HILLENBRAND, INC., 10-K filed on 11/25/2013
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Sep. 30, 2013
Nov. 15, 2013
Mar. 31, 2013
Document and Entity Information
 
 
 
Entity Registrant Name
Hillenbrand, Inc. 
 
 
Entity Central Index Key
0001417398 
 
 
Document Type
10-K 
 
 
Document Period End Date
Sep. 30, 2013 
 
 
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
 
 
$ 1,586,716,416 
Entity Common Stock, Shares Outstanding
 
63,073,082 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
FY 
 
 
CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2011
CONSOLIDATED STATEMENTS OF INCOME
 
 
 
Net revenue
$ 1,553.4 
$ 983.2 
$ 883.4 
Cost of goods sold
1,026.2 
594.3 
513.5 
Gross profit
527.2 
388.9 
369.9 
Operating expenses
409.1 
240.1 
211.3 
Operating profit
118.1 
148.8 
158.6 
Interest expense
24.0 
12.4 
11.0 
Other income (expense), net
(0.4)
(1.5)
10.2 
Income before income taxes
93.7 
134.9 
157.8 
Income tax expense
28.3 
30.1 
51.7 
Consolidated net income
65.4 
104.8 
106.1 
Less: Net income attributable to noncontrolling interests
2.0 
 
 
Net income
$ 63.4 1
$ 104.8 1
$ 106.1 1
Net income - per share of common stock
 
 
 
Basic earnings per share (in dollars per share)
$ 1.01 1
$ 1.68 1
$ 1.71 1
Diluted earnings per share (in dollars per share)
$ 1.01 1
$ 1.68 1
$ 1.71 1
Weighted-average shares outstanding - basic (in shares)
62.7 
62.2 
62.0 
Weighted-average shares outstanding - diluted (in shares)
63.0 
62.4 
62.0 
Cash dividends per share (in dollars per share)
$ 0.78 
$ 0.77 
$ 0.76 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
12 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2011
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Consolidated net income
$ 65.4 
$ 104.8 
$ 106.1 
Other comprehensive income (loss), net of tax
 
 
 
Currency translation
14.7 
(4.2)
11.3 
Pension and postretirement (net of tax of $15.2, $2.0, and $4.3)
25.5 
2.0 
(8.5)
Net unrealized gain (loss) on derivative instruments (net of tax of $0.2, $0.2, and $0.1)
0.5 
(0.5)
0.3 
Net unrealized gain (loss) on available-for-sale securities (net of tax of $0.1, $0.1, and $0.2)
(0.2)
(0.2)
0.4 
Total other comprehensive income (loss), net of tax
40.5 
(2.9)
3.5 
Consolidated comprehensive income
105.9 
101.9 
109.6 
Less: Comprehensive income attributable to noncontrolling interests
1.5 
 
 
Comprehensive income
$ 104.4 1
$ 101.9 1
$ 109.6 1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2011
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Pension and postretirement, tax
$ 15.2 
$ 2.0 
$ 4.3 
Net unrealized gain (loss) on derivative instruments, tax
0.2 
0.2 
0.1 
Net unrealized gain (loss) on available-for-sale securities, tax
$ 0.1 
$ 0.1 
$ 0.2 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Sep. 30, 2013
Sep. 30, 2012
Current Assets
 
 
Cash and cash equivalents
$ 42.7 
$ 20.2 
Trade receivables, net
213.4 
150.7 
Unbilled receivables from long-term manufacturing contracts
142.1 
 
Inventories
177.5 
90.0 
Deferred income taxes
22.3 
19.6 
Prepaid expenses
20.4 
15.1 
Other current assets
21.0 
9.7 
Total current assets
639.4 
305.3 
Property, plant, and equipment, net
171.9 
117.9 
Intangible assets, net
558.6 
313.9 
Goodwill
585.8 
303.7 
Other assets
47.5 
46.7 
Total Assets
2,003.2 
1,087.5 
Current Liabilities
 
 
Trade accounts payable
181.4 
35.3 
Liabilities from long-term manufacturing contracts and advances
80.9 
15.9 
Current portion of long-term debt
10.0 
 
Accrued compensation
59.6 
29.3 
Deferred income taxes
12.1 
0.9 
Other current liabilities
121.5 
70.4 
Total current liabilities
465.5 
151.8 
Long-term debt
654.3 
271.6 
Accrued pension and postretirement healthcare
190.3 
111.8 
Deferred income taxes
75.4 
21.7 
Other long-term liabilities
41.4 
24.3 
Total Liabilities
1,426.9 
581.2 
Commitments and contingencies
   
   
SHAREHOLDERS' EQUITY
 
 
Common stock, no par value (63.1 and 63.2 shares issued, 62.9 and 62.6 shares outstanding, 0.0 and 0.3 shares restricted)
   
   
Additional paid-in capital
321.7 
321.9 
Retained earnings
252.2 
238.3 
Treasury stock (0.2 and 0.6 shares)
(4.2)
(11.5)
Accumulated other comprehensive loss
(1.4)
(42.4)
Hillenbrand Shareholders' Equity
568.3 
506.3 
Noncontrolling interests
8.0 
 
Total Shareholders' Equity
576.3 
506.3 
Total Liabilities and Equity
$ 2,003.2 
$ 1,087.5 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, unless otherwise specified
Sep. 30, 2013
Sep. 30, 2012
CONSOLIDATED BALANCE SHEETS
 
 
Common stock, par value (in dollars per share)
   
   
Common stock, shares issued
63.1 
63.2 
Common stock, shares outstanding
62.9 
62.6 
Common stock, restricted
0.3 
Treasury stock, shares
0.2 
0.6 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2011
Operating Activities
 
 
 
Consolidated net income
$ 65.4 
$ 104.8 
$ 106.1 
Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
89.4 
40.4 
36.1 
Deferred income taxes
(23.6)
(5.0)
(4.5)
Net loss on disposal or impairment of property
1.4 
3.3 
0.7 
Net gain on auction rate securities and investments
(0.3)
(0.2)
(0.5)
Interest income on Forethought Note
 
 
(6.4)
Forethought Note interest payment
 
 
59.7 
Equity in net loss (income) from affiliates
1.3 
(1.6)
(5.4)
Share-based compensation
6.4 
8.7 
11.7 
Trade accounts receivable and receivables on long-term manufacturing contracts
(38.9)
(18.5)
(8.8)
Inventories
26.5 
(6.2)
(5.9)
Prepaid expenses and other current assets
(4.5)
(7.7)
2.5 
Trade accounts payable
0.1 
4.9 
(1.7)
Accrued expenses and other current liabilities
(24.8)
8.6 
1.4 
Income taxes payable
27.9 
(0.1)
(5.4)
Defined benefit plan funding
(20.8)
(4.0)
(2.8)
Defined benefit plan expense
17.7 
12.5 
9.9 
Other, net
4.0 
(1.7)
2.8 
Net cash provided by operating activities
127.2 
138.2 
189.5 
Investing Activities
 
 
 
Capital expenditures
(29.9)
(20.9)
(21.9)
Forethought Note principal repayment
 
 
91.5 
Proceeds from sales of property, plant, and equipment
1.6 
 
 
Acquisitions of businesses, net of cash acquired
(415.7)
(4.4)
(240.9)
Proceeds from auction rate securities and investments
1.7 
0.8 
12.4 
Return of investment capital from affiliates
1.3 
2.0 
4.4 
Net cash used in investing activities
(441.0)
(22.5)
(154.5)
Financing Activities
 
 
 
Proceeds from term loan
200.0 
 
 
Repayments on term loan
(10.0)
 
 
Proceeds from revolving credit facilities, net of financing costs
710.3 
545.7 
179.0 
Repayments on revolving credit facilities
(514.7)
(708.0)
(150.9)
Payment of dividends on common stock
(48.7)
(47.6)
(46.9)
Purchase of common stock
 
 
(3.8)
Other, net
(0.4)
(1.2)
0.6 
Net cash provided by (used in) financing activities
336.5 
(211.1)
(22.0)
Effect of exchange rate changes on cash and cash equivalents
(0.2)
0.1 
4.1 
Net cash flows
22.5 
(95.3)
17.1 
Cash and cash equivalents:
 
 
 
At beginning of period
20.2 
115.5 
98.4 
At end of period
42.7 
20.2 
115.5 
Cash paid for interest
21.7 
11.3 
10.6 
Cash paid for income taxes
$ 24.4 
$ 35.3 
$ 61.5 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Millions, except Share data, unless otherwise specified
Total
USD ($)
Common Stock
Additional Paid-in Capital
USD ($)
Retained Earnings
USD ($)
Treasury Stock
USD ($)
Accumulated Other Comprehensive Income (Loss)
USD ($)
Noncontrolling Interests
USD ($)
Balance at Sep. 30, 2010
$ 371.9 
 
$ 304.9 
$ 124.8 
$ (14.8)
$ (43.0)
 
Balance (in shares) at Sep. 30, 2010
 
63,100,000 
 
 
800,000 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Total other comprehensive income (loss), net of tax
3.5 
 
 
 
 
3.5 
 
Net income
106.1 
 
 
106.1 
 
 
 
Issuance/retirement of stock for stock awards/options
0.6 
 
(0.9)
 
1.5 
 
 
Issuance/retirement of stock for stock awards/options (in shares)
 
300,000 
 
 
(100,000)
 
 
Share-based compensation
11.7 
 
11.7 
 
 
 
 
Purchases of common stock
(3.8)
 
 
 
(3.8)
 
 
Purchases of common stock (in shares)
 
 
 
 
200,000 
 
 
Dividends
(46.9)
 
1.3 
(48.2)
 
 
 
Balance at Sep. 30, 2011
443.1 
 
317.0 
182.7 
(17.1)
(39.5)
 
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
(1.1)
 
(6.7)
 
5.6 
 
 
Issuance/retirement of stock for stock awards/options (in shares)
300,000 
(200,000)
 
 
(300,000)
 
 
Share-based compensation
8.7 
 
8.7 
 
 
 
 
Dividends
(47.6)
 
1.2 
(48.8)
 
 
 
Other
1.3 
 
1.7 
(0.4)
 
 
 
Balance at Sep. 30, 2012
506.3 
 
321.9 
238.3 
(11.5)
(42.4)
 
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
40.5 
 
 
 
 
41.0 
(0.5)
Net income
65.4 
 
 
63.4 
 
 
2.0 
Issuance/retirement of stock for stock awards/options
(0.5)
 
(7.8)
 
7.3 
 
 
Issuance/retirement of stock for stock awards/options (in shares)
400,000 
(100,000)
 
 
(400,000)
 
 
Share-based compensation
6.4 
 
6.4 
 
 
 
 
Dividends
(48.7)
 
0.8 
(49.5)
 
 
 
Other
0.4 
 
0.4 
 
 
 
 
Balance at Sep. 30, 2013
$ 576.3 
 
$ 321.7 
$ 252.2 
$ (4.2)
$ (1.4)
$ 8.0 
Balance (in shares) at Sep. 30, 2013
 
63,100,000 
 
 
200,000 
 
 
Description of the Business
Description of the Business

1.              Description of the Business

 

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.

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 income statements.  All significant intercompany accounts and transactions have been eliminated.  Certain prior period amounts have been reclassified to conform to the 2013 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 paid.  At September 30, 2013 and 2012, we had reserves against trade receivables of $19.3 and $16.5.

 

Inventories are valued at the lower of cost or market.  Inventory costs are determined by the last-in, first-out (“LIFO”) method for approximately 25% and 48% of inventories at September 30, 2013 and 2012.  Costs of remaining inventories have been determined principally by the first-in, first-out (“FIFO”) method.  If the FIFO method of inventory accounting, which approximates current cost, had been used for all inventories, they would have been approximately $13.7 and $13.8 higher than reported at September 30, 2013 and 2012.

 

 

 

September 30,

 

 

 

2013

 

2012

 

Raw materials and components

 

$

58.3

 

$

39.1

 

Work in process

 

74.8

 

13.9

 

Finished goods

 

44.4

 

37.0

 

Total inventories

 

$

177.5

 

$

90.0

 

 

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 six 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 2013, 2012, and 2011 was $25.3, $18.7, and $19.1.

 

 

 

September 30, 2013

 

September 30, 2012

 

 

 

Cost

 

Accumulated
Depreciation

 

Cost

 

Accumulated
Depreciation

 

Land and land improvements

 

$

17.0

 

$

(3.5

)

$

16.8

 

$

(3.5

)

Buildings and building equipment

 

101.8

 

(57.6

)

92.5

 

(55.5

)

Machinery and equipment

 

316.8

 

(202.6

)

272.5

 

(204.9

)

Total

 

$

435.6

 

$

(263.7

)

$

381.8

 

$

(263.9

)

 

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 2013, 2012, and 2011 was $64.1, $21.7, and $17.0.  Estimated amortization expense related to intangible assets for the next five years is: $31.4 in 2014, $29.5 in 2015, $26.7 in 2016, $26.0 in 2017, and $25.4 in 2018.

 

 

 

September 30, 2013

 

September 30, 2012

 

 

 

Cost

 

Accumulated
Amortization

 

Cost

 

Accumulated
Amortization

 

Finite-lived assets:

 

 

 

 

 

 

 

 

 

Trade names

 

$

6.1

 

$

(5.9

)

$

6.1

 

$

(5.6

)

Customer relationships

 

405.1

 

(45.1

)

240.8

 

(25.5

)

Technology, including patents

 

70.6

 

(16.3

)

24.6

 

(9.1

)

Software

 

41.3

 

(31.9

)

34.7

 

(28.8

)

Other

 

0.6

 

(0.4

)

0.6

 

(0.4

)

 

 

523.7

 

(99.6

)

306.8

 

(69.4

)

Indefinite-lived assets:

 

 

 

 

 

 

 

 

 

Trade names

 

134.5

 

 

76.5

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

658.2

 

$

(99.6

)

$

383.3

 

$

(69.4

)

 

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, 2011

 

$

294.3

 

$

5.7

 

$

300.0

 

Adjustments

 

6.4

 

 

6.4

 

Foreign currency adjustments

 

(2.7

)

 

(2.7

)

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

 

 

Investments — Our investment portfolio consists of investments in private equity limited partnerships and common stock with a carrying value of $11.3 and $15.8 at September 30, 2013 and 2012.  Investments are included in other assets on the balance sheets.  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 $3.0.  The timing of this 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-insured 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-insured retentions ranging from $0.5 to $1.0 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, 2013, we had repurchased approximately 1,200,000 shares for $22.5, which were classified as treasury stock.  During 2013 and 2012, no shares were repurchased.  In 2013 and 2012, approximately 400,000 shares and 300,000 shares were issued from treasury stock under our stock compensation programs.  At September 30, 2013, we had $77.5 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, 2013 and 2012.

 

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,

 

 

 

2013

 

2012

 

Currency translation

 

$

31.4

 

$

16.2

 

Pension and postretirement (net of taxes of $19.7 and $34.9)

 

(33.0

)

(58.5

)

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

 

0.2

 

(0.3

)

Unrealized gain on available-for-sale securities (net of taxes of $0.0 and $0.1)

 

 

0.2

 

Accumulated other comprehensive loss

 

$

(1.4

)

$

(42.4

)

 

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 2013.

 

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 $12.2, $5.2, and $4.5 for 2013, 2012, and 2011.

 

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 $13.2 and $2.7 for 2013 and 2012.  Warranty costs were $5.0, $2.6, and $2.4 for 2013, 2012, and 2011.

 

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 $165.8 and $46.0 at September 30, 2013 and 2012.

 

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 $1.5 and $0.0 (included in other current assets) and liabilities of $0.5 and $0.4 (included in other current liabilities) at September 30, 2013, and 2012.  See Note 12 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 2013 and 2012.  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 on a speculative basis.

 

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 and other target evaluation costs.

 

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 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 financial statements.

 

Recently issued accounting standards — 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 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 financial statements.

 

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 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 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 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 $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 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 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 2,100 employees worldwide as of September 30, 2013.  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.

 

Coperion revenues consist of sales of large systems, equipment, components, replacement parts, and service.  Large system sales are generally fulfilled over 12 to 18 months, whereby customers generally pay a deposit and make progress payments in advance of delivery.  Working capital requirements for Coperion generally range 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 process engineering expertise is used to create a broad system solution for customers.  A certain amount of revenue for large system sales comes from third-party-sourced products that carry only a small up-charge. As a result, margins are lower on these large system sales when compared to the rest of the business. Hillenbrand believes that selling these complete systems provides a significant competitive advantage and increases margin dollars.

 

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.  The integration of Coperion with the Process Equipment Group will continue to be a key initiative for the next 12 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 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

 

112.4

 

Current assets, excluding cash and cash equivalents and inventory

 

175.2

 

Property, plant, and equipment

 

54.4

 

Identifiable intangible assets

 

291.8

 

Goodwill

 

267.8

 

Other assets

 

2.1

 

Total assets

 

936.5

 

 

 

 

 

Current liabilities

 

281.2

 

Accrued pension obligations

 

125.6

 

Deferred income taxes

 

68.6

 

Other long-term liabilities

 

6.7

 

Total liabilities

 

482.1

 

 

 

 

 

Noncontrolling interests

 

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.  Purchase accounting adjustments totaling $34.4 were made to deferred income taxes, inventory, current assets, and current liabilities in 2013.

 

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.  The unaudited pro forma information for 2012 included acquisition costs of $16.6 as well as backlog amortization and inventory step-up costs of $56.3.  Acquisition costs, backlog amortization, and inventory step-up costs 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.

 

 

 

September 30,

 

 

 

2013

 

2012

 

Pro forma net revenue

 

$

1,668.6

 

$

1,651.6

 

Pro forma net income(1)

 

118.4

 

64.7

 

Pro forma basic earnings per share

 

1.89

 

1.04

 

Pro forma diluted earnings per share

 

1.88

 

1.04

 

 

(1)Pro forma net income attributable to Hillenbrand

 

Other Acquisitions

 

We completed the acquisition of Rotex on August 31, 2011, for an aggregate purchase price of $248.1.  The net cash purchase price was $240.4 when adjusted for cash acquired.  The results of Rotex have been included in the Company’s consolidated results since the date of acquisition.

 

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 $17.2 of business acquisition costs during 2013.  These costs consist of $0.2 of cost of goods sold, $16.8 of operating expenses, and $1.2 of interest expense, partially offset by $1.0 of other income.

Financing Agreements
Financing Agreements

4.              Financing Agreements

 

 

 

September 30,

 

 

 

2013

 

2012

 

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

 

$

325.5

 

$

123.0

 

$200 term loan

 

190.0

 

 

$150 senior unsecured notes, net of discount

 

148.8

 

148.6

 

Total debt

 

664.3

 

271.6

 

Less: current portion

 

10.0

 

 

Total long-term debt

 

$

654.3

 

$

271.6

 

 

The following table summarizes the scheduled maturities of long-term debt for 2014 through 2018:

 

 

 

Amount

 

2014

 

$10.0

 

2015

 

15.0

 

2016

 

20.0

 

2017

 

470.5

 

2018

 

 

 

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, 2013, we had $24.8 in outstanding letters of credit issued and had $349.7 of remaining borrowing capacity available.  The weighted-average interest rates on borrowings under the Facility were 1.37% and 0.80% for 2013 and 2012.  The weighted-average interest rate on the term loan was 1.72% for 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 September 30, 2013, we had credit arrangements totaling $305.9, under which $204.6 was utilized for this purpose. These arrangements include a €150.0 Syndicated Letter of Guarantee Facility (“LG Facility”) entered into on June 3, 2013, under which unsecured letters of credit, bank guarantees, or other surety bonds may be issued.  The LG Facility matures on June 3, 2018, or earlier, should we elect to discontinue or fail to replace our primary credit facility which expires on July 27, 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 (1.15% at September 30, 2013).  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, 2013, we were in compliance with all covenants.

 

We had restricted cash of $1.3 and $1.6 at September 30, 2013 and 2012.

 

On July 9, 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 15, 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,

 

 

 

2013

 

2012

 

2011

 

2013

 

2012

 

2011

 

Service cost

 

$

4.7

 

$

4.5

 

$

4.2

 

$

1.6

 

$

1.3

 

$

1.3

 

Interest cost

 

12.7

 

12.1

 

12.1

 

3.9

 

0.7

 

0.7

 

Expected return on plan assets

 

(12.9

)

(12.7

)

(14.2

)

(1.0

)

(1.0

)

(1.2

)

Amortization of unrecognized prior service cost, net

 

0.9

 

0.9

 

0.9

 

 

 

 

Amortization of actuarial loss

 

7.2

 

5.7

 

4.0

 

 

 

 

Net pension costs

 

$

12.6

 

$

10.5

 

$

7.0

 

$

4.5

 

$

1.0

 

$

0.8

 

 

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

Change in benefit obligation:

 

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of year

 

$

300.4

 

$

272.7

 

$

28.4

 

$

29.6

 

Projected benefit obligation attributable to acquisitions

 

31.5

 

 

110.1

 

 

Service cost

 

4.7

 

4.5

 

1.6

 

1.3

 

Interest cost

 

12.7

 

12.1

 

3.9

 

0.7

 

Plan amendment

 

 

0.8

 

 

 

Actuarial (gain) loss

 

(29.2

)

20.7

 

1.1

 

(0.3

)

Benefits paid

 

(12.7

)

(10.4

)

(11.3

)

(2.7

)

Employee contributions

 

 

 

0.8

 

0.8

 

Effect of exchange rates on projected benefit obligation

 

 

 

5.4

 

(1.0

)

Projected benefit obligation at end of year

 

307.4

 

300.4

 

140.0

 

28.4

 

 

 

 

 

 

 

 

 

 

 

Change in plan assets:

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

197.2

 

173.1

 

29.1

 

30.1

 

Fair value of pension assets attributable to acquisitions

 

16.0

 

 

 

 

Actual return on plan assets

 

16.4

 

33.7

 

0.9

 

0.8

 

Employee and employer contributions

 

12.1

 

2.0

 

8.8

 

1.9

 

Benefits paid

 

(12.8

)

(10.4

)

(11.3

)

(2.7

)

Administrative expenses paid

 

(0.8

)

(1.2

)

 

 

Effect of exchange rates on plan assets

 

 

 

1.1

 

(1.0

)

Fair value of plan assets at end of year

 

228.1

 

197.2

 

28.6

 

29.1

 

 

 

 

 

 

 

 

 

 

 

Funded status:

 

 

 

 

 

 

 

 

 

Plan assets less than benefit obligations

 

$

(79.3

)

$

(103.2

)

$

(111.4

)

$

0.7

 

 

 

 

 

 

 

 

 

 

 

Amounts recorded in the consolidated balance sheets:

 

 

 

 

 

 

 

 

 

Other assets

 

$

 

 

$

1.1

 

$

0.7

 

Accrued pension costs, current portion

 

(2.0

)

(1.7

)

(8.5

)

 

Accrued pension costs, long-term portion

 

(77.3

)

(101.5

)

(104.0

)

 

Plan assets less than benefit obligations

 

$

(79.3

)

$

(103.2

)

$

(111.4

)

$

0.7

 

 

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.  Net actuarial losses ($92.0) and prior service costs ($4.3), less an aggregate tax effect ($35.3), are included as components of accumulated other comprehensive loss at September 30, 2012.  The amount that will be amortized from accumulated other comprehensive loss into net pension costs in 2014 is expected to be $4.7.

 

Accumulated Benefit Obligation — The accumulated benefit obligation for all defined benefit retirement plans was $430.8 and $312.6 at September 30, 2013 and 2012.  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,

 

 

 

2013

 

2012

 

2013

 

2012

 

Projected benefit obligation

 

$

307.4

 

$

300.5

 

$

112.5

 

$

 

Accumulated benefit obligation

 

293.3

 

286.1

 

112.5

 

 

Fair value of plan assets

 

228.1

 

197.2

 

 

 

 

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,

 

 

 

2013

 

2012

 

2011

 

2013

 

2012

 

2011

 

Discount rate for obligation, end of year

 

4.9

%

4.0

%

4.5

%

3.5

%

2.3

%

2.5

%

Discount rate for expense, during the year

 

4.0

%

4.5

%

5.0

%

3.3

%

2.3

%

2.5

%

Expected rate of return on plan assets

 

6.6

%

6.6

%

7.2

%

3.5

%

3.5

%

3.5

%

Rate of compensation increase

 

2.6

%

2.5

%

2.5

%

0.2

%

1.5

%

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.

 

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 owned by the pension plan trusts at September 30, 2013.

 

The tables below provide the fair value of our pension plan assets by asset category at September 30, 2013 and 2012.  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 12 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.

·                  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.

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

 

 

 

 

 

Other types of investments:

 

 

 

 

 

 

 

 

 

Government index funds

 

5.5

 

5.5

 

 

 

Equity mutual funds

 

 

 

 

 

Corporate bond funds

 

9.8

 

9.8

 

 

 

Real estate and real estate funds

 

2.0

 

 

 

2.0

 

Total Non-U.S. pension plan assets

 

$

28.6

 

$

26.6

 

$

 

$

2.0

 

 

 

 

Fair Value at September 30, 2012 Using Inputs Considered as:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

U.S. Pension Plans

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

2.3

 

$

 

$

2.3

 

$

 

Equity securities

 

 

 

 

 

Corporate bonds

 

 

 

 

 

Other types of investments:

 

 

 

 

 

 

 

 

 

Government index funds

 

 

 

 

 

Equity mutual funds

 

93.4

 

 

93.4

 

 

Corporate bond funds

 

101.5

 

 

101.5

 

 

Real estate and real estate funds

 

 

 

 

 

Total U.S. pension plan assets

 

$

197.2

 

$

 

$

197.2

 

$

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. Pension Plans

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

5.3

 

$

5.3

 

$

 

$

 

Equity securities

 

7.3

 

7.3

 

 

 

Corporate bonds

 

10.1

 

10.1

 

 

 

Other types of investments:

 

 

 

 

 

 

 

 

 

Government index funds

 

4.4

 

4.4

 

 

 

Equity mutual funds

 

 

 

 

 

Corporate bond funds

 

 

 

 

 

Real estate and real estate funds

 

2.0

 

 

 

2.0

 

Total Non-U.S. pension plan assets

 

$

29.1

 

$

27.1

 

$

 

$

2.0

 

 

Cash Flows — During 2013, 2012, and 2011 we contributed cash of $20.1, $3.1, and $2.5, to our defined benefit retirement plans.  The increase in contributions was a result of the Coperion acquisition.  We will be required to make estimated minimum contributions of $20.1 in 2014, 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

 

2014

 

$

15.1

 

$

8.7

 

2015

 

15.5

 

8.6

 

2016

 

16.3

 

8.3

 

2017

 

17.8

 

8.1

 

2018

 

18.0

 

7.9

 

2019 - 2023

 

102.2

 

38.7

 

 

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 $8.2, $8.0, and $6.7 for 2013, 2012, and 2011.

 

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 recorded during 2013, 2012, and 2011 was $0.6, $1.0, and $1.3.

 

 

 

September 30,

 

 

 

2013

 

2012

 

Benefit obligation at beginning of year

 

$

10.9

 

$

11.0

 

Interest cost

 

0.4

 

0.5

 

Service cost

 

0.5

 

0.6

 

Plan amendments

 

(0.8

)

 

Actuarial gain

 

(0.5

)

 

Net benefits paid

 

(0.7

)

(1.2

)

Benefit obligation at end of year

 

$

9.8

 

$

10.9

 

 

 

 

 

 

 

Amounts recorded in the balance sheets:

 

 

 

 

 

Accrued postretirement benefits, current portion

 

$

0.8

 

$

0.8

 

Accrued postretirement benefits, long-term portion

 

9.0

 

10.1

 

Net amount recognized

 

$

9.8

 

$

10.9

 

 

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

 

 

 

Year Ended September 30,

 

 

 

2013

 

2012

 

2011

 

Discount rate for obligation

 

3.5

%

3.4

%

4.1

%

Healthcare cost rate assumed for next year

 

7.7

%

7.9

%

7.8

%

Ultimate trend rate

 

5.0

%

5.0

%

5.0

%

 

Net actuarial gains of $4.9 and $4.0, less tax of $1.8 and $1.5, are included as a component of accumulated other comprehensive loss at September 30, 2013 and 2012.  The estimated amount that will be amortized from accumulated other comprehensive loss as a reduction to postretirement healthcare costs in 2014 is $0.4.  A one percentage-point increase/decrease in the assumed healthcare cost trend rates as of September 30, 2013, would cause an increase/decrease in service and interest costs of $0.1, along with an increase/decrease in the benefit obligation of $0.8.

 

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,

 

 

 

2013

 

2012

 

Casket pricing obligation

 

$

6.7

 

$

7.6

 

Self-insurance loss reserves

 

14.7

 

13.4

 

Horstmann litigation liability

 

8.7

 

 

Other

 

16.7

 

8.6

 

 

 

46.8

 

29.6

 

Less current portion

 

(5.4

)

(5.3

)

Total long-term portion

 

$

41.4

 

$

24.3

 

 

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 is offset by a corresponding indemnification receivable recorded in other assets for $8.7.  See Note 10 for additional information.

Income Taxes
Income Taxes

7.              Income Taxes

 

 

 

Year Ended September 30,

 

 

 

2013

 

2012

 

2011

 

Domestic

 

$

108.0

 

$

116.3

 

$

140.5

 

Foreign

 

(14.3

)

18.6

 

17.3

 

Total earnings before income taxes

 

$

93.7

 

$

134.9

 

$

157.8

 

 

 

 

 

 

 

 

 

Income tax expense:

 

 

 

 

 

 

 

Current provision:

 

 

 

 

 

 

 

Federal

 

$

37.0

 

$

27.1

 

$

45.4

 

State

 

5.5

 

4.0

 

6.1

 

Foreign

 

9.4

 

4.0

 

4.7

 

Total current provision

 

51.9

 

35.1

 

56.2

 

 

 

 

 

 

 

 

 

Deferred provision (benefit):

 

 

 

 

 

 

 

Federal

 

(2.9

)

(4.1

)

(1.6

)

State

 

(0.5

)

0.3

 

(2.4

)

Foreign

 

(20.2

)

(1.2

)

(0.5

)

Total deferred provision (benefit)

 

(23.6

)

(5.0

)

(4.5

)

Income tax expense

 

$

28.3

 

$

30.1

 

$

51.7

 

 

 

 

Year Ended September 30,

 

 

 

2013

 

2012

 

2011

 

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

 

3.5

 

2.6

 

1.8

 

Foreign income tax rate differential

 

(7.0

)

(3.1

)

(1.2

)

Domestic manufacturer’s deduction

 

(4.0

)

(2.6

)

(2.7

)

Non-deductible acquisition costs

 

1.4

 

 

 

Valuation allowance

 

0.8

 

 

(0.6

)

Other, net

 

0.5

 

(1.5

)

0.5

 

Effective income tax rate

 

30.2

%

22.3

%

32.8

%

 

 

 

September 30,

 

 

 

2013

 

2012

 

Deferred tax assets:

 

 

 

 

 

Employee benefit accruals

 

$

63.9

 

$

64.1

 

Loss and tax credit carryforwards

 

39.6

 

2.7

 

Rebates and other discounts

 

5.5

 

4.4

 

Self-insurance reserves

 

6.4

 

5.9

 

Casket pricing obligation

 

2.7

 

2.9

 

Allowance for doubtful accounts

 

1.2

 

1.2

 

Inventory

 

2.0

 

2.0

 

Other, net

 

8.3

 

4.6

 

Total deferred tax assets before valuation allowance

 

129.6

 

87.8

 

Less valuation allowance

 

(2.5

)

(0.9

)

Total deferred tax assets, net

 

127.1

 

86.9

 

Deferred tax liabilities:

 

 

 

 

 

Depreciation

 

(20.9

)

(12.4

)

Amortization

 

(152.1

)

(71.8

)

Long-term contracts and customer prepayments

 

(14.6

)

 

Unremitted earnings of foreign operations

 

(0.2

)

(0.1

)

Other, net

 

(3.8

)

(1.8

)