Annual report pursuant to Section 13 and 15(d)

Retirement Benefits

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.