Quarterly report pursuant to Section 13 or 15(d)

Business Acquisitions and Divestitures

v3.20.1
Business Acquisitions and Divestitures
 6 Months Ended
Mar. 31, 2020
Business Combinations [Abstract]  
Business Acquisitions
Business Acquisitions and Divestitures

Acquisition of Milacron

Background

On November 21, 2019, the Company completed the acquisition of Milacron, a global leader in highly engineered and customized systems in plastic technology and processing, through a merger of its wholly-owned subsidiary with and into Milacron, resulting in ownership of 100% of Milacron common stock that was issued and outstanding after the acquisition. The acquisition provides Hillenbrand with increased scale and meaningful product diversification, enhancing its ability to serve customers with expanded capabilities across the plastics value chain.

The results of Milacron are reported separately in its own reportable segment. See Note 17 for further information.

Purchase price consideration

As a result of the acquisition, Milacron stockholders received $11.80 in cash per share and a fixed exchange ratio of 0.1612 shares of Hillenbrand common stock for each share of Milacron common stock they owned, with cash paid in lieu of fractional shares. In addition, concurrent with the closing of the acquisition, the Company made a cash payment of $772.9 to repay outstanding Milacron debt, including accrued interest. The Company funded the acquisition through a combination of cash on hand, new debt financing, and the issuance of common stock. See Note 8 for a discussion of the debt financing.

Pursuant to the Merger Agreement, certain of Milacron’s outstanding stock options, restricted stock awards, restricted stock unit awards, and performance stock unit awards immediately vested and converted into the right to receive $11.80 per share in cash and 0.1612 shares of Hillenbrand common stock per share. Additionally, certain of Milacron’s stock appreciation rights were canceled and converted into the right to receive a lump sum cash payment. The fair value of share-based equity awards was apportioned between purchase price consideration and immediate expense. The portion of the fair value of partially vested awards associated with pre-acquisition service of Milacron employees represented a component of the total purchase price consideration, while the remaining portion of the fair value was immediately recognized as expense within operating expenses in the Consolidated Statement of Operations during the six months ended March 31, 2020.

The following table summarizes the aggregate purchase price consideration to acquire Milacron:
Cash consideration paid to Milacron stockholders
$
835.9

Repayment of Milacron debt, including accrued interest
772.9

Cash consideration paid to settle outstanding share-based equity awards
34.2

Total cash consideration
1,643.0

Fair value of Hillenbrand common stock issued to Milacron stockholders (1)
356.9

Stock consideration issued to settle outstanding share-based equity awards (1)
14.4

Total consideration transferred
2,014.3

Portion of cash settlement of outstanding share-based equity awards recognized as expense (2)
(14.1
)
Portion of stock settlement of outstanding share-based equity awards recognized as expense (2)
(5.9
)
     Total purchase price consideration
$
1,994.3

 
(1) 
The fair value of the 11.4 million shares of Hillenbrand’s common stock issued as of the acquisition date was determined based on a per share price of $31.26, which was the closing price of Hillenbrand’s common stock on November 20, 2019, the last trading day before the acquisition closed on November 21, 2019. This includes a nominal amount of cash paid in lieu of fractional shares. Additionally, 0.5 million shares of Hillenbrand’s common stock were issued to settle certain of Milacron’s outstanding share-based equity awards, as previously discussed.
(2) 
In total, $20.0 was immediately recognized as expense within operating expenses in the Consolidated Statement of Operations during the six months ended March 31, 2020, which represents the portion of the fair value of outstanding share-based equity awards that was not associated with pre-acquisition service of Milacron employees, as previously discussed.

Purchase price allocation

The acquisition was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. The purchase price was allocated to the assets acquired and liabilities assumed based on management’s estimate of the respective fair values at the date of acquisition. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.  The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from the acquisition.  None of the goodwill is expected to be deductible for income tax purposes.

The following table summarizes preliminary estimates of fair values of the assets acquired and liabilities assumed as of the acquisition date:
 
November 21, 2019
(as initially reported)
 
Measurement Period Adjustments
 
November 21, 2019
(as adjusted)
Assets acquired:
 
 
 
 
 
Cash and cash equivalents
$
125.8

 
$
—

 
$
125.8

Trade receivables
135.5

 
1.3

 
136.8

Inventories
288.7

 
5.7

 
294.4

Prepaid expense and other current assets
64.3

 
1.3

 
65.6

Property, plant, and equipment
262.9

 
(17.7
)
 
245.2

Operating lease right-of-use assets
41.3

 
—

 
41.3

Identifiable intangible assets
865.0

 
(50.0
)
 
815.0

Goodwill
666.5

 
38.8

 
705.3

Other long-term assets
22.6

 
2.7

 
25.3

Total assets acquired
2,472.6

—

(17.9
)
 
2,454.7

 
 
 
 
 
 
Liabilities assumed:
 
 
 
 
 
Trade accounts payable
110.2

 
—

 
110.2

Liabilities from long-term manufacturing contracts and advances
32.7

 
—

 
32.7

Accrued compensation
23.2

 
(2.4
)
 
20.8

Other current liabilities
72.2

 
(0.3
)
 
71.9

Accrued pension and postretirement healthcare
29.4

 
—

 
29.4

Deferred income taxes
166.3

 
(15.2
)
 
151.1

Operating lease liabilities - long-term
31.2

 
—

 
31.2

Other long-term liabilities
13.1

 
—

 
13.1

Total liabilities assumed
478.3

—

(17.9
)
 
460.4

 
 
 
 
 
 
Total purchase price consideration
$
1,994.3


$
—

 
$
1,994.3



Measurement period adjustments
The preliminary purchase price allocation was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period (defined as one year following the acquisition date). As a result of further refining its estimates and assumptions during the current quarter, the Company recorded measurement period adjustments to the initial opening balance sheet as shown in the table above. Adjustments were primarily made to property, plant, and equipment, identifiable intangible assets, goodwill, and deferred income taxes. Due to the timing of the acquisition, which was completed in the middle of the Company’s previous quarter, there were no measurement period adjustments materially impacting earnings that would have been recorded in the previous reporting period if the adjustments had been recognized as of the acquisition date.
As of March 31, 2020, the allocation of the purchase price has not been finalized and the one-year measurement period has not ended. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair value of certain tangible assets acquired and liabilities assumed, the valuation of identifiable intangible assets acquired and deferred income taxes. The Company expects to continue to obtain information for the purpose of determining the fair value of the assets acquired and liabilities assumed at the acquisition date throughout the remainder of the measurement period.
Intangible assets identified
The preliminary purchase price allocation included $815.0 of acquired identifiable intangible assets. The preliminary fair value of the identifiable intangible assets has been estimated using the income approach through a discounted cash flow analysis. The cash flows are based on estimates used to price the Milacron acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return to the Company’s pricing model and the weighted-average cost of capital. Definite-lived intangible assets are being amortized over the estimated useful life on a straight-line basis.  The determination of the useful lives is based upon various industry studies, historical acquisition experience, economic factors, and future cash flows of the Company post-acquisition of Milacron.  In addition, Hillenbrand reviewed certain technological trends and considered the relative stability in the current Milacron customer base.

The preliminary amounts allocated to intangible assets are as follows:
 
 
Gross Carrying Amount
 
Weighted-Average Useful Life
Customer relationships
 
$
560.0

 
19 years
Trade names
 
150.0

 
Indefinite
Technology, including patents
 
95.0

 
10 years
Backlog
 
10.0

 
3 months
    Total
 
$
815.0

 
 


The Company is required to provide additional disclosures about fair value measurements as part of the Consolidated Financial Statements for each major category of assets and liabilities measured at fair value on a nonrecurring basis (including business acquisitions). The working capital assets and liabilities, as well as the property, plant, and equipment acquired, were valued using Level 2 inputs which included data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets (market approach). Goodwill and identifiable intangible assets were valued using Level 3 inputs, which are unobservable by nature, and included internal estimates of future cash flows (income approach). Significant increases (decreases) in any of those unobservable inputs in isolation would result in a significantly higher (lower) fair value measurement.  Management used a third-party valuation firm to assist in the determination of the preliminary purchase accounting fair values, and specifically those considered Level 3 measurements along with Level 2 measurements for certain tangible assets. Management ultimately oversees the third-party valuation firm to ensure that the transaction-specific assumptions are appropriate for the Company.

Impact on results of operations

The results of Milacron’s operations have been included in Hillenbrand’s Consolidated Financial Statements since the November 21, 2019 acquisition date. The following table provides the results of operations for Milacron included in Hillenbrand’s Consolidated Statements of Operations for the three and six months ended March 31, 2020:
 
Three Months Ended
March 31, 2020
 
Six Months Ended
March 31, 2020
Net revenue
$
199.0

 
$
332.3

Loss before income taxes
(30.2
)
 
(29.5
)


In connection with the acquisition of Milacron, the Company incurred a total of $3.9 and $57.7 of business acquisition and integration costs during the three and six months ended March 31, 2020, respectively, which were recorded within operating expenses in the Consolidated Statements of Operations.

Supplemental Pro Forma Information

The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the Milacron acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that Hillenbrand believes are reasonable under the circumstances.

The supplemental pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the Milacron acquisition had occurred on October 1, 2018 to give effect to certain events that Hillenbrand believes to be directly attributable to the Milacron acquisition. These pro forma adjustments primarily include:

•
an increase to depreciation and amortization expense that would have been recognized due to acquired tangible and identifiable intangible assets;
•
an adjustment to interest expense to reflect the additional borrowings of Hillenbrand and the repayment of Milacron’s historical debt in conjunction with the acquisition;
•
an adjustment to remove business acquisition and integration costs, inventory step-up costs, and backlog amortization during the three and six months ended March 31, 2020, as these costs are non-recurring in nature and will not have a continuing effect on Hillenbrand’s results; and
•
the related income tax effects of the adjustments noted above.

The supplemental pro forma financial information for the periods presented is as follows:
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2020
 
2019
 
2020
 
2019
Net revenue
$
648.9

 
$
713.3

 
$
1,331.5

 
$
1,413.1

Net (loss) income attributable to Hillenbrand
(46.8
)
 
37.5

 
(31.3
)
 
67.4

 
 
 
 
 
 
 
 
Net income attributable to Hillenbrand  — per share of common stock:
 
 
 
 
 
 
 
Basic (loss) earnings per share
$
(0.62
)
 
$
0.50

 
$
(0.42
)
 
$
0.90

Diluted (loss) earnings per share
$
(0.62
)
 
$
0.50

 
$
(0.42
)
 
$
0.90



Sale of Milacron facility

In December 2019, the Company completed the sale of a Milacron manufacturing facility located in Germany. As a result of the sale, the Company received net cash proceeds of $13.1 during the six months ended March 31, 2020. There was no material impact to the Consolidated Statement of Operations resulting from the sale of the facility during the six months ended March 31, 2020.

Divestiture of Cimcool

On March 30, 2020, the Company completed the sale of its Cimcool business (“Cimcool”), which represented the former Fluids Technologies reportable segment of Milacron before its acquisition by the Company, to DuBois Chemicals, Inc. The sale resulted in cash proceeds received at closing of $222.4, net of cash divested.

In addition, the Company may receive contingent consideration for the sale of Cimcool of up to an aggregate of $26.0 based on multiple earn-out provisions. The Company accounts for contingent consideration under a loss recovery approach. Under a loss recovery approach, the Company records a contingent consideration asset only to the extent of the lesser of (1) the amount that the non-contingent consideration received is exceeded by the net assets deconsolidated, or (2) the amount of contingent consideration that it is probable will be received. As of the transaction date (and at March 31, 2020), the Company was unable to determine that it was probable that any of the contingent consideration would be received, and accordingly no asset was recorded for contingent consideration. Subsequent measurement of contingent consideration will be based on the guidance for gain contingencies and any gain from contingent consideration will be recorded at the time the consideration is received.

As a result of the sale, the Company recorded a pre-tax loss of $3.0, using Level 2 nonrecurring fair value measurements, within other (expense) income, net in the Consolidated Statements of Operations during the three and six months ended March 31, 2020. The related tax effect resulted in tax expense of $13.0 and was included within income tax expense (benefit) in the Consolidated Statements of Operations during the three and six months ended March 31, 2020. The Company incurred $3.8 of transaction costs associated with the sale during the three and six months ended March 31, 2020, which were recorded within operating expenses in the Consolidated Statements of Operations.

The Company determined that the sale of Cimcool did not represent a strategic shift that had or will have a major effect on its consolidated operations and financial results, and therefore Cimcool was not classified as a discontinued operation. Cimcool’s results of operations were included within the Milacron reportable segment until the completion of the sale on March 30, 2020.

Acquisition of Burnaby Machine and Mill Equipment Ltd.

The Company completed the acquisition of Burnaby Machine and Mill Equipment Ltd. (“BM&M”) in November 2018 for $26.2 in cash, which included post-closing working capital adjustments. The Company used its revolving credit facility to fund the acquisition.  Based in Canada, BM&M provides high-speed gyratory screeners for a variety of industries. The results of BM&M are reported in the Process Equipment Group reportable segment.