Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies

v3.19.3
Summary of Significant Accounting Policies
12 Months Ended
Sep. 30, 2019
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 Consolidated 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 Consolidated 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 within the Consolidated Statements of Income 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.
 
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, 2019 and 2018, we had reserves against trade receivables of $22.8 and $22.2.
 
Inventories are valued at the lower of cost or market.  Inventory costs are determined by the last-in, first-out (“LIFO”) method for approximately 28% and 30% of inventories at September 30, 2019 and 2018.  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 $17.3 and $15.7 higher than reported at September 30, 2019 and 2018.
 
September 30,
 
2019
 
2018
Raw materials and components
$
72.3

 
$
68.3

Work in process
44.0

 
44.7

Finished goods
60.3

 
59.5

Total inventories
$
176.6

 
$
172.5


 
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. Major improvements that extend the useful lives of such assets are capitalized while expenditures for maintenance, repairs, and minor improvements 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 2019, 2018, and 2017 was $23.2, $23.4, and $25.4.
 
 
September 30, 2019
 
September 30, 2018
 
Cost
 
Accumulated
Depreciation
 
Cost
 
Accumulated
Depreciation
Land and land improvements
$
15.0

 
$
(3.4
)
 
$
15.0

 
$
(3.3
)
Buildings and building equipment
103.5

 
(64.2
)
 
102.3

 
(60.7
)
Machinery and equipment
330.8

 
(241.4
)
 
328.5

 
(239.8
)
Total
$
449.3

 
$
(309.0
)
 
$
445.8

 
$
(303.8
)

 
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: $30.6 in 2020, $29.5 in 2021, $28.5 in 2022, $28.1 in 2023, and $27.9 in 2024.
 
 
September 30, 2019
 
September 30, 2018
 
Cost
 
Accumulated
Amortization
 
Cost
 
Accumulated
Amortization
Finite-lived assets:
 

 
 

 
 

 
 

Trade names
$
0.2

 
$
(0.2
)
 
$
0.2

 
$
(0.2
)
Customer relationships
464.2

 
(169.2
)
 
464.5

 
(148.4
)
Technology, including patents
76.8

 
(49.4
)
 
79.6

 
(45.1
)
Software
58.7

 
(51.7
)
 
58.0

 
(48.9
)
Other
0.2

 
(0.2
)
 
0.2

 
(0.2
)
 
600.1

 
(270.7
)
 
602.5

 
(242.8
)
Indefinite-lived assets:
 

 
 

 
 

 
 

Trade names
125.5

 

 
127.6

 

 
 
 
 
 
 
 
 
Total
$
725.6

 
$
(270.7
)
 
$
730.1

 
$
(242.8
)


The net change in intangible assets during the year ended September 30, 2019 was driven by normal amortization and foreign currency translation, partially offset by the acquisition of BM&M in November 2018, which included intangible assets of approximately $14. See Note 4 for further detail on the acquisition of BM&M.

As a result of the required annual impairment assessment performed in the third quarter of 2019, the fair value of trade names was determined to meet or exceed the carrying value for all trade names, resulting in no impairment to trade names during the year ended September 30, 2019.

An impairment charge of $4.6 pre-tax ($3.5 after tax) was recorded during the year ended September 30, 2018 for trade names most directly impacted by domestic coal mining and coal power. See discussion of Goodwill below for further information on the impairment charge.

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, 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

Acquisitions, including purchase price adjustments
12.4

 

 
12.4

Foreign currency adjustments
(16.3
)
 

 
(16.3
)
Balance September 30, 2019
$
569.7

 
$
8.3

 
$
578.0



As a result of the required annual impairment assessment performed in the third quarter of 2019, the Company tested the recoverability of its goodwill, and in all reporting units, the fair value of goodwill was determined to exceed the carrying value, resulting in no impairment of goodwill.

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 during the year ended September 30, 2018.
 
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 liabilities and Other long-term liabilities within the Consolidated 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.
 
In December 2018, the Board of Directors authorized a new share repurchase program of up to $200.0 in replacement of the Company’s prior share repurchase program, which eliminated the balance of approximately $39.6 remaining under that prior authorization. The repurchase program has no expiration date but may be terminated by the Board of Directors at any time.  Share repurchases under the program are classified as treasury stock. We made no repurchases of our common stock during 2019. We repurchased approximately 1,385,600 shares of our common stock during 2018, at a total cost of $61.0. In 2019 and 2018, approximately 400,000 shares and 500,000 shares were issued from treasury stock under our stock compensation programs.  At September 30, 2019, we had $200.0 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, 2019 and 2018.
 
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,
 
2019
 
2018
Currency translation
$
(64.7
)
 
$
(44.1
)
Pension and postretirement (net of taxes of $30.0 and $22.3)
(62.3
)
 
(41.0
)
Unrealized (loss) gain on derivative instruments (net of taxes of $0.7 and $0.3)
(13.6
)
 
0.9

Accumulated other comprehensive loss
$
(140.6
)
 
$
(84.2
)

 
Revenue recognition — Effective October 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 under the modified retrospective transition approach. See Note 3 for our policy for recognizing revenue under ASC 606 as well as the various other disclosures required by ASC 606.

For the years ended September 30, 2018 and 2017, revenue continues to be presented based on prior guidance. Under such guidance, net revenue included 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 estimated these allowances based upon historical rates and projections of customer purchases toward contractual rebate thresholds.
 
A portion of Hillenbrand’s revenue was derived from long-term manufacturing contracts.  The majority of this revenue was 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% of Hillenbrand’s revenue was attributable to these long-term manufacturing contracts for both 2018 and 2017.
 
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 seek 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 $10.6, $11.7, and $11.9 for 2019, 2018, and 2017.
 
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 $17.1 and $16.9 for 2019 and 2018.  Warranty costs were $3.4, $3.3, and $4.1 for 2019, 2018, and 2017.
 
Income taxesOn December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code, some of which went into effect during our fiscal year ended September 30, 2018 including, but not limited to (a) a reduction of the U.S. federal corporate tax rate from 35% to 21%, (b) a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”), and (c) immediate expensing of certain capital expenditures. Since the effective date of the reduced tax rate was January 1, 2018, our fiscal year ended September 30, 2018 had a prorated U.S. federal corporate tax rate of 24.5%. In addition to the 21% tax rate, other key provisions of the Tax Act, such as the repeal of the Domestic Production Activities Deduction, imposition of tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries, the Foreign Derived Intangible Income Deduction (FDII), and the Base Erosion and Anti-Abuse Tax (BEAT) went into effect in our fiscal year ended September 30, 2019. A company can elect to either recognize deferred taxes or provide tax expense in the year GILTI is incurred. The Company has elected to account for GILTI in the year the tax is incurred.

We establish deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Consolidated 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 recorded in our Consolidated Financial Statements, as we do not intend, nor do we foresee a need, to repatriate these funds. We continue to actively evaluate our global capital deployment and cash needs.

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. Additionally, the Company periodically enters into interest rate swaps to manage or hedge the risks associated with our indebtedness and interest payments. Our objectives in using these swaps are to add stability to interest expense and to manage our exposure to interest rate movements.

We measure all derivative instruments at fair value and report them on our balance sheets as assets or liabilities.  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.  If a derivative is designated as a fair value hedge, the gain or loss on the derivative and the offsetting loss or gain on the hedged asset or liability are recognized in earnings. For derivative instruments designated as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income and reclassified to earnings in the same period that the hedged transaction affects earnings. The portion of the gain or loss that does not qualify for hedge accounting is immediately recognized in earnings.

The aggregate notional amount of all derivative instruments was $128.9 and $152.6 at September 30, 2019 and 2018. The carrying value of all of our derivative instruments at fair value resulted in assets of $2.5 and $1.9 (included in other current assets and other assets) and liabilities of $2.6 and $2.2 (included in other current liabilities) at September 30, 2019 and 2018.  See Note 13 for additional information on the fair value of our derivative instruments.

Foreign currency derivatives

Contracts designated as cash flow hedges for customer orders or intercompany purchases have an offsetting tax-adjusted amount in Accumulated other comprehensive loss.  Foreign exchange contracts intended to manage 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.

Interest rate swap contracts

During the first quarter of 2019, the Company entered into interest rate swap contracts to hedge the interest rate associated with the forecasted issuance of $150.0 ten-year, fixed-rate debt. In September 2019, we issued $375.0 of senior unsecured notes (the “2019 Notes” as defined in Note 5) with a term of seven years. As a result of this issuance, Hillenbrand terminated and settled the interest rate swap contracts for a cash payment of $20.2.

Upon the issuance of the 2019 Notes, Hillenbrand determined that it was probable that the originally forecasted issuance of ten-year, fixed-rate debt would not occur. As a result, the Company accelerated the release of accumulated other comprehensive loss related to the missed forecasted transaction, resulting in a loss on settlement of $6.4. The loss on settlement was recorded within Other (expense) income, net, on the Consolidated Statements of Income. The remaining $13.8 is classified within Accumulated other comprehensive loss and will be amortized into Interest expense over the seven-year term of the 2019 Notes. The Company expects to reclassify amounts of $2.0 out of Accumulated other comprehensive loss into Interest expense over the next twelve months related to these interest rate swap contracts.

During the year ended September 30, 2018, we entered into interest rate swap contracts on $50.0 of outstanding borrowings under the Revolver (as defined in Note 5) in order to manage exposure to our variable interest payments. We terminated these interest rate swaps in the fourth quarter of 2018. As a result, a gain on settlement of $2.3 was released from Accumulated other comprehensive loss to Other (expense) income, net.

Business acquisitions and related business acquisition, development, 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, 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 investigating opportunities (including acquisition and disposition).  Business acquisition, development, 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 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 Consolidated 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 2017-04, 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.

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 $0.8 credit from Cost of goods sold to Other (expense) income, net, for the year ended September 30, 2018, and $0.5 credit from Cost of goods sold and $0.9 from Operating expenses to Other (expense) income, net, for the year ended September 30, 2017.

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 year ended September 30, 2019.

Consolidated Statements of Income:
 
Year Ended September 30, 2019
 
As Reported
 
Adjustments Due to ASC 606
 
Balances without Adoption
Net revenue
$
1,807.3

 
$

 
$
1,807.3

Cost of goods sold
1,184.3

 

 
1,184.3

Gross profit
623.0

 

 
623.0

Income before income taxes
176.7

 

 
176.7

Consolidated net income
126.2

 

 
126.2


Consolidated Balance Sheet:
 
September 30, 2019
 
As Reported
 
Adjustments Due to ASC 606
 
Balances without Adoption
Assets
 
 
 
 
 
Receivables from long-term manufacturing contracts
$
181.1

 
$
(1.9
)
 
$
179.2

Inventories
176.6

 
1.7

 
178.3

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Deferred income taxes
$
73.6

 
$

 
$
73.6

 
 
 
 
 
 
Shareholders’ Equity
 
 
 
 
 
Retained earnings
$
599.5

 
$
(0.2
)
 
$
599.3


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. The FASB has also issued several updates to ASU 2016-02. ASU 2016-02 is effective for our fiscal year beginning on October 1, 2019. The Company plans to utilize the optional transition method to use the effective date as the date of initial application on transition. At transition, the Company has elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. The new standard also provides practical expedients for an entity’s ongoing accounting. We will elect the short-term lease recognition exemption for all leases that qualify and we expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.

We have developed a project plan for implementation, surveyed our businesses, assessed our portfolio of leases, and compiled a central repository of all leases. Additionally, we have identified and implemented appropriate changes to policies, procedures and controls pertaining to existing and future lease arrangements to support recognition and disclosure requirements under the new standard. Although we are still finalizing our evaluation of the impact of the new lease accounting guidance, we expect to recognize $120.0 to $140.0 in right-of-use assets and lease liabilities in the Consolidated Balance Sheet upon adoption.

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. We are currently evaluating the impact that ASU 2016-13 will have on our Consolidated Financial Statements.