Hillenbrand, Inc. - Quarter Report: 2020 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2020
OR
☐ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number. 001-33794
HILLENBRAND, INC.
(Exact name of registrant as specified in its charter)
| Indiana | 26-1342272 | ||||||||||
| (State of incorporation) | (I.R.S. Employer Identification No.) | ||||||||||
| One Batesville Boulevard | |||||||||||
| Batesville | IN | 47006 | |||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(812) 934-7500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, without par value | HI | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Emerging growth company | ☐ | |||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had 75,052,673 shares of common stock, no par value per share, outstanding as of January 28, 2021.
HILLENBRAND, INC.
INDEX TO FORM 10-Q
| Page | ||||||||
1
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Hillenbrand, Inc.
Consolidated Statements of Operations (Unaudited)
(in millions, except per share data)
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net revenue | $ | 692.5 | $ | 566.9 | |||||||
| Cost of goods sold | 448.3 | 395.1 | |||||||||
| Gross profit | 244.2 | 171.8 | |||||||||
| Operating expenses | 131.6 | 157.4 | |||||||||
| Amortization expense | 13.6 | 14.8 | |||||||||
| Gain on divestiture | (31.6) | — | |||||||||
| Interest expense | 21.2 | 14.7 | |||||||||
| Other (expense) income, net | (0.4) | 1.9 | |||||||||
| Income (loss) before income taxes | 109.0 | (13.2) | |||||||||
| Income tax expense (benefit) | 31.3 | (12.4) | |||||||||
| Consolidated net income (loss) | 77.7 | (0.8) | |||||||||
| Less: Net income attributable to noncontrolling interests | 1.3 | 2.3 | |||||||||
| Net income (loss) attributable to Hillenbrand | $ | 76.4 | $ | (3.1) | |||||||
| Net income (loss) attributable to Hillenbrand — per share of common stock: | |||||||||||
| Basic earnings (loss) per share | $ | 1.01 | $ | (0.05) | |||||||
| Diluted earnings (loss) per share | $ | 1.01 | $ | (0.05) | |||||||
| Weighted average shares outstanding (basic) | 75.3 | 68.4 | |||||||||
| Weighted average shares outstanding (diluted) | 75.5 | 68.4 | |||||||||
See Condensed Notes to Consolidated Financial Statements
2
Hillenbrand, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
(in millions)
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Consolidated net income (loss) | $ | 77.7 | $ | (0.8) | |||||||
| Changes in other comprehensive income, net of tax | |||||||||||
| Currency translation adjustment | 59.3 | 17.3 | |||||||||
| Pension and postretirement (net of tax of $0.3 and $0.5) | 1.2 | 1.1 | |||||||||
| Change in net unrealized gain on derivative instruments (net of tax of $0.3 and $0.2) | 1.7 | 1.4 | |||||||||
| Total changes in other comprehensive income, net of tax | 62.2 | 19.8 | |||||||||
| Consolidated comprehensive income | 139.9 | 19.0 | |||||||||
| Less: Comprehensive income attributable to noncontrolling interests | 1.4 | 2.2 | |||||||||
| Comprehensive income attributable to Hillenbrand | $ | 138.5 | $ | 16.8 | |||||||
See Condensed Notes to Consolidated Financial Statements
3
Hillenbrand, Inc.
Consolidated Balance Sheets
(in millions)
| December 31, 2020 (unaudited) | September 30, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 265.8 | $ | 302.2 | |||||||
| Trade receivables, net | 307.0 | 279.5 | |||||||||
| Receivables from long-term manufacturing contracts | 158.9 | 138.1 | |||||||||
| Inventories, net | 388.5 | 385.4 | |||||||||
| Prepaid expenses and other current assets | 85.1 | 83.2 | |||||||||
| Current assets held for sale | 150.0 | 181.3 | |||||||||
| Total current assets | 1,355.3 | 1,369.7 | |||||||||
| Property, plant, and equipment, net | 307.6 | 314.2 | |||||||||
| Operating lease right-of-use assets | 153.0 | 154.4 | |||||||||
| Intangible assets, net | 965.9 | 960.7 | |||||||||
| Goodwill | 1,185.9 | 1,137.8 | |||||||||
| Other long-term assets | 47.6 | 50.6 | |||||||||
| Total Assets | $ | 4,015.3 | $ | 3,987.4 | |||||||
| LIABILITIES | |||||||||||
| Current Liabilities | |||||||||||
| Trade accounts payable | $ | 274.2 | $ | 271.6 | |||||||
| Liabilities from long-term manufacturing contracts and advances | 214.1 | 189.1 | |||||||||
| Current portion of long-term debt | 28.1 | 36.3 | |||||||||
| Accrued compensation | 80.8 | 96.1 | |||||||||
| Current liabilities held for sale | 23.6 | 32.5 | |||||||||
| Other current liabilities | 254.7 | 226.5 | |||||||||
| Total current liabilities | 875.5 | 852.1 | |||||||||
| Long-term debt | 1,368.3 | 1,516.3 | |||||||||
| Accrued pension and postretirement healthcare | 171.8 | 166.8 | |||||||||
| Operating lease liabilities | 119.9 | 120.9 | |||||||||
| Deferred income taxes | 204.7 | 185.8 | |||||||||
| Other long-term liabilities | 68.8 | 66.1 | |||||||||
| Total Liabilities | 2,809.0 | 2,908.0 | |||||||||
| Commitments and contingencies (Note 15) | |||||||||||
| SHAREHOLDERS’ EQUITY | |||||||||||
| Common stock, no par value (75.8 and 75.8 shares issued, 75.1 and 74.8 shares outstanding) | — | — | |||||||||
| Additional paid-in capital | 717.2 | 723.6 | |||||||||
| Retained earnings | 541.4 | 481.4 | |||||||||
| Treasury stock (0.7 and 1.0 shares) | (32.0) | (43.2) | |||||||||
| Accumulated other comprehensive loss | (40.7) | (102.8) | |||||||||
| Hillenbrand Shareholders’ Equity | 1,185.9 | 1,059.0 | |||||||||
| Noncontrolling interests | 20.4 | 20.4 | |||||||||
| Total Shareholders’ Equity | 1,206.3 | 1,079.4 | |||||||||
| Total Liabilities and Shareholders’ Equity | $ | 4,015.3 | $ | 3,987.4 | |||||||
See Condensed Notes to Consolidated Financial Statements
4
Hillenbrand, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in millions)
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Operating Activities | |||||||||||
| Consolidated net income (loss) | $ | 77.7 | $ | (0.8) | |||||||
| Adjustments to reconcile net income (loss) to cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 29.3 | 25.9 | |||||||||
| Gain on divestiture | (31.6) | — | |||||||||
| Deferred income taxes | 14.4 | (29.0) | |||||||||
| Amortization of deferred financing costs | 1.7 | 0.5 | |||||||||
| Share-based compensation | 4.2 | 2.3 | |||||||||
| Settlement of Milacron share-based equity awards | — | 5.9 | |||||||||
| Trade accounts receivable and receivables from long-term manufacturing contracts | (32.8) | (9.4) | |||||||||
| Inventories, net | (2.1) | 26.3 | |||||||||
| Prepaid expenses and other current assets | (5.1) | 14.5 | |||||||||
| Trade accounts payable | (5.5) | (1.8) | |||||||||
| Liabilities from long-term manufacturing contracts and advances, | |||||||||||
| accrued compensation, and other current liabilities | 9.3 | (21.3) | |||||||||
| Income taxes payable | 8.1 | 6.5 | |||||||||
| Defined benefit plan and postretirement funding | (2.3) | (2.7) | |||||||||
| Defined benefit plan and postretirement expense | 0.8 | 1.5 | |||||||||
| Other, net | 0.1 | (0.6) | |||||||||
| Net cash provided by operating activities | 66.2 | 17.8 | |||||||||
| Investing Activities | |||||||||||
| Capital expenditures | (5.6) | (6.3) | |||||||||
| Proceeds from sales of property, plant, and equipment | — | 13.3 | |||||||||
| Acquisition of businesses, net of cash acquired | — | (1,503.1) | |||||||||
| Proceeds from divestiture, net of cash divested | 59.4 | — | |||||||||
| Net cash provided by (used in) investing activities | 53.8 | (1,496.1) | |||||||||
| Financing Activities | |||||||||||
| Proceeds from issuance of long-term debt | — | 725.0 | |||||||||
| Repayments on long-term debt | (220.0) | (9.1) | |||||||||
| Proceeds from revolving credit facilities | 226.0 | 747.5 | |||||||||
| Repayments on revolving credit facilities | (163.0) | (222.5) | |||||||||
| Payment of deferred financing costs | — | (5.4) | |||||||||
| Payments of dividends on common stock | (16.1) | (15.8) | |||||||||
| Proceeds from stock option exercises | 3.2 | 0.2 | |||||||||
| Payments for employee taxes on net settlement equity awards | (2.9) | (1.8) | |||||||||
| Other, net | (1.3) | 3.3 | |||||||||
| Net cash (used in) provided by financing activities | (174.1) | 1,221.4 | |||||||||
| Effect of exchange rates on cash and cash equivalents | 9.7 | 0.4 | |||||||||
| Net cash flows | (44.4) | (256.5) | |||||||||
| Cash, cash equivalents, and restricted cash: | |||||||||||
| At beginning of period | 311.8 | 399.4 | |||||||||
| At end of period | $ | 267.4 | $ | 142.9 | |||||||
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same amounts shown in the Consolidated Statements of Cash Flows:
| December 31, 2020 | December 31, 2019 | ||||||||||
| Cash and cash equivalents | $ | 265.8 | $ | 142.4 | |||||||
| Short-term restricted cash included in other current assets | 1.6 | 0.5 | |||||||||
| Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows | $ | 267.4 | $ | 142.9 | |||||||
See Condensed Notes to Consolidated Financial Statements
5
Hillenbrand, Inc.
Consolidated Statements of Shareholders’ Equity (Unaudited)
(in millions)
| Three Months Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders of Hillenbrand, Inc. | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||||||||||||||||||||||||||
| Shares | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 75.8 | $ | 723.6 | $ | 481.4 | 1.0 | $ | (43.2) | $ | (102.8) | $ | 20.4 | $ | 1,079.4 | |||||||||||||||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | — | — | — | — | — | 62.1 | 0.1 | 62.2 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 76.4 | — | — | — | 1.3 | 77.7 | |||||||||||||||||||||||||||||||||||||||
| Issuance/retirement of stock for stock awards/options | — | (10.9) | — | (0.3) | 11.2 | — | — | 0.3 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 4.2 | — | — | — | — | — | 4.2 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.2150 per share) | — | 0.3 | (16.4) | — | — | — | (1.4) | (17.5) | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 75.8 | $ | 717.2 | $ | 541.4 | 0.7 | $ | (32.0) | $ | (40.7) | $ | 20.4 | $ | 1,206.3 | |||||||||||||||||||||||||||||||||
| Three Months Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders of Hillenbrand, Inc. | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||||||||||||||||||||||||||
| Shares | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 63.9 | $ | 345.3 | $ | 599.5 | 1.2 | $ | (50.1) | $ | (140.6) | $ | 15.7 | $ | 769.8 | |||||||||||||||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | — | — | — | — | — | 19.9 | (0.1) | 19.8 | |||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | (3.1) | — | — | — | 2.3 | (0.8) | |||||||||||||||||||||||||||||||||||||||
| Issuance/retirement of stock for stock awards/options | — | (6.1) | — | (0.1) | 4.5 | — | — | (1.6) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 2.3 | — | — | — | — | — | 2.3 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.2125 per share) | — | 0.1 | (15.9) | — | — | — | (1.2) | (17.0) | |||||||||||||||||||||||||||||||||||||||
| Common stock issued to acquire Milacron (see Note 4) | 11.9 | 371.3 | — | — | — | — | — | 371.3 | |||||||||||||||||||||||||||||||||||||||
Reclassification of certain income tax effects (1) | — | — | 6.0 | — | — | (6.0) | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 75.8 | $ | 712.9 | $ | 586.5 | 1.1 | $ | (45.6) | $ | (126.7) | $ | 16.7 | $ | 1,143.8 | |||||||||||||||||||||||||||||||||
(1)Income tax effects of the Tax Act (as defined in Note 2) were reclassified from accumulated other comprehensive loss to retained earnings due to the adoption of ASU 2018-02. See Note 2 for more information.
See Condensed Notes to Consolidated Financial Statements
6
Hillenbrand, Inc.
Condensed Notes to Consolidated Financial Statements (Unaudited)
(in millions, except share and per share data)
1.Background and Basis of Presentation
Hillenbrand, Inc. (the “Company” or “Hillenbrand”) is a global diversified industrial company with multiple leading brands that serve a wide variety of industries around the world. The Company strives to provide superior return for our shareholders, exceptional value for our customers, great professional opportunities for our employees, and to be responsible to our communities through deployment of the Hillenbrand Operating Model (“HOM”). The HOM is a consistent and repeatable framework designed to produce sustainable and predictable results. The HOM describes the Company’s mission, vision, values, and mindset as leaders; applies our management practices in Strategy Management, Segmentation, Lean, Talent Development, and Acquisitions; and prescribes three steps (Understand, Focus, and Grow) designed to make the Company’s businesses both bigger and better. The Company’s goal is to continue developing Hillenbrand as a world-class global diversified industrial company through the deployment of the HOM.
Hillenbrand’s portfolio is composed of three reportable operating segments: Advanced Process Solutions designs, develops, manufactures, and services highly engineered industrial equipment around the world. Molding Technology Solutions is a global leader in highly engineered and customized systems in plastic technology and processing. Batesville is a recognized leader in the death care industry in North America. “Hillenbrand,” the “Company,” “we,” “us,” “our,” and similar words refer to Hillenbrand and its subsidiaries unless context otherwise requires.
The accompanying unaudited Consolidated Financial Statements include the accounts of Hillenbrand and its subsidiaries. They also include two subsidiaries where the Company’s ownership percentage is less than 100%. The Company’s fiscal year ends on September 30. Unless otherwise stated, references to years relate to fiscal years.
These unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements and therefore do not include all information required in accordance with United States generally accepted accounting principles (“GAAP”). The unaudited Consolidated Financial Statements have been prepared on the same basis as, and should be read in conjunction with, the audited Consolidated Financial Statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended September 30, 2020, as filed with the SEC on November 12, 2020. In the opinion of management, these Consolidated Financial Statements reflect all adjustments necessary to present a fair statement of the Company’s consolidated financial position and the consolidated results of operations and cash flows as of the dates and for the periods presented and are normal and recurring in nature. The interim period results are subject to variation and are not necessarily indicative of the results of operations to be expected for the full fiscal year.
The preparation of the Consolidated Financial Statements in conformity with GAAP requires the Company 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 Consolidated Financial Statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Examples of such estimates include, but are not limited to, revenue recognition under the percentage-of-completion method, carrying value of businesses held for sale, and the establishment of reserves related to customer rebates, doubtful accounts, warranties, early-pay discounts, inventories, income taxes, litigation, self-insurance, and progress toward achievement of performance criteria under incentive compensation programs.
On March 11, 2020, the World Health Organization declared the outbreak of the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide, and the effects of the COVID-19 pandemic and such associated measures on management’s estimates and results of operations through December 31, 2020 are reflected in the Consolidated Financial Statements. Given the unprecedented nature of the COVID-19 pandemic, the Company cannot reasonably estimate the full extent of the impact that the COVID-19 pandemic will have on its consolidated financial condition, results of operations, or cash flows in the foreseeable future. The ultimate impact of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such impacts could exist for an extended period of time, even after the COVID-19 pandemic subsides. Events and changes in circumstances arising after December 31, 2020, including those resulting from the ongoing impacts of the COVID-19 pandemic, will be reflected in management’s estimates for future periods in subsequent periodic filings.
2.Summary of Significant Accounting Policies
7
The significant accounting policies used in preparing the Consolidated Financial Statements are consistent with the accounting policies described in the Company’s Annual Report on Form 10-K as of and for the year ended September 30, 2020, except as described below.
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Statements (“ASU 2016-13”). ASU 2016-13 replaces the current incurred loss impairment model with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 became effective for the Company’s fiscal year beginning on October 1, 2020. As a result of the Company's assessment on its trade receivables and receivables from long-term manufacturing contracts, ASU 2016-13 did not have a material impact on the Consolidated Financial Statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 allows for the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) from accumulated other comprehensive loss to retained earnings. The Company adopted ASU 2018-02 on October 1, 2019, which resulted in a one-time decrease to accumulated other comprehensive loss and an increase to retained earnings of $6.0 on the Consolidated Balance Sheet, primarily related to deferred taxes previously recorded for pension and other postretirement benefits. The adoption of ASU 2018-02 did not have an impact to the Consolidated Statements of Operations or Consolidated Statements of Cash Flows.
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles, the methodology for calculating income tax rates in an interim period, and recognition of deferred taxes for outside basis differences in an investment, among other updates. ASU 2019-12 will be effective for the Company’s fiscal year beginning on October 1, 2021. The Company is currently evaluating the impact of ASU 2019-12 on the Consolidated Financial Statements.
No other new accounting pronouncements recently adopted or issued had or are expected to have a material impact on the Consolidated Financial Statements.
3.Revenue Recognition
Net revenue includes gross revenue less sales discounts, customer rebates, sales incentives, and product returns, all of which require the Company to make estimates for the portion of these allowances that have yet to be credited or paid to customers. The Company estimates these allowances using the expected value method, which is based upon historical rates and projections of customer purchases toward contractual rebate thresholds.
Contract balances
The balance in receivables from long-term manufacturing contracts at December 31, 2020 and September 30, 2020 was $158.9 and $138.1, respectively. The change was driven by the impact of net revenue recognized prior to billings. The balance in the liabilities from long-term manufacturing contracts and advances at December 31, 2020 and September 30, 2020 was $214.1 and $189.1, respectively, and consists primarily of cash payments received or due in advance of satisfying performance obligations. The revenue recognized for the three months ended December 31, 2020 and 2019 related to liabilities from long-term manufacturing contracts and advances as of September 30, 2020 and 2019 was $80.1 and $55.3, respectively. During the three months ended December 31, 2020 and 2019, the adjustments related to performance obligations satisfied in previous periods were immaterial.
Transaction price allocated to the remaining performance obligations
As of December 31, 2020, the aggregate amount of transaction price of remaining performance obligations, which corresponds to backlog as defined in Item 2 of this Form 10-Q, for the Company was $1,362.6. Approximately 78% of these performance obligations are expected to be satisfied over the next twelve months, and the remaining performance obligations, primarily within one to three years.
8
Disaggregation of revenue
The following tables present net revenue by end market:
| Three Months Ended December 31, 2020 | |||||||||||||||||||||||
| Advanced Process Solutions | Molding Technology Solutions | Batesville | Total | ||||||||||||||||||||
| End Market | |||||||||||||||||||||||
| Plastics | $ | 194.7 | $ | — | $ | — | $ | 194.7 | |||||||||||||||
| Automotive | — | 36.5 | — | 36.5 | |||||||||||||||||||
| Chemicals | 19.1 | — | — | 19.1 | |||||||||||||||||||
| Consumer goods | — | 39.0 | — | 39.0 | |||||||||||||||||||
| Food and pharmaceuticals | 22.8 | — | — | 22.8 | |||||||||||||||||||
| Custom molders | — | 38.9 | — | 38.9 | |||||||||||||||||||
| Construction | — | 20.4 | — | 20.4 | |||||||||||||||||||
| Packaging | — | 31.7 | — | 31.7 | |||||||||||||||||||
| Minerals and mining | 11.9 | — | — | 11.9 | |||||||||||||||||||
| Electronics | — | 18.4 | — | 18.4 | |||||||||||||||||||
| Medical | — | 21.2 | — | 21.2 | |||||||||||||||||||
| Death care | — | — | 164.8 | 164.8 | |||||||||||||||||||
| Other industrial | 42.3 | 30.8 | — | 73.1 | |||||||||||||||||||
| Total | $ | 290.8 | $ | 236.9 | $ | 164.8 | $ | 692.5 | |||||||||||||||
| Three Months Ended December 31, 2019 | |||||||||||||||||||||||
| Advanced Process Solutions | Molding Technology Solutions | Batesville | Total | ||||||||||||||||||||
| End Market | |||||||||||||||||||||||
| Plastics | $ | 202.0 | $ | — | $ | — | $ | 202.0 | |||||||||||||||
| Automotive | — | 25.0 | — | 25.0 | |||||||||||||||||||
| Chemicals | 24.4 | — | — | 24.4 | |||||||||||||||||||
| Consumer goods | — | 22.4 | — | 22.4 | |||||||||||||||||||
| Food and pharmaceuticals | 18.0 | — | — | 18.0 | |||||||||||||||||||
| Custom molders | — | 16.8 | — | 16.8 | |||||||||||||||||||
| Construction | — | 16.8 | — | 16.8 | |||||||||||||||||||
| Packaging | — | 13.8 | — | 13.8 | |||||||||||||||||||
| Minerals and mining | 13.3 | — | — | 13.3 | |||||||||||||||||||
| Electronics | — | 8.3 | — | 8.3 | |||||||||||||||||||
| Medical | — | 5.3 | — | 5.3 | |||||||||||||||||||
| Death care | — | — | 127.0 | 127.0 | |||||||||||||||||||
| Other industrial | 48.9 | 24.9 | — | 73.8 | |||||||||||||||||||
| Total | $ | 306.6 | $ | 133.3 | $ | 127.0 | $ | 566.9 | |||||||||||||||
9
The following tables present net revenue by geographical market:
| Three Months Ended December 31, 2020 | |||||||||||||||||||||||
| Advanced Process Solutions | Molding Technology Solutions | Batesville | Total | ||||||||||||||||||||
| Geographical Markets | |||||||||||||||||||||||
| Americas | $ | 82.1 | $ | 124.7 | $ | 164.8 | $ | 371.6 | |||||||||||||||
| Asia | 127.9 | 73.3 | — | 201.2 | |||||||||||||||||||
| Europe, the Middle East, and Africa | 80.8 | 38.9 | — | 119.7 | |||||||||||||||||||
| Total | $ | 290.8 | $ | 236.9 | $ | 164.8 | $ | 692.5 | |||||||||||||||
| Three Months Ended December 31, 2019 | |||||||||||||||||||||||
| Advanced Process Solutions | Molding Technology Solutions | Batesville | Total | ||||||||||||||||||||
| Geographical Markets | |||||||||||||||||||||||
| Americas | $ | 112.9 | $ | 80.4 | $ | 127.0 | $ | 320.3 | |||||||||||||||
| Asia | 108.3 | 32.9 | — | 141.2 | |||||||||||||||||||
| Europe, the Middle East, and Africa | 85.4 | 20.0 | — | 105.4 | |||||||||||||||||||
| Total | $ | 306.6 | $ | 133.3 | $ | 127.0 | $ | 566.9 | |||||||||||||||
The following tables present net revenue by products and services:
| Three Months Ended December 31, 2020 | |||||||||||||||||||||||
| Advanced Process Solutions | Molding Technology Solutions | Batesville | Total | ||||||||||||||||||||
| Products and Services | |||||||||||||||||||||||
| Equipment | $ | 197.9 | $ | 155.1 | $ | — | $ | 353.0 | |||||||||||||||
| Parts and services | 92.9 | 65.5 | — | 158.4 | |||||||||||||||||||
| Death care | — | — | 164.8 | 164.8 | |||||||||||||||||||
| Other | — | 16.3 | — | 16.3 | |||||||||||||||||||
| Total | $ | 290.8 | $ | 236.9 | $ | 164.8 | $ | 692.5 | |||||||||||||||
| Three Months Ended December 31, 2019 | |||||||||||||||||||||||
| Advanced Process Solutions | Molding Technology Solutions | Batesville | Total | ||||||||||||||||||||
| Products and Services | |||||||||||||||||||||||
| Equipment | $ | 206.0 | $ | 82.2 | $ | — | $ | 288.2 | |||||||||||||||
| Parts and services | 100.6 | 32.2 | — | 132.8 | |||||||||||||||||||
| Death care | — | — | 127.0 | 127.0 | |||||||||||||||||||
| Other | — | 18.9 | — | 18.9 | |||||||||||||||||||
| Total | $ | 306.6 | $ | 133.3 | $ | 127.0 | $ | 566.9 | |||||||||||||||
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The following tables present net revenue by timing of transfer:
| Three Months Ended December 31, 2020 | |||||||||||||||||||||||
| Advanced Process Solutions | Molding Technology Solutions | Batesville | Total | ||||||||||||||||||||
| Timing of Transfer | |||||||||||||||||||||||
| Point in time | $ | 146.2 | $ | 236.9 | $ | 164.8 | $ | 547.9 | |||||||||||||||
| Over time | 144.6 | — | — | 144.6 | |||||||||||||||||||
| Total | $ | 290.8 | $ | 236.9 | $ | 164.8 | $ | 692.5 | |||||||||||||||
| Three Months Ended December 31, 2019 | |||||||||||||||||||||||
| Advanced Process Solutions | Molding Technology Solutions | Batesville | Total | ||||||||||||||||||||
| Timing of Transfer | |||||||||||||||||||||||
| Point in time | $ | 147.3 | $ | 133.3 | $ | 127.0 | $ | 407.6 | |||||||||||||||
| Over time | 159.3 | — | — | 159.3 | |||||||||||||||||||
| Total | $ | 306.6 | $ | 133.3 | $ | 127.0 | $ | 566.9 | |||||||||||||||
4.Acquisitions and Divestitures
Acquisition of Milacron
Background
On November 21, 2019, the Company completed the acquisition of Milacron, a global leader in highly engineered and customized systems in plastic technology and processing, through a merger of its wholly-owned subsidiary with and into Milacron, resulting in ownership of 100% of Milacron common stock that was issued and outstanding after the acquisition. The acquisition provides Hillenbrand with increased scale and meaningful product diversification, enhancing its ability to serve customers with expanded capabilities across the plastics value chain.
The results of Milacron are reported separately in its own reportable segment (Molding Technology Solutions).
Purchase price consideration
As a result of the acquisition, Milacron stockholders received $11.80 in cash per share and a fixed exchange ratio of 0.1612 shares of Hillenbrand common stock for each share of Milacron common stock they owned, with cash paid in lieu of fractional shares. In addition, concurrent with the closing of the acquisition, the Company made a cash payment of $772.9 to repay outstanding Milacron debt, including accrued interest. The Company funded the acquisition through a combination of cash on hand, new debt financing, and the issuance of common stock.
Pursuant to the Merger Agreement, certain of Milacron’s outstanding stock options, restricted stock awards, restricted stock unit awards, and performance stock unit awards immediately vested and converted into the right to receive $11.80 per share in cash and 0.1612 shares of Hillenbrand common stock per share. Additionally, certain of Milacron’s stock appreciation rights were canceled and converted into the right to receive a lump sum cash payment. The fair value of share-based equity awards was apportioned between purchase price consideration and immediate expense. The portion of the fair value of partially vested awards associated with pre-acquisition service of Milacron employees represented a component of the total purchase price consideration, while the remaining portion of the fair value was immediately recognized as expense within operating expenses on the Consolidated Statement of Operations during the three months ended December 31, 2019.
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The following table summarizes the aggregate purchase price consideration to acquire Milacron:
| Cash consideration paid to Milacron stockholders | $ | 835.9 | |||
| Repayment of Milacron debt, including accrued interest | 772.9 | ||||
| Cash consideration paid to settle outstanding share-based equity awards | 34.2 | ||||
| Total cash consideration | 1,643.0 | ||||
Fair value of Hillenbrand common stock issued to Milacron stockholders (1) | 356.9 | ||||
Stock consideration issued to settle outstanding share-based equity awards (1) | 14.4 | ||||
| Total consideration transferred | 2,014.3 | ||||
Portion of cash settlement of outstanding share-based equity awards recognized as expense (2) | (14.1) | ||||
Portion of stock settlement of outstanding share-based equity awards recognized as expense (2) | (5.9) | ||||
| Total purchase price consideration | $ | 1,994.3 | |||
(1)The fair value of the 11.4 million shares of Hillenbrand’s common stock issued as of the acquisition date was determined based on a per share price of $31.26, which was the closing price of Hillenbrand’s common stock on November 20, 2019, the last trading day before the acquisition closed on November 21, 2019. This includes a nominal amount of cash paid in lieu of fractional shares. Additionally, 0.5 million shares of Hillenbrand’s common stock were issued to settle certain of Milacron’s outstanding share-based equity awards, as previously discussed.
(2)In total, $20.0 was immediately recognized as expense within operating expenses on the Consolidated Statements of Operations during the three months ended December 31, 2019, which represents the portion of the fair value of outstanding share-based equity awards that was not associated with pre-acquisition service of Milacron employees, as previously discussed.
Purchase price allocation
The acquisition was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. The purchase price was allocated to the assets acquired and liabilities assumed based on management’s estimate of the respective fair values at the date of acquisition. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from the acquisition. None of the goodwill is deductible for income tax purposes.
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The following table summarizes the final (as of November 21, 2020) fair values of the assets acquired and liabilities assumed as of the acquisition date:
| November 21, 2019 (as initially reported) | Measurement Period Adjustments | November 21, 2019 (as adjusted) | |||||||||||||||
| Assets acquired: | |||||||||||||||||
| Cash and cash equivalents | $ | 125.8 | $ | — | $ | 125.8 | |||||||||||
| Trade receivables | 135.5 | (2.4) | 133.1 | ||||||||||||||
| Inventories | 288.7 | (1.0) | 287.7 | ||||||||||||||
| Prepaid expense and other current assets | 64.3 | 4.9 | 69.2 | ||||||||||||||
| Property, plant, and equipment | 262.9 | (29.0) | 233.9 | ||||||||||||||
| Operating lease right-of-use assets | 41.3 | — | 41.3 | ||||||||||||||
| Identifiable intangible assets | 865.0 | (50.0) | 815.0 | ||||||||||||||
| Goodwill | 666.5 | 67.7 | 734.2 | ||||||||||||||
| Other long-term assets | 22.6 | (1.6) | 21.0 | ||||||||||||||
| Total assets acquired | 2,472.6 | (11.4) | 2,461.2 | ||||||||||||||
| Liabilities assumed: | |||||||||||||||||
| Trade accounts payable | 110.2 | — | 110.2 | ||||||||||||||
| Liabilities from long-term manufacturing contracts and advances | 32.7 | — | 32.7 | ||||||||||||||
| Accrued compensation | 23.2 | (2.4) | 20.8 | ||||||||||||||
| Other current liabilities | 72.2 | 17.2 | 89.4 | ||||||||||||||
| Accrued pension and postretirement healthcare | 29.4 | — | 29.4 | ||||||||||||||
| Deferred income taxes | 166.3 | (27.3) | 139.0 | ||||||||||||||
| Operating lease liabilities - long-term | 31.2 | — | 31.2 | ||||||||||||||
| Other long-term liabilities | 13.1 | 1.1 | 14.2 | ||||||||||||||
| Total liabilities assumed | 478.3 | (11.4) | 466.9 | ||||||||||||||
| Total purchase price consideration | $ | 1,994.3 | $ | — | $ | 1,994.3 | |||||||||||
Measurement period adjustments
The preliminary purchase price allocation was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period (defined as one year following the acquisition date). As a result of further refining its estimates and assumptions since the date of the acquisition, the Company recorded measurement period adjustments to the initial opening balance sheet as shown in the table above. Adjustments were primarily made to property, plant, and equipment, identifiable intangible assets, goodwill, other current liabilities, and deferred income taxes. There were no measurement period adjustments materially impacting earnings that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition date.
During the three months ended December 31, 2020, the purchase price allocation for the acquisition was finalized.
Intangible assets identified
The purchase price allocation included $815.0 of acquired identifiable intangible assets. The fair value of the identifiable intangible assets were estimated using the income approach through a discounted cash flow analysis with the cash flow projections. The cash flows were based on estimates used to price the Milacron acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return to the Company’s pricing model and the weighted average cost of capital. Definite-lived intangible assets are being amortized over the estimated useful life on a straight-line basis. The determination of the useful lives was based upon various industry studies, historical acquisition experience, economic factors, and future cash flows of the Company post acquisition of Milacron. In addition, Hillenbrand reviewed certain technological trends and considered the relative stability in the current Milacron customer base.
The amounts allocated to intangible assets are as follows:
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| Gross Carrying Amount | Weighted-Average Useful Life | |||||||||||||
| Customer relationships | $ | 560.0 | 19 years | |||||||||||
| Trade names | 150.0 | Indefinite | ||||||||||||
| Technology, including patents | 95.0 | 10 years | ||||||||||||
| Backlog | 10.0 | 3 months | ||||||||||||
| Total | $ | 815.0 | ||||||||||||
The Company is required to provide additional disclosures about fair value measurements as part of the Consolidated Financial Statements for each major category of assets and liabilities measured at fair value on a nonrecurring basis (including business acquisitions). The working capital assets and liabilities, as well as the property, plant, and equipment acquired, were valued using Level 2 inputs which included data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets (market approach). Goodwill and identifiable intangible assets were valued using Level 3 inputs, which are unobservable by nature, and included internal estimates of future cash flows (income approach). Significant increases (decreases) in any of those unobservable inputs, as of the date of the acquisition, in isolation would result in a significantly lower (higher) fair value measurement. Management used a third-party valuation firm to assist in the determination of the purchase accounting fair values, and specifically those considered Level 3 measurements. Management ultimately oversees the third-party valuation firm to ensure that the transaction-specific assumptions are appropriate for the Company.
Impact on results of operations
The results of Milacron’s operations have been included in Hillenbrand’s Consolidated Financial Statements since the November 21, 2019, acquisition date. The following table provides the results of operations for Milacron included in Hillenbrand’s Consolidated Statements of Operations:
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net revenue | $ | 236.9 | $ | 133.3 | |||||||
| Income before income taxes | 29.7 | 0.7 | |||||||||
In connection with the acquisition of Milacron, the Company incurred a total of $5.7 and $53.8 of business acquisition and integration costs for the three months ended December 31, 2020 and 2019, respectively, which were primarily recorded within operating expenses in the Consolidated Statements of Operations.
Supplemental Pro Forma Information
The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the Milacron acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that Hillenbrand believes are reasonable under the circumstances.
The supplemental pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the Milacron acquisition had occurred on October 1, 2019, to give effect to certain events that Hillenbrand believes to be directly attributable to the Milacron acquisition. These pro forma adjustments primarily include:
•an increase to depreciation and amortization expense that would have been recognized due to acquired tangible and intangible assets;
•an adjustment to interest expense to reflect the additional borrowings of Hillenbrand and the repayment of Milacron’s historical debt in conjunction with the acquisition;
•an adjustment to remove business acquisition and integration costs, inventory step-up costs, and backlog amortization, as these costs are non-recurring in nature and will not have a continuing effect on Hillenbrand’s results; and
•the related income tax effects of the adjustments noted above.
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The supplemental pro forma financial information for the periods presented is as follows:
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net revenue | $ | 692.5 | $ | 682.6 | |||||||
| Net income attributable to Hillenbrand | 76.4 | 22.1 | |||||||||
| Net income attributable to Hillenbrand — per share of common stock: | |||||||||||
| Basic earnings per share | $ | 1.01 | $ | 0.29 | |||||||
| Diluted earnings per share | 1.01 | 0.29 | |||||||||
Assets and liabilities held for sale
During the fourth quarter of 2020, the Company announced that it had initiated a plan to divest the TerraSource Global and flow control businesses, which includes the Red Valve business (“Red Valve”) and Abel Pump business (“ABEL”), which operate within the Advanced Process Solutions reportable segment, as these businesses were no longer considered a strategic fit with the Company’s long-term growth plan and operational objectives. As discussed below, the Company completed the sale of Red Valve on December 31, 2020, and expects to the complete the divestiture of ABEL during its second fiscal quarter. The divestiture of the TerraSource Global business is expected to occur within the current fiscal year. As of September 30, 2020, the Company determined that these businesses met the criteria to be classified as held for sale, and therefore reclassified the related assets and liabilities as held for sale on the Consolidated Balance Sheets. As of December 31, 2020, the TerraSource Global and ABEL businesses continue to be classified as held for sale.
The following is a summary of the major categories of assets and liabilities that have been classified as held for sale on the Consolidated Balance Sheets:
| December 31, 2020 | September 30, 2020 | ||||||||||
| Trade receivables, net | $ | 13.5 | $ | 19.8 | |||||||
| Inventories | 18.6 | 22.0 | |||||||||
| Property, plant and equipment, net | 8.7 | 12.9 | |||||||||
| Operating lease right-of-use assets | 3.1 | 4.3 | |||||||||
| Intangible assets, net | 92.5 | 133.6 | |||||||||
| Goodwill | 20.4 | 19.5 | |||||||||
| Other assets | 10.0 | 9.4 | |||||||||
Valuation allowance on disposal group (1) | (23.5) | (45.4) | |||||||||
Total assets held for sale (2) | $ | 143.3 | $ | 176.1 | |||||||
| Trade accounts payable | $ | 4.5 | $ | 7.3 | |||||||
| Liabilities from long-term manufacturing contracts and advances | 5.5 | 4.9 | |||||||||
| Operating lease liabilities | 2.2 | 4.5 | |||||||||
| Deferred income taxes | 5.5 | 8.8 | |||||||||
| Other liabilities | 5.9 | 7.0 | |||||||||
| Total liabilities held for sale | $ | 23.6 | $ | 32.5 | |||||||
(1)The Company adjusted the carrying value to fair value less costs to sell for certain assets held for sale during the year ended September 30, 2020. There was no adjustment recognized for the three months ended December 30, 2020.
(2)Total assets held for sale in this table exclude certain parcels of real estate that are also classified as held for sale on the Company’s Consolidated Balance Sheets as of December 31, 2020 and September 30, 2020.
The Company determined that the impending exit from these businesses does not represent a strategic shift that had or will have a major effect on its Consolidated Results of Operations, and therefore neither were classified as discontinued operations. The results of operations for these businesses are included within the Advanced Process Solutions reportable segment for all periods presented in this quarterly report.
15
Divestiture of Red Valve
On December 31, 2020, the Company completed the divestiture of Red Valve to DeZURIK, Inc. in a transaction valued at $63.0, subject to customary post-closing adjustments. The sale included cash proceeds received at closing of $59.4, including working capital adjustments, and a $5.0 note receivable, included within other long-term assets on the Consolidated Balance Sheet. The sale follows the Company’s previously announced intent to exit the Red Valve business, and Red Valve was classified as held for sale at September 30, 2020.
As a result of the sale, the Company recorded a pre-tax gain of $31.6 in the Consolidated Statement of Operations during the three months ended December 31, 2020. The related tax effect resulted in tax expense of $3.8 and was included within income tax expense in the Consolidated Statement of Operations during the three months ended December 31, 2020. The Company incurred $2.9 of transaction costs associated with the sale during the three months ended December 31, 2020, which were recorded within operating expenses in the Consolidated Statements of Operations.
The Company determined that the divestiture of Red Valve did not represent a strategic shift that had or will have a major effect on its consolidated results of operations, and therefore Red Valve was not classified as a discontinued operation. Red Valve’s results of operations were included within the Advanced Process Solutions reportable segment until the completion of the sale on December 31, 2020.
Agreement to sell ABEL Pumps
In January 2021, the Company announced that it had entered into a definitive agreement with IDEX Corporation to sell ABEL for $103.5, subject to customary post-closing adjustments. The transaction is expected to be completed in the Company’s second fiscal quarter, subject to customary closing conditions. The sale follows the Company’s previously announced intent to exit the ABEL business. The assets and liabilities of ABEL continue to be classified as held for sale as of December 31, 2020, and based on the terms of the agreement, the Company did not recognize a change in carrying value during the three months ended December 31, 2020.
Divestiture of Cimcool
On March 30, 2020, the Company completed the divestiture of its Cimcool business (“Cimcool”), which represented the former Fluids Technologies reportable segment of Milacron before its acquisition by the Company, to DuBois Chemicals, Inc. The sale resulted in cash proceeds received of $221.9, net of cash divested.
The Company determined that the divestiture of Cimcool did not represent a strategic shift that had or will have a major effect on its consolidated results of operations, and therefore Cimcool was not classified as a discontinued operation. Cimcool’s results of operations were included within the Molding Technology Solutions reportable segment until the completion of the sale on March 30, 2020.
Sale of Molding Technology Solutions facility
In December 2019, the Company completed the sale of a Molding Technology Solutions manufacturing facility located in Germany. As a result of the sale, the Company received net cash proceeds of $13.1. There was no material impact to the Consolidated Statement of Operations resulting from the sale of the facility.
16
5.Supplemental Consolidated Balance Sheet Information
| December 31, 2020 | September 30, 2020 | ||||||||||
| Allowance for doubtful accounts | $ | 28.9 | $ | 24.0 | |||||||
| Warranty reserves | $ | 25.6 | $ | 23.8 | |||||||
| Accumulated depreciation on property, plant, and equipment | $ | 357.5 | $ | 342.1 | |||||||
| Inventories, net: | |||||||||||
| Raw materials and components | $ | 139.6 | $ | 133.3 | |||||||
| Work in process | 94.7 | 88.7 | |||||||||
| Finished goods | 154.2 | 163.4 | |||||||||
| Total inventories, net | $ | 388.5 | $ | 385.4 | |||||||
6.Leases
The Company’s lease portfolio is comprised of operating leases primarily for manufacturing facilities, offices, vehicles, and certain equipment. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on whether the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Leases are classified as operating or finance leases at the commencement date of the lease. Operating leases are recorded within operating lease right-of-use assets, other current liabilities, and operating lease liabilities in the Consolidated Balance Sheets. The Company’s finance leases were insignificant as of December 31, 2020. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets. We have elected an accounting policy to combine lease and non-lease components for all leases.
Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the implicit rate is generally not readily determinable for most leases, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate reflects the estimated rate of interest that the Company would pay to borrow on a collateralized basis over a similar term in a similar economic environment. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
Leases may include renewal options, and the renewal option is included in the lease term if the Company concludes that it is reasonably certain that the option will be exercised. A certain number of the Company’s leases contain rent escalation clauses, either fixed or adjusted periodically for inflation of market rates, that are factored into the calculation of lease payments to the extent they are fixed and determinable at lease inception. The Company also has variable lease payments that do not depend on a rate or index, primarily for items such as common area maintenance and real estate taxes, which are recorded as variable costs when incurred.
For the three months ended December 31, 2020 and 2019, the Company recognized $8.9 and $8.0, respectively, of operating lease expense, including short-term lease expense and variable lease costs, which were immaterial in each period.
The following table presents supplemental Consolidated Balance Sheet information related to the Company’s operating leases.
| December 31, 2020 | September 30, 2020 | |||||||
| Operating lease right-of-use assets | $ | 153.0 | $ | 154.4 | ||||
| Other current liabilities | $ | 31.1 | $ | 31.2 | ||||
| Operating lease liabilities | 119.9 | 120.9 | ||||||
| Total operating lease liabilities | $ | 151.0 | $ | 152.1 | ||||
| Weighted-average remaining lease term (in years) | 7.6 | 7.6 | ||||||
| Weighted-average discount rate | 2.5 | % | 2.5 | % | ||||
17
As of December 31, 2020, the maturities of the Company’s operating lease liabilities were as follows:
2021 (excluding the three months ended December 31, 2020) | $ | 26.7 | |||
| 2022 | 31.0 | ||||
| 2023 | 25.4 | ||||
| 2024 | 17.6 | ||||
| 2025 | 11.5 | ||||
| Thereafter | 53.6 | ||||
| Total lease payments | 165.8 | ||||
| Less: imputed interest | (14.8) | ||||
| Total present value of lease payments | $ | 151.0 | |||
Supplemental Consolidated Statement of Cash Flow information is as follows:
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 9.7 | $ | 8.0 | |||||||
| Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | 4.3 | 13.3 | |||||||||
7.Intangible Assets and Goodwill
Intangible Assets
Intangible assets are stated at the lower of cost or fair value. With the exception of most trade names, intangible assets are amortized on a straight-line basis over periods ranging from to 21 years, representing the period over which the Company expects to receive future economic benefits from these assets. The Company assesses the carrying value of most trade names annually, or more often if events or changes in circumstances indicate there may be an impairment.
The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of December 31, 2020 and September 30, 2020:
| December 31, 2020 | September 30, 2020 | ||||||||||||||||||||||
| Cost | Accumulated Amortization | Cost | Accumulated Amortization | ||||||||||||||||||||
| Finite-lived assets: | |||||||||||||||||||||||
| Trade names | $ | 0.2 | $ | (0.2) | $ | 0.2 | $ | (0.2) | |||||||||||||||
| Customer relationships | 809.2 | (166.8) | 787.6 | (151.8) | |||||||||||||||||||
| Technology, including patents | 139.7 | (55.3) | 137.6 | (51.0) | |||||||||||||||||||
| Software | 65.4 | (55.9) | 65.6 | (54.1) | |||||||||||||||||||
| Backlog | — | — | 10.0 | (10.0) | |||||||||||||||||||
| Other | — | — | 0.1 | (0.1) | |||||||||||||||||||
| 1,014.5 | (278.2) | 1,001.1 | (267.2) | ||||||||||||||||||||
| Indefinite-lived assets: | |||||||||||||||||||||||
| Trade names | 229.6 | — | 226.8 | — | |||||||||||||||||||
| Total | $ | 1,244.1 | $ | (278.2) | $ | 1,227.9 | $ | (267.2) | |||||||||||||||
The net change in intangible assets during the three months ended December 31, 2020 was driven primarily by normal amortization and foreign currency adjustments.
Goodwill
Goodwill is not amortized, but is subject to annual impairment tests. Goodwill has been assigned to reporting units within the reportable segments. The Company assesses 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. There were no goodwill impairment charges during the three months ended December 31, 2020 and 2019.
18
The following table summarizes the changes in the Company’s goodwill, by reportable segment, for the three months ended December 31, 2020.
| Advanced Process Solutions | Molding Technology Solutions | Batesville | Total | ||||||||||||||||||||
| Balance as of September 30, 2020 | $ | 485.1 | $ | 644.4 | $ | 8.3 | $ | 1,137.8 | |||||||||||||||
| Finalization of Milacron acquisition (see Note 4) | — | 19.6 | — | 19.6 | |||||||||||||||||||
| Foreign currency adjustments | 15.3 | 13.2 | — | 28.5 | |||||||||||||||||||
| Balance as of December 31, 2020 | $ | 500.4 | $ | 677.2 | $ | 8.3 | $ | 1,185.9 | |||||||||||||||
8.Financing Agreements
The following table summarizes Hillenbrand’s current and long-term debt as of the dates reported in the Consolidated Balance Sheets.
| December 31, 2020 | September 30, 2020 | ||||||||||
$500.0 term loan facility (1) | $ | 467.5 | $ | 473.7 | |||||||
$400.0 senior unsecured notes, net of discount (2) | 395.0 | 394.8 | |||||||||
$375.0 senior unsecured notes, net of discount (3) | 370.9 | 370.8 | |||||||||
$225.0 term loan facility (4) | — | 213.4 | |||||||||
$100.0 Series A Notes (5) | 99.8 | 99.7 | |||||||||
| $900.0 revolving credit facility (excluding outstanding letters of credit) | 63.0 | — | |||||||||
| Other | 0.2 | 0.2 | |||||||||
| Total debt | 1,396.4 | 1,552.6 | |||||||||
| Less: current portion | (28.1) | (36.3) | |||||||||
| Total long-term debt | $ | 1,368.3 | $ | 1,516.3 | |||||||
(1)Includes debt issuance costs of $1.2 and $1.3 at December 31, 2020 and September 30, 2020, respectively.
(2)Includes debt issuance costs of $5.0 and $5.2 at December 31, 2020 and September 30, 2020, respectively.
(3)Includes debt issuance costs of $3.6 and $3.7 at December 31, 2020 and September 30, 2020, respectively.
(4)Includes debt issuance costs of $0.3 at September 30, 2020. This term loan was repaid in December 2020.
(5)Includes debt issuance costs of $0.2 and $0.3 at December 31, 2020 and September 30, 2020, respectively.
Financing for Milacron Acquisition
Upon completing the acquisition of Milacron on November 21, 2019, Hillenbrand incurred borrowings under its two term loans in aggregate principal amounts of $500.0 and $225.0, which are provided for under the Company’s Third Amended and Restated Credit Agreement dated August 28, 2019 and subsequently amended on October 8, 2019, January 10, 2020, and May 29, 2020 (the “Credit Agreement”). During the three months ended December 31, 2020, the Company repaid the $225.0 term loan in full with a combination of cash on hand and borrowings from its revolving credit facility.
The $500.0 term loan (the “Term Loan Facility”) matures on the fifth anniversary of the date on which it was borrowed, subject to quarterly amortization payments (equal to 5% of the original principal amount of the term loan in each of years 1 and 2, 7.5% in each of years 3 and 4, and 10% in year 5). The Term Loan Facility accrues interest, at the Company’s option, at the LIBO Rate or the Alternate Base Rate (each as defined in the Credit Agreement) plus a margin based on the Company’s leverage ratio, ranging from 1.00% to 2.375% for term loans bearing interest at the LIBO Rate and 0.0% to 1.375% for term loans bearing interest at the Alternate Base Rate. For the three months ended December 31, 2020 and 2019, the weighted average interest rates for the Term Loan Facility were 2.75% and 3.49%, respectively.
In addition to the Term Loan Facility, Hillenbrand incurred $650.0 of additional borrowings from its revolving credit facility under the Credit Agreement (the “Revolver”) at the closing of the Milacron acquisition. The additional borrowings under the Term Loan Facility, the $225.0 term loan that has since been repaid, and the Revolver, in addition to the $375.0 of senior unsecured notes issued during the quarter ended September 30, 2019, were used to pay a portion of the cash consideration in connection with the acquisition of Milacron, fees and expenses related to the acquisition, and to repay certain indebtedness of Milacron and its subsidiaries upon closing the acquisition.
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With respect to the Revolver, the Company had $7.4 in outstanding letters of credit issued and $829.6 of maximum borrowing capacity under the Revolver as of December 31, 2020. $829.6 of this borrowing capacity was immediately available based on the Company’s most restrictive covenant at December 31, 2020. The weighted-average interest rates on borrowings under the Revolver were 2.52% and 3.13% for the three months ended December 31, 2020 and 2019, respectively. The weighted average facility fee was 0.30% and 0.17% three months ended December 31, 2020 and 2019, respectively.
Other credit arrangements
In the normal course of business, operating companies within the Advanced Process Solutions reportable segment provide 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, the Company maintains adequate capacity to provide the guarantees. As of December 31, 2020, the Company had credit arrangements totaling $437.8, under which $264.9 was used for this purpose. These arrangements include the Company’s Syndicated Letter of Guarantee Facility (as amended, the “L/G Facility Agreement”) and other ancillary credit facilities.
Covenants related to current financing agreements
The Credit Agreement, the L/G Facility Agreement, and the Series A Notes pursuant to the Private Shelf Agreement, dated as of December 6, 2012 (as amended, the “Shelf Agreement”), contain the following financial covenants for the current quarter: a maximum leverage ratio (as defined in the agreements) of 4.75 to 1.00 and a minimum ratio of EBITDA (as defined in the agreements) to interest expense of 3.0 to 1.00.
As of December 31, 2020, Hillenbrand was in compliance with all covenants under these agreements. Additionally, the Credit Agreement, the L/G Facility Agreement, and the Shelf Agreement provide the Company with the ability to sell assets and to incur debt at its international subsidiaries under certain conditions.
All obligations of the Company arising under the Credit Agreement, the $400.0 and $375.0 senior unsecured notes, the Series A Notes, and the L/G Facility Agreement are fully and unconditionally, and jointly and severally, guaranteed by certain of the Company’s domestic subsidiaries.
The Credit Agreement, the L/G Facility Agreement, and the Shelf Agreement each contain certain other customary covenants, representations and warranties and events of default. The indentures governing both the $400.0 and $375.0 senior unsecured notes do not limit the Company’s ability to incur additional indebtedness. They do, however, contain certain covenants that restrict the Company’s ability to incur secured debt and to engage in certain sale and leaseback transactions. The indentures also contain customary events of default. The indentures provide holders of the senior unsecured notes with remedies if the Company fails to perform specific obligations. As of December 31, 2020, Hillenbrand was in compliance with all covenants and there were no events of default.
9.Retirement Benefits
Defined Benefit Plans
Components of net periodic pension (benefit) cost included in the Consolidated Statements of Operations were as follows:
| U.S. Pension Benefits | Non-U.S. Pension Benefits | ||||||||||||||||||||||
| Three Months Ended December 31, | Three Months Ended December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Service costs | $ | 0.2 | $ | 0.4 | $ | 0.5 | $ | 0.6 | |||||||||||||||
| Interest costs | 1.5 | 2.0 | 0.2 | 0.2 | |||||||||||||||||||
| Expected return on plan assets | (2.7) | (3.2) | (0.2) | (0.1) | |||||||||||||||||||
| Amortization of net loss | 0.5 | 1.2 | 0.7 | 0.4 | |||||||||||||||||||
| Net periodic (benefit) pension cost | $ | (0.5) | $ | 0.4 | $ | 1.2 | $ | 1.1 | |||||||||||||||
Defined Contribution Plans
Expenses related to the Company’s defined contribution plans were $3.7 and $3.3 for the three months ended December 31, 2020 and 2019, respectively.
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10.Income Taxes
The effective tax rates for the three months ended December 31, 2020 and 2019 were 28.7% and 93.9%, respectively. The difference in the effective tax rate in the current quarter relative to the federal statutory tax rate was primarily attributable to an unfavorable geographic mix of pretax income, the impact that tax loss carryforwards and the tax loss on the sale of Red Valve had on foreign tax credit determinations related to foreign income inclusions, as well as deferred taxes recognized on accumulated earnings of foreign subsidiaries. The decrease in the effective tax rate from the prior year is primarily due to the prior year net loss position and the tax benefit recognized from the revaluation of current and deferred tax balances in connection with enacted statutory tax rate reductions in certain foreign jurisdictions, which significantly increased the tax rate in the prior year, partially offset by the impact of nondeductible expenses associated with the Milacron acquisition.
The acquisition of Milacron was completed during the quarter ended December 31, 2019, through the merger of a Hillenbrand wholly-owned subsidiary with and into Milacron, resulting in 100% ownership of Milacron common stock that was issued and outstanding after the acquisition. In connection with the acquisition, the Company recorded a deferred tax asset of $5.9 and a deferred tax liability of $139.0 associated with the difference between the financial accounting basis and the tax basis in the acquired assets and liabilities assumed. Included in the acquired deferred taxes were deferred tax assets for the carryforward of Milacron’s tax net operating losses from federal, state, and foreign tax jurisdictions of $65.5, which were partially offset by the recognition of preliminary valuation allowances of $22.0 related to the estimated realizability of these items. The utilization of the acquired U.S. federal and state net operating losses to reduce Hillenbrand’s taxable income will be limited annually under Section 382 of the Internal Revenue Code. The annual Section 382 limitation is $39.6 until the net operating losses are utilized.
11.Earnings per share
The dilutive effects of performance-based stock awards were included in the computation of diluted earnings per share at the level the related performance criteria were met through the respective consolidated balance sheet date. At both December 31, 2020 and 2019, potential dilutive effects, representing approximately 448,000 and 256,000 shares, respectively, were excluded from the computation of diluted earnings per share as the related performance criteria were not yet met, although the Company expects to meet various levels of criteria in the future.
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net income (loss) attributable to Hillenbrand | $ | 76.4 | $ | (3.1) | |||||||
| Weighted average shares outstanding (basic - in millions) | 75.3 | 68.4 | |||||||||
Effect of dilutive stock options and other unvested equity awards (in millions) (1) | 0.2 | — | |||||||||
| Weighted average shares outstanding (diluted - in millions) | 75.5 | 68.4 | |||||||||
| Basic earnings (loss) per share | $ | 1.01 | $ | (0.05) | |||||||
| Diluted earnings (loss) per share | $ | 1.01 | $ | (0.05) | |||||||
| Shares with anti-dilutive effect excluded from the computation of diluted earnings per share (in millions) | 1.4 | 2.4 | |||||||||
(1)As a result of the net loss attributable to Hillenbrand during the three months ended December 31, 2019, the effect of stock options and other unvested equity awards would be antidilutive. In accordance with GAAP, they have been excluded from the diluted earnings per share calculation.
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12.Accumulated Other Comprehensive Loss
The following tables summarize the changes in the accumulated balances for each component of accumulated other comprehensive loss:
| Pension and Postretirement | Currency Translation | Net Unrealized Gain (Loss) on Derivative Instruments | Total Attributable to Hillenbrand, Inc. | Noncontrolling Interests | Total | ||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | (69.6) | $ | (21.1) | $ | (12.1) | $ | (102.8) | |||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | |||||||||||||||||||||||||||||||||||
| Before tax amount | — | 59.2 | 1.7 | 60.9 | $ | 0.1 | $ | 61.0 | |||||||||||||||||||||||||||
| Tax expense | — | — | (0.4) | (0.4) | — | (0.4) | |||||||||||||||||||||||||||||
| After tax amount | — | 59.2 | 1.3 | 60.5 | 0.1 | 60.6 | |||||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss(1) | 1.2 | — | 0.4 | 1.6 | — | 1.6 | |||||||||||||||||||||||||||||
| Net current period other comprehensive income (loss) | 1.2 | 59.2 | 1.7 | 62.1 | 0.1 | $ | 62.2 | ||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | (68.4) | $ | 38.1 | $ | (10.4) | $ | (40.7) | |||||||||||||||||||||||||||
(1)Amounts are net of tax.
| Pension and Postretirement | Currency Translation | Net Unrealized Gain (Loss) on Derivative Instruments | Total Attributable to Hillenbrand, Inc. | Noncontrolling Interests | Total | ||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | $ | (62.3) | $ | (64.7) | $ | (13.6) | $ | (140.6) | |||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | |||||||||||||||||||||||||||||||||||
| Before tax amount | — | 17.4 | 1.3 | 18.7 | $ | (0.1) | $ | 18.6 | |||||||||||||||||||||||||||
| Tax expense | — | — | (0.3) | (0.3) | — | (0.3) | |||||||||||||||||||||||||||||
| After tax amount | — | 17.4 | 1.0 | 18.4 | (0.1) | 18.3 | |||||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss(1) | 1.1 | — | 0.4 | 1.5 | — | 1.5 | |||||||||||||||||||||||||||||
| Net current period other comprehensive income (loss) | 1.1 | 17.4 | 1.4 | 19.9 | $ | (0.1) | $ | 19.8 | |||||||||||||||||||||||||||
Reclassification of certain income tax effects (2) | (6.0) | — | — | (6.0) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | (67.2) | $ | (47.3) | $ | (12.2) | $ | (126.7) | |||||||||||||||||||||||||||
(1)Amounts are net of tax.
(2)Income tax effects of the Tax Act were reclassified from accumulated other comprehensive loss to retained earnings due to the adoption of ASU 2018-02.
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Reclassifications out of accumulated other comprehensive loss include:
| Three Months Ended December 31, 2020 | |||||||||||||||||
Amortization of Pension and Postretirement (1) | (Gain)/Loss on | ||||||||||||||||
| Net Loss Recognized | Derivative Instruments | Total | |||||||||||||||
| Affected line in the Consolidated Statement of Operations: | |||||||||||||||||
| Net revenue | $ | — | $ | — | $ | — | |||||||||||
| Cost of goods sold | — | — | — | ||||||||||||||
| Other income, net | 1.3 | 0.5 | 1.8 | ||||||||||||||
| Total before tax | $ | 1.3 | $ | 0.5 | $ | 1.8 | |||||||||||
| Tax expense | (0.2) | ||||||||||||||||
| Total reclassifications for the period, net of tax | $ | 1.6 | |||||||||||||||
(1)These accumulated other comprehensive loss components are included in the computation of net periodic pension (benefit) cost (see Note 9).
| Three Months Ended December 31, 2019 | |||||||||||||||||
Amortization of Pension and Postretirement (1) | (Gain)/Loss on | ||||||||||||||||
| Net Loss Recognized | Derivative Instruments | Total | |||||||||||||||
| Affected line in the Consolidated Statement of Operations: | |||||||||||||||||
| Net revenue | $ | — | $ | 0.1 | $ | 0.1 | |||||||||||
| Cost of goods sold | — | (0.2) | (0.2) | ||||||||||||||
| Other income, net | 1.6 | 0.5 | 2.1 | ||||||||||||||
| Total before tax | $ | 1.6 | $ | 0.4 | $ | 2.0 | |||||||||||
| Tax expense | (0.5) | ||||||||||||||||
| Total reclassifications for the period, net of tax | $ | 1.5 | |||||||||||||||
(1)These accumulated other comprehensive loss components are included in the computation of net periodic pension (benefit) cost (see Note 9).
13.Share-Based Compensation
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Share-based compensation costs | $ | 4.2 | $ | 2.3 | |||||||
| Less impact of income tax benefit | (1.0) | (0.5) | |||||||||
| Share-based compensation costs, net of tax | $ | 3.2 | $ | 1.8 | |||||||
The Company has share-based compensation with long-term performance-based metrics that are contingent upon the Company’s relative total shareholder return and the creation of shareholder value. Relative total shareholder return is determined by comparing the Company’s total shareholder return during a three-year period to the respective total shareholder returns of companies in a designated performance peer group or stock index, as applicable. Creation of shareholder value is 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. For the performance-based awards contingent upon the creation of shareholder value, compensation expense is adjusted each quarter based upon actual results to date and any changes to forecasted information on each of the separate grants.
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During the three months ended December 31, 2020, the Company made the following grants:
| Number of Units | |||||
| Time-based stock awards | 277,891 | ||||
| Performance-based stock awards (maximum that can be earned) | 362,282 | ||||
The Company’s time-based stock awards and performance-based stock awards granted during fiscal 2021 had weighted-average grant date fair values of $38.03 and $44.39, respectively. Included in the performance-based stock awards granted during fiscal 2021 are 213,536 units whose payout level is based upon the Company’s relative total shareholder return over the three-year measurement period, as described above. These units will be expensed on a straight-line basis over the measurement period and are not subsequently adjusted after the grant date.
14.Other (Expense) Income, Net
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Interest income | $ | 0.6 | $ | 1.3 | |||||||
| Foreign currency exchange gain, net | 0.4 | 0.1 | |||||||||
| Other, net | (1.4) | 0.5 | |||||||||
| Other (expense) income, net | $ | (0.4) | $ | 1.9 | |||||||
15.Commitments and Contingencies
Like most companies, Hillenbrand is involved from time to time in claims, lawsuits, and government proceedings relating to its operations, including environmental, patent infringement, business practices, commercial transactions, product and general liability, workers’ compensation, auto liability, employment, and other matters. The ultimate outcome of these matters cannot be predicted with certainty. An estimated loss from these contingencies is recognized when the Company believes it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated; however, it is difficult to measure the actual loss that might be incurred related to these matters. If a loss is not considered probable and/or cannot be reasonably estimated, the Company is required to make a disclosure if there is at least a reasonable possibility that a significant loss may have been incurred. Legal fees associated with claims and lawsuits are generally expensed as incurred.
Claims covered by insurance have in most instances deductibles and self-funded retentions up to $0.5 per occurrence or per claim, depending upon the type of coverage and policy period. For auto, workers compensation, and general liability claims in the U.S., outside insurance companies and third-party claims administrators generally assist in establishing individual claim reserves. An independent outside actuary provides estimates of ultimate projected losses, including incurred but not reported claims, which are used to establish reserves for losses. For all other types of claims, reserves are established based upon advice from internal and external counsel and historical settlement information for claims when such amounts are considered probable of payment.
The liabilities recorded represent the best estimate of costs that the Company will incur in relation to such exposures, but it is possible that actual costs will differ from those estimates.
16.Fair Value Measurements
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability, developed based upon the best information available in the circumstances. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels:
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| Level 1: | Inputs are quoted prices in active markets for identical assets or liabilities. | ||||
| Level 2: | Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. | ||||
| Level 3: | Inputs are unobservable for the asset or liability. | ||||
| Carrying Value at December 31, 2020 | Fair Value at December 31, 2020 Using Inputs Considered as: | ||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 265.8 | $ | 265.8 | $ | — | $ | — | |||||||||||||||
| Investments in rabbi trust | 4.4 | 4.4 | — | — | |||||||||||||||||||
| Derivative instruments | 4.8 | — | 4.8 | — | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Revolver | 63.0 | — | 63.0 | — | |||||||||||||||||||
| $500.0 term loan | 468.7 | — | 468.7 | — | |||||||||||||||||||
| $400.0 senior unsecured notes | 400.0 | 433.9 | — | — | |||||||||||||||||||
| $375.0 senior unsecured notes | 374.5 | 421.0 | — | — | |||||||||||||||||||
| $100.0 Series A Notes | 100.0 | — | 104.6 | — | |||||||||||||||||||
| Derivative instruments | 1.3 | — | 1.3 | — | |||||||||||||||||||
| Carrying Value at September 30, 2020 | Fair Value at September 30, 2020 Using Inputs Considered as: | ||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 302.2 | $ | 302.2 | $ | — | $ | — | |||||||||||||||
| Investments in rabbi trust | 3.9 | 3.9 | — | — | |||||||||||||||||||
| Derivative instruments | 2.6 | — | 2.6 | — | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| $500.0 term loan | 475.0 | — | 475.0 | — | |||||||||||||||||||
| $400.0 senior unsecured notes | 400.0 | 429.0 | — | — | |||||||||||||||||||
| $375.0 senior unsecured notes | 374.5 | 409.0 | — | — | |||||||||||||||||||
| $225.0 term loan | 213.7 | — | 213.7 | — | |||||||||||||||||||
| $100.0 Series A Notes | 100.0 | — | 105.3 | — | |||||||||||||||||||
| Derivative instruments | 1.6 | — | 1.6 | — | |||||||||||||||||||
Valuation Techniques
•Cash and cash equivalents and investments in rabbi trust are classified within Level 1 of the fair value hierarchy. Financial instruments classified as Level 1 are based on quoted market prices in active markets. The types of financial instruments the Company classifies within Level 1 include most bank deposits, money market securities, and publicly traded mutual funds. The Company does not adjust the quoted market price for such financial instruments.
•The Company estimates the fair value of foreign currency derivatives using industry accepted models. The significant Level 2 inputs used in the valuation of derivatives include spot rates, forward rates, and volatility. These inputs were obtained from pricing services, broker quotes, and other sources.
•The fair value of the amounts outstanding under the Revolver, the $500.0 term loan, and the $225.0 term loan approximate carrying value, as the Company believes their variable interest rate terms correspond to current market terms.
•The fair values of the Series A Notes were estimated based on internally-developed models, using current market interest rate data for similar issues, as there is no active market for the Series A Notes.
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•The fair values of the $400.0 and $375.0 senior unsecured notes were based on quoted prices in active markets.
Derivative instruments
The Company has hedging programs in place to manage its currency exposures. The objectives of the Company’s hedging programs are to mitigate exposures in gross margin and non-functional-currency-denominated assets and liabilities. Under these programs, the Company uses 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 up to 24 months. The aggregate notional value of derivatives was $224.7 and $232.8 at December 31, 2020 and September 30, 2020, respectively. The derivatives are recorded at fair value primarily in other current assets and other current liabilities on the Consolidated Balance Sheets.
17.Segment and Geographical Information
The Company currently conducts operations through three reportable operating segments: Advanced Process Solutions, Molding Technology Solutions, and Batesville. The Company’s operating segments maintain separate financial information for which results of operations are evaluated on a regular basis by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company records the direct costs of business operations to the reportable operating segments, including stock-based compensation, asset impairments, restructuring activities, and business acquisition costs. Corporate provides management and administrative services to each reportable segment. These services include treasury management, human resources, legal, business development, and other public company support functions such as internal audit, investor relations, financial reporting, and tax compliance. With limited exception for certain professional services and back-office and technology costs, the Company does not allocate these types of corporate expenses to the reportable segments.
The following tables present financial information for the Company’s reportable segments and significant geographical locations:
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net revenue | |||||||||||
| Advanced Process Solutions | $ | 290.8 | $ | 306.6 | |||||||
| Molding Technology Solutions | 236.9 | 133.3 | |||||||||
| Batesville | 164.8 | 127.0 | |||||||||
| Total | $ | 692.5 | $ | 566.9 | |||||||
Adjusted EBITDA (1) | |||||||||||
| Advanced Process Solutions | $ | 48.5 | $ | 51.5 | |||||||
| Molding Technology Solutions | 48.4 | 26.3 | |||||||||
| Batesville | 52.3 | 23.0 | |||||||||
| Corporate | (11.2) | (8.9) | |||||||||
Net revenue (2) | |||||||||||
| United States | $ | 328.7 | $ | 282.0 | |||||||
| China | 111.9 | 57.0 | |||||||||
| Germany | 34.3 | 35.8 | |||||||||
| India | 41.5 | 34.3 | |||||||||
| All other foreign business units | 176.1 | 157.8 | |||||||||
| Total | $ | 692.5 | $ | 566.9 | |||||||
(1)Adjusted earnings before interest, income tax, depreciation, and amortization (“adjusted EBITDA”) is a non-GAAP measure used by management to measure segment performance and make operating decisions. See the Operating Performance Measures section of Management’s Discussion and Analysis for further information on adjusted EBITDA, which is reconciled to consolidated net income (loss) below.
(2)The Company attributes net revenue to a geography based upon the location of the end customer. Previously, the Company attributed net revenue to a geography based upon the location of the business that consummates the external sale for
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purpose of this disclosure. As such, the net revenue figures for the three months ended December 31, 2019, have been revised to conform to the current year methodology.
| December 31, 2020 | September 30, 2020 | ||||||||||
| Total assets assigned | |||||||||||
| Advanced Process Solutions | $ | 1,659.2 | $ | 1,666.5 | |||||||
| Molding Technology Solutions | 2,074.7 | 2,032.4 | |||||||||
| Batesville | 233.0 | 225.3 | |||||||||
| Corporate | 48.4 | 63.2 | |||||||||
| Total | $ | 4,015.3 | $ | 3,987.4 | |||||||
| Tangible long-lived assets, net | |||||||||||
| United States | $ | 173.6 | $ | 182.4 | |||||||
| Germany | 114.8 | 110.4 | |||||||||
| China | 55.4 | 54.2 | |||||||||
| All other foreign business units | 116.8 | 121.6 | |||||||||
| Total | $ | 460.6 | $ | 468.6 | |||||||
The following schedule reconciles reportable segment adjusted EBITDA to consolidated net income (loss).
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Adjusted EBITDA: | |||||||||||
| Advanced Process Solutions | $ | 48.5 | $ | 51.5 | |||||||
| Molding Technology Solutions | 48.4 | 26.3 | |||||||||
| Batesville | 52.3 | 23.0 | |||||||||
| Corporate | (11.2) | (8.9) | |||||||||
| Less: | |||||||||||
| Interest income | (0.6) | (1.3) | |||||||||
| Interest expense | 21.2 | 14.7 | |||||||||
| Income tax expense (benefit) | 31.3 | (12.4) | |||||||||
| Depreciation and amortization | 29.3 | 25.9 | |||||||||
| Business acquisition, disposition, and integration costs | 9.1 | 53.8 | |||||||||
| Restructuring and restructuring related charges | 1.5 | 2.4 | |||||||||
| Inventory step-up | — | 9.6 | |||||||||
| Gain on divestiture | (31.6) | — | |||||||||
| Other | 0.1 | — | |||||||||
| Consolidated net income (loss) | $ | 77.7 | $ | (0.8) | |||||||
18. Restructuring
The following schedule details the restructuring charges by reportable segment and the classification of those charges on the Consolidated Statements of Operations.
| Three Months Ended December 31, 2020 | Three Months Ended December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Cost of goods sold | Operating expenses | Total | Cost of goods sold | Operating expenses | Total | ||||||||||||||||||||||||||||||
| Advanced Process Solutions | $ | 0.6 | $ | 0.9 | $ | 1.5 | $ | 0.7 | $ | 0.9 | $ | 1.6 | |||||||||||||||||||||||
| Molding Technology Solutions | 0.1 | 0.3 | 0.4 | — | 0.8 | 0.8 | |||||||||||||||||||||||||||||
| Batesville | — | 0.2 | 0.2 | 0.1 | 0.3 | 0.4 | |||||||||||||||||||||||||||||
| Corporate | — | 0.2 | 0.2 | — | 0.3 | 0.3 | |||||||||||||||||||||||||||||
| Total | $ | 0.7 | $ | 1.6 | $ | 2.3 | $ | 0.8 | $ | 2.3 | $ | 3.1 | |||||||||||||||||||||||
The restructuring charges during the three months ended December 31, 2020 and 2019, related primarily to severance costs. The severance costs within the Molding Technology Solutions and Corporate reportable segments were primarily related to the
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ongoing integration of Milacron. At December 31, 2020, $5.4 of restructuring costs were accrued and expected to be paid over the next twelve months.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(financial amounts in millions, except share and per share data, throughout Management’s Discussion and Analysis)
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
Throughout this Form 10-Q, we make a number of “forward-looking statements” that are within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and that are intended to be covered by the safe harbor provided under these sections. As the words imply, these are statements about future sales, earnings, cash flow, results of operations, uses of cash, financings, share repurchases, ability to meet deleveraging goals, and other measures of financial performance or potential future plans or events, strategies, objectives, beliefs, prospects, assumptions, expectations, and projected costs or savings or transactions of the Company that might or might not happen in the future, as contrasted with historical information. Forward-looking statements are based on assumptions that we believe are reasonable, but by their very nature are subject to a wide range of risks. If our assumptions prove inaccurate or unknown risks and uncertainties materialize, actual results could vary materially from Hillenbrand’s expectations and projections.
Accordingly, in this Form 10-Q, we may say something like:
“We expect that future revenue associated with Advanced Process Solutions will be influenced by order backlog.”
That is a forward-looking statement, as indicated by the word “expect” and by the clear meaning of the sentence.
Other words that could indicate we are making forward-looking statements include:
| intend | believe | plan | expect | may | goal | would | project | |||||||||||||||||||||||||||||||||||||
| become | pursue | estimate | will | forecast | continue | could | anticipate | |||||||||||||||||||||||||||||||||||||
| target | encourage | promise | improve | progress | potential | should | impact | |||||||||||||||||||||||||||||||||||||
This is not an exhaustive list, but is intended to give you an idea of how we try to identify forward-looking statements. The absence of any of these words, however, does not mean that the statement is not forward-looking.
Here is the key point: Forward-looking statements are not guarantees of future performance or events, and actual results or events could differ materially from those set forth in any forward-looking statements.
Any number of factors, many of which are beyond our control, could cause our performance to differ significantly from what is described in the forward-looking statements. This includes risks related to the ongoing COVID-19 pandemic and the societal, governmental, and individual responses thereto, including supply chain disruptions; loss of contracts and/or customers; erosion of some customers’ credit quality; downgrades of the Company’s credit quality; closure or temporary interruption of the Company’s or suppliers’ manufacturing facilities; travel, shipping and logistical disruptions; loss of human capital or personnel,
and general economic calamities, in addition to a variety of risks related to our integration of Milacron. Shareholders, potential investors, and other readers are urged to consider these risks and uncertainties in evaluating forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. For a discussion of factors that could cause actual results to differ from those contained in forward-looking statements, see the discussions under the heading “Risk Factors” in Item 1A of Part I of the Company’s Form 10-K filed with the SEC on November 12, 2020, and in Item 1A of Part II of this Form 10-Q, as well as other risks and uncertainties detailed in our other filings with the SEC from time to time. The forward looking information in this Form 10-Q speaks only as of the date covered by this report and we assume no obligation to update or revise any forward-looking statements.
EXECUTIVE OVERVIEW
Hillenbrand is a global diversified industrial company with multiple leading brands that serve a wide variety of industries around the world. Hillenbrand’s portfolio is composed of three reportable operating segments: Advanced Process Solutions, Molding Technology Solutions, and Batesville®. Advanced Process Solutions designs, develops, manufactures, and services highly engineered industrial equipment around the world. Molding Technology Solutions is a global leader in highly engineered
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and customized systems in plastic technology and processing. Batesville is a recognized leader in the death care industry in North America.
We strive to provide superior return for our shareholders, exceptional value for our customers, great professional opportunities for our employees, and to be responsible to our communities through deployment of the HOM. The HOM is a consistent and repeatable framework designed to produce sustainable and predictable results. The HOM describes our mission, vision, values, and mindset as leaders; applies our management practices in Strategy Management, Segmentation, Lean, Talent Development, and Acquisitions; and prescribes three steps (Understand, Focus, and Grow) designed to make our businesses both bigger and better. Our goal is to continue developing Hillenbrand as a world-class global diversified industrial company through the deployment of the HOM.
Our strategy is to leverage our historically strong financial foundation and the implementation of the HOM to deliver sustainable profit growth, revenue expansion, and substantial free cash flow and then reinvest available cash in new growth initiatives that are focused on building platforms with leadership positions in our core markets and near adjacencies, both organically and inorganically, in order to create shareholder value.
During the three months ended December 31, 2020, the following operational decisions and economic developments had an impact on our current and future cash flows, results of operations, and financial position.
COVID-19 Impact
The COVID-19 pandemic is impacting Hillenbrand very differently by business, geography, and function. The scope and nature of these impacts continue to evolve, sometimes rapidly. It is too early to quantify the impact for 2021 or beyond, but the actions being undertaken to reduce the severity and spread of COVID-19 are currently creating disruptions, and are likely to continue to create significant disruptions, with respect to consumer demand, our ability to continue to manufacture products, and the reliability and sufficiency of our supply chain. Accordingly, management is continually evaluating the Company’s liquidity position, communicating with and monitoring the actions of our customers and suppliers, and reviewing our near- and longer-term financial performance as we manage the Company through the uncertainty related to COVID-19.
We cannot reasonably estimate the duration, spread, or severity of the COVID-19 pandemic; however, as a result of the current circumstances, we expect to continue to experience an adverse impact during at least the first part of 2021 within our Advanced Process Solutions and Molding Technology Solutions segments, including the potential for impairment of certain intangible and other long-lived assets. Should these conditions continue further into 2021 for these two segments, the Company would similarly expect an adverse impact on its net revenue, results of operations, and cash flows in such year, depending upon the severity and length of time such conditions persist. The COVID-19 pandemic has had a favorable impact on the Batesville segment’s net revenue, results of operations, and cash flows. However, we are currently not able to predict the extent and duration of this favorable impact for the remainder of fiscal 2021 or the impact that the estimated increase in deaths due to the COVID-19 pandemic will have on deaths when the pandemic has subsided. The timing and effectiveness of vaccine development and rollout could also have a significant impact on the Company’s consolidated net revenue, results of operations, and cash flows during 2021.
We continue to take actions intended to help minimize the risk to our company, employees, customers, and the communities in which we operate, as well as to lessen the financial impact on the business while protecting our ability to continue to generate profitable growth over the long-term. For information regarding these actions, see the discussion under Part 1, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2020. We continue to believe the Company has sufficient liquidity to operate in the current business environment as a result of these actions.
Employee Safety and Health
We have implemented a number of employee safety measures across our plants and other locations in an attempt to contain the spread of COVID-19. For information regarding these measures, see the discussion under Part 1, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2020.
Divestiture of Red Valve
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On December 31, 2020, the Company completed the divestiture of Red Valve to DeZURIK, Inc. in a transaction valued at $63.0, subject to customary post-closing adjustments. The sale included cash proceeds received at closing of $59.4, including working capital adjustments, and a $5.0 note receivable, included within other long-term assets on the Consolidated Balance Sheet. The sale follows the Company's previously announced intent to exit the Red Valve business, and Red Valve was classified as held for sale at September 30, 2020.
As a result of the sale, the Company recorded a pre-tax gain of $31.6 in the Consolidated Statement of Operations during the three months ended December 31, 2020. The related tax effect resulted in tax expense of $3.8 and was included within income tax expense in the Consolidated Statement of Operations during the three months ended December 31, 2020. The Company incurred $2.9 of transaction costs associated with the sale during the three months ended December 31, 2020, which were recorded within operating expenses in the Consolidated Statements of Operations.
Red Valve’s results of operations were included within the Advanced Process Solutions reportable segment until the completion of the sale on December 31, 2020.
Agreement to sell ABEL Pumps
In January 2021, the Company announced that it had entered into a definitive agreement to sell ABEL to IDEX Corporation for $103.5, subject to customary post-closing adjustments. The transaction is expected to be completed in the Company’s second fiscal quarter, subject to customary closing conditions. The sale follows the Company’s previously announced intent to exit the ABEL business. The assets and liabilities of ABEL continue to be classified as held for sale as of December 31, 2020, and based on the terms of the agreement, the Company did not recognize a change in carrying value during the three months ended December 31, 2020.
OPERATING PERFORMANCE MEASURES
The following discussion compares our results for the three months ended December 31, 2020, to the same period in fiscal year 2020. The Company’s fiscal year ends on September 30. Unless otherwise stated, references to years relate to fiscal years. We begin the discussion at a consolidated level and then provide separate detail about Advanced Process Solutions, Molding Technology Solutions, Batesville, and Corporate. These financial results are prepared in accordance with United States generally accepted accounting principles (“GAAP”).
We also provide certain non-GAAP operating performance measures. These non-GAAP measures are referred to as “adjusted” measures and exclude expenses associated with business acquisitions, disposition, and integration, restructuring and restructuring related charges, inventory step-up, backlog amortization, and debt financing activities related to the acquisition of Milacron (including net interest expense on the $375.0 senior unsecured notes for the period prior to completing the acquisition). The related income tax impact for all of these items is also excluded. The measures also exclude the non-recurring tax benefits and expenses related to the interaction of certain provisions of the Tax Act and certain tax items related to the acquisition of Milacron, including the revaluation of deferred tax balances in connection with enacted statutory tax rate reductions in certain foreign jurisdictions. Non-GAAP information is provided as a supplement, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP.
We use this non-GAAP information internally to make operating decisions and believe it is helpful to investors because it allows more meaningful period-to-period comparisons of our ongoing operating results. The information can also be used to perform trend analysis and to better identify operating trends that may otherwise be masked or distorted by these types of items. We believe this information provides a higher degree of transparency.
An important non-GAAP measure that we use is adjusted EBITDA. A part of Hillenbrand’s strategy is to selectively acquire companies that we believe can benefit from the HOM to spur faster and more profitable growth. Given that strategy, it is a natural consequence to incur related expenses, such as amortization from acquired intangible assets and additional interest expense from debt-funded acquisitions. Accordingly, we use adjusted EBITDA, among other measures, to monitor our business performance. Adjusted EBITDA is not a recognized term under GAAP and therefore does not purport to be an alternative to net income (loss). Further, the Company’s measure of adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Another important non-GAAP operational measure used is backlog. Backlog is not a term recognized under GAAP; however, it is a common measurement used in industries with extended lead times for order fulfillment, like those in which Advanced Process Solutions and Molding Technology Solutions compete. Backlog represents the amount of consolidated net revenue that
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we expect to realize on contracts awarded related to Advanced Process Solutions and Molding Technology Solutions. For purposes of calculating backlog, 100% of estimated net revenue attributable to consolidated subsidiaries is included. Backlog includes expected net revenue from large systems and equipment, as well as aftermarket parts, components, and service. The length of time that projects typically remain in backlog can span from days for aftermarket parts or service to approximately 18 to 24 months for larger system sales within Advanced Process Solutions. The majority of the backlog within Molding Technology Solutions is expected to be fulfilled within the next twelve months. Backlog includes expected net revenue from the remaining portion of firm orders not yet completed, as well as net revenue from change orders to the extent that they are reasonably expected to be realized. We include in backlog the full contract award, including awards subject to further customer approvals, which we expect to result in revenue in future periods. In accordance with industry practice, our contracts may include provisions for cancellation, termination or suspension at the discretion of the customer.
We expect that future net revenue associated with Advanced Process Solutions and Molding Technology Solutions will be influenced by backlog because of the lead time involved in fulfilling engineered-to-order equipment for customers. Although backlog can be an indicator of future net revenue, it does not include projects and aftermarket parts orders that are booked and shipped within the same quarter. The timing of order placement, size, extent of customization, and customer delivery dates can create fluctuations in backlog and net revenue. Revenue attributable to backlog may also be affected by foreign exchange fluctuations for orders denominated in currencies other than U.S. dollars.
We calculate the foreign currency impact on net revenue, gross profit, operating expenses, backlog, consolidated net income (loss), and adjusted EBITDA in order to better measure the comparability of results between periods. We calculate the foreign currency impact by translating current year results at prior year foreign exchange rates. This information is provided because exchange rates can distort the underlying change in these metrics, either positively or negatively. The cost structures for Corporate and Batesville are generally not significantly impacted by the fluctuation in foreign exchange rates, and we do not disclose the foreign currency impact in the Operations Review section below where the impact is not significant.
See page 38 for reconciliation of consolidated net income (loss), the most directly comparable GAAP measure, to our non-GAAP adjusted EBITDA. We use other non-GAAP measures in certain other instances and include information reconciling such non-GAAP measures to the respective most directly comparable GAAP measures. Given that there is no GAAP financial measure comparable to backlog, a quantitative reconciliation is not provided.
CRITICAL ACCOUNTING ESTIMATES
For the three months ended December 31, 2020, there were no significant changes to our critical accounting estimates, as outlined in our Annual Report on Form 10-K as of and for the year-end September 30, 2020.
OPERATIONS REVIEW — CONSOLIDATED
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 (1) | ||||||||||||||||||||||
| Amount | % of Net Revenue | Amount | % of Net Revenue | ||||||||||||||||||||
| Net revenue | $ | 692.5 | 100.0 | $ | 566.9 | 100.0 | |||||||||||||||||
| Gross profit | 244.2 | 35.3 | 171.8 | 30.3 | |||||||||||||||||||
| Operating expenses | 131.6 | 19.0 | 157.4 | 27.8 | |||||||||||||||||||
| Amortization expense | 13.6 | 14.8 | |||||||||||||||||||||
| Gain on divestiture | (31.6) | — | |||||||||||||||||||||
| Interest expense | 21.2 | 14.7 | |||||||||||||||||||||
| Other (expense) income, net | (0.4) | 1.9 | |||||||||||||||||||||
| Income tax expense (benefit) | 31.3 | (12.4) | |||||||||||||||||||||
| Net income (loss) attributable to Hillenbrand | 76.4 | (3.1) | |||||||||||||||||||||
(1) Included 40 days of operations related to Milacron following its acquisition on November 21, 2019
Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019
Net revenue increased $125.6 (22%), which included favorable foreign currency impact (3%).
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•Advanced Process Solutions’ net revenue decreased $15.8 (5%), primarily due to lower volume (10%) largely driven by a decrease in large polyolefin systems sales, and lower parts and service revenue driven by delays associated with the COVID-19 pandemic, partially offset by an increase in demand for other capital equipment. Foreign currency impact improved net revenue by 4%.
•Molding Technology Solutions’ net revenue increased $103.6 (78%) primarily due to an additional 50 days of revenue compared to the first quarter of fiscal 2020 as a result of the timing of the Milacron acquisition (closed November 21, 2019), partially offset by the divestiture of Cimcool, which occurred in the second quarter of 2020. Foreign currency impact improved net revenue by 1%.
•Batesville’s net revenue increased $37.8 (30%), primarily due to an increase in volume (28%) and an increase in average selling price (2%). Higher volume was driven by an increase in burial casket sales primarily due to estimated higher deaths from the COVID-19 pandemic, partially offset by an estimated increased rate at which families opted for cremation.
Gross profit increased $72.4 (42%), which included favorable foreign currency impact (3%). Gross profit margin improved 500 basis points to 35.3%.
•Advanced Process Solutions’ gross profit decreased $2.5 (2%), primarily driven by a decrease in large polyolefin systems sales, lower parts and service revenue, driven by delays associated with the COVID-19 pandemic, and cost inflation, partially offset by an increase in demand for other capital equipment, pricing and productivity improvements, and cost containment. Foreign currency impact improved gross profit by 5%. Gross profit margin improved 100 basis points to 34.6% in fiscal 2021, primarily due to pricing and productivity improvements and cost containment, partially offset by cost inflation.
Advanced Process Solutions’ gross profit included restructuring and restructuring related charges ($0.6 in fiscal 2021 and $0.7 in fiscal 2020). Excluding these charges, adjusted gross profit decreased $2.3 (2%) and adjusted gross profit margin improved 100 basis points to 34.9%.
•Molding Technology Solutions’ gross profit increased $45.4 (155%) primarily due to an additional 50 days of gross profit compared to the first quarter of fiscal 2020 as a result of the timing of the Milacron acquisition (closed November 21, 2019), partially offset by the divestiture of Cimcool, which occurred in the second quarter of 2020. Foreign currency impact improved gross profit by 2%. Gross profit margin improved 950 basis points to 31.5% in 2021, primarily due to inventory step-up charges of $9.6 in fiscal 2020 that did not repeat.
Molding Technology Solutions’ gross profit included inventory step-up charges of $9.6 in fiscal 2020, business acquisition, disposition, and integration costs of $0.7 in fiscal 2021 (including severance costs related to the integration), and restructuring and restructuring related charges of $0.2 in fiscal 2021. Excluding these charges, adjusted gross profit increased $36.8 (95%) and adjusted gross profit margin improved 280 basis points to 31.9%. The adjusted gross profit margin improvement was driven by productivity improvements, which included savings from restructuring actions taken in the prior year.
•Batesville’s gross profit increased $29.5 (75%) and gross profit margin improved 1080 basis points to 41.8%. The increase in gross profit and gross profit margin was primarily due to higher volume and productivity initiatives, partially offset by inflation in wages and benefits.
Batesville’s gross profit included restructuring and restructuring related charges ($0.1 in fiscal 2020). Excluding these charges, adjusted gross profit increased $29.6 (75%) and adjusted gross profit margin improved 1080 basis points to 41.9%.
Operating expenses decreased $25.8 (16%), primarily due to decreases in business acquisition, disposition, and integration costs related to the acquisition of Milacron and productivity initiatives, which included savings from prior year restructuring and cost containment actions, partially offset by the addition of Molding Technology Solutions’ operating expenses and an increase in variable compensation. Foreign currency impact decreased operating expenses by 1%. Our operating expense-to-revenue ratio improved by 880 basis points to 19.0% in fiscal 2021. Operating expenses included the following items:
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| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Business acquisition, disposition, and integration costs | $ | 9.7 | $ | 53.8 | |||||||
| Restructuring and restructuring related charges | 1.5 | 1.7 | |||||||||
On an adjusted basis, which excluded business acquisition, disposition, and integration costs and restructuring and restructuring related charges, operating expenses increased $20.4 (20%), primarily due to the addition of Molding Technology Solutions’ operating expenses and an increase in variable compensation, partially offset by productivity initiatives, which included savings from prior year restructuring and cost containment actions. Adjusted operating expenses as a percentage of net revenue improved 30 basis points in fiscal 2021 to 17.7%.
Amortization expense decreased $1.2 (8%), primarily driven by certain intangible assets being classified as held for sale as of September 30, 2020, resulting in no amortization for those assets during fiscal 2021. See Note 4 included in Part 1, Item 1 of this Form 10-Q for more information. In addition, there was $4.2 of backlog amortization recorded in fiscal 2020, resulting from the acquisition of Milacron, that did not repeat in fiscal 2021. These decreases were partially offset by an additional 50 days of amortization expense in fiscal 2021 compared to the first quarter of fiscal 2020 as a result of the timing of the Milacron acquisition (closed November 21, 2019).
Gain on divestiture increased $31.6 due to the gain realized on the divestiture of Red Valve on December 31, 2020. See Note 4 included in Part 1, Item 1 of this Form 10-Q for more information.
Interest expense increased $6.5 (44%), primarily due to an additional 50 days in fiscal 2021 of interest expense on the increased borrowings as a result of the Milacron acquisition compared to the first quarter of fiscal 2020 as a result of the timing of the Milacron acquisition (closed November 21, 2019). See Note 8 of Part I, Item 1 of this Form 10-Q for a discussion of the debt financing. On an adjusted basis, which excludes $2.4 of interest expense on the $375.0 senior unsecured notes for the period prior to completing the acquisition of Milacron (October 1, 2019 through November 20, 2019), interest expense increased by $8.3 (68%).
Other expense (income), net was $0.4 of expense in fiscal 2021, compared to $1.9 income in fiscal 2020. This change is primarily driven by a decrease in interest income. Fiscal 2020 included interest earned on the proceeds from the $375.0 senior unsecured notes during the period prior to completing the acquisition of Milacron.
The effective tax rate was 28.7% in fiscal 2021 compared to 93.9% in fiscal 2020. The difference in the effective tax rate in the current quarter relative to the federal statutory tax rate was primarily attributable to an unfavorable geographic mix of pretax income, the impact that tax loss carryforwards and the tax loss on the sale of Red Valve had on foreign tax credit determinations related to foreign income inclusions, as well as deferred taxes recognized on accumulated earnings of foreign subsidiaries. The decrease in the effective tax rate from the prior year is primarily due to the prior year net loss position and the tax benefit recognized from the revaluation of current and deferred tax balances in connection with enacted statutory tax rate reductions in certain foreign jurisdictions, which significantly increased the tax rate in the prior year, partially offset by the impact of nondeductible expenses associated with the Milacron acquisition.
Our adjusted effective income tax rate was 28.5% in fiscal 2021 compared to 22.0% in fiscal 2020. The adjusted effective income tax rate excludes the impact of the following items:
•the tax impact of the sale of Red Valve ($3.9 expense in fiscal 2021);
•the negative tax effect of the Milacron tax loss carryforwards on foreign income inclusion and foreign tax credits: ($3.7 expense in fiscal 2021 and $0.6 benefit in fiscal 2020);
•certain tax items related to the acquisition of Milacron ($1.1 benefit in fiscal 2020);
•the revaluation of deferred tax balances in connection with enacted statutory tax rate reductions in certain foreign jurisdictions ($5.7 benefit in fiscal 2020); and
•the tax effect of the adjustments previously discussed within this section.
The increase in the current year quarter’s adjusted effective tax rate was attributable to the increase in deferred taxes recognized for taxes on accumulated earnings of foreign subsidiaries and the prior year impact of the deferred tax benefit recognized from the revaluation of current and deferred tax balances in connection with enacted statutory tax rate reductions in certain foreign jurisdictions.
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OPERATIONS REVIEW — ADVANCED PROCESS SOLUTIONS
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Amount | % of Net Revenue | Amount | % of Net Revenue | ||||||||||||||||||||
| Net revenue | $ | 290.8 | 100.0 | $ | 306.6 | 100.0 | |||||||||||||||||
| Gross profit | 100.6 | 34.6 | 103.1 | 33.6 | |||||||||||||||||||
| Operating expenses | 56.2 | 19.3 | 57.0 | 18.6 | |||||||||||||||||||
| Amortization expense | 4.8 | 7.3 | |||||||||||||||||||||
Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019
Net revenue decreased $15.8 (5%) primarily due to lower volume (10%) largely driven by a decrease in large polyolefin systems sales, and lower parts and service revenue driven by delays associated with the COVID-19 pandemic, partially offset by an increase in demand for other capital equipment. Foreign currency impact improved net revenue by 4%. Order backlog increased $169.7 (19%) from $900.9 on December 31, 2019, to $1,070.6 on December 31, 2020. The increase in backlog was primarily driven by increased demand in engineered plastics as well as customer delays related to orders in progress. Foreign currency impact increased order backlog by 8%.
On a sequential basis, order backlog increased $82.6 (8%) to $1,070.6 at December 31, 2020, up from $988.0 at September 30, 2020. The increase in backlog was primarily driven by an increase in orders for projects in the engineered plastics industry.
Gross profit decreased $2.5 (2%), primarily driven by a decrease in large polyolefin systems sales, lower parts and service revenue, driven by delays associated with the COVID-19 pandemic, and cost inflation, partially offset by an increase in demand for other capital equipment, pricing and productivity improvements, and cost containment. Foreign currency impact improved gross profit by 5%. Gross profit margin improved 100 basis points to 34.6% in fiscal 2021, primarily due to pricing and productivity improvements and cost containment, partially offset by cost inflation.
Advanced Process Solutions’ gross profit included restructuring and restructuring related charges ($0.6 in fiscal 2021 and $0.7 in fiscal 2020). Excluding these charges, adjusted gross profit decreased $2.3 (2%) and adjusted gross profit margin improved 100 basis points to 34.9%.
Operating expenses decreased $0.8 (1%), primarily due to savings from restructuring actions and reduced discretionary spending, partially offset by cost inflation and an increase in variable compensation. Foreign currency impact increased operating expenses by 4%. Operating expenses as a percentage of net revenue increased by 70 basis points to 19.3% in fiscal 2021.
Operating expenses included restructuring and restructuring related charges ($0.7 in fiscal 2021 and $0.9 in fiscal 2020) and business acquisition, disposition, and integration costs of $0.6 in fiscal 2021. Excluding these items, adjusted operating expenses decreased $1.0 (2%) and adjusted operating expenses as a percentage of net revenue increased 60 basis points to 18.9% in fiscal 2021.
Amortization expense decreased $2.5 (34%) primarily driven by certain intangible assets being classified as held for sale as of September 30, 2020, resulting in no amortization for those assets during fiscal 2021. See Note 4 included in Part 1, Item 1 of this Form 10-Q for more information.
OPERATIONS REVIEW — MOLDING TECHNOLOGY SOLUTIONS
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| Three Months Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 (1) | ||||||||||||||||||||||
| Amount | % of Net Revenue | Amount | % of Net Revenue | ||||||||||||||||||||
| Net revenue | $ | 236.9 | 100.0 | $ | 133.3 | 100.0 | |||||||||||||||||
| Gross profit | 74.7 | 31.5 | 29.3 | 22.0 | |||||||||||||||||||
| Operating expenses | 36.0 | 15.2 | 21.9 | 16.4 | |||||||||||||||||||
| Amortization expense | 8.8 | 7.5 | |||||||||||||||||||||
(1) Included 40 days of operations related to Milacron following its acquisition on November 21, 2019
Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019
Milacron’s fiscal year 2020 results were significantly impacted by the non-recurring effects of the fair value adjustments to inventories and backlog required by acquisition accounting. These fair value adjustments are being charged to the Consolidated Statements of Operations over the respective periods that inventory is expected to be consumed and backlog is expected to be realized as net revenue.
Net revenue increased $103.6 (78%) primarily due to an additional 50 days of revenue compared to the first quarter of fiscal 2020, partially offset by the divestiture of Cimcool, which occurred in the second quarter of 2020. Foreign currency impact improved net revenue by 1%. Order backlog increased $145.2 (99%) from $146.8 on December 31, 2019, to $292.0 on December 31, 2020. The increase in backlog was primarily driven by an increase in orders within our injection molding equipment product lines.
On a sequential basis, order backlog increased $49.4 (20%) to $292.0 at December 31, 2020, up from $242.6 at September 30, 2020. The increase in backlog was primarily driven by an increase in orders within our injection molding equipment product lines.
Gross profit increased $45.4 (155%) primarily due to an additional 50 days of gross profit compared to the first quarter of fiscal 2020, partially offset by the divestiture of Cimcool, which occurred in the second quarter of 2020. Foreign currency impact improved gross profit by 2%. Gross profit margin improved 950 basis points to 31.5% in 2021, primarily due to inventory step-up charges of $9.6 in fiscal 2020 that did not repeat.
Molding Technology Solutions’ gross profit included inventory step-up charges ($9.6 in fiscal 2020), business acquisition, disposition and integration costs ($0.7 in fiscal 2021), and restructuring and restructuring related charges ($0.2 in fiscal 2021). Excluding these charges, adjusted gross profit increased $36.8 (95%) and adjusted gross profit margin improved 280 basis points to 31.9%. The adjusted gross profit margin improvement was driven by productivity improvements, which included savings from restructuring actions taken in the prior year.
Operating expenses increased $14.1 (64%), primarily due an additional 50 days of operating expenses compared to the first quarter of fiscal 2020, partially offset by the divestiture of Cimcool, which occurred in the second quarter of 2020. Operating expenses as a percentage of net revenue improved by 120 basis points to 15.2% in fiscal 2021.
Operating expenses included business acquisition, disposition, and integration costs (including severance costs related to the integration) ($0.3 in fiscal 2021 and $4.0 in fiscal 2020) and restructuring and restructuring related charges ($0.3 in fiscal 2020). Excluding these items, adjusted operating expenses increased $18.1 (103%) and adjusted operating expenses as a percentage of net revenue increased 190 basis points to 15.1% in fiscal 2021.
Amortization expense increased $1.3 (17%) primarily due to an additional 50 days of amortization expense in fiscal 2021 compared to the first quarter of fiscal 2020, partially offset by $4.2 of backlog amortization recorded in fiscal 2020 that did not repeat in fiscal 2021.
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OPERATIONS REVIEW — BATESVILLE
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Amount | % of Net Revenue | Amount | % of Net Revenue | ||||||||||||||||||||
| Net revenue | $ | 164.8 | 100.0 | $ | 127.0 | 100.0 | |||||||||||||||||
| Gross profit | 68.9 | 41.8 | 39.4 | 31.0 | |||||||||||||||||||
| Operating expenses | 18.6 | 11.3 | 18.5 | 14.6 | |||||||||||||||||||
Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019
Net revenue increased $37.8 (30%), primarily due to an increase in volume (28%) and an increase in average selling price (2%). Higher volume was driven by an increase in burial casket sales primarily due to estimated higher deaths from the COVID-19 pandemic, partially offset by an estimated increased rate at which families opted for cremation.
Gross profit increased $29.5 (75%) and gross profit margin improved 1080 basis points to 41.8%. The increase in gross profit and gross profit margin was primarily due to higher volume and productivity initiatives, partially offset by inflation in wages and benefits.
Gross profit included restructuring and restructuring related charges ($0.1 in fiscal 2020). Excluding these charges, adjusted gross profit increased $29.6 (75%) and adjusted gross profit margin improved 1080 basis points to 41.9%.
Operating expenses increased $0.1 (1%) to $18.6 primarily due to an increase in variable compensation, partially offset by productivity initiatives and cost containment actions. Operating expenses as a percentage of net revenue improved 330 basis points to 11.3%, primarily due to the increase in volume.
Operating expenses included restructuring and restructuring related charges ($0.4 in fiscal 2020). Excluding these charges, adjusted operating expenses increased $0.2 (1%) and adjusted operating expenses as a percentage of net revenue improved 320 basis points to 11.1% in fiscal 2020.
REVIEW OF CORPORATE EXPENSES
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Amount | % of Net Revenue | Amount | % of Net Revenue | ||||||||||||||||||||
| Core operating expenses | $ | 13.3 | 1.9 | $ | 10.2 | 1.8 | |||||||||||||||||
| Business acquisition, disposition, and integration costs | 7.5 | 1.1 | 49.8 | 8.8 | |||||||||||||||||||
| Operating expenses | $ | 20.8 | 3.0 | $ | 60.0 | 10.6 | |||||||||||||||||
Corporate operating expenses primarily represent operating expenses and costs related to business acquisition, disposition, and integration, which we incur as a result of our strategy to grow through selective acquisitions.
Business acquisition, disposition, and integration costs include legal, tax, accounting, and other advisory fees and due diligence costs associated with investigating opportunities (including acquisition and disposition) and integrating completed acquisitions (including severance).
Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019
Operating expenses decreased $39.2 (65%), primarily due to a decrease in business acquisition, disposition and integration costs as a result of the acquisition of Milacron, partially offset by an increase in variable compensation and the addition of Milacron. Total operating expenses as a percentage of net revenue were 3.0%, an improvement of 760 basis points from the prior year.
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Core operating expenses increased $3.1 (30%), primarily driven by an increase in variable compensation and the addition of Milacron. Total core expenses as a percentage of net revenue were 1.9%, an increase of 10 basis points from the prior year.
NON-GAAP OPERATING PERFORMANCE MEASURES
The following is a reconciliation from the most directly comparable GAAP operating performance measure to our non-GAAP adjusted EBITDA.
| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Consolidated net income (loss) | $ | 77.7 | $ | (0.8) | |||||||
| Interest income | (0.6) | (1.3) | |||||||||
| Interest expense | 21.2 | 14.7 | |||||||||
| Income tax expense (benefit) | 31.3 | (12.4) | |||||||||
| Depreciation and amortization | 29.3 | 25.9 | |||||||||
| EBITDA | $ | 158.9 | $ | 26.1 | |||||||
Business acquisition, disposition, and integration costs (1) | 9.1 | 53.8 | |||||||||
Restructuring and restructuring related charges (2) | 1.5 | 2.4 | |||||||||
Inventory step-up (3) | — | 9.6 | |||||||||
Gain on divestiture (4) | (31.6) | — | |||||||||
| Other | 0.1 | — | |||||||||
| Adjusted EBITDA | $ | 138.0 | $ | 91.9 | |||||||
(1)Business acquisition, disposition, and integration costs during the three months ended December 31, 2020 primarily included professional fees and employee-related costs attributable to the integration of Milacron and divestiture of Red Valve. Business acquisition, disposition, and integration costs during the three months ended December 31, 2019 primarily included expenses for the settlement of outstanding Milacron share-based equity awards, professional fees, and severance and employee-related costs in connection with the acquisition and integration of Milacron.
(2)Restructuring and restructuring-related charges primarily included severance costs, unrelated to the acquisition and integration of Milacron, during the three months ended December 31, 2020 and 2019.
(3)Represents the non-cash charges related to the fair value adjustment of inventories acquired in connection with the acquisition of Milacron during the three months ended December 31, 2019.
(4)Represents the gain on the divestiture of Red Valve during the three months ended December 31, 2020. See Note 4 included in Part 1, Item 1 of this Form 10-Q for more information.
Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019
Consolidated net income (loss) increased $78.5 (9813%) for the three months ended December 31, 2020, compared to the same period in fiscal 2020. The increase was primarily driven by a decrease in business acquisition, disposition, and integration costs, as well as a decrease in inventory step-up charges, primarily in relation to the acquisition of Milacron, the gain on divestiture of Red Valve, higher volume at Batesville, an additional 50 days of results from Molding Technology Solutions compared to the first quarter of fiscal 2020 as a result of the timing of the Milacron acquisition (closed November 21, 2019), and pricing and productivity improvements. This increase in consolidated net income (loss) was partially offset by an increase in income tax expense, decrease in volume at Advanced Process Solutions, an increase in interest expense, and an increase in variable compensation. Foreign currency impact improved consolidated net income by $1.5.
Consolidated adjusted EBITDA increased $46.1 (50%) for the three months ended December 31, 2020, compared to the same period in fiscal 2020. The increase was primarily due an additional 50 days of results from Molding Technology Solutions compared to the first quarter of fiscal 2020 as a result of the timing of the Milacron acquisition (closed November 21, 2019), higher volume at Batesville, and pricing and productivity improvements. This increase in consolidated adjusted EBITDA was partially offset by a decrease in volume at Advanced Process Solutions and an increase in variable compensation. Foreign currency impact improved adjusted EBITDA by $3.0.
LIQUIDITY AND CAPITAL RESOURCES
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In this section, we discuss our ability to access cash to meet business needs. We discuss how we see cash flow being affected for the next twelve months and how we intend to use it. We describe actual results in generating and utilizing cash by comparing the first three months of 2021 to the same period last year. Finally, we identify other significant matters that could affect liquidity on an ongoing basis.
Ability to Access Cash
Our debt financing has historically included revolving credit facilities, term loans, and long-term notes as part of our overall financing strategy. We regularly review and adjust the mix of fixed-rate and variable-rate debt within our capital structure in order to achieve a target range based on our financing strategy.
We have taken proactive measures to maintain financial flexibility within the landscape of the COVID-19 pandemic. We believe the Company ended the quarter with, and continues to have, sufficient liquidity to operate in the current business environment. Hillenbrand increased cash holdings over the past four quarters (from December 31, 2019 to December 31, 2020) by $123.4, primarily with cash proceeds from the issuance of $400.0 in senior unsecured notes in June 2020, net cash proceeds of $221.9 from the divestiture of the Cimcool business in March 2020, net cash proceeds of $59.4 from the divestiture of the Red Valve business in December 2020, and cash generated from operations, partially offset by repayments made on the Revolver, repayment of the $225.0 term loan, and the maturity of the $150.0 senior unsecured notes. As of December 31, 2020, Hillenbrand was in full compliance with all covenants under its financing agreements. We continue to evaluate additional measures to maintain financial flexibility and general working capital requirements as a result of the COVID-19 pandemic. As the impact of the COVID-19 pandemic on the economy and our operations has been changing frequently and evolving rapidly, we will continue to closely monitor our liquidity and capital resources through the disruption caused by the COVID-19 pandemic.
As of December 31, 2020, we had $829.6 of maximum borrowing capacity under the Revolver, of which $829.6 of this borrowing capacity was immediately available based on our most restrictive covenant as amended in January 2020. The available borrowing capacity reflects a reduction of $7.4 for outstanding letters of credit issued under the Revolver. The Company may request an increase of up to $450.0 in the total borrowing capacity under the Revolver, subject to approval of the lenders.
In the normal course of business, operating companies within the Advanced Process Solutions reportable segment provide 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 maintain adequate capacity to provide the guarantees. As of December 31, 2020, we had guarantee arrangements totaling $437.8, under which $264.9 was used for this purpose. These arrangements include the L/G Facility Agreement under which unsecured letters of credit, bank guarantees, or other surety bonds may be issued. The Company may request an increase to the total capacity under the L/G Facility Agreement by an additional €70.0, subject to approval of the lenders. In January 2020, the L/G Facility Agreement was amended to expand the size of the existing €150.0 facility by an additional €25.0.
We have significant operations outside the U.S. We continue to assert that the basis differences in the majority of our foreign subsidiaries continue to be permanently reinvested outside of the U.S. We have recorded tax liabilities associated with distribution taxes on expected distributions of available cash and current earnings. The Company has made, and intends to continue to make, substantial investments in our businesses in foreign jurisdictions to support the ongoing development and growth of our international operations. As of December 31, 2020, we had a transition tax liability of $18.3 pursuant to the Tax Act. The cash at our foreign subsidiaries totaled $246.5 at December 31, 2020. We continue to actively evaluate our global capital deployment and cash needs.
12-month Outlook
COVID-19 impact
As discussed in the COVID-19 Impact section above, the Company has taken actions aimed to safeguard its capital position in the current COVID-19 environment. We believe the Company has sufficient liquidity to operate in the current business environment. The challenges posed by the COVID-19 pandemic on our businesses have evolved rapidly over the past three quarters and will continue to evolve further. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to the COVID-19 pandemic, and we plan to take necessary steps to manage through such developments.
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Events resulting from the effects of the ongoing COVID-19 pandemic may negatively impact our ability to comply with the covenants under the Revolver, which could lead us to seek an amendment or waivers from our lenders, limit access to or require accelerated repayment of our existing credit facilities, or require us to pursue alternative financing. We have no assurance that any such alternative financing, if required, could be obtained at terms acceptable to us, or at all, including as a result of the effects of the COVID-19 pandemic on the financial markets at such time.
TerraSource Global and flow control businesses
During the fourth quarter of 2020, the Company announced that it had initiated a plan to divest the TerraSource Global and flow control businesses, which operate within the Advanced Process Solutions reportable segment, as these businesses were no
longer considered a strategic fit with the Company’s long-term growth plan and operational objectives. On December 31, 2020, the Company completed the divestiture of its Red Valve business and in January 2021, the Company announced that it entered into a definitive agreement to sell its ABEL Pumps business, subject to customary post-closing adjustments. The Company still intends to divest the TerraSource Global business. We have used and continue to expect to use cash proceeds generated from the divestiture of these businesses primarily to further reduce our outstanding debt.
Leverage update
The Company’s net leverage (defined as debt, net of cash, to adjusted EBITDA) at December 31, 2020 was 2.2x. Given the strength of the Company’s balance sheet and with leverage within our targeted range, the Company will resume consideration of share repurchases and strategic acquisitions.
Other activities
The Tax Act requires the Company to pay a transition tax on unremitted earnings of its foreign subsidiaries, resulting in an estimated liability of $18.3 recorded as of December 31, 2020. The transition tax liability under the Tax Act is expected to be paid over the next five years.
In December 2018, our Board of Directors authorized a new share repurchase program of up to $200.0. Given the strength of the Company’s balance sheet and with leverage within our targeted range, the Company will resume consideration of share repurchases.
Our anticipated contribution to our defined benefit pension plans in fiscal 2021 is $11.0, of which $2.3 was made during the three months ended December 31, 2020. We will continue to monitor plan funding levels, performance of the assets within the plans, and overall economic activity, and we may make additional discretionary funding decisions based on the net impact of the above factors.
The aggregate amount of our quarterly cash dividends increased as a result of the additional common stock issued in connection with the acquisition of Milacron. We currently expect to pay approximately $16.1 each quarter based on our outstanding common stock at December 31, 2020. We increased our quarterly dividend in fiscal 2021 to $0.2150 per common share from $0.2125 per common share paid in fiscal 2020. As of the date of this filing, the Company is committed to paying our dividend, and our policy remains unchanged. As with all discretionary cash outlays, if the current economic challenges become significantly more pronounced or extend over a longer-than-expected period, the Company would evaluate all opportunities to preserve capital, including a dividend adjustment. We cannot predict whether, and to what extent, such an adjustment would be made given the various potential factors that could exist at such time.
We believe existing cash, cash flows from operations, borrowings under existing arrangements, and the issuance of debt will be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next twelve months. Based on these factors, we believe our current liquidity position is sufficient and will continue to meet all of our financial commitments in the current business environment. However, as mentioned above, management is continuing to evaluate the Company’s liquidity position, communicating with and monitoring the actions of our customers and suppliers, and reviewing our near-term financial performance as we manage the Company through the uncertainty related to the COVID-19 pandemic.
Cash Flows
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| Three Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash flows provided by (used in) | |||||||||||
| Operating activities | $ | 66.2 | $ | 17.8 | |||||||
| Investing activities | 53.8 | (1,496.1) | |||||||||
| Financing activities | (174.1) | 1,221.4 | |||||||||
| Effect of exchange rates on cash and cash equivalents | 9.7 | 0.4 | |||||||||
| Net cash flows | $ | (44.4) | $ | (256.5) | |||||||
Operating Activities
Operating activities provided $66.2 of cash during the first three months of fiscal 2021, and provided $17.8 of cash during the first three months of fiscal 2020, a $48.4 (272%) increase. The increase in operating cash flow in fiscal 2021 was largely attributable to a decrease in payments for business acquisition, disposition, and integration costs in relation to the acquisition of Milacron compared to the prior period, the additional cash flow provided by Molding Technology Solutions in fiscal 2021, partially offset by changes in working capital requirements.
Working capital requirements for Advanced Process Solutions and Molding Technology Solutions reportable segments may continue to fluctuate in the future due primarily to the type of product and geography of customer projects in process at any point in time. Working capital needs are lower when advance payments from customers are more heavily weighted toward the beginning of the project. Conversely, working capital needs are higher when a larger portion of the cash is to be received in later stages of manufacturing.
Investing Activities
Investing activities provided $53.8 of cash during the first three months of fiscal 2021, and used $1,496.1 during the first three months of fiscal 2020. The use of cash in fiscal 2020 was primarily for the acquisition of Milacron of $1,503.1. The cash provided in the current year was primarily the result of the divestiture of Red Valve resulting in proceeds of $59.4. See Note 4 included in Part 1, Item 1 of this Form 10-Q for further details on this acquisition and divestiture.
Financing Activities
Cash used in financing activities was largely impacted by net borrowing activity. Our general practice is to use our cash to pay down debt unless it is needed for an acquisition. Cash used in financing activities during the first three months of fiscal 2021 was $174.1, including $157.0 of proceeds, net of debt repayments. Cash provided by financing activities in the first three months of fiscal 2020 was $1,221.4, including $1,240.9 of proceeds, net of debt repayments. The change in cash provided by financing activities was primarily due to financing activity for the acquisition of Milacron in the prior year, including the issuance of two term loan commitments totaling $725.0 along with an increase in net borrowings on the Revolver of $525.0 million.
We returned $16.1 to shareholders during the first three months of fiscal 2021 in the form of quarterly dividends. We increased our quarterly dividend in fiscal 2021 to $0.2150 per common share from $0.2125 per common share paid during fiscal 2020.
Off-Balance Sheet Arrangements
As part of its normal course of business, Hillenbrand is a party to various financial guarantees and other commitments. These arrangements involve elements of performance and credit risk that are not included in the Consolidated Balance Sheets. The possibility that Hillenbrand would have to make actual cash expenditures in connection with these obligations is largely dependent on the performance of the guaranteed party, or the occurrence of future events that Hillenbrand is unable to predict. We have no off-balance sheet financing agreements or guarantees at December 31, 2020, that we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.
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Summarized Financial Information for Guarantors and the Issuer of Guaranteed Securities
Summarized financial information of Hillenbrand (the “Parent”) and our subsidiaries that are guarantors of our senior unsecured notes (the “Guarantor Subsidiaries”) is shown below on a combined basis as the “Obligor Group.” The Company’s senior unsecured notes are guaranteed by certain of our wholly-owned domestic subsidiaries and rank equally in right of payment with all of our existing and financial information of the Obligor Group. All intercompany balances and transactions between the Parent and Guarantor Subsidiaries have been eliminated and all information excludes subsidiaries that are not issuers or guarantors of our senior unsecured notes, including earnings from and investments in these entities.
| December 31, 2020 | September 30, 2020 | |||||||||||||
| Combined Balance Sheets Information: | ||||||||||||||
Current assets (1) | $ | 1,526.7 | $ | 2,088.7 | ||||||||||
| Non-current assets | 7,834.7 | 4,548.4 | ||||||||||||
Current liabilities (1) | 2,748.4 | 2,067.7 | ||||||||||||
| Non-current liabilities | 1,464.7 | 1,596.8 | ||||||||||||
| Three Months Ended December 31, 2020 | For the Year Ended September 30, 2020 | |||||||||||||
| Combined Statements of Operations Information: | ||||||||||||||
Net revenue (2) | $ | 253.9 | $ | 859.6 | ||||||||||
| Gross profit | 105.8 | 387.0 | ||||||||||||
| Net income (loss) attributable to Obligors | 216.0 | (32.1) | ||||||||||||
(1) Current assets include intercompany receivables from non-guarantors of $642.3 as of December 31, 2020. Current liabilities include intercompany payables to non-guarantors $256.2 as of September 30, 2020.
(2) Revenue includes intercompany sales with non-guarantors of $10.4 as of December 31, 2020 and $55.5 as of September 30, 2020, respectively.
Recently Adopted and Issued Accounting Standards
For a summary of recently issued and adopted accounting standards applicable to us, see Item 1, Note 2 of Part I of this Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A full discussion of quantitative and qualitative disclosures about market risk may be found in Item 7A of our 2020 Form 10-K filed with the SEC on November 12, 2020. There have been no material changes in this information since the filing of our 2020 Form 10-K.
Item 4. CONTROLS AND PROCEDURES
Our management, with the participation of our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer (the “Certifying Officers”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective.
In the ordinary course of business, we review our system of internal control over financial reporting and make changes to our systems and processes to improve such controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, automating manual processes, and updating existing systems.
The acquisition of Milacron, which was completed on November 21, 2019, resulted in a material change in the Company's internal controls over financial reporting. The Company is continuing the process of designing and integrating policies, processes, operations, technology, and other components of internal controls over financial reporting of Milacron. Management believes the control design and implementation thereof have appropriately addressed the underlying risks.
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There were no other changes in internal control over financial reporting identified in the evaluation for the quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
PART II — OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Information pertaining to legal proceedings can be found in Note 15 to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Item 1A. RISK FACTORS
For information regarding the risks we face, see the discussion under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended September 30, 2020.
Item 6. EXHIBITS
The exhibits filed with this report are listed below. In reviewing any agreements included as exhibits to this report, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about us or the other parties to the agreements. The agreements may contain representations and warranties by the parties to the agreements, including us. Except where explicitly stated otherwise, these representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
•should not necessarily be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
•may have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
•were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.
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| Restated and Amended Articles of Incorporation of Hillenbrand, Inc., effective as of February 13, 2020 (Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed February 14, 2020) | ||||||||
| Amended and Restated Code of By-Laws of Hillenbrand, Inc. effective as of February 13, 2020 (Incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K filed February 14, 2020) | ||||||||
| Employment Agreement, dated March 30, 2020, by and between Mold-Masters (2007) Limited and Ling An-Heid | ||||||||
| Fourth Amendment Agreement, dated December, 2020, among Hillenbrand, Inc., certain of its subsidiaries party thereto, the lenders party thereto, and Commerzbank Finance & Covered Bond S.A., acting as agent | ||||||||
| List of Guarantor Subsidiaries of Hillenbrand, Inc. | ||||||||
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Exhibit 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, formatted in Inline XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | |||||||
| Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* Filed herewith.
** Management contracts or compensatory plans or arrangements required to be filed as exhibits to this form pursuant to Item 6 of this Form 10-Q.
*** Certain schedules and exhibits have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K. Hillenbrand hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HILLENBRAND, INC. | ||||||||
| Date: February 3, 2021 | BY: | /s/ Kristina A. Cerniglia | ||||||
| Kristina A. Cerniglia | ||||||||
| Senior Vice President and Chief Financial Officer | ||||||||
| Date: February 3, 2021 | /s/ Andrew S. Kitzmiller | |||||||
| Andrew S. Kitzmiller | ||||||||
| Vice President, Controller, and Chief Accounting Officer | ||||||||
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