following assumptions were used in the determination of fair value:

 

 

 

Year Ended September 30,

 

 

 

2014

 

2013

 

2014

 

Risk-free interest rate

 

0.1 – 2.8%

 

0.2 – 1.6%

 

0.1 – 2.0%

 

Weighted-average dividend yield

 

2.8%

 

3.8%

 

3.4%

 

Weighted-average volatility factor

 

33.5%

 

34.9%

 

37.4%

 

Exercise factor

 

29.5%

 

32.1%

 

32.9%

 

Post-vesting termination rate

 

5.0%

 

5.0%

 

5.0%

 

Expected life (years)

 

4.2

 

4.1

 

4.2

 

 

The risk-free interest rate is based upon observed interest rates appropriate for the term of the employee stock options.  The remaining assumptions require significant judgment utilizing historical information, peer data, and future expectations.  The dividend yield is based on the history of dividend payouts and the computation of expected volatility is based on historical stock volatility.  The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the binomial model.  The post-vesting termination rate and the exercise factor are based on the history of exercises and forfeitures for previous stock options.

 

The following tables provide a summary of outstanding stock option awards:

 

 

 

Number

 

Weighted-Average

 

 

 

of Shares

 

Exercise Price

 

Outstanding at September 30, 2013

 

3,045,402

 

$

21.13

 

Granted

 

455,922

 

28.18

 

Exercised

 

(914,113

)

23.15

 

Forfeited

 

(93,292

)

24.69

 

Expired

 

(14,552

)

27.36

 

Outstanding at September 30, 2014

 

2,479,367

 

21.52

 

 

 

 

 

 

 

Exercisable at September 30, 2014

 

1,664,177

 

19.95

 

 

As of September 30, 2014, there was $2.8 of unrecognized stock-based compensation associated with unvested stock options expected to be recognized over a weighted-average period of 1.9 years.  This unrecognized compensation expense included a reduction for our estimate of potential forfeitures.  As of September 30, 2014, the average remaining life of the outstanding stock options was 5.8 years with an aggregate intrinsic value of $23.9.  As of September 30, 2014, the average remaining life of the exercisable stock options was 4.6 years with an aggregate intrinsic value of $18.7.  The total intrinsic value of options exercised by employees and directors during 2014, 2013, and 2012 was $6.1, $0.9, and $0.7.

 

Time-Based Stock Awards and Performance-Based Stock Awards —These awards are consistent with our compensation program’s guiding principles and are designed to (i) align management’s interests with those of shareholders, (ii) motivate and provide incentive to achieve superior results, (iii) maintain a significant portion of at-risk incentive compensation, (iv) delineate clear accountabilities, and (v) ensure competitive compensation.  We believe that our blend of compensation components provides the Company’s leadership team with the appropriate incentives to create long-term value for shareholders while taking thoughtful and prudent risks to grow the value of the Company.  The vesting of a portion of performance-based stock awards is contingent upon the creation of shareholder value as measured by the cumulative cash returns and final period net operating profit after tax compared to the established hurdle rate over a three-year period and a corresponding service requirement.  The hurdle rate is a reflection of the weighted-average cost of capital and targeted capital structure.  The number of shares awarded is based upon the fair value of our stock at the date of grant adjusted for the attainment level at the end of the period.  Based on the extent to which the performance criteria are achieved, it is possible for none of the awards to vest or for a range up to the maximum to vest.  We record expense associated with the awards on a straight-line basis over the vesting period based upon an estimate of projected performance.  The actual performance of the Company is evaluated quarterly, and the expense is adjusted according to the new projections.  As a result, depending on the degree to which performance criteria are achieved or projections change, expenses related to the performance-based stock awards may become more volatile as we approach the final performance measurement date at the end of the three-year period.

 

In 2014, in addition to the performance-based stock awards described above, we also granted performance-based stock awards based on a relative total shareholder return formula (“TSR”).  The Monte-Carlo simulation method is used to determine fair value of the TSR award.  The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of ours and the Peer Group’s future expected stock prices.  Expense for the TSR award is determined at the grant date based upon the projected performance and recorded on a straight-line basis over the vesting period.

 

The value of time-based stock awards and performance-based stock awards in our common stock is the fair value at the date of grant. The total vest date fair value of shares held by Hillenbrand employees and directors which vested during 2014, 2013, and 2012 was $5.8, $6.5, and $10.3 (including dividends). A summary of the unvested stock award activity presented below represents the maximum number of shares that could be earned or vested:

 

 

 

 

 

Weighted-Average

 

 

 

Number of

 

Grant Date

 

Time-Based Stock Awards 

 

Shares

 

Fair Value

 

Non-vested time-based stock awards at September 30, 2013

 

113,074

 

$

20.59

 

Granted

 

99,518

 

29.50

 

Vested

 

(73,865

)

25.33

 

Forfeited

 

(19,644

)

20.67

 

Non-vested time-based stock awards at September 30, 2014

 

119,083

 

25.09

 

 

 

 

 

 

Weighted-Average

 

 

 

Number of

 

Grant Date

 

Performance-Based Stock Awards 

 

Shares

 

Fair Value

 

Non-vested performance-based stock awards at September 30, 2013

 

1,406,994

 

$

21.49

 

Granted

 

583,573

 

28.56

 

Vested

 

(98,702

)

22.33

 

Forfeited

 

(682,547

)

22.57

 

Non-vested performance-based stock awards at September 30, 2014

 

1,209,318

 

24.22

 

 

As of September 30, 2014, $2.3 and $4.6 of unrecognized stock-based compensation was associated with our unvested time-based stock awards and performance-based stock awards based upon projected performance to date.  These costs are expected to be recognized over a weighted-average period of 2.0 and 1.7 years.  This unrecognized compensation expense included a reduction for an estimate of potential forfeitures.  As of September 30, 2014, the outstanding time-based stock awards and performance-based stock awards had an aggregate fair value of $3.7 and $37.7.  The weighted-average grant date fair value of time-based stock awards was $22.25 and $21.47 per share for 2013 and 2012.  The weighted-average grant date fair value of performance-based stock awards was $20.76 and $22.34 per share for 2013 and 2012.

 

Dividends payable in stock accrue on both time-based and performance-based stock awards, and are subject to the same terms as the original grants.  As of September 30, 2014, a total of 54,198 stock units had accumulated on unvested stock awards due to dividend reinvestments and were excluded from the tables above.  The aggregate fair value of these units at September 30, 2014 was $1.7.

 

Vested Deferred Stock — Past stock-based compensation programs allowed deferrals after vesting to be set up as deferred stock.  As of September 30, 2014, there were 304,264 shares that were deferred fully-vested and were excluded from the tables above.  The aggregate fair value of these shares at September 30, 2014 was $9.4.

Other Comprehensive Income (Loss)
Other Comprehensive Income (Loss)

10.Other Comprehensive Income (Loss)

 

 

 

Pension and
Postretirement

 

Currency
Translation

 

Net
Unrealized
Gain (Loss) on
Derivative
Instruments

 

Net
Unrealized
Gain (Loss)