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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019
OR
☐ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number. 001-33794
HILLENBRAND, INC.
(Exact name of registrant as specified in its charter)
|
| | | |
Indiana | | 26-1342272 |
(State of incorporation) | | (I.R.S. Employer Identification No.) |
| | | |
One Batesville Boulevard | | |
Batesville | IN | | 47006 |
(Address of principal executive offices) | | (Zip Code) |
(812) 934-7500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, without par value | | HI | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | |
Large accelerated filer | | ☒ | | Accelerated filer | | ☐ | Emerging growth company | ☐ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had 62,667,094 shares of common stock, no par value per share, outstanding as of July 25, 2019.
HILLENBRAND, INC.
INDEX TO FORM 10-Q
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Hillenbrand, Inc.
Consolidated Statements of Income (Unaudited)
(in millions, except per share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net revenue | $ | 446.6 |
| | $ | 446.0 |
| | $ | 1,321.5 |
| | $ | 1,295.4 |
|
Cost of goods sold | 298.2 |
| | 282.5 |
| | 865.2 |
| | 817.1 |
|
Gross profit | 148.4 |
| | 163.5 |
| | 456.3 |
| | 478.3 |
|
Operating expenses | 90.8 |
| | 98.3 |
| | 275.2 |
| | 285.7 |
|
Amortization expense | 8.6 |
| | 7.6 |
| | 25.0 |
| | 22.7 |
|
Impairment charge | — |
| | — |
| | — |
| | 63.4 |
|
Interest expense | 5.2 |
| | 5.5 |
| | 16.1 |
| | 17.8 |
|
Other (expense) income, net | (0.5 | ) | | (0.7 | ) | | 0.1 |
| | (2.2 | ) |
Income before income taxes | 43.3 |
| | 51.4 |
| | 140.1 |
| | 86.5 |
|
Income tax expense | 11.6 |
| | 15.2 |
| | 39.9 |
| | 52.5 |
|
Consolidated net income | 31.7 |
| | 36.2 |
| | 100.2 |
| | 34.0 |
|
Less: Net income attributable to noncontrolling interests | 1.3 |
| | 0.3 |
| | 3.5 |
| | 1.9 |
|
Net income (1) | $ | 30.4 |
| | $ | 35.9 |
| | $ | 96.7 |
| | $ | 32.1 |
|
| | | | | | | |
Net income (1) — per share of common stock: | | | | | | | |
Basic earnings per share | $ | 0.48 |
| | $ | 0.57 |
| | $ | 1.54 |
| | $ | 0.51 |
|
Diluted earnings per share | $ | 0.48 |
| | $ | 0.56 |
| | $ | 1.52 |
| | $ | 0.50 |
|
Weighted average shares outstanding (basic) | 63.0 |
| | 62.8 |
| | 62.9 |
| | 63.2 |
|
Weighted average shares outstanding (diluted) | 63.4 |
| | 63.5 |
| | 63.4 |
| | 63.9 |
|
(1)
See Condensed Notes to Consolidated Financial Statements
Hillenbrand, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
(in millions)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Consolidated net income | $ | 31.7 |
| | $ | 36.2 |
| | $ | 100.2 |
| | $ | 34.0 |
|
Changes in other comprehensive income (loss), net of tax | | | | |
| |
|
Currency translation adjustment | 6.1 |
| | (26.1 | ) | | (3.4 | ) | | (5.1 | ) |
Pension and postretirement (net of quarter-to-date tax of $0.5 and $0.2 and year-to-date tax of $0.7 and $0.9) | 1.5 |
| | 0.7 |
| | 2.0 |
| | 2.1 |
|
Change in net unrealized gain (loss) on derivative instruments (net of quarter-to-date tax of $1.2 and $0.0 and year-to-date tax of $3.8 and $0.1) | (4.3 | ) | | (0.1 | ) | | (12.7 | ) | | 0.2 |
|
Total changes in other comprehensive income (loss), net of tax | 3.3 |
| | (25.5 | ) | | (14.1 | ) | | (2.8 | ) |
Consolidated comprehensive income | 35.0 |
| | 10.7 |
| | 86.1 |
| | 31.2 |
|
Less: Comprehensive income attributable to noncontrolling interests | 1.3 |
| | — |
| | 3.7 |
| | 1.6 |
|
Comprehensive income (2) | $ | 33.7 |
| | $ | 10.7 |
| | $ | 82.4 |
| | $ | 29.6 |
|
(2)
See Condensed Notes to Consolidated Financial Statements
Hillenbrand, Inc.
Consolidated Balance Sheets (Unaudited)
(in millions)
|
| | | | | | | |
| June 30, 2019 | | September 30, 2018 |
ASSETS | |
| | |
|
Current Assets | |
| | |
|
Cash and cash equivalents | $ | 64.4 |
| | $ | 56.0 |
|
Trade receivables, net | 198.8 |
| | 218.5 |
|
Receivables from long-term manufacturing contracts | 158.6 |
| | 120.3 |
|
Inventories | 186.7 |
| | 172.5 |
|
Prepaid expenses | 29.0 |
| | 25.2 |
|
Other current assets | 20.7 |
| | 18.1 |
|
Total current assets | 658.2 |
| | 610.6 |
|
Property, plant, and equipment, net | 136.6 |
| | 142.0 |
|
Intangible assets, net | 471.1 |
| | 487.3 |
|
Goodwill | 586.8 |
| | 581.9 |
|
Other assets | 37.9 |
| | 42.8 |
|
Total Assets | $ | 1,890.6 |
| | $ | 1,864.6 |
|
| | | |
LIABILITIES | |
| | |
|
Current Liabilities | |
| | |
|
Trade accounts payable | $ | 224.5 |
| | $ | 196.8 |
|
Liabilities from long-term manufacturing contracts and advances | 109.2 |
| | 125.9 |
|
Accrued compensation | 68.9 |
| | 71.9 |
|
Other current liabilities | 123.7 |
| | 137.1 |
|
Total current liabilities | 526.3 |
| | 531.7 |
|
Long-term debt | 323.2 |
| | 344.6 |
|
Accrued pension and postretirement healthcare | 114.2 |
| | 120.5 |
|
Deferred income taxes | 70.8 |
| | 76.4 |
|
Other long-term liabilities | 60.3 |
| | 47.3 |
|
Total Liabilities | 1,094.8 |
| | 1,120.5 |
|
| | | |
Commitments and contingencies (Note 14) |
|
| |
|
|
| | | |
SHAREHOLDERS’ EQUITY | |
| | |
|
Common stock, no par value (63.9 and 63.9 shares issued, 62.6 and 62.3 shares outstanding) | — |
| | — |
|
Additional paid-in capital | 345.3 |
| | 351.4 |
|
Retained earnings | 588.1 |
| | 531.0 |
|
Treasury stock (1.3 and 1.6 shares) | (53.7 | ) | | (67.1 | ) |
Accumulated other comprehensive loss | (98.5 | ) | | (84.2 | ) |
Hillenbrand Shareholders’ Equity | 781.2 |
| | 731.1 |
|
Noncontrolling interests | 14.6 |
| | 13.0 |
|
Total Shareholders’ Equity | 795.8 |
| | 744.1 |
|
| | | |
Total Liabilities and Equity | $ | 1,890.6 |
| | $ | 1,864.6 |
|
See Condensed Notes to Consolidated Financial Statements
Hillenbrand, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in millions)
|
| | | | | | | |
| Nine Months Ended June 30, |
| 2019 | | 2018 |
Operating Activities | |
| | |
|
Consolidated net income | $ | 100.2 |
| | $ | 34.0 |
|
Adjustments to reconcile net income to cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 44.3 |
| | 42.0 |
|
Impairment charge | — |
| | 63.4 |
|
Deferred income taxes | 0.2 |
| | (4.8 | ) |
Share-based compensation | 8.7 |
| | 8.8 |
|
Trade accounts receivable and receivables from long-term manufacturing contracts | (15.5 | ) | | (43.4 | ) |
Inventories | (15.0 | ) | | (32.4 | ) |
Prepaid expenses and other current assets | (6.0 | ) | | (2.5 | ) |
Trade accounts payable | 28.3 |
| | 17.1 |
|
Liabilities from long-term manufacturing contracts and advances, | | | |
accrued compensation, and other current liabilities | (29.8 | ) | | 46.4 |
|
Income taxes payable | (5.3 | ) | | 28.9 |
|
Defined benefit plan and postretirement funding | (6.8 | ) | | (8.2 | ) |
Defined benefit plan and postretirement expense | 2.6 |
| | 3.4 |
|
Other, net | 3.7 |
| | 3.6 |
|
Net cash provided by operating activities | 109.6 |
| | 156.3 |
|
| | | |
Investing Activities | |
| | |
|
Capital expenditures | (12.6 | ) | | (16.3 | ) |
Acquisition of business, net of cash acquired | (25.9 | ) | | — |
|
Other, net | 0.1 |
| | 0.4 |
|
Net cash used in investing activities | (38.4 | ) | | (15.9 | ) |
| | | |
Financing Activities | |
| | |
|
Repayments on term loan | — |
| | (148.5 | ) |
Proceeds from revolving credit facilities, net of financing costs | 449.7 |
| | 946.5 |
|
Repayments on revolving credit facilities | (470.1 | ) | | (837.2 | ) |
Payments of dividends on common stock | (39.4 | ) | | (39.1 | ) |
Repurchases of common stock | — |
| | (60.6 | ) |
Proceeds from stock option exercises and other | 2.4 |
| | 10.3 |
|
Payments for employee taxes on net settlement equity awards | (4.2 | ) | | (4.1 | ) |
Other, net | (0.9 | ) | | (1.8 | ) |
Net cash used in financing activities | (62.5 | ) | | (134.5 | ) |
| | | |
Effect of exchange rates on cash and cash equivalents | (0.2 | ) | | (1.0 | ) |
| | | |
Net cash flows | 8.5 |
| | 4.9 |
|
| | | |
Cash, cash equivalents, and restricted cash: | |
| | |
|
At beginning of period | 56.5 |
| | 66.7 |
|
At end of period | $ | 65.0 |
| | $ | 71.6 |
|
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same amounts shown in the Consolidated Statements of Cash Flows:
|
| | | | | | | |
| June 30, 2019 | | June 30, 2018 |
Cash and cash equivalents | 64.4 |
| | 71.1 |
|
Short-term restricted cash included in other current assets | 0.6 |
| | 0.5 |
|
Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows | $ | 65.0 |
| | $ | 71.6 |
|
See Condensed Notes to Consolidated Financial Statements
Hillenbrand, Inc.
Consolidated Statements of Shareholders' Equity (Unaudited)
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
| Shareholders of Hillenbrand, Inc. |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total |
| Shares | | | | Shares | | Amount | | | |
Balance at March 31, 2019 | 63.9 |
| | $ | 343.1 |
| | $ | 571.1 |
| | 1.3 |
| | $ | (55.6 | ) | | $ | (101.8 | ) | | $ | 13.3 |
| | $ | 770.1 |
|
Total other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 3.3 |
| | — |
| | 3.3 |
|
Net income | — |
| | — |
| | 30.4 |
| | — |
| | — |
| | — |
| | 1.3 |
| | 31.7 |
|
Issuance/retirement of stock for stock awards/options | — |
| | (0.9 | ) | | — |
| | — |
| | 1.9 |
| | — |
| | — |
| | 1.0 |
|
Share-based compensation | — |
| | 2.9 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2.9 |
|
Dividends ($0.2100 per share) | — |
| | 0.2 |
| | (13.4 | ) | | — |
| | — |
| | — |
| | — |
| | (13.2 | ) |
Balance at June 30, 2019 | 63.9 |
| | $ | 345.3 |
| | $ | 588.1 |
| | 1.3 |
| | $ | (53.7 | ) | | $ | (98.5 | ) | | $ | 14.6 |
| | $ | 795.8 |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2019 |
| Shareholders of Hillenbrand, Inc. |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total |
| Shares | | | | Shares | | Amount | | | |
Balance at September 30, 2018 | 63.9 |
| | $ | 351.4 |
| | $ | 531.0 |
| | 1.6 |
| | $ | (67.1 | ) | | $ | (84.2 | ) | | $ | 13.0 |
| | $ | 744.1 |
|
Total other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (14.3 | ) | | 0.2 |
| | (14.1 | ) |
Net income | — |
| | — |
| | 96.7 |
| | — |
| | — |
| | — |
| | 3.5 |
| | 100.2 |
|
Issuance/retirement of stock for stock awards/options | — |
| | (15.2 | ) | | — |
| | (0.3 | ) | | 13.4 |
| | — |
| | — |
| | (1.8 | ) |
Share-based compensation | — |
| | 8.7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8.7 |
|
Dividends ($0.6300 per share) | — |
| | 0.4 |
| | (39.8 | ) | | — |
| | — |
| | — |
| | (2.1 | ) | | (41.5 | ) |
Other | — |
| | — |
| | 0.2 |
| | — |
| | — |
| | — |
| | — |
| | 0.2 |
|
Balance at June 30, 2019 | 63.9 |
| | $ | 345.3 |
| | $ | 588.1 |
| | 1.3 |
| | $ | (53.7 | ) | | $ | (98.5 | ) | | $ | 14.6 |
| | $ | 795.8 |
|
See Condensed Notes to Consolidated Financial Statements
Hillenbrand, Inc.
Consolidated Statements of Shareholders' Equity (Unaudited)
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
| Shareholders of Hillenbrand, Inc. |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total |
| Shares | | | | Shares | | Amount | | | |
Balance at March 31, 2018 | 63.9 |
| | $ | 346.4 |
| | $ | 476.9 |
| | 1.2 |
| | $ | (48.0 | ) | | $ | (58.5 | ) | | $ | 15.2 |
| | $ | 732.0 |
|
Total other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (25.2 | ) | | (0.3 | ) | | (25.5 | ) |
Net income | — |
| | — |
| | 35.9 |
| | — |
| | — |
| | — |
| | 0.3 |
| | 36.2 |
|
Issuance/retirement of stock for stock awards/options | — |
| | (0.5 | ) | | — |
| | (0.1 | ) | | 1.5 |
| | — |
| | — |
| | 1.0 |
|
Share-based compensation | — |
| | 2.6 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2.6 |
|
Purchases of common stock | — |
| | — |
| | — |
| | 0.5 |
| | (21.7 | ) | | — |
| | — |
| | (21.7 | ) |
Dividends ($0.2075 per share) | — |
| | — |
| | (13.1 | ) | | — |
| | — |
| | — |
| | — |
| | (13.1 | ) |
Balance at June 30, 2018 | 63.9 |
| | $ | 348.5 |
| | $ | 499.7 |
| | 1.6 |
| | $ | (68.2 | ) | | $ | (83.7 | ) | | $ | 15.2 |
| | $ | 711.5 |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2018 |
| Shareholders of Hillenbrand, Inc. |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total |
| Shares | | | | Shares | | Amount | | | |
Balance at September 30, 2017 | 63.8 |
| | $ | 349.9 |
| | $ | 507.1 |
| | 0.7 |
| | $ | (24.4 | ) | | $ | (81.2 | ) | | $ | 14.5 |
| | $ | 765.9 |
|
Total other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (2.5 | ) | | (0.3 | ) | | (2.8 | ) |
Net income | — |
| | — |
| | 32.1 |
| | — |
| | — |
| | — |
| | 1.9 |
| | 34.0 |
|
Issuance/retirement of stock for stock awards/options | 0.1 |
| | (10.6 | ) | | — |
| | (0.5 | ) | | 16.8 |
| | — |
| | — |
| | 6.2 |
|
Share-based compensation | — |
| | 8.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8.8 |
|
Purchases of common stock | — |
| | — |
| | — |
| | 1.4 |
| | (60.6 | ) | | — |
| | — |
| | (60.6 | ) |
Dividends ($0.6225 per share) | — |
| | 0.4 |
| | (39.5 | ) | | — |
| | — |
| | — |
| | (0.9 | ) | | (40.0 | ) |
Balance at June 30, 2018 | 63.9 |
| | $ | 348.5 |
| | $ | 499.7 |
| | 1.6 |
| | $ | (68.2 | ) | | $ | (83.7 | ) | | $ | 15.2 |
| | $ | 711.5 |
|
See Condensed Notes to Consolidated Financial Statements
Hillenbrand, Inc.
Condensed Notes to Consolidated Financial Statements (Unaudited)
(in millions, except share and per share data)
| |
1. | Background and Basis of Presentation |
Hillenbrand, Inc. (“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.
The accompanying unaudited consolidated financial statements include the accounts of Hillenbrand and its subsidiaries. They also include two subsidiaries where the Company’s ownership percentage is less than 100%. The Company’s fiscal year ends on September 30. Unless otherwise stated, references to years relate to fiscal years.
These unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements and therefore do not include all information required in accordance with accounting principles generally accepted in the United States (“GAAP”). The unaudited consolidated financial statements have been prepared on the same basis as, and should be read in conjunction with, the audited consolidated financial statements and notes thereto included in our latest Annual Report on Form 10-K for the year ended September 30, 2018, as filed with the SEC. The September 30, 2018 Consolidated Balance Sheet included in this Form 10-Q was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP for a year-end balance sheet included in Form 10-K. In the opinion of management, these financial statements reflect all adjustments necessary to present a fair statement of the Company’s consolidated financial position and the consolidated results of operations and cash flow as of the dates and for the periods presented.
The preparation of financial statements in conformity with GAAP requires us 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 period. Actual results could differ from those estimates. Examples of such estimates include, but are not limited to, revenue recognition under the percentage-of-completion method and the establishment of reserves related to customer rebates, doubtful accounts, warranties, early-pay discounts, inventories, income taxes, litigation, self-insurance, and progress toward achievement of performance criteria under incentive compensation programs.
| |
2. | Summary of Significant Accounting Policies |
The significant accounting policies used in preparing these consolidated financial statements are consistent with the accounting policies described in our Annual Report on Form 10-K for 2018, except as described below.
Recently Adopted Accounting Standards
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 was early adopted for our fiscal year beginning on October 1, 2018 on a prospective basis. The adoption of this standard did not have a significant impact 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 2016-18 became effective and was adopted for our fiscal year beginning on October 1, 2018. The adoption of ASU 2016-18 had 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 became effective and was adopted for our fiscal year beginning on October 1, 2018. The adoption of ASU 2017-01 did not 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 became effective and was adopted for our fiscal year beginning on October 1, 2018. On the Consolidated Statements of Income, the adoption of this standard resulted in the reclassification of $0.2 credit from Cost of goods sold and $0.1 from Operating expenses to Other (expense) income, net, for the three months ended June 30, 2018, and $0.4 credit from Cost of goods sold and $0.2 from Operating expenses to Other (expense) income, net, for the nine months ended June 30, 2018.
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 became effective and was adopted for our fiscal year beginning on October 1, 2018. The adoption of ASU 2017-09 did not have a significant impact on our consolidated financial statements.
Beginning in 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), plus a number of related ASUs designed to clarify and interpret ASC 606. The new standard 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 new standard supersedes U.S. GAAP guidance on revenue recognition and requires the use of more estimates than the previously effective 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. The new standard became effective for our fiscal year beginning on October 1, 2018 and was adopted on a modified retrospective basis. The Company elected the practical expedient and only evaluated contracts for which substantially all revenue had not been recognized under ASC Topic 605, with the cumulative effect of the new guidance recorded as of the date of initial application.
The primary changes from the adoption of ASC 606 resulted from certain performance obligations that were previously recognized at a point in time that are now recognized over time. The cumulative effect of the changes made to the Consolidated Balance Sheet as of October 1, 2018 for the adoption of ASC 606 was as follows:
|
| | | | | | | | | | | |
| Balance at September 30, 2018 | | Adjustments due to ASC 606 | | Balance at October 1, 2018 |
Assets | | | | | |
Receivables from long-term manufacturing contracts | $ | 120.3 |
| | $ | 1.9 |
| | $ | 122.2 |
|
Inventories | 172.5 |
| | (1.6 | ) | | 170.9 |
|
| | | | | |
Liabilities | | | | | |
Deferred income taxes | $ | 76.4 |
| | $ | 0.1 |
| | $ | 76.5 |
|
| | | | | |
Shareholders’ Equity | | | | | |
Retained earnings | $ | 531.0 |
| | $ | 0.2 |
| | $ | 531.2 |
|
The following tables summarize the impacts of adopting ASC 606 on the Company’s consolidated financial statements as of and for the three and nine months ended June 30, 2019.
Consolidated Statements of Income:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Nine Months Ended June 30, 2019 |
| As Reported | | Adjustments Due to ASC 606 | | Balances without Adoption | | As Reported | | Adjustments Due to ASC 606 | | Balances without Adoption |
Net revenue | $ | 446.6 |
| | $ | 1.0 |
| | $ | 447.6 |
| | $ | 1,321.5 |
| | $ | (0.1 | ) | | $ | 1,321.4 |
|
Cost of goods sold | 298.2 |
| | 1.0 |
| | 299.2 |
| | 865.2 |
| | — |
| | 865.2 |
|
Gross profit | 148.4 |
| | — |
| | 148.4 |
| | 456.3 |
| | (0.1 | ) | | 456.2 |
|
Income before income taxes | 43.3 |
| | — |
| | 43.3 |
| | 140.1 |
| | (0.1 | ) | | 140.0 |
|
Consolidated net income | 31.7 |
| | — |
| | 31.7 |
| | 100.2 |
| | (0.1 | ) | | 100.1 |
|
Consolidated Balance Sheet:
|
| | | | | | | | | | | |
| June 30, 2019 |
| As Reported | | Adjustments Due to ASC 606 | | Balances without Adoption |
Assets | | | | |
|
|
Receivables from long-term manufacturing contracts | $ | 158.6 |
| | $ | (2.0 | ) | | $ | 156.6 |
|
Inventories | 186.7 |
| | 1.7 |
| | 188.4 |
|
| | | | | |
Liabilities | | | | | |
Deferred income taxes | $ | 70.8 |
| | $ | (0.1 | ) | | $ | 70.7 |
|
| | | | | |
Shareholders’ Equity | | | | | |
Retained earnings | $ | 588.1 |
| | $ | (0.2 | ) | | $ | 587.9 |
|
The Company has elected the following as a result of adopting the new standard on revenue recognition:
| |
• | Hillenbrand elected not to adjust the promised amount of consideration for the effects of the time value of money for contracts in which the anticipated period between when Hillenbrand transfers the goods or services to the customer and when the customer pays is equal to one year or less. |
| |
• | Hillenbrand elected to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfillment activities rather than as a promised service. |
| |
• | Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, and that are collected by the Company from a customer, are excluded from revenue. |
Recently Issued Accounting Standards
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. ASU 2016-02 will be effective for our fiscal year beginning on October 1, 2019. We have developed an implementation plan that we continue to make progress on, including compiling a central repository of leases and evaluating key policy elections and practical expedients that are available under the new standard. The adoption is anticipated to have a significant impact on assets and liabilities within our Consolidated Balance Sheets 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.
We adopted ASC 606, Revenue from Contracts with Customers, on October 1, 2018. As a result, we have changed our accounting policy for revenue recognition as detailed below.
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 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, 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 defined in ASC 606, we allocate a portion 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 time 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 more of the following: (i) service over a period 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 sales of death care products, is recognized at a point in time.
We use the input method of “cost-to-cost” to recognize revenue over time. 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 judgment. We measure progress based on costs incurred to date relative 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 complexity 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 period of the underlying contract or as invoiced, depending on the terms of the arrangement. Stand-alone service revenue is not material to the Company.
For the Process Equipment Group and Batesville segment products where revenue is recognized at a point in time, we recognize it when our customers take control of the asset. We define this as the point in time at which the customer has the capability of full beneficial use of the asset as intended per the contract.
Contract balances
In the Process Equipment Group segment, the Company requires an advance deposit based on the terms and conditions of contracts with customers for many of its contracts. Payment terms generally require an upfront payment at the start of the contract, and the remaining payments during the contract or within a certain number of days of delivery. Typically, revenue is recognized within one year of receiving an advance deposit. For contracts where an advance payment is received greater than one year from expected revenue recognition, or a portion of the payment due extends beyond one year, the Company has determined it does not constitute a significant financing component.
The timing of revenue recognition, billings, and cash collections can result in customer receivables, advance payments, and billings in excess of revenue recognized. Customer receivables include amounts billed and currently due from customers and are included in Trade receivables, net, as well as unbilled amounts (contract assets) which are included in Receivables from long-term manufacturing contracts on our Consolidated Balance Sheets. Amounts are billed in accordance with contractual terms or as work progresses in accordance with contractual terms. Unbilled amounts arise when the timing of billing differs from the timing of revenue recognized, such as when contract provisions require specific milestones to be met before a customer can be billed. Unbilled amounts primarily relate to performance obligations satisfied over time when the cost-to-cost method is used and the revenue recognized exceeds the amount billed to the customer as there is not yet a right to payment in accordance with contractual terms. Unbilled amounts are recorded as a contract asset when the revenue associated with the contract is recognized prior to billing and derecognized when billed in accordance with the terms of the contract. Trade receivables are recorded at face amounts and represent the amounts we believe to be collectible. The Company maintains allowances for doubtful accounts for estimated losses as a result of customers’ inability to make required payments. Management evaluates the aging of the customer receivable balances, the financial condition of its customers, historical trends and the time outstanding of specific balances to estimate the amount of customer receivables that may not be collected in the future, and records the appropriate provision.
Advance payments and billings in excess of revenue recognized are included in Liabilities from long-term manufacturing contracts and advances on our Consolidated Balance Sheets. Advance payments and billings in excess of revenue recognized represent contract liabilities and are recorded when customers remit contractual cash payments in advance of us satisfying performance obligations under contractual arrangements, including those with performance obligations satisfied over time. Billings in excess of revenue recognized primarily relate to performance obligations satisfied over time when the cost-to-cost method is used and revenue cannot yet be recognized as the Company has not completed the corresponding performance obligation. Contract liabilities are derecognized when revenue is recognized and the performance obligation is satisfied.
The balance in Receivables from long-term manufacturing contracts at June 30, 2019 and September 30, 2018 was $158.6 and $120.3. The change was driven by the adoption of ASC 606 ($2.0) and the impact of net revenue recognized prior to billings ($36.3). The balance in the Liabilities from long-term manufacturing contracts and advances at June 30, 2019 and September 30, 2018 was $109.2 and $125.9 and consists primarily of cash payments received or due in advance of satisfying our performance obligations. The revenue recognized for the nine months ended June 30, 2019 related to Liabilities from long-term manufacturing
contracts and advances as of September 30, 2018 was $113.0. During the nine months ended June 30, 2019, the adjustments related to performance obligations satisfied in previous periods were immaterial.
Costs incurred to obtain a customer contract are not material to the Company. The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with a duration of one year or less, which are expensed as incurred.
Transaction price allocated to the remaining performance obligations
As of June 30, 2019, the aggregate amount of transaction price of remaining performance obligations, which corresponds to backlog as defined in Item 2 of this Form 10-Q, for the Company was $940.3. Approximately 88% of these obligations are expected to be satisfied over the next twelve months, and the remaining performance obligations, primarily within one to three years.
Disaggregation of revenue
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Nine Months Ended June 30, 2019 |
| Process Equipment Group | | Batesville | | Total | | Process Equipment Group | | Batesville | | Total |
Revenue by End Market | | | | | | | | | | | |
Plastics | $ | 197.9 |
| | $ | — |
| | $ | 197.9 |
| | $ | 561.0 |
| | $ | — |
| | $ | 561.0 |
|
Chemicals | 28.3 |
| | — |
| | 28.3 |
| | 80.8 |
| | — |
| | 80.8 |
|
Food & Pharmaceuticals | 20.0 |
| | — |
| | 20.0 |
| | 60.9 |
| | — |
| | 60.9 |
|
Minerals & Mining | 14.1 |
| | — |
| | 14.1 |
| | 64.3 |
| | — |
| | 64.3 |
|
Water & Wastewater | 8.3 |
| | — |
| | 8.3 |
| | 25.5 |
| | — |
| | 25.5 |
|
Death Care | — |
| | 131.3 |
| | 131.3 |
| | — |
| | 397.3 |
| | 397.3 |
|
Other | 46.7 |
| | — |
| | 46.7 |
| | 131.7 |
| | — |
| | 131.7 |
|
Total | $ | 315.3 |
| | $ | 131.3 |
| | $ | 446.6 |
| | $ | 924.2 |
| | $ | |