| | |
16. | Segment and Geographical Information
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net revenue | |
| | |
| | | | |
Process Equipment Group | $ | 315.3 |
| | $ | 316.7 |
| | $ | 924.2 |
| | $ | 880.8 |
|
Batesville | 131.3 |
| | 129.3 |
| | 397.3 |
| | 414.6 |
|
Total | $ | 446.6 |
| | $ | 446.0 |
| | $ | 1,321.5 |
| | $ | 1,295.4 |
|
| | | | | | | |
Adjusted EBITDA | |
| | |
| | | | |
Process Equipment Group | $ | 54.9 |
| | $ | 58.2 |
| | $ | 156.6 |
| | $ | 153.7 |
|
Batesville | 25.3 |
| | 25.6 |
| | 83.6 |
| | 92.1 |
|
Corporate | (10.7 | ) | | (12.4 | ) | | (31.7 | ) | | (32.9 | ) |
| | | | | | | |
Net revenue (1) | |
| | |
| | | | |
United States | $ | 222.1 |
| | $ | 226.7 |
| | $ | 669.3 |
| | $ | 691.7 |
|
Germany | 145.4 |
| | 130.7 |
| | 398.3 |
| | 370.9 |
|
All other foreign business units | 79.1 |
| | 88.6 |
| | 253.9 |
| | 232.8 |
|
Total | $ | 446.6 |
| | $ | 446.0 |
| | $ | 1,321.5 |
| | $ | 1,295.4 |
|
(1)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)(1) We attributeThe Company attributes net revenue to a geography based upon the location of the business unit that consummates the external sale.
| | | | | | | | | | | |
| June 30, 2020 | | September 30, 2019 |
Total assets assigned | | | |
Process Equipment Group | $ | 1,710.4 | | | $ | 1,729.1 | |
Milacron | 1,988.0 | | | — | |
Batesville | 228.7 | | | 186.1 | |
Corporate | 102.8 | | | 313.4 | |
Total | $ | 4,029.9 | | | $ | 2,228.6 | |
| | | |
Tangible long-lived assets, net(1) | | | |
United States | $ | 208.0 | | | $ | 75.8 | |
Germany | 103.2 | | | 40.2 | |
China | 51.4 | | | 4.4 | |
| | | |
All other foreign business units | 130.4 | | | 19.9 | |
Total | $ | 493.0 | | | $ | 140.3 | |
|
| | | | | | | |
| June 30, 2019 | | September 30, 2018 |
Total assets assigned | |
| | |
|
Process Equipment Group | $ | 1,682.7 |
| | $ | 1,638.8 |
|
Batesville | 175.9 |
| | 191.8 |
|
Corporate | 32.0 |
| | 34.0 |
|
Total | $ | 1,890.6 |
| | $ | 1,864.6 |
|
| | | |
Tangible long-lived assets, net | |
| | |
|
United States | $ | 73.5 |
| | $ | 76.6 |
|
Germany | 38.6 |
| | 40.7 |
|
All other foreign business units | 24.5 |
| | 24.7 |
|
Total | $ | 136.6 |
| | $ | 142.0 |
|
(1)Tangible long-lived assets, net includes operating lease right-of-use assets as of June 30, 2020 due to the adoption of ASU 2016-02 in the current year.
The following schedule reconciles reportable segment adjusted EBITDA to consolidated net income (loss).:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Adjusted EBITDA: | | | | | | | |
Process Equipment Group | $ | 54.9 |
| | $ | 58.2 |
| | $ | 156.6 |
| | $ | 153.7 |
|
Batesville | 25.3 |
| | 25.6 |
| | 83.6 |
| | 92.1 |
|
Corporate | (10.7 | ) | | (12.4 | ) | | (31.7 | ) | | (32.9 | ) |
Less: | |
| | |
| | | | |
Interest income | (0.3 | ) | | (0.3 | ) | | (0.7 | ) | | (1.1 | ) |
Interest expense | 5.2 |
| | 5.5 |
| | 16.1 |
| | 17.8 |
|
Income tax expense | 11.6 |
| | 15.2 |
| | 39.9 |
| | 52.5 |
|
Depreciation and amortization | 15.1 |
| | 14.2 |
| | 44.3 |
| | 42.0 |
|
Impairment charge | — |
| | — |
| | — |
| | 63.4 |
|
Business acquisition, development, and integration | 3.8 |
| | 0.1 |
| | 4.9 |
| | 2.6 |
|
Restructuring and restructuring related | 2.4 |
| | 0.5 |
| | 3.6 |
| | 1.7 |
|
Inventory step-up | — |
| | — |
| | 0.2 |
| | — |
|
Consolidated net income | $ | 31.7 |
| | $ | 36.2 |
| | $ | 100.2 |
| | $ | 34.0 |
|
| |
17. | Condensed Consolidating Information |
Certain 100% owned domestic subsidiaries of Hillenbrand fully and unconditionally, jointly and severally, agreed to guarantee all of the indebtedness and guarantee obligations relating to our obligations under our senior unsecured notes. The following are the condensed consolidating financial statements, including the guarantors, which present the statements of income, balance sheets, and cash flows of (i) the parent holding company, (ii) the guarantor subsidiaries, (iii) the non-guarantor subsidiaries, and (iv) eliminations necessary to present the information for Hillenbrand on a consolidated basis.
Condensed Consolidating Statements of Income
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | | Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
Net revenue | $ | — |
| | $ | 220.4 |
| | $ | 284.2 |
| | $ | (58.0 | ) | | $ | 446.6 |
| | $ | — |
| | $ | 232.7 |
| | $ | 273.2 |
| | $ | (59.9 | ) | | $ | 446.0 |
|
Cost of goods sold | — |
| | 125.0 |
| | 204.7 |
| | (31.5 | ) | | 298.2 |
| | — |
| | 126.4 |
| | 189.6 |
| | (33.5 | ) | | 282.5 |
|
Gross profit | — |
| | 95.4 |
| | 79.5 |
| | (26.5 | ) | | 148.4 |
| | — |
| | 106.3 |
| | 83.6 |
| | (26.4 | ) | | 163.5 |
|
Operating expenses | 15.1 |
| | 59.8 |
| | 42.4 |
| | (26.5 | ) | | 90.8 |
| | 13.4 |
| | 63.1 |
| | 48.2 |
| | (26.4 | ) | | 98.3 |
|
Amortization expense | — |
| | 3.3 |
| | 5.3 |
| | — |
| | 8.6 |
| | — |
| | 3.3 |
| | 4.3 |
| | — |
| | 7.6 |
|
Interest expense | 4.4 |
| | 0.1 |
| | 0.7 |
| | — |
| | 5.2 |
| | 4.6 |
| | — |
| | 0.9 |
| | — |
| | 5.5 |
|
Other (expense) income, net | (0.1 | ) | | (0.3 | ) | | (0.1 | ) | | — |
| | (0.5 | ) | | (0.2 | ) | | (0.4 | ) | | (0.1 | ) | | — |
| | (0.7 | ) |
Equity in net income of subsidiaries | 44.8 |
| | 2.4 |
| | — |
| | (47.2 | ) | | — |
| | 34.8 |
| | 3.6 |
| | — |
| | (38.4 | ) | | — |
|
Income before income taxes | 25.2 |
| | 34.3 |
| | 31.0 |
| | (47.2 | ) | | 43.3 |
| | 16.6 |
| | 43.1 |
| | 30.1 |
| | (38.4 | ) | | 51.4 |
|
Income tax expense | (5.2 | ) | | 9.3 |
| | 7.5 |
| | — |
| | 11.6 |
| | (19.3 | ) | | 9.9 |
| | 24.6 |
| | — |
| | 15.2 |
|
Consolidated net income | 30.4 |
| | 25.0 |
| | 23.5 |
| | (47.2 | ) | | 31.7 |
| | 35.9 |
| | 33.2 |
| | 5.5 |
| | (38.4 | ) | | 36.2 |
|
Less: Net income attributable to | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | — |
| | — |
| | 1.3 |
| | — |
| | 1.3 |
| | — |
| | — |
| | 0.3 |
| | — |
| | 0.3 |
|
Net income (1) | $ | 30.4 |
| | $ | 25.0 |
| | $ | 22.2 |
| | $ | (47.2 | ) | | $ | 30.4 |
| | $ | 35.9 |
| | $ | 33.2 |
| | $ | 5.2 |
| | $ | (38.4 | ) | | $ | 35.9 |
|
Consolidated comprehensive income | $ | 33.7 |
| | $ | 26.2 |
| | $ | 30.2 |
| | $ | (55.1 | ) | | $ | 35.0 |
| | $ | 10.7 |
| | $ | 33.8 |
| | $ | (20.4 | ) | | $ | (13.4 | ) | | $ | 10.7 |
|
Less: Comprehensive income attributable | | | | | | | | | | | | | | | | | | | |
to noncontrolling interests | — |
| | — |
| | 1.3 |
| | — |
| | 1.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Comprehensive income (2) | $ | 33.7 |
| | $ | 26.2 |
| | $ | 28.9 |
| | $ | (55.1 | ) | | $ | 33.7 |
| | $ | 10.7 |
| | $ | 33.8 |
| | $ | (20.4 | ) | | $ | (13.4 | ) | | $ | 10.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2019 | | Nine Months Ended June 30, 2018 |
| Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | | Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
Net revenue | $ | — |
| | $ | 667.1 |
| | $ | 826.1 |
| | $ | (171.7 | ) | | $ | 1,321.5 |
| | $ | — |
| | $ | 701.8 |
| | $ | 758.7 |
| | $ | (165.1 | ) | | $ | 1,295.4 |
|
Cost of goods sold | — |
| | 367.6 |
| | 589.1 |
| | (91.5 | ) | | 865.2 |
| | — |
| | 371.2 |
| | 530.7 |
| | (84.8 | ) | | 817.1 |
|
Gross profit | — |
| | 299.5 |
| | 237.0 |
| | (80.2 | ) | | 456.3 |
| | — |
| | 330.6 |
| | 228.0 |
| | (80.3 | ) | | 478.3 |
|
Operating expenses | 39.0 |
| | 182.1 |
| | 134.3 |
| | (80.2 | ) | | 275.2 |
| | 37.9 |
| | 189.5 |
| | 138.6 |
| | (80.3 | ) | | 285.7 |
|
Amortization expense | — |
| | 10.0 |
| | 15.0 |
| | — |
| | 25.0 |
| | — |
| | 10.0 |
| | 12.7 |
| | — |
| | 22.7 |
|
Impairment charge | — |
|
| — |
|
| — |
|
| — |
|
| — |
| | — |
| | 63.4 |
| | — |
| | — |
| | 63.4 |
|
Interest expense | 13.6 |
| | 0.2 |
| | 2.3 |
| | — |
| | 16.1 |
| | 15.7 |
| | — |
| | 2.1 |
| | — |
| | 17.8 |
|
Other (expense) income, net | (0.6 | ) | | (0.4 | ) | | 1.1 |
| | — |
| | 0.1 |
| | (0.6 | ) | | (0.1 | ) | | (1.5 | ) | | — |
| | (2.2 | ) |
Equity in net income of subsidiaries | 138.2 |
| | 8.1 |
| | — |
| | (146.3 | ) | | — |
| | 67.1 |
| | 6.8 |
| | — |
| | (73.9 | ) | | — |
|
Income before income taxes | 85.0 |
| | 114.9 |
| | 86.5 |
| | (146.3 | ) | | 140.1 |
| | 12.9 |
| | 74.4 |
| | 73.1 |
| | (73.9 | ) | | 86.5 |
|
Income tax expense | (11.7 | ) | | 29.8 |
| | 21.8 |
| | — |
| | 39.9 |
| | (19.2 | ) | | 34.8 |
| | 36.9 |
| | — |
| | 52.5 |
|
Consolidated net income | 96.7 |
| | 85.1 |
| | 64.7 |
| | (146.3 | ) | | 100.2 |
| | 32.1 |
| | 39.6 |
| | 36.2 |
| | (73.9 | ) | | 34.0 |
|
Less: Net income attributable to | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | — |
| | — |
| | 3.5 |
| | — |
| | 3.5 |
| | — |
| | — |
| | 1.9 |
| | — |
| | 1.9 |
|
Net income (1) | $ | 96.7 |
| | $ | 85.1 |
| | $ | 61.2 |
| | $ | (146.3 | ) | | $ | 96.7 |
| | $ | 32.1 |
| | $ | 39.6 |
| | $ | 34.3 |
| | $ | (73.9 | ) | | $ | 32.1 |
|
Consolidated comprehensive income | $ | 82.4 |
| | $ | 86.4 |
| | $ | 61.6 |
| | $ | (144.3 | ) | | $ | 86.1 |
| | $ | 29.6 |
| | $ | 41.1 |
| | $ | 31.0 |
| | $ | (70.5 | ) | | $ | 31.2 |
|
Less: Comprehensive income attributable | | | | | | | | | | | | | | | | | | | |
to noncontrolling interests | — |
| | — |
| | 3.7 |
| | — |
| | 3.7 |
| | — |
| | — |
| | 1.6 |
| | — |
| | 1.6 |
|
Comprehensive income (2) | $ | 82.4 |
| | $ | 86.4 |
| | $ | 57.9 |
| | $ | (144.3 | ) | | $ | 82.4 |
| | $ | 29.6 |
| | $ | 41.1 |
| | $ | 29.4 |
| | $ | (70.5 | ) | | $ | 29.6 |
|
(1) Net income attributable to Hillenbrand
(2) Comprehensive income attributable to Hillenbrand
Condensed Consolidating Balance Sheets
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | September 30, 2018 |
| Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | | Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
Cash and cash equivalents | $ | 0.1 |
| | $ | 5.5 |
| | $ | 58.8 |
| | $ | — |
| | $ | 64.4 |
| | $ | 1.1 |
| | $ | 5.8 |
| | $ | 49.1 |
| | $ | — |
| | $ | 56.0 |
|
Trade receivables, net | — |
| | 99.2 |
| | 99.6 |
| | — |
| | 198.8 |
| | — |
| | 124.5 |
| | 94.0 |
| | — |
| | 218.5 |
|
Receivables from long-term manufacturing contracts | — |
| | 9.8 |
| | 148.8 |
| | — |
| | 158.6 |
| | — |
| | 5.3 |
| | 115.0 |
| | — |
| | 120.3 |
|
Inventories | — |
| | 81.1 |
| | 108.4 |
| | (2.8 | ) | | 186.7 |
| | — |
| | 76.7 |
| | 98.6 |
| | (2.8 | ) | | 172.5 |
|
Prepaid expense | 3.0 |
| | 6.6 |
| | 19.4 |
| | — |
| | 29.0 |
| | 2.7 |
| | 7.0 |
| | 15.5 |
| | — |
| | 25.2 |
|
Intercompany receivables | — |
| | 1,169.2 |
| | 51.3 |
| | (1,220.5 | ) | | — |
| | — |
| | 1,131.1 |
| | 79.1 |
| | (1,210.2 | ) | | — |
|
Other current assets | — |
| | 2.6 |
| | 17.6 |
| | 0.5 |
| | 20.7 |
| | — |
| | 3.2 |
| | 14.6 |
| | 0.3 |
| | 18.1 |
|
Total current assets | 3.1 |
| | 1,374.0 |
| | 503.9 |
| | (1,222.8 | ) | | 658.2 |
| | 3.8 |
| | 1,353.6 |
| | 465.9 |
| | (1,212.7 | ) | | 610.6 |
|
Property, plant and equipment, net | 3.5 |
| | 58.6 |
| | 74.5 |
| | — |
| | 136.6 |
| | 3.8 |
| | 60.2 |
| | 78.0 |
| | — |
| | 142.0 |
|
Intangible assets, net | 2.5 |
| | 185.0 |
| | 283.6 |
| | — |
| | 471.1 |
| | 3.2 |
| | 196.0 |
| | 288.1 |
| | — |
| | 487.3 |
|
Goodwill | — |
| | 225.0 |
| | 361.8 |
| | — |
| | 586.8 |
| | — |
| | 225.0 |
| | 356.9 |
| | — |
| | 581.9 |
|
Investment in consolidated subsidiaries | 2,347.3 |
| | 667.8 |
| | — |
| | (3,015.1 | ) | | — |
| | 2,263.1 |
| | 653.9 |
| | — |
| | (2,917.0 | ) | | — |
|
Other assets | 31.2 |
| | 27.6 |
| | 3.0 |
| | (23.9 | ) | | 37.9 |
| | 15.7 |
| | 28.2 |
| | 5.9 |
| | (7.0 | ) | | 42.8 |
|
Total Assets | $ | 2,387.6 |
| | $ | 2,538.0 |
| | $ | 1,226.8 |
| | $ | (4,261.8 | ) | | $ | 1,890.6 |
| | $ | 2,289.6 |
| | $ | 2,516.9 |
| | $ | 1,194.8 |
| | $ | (4,136.7 | ) | | $ | 1,864.6 |
|
| | | | | | | | | | | | | | | | | | | |
Trade accounts payable | $ | 0.2 |
| | $ | 62.5 |
| | $ | 161.8 |
| | $ | — |
| | $ | 224.5 |
| | $ | — |
| | $ | 62.4 |
| | $ | 134.4 |
| | $ | — |
| | $ | 196.8 |
|
Liabilities from long-term manufacturing contracts and advances | — |
| | 20.0 |
| | 89.2 |
| | — |
| | 109.2 |
| | — |
| | 26.6 |
| | 99.3 |
| | — |
| | 125.9 |
|
Accrued compensation | 5.2 |
| | 19.1 |
| | 44.6 |
| | — |
| | 68.9 |
| | 7.2 |
| | 20.1 |
| | 44.6 |
| | — |
| | 71.9 |
|
Intercompany payables | 1,214.5 |
| | 8.8 |
| | — |
| | (1,223.3 | ) | | — |
| | 1,206.2 |
| | 6.1 |
| | — |
| | (1,212.3 | ) | | — |
|
Other current liabilities | 24.1 |
| | 42.6 |
| | 67.0 |
| | (10.0 | ) | | 123.7 |
| | 19.4 |
| | 38.9 |
| | 78.1 |
| | 0.7 |
| | 137.1 |
|
Total current liabilities | 1,244.0 |
| | 153.0 |
| | 362.6 |
| | (1,233.3 | ) | | 526.3 |
| | 1,232.8 |
| | 154.1 |
| | 356.4 |
| | (1,211.6 | ) | | 531.7 |
|
Long-term debt | 323.2 |
| | — |
| | — |
| | — |
| | 323.2 |
| | 300.2 |
| | — |
| | 44.4 |
| | — |
| | 344.6 |
|
Accrued pension and postretirement healthcare | 0.7 |
| | 28.8 |
| | 84.7 |
| | — |
| | 114.2 |
| | 0.7 |
| | 29.8 |
| | 90.0 |
| | — |
| | 120.5 |
|
Deferred income taxes | — |
| | 23.1 |
| | 61.1 |
| | (13.4 | ) | | 70.8 |
| | 0.7 |
| | 22.9 |
| | 60.9 |
| | (8.1 | ) | | 76.4 |
|
Other long-term liabilities | 38.5 |
| | 12.9 |
| | 8.9 |
| | — |
| | 60.3 |
| | 24.1 |
| | 14.3 |
| | 8.9 |
| | — |
| | 47.3 |
|
Total Liabilities | 1,606.4 |
| | 217.8 |
| | 517.3 |
| | (1,246.7 | ) | | 1,094.8 |
| | 1,558.5 |
| | 221.1 |
| | 560.6 |
| | (1,219.7 | ) | | 1,120.5 |
|
Total Hillenbrand Shareholders’ Equity | 781.2 |
| | 2,320.2 |
| | 694.9 |
| | (3,015.1 | ) | | 781.2 |
| | 731.1 |
| | 2,295.8 |
| | 621.2 |
| | (2,917.0 | ) | | 731.1 |
|
Noncontrolling interests | — |
| | — |
| | 14.6 |
| | — |
| | 14.6 |
| | — |
| | — |
| | 13.0 |
| | — |
| | 13.0 |
|
Total Equity | 781.2 |
| | 2,320.2 |
| | 709.5 |
| | (3,015.1 | ) | | 795.8 |
| | 731.1 |
| | 2,295.8 |
| | 634.2 |
| | (2,917.0 | ) | | 744.1 |
|
Total Liabilities and Equity | $ | 2,387.6 |
| | $ | 2,538.0 |
| | $ | 1,226.8 |
| | $ | (4,261.8 | ) | | $ | 1,890.6 |
| | $ | 2,289.6 |
| | $ | 2,516.9 |
| | $ | 1,194.8 |
| | $ | (4,136.7 | ) | | $ | 1,864.6 |
|
Condensed Consolidating Statements of Cash Flows | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Nine Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
Adjusted EBITDA: | | | | | | | | | | | |
Process Equipment Group | $ | 57.6 | | | $ | 54.9 | | | $ | 166.6 | | | $ | 156.6 | | | | | |
Milacron | 38.1 | | | — | | | 96.4 | | | — | | | | | |
Batesville | 36.4 | | | 25.3 | | | 91.4 | | | 83.6 | | | | | |
Corporate | (11.1) | | | (10.7) | | | (30.9) | | | (31.7) | | | | | |
Less: | | | | | | | | | | | |
Interest income | (0.6) | | | (0.3) | | | (2.5) | | | (0.7) | | | | | |
Interest expense | 19.7 | | | 5.2 | | | 55.3 | | | 16.1 | | | | | |
Income tax expense | 28.3 | | | 11.6 | | | 17.7 | | | 39.9 | | | | | |
Depreciation and amortization | 33.9 | | | 15.1 | | | 98.4 | | | 44.3 | | | | | |
Impairment charges | — | | | — | | | 82.5 | | | — | | | | | |
Business acquisition, disposition, and integration costs | 5.5 | | | 3.8 | | | 67.3 | | | 4.9 | | | | | |
Restructuring and restructuring-related charges | 3.6 | | | 2.4 | | | 6.7 | | | 3.6 | | | | | |
Inventory step-up | 3.6 | | | — | | | 40.7 | | | 0.2 | | | | | |
Net loss on divestiture | — | | | — | | | 3.0 | | | — | | | | | |
Other | 2.0 | | | — | | | 2.4 | | | — | | | | | |
Consolidated net income (loss) | $ | 25.0 | | | $ | 31.7 | | | $ | (48.0) | | | $ | 100.2 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2019 | | Nine Months Ended June 30, 2018 |
| Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | | Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
Net cash provided by (used in) operating activities | $ | 18.2 |
| | $ | 105.2 |
| | $ | 92.6 |
| | $ | (106.4 | ) | | $ | 109.6 |
| | $ | 186.0 |
| | $ | 126.6 |
| | $ | (32.0 | ) | | $ | (124.3 | ) | | $ | 156.3 |
|
| | | | | | | | | | | | | | | | | | | |
Investing activities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Capital expenditures | (0.7 | ) | | (5.6 | ) | | (6.3 | ) | | — |
| | (12.6 | ) | | (1.5 | ) | | (7.5 | ) | | (7.3 | ) | | — |
| | (16.3 | ) |
Acquisition of business, net of cash acquired | — |
| | — |
| | (25.9 | ) | | — |
| | (25.9 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Other, net | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
| | — |
| | — |
| | 0.4 |
| | — |
| | 0.4 |
|
Net cash used in investing activities | (0.7 | ) | | (5.5 | ) | | (32.2 | ) | | — |
| | (38.4 | ) | | (1.5 | ) | | (7.5 | ) | | (6.9 | ) | | — |
| | (15.9 | ) |
| | | | | | | | | | | | | | | | | | | |
Financing activities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Repayments on term loan | — |
| | — |
| | — |
| | — |
| | — |
| | (148.5 | ) | | — |
| | — |
| | — |
| | (148.5 | ) |
Proceeds from revolving credit facilities, net of financing costs | 215.0 |
| | — |
| | 234.7 |
| | — |
| | 449.7 |
| | 530.6 |
| | — |
| | 415.9 |
| | — |
| | 946.5 |
|
Repayments on revolving credit facilities | (192.3 | ) | | — |
| | (277.8 | ) | | — |
| | (470.1 | ) | | (472.9 | ) | | — |
| | (364.3 | ) | | — |
| | (837.2 | ) |
Payment of dividends - intercompany | — |
| | (100.0 | ) | | (6.4 | ) | | 106.4 |
| | — |
| | — |
| | (118.3 | ) | | (6.0 | ) | | 124.3 |
| | — |
|
Payment of dividends on common stock | (39.4 | ) | | — |
| | — |
| | — |
| | (39.4 | ) | | (39.1 | ) | | — |
| | — |
| | — |
| | (39.1 | ) |
Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (60.6 | ) | | — |
| | — |
| | — |
| | (60.6 | ) |
Proceeds from stock option exercises and other | 2.4 |
| | — |
| | — |
| | — |
| | 2.4 |
| | 10.3 |
| | — |
| | — |
| | — |
| | 10.3 |
|
Payments for employee taxes on net settlement equity awards | (4.2 | ) | |
|
| |
|
| |
|
| | (4.2 | ) | | (4.1 | ) | | — |
| | — |
| | — |
| | (4.1 | ) |
Other, net | — |
| | — |
| | (0.9 | ) | | — |
| | (0.9 | ) | | — |
| | — |
| | (1.8 | ) | | — |
| | (1.8 | ) |
Net cash (used in) provided by financing activities | (18.5 | ) | | (100.0 | ) | | (50.4 | ) | | 106.4 |
| | (62.5 | ) | | (184.3 | ) | | (118.3 | ) | | 43.8 |
| | 124.3 |
| | (134.5 | ) |
| | | | | | | | | | | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | — |
| | — |
| | (0.2 | ) | | — |
| | (0.2 | ) | | — |
| | — |
| | (1.0 | ) | | — |
| | (1.0 | ) |
| | | | | | | | | | | | | | | | | | | |
Net cash flow | (1.0 | ) | | (0.3 | ) | | 9.8 |
| | — |
| | 8.5 |
| | 0.2 |
| | 0.8 |
| | 3.9 |
| | — |
| | 4.9 |
|
Cash, cash equivalents and restricted cash at beginning of period | 1.1 |
| | 5.8 |
| | 49.6 |
| | — |
| | 56.5 |
| | 0.1 |
| | 5.0 |
| | 61.6 |
| | — |
| | 66.7 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 0.1 |
| | $ | 5.5 |
| | $ | 59.4 |
| | $ | — |
| | $ | 65.0 |
| | $ | 0.3 |
| | $ | 5.8 |
| | $ | 65.5 |
| | $ | — |
| | $ | 71.6 |
|
33
18.Restructuring
The following schedule details the restructuring charges by reportable segment and the classification of those charges onin the income statement.Consolidated Statements of Operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | | | Three Months Ended June 30, 2019 | | | | |
| Cost of goods sold | | Operating expenses | | Total | | Cost of goods sold | | Operating expenses | | Total |
Process Equipment Group | $ | 0.2 | | | $ | 1.9 | | | $ | 2.1 | | | $ | 0.2 | | | $ | 0.4 | | | $ | 0.6 | |
Milacron | 0.8 | | | 0.1 | | | 0.9 | | | — | | | — | | | — | |
Batesville | (0.1) | | | 0.1 | | | — | | | 0.3 | | | 1.4 | | | 1.7 | |
Corporate | — | | | 0.4 | | | 0.4 | | | — | | | — | | | — | |
Total | $ | 0.9 | | | $ | 2.5 | | | $ | 3.4 | | | $ | 0.5 | | | $ | 1.8 | | | $ | 2.3 | |
| | | | | | | | | | | |
| Nine Months Ended June 30, 2020 | | | | | | Nine Months Ended June 30, 2019 | | | | |
| Cost of goods sold | | Operating expenses | | Total | | Cost of goods sold | | Operating expenses | | Total |
Process Equipment Group | $ | 0.9 | | | $ | 3.1 | | | $ | 4.0 | | | $ | 0.6 | | | $ | 0.5 | | | $ | 1.1 | |
Milacron | 0.6 | | | 1.3 | | | 1.9 | | | — | | | — | | | — | |
Batesville | — | | | 0.5 | | | 0.5 | | | 0.5 | | | 1.9 | | | 2.4 | |
Corporate | — | | | 1.4 | | | 1.4 | | | — | | | — | | | — | |
Total | $ | 1.5 | | | $ | 6.3 | | | $ | 7.8 | | | $ | 1.1 | | | $ | 2.4 | | | $ | 3.5 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| Cost of goods sold | | Operating expenses | | Total | | Cost of goods sold | | Operating expenses | | Total |
Process Equipment Group | $ | 0.2 |
| | $ | 0.4 |
| | $ | 0.6 |
| | $ | 0.3 |
| | $ | 0.2 |
| | $ | 0.5 |
|
Batesville | 0.3 |
| | 1.4 |
| | 1.7 |
| | — |
| | — |
| | — |
|
Corporate | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.1 | ) |
Total | $ | 0.5 |
| | $ | 1.8 |
| | $ | 2.3 |
| | $ | 0.3 |
| | $ | 0.1 |
| | $ | 0.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2019 | | Nine Months Ended June 30, 2018 |
| Cost of goods sold | | Operating expenses | | Total | | Cost of goods sold | | Operating expenses | | Total |
Process Equipment Group | $ | 0.6 |
| | $ | 0.5 |
| | $ | 1.1 |
| | $ | 0.2 |
| | $ | 0.4 |
| | $ | 0.6 |
|
Batesville | 0.5 |
| | 1.9 |
| | 2.4 |
| | — |
| | 0.2 |
| | 0.2 |
|
Corporate | — |
| | — |
| | — |
| | — |
| | 0.5 |
| | 0.5 |
|
Total | $ | 1.1 |
| | $ | 2.4 |
| | $ | 3.5 |
| | $ | 0.2 |
| | $ | 1.1 |
| | $ | 1.3 |
|
The restructuring charges during the three and nine months ended June 30, 2020 and 2019 related primarily to severance costs. The severance costs within the Milacron and Corporate reportable segments were primarily related to the ongoing integration of Milacron. At June 30, 2019, $2.72020, $4.0 of restructuring costs were accrued and expected to be paid over the next twelve months.
Proposed Acquisition of Milacron
We entered into a definitive agreement on July 12, 2019 to acquire Milacron Holdings Corp. (“Milacron”) in a cash and stock transaction valued at approximately $2 billion, including debt, net of cash on hand, of $686 as of March 31, 2019. The transaction, which is expected to close in the first calendar quarter of 2020, is subject to customary closing conditions and regulatory approvals, including the approval of stockholders of Milacron.
Under the terms of the agreement, Milacron stockholders will receive $11.80 in cash and a fixed exchange ratio of 0.1612 shares of Hillenbrand common stock for each share of Milacron common stock they own. Upon closing, Hillenbrand shareholders will own approximately 84% of the combined company, and Milacron stockholders will own approximately 16%.
In connection with the proposed transaction, we entered into a commitment letter on July 12, 2019 pursuant to which JPMorgan Chase Bank, N.A. committed to provide a 364-day senior unsecured bridge facility in an aggregate principal amount of $1.1 billion.
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 1995.1995, 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 expectationsprojected 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 the Process Equipment Group 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 | | encourageimpact | | promise | | improve | | progress | | potential | | should | | |
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, and our actual results 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 impactongoing 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 Tax Act onCompany’s credit quality; closure or temporary interruption of the Company’s financial position, resultsor suppliers’ manufacturing facilities; travel, shipping and logistical disruptions; loss of operations,human capital or personnel, and cash flows, as well asgeneral economic calamities, in addition to a variety of risks related to our proposed acquisition and integration of Milacron. 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 13, 2018,2019, 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. WeThe 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: the Process Equipment Group, Milacron®, and Batesville®. The Process Equipment Group businesses design, develop, manufacture, and service highly engineered industrial equipment around the world. Milacron 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.
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 and nine months ended June 30, 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
On March 11, 2020, the World Health Organization categorized the outbreak of the novel coronavirus (“COVID-19”) as a pandemic, and the virus continues to spread throughout the United States and other countries across the world. To limit the spread of COVID-19, national and local governments around the world have instituted certain measures, including travel restrictions, business curtailments, shelter-in-place orders and social distancing guidelines.
COVID-19 is impacting Hillenbrand very differently by business, geography, and function. The scope and nature of these impacts continue to evolve each day. We have experienced an adverse impact on our sales, consolidated results of operations, and cash flows during the three and nine months ended June 30, 2020. It is too early to quantify the impact for the remainder of our fiscal year ended September 30, 2020 or beyond, but the actions being undertaken to reduce the 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 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 this pandemic; however, as a result of the current circumstances, we expect to continue to experience an adverse impact during the remainder of fiscal 2020, including the potential for impairment of certain intangible and other long-lived assets, in addition to the impairment charges that were recorded in the second quarter of 2020. Should these conditions continue into fiscal 2021, the Company would similarly expect an adverse impact on its net revenue, consolidated results of operations, and cash flows in such year, depending upon the severity and length of time such conditions persist.
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 lessen the financial impact on the business while protecting our ability to continue to generate profitable growth over the long term. Among these are proactive measures aimed at mitigating the financial impact of COVID-19 and preserving liquidity, including:
•Voluntary reduction in CEO base salary by 30% through at least the end of the fiscal year;
•Voluntary waiver by the Board of Directors of its scheduled cash compensation increase for 2020;
•Cancellation of all regularly scheduled merit-based salary increases for salaried US- and Canada-based employees for 2020;
•Suspension of all hiring for exempt and nonexempt positions, except for critical positions;
•Reduction in capital spend while continuing to invest in high-return projects and prioritizing critical maintenance, safety, and regulatory projects;
•Employee furloughs and reduced work arrangements at several Company locations due to lower demand, which impacted approximately 15% of employees; and
•The Company’s share repurchase program remains suspended.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, customers, and our relationships with our third-party vendors.
In addition, we have taken proactive measures to maintain financial flexibility within the landscape of the COVID-19 pandemic. We believe the Company has sufficient liquidity to operate in the current business environment as a result of these actions. Hillenbrand increased cash holdings over the past two quarters (from December 31, 2019 to June 30, 2020) by $120.7, primarily with a portion of the cash proceeds from the issuance of $400.0 in senior unsecured notes in June 2020 and the sale of the Cimcool business in March 2020. Additionally, we amended the Credit Agreement on May 19, 2020 to, among other things, increase the maximum permitted leverage ratio for current and future quarters. As of June 30, 2020, Hillenbrand was in full compliance with all covenants under the Credit Agreement, and as of that date, it had liquidity of approximately $905.5, including $263.1 in cash on hand and $642.4 of borrowing capacity immediately available under the Revolver. We continue to evaluate additional measures to maintain financial flexibility and support general working capital requirements as a result of the COVID-19 pandemic. See Note 8 included in Part 1, Item 1 of this Form 10-Q for further details on all financing activity that occurred during the quarter ended June 30, 2020.
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. Such actions have included:
•Initiated regular communication regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures;
•Required telework for those employees who can conduct their work remotely;
•Implemented temperature screening of employees at the majority of manufacturing facilities;
•Instituted additional sanitization protocols, including increased frequency of disinfecting high-traffic areas;
•Established new physical distancing procedures for employees who need to be onsite;
•Provided additional personal protective equipment and cleaning supplies;
•Modified work spaces with plexiglass and touchless faucets;
•Implemented protocols to address actual and suspected COVID-19 cases and exposure; and
•Prohibited all domestic and international non-essential travel for all employees.
Customer Focus
Our customer service, sales, and engineering teams are working closely with customers to meet current demand. Sales and engineering teams are meeting with customers remotely via video calls to continue the design and specification process that would have previously been held in-person. Call centers remain operational through remote call-in.
Business Continuity
While a number of our plants are operating as essential businesses, as determined by the jurisdictions in which we operate, we have experienced disruptions at some smaller facilities in locations such as India as we take actions to comply with the temporary government restrictions related to the COVID-19 pandemic. We expect that these impacted facilities will account for approximately 5% of the Company’s projected annual consolidated revenue. These facilities were closed or operating at reduced capacity at various times during the quarter ended June 30, 2020, but all significant facilities were operating at or near normal production levels as of the date of this filing. While the Company’s manufacturing plants in China were closed for part of the quarter ended March 31, 2020, they were running at or near full capacity by late March. Many of the Company’s non-production employees were working remotely as of the date of this filing.
We are closely monitoring the supply chain and taking actions as needed to mitigate disruptions. We continue to work closely with our suppliers and customers to preserve business continuity and meet current demand. We are capitalizing on our global manufacturing footprint and flexible supply chains to move production to different regions of the world as needed. As of the date of this filing the Company has not experienced any major shortages in our supply chain. For the quarter ended June 30, 2020, order intake at the Process Equipment Group and Milacron segments was negatively impacted by the COVID-19 pandemic and decreased sequentially from the quarter ended March 31, 2020, primarily due to softening in the markets as customers are delaying their decision-making process; however, we have not seen significant order cancellations as of the date of this filing. Batesville experienced higher demand for burial caskets in certain geographical areas starting in late March, and that higher demand continued throughout the quarter ended June 30, 2020. That higher demand resulted in a strong year-over-year sales increase at Batesville for the quarter ended June 30, 2020, partially offset by an estimated increased rate at which families opted for cremation. Given the uncertainty related to COVID-19, we cannot predict the potential further magnitude or duration of these developments and the impact they will have on our financial results and cash flows for the remainder of fiscal 2020 and at least the first half of fiscal 2021. In addition to the actions taken as of the date of this filing as discussed above, further actions may be taken in certain businesses in response to continued lower customer demand, including temporary reductions in work hours, furloughs, or layoffs, if required.
Government Updates
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property, as well as loans to certain qualifying businesses. We continue to examine the impacts that the CARES Act may have on our business. While we may take advantage of certain of the CARES Act’s cash deferral provisions, many of the provisions are not applicable to us. As of the date of this filing, we have not participated in CARES Act loans.
Additionally, we continue to monitor the COVID-19 legislative activity of many of the other countries in which we operate. As is the case in the United States, many provisions of the legislation enacted outside the United States are not applicable to us at this time.
Except as specifically identified in this report, events and changes in circumstances arising after the quarter ended June 30, 2020, including those resulting from the impact of COVID-19, will be reflected in management’s estimates for future periods in subsequent periodic filings. For further discussion of management’s estimates, refer to Note 1 in Part 1, Item 1 of this report. For further discussion of the COVID-19 pandemic, refer to “Item 1A. Risk Factors” in Part II of this report.
Acquisition of Milacron
As discussed in Note 4 of Part I, Item 1 of this Form 10-Q, on November 21, 2019, we completed the acquisition of Milacron for a total purchase price of approximately $2.0 billion through a merger of our wholly-owned subsidiary with and into Milacron, resulting in ownership of 100% of Milacron common stock. Milacron is a global leader in highly engineered and customized systems in plastic technology and processing. 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 currently reported separately in its own reportable segment. The Consolidated Financial Statements include the financial results of Milacron from the date of acquisition.
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, we 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. See Note 8 of Part I, Item 1 of this Form 10-Q for a discussion of the debt financing.
The Company’s results for the period since the acquisition 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 revenue. The preliminary fair value assigned to Milacron’s backlog was $10.0, which was fully amortized as expense during the nine months ended June 30, 2020. The preliminary step-up adjustment to inventories was $40.7, which was fully charged as expense during the nine months ended June 30, 2020 ($3.6 of expense during the three months ended June 30, 2020).
The preliminary fair value assigned to Milacron’s customer relationships, trade names, and technology totaled $805.0, of which $125.0 was related to the Cimcool business that was divested in the second quarter of 2020. The trade names were designated as indefinite-lived intangible assets while the customer relationships and technology are amortized over their respective estimated useful lives on a straight-line basis, which will result in approximately $9.0 of amortization expense during the remaining three months of 2020. The acquisition resulted in preliminary goodwill of $707.6.
Divestiture of Cimcool
On March 30, 2020, we completed the sale of the Company’s Cimcool (“Cimcool”) business, 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 at closing of $222.4, net of cash divested. Consistent with our current capital allocation priorities, we used a portion of the cash proceeds from the sale for repayments on the Revolver during the quarter ended March 31, 2020, and intend to use the remainder for general working capital purposes.
In addition, we may receive contingent consideration of up to an aggregate of $26.0 based on multiple earn-out provisions. As of the transaction date (and at June 30, 2020), we were unable to determine that it was probable that any of the contingent consideration would be received, and accordingly no asset was recorded for contingent consideration.
As a result of the sale, we recorded a pre-tax loss of $3.0 within other income (expense), net in the Consolidated Statement of Operations during the nine months ended June 30, 2020. The related tax effect resulted in tax expense of $13.0 and was included within income tax expense in the Consolidated Statement of Operations during the nine months ended June 30, 2020. We incurred $0.4 and $4.2 of transaction costs associated with the sale during the three and nine months ended June 30, 2020, respectively, which were recorded within operating expenses in the Consolidated Statements of Operations.
We determined that the sale of Cimcool did not represent a strategic shift that had or will have a major effect on our consolidated results of operations, and therefore, Cimcool was not classified as a discontinued operation. Cimcool’s results of operations were included within the Milacron reportable segment until the completion of the sale on March 30, 2020.
OPERATING PERFORMANCE MEASURESEXECUTIVE 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: the Process Equipment Group, Milacron®, and Batesville®. The following discussion comparesProcess Equipment Group businesses design, develop, manufacture, and service highly engineered industrial equipment around the world. Milacron 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.
We strive to provide superior return for our resultsshareholders, 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 and nine months ended June 30, 2019,2020, 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
On March 11, 2020, the World Health Organization categorized the outbreak of the novel coronavirus (“COVID-19”) as a pandemic, and the virus continues to spread throughout the same periods in fiscal year 2018.United States and other countries across the world. To limit the spread of COVID-19, national and local governments around the world have instituted certain measures, including travel restrictions, business curtailments, shelter-in-place orders and social distancing guidelines.
COVID-19 is impacting Hillenbrand very differently by business, geography, and function. 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 levelscope and then provide separate detail about the Process Equipment Group, Batesville, and Corporate. These financial results are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”).
We also provide certain non-GAAP operating performance measures. These non-GAAP measures are referred to as “adjusted” measures and exclude impairment charges, expenses associated with business acquisition, development, and integration, restructuring and restructuring related charges, and inventory step-up. The related income tax for allnature of these items is also excluded. The measures also exclude the non-recurring tax benefits and expenses relatedimpacts continue to the Tax Act. 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.
evolve each day. 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 earnings before interest, income tax, depreciation, and amortization
(“adjusted EBITDA”). A part of Hillenbrand’s strategy is to selectively acquire companies that we believe can benefit from the Hillenbrand Operating Model (“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.
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 (long-term contracts), like those in which our Process Equipment Group competes. Backlog represents the amount of consolidated revenue that we expect to realize on contracts awarded related to the Process Equipment Group. For purposes of calculating backlog, 100% of estimated revenue attributable to consolidated subsidiaries is included. Backlog includes expected revenue from large systems and equipment, as well as replacement parts, components, and service. The length of time that projects remain in backlog can span from days for replacement parts or service to approximately 18 to 36 months for larger system sales. Backlog includes expected revenue from the remaining portion of firm orders not yet completed, as well as 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 revenue associated with the Process Equipment Group will be influenced by backlog because of the lead time involved in fulfilling engineered-to-order equipment for customers. Although backlog can behave experienced an indicator of future revenue, it does not include projects and 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 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 currencyadverse impact on net revenue, gross profit, operating expenses, backlog,our sales, consolidated net income,results of operations, 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 below where the impact is not significant.
See page 39 for reconciliation of adjusted EBITDA to consolidated net income, the most directly comparable GAAP measure. 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
Forcash flows during the three and nine months ended June 30, 2019, there were no significant changes2020. It is too early to our critical accounting estimates, as outlined in our Annual Report on Form 10-K for 2018, except as described below.
2017 Tax Cuts and Jobs Act — On December 22, 2017,quantify the Tax Act was enacted. The majority of the provisions of the Tax Act were to be effective for tax years beginning after December 31, 2017 (which corresponds to Hillenbrand’s current fiscal year ending September 30, 2019). The Tax Act reduced the federal corporate tax rate from 35% to 21% and became effective on January 1, 2018. As a non-calendar year end company, certain of the provisions of the Tax Act were effectiveimpact for the fiscal year ended September 30, 2018, while others became effective for us for our current fiscal year ending September 30, 2019. The Internal Revenue Code provides thatremainder of our fiscal year ended September 30, 2018 had2020 or beyond, but the actions being undertaken to reduce the 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 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 this pandemic; however, as a blended U.S. corporate tax rate of 24.5%, which is based on a prorationresult of the applicable tax rates beforecurrent circumstances, we expect to continue to experience an adverse impact during the remainder of fiscal 2020, including the potential for impairment of certain intangible and after effective dateother long-lived assets, in addition to the impairment charges that were recorded in the second quarter of 2020. Should these conditions continue into fiscal 2021, the Company would similarly expect an adverse impact on its net revenue, consolidated results of operations, and cash flows in such year, depending upon the severity and length of time such conditions persist.
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 lessen the financial impact on the business while protecting our ability to continue to generate profitable growth over the long term. Among these are proactive measures aimed at mitigating the financial impact of COVID-19 and preserving liquidity, including:
•Voluntary reduction in CEO base salary by 30% through at least the end of the Tax Act. fiscal year;
•Voluntary waiver by the Board of Directors of its scheduled cash compensation increase for 2020;
•Cancellation of all regularly scheduled merit-based salary increases for salaried US- and Canada-based employees for 2020;
•Suspension of all hiring for exempt and nonexempt positions, except for critical positions;
•Reduction in capital spend while continuing to invest in high-return projects and prioritizing critical maintenance, safety, and regulatory projects;
•Employee furloughs and reduced work arrangements at several Company locations due to lower demand, which impacted approximately 15% of employees; and
•The statutory tax rateCompany’s share repurchase program remains suspended.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, customers, and our relationships with our third-party vendors.
In addition, we have taken proactive measures to maintain financial flexibility within the landscape of 21% appliesthe COVID-19 pandemic. We believe the Company has sufficient liquidity to fiscal year ending Septemberoperate in the current business environment as a result of these actions. Hillenbrand increased cash holdings over the past two quarters (from December 31, 2019 to June 30, 20192020) by $120.7, primarily with a portion of the cash proceeds from the issuance of $400.0 in senior unsecured notes in June 2020 and the sale of the Cimcool business in March 2020. Additionally, we amended the Credit Agreement on May 19, 2020 to, among other things, increase the maximum permitted leverage ratio for current and future years.
Furthermore,quarters. As of June 30, 2020, Hillenbrand is subjectwas in full compliance with all covenants under the Credit Agreement, and as of that date, it had liquidity of approximately $905.5, including $263.1 in cash on hand and $642.4 of borrowing capacity immediately available under the Revolver. We continue to the Transition Tax. This Transition Tax is imposed on the deferred accumulated earnings of foreign subsidiaries at an effective rate of 15.5% of foreign earnings attributableevaluate additional measures to cashmaintain financial flexibility and cash equivalents, and 8%support general working capital requirements as a result of the residual foreign earnings. During the fiscal year ended September 30, 2018, we recorded a provisional net expenseCOVID-19 pandemic. See Note 8 included in Part 1, Item 1 of this Form 10-Q for the Transition Tax of $24.6. During the quarter ended December 31, 2018, we completed our determination of the Transition Tax and, pursuant to SAB 118, we recognized a $0.5 increase to the Transition Tax liability, resulting in a final Transition tax liability of $25.1. Hillenbrand elected to pay the Transition Tax over eight years and made the first installment payment of $2.0further details on all financing activity that occurred during the quarter ended December 31, 2018. In connectionJune 30, 2020.
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. Such actions have included:
•Initiated regular communication regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures;
•Required telework for those employees who can conduct their work remotely;
•Implemented temperature screening of employees at the majority of manufacturing facilities;
•Instituted additional sanitization protocols, including increased frequency of disinfecting high-traffic areas;
•Established new physical distancing procedures for employees who need to be onsite;
•Provided additional personal protective equipment and cleaning supplies;
•Modified work spaces with plexiglass and touchless faucets;
•Implemented protocols to address actual and suspected COVID-19 cases and exposure; and
•Prohibited all domestic and international non-essential travel for all employees.
Customer Focus
Our customer service, sales, and engineering teams are working closely with customers to meet current demand. Sales and engineering teams are meeting with customers remotely via video calls to continue the design and specification process that would have previously been held in-person. Call centers remain operational through remote call-in.
Business Continuity
While a number of our plants are operating as essential businesses, as determined by the jurisdictions in which we operate, we have experienced disruptions at some smaller facilities in locations such as India as we take actions to comply with the Tax Act, we evaluated our future cash deployment needs and revised our permanent reinvestment assertions. While we continuetemporary government restrictions related to assert permanent reinvestmentthe COVID-19 pandemic. We expect that these impacted facilities will account for approximately 5% of the earnings of certain of our foreign
subsidiaries, we recognized an additional $1.3 of deferred tax liabilityCompany’s projected annual consolidated revenue. These facilities were closed or operating at reduced capacity at various times during the quarter ended December 31, 2018, associated with those foreign subsidiaries where we no longer maintain a permanent reinvestment assertion.
Revenue Recognition — Net revenue includes gross revenue less sales discounts, customer rebates, sales incentives, and product returns,June 30, 2020, but all of which require us to make estimates for the portion of these allowances that have yet to be creditedsignificant facilities were operating at or paid to our customers. We estimate these allowances using the expected value method, which is based upon historical rates and projections of customer purchases toward contractual rebate thresholds.
Performance Obligations & Contract Estimates
The Process Equipment Group designs, engineers, manufactures, markets, and services differentiated process and material handling equipment and systems for a wide variety of industries. A large portion of our revenue across the Process Equipment Group is derived from manufactured equipment, which may be standard, customized to meet customer specifications, or turnkey.
Our contracts with customers in the Process Equipment Group segment often include multiple performance obligations. Performance obligations are promises in a contract to transfer a distinct good or service to the customer, and are the basis for determining how revenue is recognized. For instance, a contract may include obligations to deliver equipment, installation services, and spare parts. We frequently have contracts for which the equipment and the installation services,near normal production levels as well as highly engineered or specialized spare parts, are all considered a single performance obligation, as in these instances the installation services and/or spare parts are not separately identifiable. However, due to the varying nature of equipment and contracts across the Process Equipment Group, we also have contracts where the installation services and/or spare parts are deemed to be separately identifiable and are therefore deemed to be distinct performance obligations.
A contract’s transaction price is allocated to each distinct performance obligation based on its respective stand-alone selling price, and recognized as revenue when, or as, the performance obligation is satisfied. When a distinct performance obligation is not sold separately, the value of the standalone selling price is estimated considering all reasonably available information. When an obligation is distinct, as defineddate of this filing. While the Company’s manufacturing plants in ASC606, we allocate a portionChina were closed for part of the contract price to the obligation and recognize it separately from the other performance obligations.
The timing of revenue recognition for each performance obligation is either over timequarter ended March 31, 2020, they were running at or at a point in time. We recognize revenue over time for contracts that have an enforceable right to collect payment for performance completed to-date upon customer cancellation and provide one or morenear full capacity by late March. Many of the following: (i) service over a periodCompany’s non-production employees were working remotely as of time, (ii) highly customized equipment, or (iii) parts which are highly engineered and have no alternative use. Revenue generated from standard equipment and highly customized equipment or parts contracts without an enforceable right to payment for performance completed to-date, as well as non-specialized parts sales and salesthe date of death care products, is recognized at a point in time.this filing.
We useare closely monitoring the input method of “cost-to-cost”supply chain and taking actions as needed to recognize revenue over time. Accounting for these contracts involves management judgment in estimating total contract revenuemitigate disruptions. We continue to work closely with our suppliers and cost. Contract revenuescustomers to preserve business continuity and meet current demand. We are largely determined by negotiated contract pricescapitalizing on our global manufacturing footprint and quantities, modified by our assumptions regarding contract options, change orders, and incentive and award provisions associated with technical performance clauses. Contract costs are incurred over longer periods of time and, accordingly, the estimation of these costs requires judgment. We measure progress based on costs incurredflexible supply chains to date relativemove production to total estimated cost at completion. Incurred cost represents work performed, which corresponds with, and we believe thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, and certain overhead expenses. Cost estimates are based on various assumptions to project the outcome of future events, including labor productivity and availability, the complexitydifferent regions of the work to be performed, the cost of materials, and the performance of subcontractors. Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements. Revenue and cost estimates are regularly monitored and revised based on changes in circumstances. Anticipated losses on long-term contracts are recognized immediately when such losses become evident. We maintain financial controls over the customer qualification, contract pricing, and estimation processes to reduce the risk of contract losses.
Stand-alone service revenue is recognized either over time proportionately over the periodworld as needed. As of the underlying contract or as invoiced, depending ondate of this filing the terms ofCompany has not experienced any major shortages in our supply chain. For the arrangement. Stand-alone service revenue is not material to the Company.
Forquarter ended June 30, 2020, order intake at the Process Equipment Group and Batesville segment products where revenue is recognized at a pointMilacron segments was negatively impacted by the COVID-19 pandemic and decreased sequentially from the quarter ended March 31, 2020, primarily due to softening in time,the markets as customers are delaying their decision-making process; however, we recognize it when our customers take controlhave not seen significant order cancellations as of the asset. We definedate of this asfiling. Batesville experienced higher demand for burial caskets in certain geographical areas starting in late March, and that higher demand continued throughout the pointquarter ended June 30, 2020. That higher demand resulted in timea strong year-over-year sales increase at Batesville for the quarter ended June 30, 2020, partially offset by an estimated increased rate at which families opted for cremation. Given the customer hasuncertainty related to COVID-19, we cannot predict the capabilitypotential further magnitude or duration of full beneficial usethese developments and the impact they will have on our financial results and cash flows for the remainder of fiscal 2020 and at least the first half of fiscal 2021. In addition to the actions taken as of the assetdate of this filing as intended perdiscussed above, further actions may be taken in certain businesses in response to continued lower customer demand, including temporary reductions in work hours, furloughs, or layoffs, if required.
Government Updates
On March 27, 2020, the contract.U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property, as well as loans to certain qualifying businesses. We continue to examine the impacts that the CARES Act may have on our business. While we may take advantage of certain of the CARES Act’s cash deferral provisions, many of the provisions are not applicable to us. As of the date of this filing, we have not participated in CARES Act loans.
Additionally, we continue to monitor the COVID-19 legislative activity of many of the other countries in which we operate. As is the case in the United States, many provisions of the legislation enacted outside the United States are not applicable to us at this time.
Except as specifically identified in this report, events and changes in circumstances arising after the quarter ended June 30, 2020, including those resulting from the impact of COVID-19, will be reflected in management’s estimates for future periods in subsequent periodic filings. For further discussion of management’s estimates, refer to Note 1 in Part 1, Item 1 of this report. For further discussion of the COVID-19 pandemic, refer to “Item 1A. Risk Factors” in Part II of this report.
Acquisition of Milacron
As discussed in Note 4 of Part I, Item 1 of this Form 10-Q, on November 21, 2019, we completed the acquisition of Milacron for a total purchase price of approximately $2.0 billion through a merger of our wholly-owned subsidiary with and into Milacron, resulting in ownership of 100% of Milacron common stock. Milacron is a global leader in highly engineered and customized systems in plastic technology and processing. 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 currently reported separately in its own reportable segment. The Consolidated Financial Statements include the financial results of Milacron from the date of acquisition.
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, we 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. See Note 8 of Part I, Item 1 of this Form 10-Q for a discussion of the debt financing.
The Company’s results for the period since the acquisition 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 revenue. The preliminary fair value assigned to Milacron’s backlog was $10.0, which was fully amortized as expense during the nine months ended June 30, 2020. The preliminary step-up adjustment to inventories was $40.7, which was fully charged as expense during the nine months ended June 30, 2020 ($3.6 of expense during the three months ended June 30, 2020).
The preliminary fair value assigned to Milacron’s customer relationships, trade names, and technology totaled $805.0, of which $125.0 was related to the Cimcool business that was divested in the second quarter of 2020. The trade names were designated as indefinite-lived intangible assets while the customer relationships and technology are amortized over their respective estimated useful lives on a straight-line basis, which will result in approximately $9.0 of amortization expense during the remaining three months of 2020. The acquisition resulted in preliminary goodwill of $707.6.
Divestiture of Cimcool
On March 30, 2020, we completed the sale of the Company’s Cimcool (“Cimcool”) business, 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 at closing of $222.4, net of cash divested. Consistent with our current capital allocation priorities, we used a portion of the cash proceeds from the sale for repayments on the Revolver during the quarter ended March 31, 2020, and intend to use the remainder for general working capital purposes.
In addition, we may receive contingent consideration of up to an aggregate of $26.0 based on multiple earn-out provisions. As of the transaction date (and at June 30, 2020), we were unable to determine that it was probable that any of the contingent consideration would be received, and accordingly no asset was recorded for contingent consideration.
As a result of the sale, we recorded a pre-tax loss of $3.0 within other income (expense), net in the Consolidated Statement of Operations during the nine months ended June 30, 2020. The related tax effect resulted in tax expense of $13.0 and was included within income tax expense in the Consolidated Statement of Operations during the nine months ended June 30, 2020. We incurred $0.4 and $4.2 of transaction costs associated with the sale during the three and nine months ended June 30, 2020, respectively, which were recorded within operating expenses in the Consolidated Statements of Operations.
We determined that the sale of Cimcool did not represent a strategic shift that had or will have a major effect on our consolidated results of operations, and therefore, Cimcool was not classified as a discontinued operation. Cimcool’s results of operations were included within the Milacron reportable segment until the completion of the sale on March 30, 2020.
EXECUTIVE OVERVIEW
(financial amounts in millions, except share and per share data, throughout Management’s Discussion and Analysis)
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 two businessthree reportable operating segments: the Process Equipment Group, Milacron®, and Batesville®. The Process Equipment Group businesses design, develop, manufacture, and service highly engineered industrial equipment around the world. Milacron 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.
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.
Proposed During the three and nine months ended June 30, 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
On March 11, 2020, the World Health Organization categorized the outbreak of the novel coronavirus (“COVID-19”) as a pandemic, and the virus continues to spread throughout the United States and other countries across the world. To limit the spread of COVID-19, national and local governments around the world have instituted certain measures, including travel restrictions, business curtailments, shelter-in-place orders and social distancing guidelines.
COVID-19 is impacting Hillenbrand very differently by business, geography, and function. The scope and nature of these impacts continue to evolve each day. We have experienced an adverse impact on our sales, consolidated results of operations, and cash flows during the three and nine months ended June 30, 2020. It is too early to quantify the impact for the remainder of our fiscal year ended September 30, 2020 or beyond, but the actions being undertaken to reduce the 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 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 this pandemic; however, as a result of the current circumstances, we expect to continue to experience an adverse impact during the remainder of fiscal 2020, including the potential for impairment of certain intangible and other long-lived assets, in addition to the impairment charges that were recorded in the second quarter of 2020. Should these conditions continue into fiscal 2021, the Company would similarly expect an adverse impact on its net revenue, consolidated results of operations, and cash flows in such year, depending upon the severity and length of time such conditions persist.
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 lessen the financial impact on the business while protecting our ability to continue to generate profitable growth over the long term. Among these are proactive measures aimed at mitigating the financial impact of COVID-19 and preserving liquidity, including:
•Voluntary reduction in CEO base salary by 30% through at least the end of the fiscal year;
•Voluntary waiver by the Board of Directors of its scheduled cash compensation increase for 2020;
•Cancellation of all regularly scheduled merit-based salary increases for salaried US- and Canada-based employees for 2020;
•Suspension of all hiring for exempt and nonexempt positions, except for critical positions;
•Reduction in capital spend while continuing to invest in high-return projects and prioritizing critical maintenance, safety, and regulatory projects;
•Employee furloughs and reduced work arrangements at several Company locations due to lower demand, which impacted approximately 15% of employees; and
•The Company’s share repurchase program remains suspended.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, customers, and our relationships with our third-party vendors.
In addition, we have taken proactive measures to maintain financial flexibility within the landscape of the COVID-19 pandemic. We believe the Company has sufficient liquidity to operate in the current business environment as a result of these actions. Hillenbrand increased cash holdings over the past two quarters (from December 31, 2019 to June 30, 2020) by $120.7, primarily with a portion of the cash proceeds from the issuance of $400.0 in senior unsecured notes in June 2020 and the sale of the Cimcool business in March 2020. Additionally, we amended the Credit Agreement on May 19, 2020 to, among other things, increase the maximum permitted leverage ratio for current and future quarters. As of June 30, 2020, Hillenbrand was in full compliance with all covenants under the Credit Agreement, and as of that date, it had liquidity of approximately $905.5, including $263.1 in cash on hand and $642.4 of borrowing capacity immediately available under the Revolver. We continue to evaluate additional measures to maintain financial flexibility and support general working capital requirements as a result of the COVID-19 pandemic. See Note 8 included in Part 1, Item 1 of this Form 10-Q for further details on all financing activity that occurred during the quarter ended June 30, 2020.
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. Such actions have included:
•Initiated regular communication regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures;
•Required telework for those employees who can conduct their work remotely;
•Implemented temperature screening of employees at the majority of manufacturing facilities;
•Instituted additional sanitization protocols, including increased frequency of disinfecting high-traffic areas;
•Established new physical distancing procedures for employees who need to be onsite;
•Provided additional personal protective equipment and cleaning supplies;
•Modified work spaces with plexiglass and touchless faucets;
•Implemented protocols to address actual and suspected COVID-19 cases and exposure; and
•Prohibited all domestic and international non-essential travel for all employees.
Customer Focus
Our customer service, sales, and engineering teams are working closely with customers to meet current demand. Sales and engineering teams are meeting with customers remotely via video calls to continue the design and specification process that would have previously been held in-person. Call centers remain operational through remote call-in.
Business Continuity
While a number of our plants are operating as essential businesses, as determined by the jurisdictions in which we operate, we have experienced disruptions at some smaller facilities in locations such as India as we take actions to comply with the temporary government restrictions related to the COVID-19 pandemic. We expect that these impacted facilities will account for approximately 5% of the Company’s projected annual consolidated revenue. These facilities were closed or operating at reduced capacity at various times during the quarter ended June 30, 2020, but all significant facilities were operating at or near normal production levels as of the date of this filing. While the Company’s manufacturing plants in China were closed for part of the quarter ended March 31, 2020, they were running at or near full capacity by late March. Many of the Company’s non-production employees were working remotely as of the date of this filing.
We are closely monitoring the supply chain and taking actions as needed to mitigate disruptions. We continue to work closely with our suppliers and customers to preserve business continuity and meet current demand. We are capitalizing on our global manufacturing footprint and flexible supply chains to move production to different regions of the world as needed. As of the date of this filing the Company has not experienced any major shortages in our supply chain. For the quarter ended June 30, 2020, order intake at the Process Equipment Group and Milacron segments was negatively impacted by the COVID-19 pandemic and decreased sequentially from the quarter ended March 31, 2020, primarily due to softening in the markets as customers are delaying their decision-making process; however, we have not seen significant order cancellations as of the date of this filing. Batesville experienced higher demand for burial caskets in certain geographical areas starting in late March, and that higher demand continued throughout the quarter ended June 30, 2020. That higher demand resulted in a strong year-over-year sales increase at Batesville for the quarter ended June 30, 2020, partially offset by an estimated increased rate at which families opted for cremation. Given the uncertainty related to COVID-19, we cannot predict the potential further magnitude or duration of these developments and the impact they will have on our financial results and cash flows for the remainder of fiscal 2020 and at least the first half of fiscal 2021. In addition to the actions taken as of the date of this filing as discussed above, further actions may be taken in certain businesses in response to continued lower customer demand, including temporary reductions in work hours, furloughs, or layoffs, if required.
Government Updates
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property, as well as loans to certain qualifying businesses. We continue to examine the impacts that the CARES Act may have on our business. While we may take advantage of certain of the CARES Act’s cash deferral provisions, many of the provisions are not applicable to us. As of the date of this filing, we have not participated in CARES Act loans.
Additionally, we continue to monitor the COVID-19 legislative activity of many of the other countries in which we operate. As is the case in the United States, many provisions of the legislation enacted outside the United States are not applicable to us at this time.
Except as specifically identified in this report, events and changes in circumstances arising after the quarter ended June 30, 2020, including those resulting from the impact of COVID-19, will be reflected in management’s estimates for future periods in subsequent periodic filings. For further discussion of management’s estimates, refer to Note 1 in Part 1, Item 1 of this report. For further discussion of the COVID-19 pandemic, refer to “Item 1A. Risk Factors” in Part II of this report.
Acquisition of Milacron
As discussed in Note 194 of Part I, Item 1 of this Form 10-Q, on July 12,November 21, 2019, we completed the acquisition of Milacron for a total purchase price of approximately $2.0 billion through a merger of our wholly-owned subsidiary with and into Milacron, resulting in ownership of 100% of Milacron common stock. Milacron is a global leader in highly engineered and customized systems in plastic technology and processing. The acquisition provides Hillenbrand entered intowith 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 currently reported separately in its own reportable segment. The Consolidated Financial Statements include the financial results of Milacron from the date of acquisition.
As a definitive agreement to acquireresult of the acquisition, Milacron Holdings Corp (“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, we made a cash and stock transaction valued at approximately $2 billion,payment of $772.9 to repay outstanding Milacron debt, including debt, netaccrued interest. The Company funded the acquisition through a combination of cash on hand, new debt financing, and the issuance of $686common stock. See Note 8 of Part I, Item 1 of this Form 10-Q for a discussion of the debt financing.
The Company’s results for the period since the acquisition 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 revenue. The preliminary fair value assigned to Milacron’s backlog was $10.0, which was fully amortized as expense during the nine months ended June 30, 2020. The preliminary step-up adjustment to inventories was $40.7, which was fully charged as expense during the nine months ended June 30, 2020 ($3.6 of expense during the three months ended June 30, 2020).
The preliminary fair value assigned to Milacron’s customer relationships, trade names, and technology totaled $805.0, of which $125.0 was related to the Cimcool business that was divested in the second quarter of 2020. The trade names were designated as indefinite-lived intangible assets while the customer relationships and technology are amortized over their respective estimated useful lives on a straight-line basis, which will result in approximately $9.0 of amortization expense during the remaining three months of 2020. The acquisition resulted in preliminary goodwill of $707.6.
Divestiture of Cimcool
On March 31, 2019. We expect30, 2020, we completed the sale of the Company’s Cimcool (“Cimcool”) business, which represented the former Fluids Technologies reportable segment of Milacron before its acquisition by the Company, to permanently finance theDuBois Chemicals, Inc. The sale resulted in cash proceeds received at closing of $222.4, net of cash divested. Consistent with our current capital allocation priorities, we used a portion of the mergercash proceeds from the sale for repayments on the Revolver during the quarter ended March 31, 2020, and intend to use the remainder for general working capital purposes.
In addition, we may receive contingent consideration refinance Milacron’s outstanding debtof up to an aggregate of $26.0 based on multiple earn-out provisions. As of the transaction date (and at close,June 30, 2020), we were unable to determine that it was probable that any of the contingent consideration would be received, and pay fees,accordingly no asset was recorded for contingent consideration.
As a result of the sale, we recorded a pre-tax loss of $3.0 within other income (expense), net in the Consolidated Statement of Operations during the nine months ended June 30, 2020. The related tax effect resulted in tax expense of $13.0 and was included within income tax expense in the Consolidated Statement of Operations during the nine months ended June 30, 2020. We incurred $0.4 and $4.2 of transaction costs and expenses associated with the transactionsale during the three and nine months ended June 30, 2020, respectively, which were recorded within operating expenses in the Consolidated Statements of Operations.
We determined that the sale of Cimcool did not represent a strategic shift that had or will have a major effect on our consolidated results of operations, and therefore, Cimcool was not classified as a discontinued operation. Cimcool’s results of operations were included within the Milacron reportable segment until the completion of the sale on March 30, 2020.
OPERATING PERFORMANCE MEASURES
The following discussion compares our results for the three and nine months ended June 30, 2020, to the same period in 2019. 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 the Process Equipment Group, Milacron, Batesville, and Corporate. These results of operations are prepared in accordance with available cash,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 primarily exclude the following items:
•business acquisitions, disposition, and integration costs;
•restructuring and restructuring-related charges;
•impairment charges;
•inventory step-up charges;
•debt financing activities related to the acquisition of Milacron;
•net loss on divestiture of Cimcool;
•COVID-19 pandemic-related costs;
•the related income tax impact for all of these items; and
•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 and divestiture of Cimcool.
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 items such as the above excluded items. We believe this information provides a higher degree of transparency.
An important non-GAAP measure that we use is adjusted earnings before interest, income tax, depreciation, and amortization
(“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 the Process Equipment Group and Milacron compete. Backlog represents the amount of net revenue that we expect to realize on contracts awarded related to the Process Equipment Group and Milacron. For purposes of calculating backlog, 100% of estimated net revenue attributable to consolidated subsidiaries is included. Backlog includes expected revenue from large systems and equipment, as well as replacement parts, components, and service. The length of time that projects remain in backlog can span from days for replacement parts or service to approximately 18 to 24 months for larger system sales within the Process Equipment Group. The majority of the backlog within Milacron 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 market conditions, new term loan debt and/further customer approvals, which we expect to result in net revenue in future periods. In accordance with industry practice, our contracts may include provisions for cancellation, termination or senior notes.suspension at the discretion of the customer.
We expect that future revenue associated with the Process Equipment Group and Milacron 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 parts orders that are booked and shipped within the same quarter. The debttiming of order placement, size, extent of customization, and customer delivery dates can create fluctuations in backlog and revenue. Net revenue attributable to backlog may also be incurred underaffected 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 48 for a new or amended credit facility, one or more senior unsecured term loan facilities, or new senior unsecured notes. Exceptreconciliation of adjusted EBITDA to consolidated net income (loss), the most directly comparable GAAP measure. 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 and nine months ended June 30, 2020, there were no significant changes to our critical accounting estimates, as otherwise explicitly noted, the anticipated acquisition is excluded from the following discussion and analysis of financial condition and results of operations.outlined in our Annual Report on Form 10-K for 2019.
OPERATIONS REVIEW — CONSOLIDATED
| | | Three Months Ended June 30, | | Nine Months Ended June 30, | | Three Months Ended June 30, | | | Nine Months Ended June 30, | |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue |
Net revenue | $ | 446.6 |
| | 100.0 | | $ | 446.0 |
| | 100.0 | | $ | 1,321.5 |
| | 100.0 | | $ | 1,295.4 |
| | 100.0 | Net revenue | $ | 607.5 | | | 100.0 | | | $ | 446.6 | | | 100.0 | | | $ | 1,823.3 | | | 100.0 | | | $ | 1,321.5 | | | 100.0 | |
Gross profit | 148.4 |
| | 33.2 | | 163.5 |
| | 36.7 | | 456.3 |
| | 34.5 | | 478.3 |
| | 36.9 | Gross profit | 207.3 | | | 34.1 | | | 148.4 | | | 33.2 | | | 572.8 | | | 31.4 | | | 456.3 | | | 34.5 | |
Operating expenses | 90.8 |
| | 20.3 | | 98.3 |
| | 22.0 | | 275.2 |
| | 20.8 | | 285.7 |
| | 22.1 | Operating expenses | 118.5 | | | 19.5 | | | 90.8 | | | 20.3 | | | 411.9 | | | 22.6 | | | 275.2 | | | 20.8 | |
Amortization expense | 8.6 |
| | 1.9 | | 7.6 |
| | 1.7 | | 25.0 |
| | 1.9 | | 22.7 |
| | 1.8 | Amortization expense | 16.4 | | | 2.7 | | | 8.6 | | | 1.9 | | | 55.2 | | | 3.0 | | | 25.0 | | | 1.9 | |
Impairment charge | — |
| | — | | — |
| | — | | — |
| | — | | 63.4 |
| | 4.9 | |
Impairment charges | | Impairment charges | — | | | — | | | — | | | — | | | 82.5 | | | 4.5 | | | — | | | — | |
Interest expense | 5.2 |
| | 1.2 | | 5.5 |
| | 1.2 | | 16.1 |
| | 1.2 | | 17.8 |
| | 1.4 | Interest expense | 19.7 | | | 3.2 | | | 5.2 | | | 1.2 | | | 55.3 | | | 3.0 | | | 16.1 | | | 1.2 | |
Other (expense) income, net | (0.5 | ) | | 0.1 | | (0.7 | ) | | 0.2 | | 0.1 |
| | — | | (2.2 | ) | | 0.2 | |
Income taxes | 11.6 |
| | 2.6 | | 15.2 |
| | 3.4 | | 39.9 |
| | 3.0 | | 52.5 |
| | 4.1 | |
Net income (1) | 30.4 |
| | 6.8 | | 35.9 |
| | 8.0 | | 96.7 |
| | 7.3 | | 32.1 |
| | 2.5 | |
Other income (expense), net | | Other income (expense), net | 0.6 | | | (0.1) | | | (0.5) | | | 0.1 | | | 1.8 | | | (0.1) | | | 0.1 | | | — | |
Income tax expense | | Income tax expense | 28.3 | | | 4.7 | | | 11.6 | | | 2.6 | | | 17.7 | | | 1.0 | | | 39.9 | | | 3.0 | |
Net income (loss) attributable | | Net income (loss) attributable | |
to Hillenbrand | | to Hillenbrand | 24.0 | | | 4.0 | | | 30.4 | | | 6.8 | | | (53.1) | | | (2.9) | | | 96.7 | | | 7.3 | |
(1) Net income attributableWe are actively monitoring the impact of the COVID-19 pandemic, which we expect to Hillenbrand.
create continued economic uncertainty for our fourth quarter ended September 30, 2020 and likely beyond. Cost containment actions taken as a result of the COVID-19 pandemic are expected to be temporary; we do not anticipate them to continue to the same extent as implemented during the current fiscal year.
Hillenbrand is on track to realize the targeted year-one cost synergies related to the Milacron acquisition of $20.0 to $25.0 within the current fiscal year, and the Company now expects to generate annual run rate cost synergies of $75.0 within three years of the transaction close, a 50% increase from the original target of $50.0.
Three Months Ended June 30, 20192020 Compared to Three Months Ended June 30, 20182019
Net revenue increased $0.6 (0.1%$160.9 (36%), which included unfavorable foreign currency impact (3%(1%).
| |
• | The Process Equipment Group’s net revenue decreased $1.4 (0.4%). Foreign currency impact decreased net revenue by 4%, and was partially offset by pricing and the acquisition of BM&M. |
Batesville’s net revenue increased $2.0 (2%decreased $34.0 (11%), primarily due to a decrease in large systems sales in plastics largely driven by delays associated with the COVID-19 pandemic, and a decrease in demand for parts and service and other capital equipment, partially offset by favorable pricing. Foreign currency impact decreased net revenue by 1%.
•Milacron contributed net revenue of $186.3 during the three months ended June 30, 2020.
•Batesville’s net revenue increased $8.6 (7%), primarily due to an increase in volume (8%), partially offset by a prior year multi-year contract renewal with a key customer that includeddecline in average selling price (1%). Higher volume was driven by an upfront incentive.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 $58.9 (40%) and gross profit margin improved 90 basis points to 34.1%. Gross profit included inventory step-up charges at Milacron of $3.6, restructuring and restructuring-related charges of $0.8, and costs associated with the COVID-19 pandemic of $0.8. Excluding these charges, adjusted gross profit margin improved 170 basis points to 35.0%.
•The Process Equipment Group’s gross profit decreased $15.1 (9%$3.8 (4%), which included unfavorable foreignprimarily due to a decrease in large systems sales in plastics, largely driven by delays associated with the COVID-19 pandemic, a decline in demand for parts and service, and cost inflation, partially offset by pricing and productivity improvements, cost containment, and improved cost of quality. Foreign currency impact (2%)decreased gross profit by 1%. Gross profit margin decreased 350improved 280 basis points to 33.2%.
40
| |
• | The Process Equipment Group’s gross profit decreased $11.6 (10%), primarily due to cost inflation, unfavorable mix due to an increased proportion of lower margin, large systems sales in plastics, and a supplier quality issue, partially offset by pricing and productivity improvements and the acquisition of BM&M. Foreign currency impact decreased gross profit by 3%. Gross profit margin decreased 350 basis points to 34.2% in 2019, primarily due to cost inflation, an increased proportion of lower margin, large systems sales in plastics, and a supplier quality issue, partially offset by pricing and productivity improvements.
37.0% in 2020, primarily due to pricing and productivity improvements and a supplier quality issue in the prior year that did not repeat in the current year, partially offset by cost inflation.
|
The Process Equipment Group’s gross profit included restructuring and restructuring relatedrestructuring-related charges ($0.2 in 20192020 and $0.3$0.2 in 2018)2019). Excluding these charges, adjusted gross profit decreased $11.7 (10%$3.7 (3%) and adjusted gross profit margin decreased 350improved 280 basis points to 34.3%37.1%.
| |
• | Batesville’s gross profit decreased $3.5 (8%) and gross profit margin decreased 320 basis points to 30.8%. The decrease in gross profit and gross profit margin was primarily due to inflation in commodities and wages, partially offset by the impact of the key customer contract renewal in the prior year and productivity initiatives.•Milacron’s gross profit was $52.0 and gross profit margin was 27.9%. Milacron’s gross profit included inventory step-up charges of $3.6, restructuring and restructuring-related charges of $0.7, and costs associated with the COVID-19 pandemic of $0.6. Excluding these charges, adjusted gross profit margin was 30.5%.
•Batesville’s gross profit increased $10.7 (26%) and gross profit margin improved 580 basis points to 36.6%. The increase in gross profit and gross profit margin was primarily due to higher volume, productivity initiatives, and deflation in commodities and fuel, partially offset by inflation in wages and benefits.
|
Batesville’s gross profit included restructuring and restructuring relatedrestructuring-related charges of $0.3 in fiscal 2019.2019 and costs associated with the COVID-19 pandemic of $0.2 in 2020. Excluding these charges, adjusted gross profit decreased $3.2 (7%increased $10.5 (26%) and adjusted gross profit margin decreased 290improved 560 basis points to 31.1%36.7%.
Operating expenses decreased $7.5 (8%increased $27.7 (31%), primarily due to productivity improvements, and decreases in variable compensation, litigationthe addition of Milacron operating expenses and strategic project investments, partially offset by($32.3), increases in business acquisition, development, anddisposition, integration costs restructuring and restructuring related charges,to the acquisition of Milacron, and cost inflation.inflation, partially offset by productivity initiatives, cost containment actions, and a decrease in variable compensation. Foreign currency impact decreased operating expenses by 2%1%. Our operating expense-to-revenue ratio improved by 17080 basis points to 20.3%19.5% in 2019.2020. Operating expenses included the following items:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Business acquisition, development, and integration costs | $ | 3.8 |
| | $ | 0.1 |
|
Restructuring and restructuring related charges | 1.9 |
| | 0.2 |
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2020 | | 2019 |
Business acquisition, disposition, and integration costs | $ | 5.4 | | | $ | 3.8 | |
Restructuring and restructuring-related charges | 2.8 | | | 1.9 | |
COVID-19 pandemic-related costs | 1.1 | | | — | |
| | | |
On an adjusted basis, which excludedexcludes business acquisition, development,disposition, and integration costs, and restructuring and restructuring relatedrestructuring-related charges, and costs associated with the COVID-19 pandemic, operating expenses decreased $12.9 (13%increased $24.1 (28%). Adjusted operating expenses as a percentage of net revenue improved 290110 basis points in 20192020 to 19.1%18.0%.
Amortization expense increased $1.0 (13% $7.8 (91%), primarily due to amortization on the acquired intangiblesintangible assets of BM&M.Milacron ($9.1 in 2020).
Interest expense decreased $0.3,increased $14.5 (279%), primarily due to lower average borrowings.increased borrowings as a result of the Milacron acquisition. See Note 8 of Part I, Item 1 of this Form 10-Q for a discussion of the debt financing.
Other income (expense) income,, net was $0.6 of income in 2020, compared to $0.5 of other expense in 2019, compared2019. The increase in other income was primarily due to $0.7 of other expenseincreases in 2018.foreign currency exchange gains and interest income.
The effective tax rate was 53.1% in 2020 compared to 26.8% in fiscal 20192019. The effective tax rate in the current quarter and the difference from the prior year is primarily due to the impact of Milacron carryforward tax attributes adversely impacting domestic taxes associated with the Tax Act, unfavorable geographic mix of income, and nondeductible acquisition expenses related to the Milacron acquisition.
The adjusted effective tax rate was 26.7% in 2020 compared to 29.6%26.6% in fiscal 2018.2019. The adjusted effective income tax rate primarily excludes the impact of the following items:
•certain tax items related to the acquisition of Milacron, including:
◦the impact of Milacron carryforward tax attributes adversely impacting domestic taxes associated with the Tax Act resulted($7.2 tax expense in 2020);
◦the tax effect of nondeductible acquisition expenses ($2.3 tax expense in 2020); and
•the tax effect of adjustments to income (loss) before income taxes.
Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019
Net revenue increased $501.8 (38%), which included unfavorable foreign currency impact (1%).
•The Process Equipment Group’s net revenue decreased $25.2 (3%), primarily due to a reductiondecline in demand for screening and separating equipment (including equipment that processes proppants for hydraulic fracturing), other capital equipment, and parts and service, partially offset by increased demand for large systems in plastics and favorable pricing. Foreign currency impact decreased net revenue by 2%.
•Milacron contributed net revenue of $518.6 since the domestic statutoryacquisition date (November 21, 2019).
•Batesville’s net revenue increased $8.4 (2%), primarily due to an increase in volume (3%), partially offset by a decrease in average selling price (1%). 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 from 35%at which families opted for cremation.
Gross profit increased $116.5 (26%), which included unfavorable foreign currency impact (1%). Gross profit margin decreased 310 basis points to 21%31.4%. Gross profit included inventory step-up charges at Milacron of $40.7, restructuring and restructuring-related charges of $1.5, and costs associated with the COVID-19 pandemic of $1.2. Excluding these charges, adjusted gross profit margin decreased 80 basis points to 33.8%.
•The Process Equipment Group’s gross profit decreased $6.3 (2%), primarily due to a decline in demand for screening and separating equipment (including equipment that processes proppants for hydraulic fracturing), cost inflation, and unfavorable mix due to an increased proportion of lower margin, large systems sales in plastics, partially offset by pricing and productivity improvements and an increase in volume of large systems sales in plastics. Foreign currency impact decreased gross profit by 1%. Gross profit margin improved 30 basis points to 35.4% in 2020 primarily due to pricing and productivity improvements, partially offset by cost inflation and an increased proportion of lower margin, large systems sales in plastics.
The Process Equipment Group’s gross profit included restructuring and restructuring-related charges ($0.9 in 2020 and $0.6 in 2019) and inventory step-up charges ($0.2 in 2019). Excluding these charges, adjusted gross profit decreased $6.0 (2%) and adjusted gross profit margin improved 30 basis points to 35.5%.
•Milacron’s gross profit was $116.9 and gross profit margin was 22.5% for the period since the acquisition date. Milacron’s gross profit included inventory step-up charges of $40.7, restructuring and restructuring-related charges of $0.5, and costs associated with the COVID-19 pandemic of $0.9. Excluding these charges, adjusted gross profit was $159.0 and adjusted gross profit margin was 30.7%.
•Batesville’s gross profit increased $5.9 (5%) and gross profit margin improved 80 basis points to 34.0%. The Internal Revenue Code provides that our fiscal year ended September 30, 2018 had a blended corporate tax rateincrease in gross profit and gross profit margin was primarily due to higher volume, productivity initiatives, and deflation in commodities and fuel, partially offset by inflation in wages and benefits.
Batesville’s gross profit included restructuring and restructuring-related charges of 24.5%$0.5 in 2019, business acquisition, disposition, and integration costs of $0.2 in 2020, and costs associated with the COVID-19 pandemic of $0.2 in 2020. Excluding these charges, adjusted gross profit increased $5.8 (4%) and adjusted gross profit margin improved 80 basis points to 34.1%.
Operating expenses increased $136.7 (50%), which is based on a proration of the applicable tax rates before and after the effective date of the Tax Act. The domestic statutory tax rate of 21% appliesprimarily due to the fiscal year ending September 30, 2019addition of Milacron operating expenses ($97.7), increases in business acquisition, disposition, and future years. The decreaseintegration costs related to the acquisition of Milacron and divestiture of Cimcool, an increase in restructuring and restructuring-related charges, and costs associated with the COVID-19 pandemic incurred in the current year, quarter’spartially offset by productivity initiatives, cost containment actions, and a decrease in variable compensation. Foreign currency impact decreased operating expenses by 1%. Our operating expense-to-revenue ratio increased by 180 basis points to 22.6% in 2020. Operating expenses included the following items:
| | | | | | | | | | | |
| Nine Months Ended June 30, | | |
| 2020 | | 2019 |
Business acquisition, disposition, and integration costs | $ | 66.8 | | | $ | 4.9 | |
Restructuring and restructuring-related charges | 5.2 | | | 2.5 | |
COVID-19 pandemic-related costs | 1.1 | | | — | |
| | | |
On an adjusted basis, which excludes business acquisition, disposition, and integration costs, restructuring and restructuring-related charges, and costs associated with the COVID-19 pandemic, operating expenses increased $71.1 (27%). Adjusted operating expenses as a percentage of net revenue improved 170 basis points in 2020 to 18.6%.
Amortization expense increased $30.2 (121%), primarily due to amortization on the acquired intangible assets of Milacron ($33.2 in 2020).
Impairment chargeswere $82.5 due to goodwill and intangible asset impairments recorded in 2020. See Note 7 of Part I, Item 1 of this Form 10-Q for further information on the impairment charges.
Interest expense increased $39.2 (244%), primarily due to increased borrowings as a result of the Milacron acquisition. 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 primarily 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 $36.1 (224%).
Other income (expense), net was $1.8 of income in 2020, compared to $0.1 of income in 2019. The increase in other income was primarily due to increases in interest income and foreign currency exchange gains, partially offset by the $3.0 pre-tax loss on the divestiture of Cimcool in 2020.
The effective tax rate was attributable(58.4)% in 2020 compared to 28.5% in 2019. Due to the full implementationcurrent year net loss position, the effective tax rate decreased over the prior year primarily as a result of the discrete recognition of tax expense on the divestiture of Cimcool, the impact of Milacron carryforward tax attributes adversely impacting domestic taxes associated with the Tax Act, partially offset by an unfavorable geographic mix of pretax income, and annondeductible acquisition expenses related to the Milacron acquisition, net of the tax benefit recognized in 2020 from the revaluation of current and deferred tax balances in connection with the enacted statutory tax rate reductions in certain foreign jurisdictions. The change in the effective tax rate compared to the prior year was also impacted by the prior year increase in the reserve for unrecognized tax benefits in the prior year that did not recur in the current year.
OurThe adjusted effective tax rate was 25.8% in 2020 compared to 27.0% in 2019. The adjusted effective income tax rate whichprimarily excludes the impact of the following items:
•the tax effect on the divestiture of Cimcool ($13.0 tax expense in 2020);
•certain tax items related to the acquisition of Milacron, including:
◦the tax effect of Milacron carryforward tax attributes adversely impacting domestic taxes associated with the Tax Act ($9.7 tax expense in 2020);
◦the revaluation of the deferred tax balances in connection with enacted statutory tax rate reductions in certain foreign jurisdictions ($6.7 tax benefit in 2020);
◦the tax effect of nondeductible acquisition expenses ($2.8 tax expense in 2020);
•an adjustment to our transition tax liability pursuant to the Tax Act ($0.5 tax expense in 2019);
•an adjustment to our deferred tax liability as a result of revisions to our permanent reinvestment assertion on earnings of foreign subsidiaries driven by the Tax Act was 26.7%($1.3 tax expense in fiscal 2019 compared2019); and
•the tax effect of adjustments to 29.2% in fiscal 2018. income (loss) before income taxes.
The decrease in the current year quarter’sadjusted effective tax rate was attributable to the full implementationtax benefit recognized from the revaluation of current and deferred tax balances, unrelated to the Tax Act, partially offset byMilacron acquisition accounting, in connection with an unfavorable geographic mixenacted statutory tax rate reduction in a foreign jurisdiction in the first quarter of pretax income and anfiscal year 2020 as well as the impact of the increase in the reserve for unrecognized tax benefits in the prior year that did not recur in the current year.
OPERATIONS REVIEW — PROCESS EQUIPMENT GROUP
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | | | Nine Months Ended June 30, | | | | | | |
| 2020 | | | | 2019 | | | | 2020 | | | | 2019 | | |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue |
Net revenue | $ | 281.3 | | | 100.0 | | | $ | 315.3 | | | 100.0 | | | $ | 899.0 | | | 100.0 | | | $ | 924.2 | | | 100.0 | |
Gross profit | 104.1 | | | 37.0 | | | 107.9 | | | 34.2 | | | 318.1 | | | 35.4 | | | 324.4 | | | 35.1 | |
Operating expenses | 51.8 | | | 18.4 | | | 56.5 | | | 17.9 | | | 166.3 | | | 18.5 | | | 179.9 | | | 19.5 | |
Amortization expense | 7.3 | | | 2.6 | | | 8.6 | | | 2.7 | | | 22.0 | | | 2.4 | | | 25.0 | | | 2.7 | |
Impairment charges | — | | | — | | | — | | | — | | | 73.0 | | | 8.1 | | | — | | | — | |
Three Months Ended June 30, 20192020 Compared to NineThree Months Ended June 30, 20182019
Net revenue increased $26.1 (2%decreased $34.0 (11%), which included unfavorable foreign currency impact (3%).
The Process Equipment Group’s net revenue increased $43.4 (5%), primarily due to higher volume (6%), pricing,a decrease in large systems sales in plastics, largely driven by delays associated with the COVID-19 pandemic, and the acquisition of BM&M.a decrease in demand for parts and service and other capital equipment, partially offset by favorable pricing. Foreign currency impact decreased net revenue by 4%1%.
Batesville’s net revenueOrder backlog decreased $17.3$1.4 (0.2%) from $940.3 on June 30, 2019, to $938.9 on June 30, 2020. The decrease in backlog was primarily driven by foreign currency impact, which decreased order backlog by 1%. On a sequential basis, order backlog decreased $43.2 (4%), to $938.9 at June 30, 2020, down from $982.1 at March 31, 2020, with order softness across the segment due in part to the impact of COVID-19.
Gross profit decreased $3.8 (4%) primarily due to a decrease in volume (5%), driven primarily by a decreaselarge systems sales in burial sales resulting from what we estimate to be a decrease in North American burialsplastics, largely driven by lower estimated deathsdelays associated with the COVID-19 pandemic, a decline in demand for parts and the increased rate at which families opted for cremation.
Gross profit decreased $22.0 (5%), which included unfavorable foreignservice, and cost inflation, partially offset by pricing and productivity improvements, cost containment, and improved cost of quality. Foreign currency impact (2%)decreased gross profit by 1%. Gross profit margin decreased 240improved 280 basis points to 34.5%. 37.0% in 2020, primarily due to pricing and productivity improvements and a supplier quality issue in the prior year that did not repeat in the current year, partially offset by cost inflation.
| |
• | The Process Equipment Group’s gross profit decreased $5.2 (2%), primarily due to unfavorable mix due to an increased proportion of lower margin, large systems sales in plastics and cost inflation, partially offset by higher volume, pricing and productivity improvements, and the acquisition of BM&M. Foreign currency impact decreased gross profit by 3%. Gross profit margin decreased 230 basis points to 35.1% in 2019, primarily due to an increased proportion of lower margin, large systems sales in plastics and cost inflation, partially offset by pricing and productivity improvements.
|
The Process Equipment Group’s gross profit included restructuring and restructuring relatedrestructuring-related charges ($0.60.2 in 20192020 and $0.2 in 2018) and inventory step-up charges ($0.2 in 2019). Excluding these charges, adjusted gross profit decreased $4.6 (1%$3.7 (3%) and adjusted gross profit margin decreased 220improved 280 basis points to 35.2%37.1%.
| |
• | Batesville’s gross profit decreased $16.8 (11%) and gross profit margin decreased 270 basis points to 33.2%. The decrease in gross profit and gross profit margin was primarily due to inflation in commodities and wages, a decrease in volume and restructuring and restructuring related charges, partially offset by productivity initiatives.
|
Batesville’s gross profit included restructuring and restructuring related charges ($0.5 in 2019 and $0.1 in 2018). Excluding these charges, adjusted gross profit decreased $16.4 (11%) and adjusted gross profit margin decreased 260 basis points to 33.3%.
Operating expenses decreased $10.5 (4%$4.7 (8%), primarily due to a decrease in variable compensation, productivity improvements, and decreases in litigation expenses and variable compensation, partially offset by cost inflation, and increases in business acquisition, development, and integration costs and restructuring and restructuring related charges.containment actions. Foreign currency impact decreased operating expenses by 2%1%. Our operating expense-to-revenue ratio improvedOperating expenses as a percentage of net revenue increased by 13050 basis points to 20.8%18.4% in 2019. 2020.
Operating expenses included the following items:
|
| | | | | | | |
| Nine Months Ended June 30, |
| 2019 | | 2018 |
Business acquisition, development, and integration costs | $ | 4.9 |
| | $ | 2.6 |
|
Restructuring and restructuring related charges | 2.5 |
| | 1.4 |
|
On an adjusted basis, which excludedrestructuring and restructuring-related charges ($1.8 in 2020 and $0.4 in 2019), business acquisition, development,disposition, and integration costs ($0.2 in 2020 and restructuring$0.1 in 2019), and restructuring related charges,costs associated with the COVID-19 pandemic of $0.6 in 2020. Excluding these items, adjusted operating expenses decreased $13.9 (5%$6.7 (12%). Adjusted and adjusted operating expenses as a percentage of net revenue improved 14030 basis points to 17.5% in 2019 to 20.3%.2020.
Amortization expense increased $2.3 (10%decreased $1.3 (15%), primarily due to amortization in the prior year that did not repeat on the acquired intangiblesbacklog of BM&M.
Interest expense decreased $1.7, primarily due to lower average borrowings.
Impairment charge decreased $63.4 due to the goodwill and trade name impairments recorded in 2018. See Note 6 of Part I of this Form 10-Q for further information on the impairment charges.
Other (expense) income, net was $0.1 of other income in 2019, compared to $2.2 of other expense in 2018. The change was driven primarily by decreased foreign currency exchange losses.
The effective tax rate was 28.5% in fiscal 2019 compared to 60.7% in fiscal 2018. The high effective tax rate during the nine months endedNine Months Ended June 30, 2018 primarily resulted from the nondeductible portion of the impairment charge recorded in the Process Equipment Group segment and the resulting loss before tax and the impact of the Tax Act, driven by the items discussed below. Additionally, the current year effective tax rate is reflective of the full implementation of the Tax Act, partially offset by an unfavorable geographic mix of pretax income.
The Tax Act resulted in a reduction of the domestic statutory rate from 35%2020 Compared to 21%. The Internal Revenue Code provides that our fiscal year ended September 30, 2018 had a blended corporate tax rate of 24.5%, which is based on a proration of the applicable tax rates before and after effective date of the Tax Act. The domestic statutory tax rate of 21% applies to the fiscal year ending September 30, 2019 and future years. During the quarter ended December 31, 2017, we recognized a provisional net tax expense of $14.3, pursuant to SAB 118, for the impact of the tax rate reduction on our domestic net deferred tax liability, as well as a recognition of the estimated Transition Tax liability. During the quarter ended December 31, 2018, we recognized an additional $0.5 increase to the Transition Tax liability.
Our adjusted effective income tax rate was 27.1% in 2019 compared to 25.8% in 2018. The adjusted effective income tax rate excludes the impact of the Transition Tax ($0.5 in 2019 and $28.9 in 2018), the revaluation of the deferred tax balances ($14.9 benefit in 2018), and accrued deferred tax liability associated with the permanent reinvestment assertions ($1.3 in 2019). The adjusted effective income tax rate also excludes the tax effect of the previously mentioned impairment charge, as well as the tax impact of the adjustments discussed above. Excluding these items, the increase in the adjusted effective tax rate was primarily due to an unfavorable geographic mix of pretax income, partially offset by the full implementation of the recurring provisions of the Tax Act.
OPERATIONS REVIEW — PROCESS EQUIPMENT GROUP
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue |
Net revenue | $ | 315.3 |
| | 100.0 | | $ | 316.7 |
| | 100.0 | | $ | 924.2 |
| | 100.0 | | $ | 880.8 |
| | 100.0 |
Gross profit | 107.9 |
| | 34.2 | | 119.5 |
| | 37.7 | | 324.4 |
| | 35.1 | | 329.6 |
| | 37.4 |
Operating expenses | 56.5 |
| | 17.9 | | 64.7 |
| | 20.4 | | 179.9 |
| | 19.5 | | 184.3 |
| | 20.9 |
Amortization expense | 8.6 |
| | 2.7 | | 7.6 |
| | 2.4 | | 25.0 |
| | 2.7 | | 22.7 |
| | 2.6 |
Impairment charge | — |
| | — | | — |
| | — | | — |
| | — | | 63.4 |
| | 7.2 |
ThreeNine Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
Net revenue decreased $1.4 (0.4%$25.2 (3%). Foreign currency impact decreased net revenue by 4%, and was partially offset by pricing and the acquisition of BM&M. Compared primarily due to the prior year, volume was essentially flat, as a decline in demand for screening and separating equipment (including equipment that processes proppants for hydraulic fracturing) was, other capital equipment, and parts and service, partially offset by increased demand for large systems in plastics. Order backlog increased $157.5 (20%) from $782.8 on June 30, 2018, to $940.3 on June 30, 2019. The increase in backlog is primarily driven by an increase in orders for projects in the plastics industry.and favorable pricing. Foreign currency impact decreased order backlognet revenue by 2%.
On a sequential basis, order backlog decreased $20.2 (2%) to $940.3 at June 30, 2019, down from $960.5 at March 31, 2019.
Gross profit decreased $11.6 (10%$6.3 (2%), primarily due to cost inflation, unfavorable mix due to an increased proportion of lower margin, large systems sales in plastics, and a supplier quality issue, partially offset by pricing and productivity improvements and the acquisition of BM&M. Foreign currency impact decreased gross profit by 3%. Gross profit margin decreased 350 basis points to 34.2% in 2019, primarily due to cost inflation, an increased proportion of lower margin, large systems sales in plastics, and a supplier quality issue, partially offset by pricing and productivity improvements.
The Process Equipment Group’s gross profit included restructuring and restructuring related charges ($0.2 in 2019 and $0.3 in 2018). Excluding these charges, adjusted gross profit decreased $11.7 (10%) and adjusted gross profit margin decreased 350 basis points to 34.3%.
Operating expenses decreased $8.2 (13%), primarily due to a decrease in variable compensation, productivity improvements, and a decrease in litigation expenses, partially offset by cost inflation. Foreign currency impact decreased operating expenses by 3%. Operating expenses as a percentage of net revenue improved by 250 basis points to 17.9% in 2019.
Operating expenses included restructuring and restructuring related charges ($0.4 in 2019 and $0.2 in 2018) and business acquisition, development, and integration costs ($0.1 in 2019). Excluding these items, adjusted operating expenses decreased $8.5 (13%) and adjusted operating expenses as a percentage of net revenue improved 260 basis points to 17.8% in 2019.
Amortization expense increased $1.0 (13%) primarily due to amortization on the acquired intangibles of BM&M.
Nine Months Ended June 30, 2019 Compared to Nine Months Ended June 30, 2018
Net Revenueincreased $43.4 (5%), primarily due to higher volume (6%), largely driven by increased demand for large systems in plastics, in addition to pricing and the acquisition of BM&M, partially offset by a decline in demand for screening and separating equipment (including equipment that processes proppants for hydraulic fracturing). Foreign currency impact decreased net revenue by 4%.
Gross Profit decreased $5.2 (2%), primarily due tocost inflation, and unfavorable mix due to an increased proportion of lower margin, large systems sales in plastics, and cost inflation, partially offset by higher volume, pricing and productivity improvements and the acquisitionan increase in volume of BM&M.large systems sales in plastics. Foreign currency impact decreased gross profit by 3%1%. Gross profit margin decreased 230improved
30 basis points to 35.1%35.4% in 2019,2020, primarily due to pricing and productivity improvements, partially offset by cost inflation and an increased proportion of lower margin, large systems sales in plastics and cost inflation, partially offset by pricing and productivity improvements.plastics.
The Process Equipment Group’s gross profit included restructuring and restructuring relatedrestructuring-related charges ($0.60.9 in 20192020 and $0.2$0.6 in 2018)2019) and inventory step-up charges ($0.2 in 2019). Excluding these charges, adjusted gross profit decreased $4.6 (1%$6.0 (2%) and adjusted gross profit margin decreased 220improved 30 basis points to 35.2%35.5%.
Operating expenses decreased $4.4 (2%$13.6 (8%), primarily due to lower litigation expenses, productivity improvements, andinitiatives, including savings from restructuring actions, a decrease in variable compensation, partially offset byand cost inflation, an increase in strategic project investments, and the acquisition of BM&M.containment actions. Foreign currency impact decreased operating expenses by 3%1%. Operating expenses as a percentage of net revenue improved by 140100 basis points to 19.5%18.5% in 2019.2020.
Operating expenses included restructuring and restructuring relatedrestructuring-related charges ($0.52.9 in 20192020 and $0.4$0.5 in 2018) and2019), business acquisition, development,disposition, and integration costs ($0.60.8 in 2020 and $0.6 in 2019)., and costs associated with the COVID-19 pandemic of $0.7 in 2020. Excluding these items, adjusted operating expenses decreased $5.1 (3%) and adjusted operating expenses as a percentage of net revenue improved 160 basis points to 19.3% in 2019.
Amortization expense increased $2.3$16.9 (10%) primarily due to amortization on the acquired intangibles of BM&M.
Impairment charge decreased $63.4 due to the goodwill and trade name impairments recorded in 2018. See Note 6 of Part I of this Form 10-Q for further information on the impairment charges.
OPERATIONS REVIEW — BATESVILLE
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue |
Net revenue | $ | 131.3 |
| | 100.0 | | $ | 129.3 |
| | 100.0 | | $ | 397.3 |
| | 100.0 | | $ | 414.6 |
| | 100.0 |
Gross profit | 40.5 |
| | 30.8 | | 44.0 |
| | 34.0 | | 131.9 |
| | 33.2 | | 148.7 |
| | 35.9 |
Operating expenses | 19.4 |
| | 14.8 | | 20.8 |
| | 16.1 | | 57.8 |
| | 14.5 | | 64.1 |
| | 15.5 |
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
Net revenue increased $2.0 (2%), primarily due to the impact of a prior year multi-year contract renewal with a key customer that included an upfront incentive.
Gross profit decreased $3.5 (8%) and gross profit margin decreased 320 basis points to 30.8%. The decrease in gross profit and gross profit margin was primarily due to inflation in commodities and wages, partially offset by the impact of the key customer contract renewal in the prior year and productivity initiatives.
Gross profit included restructuring and restructuring related charges of $0.3 in 2019. Excluding these charges, adjusted gross profit decreased $3.2 (7%) and adjusted gross profit margin decreased 290 basis points to 31.1%.
Operating expenses decreased $1.4 (7%) to $19.4 and operating expenses as a percentage of net revenue decreased 130 basis points to 14.8%, primarily due to productivity initiatives and a decrease in variable compensation, partially offset by restructuring and restructuring related charges.
Operating expenses included restructuring and restructuring related charges of $1.4 in 2019. Excluding these charges, adjusted operating expenses decreased $2.8 (14%) and adjusted operating expenses as a percentage of net revenue improved 240 basis points to 13.7% in fiscal 2019.
Nine Months Ended June 30, 2019 Compared to Nine Months Ended June 30, 2018
Net revenuedecreased $17.3 (4%), primarily due to a decrease in volume (5%), driven primarily by a decrease in burial sales resulting from what we estimate to be a decrease in North American burials driven by lower estimated deaths and the increased rate at which families opted for cremation.
Gross profit decreased $16.8 (11%) and gross profit margin decreased 270 basis points to 33.2%. The decrease in gross profit and gross profit margin was primarily due to inflation in commodities and wages, a decrease in volume and restructuring and restructuring related charges, partially offset by productivity initiatives.
Gross profit included restructuring and restructuring related charges ($0.5 in 2019 and $0.1 in 2018). Excluding these charges, adjusted gross profit decreased $16.4 (11%) and adjusted gross profit margin decreased 260 basis points to 33.3%.
Operating expensesdecreased $6.3 (10%) to $57.8 and operating expenses as a percentage of net revenue improved 100 basis points to 14.5%, primarily due to productivity initiatives and a decrease in variable compensation, partially offset by restructuring and restructuring related charges.
Operating expenses included restructuring and restructuring related charges ($1.9 in 2019 and $0.2 in 2018). Excluding these charges, adjusted operating expenses decreased $8.0 (13%), and adjusted operating expenses as a percentage of net revenue improved 130 basis points to 14.1%18.0% in fiscal 2019.2020.
Amortization expense decreased $3.0 (12%), primarily due to amortization in the prior year that did not repeat on the acquired backlog of BM&M.
Impairment chargeswere $73.0 due to goodwill and intangible asset impairments recorded in 2020. See Note 7 of Part I, Item 1 of this Form 10-Q for further information on the impairment charges.
OPERATIONS REVIEW — MILACRON
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | Nine Months Ended June 30, 2020 | | |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue |
Net revenue | $ | 186.3 | | | 100.0 | | | $ | 518.6 | | | 100.0 | |
Gross profit | 52.0 | | | 27.9 | | | 116.9 | | | 22.5 | |
Operating expenses | 32.3 | | | 17.3 | | | 97.7 | | | 18.8 | |
Amortization expense | 9.1 | | | 4.9 | | | 33.2 | | | 6.4 | |
Impairment charges | — | | | — | | | 9.5 | | | 1.8 | |
Since we acquired Milacron on November 21, 2019, we do not present comparative period results for variance analysis. Milacron’s results for the period since the acquisition date 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 recognized in 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.
Three Months Ended June 30, 2020
Net revenue was $186.3 during the three months ended June 30, 2020. Net revenue was adversely impacted by the effects of the COVID-19 pandemic. On a sequential basis, order backlog decreased $2.7 (1%) to $184.7 at June 30, 2020, down from $187.4 at March 31, 2020. The decrease in backlog was primarily driven by a decrease in orders within our injection molding equipment and extrusion product lines, partially offset by an increase in orders within our hot runner product line.
Gross profit was $52.0 and gross profit margin was 27.9%. Milacron’s gross profit included inventory step-up charges of $3.6, restructuring and restructuring-related charges of $0.7, and costs associated with the COVID-19 pandemic of $0.6. Excluding these charges, adjusted gross profit margin was 30.5%.
Operating expenses were $32.3 and operating expense as a percentage of net revenue was 17.3%. Operating expenses included restructuring and restructuring-related charges of $0.9 and costs associated with the COVID-19 pandemic of $0.3. Excluding these charges, adjusted operating expenses as a percentage of net revenue was 16.6%.
Amortization expense was $9.1 related to the amortization on the intangible assets acquired in the Milacron acquisition.
Nine Months Ended June 30, 2020
Net revenue was $518.6 since the acquisition date (November 21, 2019). Net revenue was adversely impacted by the effects of the COVID-19 pandemic.
Gross profit was $116.9 and gross profit margin was 22.5% since the acquisition date (November 21, 2019). Milacron’s gross profit included inventory step-up charges of $40.7, restructuring and restructuring-related charges of $0.5, and costs associated with the COVID-19 pandemic of $0.9. Excluding these charges, adjusted gross profit margin was 30.7%.
Operating expenses were $97.7 and operating expense as a percentage of net revenue was 18.8%. Operating expenses included business acquisition, disposition, and integration costs of $4.1 (including severance costs related to the integration) and restructuring and restructuring-related charges of $1.8. Excluding these charges, adjusted operating expenses as a percentage of net revenue was 17.6%.
Amortization expense was $33.2, including backlog amortization of $10.0.
Impairment chargeswere $9.5 due to intangible asset impairments. See Note 7 of Part I, Item 1 of this Form 10-Q for further information on the impairment charges.
OPERATIONS REVIEW — BATESVILLE
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | | | Nine Months Ended June 30, | | | | | | |
| 2020 | | | | 2019 | | | | 2020 | | | | 2019 | | |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue |
Net revenue | $ | 139.9 | | | 100.0 | | | $ | 131.3 | | | 100.0 | | | $ | 405.7 | | | 100.0 | | | $ | 397.3 | | | 100.0 | |
Gross profit | 51.2 | | | 36.6 | | | 40.5 | | | 30.8 | | | 137.8 | | | 34.0 | | | 131.9 | | | 33.2 | |
Operating expenses | 16.8 | | | 12.0 | | | 19.4 | | | 14.8 | | | 52.7 | | | 13.0 | | | 57.8 | | | 14.5 | |
| | | | | | | | | | | | | | | |
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Net revenue increased $8.6 (7%), primarily due to an increase in volume (8%), partially offset by a decrease in average selling price (1%). 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 $10.7 (26%) and gross profit margin improved 580 basis points to 36.6%. The increase in gross profit and gross profit margin was primarily due to higher volume, productivity initiatives, and deflation in commodities and fuel, partially offset by inflation in wages and benefits.
Gross profit included restructuring and restructuring-related charges of $0.3 in 2019 and costs associated with the COVID-19 pandemic of $0.2 in 2020. Excluding these charges, adjusted gross profit increased $10.5 (26%) and adjusted gross profit margin improved 560 basis points to 36.7%.
Operating expenses decreased $2.6 (13%) to $16.8 and operating expenses as a percentage of net revenue improved 280 basis points to 12.0%, primarily due to current year productivity initiatives, prior year restructuring actions, cost containment actions, and a decrease in restructuring and restructuring related expenses, partially offset by an increase in variable compensation.
Operating expenses included restructuring and restructuring-related charges ($0.1 in 2020 and $1.4 in 2019). Excluding these charges, adjusted operating expenses decreased $1.3 (7%) and adjusted operating expenses as a percentage of net revenue improved 180 basis points to 11.9% in 2020.
Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019
Net revenue increased $8.4 (2%), primarily due to an increase in volume (3%), partially offset by a decrease in average selling price (1%). 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 $5.9 (5%) and gross profit margin improved 80 basis points to 34.0%. The increase in gross profit and gross profit margin was primarily due to higher volume, productivity initiatives, and deflation in commodities and fuel, partially offset by inflation in wages and benefits.
Gross profit included restructuring and restructuring-related charges of $0.5 in 2019, business acquisition, disposition, and integration costs of $0.2 in 2020, and costs associated with the COVID-19 pandemic of $0.2 in 2020. Excluding these charges, adjusted gross profit increased $5.8 (4%) and adjusted gross profit margin improved 80 basis points to 34.1%.
Operating expenses decreased $5.1 (9%) to $52.7 and operating expenses as a percentage of net revenue improved 150 basis points to 13.0%, primarily due to current year productivity initiatives, prior year restructuring actions, cost containment actions, and a decrease in restructuring and restructuring related expenses, partially offset by an increase in variable compensation.
Operating expenses included restructuring and restructuring-related charges ($0.6 in 2020 and $1.9 in 2019) and business acquisition, disposition, and integration costs of $0.2 in 2020. Excluding these charges, adjusted operating expenses decreased $4.0 (7%) and adjusted operating expenses as a percentage of net revenue improved 130 basis points to 12.8% in 2020.
REVIEW OF CORPORATE EXPENSES
| | | Three Months Ended June 30, | | Nine Months Ended June 30, | | Three Months Ended June 30, | | | Nine Months Ended June 30, | |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue |
Core operating expenses | $ | 11.1 |
| | 2.5 | | $ | 12.7 |
| | 2.8 | | $ | 33.0 |
| | 2.5 | | $ | 33.9 |
| | 2.6 | Core operating expenses | $ | 12.3 | | | 2.0 | | | $ | 11.1 | | | 2.5 | | | $ | 33.4 | | | 1.8 | | | $ | 33.0 | | | 2.5 | |
Business acquisition, development, and integration costs | 3.7 |
| | 0.8 | | 0.1 |
| | 0.1 | | 4.4 |
| | 0.3 | | 2.6 |
| | 0.2 | |
Restructuring and restructuring related charges | 0.1 |
| | — | | — |
| | — | | 0.1 |
| | — | | 0.8 |
| | 0.1 | |
Business acquisition, disposition, and integration costs | | Business acquisition, disposition, and integration costs | 5.2 | | | 0.9 | | | 3.7 | | | 0.8 | | | 61.7 | | | 3.4 | | | 4.4 | | | 0.3 | |
Restructuring and restructuring-related charges | | Restructuring and restructuring-related charges | — | | | — | | | 0.1 | | | — | | | — | | | — | | | 0.1 | | | — | |
COVID-19 pandemic-related costs | | COVID-19 pandemic-related costs | 0.1 | | | — | | | — | | | — | | | 0.1 | | | — | | | — | | | — | |
Operating expenses | $ | 14.9 |
| | 3.3 | | $ | 12.8 |
| | 2.9 | | $ | 37.5 |
| | 2.8 | | $ | 37.3 |
| | 2.9 | Operating expenses | $ | 17.6 | | | 2.9 | | | $ | 14.9 | | | 3.3 | | | $ | 95.2 | | | 5.2 | | | $ | 37.5 | | | 2.8 | |
CoreCorporate operating expenses primarily representinclude the cost of providing management and administrative services to each reportable operating segment. These services include treasury management, human resources, legal, business development, and other public company support functions such as information technology, internal audit, investor relations, financial reporting, and tax compliance. Corporate operating expenses excluding restructuring and restructuring related charges andalso include costs related to business acquisition, development,disposition, and integration, which we incur as a result of our strategy to grow through selective acquisitions. Core operating expenses primarily represent corporate operating expenses excluding costs related to business acquisition, disposition, and integration costs.
Business acquisition, development,disposition, and integration costs include legal, tax, accounting, and other advisory fees and due diligence costs associated with investigating opportunities (including acquisitionacquisitions and disposition)dispositions) and integrating completed acquisitions.acquisitions (including severance).
Three Months Ended June 30, 20192020 Compared to Three Months Ended June 30, 20182019
Operating expenses increased $2.1 (16%$2.7 (18%), primarily due to increasesan increase in business acquisition, development,disposition, and integration costs as a result of the acquisition of Milacron, and variable compensation,the additional operating expenses from Milacron, partially offset by lower strategic project investments. These expenses ascost containment actions and a percentage of net revenue were 3.3%, an increase of 40 basis points from the prior year.
Core operating expenses decreased $1.6 (13%), primarily due to lower strategic project investments, partially offset by variable compensation. These expenses as a percentage of net revenue were 2.5%, a decrease of 30 basis points from the prior year.
Nine Months Ended June 30, 2019 Compared to Nine Months Ended June 30, 2018
Operating expenses increased $0.2 (1%), primarily due to increases in business acquisition, development, and integration costs and variable compensation, partially offset by lower strategic investments and restructuring and restructuring related charges. These expenses as a percentage of net revenue were 2.8%, a decrease of 10 basis points from the prior year.
Core operating expenses decreased $0.9 (3%), primarily due to lower strategic investments, partially offset by an increase in variable compensation. These expenses as a percentage of net revenue were 2.5%2.9%, an improvement of 40 basis points from the prior year, primarily driven by the addition of Milacron revenue and the synergies realized in relation to combining two corporate centers and eliminating duplicative public company-related costs.
Core operating expenses increased $1.2 (11%), primarily driven by the additional operating expenses from Milacron, partially offset by cost containment actions and a decrease in variable compensation. These expenses as a percentage of 10net revenue were 2.0%, an improvement of 50 basis points from the prior year, primarily driven by the addition of Milacron revenue and the synergies realized in relation to combining two corporate centers and eliminating duplicative public company-related costs.
Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019
Operating expenses increased $57.7 (154%), primarily due to an increase in business acquisition, disposition, and integration costs as a result of the acquisition of Milacron and the divestiture of Cimcool and the additional operating expenses from Milacron, partially offset by cost containment actions and a decrease in variable compensation. These expenses as a percentage of net revenue were 5.2%, an increase of 240 basis points from the prior year.
Core operating expenses increased $0.4 (1%), primarily driven by the additional operating expenses from Milacron, partially offset by cost containment actions and a decrease in variable compensation. These expenses as a percentage of net revenue were 1.8%, an improvement of 70 basis points from the prior year, primarily driven by the addition of Milacron revenue and the synergies realized in relation to combining two corporate centers and eliminating duplicative public company-related costs.
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 June 30, | | | Nine Months Ended June 30, | |
| Three Months Ended June 30, | | Nine Months Ended June 30, | | 2020 | | 2019 | | 2020 | | 2019 |
| 2019 | | 2018 | | 2019 | | 2018 | |
Consolidated net income | $ | 31.7 |
| | $ | 36.2 |
| | $ | 100.2 |
| | $ | 34.0 |
| |
Consolidated net income (loss) | | Consolidated net income (loss) | $ | 25.0 | | | $ | 31.7 | | | $ | (48.0) | | | $ | 100.2 | |
Interest income | (0.3 | ) | | (0.3 | ) | | (0.7 | ) | | (1.1 | ) | Interest income | (0.6) | | | (0.3) | | | (2.5) | | | (0.7) | |
Interest expense | 5.2 |
| | 5.5 |
| | 16.1 |
| | 17.8 |
| Interest expense | 19.7 | | | 5.2 | | | 55.3 | | | 16.1 | |
Income tax expense | 11.6 |
| | 15.2 |
| | 39.9 |
| | 52.5 |
| Income tax expense | 28.3 | | | 11.6 | | | 17.7 | | | 39.9 | |
Depreciation and amortization | 15.1 |
| | 14.2 |
| | 44.3 |
| | 42.0 |
| Depreciation and amortization | 33.9 | | | 15.1 | | | 98.4 | | | 44.3 | |
EBITDA | $ | 63.3 |
| | $ | 70.8 |
| | $ | 199.8 |
| | $ | 145.2 |
| EBITDA | 106.3 | | | 63.3 | | | 120.9 | | | 199.8 | |
Impairment charge | — |
| | — |
| | — |
| | 63.4 |
| |
Business acquisition, development, and integration | 3.8 |
| | 0.1 |
| | 4.9 |
| | 2.6 |
| |
Restructuring and restructuring related | 2.4 |
| | 0.5 |
| | 3.6 |
| | 1.7 |
| |
Inventory step-up | — |
| | — |
| | 0.2 |
| | — |
| |
Impairment charges (1) | | Impairment charges (1) | — | | | — | | | 82.5 | | | — | |
Business acquisition, disposition, and integration costs (2) | | Business acquisition, disposition, and integration costs (2) | 5.5 | | | 3.8 | | | 67.3 | | | 4.9 | |
Restructuring and restructuring-related charges (3) | | Restructuring and restructuring-related charges (3) | 3.6 | | | 2.4 | | | 6.7 | | | 3.6 | |
Inventory step-up (4) | | Inventory step-up (4) | 3.6 | | | — | | | 40.7 | | | 0.2 | |
Net loss on divestiture (5) | | Net loss on divestiture (5) | — | | | — | | | 3.0 | | | — | |
Other (6) | | Other (6) | 2.0 | | | — | | | 2.4 | | | — | |
Adjusted EBITDA | $ | 69.5 |
| | $ | 71.4 |
| | $ | 208.5 |
| | $ | 212.9 |
| Adjusted EBITDA | $ | 121.0 | | | $ | 69.5 | | | $ | 323.5 | | | $ | 208.5 | |
(1)Hillenbrand recorded impairment charges to goodwill and certain identifiable intangible assets within both the Process Equipment Group and Milacron reportable segments during the nine months ended June 30, 2020. See Note 7 of Part I, Item 1 of this Form 10-Q for more information.
(2)Business acquisition, disposition, and integration costs during the three and nine months ended June 30, 2020 primarily included $5.0 and $62.7, respectively, of 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. The remaining costs incurred during the three and nine months ended June 30, 2020 were primarily related to professional fees and other transaction costs in connection with the divestiture of Cimcool. Business acquisition, disposition, and integration costs during the three and nine months ended June 30, 2019 primarily included professional fees.
(3)Restructuring and restructuring-related charges primarily included severance costs, unrelated to the acquisition and integration of Milacron, during the three and nine months ended June 30, 2020 and 2019.
(4)Represents the non-cash charges related to the fair value adjustment of inventories acquired in connection with the acquisitions of Milacron and BM&M during 2020 and 2019, respectively. See Note 4 of Part I, Item 1 of this Form 10-Q for more information on the acquisitions of Milacron and BM&M.
(5)Hillenbrand recorded a pre-tax net loss on the divestiture of Cimcool during the nine months ended June 30, 2020. See Note 4 of Part I, Item 1 of this Form 10-Q for more information on the divestiture of Cimcool.
(6)Other primarily included incremental expenses directly attributable to the COVID-19 pandemic, such as costs for sanitary supplies, bad debt expense, and transportation costs, during the three and nine months ended June 30, 2020.
Three Months Ended June 30, 20192020 Compared to Three Months Ended June 30, 20182019
Consolidated net income (loss) decreased $4.5$6.7 (21%) for the three months ended June 30, 2019,2020, compared to the same period in fiscal 2018.2019. The decrease was primarily driven by cost inflation, unfavorable product mix resulting frominventory step-up charges and additional amortization on intangibles in relation to the acquisition of Milacron, an increased proportion of lower margin, large systems salesincrease in plastics,interest expense, an increase in business acquisition, development,disposition, and integration costs, primarily in relation to the acquisition of Milacron, inflation in wages and restructuringbenefits, and restructuring related charges.a decline in demand for parts and service, large system sales in plastics and other capital equipment at the Process Equipment Group. This decrease in consolidated net income (loss) was partially offset by pricing and productivity improvements, increased volume at Batesville, and a decrease in variable compensation.cost containment actions. Foreign currency impact decreased consolidated net income (loss) by $0.8.$0.5.
Consolidated adjusted EBITDA decreased $1.9 (3%increased $51.5 (74%) for the three months ended June 30, 2019,2020, compared to the same period in fiscal 2018.2019. The decreaseincrease was primarily due to the acquisition of Milacron, pricing and productivity improvements, increased volume at Batesville, and cost inflation and unfavorable product mix resulting from an increased proportion of lower margin, large systems sales in plastics.containment actions. This decreaseincrease in consolidated adjusted EBITDA was partially offset by pricinginflation in wages and productivity improvementsbenefits and a decreasedecline in variable compensation.demand for parts and service, large system sales in plastics and other capital equipment at the Process Equipment Group. Foreign currency impact decreased adjusted EBITDA by $2.2.
$0.8.
Nine Months Ended June 30, 20192020 Compared to Nine Months Ended June 30, 20182019
Consolidated net income increased $66.2 for the nine months ended June 30, 2019, compared to the same period in fiscal 2018. The increase was primarily driven by the impairment charges recorded in the Process Equipment Group segment in 2018, pricing and productivity improvements, higher volume from increased demand for large systems in plastics and parts and service, lower litigation expenses and variable compensation, and a decrease in the effective tax rate as a result of the Tax Act. This increase in consolidated net income was partially offset by cost inflation, unfavorable product mix resulting from an increased proportion of lower margin, large systems sales in plastics, a decrease in volume at Batesville, and increases in business acquisition, development, and integration costs and restructuring and restructuring related charges. Foreign currency impact(loss) decreased consolidated net income by $3.5.
Consolidated adjusted EBITDA decreased $4.4 (2%$148.2 (148%) for the nine months ended June 30, 2019,2020, compared to the same period in fiscal 2018.2019. The decrease was primarily duedriven by impairment charges, inventory step-up charges and additional amortization on intangibles in relation to costthe acquisition of Milacron, an increase in business acquisition, disposition, and integration costs, primarily in relation to the acquisition of Milacron, an increase in interest expense, inflation unfavorable product mix resulting from an increased proportion of lower margin, large systems sales in plastics,wages and benefits, and a decline in demand for screening and separating equipment (including equipment that processes proppants for hydraulic fracturing) and other capital equipment at the Process Equipment Group. This decrease in consolidated net income (loss) was partially offset by a decrease in income tax expense, pricing and productivity improvements, higher volume at Batesville.Batesville, cost containment actions, a decrease in variable compensation, and increased demand for large systems in plastics at the Process Equipment Group. Foreign currency impact decreased consolidated net income (loss) by $1.2.
Consolidated adjusted EBITDA increased $115.0 (55%) for the nine months ended June 30, 2020, compared to the same period in 2019. The increase was primarily due to the acquisition of Milacron, pricing and productivity improvements, higher volume at Batesville, cost containment actions, a decrease in variable compensation, and increased demand for large systems in plastics at the Process Equipment Group. This decreaseincrease in consolidated adjusted EBITDA was partially offset by pricinginflation in wages and productivity improvements, higher volume from increasedbenefits and a decline in demand for large systems in plasticsscreening and partsseparating equipment (including equipment that processes proppants for hydraulic fracturing) and service, and lower litigation expenses and variable compensation.other capital equipment at the Process Equipment Group. Foreign currency impact decreased adjusted EBITDA by $6.1.$2.3.
LIQUIDITY AND CAPITAL RESOURCES
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 utilizingusing cash by comparing the first nine months of 20192020 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 includeshas historically included revolving credit facilities, term loans, and long-term notes and our Facility as part of our overall financing strategy. We believe we have ready access to capital markets and regularly review and adjust the optimal mix of fixed-rate and variable-rate debt. In additiondebt 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 balancesholdings over the past two quarters (from December 31, 2019 to June 30, 2020) by $120.7, primarily with cash proceeds from the issuance of $400.0 in senior unsecured notes in June 2020 and net cash proceeds of $222.4 from the sale of the Cimcool business in March 2020, partially offset by repayments made on the Revolver. As of June 30, 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 abilityoperations has been changing frequently and evolving rapidly, we will continue to access additional long-term financing,closely monitor our liquidity and capital resources through the disruption caused by COVID-19 and continue to assess cuts to discretionary spending and other variable costs.
As of June 30, 2020, we had $818.9$891.9 of maximum borrowing capacity available under the Facility as of June 30, 2019,Revolver, of which $768.8$642.4 was immediately available based on our most restrictive covenant at June 30, 2019, with additional amounts available in the event of a qualifying acquisition.covenant. The available borrowing capacity reflects a reduction of $7.1$8.1 for outstanding letters of credit issued under the Facility.Revolver. The Company may request an increase of up to $450.0 in the total borrowing capacity under the Facility,Revolver, subject to approval of the lenders.
In the normal course of business, operating companies within the Process Equipment Group providesand Milacron reportable segments 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 June 30, 2019,2020, we had guarantee arrangements totaling $317.6,$383.7, under which $238.0$267.4 was utilized,used for this purpose.guarantees. These arrangements include the €150.0 LGL/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 LGL/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. Pursuant to the Tax Act, we have reevaluated our indefinite reinvestment assertion with respect to the foreign earnings of those subsidiaries. We continue to assert that the basis differences in the majority of our foreign earnings is consideredsubsidiaries continue to be indefinitelypermanently reinvested outside of the U.S. We have changed the permanent reinvestment assertionsrecorded tax liabilities associated with distribution taxes on expected distributions of certain of our lower tier subsidiaries in certain foreign jurisdictions where we foresee those earnings to no longer be permanently reinvested. We continue to assert permanent reinvestment in certain jurisdictions where theavailable 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. Accordingly,As of June 30, 2020, we had a transition tax liability of $19.7 pursuant to the Tax Act, no U.S. federal and state income taxes have been accrued on the portion of our foreign earnings that is considered to be indefinitely reinvested outside the U.S.Act. The cash at our foreign subsidiaries totaled $58.2$196.2 at June 30, 2019.2020. We continue to makeactively evaluate our global capital allocation decisions to optimally utilize our U.S.deployment and foreign cash flows while minimizing our tax exposures. In this regard, we may repatriate cash to the U.S. taking advantage of the favorable new tax provisions.needs.
12-month Outlook
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 12-month outlook for our business remains positive. Although cash flow from operationsCompany has sufficient liquidity to operate in the Process Equipment Group naturally experiences substantial fluctuations drivencurrent business environment. The challenges posed by changesCOVID-19 on our businesses have evolved rapidly over the past two quarters and are likely to evolve further. Consequently, we will continue to evaluate our financial position in working capital requirementslight of future developments, particularly those relating to COVID-19, and we plan to take necessary steps to manage through such developments.
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 Coperion (dueterms acceptable to us, or at all, including as a result of the effects of COVID-19 on the financial markets at such time.
$400.0 senior unsecured notes
On June 16, 2020, we issued $400.0 of senior unsecured notes due June 2025 (the “2020 Notes”). The 2020 Notes were issued at par value and bear interest at a fixed rate of 5.75% per year, payable semi-annually in arrears beginning December 2020. Deferred financing costs associated with the 2020 Notes of $5.5 are being amortized to interest expense on a straight-line basis over the term of the 2020 Notes.
Acquisitions and divestitures
As discussed in Note 4 of Part I, Item 1 of this Form 10-Q, on November 21, 2019, we completed the acquisition of Milacron for a total purchase price of approximately $2.0 billion through a merger of our wholly-owned subsidiary with and into Milacron, resulting in ownership of 100% of Milacron common stock that was issued and outstanding after the merger. Hillenbrand used approximately $1.75 billion of borrowings from notes, term loans, and the Revolver to pay the aggregate cash portion of the merger consideration, to pay off Milacron’s existing debt, and to pay fees and expenses related to the typetransaction. These borrowings were comprised of productthe following:
•$374.4 (net of discount) was raised in connection with issuing publicly traded notes in September 2019;
•$650.0 of additional borrowings under the Revolver. With respect to the Revolver, Hillenbrand has made repayments since the closing date of the acquisition of Milacron, resulting in no outstanding balance as of June 30, 2020; and geography of customer projects
•Two term loan commitments totaling $725.0 in process at any given time), we believe we have significant flexibility to meet our financial commitments, including working capital needs, capital expenditures, and financing obligations.principal.
We entered into a definitive agreement on July 12, 2019 to acquire Milacron, which we expect to have a material impact on cash flows and liquidity levels over at least the next 12 months. See Note 19 of8 included in Part I1, Item 1 of this Form 10-Q for further informationdetails on the financing for the Milacron acquisition.
We completed the divestiture of Cimcool on March 30, 2020, resulting in cash proceeds of $222.4, net of cash divested, at closing. We primarily used the cash proceeds to pay down debt.
From a strategic perspective and following the most recent review of the Company’s portfolio, we have made the decision to exit the TerraSource and the Flow Control businesses, pending market conditions. We have a process in place to review the Company’s portfolio on a regular basis, and following the transformational acquisition of Milacron and with the integration under way, we believe these businesses are now subscale within our portfolio.
The Company’s stated goal was to return net leverage (defined as debt, net of cash, to adjusted EBITDA) to below 2.75x within twelve months of the date the Milacron acquisition was completed, November 21, 2019. The Company remains committed to de-leveraging and intends to prioritize paying down its debt over the next twelve months; however, the effects of COVID-19 are expected to continue to impact our cash flow and our ability to de-leverage at the pace we have previously anticipated. The timeline has shifted and will depend on the severity and duration of the current macroeconomic uncertainty created by the pandemic.
Amendments to current financing agreements
On January 10, 2020, we amended the Credit Agreement (along with other of our financing agreements) to, among other things, (i) increase the maximum permitted leverage ratio; and (ii) add additional pricing levels to compensate for the increase in permitted leverage ratios.
On May 19, 2020, we further amended the Credit Agreement (along with other of our financing agreements) to, among other things, (i) increase the maximum permitted leverage ratio for current and future quarters to; (ii) increase the margin paid on various rates defined in the Credit Agreement at certain pricing levels; (iii) add additional pricing levels to compensate for the increase in permitted leverage ratios; (iv) increase the interest rate floor for various rates defined in the Credit Agreement; (v) add as a condition to each borrowing under the Revolver that the amount of cash or cash equivalents on our Consolidated Balance Sheet not exceed $350.0, subject to certain exceptions; and (vi) impose certain restrictions on our ability to make restricted payments, including limitations on share repurchases and the payment of dividends, and grant liens on assets until January 1, 2022.
See Note 8 included in Part 1, Item 1 of this Form 10-Q for further details on these amendments.
Credit ratings update
The coupon rate on the $375.0 senior unsecured notes is impacted by public bond ratings from Moody’s and S&P Global. Downgrades from either rating agency will increase the coupon rate by 0.25% per downgrade level if the ratings are below investment grade. During the three months ended June 30, 2020, Moody’s and S&P Global each downgraded the Company’s senior unsecured credit rating by one level. As such, the original coupon rate of 4.5% on the $375.0 senior unsecured notes will increase to 5.0%, effective September 15, 2020.
Other activities
Upon maturity in July 2020, we refinanced the $150.0 senior unsecured notes issued in July 2010 on a long-term basis, as they were repaid with available borrowing capacity from the Revolver. There were no outstanding borrowings under the Revolver as of June 30, 2020, primarily due to repayments made with proceeds from the 2020 Notes issued in June 2020. As such, the $150.0 senior unsecured notes were classified as long-term debt within the Consolidated Balance Sheet as of June 30, 2020.
The Tax Act will requirerequires the Company to pay a transition tax on unremitted earnings of its foreign subsidiaries, resulting in an amountestimated liability of $25.1. During$19.7 recorded as of June 30, 2020. The transition tax liability under the quarter ended December 31, 2018, we elected to pay the Transition Tax in eight annual installments and made the first installment payment of $2.0. The portion of this tax we anticipate to pay in the next twelve months is $2.0, with the remainder toAct will be paid over the next sixfive years. In addition, we expect the lower corporate tax rate of 21% to benefit our cash flow in current and future periods.
OnIn December 7, 2018, we announced that our Board of Directors authorized a new share repurchase program of up to $200.0 in replacement of the Company’s prior$200.0. The Company has temporarily suspended share repurchase program, which eliminated the balance of approximately $39.6 remaining under that prior authorization. Management does not expect to repurchase sharesrepurchases in the near term as a result of the pendingpriority given to paying down long-term debt following the acquisition of Milacron.Milacron and conserving cash in light of the impact of COVID-19.
Our anticipated contribution to our defined benefit pension plans in 20192020 is $10,$9.3, of which $6.8$7.5 was made during the nine months ended June 30, 2019.2020. 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.
We expect that the aggregate amount of our quarterly cash dividends will increase in the future compared to those we paid in 2019 as result of the additional common stock issued in connection with the acquisition of Milacron. We currently expect to pay quarterly cash dividends in the future comparable to those we paid in 2018, which will require approximately $13.1$16.0 each quarter based on our outstanding common stock at June 30, 2019.2020. We increased our quarterly dividend in 20192020 to $0.2100$0.2125 per common share from $0.2075$0.2100 per common share paid in 2018.2019. 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 extended 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. Based on these factors, we believe our current liquidity position is strongsufficient and will continue to meet all of our financial commitments forin the foreseeable future.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 COVID-19.
Cash Flows
| | | | | | | | | | | |
| Nine Months Ended June 30, | | |
| 2020 | | 2019 |
Cash flows provided by (used in) | | | |
Operating activities | $ | 120.1 | | | $ | 109.6 | |
Investing activities | (1,286.8) | | | (38.4) | |
Financing activities | 1,031.1 | | | (62.5) | |
Effect of exchange rates on cash and cash equivalents | 1.1 | | | (0.2) | |
Net cash flows | $ | (134.5) | | | $ | 8.5 | |
|
| | | | | | | |
| Nine Months Ended June 30, |
(in millions) | 2019 | | 2018 |
Cash flows provided by (used in) | |
| | |
|
Operating activities | $ | 109.6 |
| | $ | 156.3 |
|
Investing activities | (38.4 | ) | | (15.9 | ) |
Financing activities | (62.5 | ) | | (134.5 | ) |
Effect of exchange rates on cash and cash equivalents | (0.2 | ) | | (1.0 | ) |
Increase in cash and cash equivalents | $ | 8.5 |
| | $ | 4.9 |
|
Operating Activities
Operating activities provided $120.1 of cash during the first nine months of 2020, and provided $109.6 of cash during the first nine months of fiscal year 2019, and provided $156.3 of cash during the first nine months of fiscal year 2018, a $46.7 (30%$10.5 (10%) decrease.increase. The decreaseincrease in operating cash flow in 2019 was primarily due to reduced working capital requirements, the additional cash flow provided by Milacron in 2020, cost containment actions taken during 2020, and a decrease in income taxes paid, partially offset by an increase in working capital requirementspayments for business acquisition, disposition, and an increaseintegration costs in relation to the acquisition of $16.6 in cash paid for taxes.Milacron and divestiture of Cimcool as well as higher interest paid.
Working capital requirements for the Process Equipment Group and Milacron 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
The $22.5$1,248.4 increase in cash used in investing activities in the first nine months of fiscal 20192020 was primarily due to a cash outflow of $1,503.1 for the acquisition of Milacron in the current period, compared to $25.9 for the acquisition of BM&M for $25.9 in November 2018,the prior year period. Additionally, capital expenditures increased by $7.7 compared to no acquisitionsthe prior year period, primarily related to the acquisition of Milacron in fiscal 2018.the current period. These cash outflows were partially offset by inflows of $222.4 due to proceeds from the divestiture of Cimcool and $13.1 due to proceeds received from the sale of a Milacron manufacturing facility during the current period. See Note 4 included in Part 1, Item 1 of this Form 10-Q for further details on this acquisition.these acquisitions and divestitures.
Financing Activities
Cash used inprovided by financing activities was largely impacted by net borrowing activity. Our general practice is to utilize ouruse available cash to pay down debt unless it is needed for an acquisition. Cash used inprovided by financing activities during the first nine months of 2020 was $1,031.1, including $1,096.9 of proceeds, net of debt repayments. Cash provided by financing activities in the first nine months of 2019 was $62.5, including $20.4 of debt repayments, net of proceeds. Cash used in financing activities in the first nine months of fiscal 2018 was $134.5. The decreaseincrease in cash used inprovided by financing activities was primarily due to the borrowings used to fundissuance of two term loan commitments totaling $725.0 for financing the Milacron acquisition, the issuance of BM&Mthe 2020 Notes for $25.9 in 2019$400.0, and a decrease in repurchasesnet repayments on the Revolver of common stock in 2019.$19.3 compared to the prior year period.
We returned $39.4$47.6 to shareholders during the first nine months of 20192020 in the form of quarterly dividends. We increased our quarterly dividend in 20192020 to $0.2100$0.2125 per common share from $0.2075$0.2100 per common share paid during 2018.2019.
Off-Balance Sheet Arrangements
There wereAs 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 significant changes in off-balance sheet arrangements, as described infinancing agreements or guarantees at June 30, 2020, that we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.
Contractual Obligations and Contingent Liabilities and Commitments
For a full summary of our future obligations, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, in our Annual Report on Form 10-K for 2018.the year ended September 30, 2019 (the “2019 Form 10-K”). This information is intended to give you an understanding of the significance of cash outlays that are fixed beyond the normal accounts payable we have already incurred and have recorded in the Consolidated Financial Statements.
The following table provides updated amounts for our contractual obligations that have changed significantly since the filing of our 2019 Form 10-K. The changes resulted from debt obligations and operating lease liabilities assumed in connection with the acquisition of Milacron.
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| | Payment Obligations by Year | | | | | | | | |
As of June 30, 2020 | | Total | | Remainder of 2020 | | 2021 - 2022 | | 2023 - 2024 | | Thereafter |
$500.0 term loan | | $ | 481.3 | | | $ | 6.3 | | | $ | 62.5 | | | $ | 87.5 | | | $ | 325.0 | |
$225.0 term loan | | 216.6 | | | 2.8 | | | 28.2 | | | 185.6 | | | — | |
| | | | | | | | | | |
$400.0 senior unsecured notes | | 400.0 | | | — | | | — | | | — | | | 400.0 | |
Interest on financing agreements (1) | | 304.6 | | | 16.4 | | | 125.4 | | | 110.9 | | | 51.9 | |
Operating lease payments | | 173.4 | | | 13.4 | | | 62.5 | | | 39.3 | | | 58.2 | |
(1)Cash obligations for interest requirements relate to our fixed-rate debt obligations at the contractual rates and our variable-rate debt obligations at the current rates as of June 30, 2020.
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.
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| | June 30, 2020 | | September 30, 2019 |
Combined Balance Sheets Information: | | | | |
Current assets (1) | | $ | 1,450.6 | | | $ | 1,681.5 | |
Non-current assets | | 4,506.7 | | | 2,634.4 | |
Current liabilities (1) | | 1,677.2 | | | 1,343.0 | |
Non-current liabilities | | 1,766.0 | | | 710.8 | |
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| | Nine Months Ended June 30, 2020 | | Year Ended September 30, 2019 |
Combined Statements of Operations Information: | | | | |
Revenue (2) | | $ | 630.2 | | | $ | 893.7 | |
Gross profit | | 283.8 | | | 400.0 | |
Net income (loss) attributable to Obligors | | (11.7) | | | 243.6 | |
(1) Current liabilities include intercompany payables to non-guarantors of $135.7 as of June 30, 2020 and Current assets included intercompany receivables with non-guarantors $5.3 as of September 30, 2019.
(2) Revenue includes intercompany sales with non-guarantors of $39.7 as of June 30, 2020 and $53.0 as of September 30, 2019.
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.
Factors that could result in additional impairment
As discussed in Note 7 of Part I of this Form 10-Q, testing for impairment of goodwill and indefinite lived assets must be performed annually, or on an interim basis upon the occurrence of triggering events or substantive changes in circumstances that indicate that the fair value of the asset or reporting unit may have decreased below the carrying value. As a result of our revised forecasts driven by the impact of the COVID-19 pandemic on all reporting units within the Milacron reportable segment, we performed an interim impairment review for these reporting units during the three months ended March 31, 2020 and determined that no impairment of goodwill occurred as a result of this triggering event. The estimated fair value, as calculated, for all four reporting units within the Milacron reportable segment ranged from approximately 3% to 16% greater than their carrying value as of March 31, 2020. Under the relief-from-royalty fair value method, we concluded that the carrying value of certain trade names and technology associated with these reporting units exceeded their fair value. As a result, impairment charges of $9.5 were recorded for these intangible assets during the three months ended March 31, 2020. The pre-impairment balance for these intangible assets was $125.0. A 10% further reduction in the fair value of these intangible assets, caused by further declines in forecasted revenues and changes in the discount rate selected by management, would indicate a potential additional impairment of approximately $12.0. During the three months ended June 30, 2020, there were no material changes to the Company’s previous forecasts or significant changes in macroeconomic conditions that triggered an interim impairment review.
The valuation used to test goodwill and identifiable intangible assets for impairment is dependent upon a number of significant estimates and assumptions, including macroeconomic conditions, growth rates, competitive activities, cost containment, margin expansion, and our business plans. We believe these estimates and assumptions are reasonable. However, future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill and identifiable intangible assets, including discount and tax rates or future cash flow projections, could result in significantly different estimates of the fair values. As a result of these factors and the limited cushion (or headroom as commonly referred) due to the recent acquisition of Milacron, goodwill and identifiable intangible assets for the reporting units within the Milacron reportable segment are more susceptible to impairment risk.
The most significant assumptions used in the determination of the estimated fair value of the reporting units are the revenue and EBITDA growth rates (including terminal growth rates) and the discount rate. The terminal growth rate represents the rate at which the reporting unit is expected to grow beyond the shorter-term business planning period. The terminal growth rate utilized in our fair value estimate is consistent with the reporting unit operating plans and approximates expected long-term category market growth rates and inflation. The discount rate, which is consistent with a weighted-average cost of capital that is
likely to be expected by a market participant, is based upon industry required rates of return, including consideration of both debt and equity components of the capital structure. The discount rates may be impacted by adverse changes in the macroeconomic environment, specifically the COVID-19 pandemic, volatility in the equity and debt markets, or other factors.
While management can implement and has implemented certain strategies to address these events, changes in operating plans or other adverse changes in the future could reduce the underlying cash flows used to estimate reporting unit fair values and could result in a further decline in fair value that would trigger a future material impairment charge of the reporting units’ goodwill and identifiable intangible asset balances.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(financial amounts in millions)
A full discussion of quantitative and qualitative disclosures about market risk may be found in Item 7A of our 20182019 Form 10-K filed10-K. The following discussion provides information on significant changes to our market risks that we think could have a significant impact to our bottom line or the financial strength of the Company. These changes resulted from an increase to our variable-rate debt obligations and additional foreign currency exposures as a result of the acquisition of Milacron. As discussed elsewhere in this Form 10-Q, the recent COVID-19 pandemic is negatively impacting our business and results of operations. As we cannot predict the duration and scope of the COVID-19 pandemic, the negative financial impact and economic risk to our results cannot be reasonably estimated, but could be material.
Interest rate risk
As of September 30, 2019, we had no outstanding variable-rate debt obligations. As of June 30, 2020, our variable-rate debt obligations were $696.1, which included borrowings under our two term loan commitments that were issued in connection with the SECacquisition of Milacron. We are subject to interest rate risk associated with such borrowings, which bear a variable rate of interest that is based upon, at the Company’s option, the LIBO Rate or the Alternate Base Rate (each as defined in the Credit Agreement) plus a margin based on November 13, 2018. There have been no material changes in this information since the filingCompany’s leverage ratio. The interest we pay on such borrowings is dependent on interest rate conditions and the timing of our 2018 Form 10-K.financing needs. If we assumed the borrowings under our variable-rate debt obligations remained at $696.1 for 12 months, a one percentage point change in the related interest rates would decrease or increase annual interest expense by approximately $7.0.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR, the London Inter-bank Offered Rate) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks.
Foreign currency risk
We are subject to variability in foreign currency exchange rates in our international operations. We have a hedging program in place which is designed to limit the exposure to this variability through the use of natural hedges and also by entering into currency exchange agreements. Due to Milacron’s significant international operations, we have additional exposures to the variability in certain foreign currencies. Under our hedging program, we believe we have taken steps to effectively hedge any significant additional exposures resulting from the Milacron acquisition. As such, there is no significant impact to pre-tax earnings during the current period as a result of exchange rates on transactions denominated in non-functional currencies.
Item 4. CONTROLS AND PROCEDURES
(financial amounts in millions)
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.
In 2018,On November 21, 2019, we completed the Company established newacquisition of Milacron, which includes its existing information systems and internal controls relatedover financial reporting. In conducting our evaluation of the effectiveness of our internal control over financial reporting for our fiscal year ended September 30, 2020, we plan to exclude Milacron from our evaluation as permitted under existing SEC Staff interpretive guidance for newly acquired businesses. We are currently in the process of evaluating and integrating Milacron’s historical internal controls over financial reporting with ours. The integration may lead to changes in future fiscal periods but we do not expect these changes to materially affect our internal controls over financial reporting. We expect to complete this integration in fiscal 2021. For the nine months ended June 30, 2020, Milacron accounted for $518.6 of our total net revenue, and as of June 30, 2020, had total assets of $1,988.0 (inclusive of acquired goodwill and identifiable intangible assets of $1,271.2).
During the nine months ended June 30, 2020 and through the date of this filing, we have not experienced any material impact to our accounting policies and procedures as partinternal controls over financial reporting despite the fact that many of our adoption ofnon-production employees are working remotely due to the new revenue recognition standard. These internal controls included providing global training toCOVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our finance team and holding regular meetings with management to review and approve key decisions. Beginning October 2018, we have implemented new internal controls to address risks associated with applyingminimize the new standard.impact to their design and operating effectiveness.
Other than as noted above, there were no changes in internal control over financial reporting identified in the evaluation for the quarter ended June 30, 20192020, 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 1415 to the interim consolidated financial statementsConsolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Item 1A. RISK FACTORS
(financial amounts in millions)
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, 2018,2019, and the additional risk factors below. The following descriptions of risk factors include any additions and material changes to, and supersede the corresponding descriptions of, the risk factors associated with our business as previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 2019. As described herein, the COVID-19 pandemic may adversely affect our business and financial results and may also have the effect of heightening many of the other risks described in this section and in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended September 30, 2019.
Risks Related to Taxes1. The COVID-19 pandemic could have a material adverse effect on our business and results of operations, the nature and extent of which are highly uncertain and unpredictable.
The effective tax rateCOVID-19 pandemic, and the various government, industry and consumer actions related thereto, are having and are likely to continue to have negative impacts on our business, and have created or could create or intensify adverse conditions described in our other risk factors. These impacts and conditions include, but are not limited to, potential significant volatility or decreases in demand for our products, changes in customer behavior and preferences, disruptions in or closures of our manufacturing operations or those of our customers and suppliers, disruptions within our supply chain, limitations on our employees’ ability to work and travel, potential increased vulnerability to cybersecurity incidents, including breaches of information systems security due to widespread remote working arrangements, potential financial difficulties of customers and suppliers, significant changes in economic or political conditions, including rapidly changing government orders and regulations and our efforts to comply with them, and related financial and commodity volatility, including volatility in raw material and other input costs (including but not limited to oil prices), any of which could last for extended periods. Disruption caused by the COVID-19 pandemic and the Company’s response to the COVID-19 pandemic could also increase the Company’s exposure to claims from customers, suppliers, financial institutions, regulators, payment card associations,
employees and others, any of which could have a material adverse effect on the Company’s financial condition and results of operations. Furthermore, the pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates, and interest rates. For example, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which increases the cost of capital and adversely impacts access to capital.
Despite our efforts to manage through the current circumstances, the degree to which COVID-19 and related actions ultimately impact our business, financial position, results of operations, and cash flows may depend on certain factors beyond our control, including the duration, spread, and severity of the Companypandemic, the actions taken to contain COVID-19 and mitigate its public health effects, the impact on the U.S. and global economies and demand for our products, and how quickly and to what extent normal economic and operating conditions resume or become impacted by long-lasting changes. The extent to which COVID-19 may impact our business, while likely to continue to be significant, cannot be predicted with certainty.
2. We may be unable to successfully integrate the businesses of Hillenbrand and Milacron and realize the anticipated benefits of the merger.
On November 21, 2019, we completed the acquisition of Milacron. The success of the merger will depend, in part, on the Company’s ability to successfully combine and integrate the businesses of Hillenbrand and Milacron, which previously operated as independent public companies, and realize the anticipated benefits, including synergies, cost savings, innovation opportunities, and operational efficiencies, in a manner that does not materially disrupt existing customer, supplier, and employee relations nor result in decreased revenues due to losses of, or decreases in orders by, customers. If the Company is unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or may take longer to realize than expected, and the value of the Company’s common stock may decline.
The integration of the two companies may result in material challenges, including, without limitation:
•the diversion of management’s attention from ongoing business concerns and performance shortfalls at one or both of the companies as a result of the devotion of management’s attention to the merger or integration;
•managing a larger combined business;
•maintaining employee morale and retaining key management and other employees;
•retaining existing business and operational relationships, including customers, suppliers and employees and other counterparties, as may be impacted by contracts containing consent and/or other provisions that may be triggered by the merger, and attracting new business and operational relationships;
•the possibility of faulty assumptions underlying expectations regarding the integration process;
•consolidating corporate and administrative infrastructures and eliminating duplicative operations;
•coordinating geographically separate organizations; and
•unanticipated issues in integrating information technology, communications and other systems.
Some of these factors are outside of the Company’s control, including certain impacts of the COVID-19 pandemic discussed elsewhere in our risk factors, and any one of them could result in delays, increased costs, decreases in the amount of expected revenues or synergies, and diversion of management’s time and energy, which could materially affect our financial position, results of operations, and cash flows.
We have incurred substantial expenses in connection with the completion of the merger with Milacron and we expect to incur further expenses in order to integrate a large number of processes, policies, procedures, operations, technologies, and systems of Milacron in connection with the merger.
3. We have a significant amount of debt, which could adversely affect the Company and limit our ability to respond to changes in our business or make future desirable acquisitions.
As of June 30, 2020, our outstanding debt was $1,711.1. The amount of debt could increase if additional levels of liquidity are needed, including as a result of conditions created by COVID-19. This level of debt (and additional debt we may incur after that date) has important consequences to our businesses. For example:
•We may be more vulnerable to general adverse economic and industry conditions, because we have lower borrowing capacity.
•We may be required to dedicate a larger portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for other purposes, including business development efforts and acquisitions, working capital requirements, and capital expenditures.
•We will continue to be exposed to the risk of increased interest rates, because a portion of our borrowings is at variable rates of interest.
•We may be more limited in our flexibility in planning for, or reacting to, changes in our businesses and the industries in which they operate, thereby placing us at a competitive disadvantage compared to competitors that have less indebtedness.
•We may be more vulnerable to credit rating downgrades which could have an impact on our ability to secure future financing at attractive interest rates.
During the three months ended June 30, 2020, primarily due to COVID-19 and its anticipated economic impact, our credit rating was downgraded by Moody’s, S&P Global, and Fitch, and we may be vulnerable to additional downgrades. This downgrade and/or additional downgrades could have an impact on our ability to secure future financing at attractive interest rates, to access the credit and capital markets, or to negotiate favorable covenants in any future amendments to our financial documents or new financings.
While we have publicly stated that we will seek to deleverage our business, there can be no assurances that we will successfully achieve our deleveraging targets within our anticipated timeline or at all, especially in light of the COVID-19 pandemic and its impact on our business and cash flows. In order to achieve our targeted leverage ratios, we currently plan to curtail material acquisitions and share repurchases, and as a result, may forego opportunities that might otherwise be beneficial to the Company. Additionally, at any time and from time to time, we may evaluate or pursue one or more strategic options, including potential sale transactions, for a portion of the assets acquired in the merger or other assets. There can be no assurances if or when the Company would enter into any such transaction or the terms thereof or whether any such transaction would result in the Company achieving its desired leverage targets. The failure to achieve such deleveraging targets could result in a negative impact to the Company’s credit ratings, impair its ability to raise future indebtedness, or otherwise adversely impact its operating or financial condition or performance.
4. If we are unable to comply with the financial and other covenants in our debt agreements, our business, financial condition, and liquidity could be materially adversely affected.
Our Credit Agreement, the L/G Facility Agreement, and the Shelf Agreement contain financial and other restrictive covenants. These covenants could adversely affect us by limiting our financial and operating flexibility as well as our ability to plan for and react to market conditions, including as a result of the COVID-19 pandemic and its effect on our business, and to meet our capital needs. Our failure to comply with these covenants, including as a result of the COVID-19 pandemic and its effect on our business, could result in events of default which, if not cured or waived, could result in us being required to repay indebtedness before its due date, and we may not have the financial resources or be able to arrange alternative financing to do so. Any event that requires us to repay any of our debt before it is due could require us to borrow additional amounts at unfavorable borrowing terms, cause a significant reduction in our liquidity, and impair our ability to pay amounts due on our indebtedness. Moreover, if we are required to repay any of our debt before it becomes due, we may be unable to borrow additional amounts or otherwise obtain the cash necessary to repay that debt when due, which could materially adversely affect our business, financial condition, and liquidity. Furthermore, the current market volatility and economic downturn as a result of the COVID-19 pandemic may adversely impact the rates at which we are able to borrow and our ability to borrow under the Revolver or any other credit facility in the future, or pursuant to other available sources. In addition, in light of the impacts to our ability to generate cash from operations during the COVID-19 pandemic, our results may be further negatively impacted by our payment obligations (including interest) with respect to our outstanding borrowings under the Revolver and our other credit agreements.
5. Goodwill and other identifiable intangible assets, which are subject to periodic impairment evaluations, represent a significant portion of our total assets. An impairment charge on these assets could have a material adverse impact on our financial condition and results of operations.
We acquired intangible assets with the acquisitions of Milacron, Coperion, K-Tron (including TerraSource Global), Rotex, Abel, Red Valve, and BM&M, portions of which were identified as either goodwill or indefinite-lived assets. We periodically assess these assets to determine if they are impaired. Significant negative industry or economic downturnstrends, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets, divestitures, and market capitalization declines may impair these assets, and any of these factors may be increasingly present during the COVID-19 pandemic.
As required by applicable accounting standards, we review goodwill and other identifiable intangible assets for impairment either annually or whenever changes in circumstances indicate that the carrying value may not be recoverable. The risk of impairment to goodwill is higher during the early years following an acquisition. This is because the fair values of these assets
align very closely with what we paid to acquire the reporting units to which these assets are assigned. As a result, the difference between the carrying value of the reporting unit and its fair value (typically referred to as well as future changes“headroom”) is smaller at the time of acquisition. Until this headroom grows over time, due to business growth or lower carrying value of the reporting unit, a relatively small decrease in reporting unit fair value can trigger impairment charges. When impairment charges are triggered, they tend to be material due to the size of the assets involved. The recency and relative size of the Milacron acquisition have elevated and could further elevate the risk of such impairment charges, including material impairment charges. Future acquisitions could present the same risks.
Any charges relating to such impairments could adversely affect our results of operations in the periods recognized.
6. We rely upon our employees, agents, and business partners to comply with laws in many different countries and jurisdictions. We establish policies and provide training to assist them in understanding our policies and the regulations most applicable to our business; however, our reputation, ability to do business, and financial results may be impaired by improper conduct by these parties.
We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by our employees, agents, or business partners that would violate U.S. and/or non-U.S. laws, including laws governing payments to government officials, bribery, fraud, anti-kickback, false claims, competition, export and import compliance, including the U.S. Commerce Department’s Export Administration Regulations, trade sanctions promulgated by the Office of Foreign Asset Control (“OFAC”), anti-money laundering, and data privacy. In particular, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries, including us, from making improper payments to government officials or other parties for the purpose of obtaining or retaining business, and we operate in many parts of the world that have experienced corruption to some degree. Consequently, we are subject to the jurisdiction of various governments and regulatory agencies outside of the U.S., which may bring our personnel into contact with foreign officials responsible for issuing or renewing permits, licenses or approvals or for enforcing other governmental regulations. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. Our global operations expose us to the risk of violating, or being accused of violating, the foregoing or other anti-corruption laws. Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions; could lead to substantial civil and criminal, monetary, and non-monetary penalties, and related shareholder lawsuits; could cause us to incur significant legal fees; and could damage our reputation.
7. We are exposed to a number of different tax uncertainties, which could have a material adverse effect on our results of operations.
We are required to pay taxes in multiple jurisdictions. We determine the tax liability we are required to pay based on our interpretation of applicable tax laws and regulations in globalthe jurisdictions in which we operate.
We may be subject to unfavorable changes, including retroactive changes, in the tax laws and regulations to which we are subject.
We are subject to income taxestax audits by governmental authorities in the United States and various other global jurisdictions. Our effectivenumerous non-U.S. jurisdictions, which are inherently uncertain. Negative or unexpected results from one or more such tax rateaudits could be adversely affected byaffect our results of operations. Tax controls and changes in tax laws or regulations or the mixinterpretation given to them may expose us to negative tax consequences, including interest payments and potential penalties, which could have a material adverse effect on our results of earnings by jurisdictionoperations.
8. We continually assess the strategic fit of our existing businesses and may divest or otherwise dispose of businesses that are deemed not to fit with our strategic plan or are not achieving the valuation of deferred tax assetsdesired return on investment, and liabilities. We recognize deferred tax assetswe cannot be certain that our business, operating results and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Significant judgment is required in determining our provision for income taxes. We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax assetcondition will not be realized.materially and adversely affected.
A successful divestiture depends on various factors, including reaching an agreement with potential buyers on terms we deem attractive, our ability to effectively transfer liabilities, contracts, facilities, and employees to any purchaser, identify and separate the intellectual property to be divested from the intellectual property that we wish to retain, reduce fixed costs previously associated with the divested assets or business, and collect the proceeds from any divestitures. These efforts require varying levels of management resources, which may divert our attention from other business operations. If we are unable to generate sufficient future taxable income, if there is a material change indo not realize the actual effective tax rates, or if there is a change to the time period within which the underlying temporary differences become taxable or deductible, weexpected benefits of any divestiture transaction, our consolidated financial position, results of operations, and cash flows could be required to increase our valuation allowance against our deferred tax assets, which could result in a material increase in our effective tax rate.
negatively impacted. In addition, the enacted Tax Act makes significant changes to the U.S. Internal Revenue Code. Such changes include a reduction in the domestic corporate tax rate, limitations on certain corporate deductions and credits, and a one-time transition tax on certain unrepatriated earningsdivestitures of foreign subsidiaries. Some of the Tax Act changes could have a negative impact on our business. The impact of the law is based on management’s current knowledge and assumptions, and further impacts may result from any additional regulations or guidance issued by the U.S. government. Changes in other tax laws or tax rulings could also have a material impact on our effective tax rate. Additionally, many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, are actively considering changes to existing tax laws. Certain proposals could include recommendations that could increase our tax obligations in many countries where we do business. Any changes in the taxation of our activities in such jurisdictions may result in a material increase in our effective tax rate.
Risks Related to our Milacron Transaction
The proposed acquisition of Milacron is subject to conditions, as well as other uncertainties, and there can be no assurances as to whether or when it may be completed. Failure to complete the proposed transaction could have material adverse effects on us.
The completion of the proposed acquisition of Milacron is subject to a number of conditions, including, among others, the approval by Milacron stockholders and the receipt of certain regulatory approvals, which make the completion and timing of the completion of the proposed transaction uncertain. Also, either we or Milacron may generally terminate the transaction if it has not been consummated by April 7, 2020 (subject to a 90 day extension in certain circumstances).
If the proposed transaction is not completed, our businesses may be materially adversely affected and, without realizing any of the benefits of having completed the proposed transaction, we will be subject toinvolve a number of risks, including significant costs and expenses, the following:loss of customer relationships, and a decrease in revenues and earnings associated with the divested business. Furthermore, divestitures potentially involve significant post-closing separation activities, which could involve the expenditure of material financial resources and significant employee resources. Any divestiture may result in a dilutive impact to our future earnings if we are unable to offset the dilutive impact from the loss of revenue associated with the divestiture, as well as
significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition.
•
9. We operate in cyclical industries.
As an industrial capital goods supplier, we serve industries that are cyclical and sensitive to changes in general economic conditions, such as packaging, automotive, construction, consumer goods, electronics, chemicals, and plastics industries. The performance of many of our business is directly related to the marketproduction levels of our customers. In particular, prices for plastic resins used to make plastic products and parts tend to fluctuate to a greater degree than our customers can adjust for in the pricing of their products. When resin prices increase, certain of our customers’ profit margins decrease, which may result in lower demand for our products. Therefore, our business is affected by fluctuations in the price of resin, which could have an adverse effect on our common stock could decline;business and ability to generate operating cash flows.
•we cannot be certain that we could find an acquisitionDuring periods of economic expansion, when capital spending normally increases, the Process Equipment Group and Milacron businesses generally benefit from greater demand for their products. During periods of economic contraction, such as attractive asduring the proposedongoing COVID-19 pandemic, when capital spending normally decreases, the Process Equipment Group and Milacron acquisition;
•timebusinesses generally are adversely affected by declining demand for new equipment orders, and resources committed by our management to matters relating to the proposed transaction could otherwise have been devoted to pursuing other beneficial opportunities; and
•we may experience negative reactions from the financial markets or from our customers, suppliers, or employees.
In addition, if the proposed transaction is not completed, we could be subject to litigation related to any failure to complete the proposed transaction.
The materialization of any of these risks could adversely impact our ongoing businesses.
Similarly, delaysincreases in the completion of the proposed transaction could, among other things, result in additional transaction costs, loss of revenue or personnel, or other negative effects associated with uncertainty about completion of the proposed transaction.
The proposed acquisition of Milacron is subject to the expiration or termination of applicable waiting periods and the receipt of approvals, consents or clearancesuncollectible receivables from regulatory authorities that could prevent or delay the completion of the proposed acquisition.
Before the proposed acquisition of Milacron may be completed, any applicable waiting period under applicable U.S. antitrust laws must have expired or been terminated and any clearance or approval required to be obtained under certain other competition laws of foreign jurisdictions with respect to the proposed transaction must have been obtained. Regulators may impose conditions, terms, obligations or restrictions in connection with their authorization of or consent to the proposed transaction, and such conditions, terms, obligations or restrictions may delay completion of the proposed transaction or impose additional material costs or obligations on the combined company following the completion of the transaction.customers who become insolvent. There can be no assurance that regulatorseconomic expansion or increased demand will choose notbe sustainable, and our financial condition, results of operations, and cash flows could be materially adversely affected.
10. We derive significant revenues from the plastics industry. Decrease in demand for base resin or engineering plastics or equipment used in the production of these products, or changes in technological advances, or changes in laws or regulations could have a material adverse effect on our business, financial condition, and results of operations.
Approximately 90% of Milacron sales are realized from the manufacture, distribution, and service of highly engineered and customized systems within the plastic technology and processing market. The Process Equipment Group sells equipment, including highly engineered extruders, feeders, and conveying systems, to impose such conditions, terms, obligationsthe plastics industry for the production of base resins, durable engineering grade plastics, and other compounded plastics (including bioplastics and recycled plastic product). Sales volume is dependent upon the need for equipment used to produce these products, which may be significantly influenced by the demand for plastics, the capital investment needs of companies in the plastics industry, changes in technological advances, or restrictions,changes in laws or regulations. Unfavorable developments in the plastics industry could have a material adverse effect on our business, financial condition, and results of operations.
11. We operate in highly competitive industries, many of which are currently subject to intense price competition, and if we are unable to compete successfully, it could have a material adverse effect on our business, financial condition, and results of operations.
Many of the industries in which we operate are highly competitive. Our products may not compete successfully with those of our competitors. The markets for plastic processing equipment and related products, material handling equipment, complete equipment systems, mold components, burial caskets, and minerals and mining equipment, are highly competitive and include a number of North American, European, and Asian competitors. Principal competitive factors in the plastic processing industry, material handling equipment, and complete equipment systems include price, lead time, product features, technology, total cost of ownership, performance, reliability, quality, delivery, and customer service. Principal competitive factors in the mold components industry include technology, price, quality, performance, and delivery. Principal competitive factors in the burial caskets industry include product, price, delivery, and customer service. Principal competitive factors in the minerals and mining industry include product features, performance, price, delivery, and customer service.
Our competitors may be positioned to offer more favorable pricing to customers, resulting in reduced volume and profitability. In certain cases, we have lost business to competitors who offered prices lower than ours. Competition may also limit our ability to pass on the effects of increases in our cost structure. In addition, some of our competitors may have greater financial resources and less debt than we do, which may place us at a competitive disadvantage in the future. These competitors may be better able to withstand and respond to changes in conditions within our industry.
Competition in any of these areas may reduce our sales and adversely affect our earnings or cash flow by resulting in decreased sales volumes, reduced prices, and increased costs of manufacturing, distributing and selling our products.
12. Uncertainty in the United States political environment and in trade policy could negatively impact our business.
The political environment in the United States has created significant uncertainty with respect to, and has resulted in and could
result in additional changes in, legislation, regulation, international relations, and government policy. While it is not possible to
predict whether and when any such additional changes will occur, changes at the local, state or federal level could significantly
impact our business and the industries in which we compete. Specific legislative and regulatory developments and proposals that could have a material impact on us involve matters including (but not limited to) changes to existing trade agreements or entry into new trade agreements, sanctions policies, import and export regulations, tariffs, taxes and customs duties, public company reporting requirements, environmental regulation, and antitrust enforcement. In addition, certain countries that are central to our businesses have imposed and/or been subject to imposition or have threatened imposition of retaliatory tariffs in response to tariffs imposed by the U.S. upon various raw materials and finished goods, including steel and others that are important to our businesses. To the extent changes in the political or regulatory environment have a negative impact on the Company or the markets in which we operate, it may materially and adversely impact our business, results of operations and financial condition in the periods to come.
The U.S. government has at times indicated a willingness to significantly change, and has in some cases significantly changed,
trade policies and/or agreements. This exposes us to risks of disruption and cost increases in our established patterns for sourcing our raw materials, and creates increased uncertainties in planning our sourcing strategies and forecasting our margins. Changes in U.S. tariffs, quotas, trade relationships or agreements, or tax law could reduce the supply of goods available to us or increase our cost of goods. Although such conditions, terms, obligations or restrictionschanges would in many cases have implications across the entire industry, we may delay or leadfail to effectively adapt to and manage the adjustments in strategy that would be necessary in response to those changes. In addition to the abandonmentgeneral uncertainty and overall risk from potential changes in U.S. laws and policies, as we make business decisions in the face of uncertainty, we may incorrectly anticipate the outcomes, miss out on business opportunities or fail to effectively adapt our business strategies and manage the adjustments that are necessary in response to those changes. These risks could materially and adversely impact our business, results of operations and financial condition in the periods to come.
Further, the level of impact of COVID-19 and the reactions of governmental authorities and others thereto may have significant adverse effects on international trade policy and the impact of any changes in international trade policy on the economy or on the businesses of the proposed transaction.Company and those of its customers and its suppliers remains uncertain.
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 March 31, 2008 (Incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q filed August 12, 2008) |
| | Articles of Correction of the Restated and Amended Articles of Incorporation of Hillenbrand, Inc., effective March 31, 2008 (Incorporated by reference to Exhibit 3.2 to Quarterly Report on Form 10-Q filed August 12, 2008) |
| | Articles of Amendment of the Restated and Amended Articles of Incorporation of Hillenbrand, Inc., effective February 27, 201513, 2020 (Incorporated by reference to Exhibit 3.33.1 to QuarterlyCurrent Report on Form 10-Q8-K filed May 11, 2015)February 14, 2020) |
| | Amended and Restated Code of By-laws of Hillenbrand, Inc. (Incorporated by reference to Exhibit 3.13.2 to Current Report on Form 8-K filed February 26, 2015)14, 2020) |
| | Supplemental Indenture No. 4, dated as of June 16, 2020, by and among the Company, the subsidiary guarantors party thereto and the Trustee (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed June 16, 2020) |
| | Amendment No. 4 to Third Amended and Restated Credit Agreement, dated as of May 19, 2020, among Hillenbrand, Inc., as a borrower, the subsidiary borrowers party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed May 20, 2020) |
| | Amendment No. 7 to Private Shelf Agreement, dated as of May 19, 2020, among Hillenbrand, Inc., PGIM, Inc. (f/k/a Prudential Investment Management, Inc.), the subsidiary guarantors party thereto, and the additional parties thereto (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed May 20, 2020) |
| | Third Amendment and Restatement Agreement, dated as of May 19, 2020, among Hillenbrand, Inc., certain of its subsidiaries party thereto, the lenders party thereto, and Commerzbank Finance & Covered Bond S.A., acting as agent (Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed May 20, 2020) |
| | 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 |
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The following documents are being filed pursuant to Inline XBRL: | | |
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Exhibit 101.INS | | Instance document |
Exhibit 101.SCH | | Schema document |
Exhibit 101.CAL | | Calculation linkbase document |
Exhibit 101.LAB | | Labels linkbase document |
Exhibit 101.PRE | | Presentation linkbase document |
Exhibit 101.DEF | | Definition linkbase document |
Exhibit 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
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.
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| HILLENBRAND, INC. | |
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Date: July 31, 2019August 5, 2020 | BY: | /s/ Kristina A. Cerniglia |
| | Kristina A. Cerniglia |
| | Senior Vice President and Chief Financial Officer |
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Date: July 31, 2019August 5, 2020 | | /s/ Timothy C. RyanAndrew S. Kitzmiller |
| | Timothy C. RyanAndrew S. Kitzmiller |
| | Vice President, Controller, and Chief Accounting Officer |