Hillenbrand, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Retirement Benefits

Retirement Benefits

12 Months Ended

Sep. 30, 2015

Defined Benefit Pension Plans and Defined Benefit Postretirement Plans Disclosure [Abstract]

Defined Benefit Retirement Plans — Approximately 39% 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,
	2015			2014			2013			2015			2014			2013
Service cost	$	4.3		$	4.0		$	4.7		$	1.7		$	1.6		$	1.6
Interest cost	14.4			14.5			12.7			2.8			4.2			3.9
Expected return on plan assets	(14.3		)	(14.0		)	(12.9		)	(1.0		)	(1.0		)	(1.0		)
Amortization of unrecognized prior service cost, net	0.9			0.9			0.9			—			—			—
Amortization of actuarial loss	5.3			3.8			7.2			0.1			—			—
Settlement expense	17.7			—			—			—			—			—
Net pension costs	$	28.3		$	9.2		$	12.6		$	3.6		$	4.8		$	4.5

On April 1, 2015, we announced an offer to provide former employees who are participants in the Company’s U.S. defined benefit pension plan (the “Plan”) the opportunity to elect a lump sum distribution of their earned Plan benefits. The Plan’s fiduciaries made lump sum payments to electing eligible participants in September 2015, funded by the existing assets in the Plan. As a result, the assets in the Plan decreased by benefits paid of $75.9, and the projected obligation of the plan decreased by $81.9, consisting of benefits paid of $75.9 and the gain due to settlement of $6.0, which is included in accumulated other comprehensive income. The Company also recorded a non-cash income statement settlement pre-tax charge of $17.7 in September 2015.

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,
	2015			2014			2015			2014
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	338.5		$	307.4		$	142.9		$	140.0
Projected benefit obligation attributable to acquisitions	—			—			—			1.9
Service cost	4.3			4.0			1.7			1.6
Interest cost	14.4			14.5			2.8			4.2
Amendments	—			—			0.7			—
Actuarial loss	10.0			26.5			6.2			12.8
Benefits paid	(89.0		)	(13.9		)	(8.3		)	(8.8		)
Gain due to settlement	(6.0		)	—			—			—
Employee contributions	—			—			0.8			0.7
Effect of exchange rates on projected benefit obligation	—			—			(12.6		)	(9.5		)
Projected benefit obligation at end of year	272.2			338.5			134.2			142.9

Change in plan assets:
Fair value of plan assets at beginning of year	249.7			228.1			29.4			28.6
Actual return on plan assets	(8.6		)	26.6			—			1.0
Employee and employer contributions	6.8			10.2			8.9			10.4
Benefits paid	(89.0		)	(13.9		)	(8.3		)	(8.8		)
Administrative expenses paid	—			(1.3		)	—			—
Effect of exchange rates on plan assets	—			—			(0.5		)	(1.8		)
Fair value of plan assets at end of year	158.9			249.7			29.5			29.4

Funded status:
Plan assets less than benefit obligations	$	(113.3	)	$	(88.8	)	$	(104.7	)	$	(113.5	)

Amounts recorded in the consolidated balance sheets:
Other assets	$	—		$	—		$	—		$	0.1
Accrued pension costs, current portion	(1.8		)	(1.8		)	(6.9		)	(7.9		)
Accrued pension costs, long-term portion	(111.5		)	(87.0		)	(97.8		)	(105.7		)
Plan assets less than benefit obligations	$	(113.3	)	$	(88.8	)	$	(104.7	)	$	(113.5	)

Net actuarial losses ($86.4) and prior service costs ($1.5), less an aggregate tax effect ($30.8), are included as components of accumulated other comprehensive loss at September 30, 2015. Net actuarial losses ($75.8) and prior service costs ($2.4), less an aggregate tax effect ($28.0), are included as components of accumulated other comprehensive loss at September 30, 2014. The amount that will be amortized from accumulated other comprehensive loss into net pension costs in 2016 is expected to be $5.0.

Accumulated Benefit Obligation — The accumulated benefit obligation for all defined benefit retirement plans was $390.1 and $463.8 at September 30, 2015 and 2014. 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,
	2015		2014		2015		2014
Projected benefit obligation	$	272.2	$	338.5	$	134.2	$	113.6
Accumulated benefit obligation	258.9		324.0		131.2		113.6
Fair value of plan assets	158.9		249.7		29.5		—

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,
	2015		2014		2013		2015		2014		2013
Discount rate for obligation, end of year	4.4	%	4.4	%	4.9	%	2.1	%	2.3	%	3.5	%
Discount rate for expense, during the year	4.4	%	4.9	%	4.0	%	1.9	%	3.0	%	3.3	%
Expected rate of return on plan assets	6.3	%	6.6	%	6.6	%	3.5	%	3.5	%	3.5	%
Rate of compensation increase	3.0	%	3.0	%	2.6	%	0.2	%	0.2	%	0.2	%

The discount rates are evaluated annually based on current market conditions. In setting these rates, we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, then make adjustments to the indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected outflow of pension obligations. The overall expected long-term rate of return is based on historical and expected future returns, which are inflation-adjusted and weighted for the expected return for each component of the investment portfolio. The rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments in recent years.

U.S. Pension Plan Assets — Long-term strategic investment objectives utilize a diversified mix of equity and fixed income securities to preserve the funded status of the trusts, and balance risk and return. The primary investment strategy is a dynamic target allocation method that periodically rebalances among various investment categories depending on the current funded position. This program is designed to actively move from return-seeking investments (such as equities) toward liability-hedging investments (such as long-duration fixed income) as funding levels improve. The investment in return-seeking assets is not to exceed 60% of total domestic plan assets. 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, 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, 2015.

The tables below provide the fair value of our pension plan assets by asset category at September 30, 2015 and 2014. 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.


•	Corporate bonds actively traded are stated at the closing price reported in the active markets in which the bonds are traded.


•	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

Effective September 30, 2015, we adopted new accounting guidance for investments that calculate net asset value per share (or its equivalent). As a result of the adoption of this new guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient are not required to be classified in the fair value hierarchy. At September 30, 2015, and 2014, the fair values of these investments, were $158.9 and $249.7, which had been previously classified in level 2 at September 30, 2014. The guidance was required to be applied retrospectively, and accordingly, prior period amounts have been revised to conform with the current period presentation.

Non-U.S. Pension Plans



	Fair Value at September 30, 2015 Using Inputs Considered as:
	Total		Level 1		Level 2		Level 3
Non-U.S. Pension Plans
Cash equivalents	$	5.5	$	5.5	$	—	$	—
Equity securities	5.9		5.9		—		—
Corporate bonds	—		—		—		—
Other types of investments:
Government index funds	5.2		5.2		—		—
Corporate bond funds	9.9		9.9		—		—
Equity mutual funds	—		—		—		—
Real estate and real estate funds	2.0		—		—		2.0
Other	1.0		—		1.0		—
Total Non-U.S. pension plan assets	$	29.5	$	26.5	$	1.0	$	2.0



	Fair Value at September 30, 2014 Using Inputs Considered as:
	Total		Level 1		Level 2		Level 3
Non-U.S. Pension Plans
Cash equivalents	$	5.4	$	5.4	$	—	$	—
Equity securities	7.3		7.3		—		—
Corporate bonds	9.0		9.0		—		—
Other types of investments:
Government index funds	5.7		5.7		—		—
Corporate bond funds	—		—		—		—
Equity mutual funds	—		—		—		—
Real estate and real estate funds	2.0		—		—		2.0
Total Non-U.S. pension plan assets	$	29.4	$	27.4	$	—	$	2.0

Cash Flows — During 2015, 2014, and 2013 we contributed cash of $14.9, $19.9, and $20.1, to our defined benefit retirement plans. The increase in contributions in 2013 was a result of the Coperion acquisition. We expect to make estimated contributions of $14.9 in 2016, although we may make additional discretionary contributions. We will evaluate business conditions and capital and equity market volatility to determine whether we will make discretionary contributions.

Estimated Future Benefit Payments — The following represents estimated future benefit payments, including expected future service, which are expected to be paid from plan assets or Company contributions as necessary:



	U.S. Pension Plans Projected Pension Benefits Payout		Non-U.S Pension Plans Projected Pension Benefits Payout
2016	$	11.7	$	7.3
2017	12.3		7.2
2018	13.1		7.0
2019	13.9		6.8
2020	14.7		6.6
2021 - 2025	83.0		31.1

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 $9.1, $8.7, and $8.2 for 2015, 2014, and 2013.

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 2015, 2014, and 2013 was $0.3, $0.3, and $0.6.



	September 30,
	2015			2014
Benefit obligation at beginning of year	$	8.9		$	9.8
Interest cost	0.3			0.3
Service cost	0.4			0.4
Actuarial loss (gain)	1.1			(1.4		)
Net benefits paid	(0.4		)	(0.2		)
Benefit obligation at end of year	$	10.3		$	8.9

Amounts recorded in the balance sheets:
Accrued postretirement benefits, current portion	$	0.9		$	0.7
Accrued postretirement benefits, long-term portion	9.4			8.2
Net amount recognized	$	10.3		$	8.9

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



	Year Ended September 30,
	2015		2014		2013
Discount rate for obligation	3.7	%	3.7	%	3.5	%
Healthcare cost rate assumed for next year	7.6	%	7.2	%	7.7	%
Ultimate trend rate	4.5	%	5.0	%	5.0	%

Net actuarial gains of $4.2 and $5.8, less tax of $1.6 and $1.6, were included as a component of accumulated other comprehensive loss at September 30, 2015 and 2014. The estimated amount that will be amortized from accumulated other comprehensive loss as a reduction to postretirement healthcare costs in 2016 is $0.4. A one percentage-point increase/decrease in the assumed healthcare cost trend rates as of September 30, 2015, would cause an increase/decrease in service and interest costs of $0.1, along with an increase/decrease in the benefit obligation of $0.7.

We fund the postretirement healthcare plan as benefits are paid. Current plan benefits are expected to require net Company contributions for retirees of $0.9 per year for the foreseeable future.