HILLENBRAND, INC., 10-K filed on 11/13/2018
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
12 Months Ended
Sep. 30, 2018
Nov. 08, 2018
Mar. 31, 2017
Document and Entity Information      
Entity Registrant Name Hillenbrand, Inc.    
Entity Central Index Key 0001417398    
Current Fiscal Year End Date --09-30    
Entity Filer Category Large Accelerated Filer    
Document Type 10-K    
Document Period End Date Sep. 30, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Amendment Flag false    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Common Stock, Shares Outstanding   62,347,253  
Entity Public Float     $ 2,259,976
v3.10.0.1
CONSOLIDATED STATEMENTS OF INCOME - USD ($)
shares in Millions, $ in Millions
12 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2016
Income Statement [Abstract]      
Net revenue $ 1,770.1 $ 1,590.2 $ 1,538.4
Cost of goods sold 1,127.2 998.9 967.8
Gross profit 642.9 591.3 570.6
Operating expenses 378.9 344.4 346.5
Amortization expense 30.2 29.2 33.0
Goodwill and Intangible Asset Impairment 63.4 0.0 0.0
Interest expense 23.3 25.2 25.3
Other (expense) income, net (0.6) (4.2) (1.7)
Income (Loss) from Continuing Operations before Income Taxes, Noncontrolling Interest 146.5 188.3 164.1
Income tax expense 65.3 59.9 47.3
Consolidated net income 81.2 128.4 116.8
Less: Net income attributable to noncontrolling interests 4.6 2.2 4.0
Net income [1] $ 76.6 $ 126.2 $ 112.8
Net income - per share of common stock:      
Basic earnings per share (in dollars per share) [1] $ 1.21 $ 1.99 $ 1.78
Diluted earnings per share (in dollars per share) [1] $ 1.20 $ 1.97 $ 1.77
Weighted-average shares outstanding-basic (in shares) 63.1 63.6 63.3
Weighted-average shares outstanding-diluted (in shares) 63.8 64.0 63.8
Cash dividends per share (in dollars per share) $ 0.83 $ 0.82 $ 0.81
[1] Net income attributable to Hillenbrand
v3.10.0.1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($)
$ in Millions
12 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2016
Statement of Comprehensive Income [Abstract]      
Consolidated net income $ 81.2 $ 128.4 $ 116.8
Other comprehensive (loss) income, net of tax      
Currency translation (7.9) 24.9 (9.8)
Pension and postretirement (net of tax of $1.3, $10.9, and $4.8) 4.3 22.2 (13.1)
Net unrealized (loss) gain on derivative instruments (net of tax of $0.0, $1.0, and $0.2) (0.1) 1.7 0.7
Total other comprehensive income (loss), net of tax (3.7) 48.8 (22.2)
Consolidated comprehensive income 77.5 177.2 94.6
Less: Comprehensive income attributable to noncontrolling interests 3.9 2.4 3.7
Comprehensive Income (Loss), Net of Tax, Attributable to Parent [1] $ 73.6 $ 174.8 $ 90.9
[1] Comprehensive income attributable to Hillenbrand
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) - USD ($)
$ in Millions
12 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2016
Statement of Comprehensive Income [Abstract]      
Pension and postretirement, tax $ 1.3 $ (10.9) $ (4.8)
Net unrealized (loss) gain on derivative instruments, tax $ 0.0 $ 1.0 $ 0.2
v3.10.0.1
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Millions
Sep. 30, 2018
Sep. 30, 2017
Current Assets    
Cash and cash equivalents $ 56.0 $ 66.0
Trade receivables, net 218.5 206.1
Receivables from long-term manufacturing contracts 120.3 125.2
Inventories 172.5 151.6
Prepaid expenses 25.2 28.2
Other current assets 18.1 16.5
Total current assets 610.6 593.6
Property, plant, and equipment, net 142.0 150.4
Intangible assets, net 487.3 523.9
Goodwill 581.9 647.5
Other assets 42.8 41.1
Total Assets 1,864.6 1,956.5
Current Liabilities    
Trade accounts payable 196.8 158.0
Liabilities from long-term manufacturing contracts and advances 125.9 132.3
Current portion of long-term debt 0.0 18.8
Accrued compensation 71.9 66.9
Other current liabilities 137.1 135.7
Total current liabilities 531.7 511.7
Long-term debt 344.6 446.9
Accrued pension and postretirement healthcare 120.5 129.6
Deferred income taxes 76.4 75.7
Other long-term liabilities 47.3 26.7
Total Liabilities 1,120.5 1,190.6
Commitments and contingencies (Note 11)
SHAREHOLDERS’ EQUITY    
Common stock, no par value (63.9 and 63.8 shares issued, 62.3 and 63.1 shares outstanding) 0.0 0.0
Additional paid-in capital 351.4 349.9
Retained earnings 531.0 507.1
Treasury stock (1.6 and 0.7 shares) (67.1) (24.4)
Accumulated other comprehensive loss (84.2) (81.2)
Hillenbrand Shareholders’ Equity 731.1 751.4
Noncontrolling interests 13.0 14.5
Total Shareholders’ Equity 744.1 765.9
Total Liabilities and Equity $ 1,864.6 $ 1,956.5
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CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
shares in Millions
Sep. 30, 2018
Sep. 30, 2017
Statement of Financial Position [Abstract]    
Common stock, par value (in dollars per share) $ 0 $ 0
Common stock, shares issued 63.9 63.8
Common stock, shares outstanding 62.3 63.1
Treasury stock, shares 1.6 0.7
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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Millions
12 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2016
Operating Activities      
Consolidated net income $ 81.2 $ 128.4 $ 116.8
Adjustments to reconcile net income to cash provided by operating activities:      
Depreciation and amortization 56.5 56.6 60.4
Goodwill and Intangible Asset Impairment 63.4 0.0 0.0
Impairment of Intangible Assets, Indefinite-lived (Excluding Goodwill)   0.0 2.2
Deferred income taxes 3.7 37.1 (4.7)
Net loss (gain) on disposal or impairment of property 0.7 (4.6) 0.3
Equity in net loss (income) from affiliates 0.0 0.4 (0.3)
Share-based compensation 12.1 10.5 8.5
Trade accounts receivable and receivables on long-term manufacturing contracts (13.0) 10.7 9.7
Inventories (24.0) 5.4 11.3
Prepaid expenses and other current assets (0.1) (6.2) 5.5
Trade accounts payable 41.6 17.2 30.2
Accrued expenses and other current liabilities 5.8 64.6 (10.7)
Income taxes payable 23.0 4.8 3.8
Defined benefit plan funding (10.9) (90.6) (15.5)
Defined benefit plan expense 3.6 6.4 11.9
Other, net 4.7 5.5 8.8
Net cash provided by operating activities 248.3 246.2 238.2
Investing Activities      
Capital expenditures (27.0) (22.0) (21.2)
Proceeds from sales of property, plant, and equipment 3.7 5.7 2.0
Acquisitions of businesses, net of cash acquired 0.0 0.0 (235.4)
Return of investment capital from affiliates 0.0 3.2 1.1
Other, net 0.2 (0.4) 0.0
Net cash used in investing activities (23.1) (13.5) (253.5)
Financing Activities      
Repayments on term loan (148.5) (13.5) (9.0)
Proceeds from revolving credit facility, net of financing costs 1,094.0 819.3 719.8
Repayments on revolving credit facility (1,065.7) (953.0) (627.2)
Payment of dividends on common stock (52.1) (51.9) (51.1)
Repurchases of common stock (61.0) (28.0) (21.2)
Net proceeds on stock plans 7.1 13.7 11.1
Other, net (6.3) (1.7) (0.8)
Net cash (used in) provided by financing activities (232.5) (215.1) 21.6
Effect of exchange rate changes on cash and cash equivalents (2.7) (3.6) (2.6)
Net cash flows (10.0) 14.0 3.7
Cash and cash equivalents:      
At beginning of period 66.0 52.0 48.3
At end of period 56.0 66.0 52.0
Cash paid for interest 20.7 20.3 22.7
Cash paid for income taxes $ 38.9 $ 18.2 $ 48.0
v3.10.0.1
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($)
$ in Millions
Total
Common Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Loss
Noncontrolling Interests
Balance at Sep. 30, 2015 $ 605.8   $ 350.9 $ 372.1 $ (21.0) $ (107.9) $ 11.7
Balance (in shares) at Sep. 30, 2015   63,600,000     700,000    
Increase (Decrease) in Stockholders' Equity              
Total other comprehensive income, net of tax (22.2)         (21.9) (0.3)
Net income 116.8     112.8     4.0
Issuance/retirement of stock for stock awards/options 11.1   (11.2)   $ 22.3    
Issuance/retirement of stock for stock awards/options (in shares)   (100,000)     (700,000)    
Share-based compensation 8.5   8.5        
Treasury Stock, Shares, Acquired         700,000    
Purchases of common stock 21.2       $ 21.2    
Dividends (52.6)   (0.5) (51.6)     (1.5)
Balance at Sep. 30, 2016 646.2   348.7 433.3 $ (19.9) (129.8) 13.9
Balance (in shares) at Sep. 30, 2016   63,700,000     700,000    
Increase (Decrease) in Stockholders' Equity              
Total other comprehensive income, net of tax 48.8         48.6 0.2
Net income 128.4     126.2     2.2
Issuance/retirement of stock for stock awards/options $ 13.7   (9.8)   $ 23.5    
Issuance/retirement of stock for stock awards/options (in shares) (700,000) (100,000)     (700,000)    
Share-based compensation $ 10.5   10.5        
Treasury Stock, Shares, Acquired         700,000    
Purchases of common stock 28.0       $ 28.0    
Dividends (53.7)   (0.5) (52.4)     (1.8)
Balance at Sep. 30, 2017 765.9   349.9 507.1 $ (24.4) (81.2) 14.5
Balance (in shares) at Sep. 30, 2017   63,800,000     700,000    
Increase (Decrease) in Stockholders' Equity              
Total other comprehensive income, net of tax (3.7)         (3.0) (0.7)
Net income 81.2     76.6     4.6
Issuance/retirement of stock for stock awards/options $ 7.1   (11.2)   $ 18.3    
Issuance/retirement of stock for stock awards/options (in shares) (500,000) (100,000)     (500,000)    
Share-based compensation $ 12.1   12.1        
Treasury Stock, Shares, Acquired         1,400,000    
Purchases of common stock 61.0       $ 61.0    
Dividends (57.5)   (0.6) (52.7)     (5.4)
Balance at Sep. 30, 2018 $ 744.1   $ 351.4 $ 531.0 $ (67.1) $ (84.2) $ 13.0
Balance (in shares) at Sep. 30, 2018   63,900,000     1,600,000    
v3.10.0.1
Background
12 Months Ended
Sep. 30, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Background
Background
 
Hillenbrand, Inc. (“Hillenbrand”) is a global diversified industrial company with multiple leading brands that serve a wide variety of industries around the world.  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 Hillenbrand Operating Model (“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. Hillenbrand’s portfolio is composed of two business segments:  the Process Equipment Group and Batesville®.  The Process Equipment Group businesses design, develop, manufacture, and service highly engineered industrial equipment around the world.  Batesville is a recognized leader in the death care industry in North America.  “Hillenbrand,” “the Company,” “we,” “us,” “our,” and similar words refer to Hillenbrand and its subsidiaries unless context otherwise requires.
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Summary of Significant Accounting Policies
12 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
 
Basis of presentation — The accompanying consolidated financial statements include the accounts of Hillenbrand and its subsidiaries.  They also include two subsidiaries where the Company’s ownership percentage is less than 100%.  The portion of the business that is not owned by the Company is presented as noncontrolling interests within equity in the balance sheets.  Income attributable to the noncontrolling interests is separately reported within the statements of income.  All significant intercompany accounts and transactions have been eliminated. 
 
Use of estimates — We prepared the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”).  GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Foreign currency translation — The financial statements of our foreign subsidiaries are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for operating results.  Unrealized translation gains and losses are included in accumulated other comprehensive loss in shareholders’ equity.  When a transaction is denominated in a currency other than the subsidiary’s functional currency, we recognize a transaction gain or loss in “other (expense) income, net” when the transaction is settled.
 
Cash and cash equivalents include short-term investments with original maturities of three months or less.  The carrying amounts reported in the balance sheet for cash and cash equivalents are valued at cost, which approximates their fair value.
 
Restricted cash - Restricted cash of $0.5 and $0.8 are included in Other current assets in the Consolidated Balance Sheets at September 30, 2018 and 2017.

Trade receivables are recorded at the invoiced amount and generally do not bear interest, unless they become past due.  The allowance for doubtful accounts is a best estimate of the amount of probable credit losses and collection risk in the existing accounts receivable portfolio.  The allowance for cash discounts and sales returns reserve are based upon historical experience and trends.  Account balances are charged against the allowance when we believe it is probable the receivable will not be recovered. We generally hold trade accounts receivable until they are collected.  At September 30, 2018 and 2017, we had reserves against trade receivables of $22.2 and $21.6.
 
Inventories are valued at the lower of cost or market.  Inventory costs are determined by the last-in, first-out (“LIFO”) method for approximately 30% and 32% of inventories at September 30, 2018 and 2017.  Costs of remaining inventories have been determined principally by the first-in, first-out (“FIFO”) and average cost methods.  If the FIFO method of inventory accounting, which approximates current cost, had been used for inventory accounted for using the LIFO method, that inventory would have been approximately $15.7 and $15.0 higher than reported at September 30, 2018 and 2017.
 
September 30,
 
2018
 
2017
Raw materials and components
$
68.3

 
$
52.6

Work in process
44.7

 
55.4

Finished goods
59.5

 
43.6

Total inventories
$
172.5

 
$
151.6


 
Property, plant, and equipment are carried at cost less accumulated depreciation. Depreciation is computed using principally the straight-line method based on estimated useful lives of three to 50 years for buildings and improvements and three to 25 years for machinery and equipment. Maintenance and repairs are expensed as incurred. Upon disposal or retirement, the cost and accumulated depreciation of assets are eliminated. Any gain or loss is reflected in the Company’s income from operations. We review these assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than its carrying amount. The impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value. Total depreciation expense for 2018, 2017, and 2016 was $23.4, $25.4, and $25.6.
 
 
September 30, 2018
 
September 30, 2017
 
Cost
 
Accumulated
Depreciation
 
Cost
 
Accumulated
Depreciation
Land and land improvements
$
15.0

 
$
(3.3
)
 
$
15.9

 
$
(3.5
)
Buildings and building equipment
102.3

 
(60.7
)
 
110.5

 
(68.0
)
Machinery and equipment
328.5

 
(239.8
)
 
335.8

 
(240.3
)
Total
$
445.8

 
$
(303.8
)
 
$
462.2

 
$
(311.8
)

 
Intangible assets are stated at the lower of cost or fair value.  With the exception of certain trade names, intangible assets are amortized on a straight-line basis over periods ranging from three to 21 years, representing the period over which we expect to receive future economic benefits from these assets.  We assess the carrying value of trade names annually, or more often if events or changes in circumstances indicate there may be impairment. Estimated amortization expense related to intangible assets for the next five years is: $32.1 in 2019, $31.5 in 2020, $30.4 in 2021, $29.2 in 2022, and $28.8 in 2023.
 
 
September 30, 2018
 
September 30, 2017
 
Cost
 
Accumulated
Amortization
 
Cost
 
Accumulated
Amortization
Finite-lived assets:
 

 
 

 
 

 
 

Trade names
$
0.2

 
$
(0.2
)
 
$
0.2

 
$
(0.1
)
Customer relationships
464.5

 
(148.4
)
 
468.7

 
(125.9
)
Technology, including patents
79.6

 
(45.1
)
 
80.7

 
(39.9
)
Software
58.0

 
(48.9
)
 
48.3

 
(41.5
)
Other
0.2

 
(0.2
)
 
0.2

 
(0.2
)
 
602.5

 
(242.8
)
 
598.1

 
(207.6
)
Indefinite-lived assets:
 

 
 

 
 

 
 

Trade names
127.6

 

 
133.4

 

 
 
 
 
 
 
 
 
Total
$
730.1

 
$
(242.8
)
 
$
731.5

 
$
(207.6
)


The net change in intangible assets during the year ended September 30, 2018 was driven by normal amortization, foreign currency translation, and an impairment charge on certain trade names. An impairment charge of $4.6 pre-tax ($3.5 after tax) was recorded during the quarter ended March 31, 2018 for trade names most directly impacted by domestic coal mining and coal power. As of September 30, 2018, we had approximately $4 of trade name book value remaining in the Process Equipment Group segment most directly impacted by domestic coal mining and coal power. In conjunction with our impairment testing, we also reassessed the useful lives of other definite-lived intangible assets specific to the intangibles impacted by domestic coal mining and coal power, resulting in no significant changes in amortization.


In the third quarter of 2016, the Company recorded a trade name impairment charge of $2.2, included in operating expenses, on two trade names related to the Process Equipment Group segment. The decline in the estimated fair value of these trade names was largely driven by the decreased demand for equipment and parts used in coal mining and coal power.

As a result of the required annual impairment assessment performed in the third quarter of 2018, the fair value of trade names was determined to meet or exceed the carrying value for all trade names, resulting in no further impairment to trade names.

Goodwill is not amortized, but is subject to annual impairment tests.  Goodwill has been assigned to reporting units.  We assess the carrying value of goodwill annually, or more often if events or changes in circumstances indicate there may be impairment.  Impairment testing is performed at a reporting unit level.
 
Process
Equipment
Group
 
Batesville
 
Total
Balance September 30, 2016
$
626.0

 
$
8.3

 
$
634.3

Adjustments
(0.9
)
 

 
(0.9
)
Foreign currency adjustments
14.1

 

 
14.1

Balance September 30, 2017
639.2

 
8.3

 
647.5

Impairment charge
(58.8
)
 

 
(58.8
)
Foreign currency adjustments
(6.8
)
 

 
(6.8
)
Balance September 30, 2018
$
573.6

 
$
8.3

 
$
581.9



In connection with the preparation of the quarterly financial statements for the second quarter of 2018, an interim impairment assessment was performed at the reporting unit most directly impacted by domestic coal mining and coal power. During the quarter ended March 31, 2018, published industry reports reduced their forecasts for domestic coal production and consumption. The reporting unit also experienced a larger than expected decline in orders for equipment and parts used in the domestic coal mining and coal power industries. In conjunction with these events and as part of the long-term strategic forecasting process, the Company made the decision to redirect strategic investments for growth, significantly reducing the reporting unit’s terminal growth rate. As a result of this change in expected future cash flows, along with comparable fair value information, management concluded that the reporting unit carrying value exceeded its fair value, resulting in a goodwill impairment charge of $58.8. The pre-impairment goodwill balance for the reporting unit was $71.3. A 10% further reduction in the fair value of this reporting unit would indicate a potential additional impairment of $7.4.
 
Environmental liabilities — Expenditures that relate to an existing condition caused by past operations which do not contribute to current or future revenue generation are expensed.  A reserve is established when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  These reserves are determined without consideration of possible loss recoveries.  Based on consultations with an environmental engineer, the range of liability is estimated based on current interpretations of environmental laws and regulations.  A determination is made of the specific measures that are believed to be required to remediate the site, the estimated total cost to carry out the remediation plan, and the periods in which we will make payments toward the remediation plan.  We do not make an estimate of inflation for environmental matters because the number of sites is relatively small, we believe the magnitude of costs to execute remediation plans is not significant, and the estimated time frames to remediate sites are not believed to be lengthy.
 
Specific costs included in environmental expense and reserves include site assessment, remediation plan development, clean-up costs, post-remediation expenditures, monitoring, fines, penalties, and legal fees.  The amount reserved represents the expected undiscounted future cash outflows associated with such plans and actions and we believe is not significant to Hillenbrand.
 
Self-insurance — We are self-funded up to certain limits for product and general liability, workers compensation, and auto liability insurance programs, as well as certain employee health benefits including medical, drug, and dental.  Claims covered by insurance have in most instances deductibles and self-funded retentions up to $0.5 per occurrence, depending upon the type of coverage and policy period.  Our policy is to estimate reserves for product and general liability, workers compensation, and auto liability based upon a number of factors, including known claims, estimated incurred but not reported claims, and outside actuarial analysis.  The outside actuarial analysis is based on historical information along with certain assumptions about future events.  These reserves are classified as other current and other long-term liabilities within the balance sheets.
 
Treasury stock consists of our common shares that have been issued but subsequently reacquired.  We account for treasury stock purchases under the cost method.  When these shares are reissued, we use an average-cost method to determine cost.  Proceeds in excess of cost are credited to additional paid-in capital.
 
On July 24, 2008, our Board of Directors approved a stock repurchase program for the repurchase of up to $100.0 of our common stock. On February 23, 2017, our Board of Directors approved an increase of $100.0 to the existing stock repurchase program. The authorization brings the maximum cumulative repurchase authorization up to $200.0. The repurchase program has no expiration date, but may be terminated by the Board of Directors at any time. As of September 30, 2018, we had repurchased approximately 4,950,000 shares for approximately $160.4 in the aggregate. Such shares were classified as treasury stock. We repurchased approximately 1,385,600 shares of our common stock during 2018, at a total cost of approximately $61.0. In 2018 and 2017, approximately 500,000 shares and 700,000 shares were issued from treasury stock under our stock compensation programs.  At September 30, 2018, we had approximately $39.6 remaining for share repurchases under the existing Board authorization.
 
Preferred stock — The Company has authorized 1,000,000 shares of preferred stock (no par value), of which no shares were issued at September 30, 2018 and 2017.
 
Accumulated other comprehensive loss includes all changes in Hillenbrand shareholders’ equity during the period except those that resulted from investments by or distributions to our shareholders.
 
September 30,
 
2018
 
2017
Currency translation
$
(44.1
)
 
$
(36.9
)
Pension and postretirement (net of taxes of $22.3 and $23.4)
(41.0
)
 
(45.3
)
Unrealized gain (loss) on derivative instruments (net of taxes of $0.3 and $0.8)
0.9

 
1.0

Accumulated other comprehensive loss
$
(84.2
)
 
$
(81.2
)

 
Revenue recognition — Net revenue includes gross revenue less sales discounts, customer rebates, sales incentives, and product returns, all of which require us to make estimates for the portion of these allowances that have yet to be credited or paid to our customers.  We estimate these allowances based upon historical rates and projections of customer purchases toward contractual rebate thresholds.
 
A portion of Hillenbrand’s revenue is derived from long-term manufacturing contracts.  The majority of this revenue is recognized based on the percentage-of-completion method. Under this method, revenue is recognized based upon the costs incurred to date as compared to the total estimated project costs.  Approximately 25%, 25%, and 24% of Hillenbrand’s revenue was attributable to these long-term manufacturing contracts for 2018, 2017, and 2016.
 
Accounting for these contracts involves management judgment in estimating total contract revenue and cost.  Contract revenues are largely determined by negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, and incentive and award provisions associated with technical performance clauses.  Contract costs are incurred over longer periods of time and, accordingly, the estimation of these costs requires management judgment.  Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends, and other economic projections.  Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements.  Revenue and cost estimates are regularly monitored and revised based on changes in circumstances.  Anticipated losses on long-term contracts are recognized immediately when such losses become evident.  We maintain financial controls over the customer qualification, contract pricing, and estimation processes to reduce the risk of contract losses.
 
Revenue for components, most replacement parts, and service is recognized when title and risk of loss passes to the customer.
 
Cost of goods sold consists primarily of purchased material costs, fixed manufacturing expense, variable direct labor, and overhead costs.  It also includes costs associated with the distribution and delivery of products.
 
Research and development costs are expensed as incurred as a component of operating expenses and were $11.7, $11.9, and $12.6 for 2018, 2017, and 2016.
 
Warranty costs — We provide for the estimated warranty cost of a product at the time revenue is recognized.  Warranty expense is accrued based upon historical information and may also include specific provisions for known conditions.  Warranty obligations are affected by actual product performance and by material usage and service costs incurred in making product corrections.  Our warranty provision takes into account the best estimate of amounts necessary to settle future and existing claims on products sold.  The Process Equipment Group generally offers a one to two-year warranty on a majority of its products.  It engages in extensive product quality programs and processes in an effort to minimize warranty obligations, including active monitoring and evaluation of the quality of component suppliers.  Warranty reserves were $16.9 and $15.8 for 2018 and 2017.  Warranty costs were $3.3, $4.1, and $4.3 for 2018, 2017, and 2016.
 
Income taxesOn December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code that will impact our fiscal year ended September 30, 2018 including, but not limited to (a) reducing the U.S. federal corporate tax rate, (b) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”), and (c) accelerating expensing of certain capital expenditures. The Tax Act reduced the federal corporate tax rate from 35% to 21%. The Internal Revenue Code stipulates that our fiscal year ending 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 the effective date of the Tax Act. The statutory tax rate of 21% will apply to future years. Furthermore, certain provisions of the Tax Act, such as the repeal of the Domestic Production Activities Deduction, Global Intangible Low-Taxed Income, Foreign Derived Intangible Income Deduction, and the Base Erosion Anti-Avoidance Tax, are not effective until our fiscal year ending September 30, 2019.

Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Act under Accounting Standards Codification Topic 740 (“ASC 740”). Per SAB 118, the Company must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC 740 is complete.

In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, the company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined. If a company cannot determine a provisional estimate to be included in the financial statements, the company should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. If a company is unable to provide a reasonable estimate of the impacts of the Tax Act in a reporting period, a provisional amount must be recorded in the first reporting period in which a reasonable estimate can be determined.

The impact of the federal tax rate reduction from 35.0% to 24.5% was recognized in the rate applied to earnings. We have reflected the tax effect of temporary differences originating in the current period at the 24.5% federal tax rate and have recognized the deferred tax effect of such differences that will reverse in future periods at the 21% federal tax rate. We recorded a provisional net expense for the transition tax during the quarter ended December 31, 2017 and have revised the estimate during the period ended September 30, 2018. While we have recorded a reasonable estimate of the transition tax certain other information is still being gathered in order to verify the foreign taxes paid and other information. We will record a final revision to the provisional transition tax liability during the quarter ending December 31, 2018.

We establish deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined in part based on the differences between the accounting treatment of tax assets and liabilities under GAAP and the tax basis of assets and liabilities using statutory tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in statutory tax rates on deferred tax assets and liabilities is recognized in net income in the period that includes the enactment date. We continue to assert that most of the cash at our foreign subsidiaries represents earnings considered to be permanently reinvested for which deferred taxes have not been provided for in our financial statements, as we do not intend, nor do we foresee a need, to repatriate these funds. However, with the enactment of the Tax Act, we are evaluating our future cash deployment and may change our permanent reinvestment assertion in future periods.

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

Derivative financial instruments — The Company has hedging programs in place to manage its currency exposures.  The objectives of our hedging programs are to mitigate exposures in gross margin and non-functional-currency-denominated assets and liabilities. Under these programs, we use derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates.  These include foreign currency exchange forward contracts, which generally have terms up to 24 months.   

We require that hedging derivative instruments be highly effective in reducing the risk exposure that they are designated to hedge. As a result, there was no significant ineffectiveness from any of our derivative activities during the period. We formally designate any instrument that meets these hedging criteria as a hedge.

The aggregate notional amount of all derivative instruments was $152.6 and $262.4 at September 30, 2018 and 2017.

We measure all derivative instruments at fair value and report them on our balance sheets as assets or liabilities.  Contracts designated as hedges for customer orders or intercompany purchases have an offsetting tax-adjusted amount in accumulated other comprehensive gain (loss).  Foreign exchange contracts designated to hedge foreign currency exposures within our balance sheet have an offsetting amount recorded in “Other (expense) income, net”.  The cash flows from such hedges are presented in the same category in the Company’s Consolidated Statement of Cash Flows as the items being hedged.

The carrying value of all of derivative instruments at fair value resulted in assets of $1.9 and $3.8 (included in other current assets and other assets) and liabilities of $2.2 and $2.3 (included in other current liabilities) at September 30, 2018 and 2017.  See Note 13 for additional information on the fair value of our derivative instruments.
 
Changes in the fair value of derivatives are accounted for depending on the intended use of the derivative, designation of the hedging relationship, and whether or not the criteria to apply hedge accounting has been satisfied.  Gains and losses on derivative instruments reported in accumulated other comprehensive gain (loss) are subsequently included in earnings in the periods in which earnings are affected by the hedged item.  The amounts recognized in accumulated other comprehensive income (loss) and subsequently through earnings were not significant from 2016 through 2018.  Net gains and losses on foreign exchange contracts offset foreign exchange effects on the hedged items.  The Company does not enter into derivative contracts for purposes of speculation.
 
Business acquisitions and related business acquisition and integration costs — Assets and liabilities associated with business acquisitions are recorded at fair value, using the acquisition method of accounting.  We allocate the purchase price of acquisitions based upon the fair value of each component, which may be derived from observable or unobservable inputs and assumptions.  We may utilize third-party valuation specialists to assist us in this allocation.  Initial purchase price allocations are preliminary and subject to revision within the measurement period, generally not to exceed one year from the date of acquisition.
 
Business acquisition, development, and integration costs are expensed as incurred and are reported as a component of cost of goods sold, operating expenses, interest expense, and “other (expense) income, net,” depending on the nature of the cost.  We define these costs to include finder’s fees, advisory, legal, accounting, valuation, and other professional or consulting fees, as well as travel associated with the evaluation and effort to acquire specific businesses.  Business acquisition and integration costs also include costs associated with acquisition tax planning, retention bonuses, and related integration costs.  These costs exclude the ongoing expenses of our business development department.
 
Restructuring costs may occur when we take action to exit or significantly curtail a part of our operations or change the deployment of assets or personnel.  A restructuring charge can consist of an impairment or accelerated depreciation of affected assets, severance costs associated with reductions to the workforce, costs to terminate an operating lease or contract, and charges for legal obligations for which no future benefit will be derived.
 
Recently adopted accounting standards — In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 from the goodwill impairment test and modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. We early adopted this standard for fiscal year 2018. See Critical Accounting Estimates within this Form 10-K for further information on the impact this adoption had on our consolidated results of operations, financial position, and cash flows.

Recently issued accounting standards — In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has also issued several updates to ASU 2014-09. The new standard supersedes U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards. It also requires significant disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 will be effective for our fiscal year beginning on October 1, 2018, including interim periods within that reporting period, and allows for either full retrospective adoption or modified retrospective adoption.

Based on our assessment, which included a comparison of our existing accounting policies and practices against the new standard and a review of contracts, we believe the key areas of consideration for our financial statements include percentage-of-completion accounting, separate performance obligations, and related revenue recognized over time. We have executed our implementation plan and have developed new accounting policies and created draft disclosures under the new standard. We are also evaluating changes in our internal controls over revenue recognition and continue to implement system changes and enhancements to facilitate the collection of data required for disclosures under the new standard. As previously disclosed, we expect to adopt this new standard using the modified retrospective method, which would result in a cumulative effect adjustment as of the date of adoption. We currently believe the most significant impact of the adoption of this standard relates to the increased financial statement disclosures. We currently do not expect the adoption of ASU 2014-09 to have a material impact on our consolidated results of operations, financial position, and cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize a right of use asset and related lease liability for leases that have terms of more than twelve months. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance, with the classifications based on criteria that are similar to those applied under the current lease guidance, without the explicit bright lines. The FASB has also issued several updates to ASU 2016-02. ASU 2016-02 will be effective for our fiscal year beginning on October 1, 2019, with early adoption permitted. We are currently evaluating the impact that ASU 2016-02 will have on our consolidated financial statements, and expect that there will be increases in assets and liabilities in our Consolidated Balance Sheets upon adoption, due to the recognition of right-of-use assets and corresponding lease liabilities.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Statements. ASU 2016-13 replaces the current incurred loss impairment model with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 will be effective for our fiscal year beginning on October 1, 2020, with early adoption permitted for our fiscal year beginning October 1, 2019. We are currently evaluating the impact that ASU 2016-13 will have on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-17 will be effective for our fiscal year beginning on October 1, 2018. We expect the adoption of ASU 2016-18 to have a financial statement presentation and disclosure impact only.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. ASU 2017-01 assists entities in determining whether a transaction involves an asset or a business. Specifically, it states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output.  ASU 2017-01 will be effective for our fiscal year beginning on October 1, 2018. We are currently evaluating ASU 2017-01, but do not expect its adoption will have a significant impact on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 states that an employer must report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period and present the other components of net benefit cost (as defined in paragraphs 715-30-35-4 and 715-60-35-9) in the income statement separately from the service cost component and outside a subtotal of income from operations (if one is presented). In addition, ASU 2017-07 limits the capitalization of compensation costs to the service cost component only (if capitalization is appropriate). ASU 2017-07 will be effective for our fiscal year beginning on October 1, 2018. We do not expect the adoption of ASU 2017-07 to have a material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications (in accordance with Topic 718). The new guidance will provide relief to entities that make non-substantive changes to share-based payment awards. ASU 2017-09 will be effective for our fiscal year beginning on October 1, 2018. The amendment would be applied prospectively to an award modified on or after the adoption date. We do not expect ASU 2017-09 to have a significant impact on our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 intends to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components, and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. In addition, this ASU makes certain targeted improvements to simplify the application of hedge accounting guidance.  ASU 2017-12 will be effective for our fiscal year beginning on October 1, 2019, with early adoption permitted. The amendment would be applied to hedging relationships existing on the date of adoption and the effect of adoption would be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date). We are currently evaluating the impact that ASU 2017-12 will have on our consolidated financial statements.
v3.10.0.1
Business Acquisitions
12 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Business Acquisitions
Business Acquisitions
 
Abel
 
We completed the acquisition of Abel Pumps LP and Abel GmbH & Co. KG and certain of their affiliates (collectively “Abel”) on October 2, 2015, for €95 in cash.  We utilized borrowings under our former $700.0 revolving credit facility and former$180.0 term loan to fund this acquisition. Based in Büchen, Germany, Abel is a globally-recognized leader in positive displacement pumps. Abel specializes in designing, developing, and manufacturing piston and piston diaphragm pumps as well as pumping solutions and in providing related parts and service. This equipment is sold under the ABEL® Pump Technology brand in the power generation, wastewater treatment, mining, general industry, and marine markets. The results of Abel are reported in our Process Equipment Group segment for the relevant periods.

Based on the final purchase allocation, we recorded goodwill of $36 and acquired identifiable intangible assets of $58, which consisted of $5 of trade names not subject to amortization, $9 of developed technology, $3 of backlog, and $41 of customer relationships. In addition, we recorded $14 of net tangible assets, primarily working capital. Goodwill is deductible for tax purposes in Germany. Supplemental proforma information has not been provided as the acquisition did not have a material impact on consolidated results of operations.

Red Valve

On February 1, 2016, we completed the acquisition of Red Valve Company, Inc. (“Red Valve”) for $130.4 in cash, net of certain adjustments. We utilized borrowings under our former $700.0 revolving credit facility and former $180.0 term loan to fund this acquisition. Based in Carnegie, Pennsylvania, Red Valve is a global leader in highly-engineered valves designed to operate in the harshest municipal and industrial wastewater environments. Its products support mission critical applications in water/wastewater, power and mining, and other general industrial markets. The results of Red Valve are reported in our Process Equipment Group segment for the relevant periods.

Based on the final purchase allocation, we recorded goodwill of $59 and acquired identifiable intangible assets of $61, which consisted of $4 of trade names not subject to amortization, $8 of developed technology, $1 of backlog, and $48 of customer relationships. In addition, we recorded $10 of net tangible assets, primarily working capital. Goodwill is deductible for tax purposes. Supplemental proforma information has not been provided, as the acquisition did not have a material impact on consolidated results of operations.

Both of these acquisitions continue Hillenbrand’s strategy to transform into a world-class global diversified industrial company by increasing our ability to expand into new markets and geographies within the highly attractive flow control space. The fair value of these acquisitions did not ascribe a significant amount to tangible assets, as we often seek to acquire companies with a relatively low physical asset base in order to limit the need to invest significant additional cash post-acquisition.
v3.10.0.1
Financing Agreements
12 Months Ended
Sep. 30, 2018
Debt Disclosure [Abstract]  
Financing Agreements
Financing Agreements
 
 
September 30,
 
2018
 
2017
$900 revolving credit facility (excluding outstanding letters of credit)
$
95.7

 
$
68.0

$180 term loan

 
148.5

$150 senior unsecured notes, net of discount (1)
149.3

 
148.9

$100 Series A Notes (2)
99.6

 
99.7

Other

 
0.6

Total debt
344.6

 
465.7

Less: current portion

 
18.8

Total long-term debt
$
344.6

 
$
446.9

 
 
 
 
(1) Includes debt issuance costs of $0.4 and $0.6 at September 30, 2018 and September 30, 2017.
(2) Includes debt issuance costs of $0.4 and $0.3 at September 30, 2018 and September 30, 2017.

 
The following table summarizes the scheduled maturities of long-term debt for 2019 through 2023:
 
 
Amount
2019
$

2020
150.0

2021

2022

2023
95.7


 

On December 8, 2017, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”), which governs our revolving credit facility (the “Facility”), by and among the Company and certain of its affiliates, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement amended and extended the Company’s former credit agreement which provided for a revolving credit facility of up to $700.0 in aggregate principal amount and a term loan in an original principal amount of $180.0.

The Credit Agreement increased the maximum principal amount available for borrowing under the Facility from $700.0 to $900.0. In connection with the Credit Agreement, the Company repaid the existing term loan in full with borrowings under the Facility. The aggregate principal amount available for borrowing under the Credit Agreement may be expanded, subject to the approval of the lenders, by an additional $450.0. The Credit Agreement extended the maturity date of the Facility to December 8, 2022. New deferred financing costs related to the Credit Agreement were $2.1, which along with existing costs of $1.0, are being amortized to interest expense over the term of the Facility.

Borrowings under the Facility bear interest at variable rates plus a margin amount based upon our leverage.  There is also a facility fee based upon our leverage.  All revolving amounts due under the Facility mature upon expiration.  These borrowings are classified as long-term. The Facility is an unsubordinated obligation of Hillenbrand and ranks equally in right of payment with all our other existing and future unsubordinated obligations.

With respect to the Facility, as of September 30, 2018, we had $7.3 in outstanding letters of credit issued and $797.0 of maximum borrowing capacity. Of the maximum borrowing capacity, $769.2 was immediately available based on our leverage covenant at September 30, 2018, with additional amounts available in the event of a qualifying acquisition.  The weighted-average interest rates on borrowings under the Facility were 1.83% and 1.40% for 2018 and 2017.  The weighted average facility fee was 0.15% and 0.23% for 2018 and 2017. The weighted-average interest rate on the Facility’s term loan was 2.60% for 2018 (until the date of repayment) and 2.27% for 2017.

We had interest rate swaps on $50.0 of outstanding borrowings under the Facility in order to manage exposure to our variable interest payments. We terminated these swaps in the fourth quarter of 2018, and the related amounts were released from accumulated other comprehensive loss to other (expense) income, net.

In July 2010, we issued $150 of senior unsecured notes (“Notes”) due July 2020.  The Notes bear interest at a fixed rate of 5.5% per year, payable semi-annually in arrears beginning January 2011.  The Notes were issued at a discount of $1.6, resulting in an initial carrying value of $148.4.  We are amortizing the discount to interest expense over the term of the Notes using the effective interest rate method, resulting in an annual interest rate of 5.65%.  Deferred financing costs associated with the Notes of $2.1 are being amortized to interest expense on a straight-line basis over the term of the Notes.  The Notes are unsubordinated obligations of Hillenbrand and rank equally in right of payment with all of our other existing and future unsubordinated obligations.
 
The indenture governing the Notes does not limit our ability to incur additional indebtedness.  It does, however, contain certain covenants that restrict our ability to incur secured debt and to engage in certain sale and leaseback transactions.  The indenture provides holders of debt securities with remedies if we fail to perform specific obligations.  In the event of a “Change of Control Triggering Event” (as defined in the indenture), each holder of the Notes has the right to require the Company to purchase all or a portion of its Notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest.  The Notes are redeemable with prior notice at a price equal to par plus accrued interest and a make-whole amount.

On December 15, 2014, we issued $100.0 in 4.60% Series A unsecured notes (“Series A Notes”) pursuant to the Private Shelf Agreement, dated as of December 6, 2012 (as amended, the “Shelf Agreement”), among the Company, Prudential Investment Management, Inc. (“Prudential”) and each Prudential Affiliate (as defined therein) that became a purchaser thereunder. The Series A Notes are unsecured, mature on December 15, 2024, and bear interest at 4.60% payable semi-annually in arrears. The Company may at any time upon providing notice, prepay all or part of the Series A Notes at 100% of the principal amount prepaid plus a Make-Whole Amount (as defined therein). Deferred financing costs of $0.4 related to the Series A Notes are being amortized to interest expense over the term of the Series A Notes.

On December 15, 2014, December 19, 2014, March 24, 2016, and December 8, 2017, the Company and certain of the Company’s domestic subsidiaries entered into amendments (collectively, the “Prudential Amendments”) to the Shelf Agreement. The latest amendment conformed certain terms of the Shelf Agreement with those contained in the Credit Agreement. The Shelf Agreement is a $200 uncommitted facility, of which $100.0 has been drawn. The issuance of notes under the Shelf Agreement is subject to successful placement by Prudential.

On March 8, 2018, the Company entered into the L/G Facility Agreement. The L/G Facility Agreement replaces the Company’s former Syndicated L/G Facility Agreement dated as of June 3, 2013 and permits the Company and certain of its subsidiaries to request that one or more of the lenders issue up to an aggregate of €150.0 in unsecured letters of credit, bank guarantees or other surety bonds (collectively, the “Guarantees”).

The Guarantees carry an annual fee that varies based on the Company’s leverage ratio. The L/G Facility Agreement also provides for a leverage-based commitment fee assessed on the undrawn portion of the facility. The L/G Facility Agreement matures in December 2022 but can be extended or terminated earlier under certain conditions. New deferred financing costs related to the L/G Facility Agreement were $1.0, which along with existing costs of $0.6, are being amortized to interest expense over the term of the agreement.

In the normal course of business, the Process Equipment Group provides to certain customers bank guarantees and other credit arrangements in support of performance, warranty, advance payment, and other contractual obligations.  This form of trade finance is customary in the industry and, as a result, we maintain adequate capacity to provide the guarantees.  As of September 30, 2018, we had credit arrangements totaling $248.4, under which $196.5 was utilized for this purpose.  These arrangements included the facilities under the L/G Facility Agreement and other ancillary credit facilities.
 
v3.10.0.1
Retirement Benefits
12 Months Ended
Sep. 30, 2018
Defined Benefit Plan [Abstract]  
Retirement Benefits
Retirement Benefits
 
Defined Benefit Retirement Plans — Approximately 38% of our employees participate in one of four defined benefit retirement programs, including the master defined benefit retirement plan in the U.S., the defined benefit plans of our German and Swiss subsidiaries, and the supplemental executive defined benefit retirement plan.  We fund the pension trusts in compliance with ERISA or local funding requirements and as necessary to provide for current service and for any unfunded projected future benefit obligations over a reasonable period.  The benefits for these plans are based primarily on years of service and the employee’s level of compensation during specific periods of employment.  All pension plans have a September 30 measurement date.
 
Effect on Operations — The components of net pension costs under defined benefit retirement plans were:
 
 
U.S. Pension Benefits
Year Ended September 30,
 
Non-U.S. Pension Benefits
Year Ended September 30,
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Service cost
$
2.7

 
$
3.6

 
$
3.9

 
$
1.4

 
$
1.3

 
$
1.8

Interest cost
8.7

 
8.8

 
9.5

 
1.1

 
0.7

 
1.8

Expected return on plan assets
(14.0
)
 
(13.7
)
 
(9.7
)
 
(0.6
)
 
(0.5
)
 
(1.0
)
Amortization of unrecognized prior service cost, net
0.2

 
0.4

 
0.6

 
0.1

 
0.1

 
0.1

Amortization of actuarial loss
3.2

 
3.6

 
3.8

 
0.7

 
1.1

 
0.3

Settlement expense

 
0.1

 

 

 
0.6

 
0.5

Net pension costs
$
0.8

 
$
2.8

 
$
8.1

 
$
2.7

 
$
3.3

 
$
3.5



We use a full yield curve approach in the estimation of the service and interest cost components of our defined benefit retirement plans. Under this approach, we applied discounting using individual spot rates from a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date. These spot rates align to each of the projected benefit obligations and service cost cash flows. The service cost component relates to the active participants in the plan, so the relevant cash flows on which to apply the yield curve are considerably longer in duration on average than the total projected benefit obligation cash flows, which also include benefit payments to retirees. Interest cost is computed by multiplying each spot rate by the corresponding discounted projected benefit obligation cash flows. The full yield curve approach reduces any actuarial gains and losses based upon interest rate expectations (e.g. built-in gains in interest cost in an upward sloping yield curve scenario), or gains and losses merely resulting from the timing and magnitude of cash outflows associated with our benefit obligations. We use the full yield curve approach to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest rate costs.
During 2017, we began implementing a plan to transition our U.S. employees not covered by a collective bargaining agreement and our employees covered by collective bargaining agreements at two of our U.S. facilities from a defined benefit-based model to a defined contribution structure over a three-year sunset period. This change caused remeasurements for the U.S. defined benefit pension plan for the affected populations. The remeasurements did not cause a material change, as the assumptions did not materially differ from the assumptions at September 30, 2016.

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

 
U.S. Pension Benefits
September 30,
 
Non-U.S. Pension Benefits
September 30,
 
2018
 
2017
 
2018
 
2017
Change in benefit obligation:
 

 
 

 
 

 
 

Projected benefit obligation at beginning of year
$
281.8

 
$
294.2

 
$
133.4

 
$
140.9

Service cost
2.7

 
3.6

 
1.4

 
1.3

Interest cost
8.7

 
8.8

 
1.1

 
0.7

Actuarial (gain) loss
(14.7
)
 
(6.9
)
 
0.4

 
(9.5
)
Benefits paid
(11.5
)
 
(11.0
)
 
(5.2
)
 
(5.7
)
Gain due to settlement

 
(6.9
)
 
(3.4
)
 
(1.2
)
Employee contributions

 

 
0.9

 
0.8

Effect of exchange rates on projected benefit obligation

 

 
(2.3
)
 
6.1

Projected benefit obligation at end of year
267.0

 
281.8

 
126.3

 
133.4

 
 
 
 
 
 
 
 
Change in plan assets:
 

 
 

 
 

 
 

Fair value of plan assets at beginning of year
262.4

 
173.7

 
31.4

 
29.7

Actual return on plan assets
0.6

 
17.9

 
(0.1
)
 
0.3

Employee and employer contributions
1.8

 
81.8

 
9.0

 
8.5

Benefits paid
(11.5
)
 
(11.0
)
 
(5.2
)
 
(5.7
)
Gain due to settlement

 

 
(3.0
)
 
(1.6
)
Effect of exchange rates on plan assets

 

 
(0.2
)
 
0.2

Fair value of plan assets at end of year
253.3

 
262.4

 
31.9

 
31.4

 
 
 
 
 
 
 
 
Funded status:
 

 
 

 
 

 
 

Plan assets less than benefit obligations
$
(13.7
)
 
$
(19.4
)
 
$
(94.4
)
 
$
(102.0
)
 
 
 
 
 
 
 
 
Amounts recorded in the consolidated balance sheets:
 

 
 

 
 

 
 

Prepaid pension costs, non-current
$
12.0

 
$
8.2

 
$
2.2

 
$
0.4

Accrued pension costs, current portion
(2.0
)
 
(1.8
)
 
(6.6
)
 
(6.8
)
Accrued pension costs, long-term portion
(23.7
)
 
(25.8
)
 
(90.0
)
 
(95.6
)
Plan assets greater (less) than benefit obligations
$
(13.7
)
 
$
(19.4
)
 
$
(94.4
)
 
$
(102.0
)

 
Net actuarial losses ($67.2) and prior service costs ($0.8), less an aggregate tax effect ($24.0), are included as components of accumulated other comprehensive loss at September 30, 2018.  Net actuarial losses ($71.9) and prior service costs ($1.0), less an aggregate tax effect ($25.0), are included as components of accumulated other comprehensive loss at September 30, 2017.  The amount that will be amortized from accumulated other comprehensive loss into net pension costs in 2019 is expected to be $2.0.
 
Accumulated Benefit Obligation — The accumulated benefit obligation for all defined benefit retirement plans was $387.0 and $407.7 at September 30, 2018 and 2017.  Selected information for plans with accumulated benefit obligations in excess of plan assets was:
 
 
U.S. Pension Benefits
September 30,
 
Non-U.S. Pension Benefits
September 30,
 
2018
 
2017
 
2018
 
2017
Projected benefit obligation
$
25.7

 
$
27.7

 
$
96.6

 
$
102.0

Accumulated benefit obligation
25.7

 
27.6

 
96.6

 
102.0

Fair value of plan assets

 

 

 



The weighted-average assumptions used in accounting for defined benefit retirement plans were:
 
 
U.S. Pension Benefits
Year Ended September 30,
 
Non-U.S. Pension Benefits
Year Ended September 30,
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Discount rate for obligation, end of year
4.2
%
 
3.7
%
 
3.6
%
 
1.2
%
 
1.1
%
 
1.0
%
Discount rate for expense, during the year
3.4
%
 
3.5
%
 
4.4
%
 
1.5
%
 
0.5
%
 
1.7
%
Expected rate of return on plan assets
5.6
%
 
5.6
%
 
5.5
%
 
2.0
%
 
2.0
%
 
2.0
%
Rate of compensation increase
3.0
%
 
3.0
%
 
3.0
%
 
2.0
%
 
2.0
%
 
2.0
%

 
The discount rates are evaluated annually based on current market conditions.  In setting these rates, we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, then make adjustments to the indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected outflow of pension obligations. The overall expected long-term rate of return is based on historical and expected future returns, which are inflation-adjusted and weighted for the expected return for each component of the investment portfolio.  The rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments in recent years.
 
U.S. Pension Plan Assets — Long-term strategic investment objectives utilize a diversified mix of equity and fixed income securities to preserve the funded status of the trusts and balance risk and return.  The primary investment strategy is a dynamic target allocation method that periodically rebalances among various investment categories depending on the current funded position.  This program is designed to actively move from return-seeking investments (such as equities) toward liability-hedging investments (such as long-duration fixed income) as funding levels improve.  The target investment in return-seeking assets may vary from 60% to 20% of total plan assets based on the plan’s funding level. Plan assets are invested by the plans’ fiduciaries, which direct investments according to specific policies.  Those policies subject investments to the following restrictions in our domestic plan: short-term securities must be rated A2/P2 or higher, liability-hedging fixed income securities must have an average quality credit rating of investment grade and investments in equities in any one company may not exceed 10% of the equity portfolio.

Non-U.S. Pension Plan Assets — Long-term strategic investment objectives utilize a diversified mix of suitable assets of appropriate liquidity to generate income and capital growth that, together with contributions from participants and Hillenbrand, we believe will meet the cost of the current and future benefits that the plan provides.  Long-term strategic investment objectives also seek to limit the risk of the assets failing to meet the liabilities over the long term.
 
None of Hillenbrand’s common stock was directly owned by the pension plan trusts at September 30, 2018.
 
The tables below provide the fair value of our pension plan assets by asset category at September 30, 2018 and 2017.  The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2, and 3).  See Note 13 for definitions.
 
Fair values are determined as follows:
 
Cash equivalents are stated at the carrying amount, which approximates fair value, or at the fund’s net asset value.
Equity securities are stated at the last reported sales price on the day of valuation.
Government index funds are stated at the closing price reported in the active market in which the fund is traded.
Corporate bond funds and equity mutual funds are stated at the closing price in the active markets in which the underlying securities of the funds are traded.
Real estate is stated based on a discounted cash flow approach, which includes future rental receipts, expenses, and residual values as the highest and best use of the real estate from a market participant view as rental property.

U.S. Pension Plans

The plan assets of our U.S. pension plans consist of certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient. Accordingly, these assets are not required to be classified and reported under the fair value hierarchy. At September 30, 2018 and 2017, the fair values of these investments were $253.3 and $262.4.

Non-U.S. Pension Plans
 
Fair Value at September 30, 2018 Using Inputs Considered as:
 
Total
 
Level 1
 
Level 2
 
Level 3
Non-U.S. Pension Plans
 

 
 

 
 

 
 

Cash equivalents
$
2.4

 
$
2.4

 
$

 
$

Equity securities
7.3

 
7.3

 

 

Other types of investments:
 
 
 
 
 
 
 
Government index funds
5.6

 
5.6

 

 

Corporate bond funds
12.1

 
12.1

 

 

Real estate and real estate funds
2.4

 

 

 
2.4

Other
2.1

 

 
2.1

 

Total Non-U.S. pension plan assets
$
31.9

 
$
27.4

 
$
2.1

 
$
2.4

 
 
Fair Value at September 30, 2017 Using Inputs Considered as:
 
Total
 
Level 1
 
Level 2
 
Level 3
Non-U.S. Pension Plans
 

 
 

 
 

 
 

Cash equivalents
$
5.2

 
$
5.2

 
$

 
$

Equity securities
6.8

 
6.8

 

 

Other types of investments:
0

 
0

 
0

 
0

Government index funds
5.7

 
5.7

 

 

Corporate bond funds
9.8

 
9.8

 

 

Real estate and real estate funds
2.0

 

 

 
2.0

Other
1.9

 

 
1.9

 

Total Non-U.S. pension plan assets
$
31.4

 
$
27.5

 
$
1.9

 
$
2.0


 
Cash Flows — During 2018, 2017, and 2016 we contributed cash of $10.0, $89.6, and $14.6, to our defined benefit pension plans.  We expect to make estimated contributions of $10.0 in 2019 to our pension plans.  Due to the funded status of our U.S. defined benefit pension plan, we do not expect to make contributions to this plan in 2019. We will evaluate business conditions and capital and equity market volatility to determine whether we will make any additional discretionary contributions.

Estimated Future Benefit Payments — The following represents estimated future benefit payments, including expected future service, which are expected to be paid from plan assets or Company contributions as necessary:
 
 
U.S. Pension Plans
Projected Pension
Benefits Payout
 
Non-U.S. Pension Plans
Projected Pension
Benefits Payout
2019
$
14.0

 
$
7.7

2020
14.3

 
7.9

2021
15.0

 
7.2

2022
15.5

 
7.3

2023
16.0

 
7.3

2023 - 2027
83.8

 
33.6


 
Defined Contribution Plans — We sponsor a number of defined contribution plans.  Depending on the plan, we may make contributions up to 4% of an employee’s compensation and matching contributions up to 6% of compensation.  Company contributions generally vest over a period of zero to five years.  Expenses related to our defined contribution plans were $11.3, $11.4, and $9.9 for 2018, 2017, and 2016. See comments above regarding our retirement strategy change for certain U.S. employees in 2017.
 
Postretirement Healthcare Plan — The Company offers a domestic postretirement healthcare plan that provides healthcare benefits to eligible qualified retirees and their spouses.  The plan includes retiree cost-sharing provisions and generally extends retiree coverage for medical, prescription, and dental benefits beyond the COBRA continuation period to the date of Medicare eligibility.  We use a measurement date of September 30.  The net postretirement healthcare benefit cost for 2018 was $0.1, and for 2017 and 2016 cost was $0.3 for both years.
 
 
September 30,
 
2018
 
2017
Benefit obligation at beginning of year
$
9.0

 
$
10.3

Interest cost
0.2

 
0.2

Service cost
0.3

 
0.4

Actuarial (gain) loss
(0.9
)
 
(0.9
)
Net benefits paid
(1.0
)
 
(1.0
)
Benefit obligation at end of year
$
7.6

 
$
9.0

 
 
 
 
Amounts recorded in the balance sheets:
 

 
 

Accrued postretirement benefits, current portion
$
0.8

 
$
0.8

Accrued postretirement benefits, long-term portion
6.8

 
8.2

Net amount recognized
$
7.6

 
$
9.0


 
The weighted-average assumptions used in revaluing our obligation under the postretirement healthcare plan were:
 
 
Year Ended September 30,
 
2018
 
2017
 
2016
Discount rate for obligation
4.0
%
 
3.3
%
 
3.1
%
Healthcare cost rate assumed for next year
7.1
%
 
7.6
%
 
7.3
%
Ultimate trend rate
4.5
%
 
4.5
%
 
4.5
%

 
Net actuarial gains of $4.0 and $3.4 and prior service costs of $0.7 and $0.8, less tax of $1.7 and $1.6, were included as a component of accumulated other comprehensive loss at September 30, 2018 and 2017.  The estimated amount that will be amortized from accumulated other comprehensive loss as a reduction to postretirement healthcare costs in 2019 is $0.5.  A one percentage-point increase or decrease in the assumed healthcare cost trend rates as of September 30, 2018, would cause an increase or decrease in service and interest costs of $0.1, along with an increase or decrease in the benefit obligation of $0.5.
 
We fund the postretirement healthcare plan as benefits are paid.  Current plan benefits are expected to require net Company contributions for retirees of $0.8 per year for the foreseeable future.
v3.10.0.1
Other Long-Term Liabilities
12 Months Ended
Sep. 30, 2018
Other Liabilities Disclosure [Abstract]  
Other Long-Term Liabilities
Other Long-Term Liabilities
 
 
September 30,
 
2018
 
2017
Transition Tax liability
$
24.6

 
$

Rabbi trust liability
4.3

 
4.3

Self-insurance loss reserves
11.2

 
14.3

Other
13.1

 
14.9

 
53.2

 
33.5

Less current portion
(5.9
)
 
(6.8
)
Total long-term portion
$
47.3

 
$
26.7


 

v3.10.0.1
Income Taxes
12 Months Ended
Sep. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
 
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code that impact our fiscal year ended September 30, 2018 including, but not limited to (a) reducing the U.S. federal corporate tax rate, (b) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”), and (c) accelerating expensing of certain capital expenditures. The Tax Act reduced the federal corporate tax rate from 35% to 21%. The Internal Revenue Code stipulates that our fiscal year ending 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 the effective date of the Tax Act. The statutory tax rate of 21% will apply to future years.

 
Year Ended September 30,
 
2018
 
2017
 
2016
Domestic
$
33.7

 
$
108.2

 
$
99.3

Foreign
112.8

 
80.1

 
64.8

Total earnings before income taxes
$
146.5

 
$
188.3

 
$
164.1

 
 
 
 
 
 
Income tax expense:
 

 
 

 
 

Current provision:
 

 
 

 
 

Federal
$
38.2

 
$
0.5

 
$
28.9

State
6.7

 
(0.4
)
 
5.1

Foreign
16.7

 
22.7

 
18.0

Total current provision
61.6

 
22.8

 
52.0

 
 
 
 
 
 
Deferred provision (benefit):
 

 
 

 
 

Federal
(7.5
)
 
32.0

 
3.2

State
0.5

 
5.0

 
(0.7
)
Foreign
10.7

 
0.1

 
(7.2
)
Total deferred provision (benefit)
3.7

 
37.1

 
(4.7
)
Income tax expense
$
65.3

 
$
59.9

 
$
47.3


 
 
Year Ended September 30,
 
2018
 
2017
 
2016
Federal statutory rates
24.5
 %
 
35.0
 %
 
35.0
 %
Adjustments resulting from the tax effect of:
 

 
 

 
 

State income taxes, net of federal benefit
2.4

 
1.6

 
2.0

Foreign income tax rate differential
(0.6
)
 
(5.8
)
 
(6.7
)
Domestic manufacturer’s deduction
(1.2
)
 
(0.3
)
 
(1.9
)
Share-based compensation
(1.6
)
 
(1.1
)
 
(1.5
)
Foreign distribution taxes
(1.7
)
 
2.7

 

Valuation allowance
(0.7
)
 
(1.3
)
 
1.7

Goodwill impairment charge
11.2

 

 

Transition tax
17.8

 

 

Deferred tax impact of rate change
(9.4
)
 

 

Unrecognized tax benefits
2.1

 

 

Other, net
1.8

 
1.0

 
0.2

Effective income tax rate
44.6
 %
 
31.8
 %
 
28.8
 %

 
September 30,
 
2018
 
2017
Deferred tax assets:
 

 
 

Employee benefit accruals
$
29.0

 
$
46.0

Loss and tax credit carryforwards
37.3

 
43.7

Rebates and other discounts
4.4

 
5.8

Self-insurance reserves
2.5

 
4.6

Inventory, net
2.0

 
3.1

Other, net
8.5

 
12.6

Total deferred tax assets before valuation allowance
83.7

 
115.8

Less valuation allowance
(1.8
)
 
(3.1
)
Total deferred tax assets, net
81.9

 
112.7

Deferred tax liabilities:
 

 
 

Depreciation
(8.3
)
 
(11.6
)
Amortization
(105.3
)
 
(134.9
)
Long-term contracts and customer prepayments
(38.9
)
 
(28.9
)
Unremitted earnings of foreign operations
(0.5
)
 
(4.2
)
Other, net
(1.8
)
 
(5.1
)
Total deferred tax liabilities
(154.8
)
 
(184.7
)
Deferred tax liabilities, net
$
(72.9
)
 
$
(72.0
)
 
 
 
 
Amounts recorded in the balance sheets:
 

 
 

Deferred tax assets, non-current
3.5

 
3.7

Deferred tax liabilities, non-current
(76.4
)
 
(75.7
)
Total
$
(72.9
)
 
$
(72.0
)

 
We recorded a tax benefit of $13.7 at September 30, 2018, for the remeasurement of the deferred tax items to reflect the impact of the U.S. corporate tax rate reduction to 21%. At September 30, 2018, we had $2.3 of deferred tax assets related to U.S. federal and state net operating losses and tax credit carryforwards, which will begin to expire in 2019, and $35.0 of deferred tax assets related to foreign net operating loss carryforwards, which will begin to expire in 2019. Deferred tax assets as of September 30, 2018 and 2017, were reduced by a valuation allowance of $1.8 and $3.1 relating to foreign net operating loss carryforwards and foreign tax credit carryforwards.  At September 30, 2018 and 2017, we had $19.5 and $18.3 of current income tax payable classified as other current liabilities on our balance sheets. The September 30, 2018 current liability included $2.0 of the first annual installment of the Transition Tax. As of September 30, 2018, we also had $22.6 of Transition Tax that we expect to be payable over the next 7 years classified as other noncurrent liabilities on our balance sheets.