Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies

v2.4.0.6
Summary of Significant Accounting Policies
12 Months Ended
Sep. 30, 2012
Summary of Significant Accounting Policies  
Summary of Significant Accounting Policies

2.             Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Hillenbrand and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.  Certain prior period amounts have been reclassified to conform to the 2012 presentation.

 

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 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 stockholders’ 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 income (expense), net” when the transaction is settled.

 

Cash and Cash Equivalents

 

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

 

Trade accounts receivable 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 do not have any off-balance sheet credit exposure related to customers.  We generally hold trade accounts receivable until they are paid.  At September 30, 2012 and 2011, we had reserves against trade receivables of approximately $16.5 and $21.7.

 

Inventories

 

Inventories are valued at the lower of cost or market.  Inventory costs are determined by the last-in, first-out (“LIFO”) method for approximately 48% and 54% of inventories at September 30, 2012 and 2011.  Costs of remaining inventories have been determined principally by the first-in, first-out (“FIFO”) method.

 

 

 

September 30,

 

 

 

2012

 

2011

 

Raw materials and components

 

$

39.1

 

$

36.0

 

Work in process

 

13.9

 

10.8

 

Finished goods

 

37.0

 

36.9

 

Total inventories

 

$

90.0

 

83.7

 

 

If the FIFO method of inventory accounting, which approximates current cost, had been used for all inventories, they would have been approximately $13.8 and $12.8 higher than reported at September 30, 2012 and 2011.

 

Property, Plant, and Equipment

 

Property, plant, and equipment is carried at cost less accumulated depreciation.  Depreciation is computed using principally the straight-line method based on estimated useful lives of six to 40 years for buildings and improvements and three to 10 years for machinery and equipment.  Maintenance and repairs are expensed as incurred.  Upon disposal or retirement, the cost and accumulated depreciation of assets are eliminated from the respective accounts.  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.

 

 

 

September 30, 2012

 

September 30, 2011

 

 

 

Cost

 

Accumulated
Depreciation

 

Cost

 

Accumulated
Depreciation

 

Land and land improvements

 

$

16.8

 

$

(3.5

)

$

15.5

 

$

(3.5

)

Buildings and building equipment

 

92.5

 

(55.5

)

99.1

 

(56.7

)

Machinery and equipment

 

272.5

 

(204.9

)

262.2

 

(196.0

)

Total

 

$

381.8

 

$

(263.9

)

$

376.8

 

$

(256.2

)

 

Total depreciation expense for fiscal years 2012, 2011, and 2010 was $18.7, $19.1, and $17.2.

 

Intangible Assets

 

Intangible assets are initially valued at their fair value.  We have determined the fair value of our intangible assets either by the fair value of the consideration exchanged for the intangible asset or the estimated after-tax discounted cash flows expected to be generated from the intangible asset.

 

Indefinite-lived trade names are not amortized.  Intangible assets with an indefinite life are tested for impairment annually and whenever events or circumstances indicate that the carrying amount may not be recoverable.  Intangible assets with an indefinite life are reviewed for impairment utilizing either a qualitative assessment or quantitative assessment.  If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. The qualitative assessment includes evaluating macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant entity-specific events.  If after completing the qualitative assessment, the carrying value more likely than not exceeds the fair value, we must complete the quantitative assessment.

 

If we perform a quantitative assessment, we compare the fair value of the asset to its carrying value.  An impairment loss would be recognized if the carrying amount exceeds the estimated fair value of the asset.  The amount of the impairment loss would be determined based upon the excess of the asset’s carrying value over its fair value.  The fair values of indefinite-lived intangible assets are determined based upon a discounted cash flow analysis using the relief-from-royalty method, which estimates the cost savings associated with owning, rather than licensing assets.  Significant assumptions are incorporated into these discounted cash flow analyses such as estimated growth rates, royalty rates, and risk-adjusted discount rates.  Based upon our assessments performed in 2012, 2011, and 2010, no impairment charge was required.

 

All other intangible assets, which have finite lives, are amortized on a straight-line basis over periods ranging from five to 22 years.  The useful lives of intangible assets are estimated based on the future economic benefit expected to be received from the assets.  We review finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

 

 

 

September 30, 2012

 

September 30, 2011

 

 

 

Cost

 

Accumulated
Amortization

 

Cost

 

Accumulated
Amortization

 

Finite assets:

 

 

 

 

 

 

 

 

 

Trade names

 

$

6.1

 

$

(5.6

)

$

6.1

 

$

(5.0

)

Customer relationships

 

240.8

 

(25.5

)

242.0

 

(13.8

)

Technology, including patents

 

24.6

 

(9.1

)

24.7

 

(5.0

)

Software

 

34.7

 

(28.8

)

31.0

 

(26.6

)

Other

 

0.6

 

(0.4

)

3.9

 

(1.0

)

 

 

306.8

 

(69.4

)

307.7

 

(51.4

)

Indefinite-lived assets:

 

 

 

 

 

 

 

 

 

Trade names

 

76.5

 

 

76.5

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

383.3

 

$

(69.4

)

$

384.2

 

$

(51.4

)

 

Total amortization expense for fiscal years 2012, 2011, and 2010 was $21.7, $17.0, and $11.0.  Estimated amortization expense related to amortizable intangible assets for the next five years is: $18.5 in 2013, $17.5 in 2014, $15.5 in 2015, $13.4 in 2016, and $13.2 in 2017.

 

Goodwill

 

Goodwill is carried at the reporting unit level.  It is not amortized but is subject to impairment tests performed annually and when events or circumstances indicate the fair value of the reporting unit may be below its carrying value.  Goodwill is reviewed for impairment utilizing either a qualitative assessment or a quantitative assessment.  If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. The qualitative assessment includes evaluating macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific or reporting unit events, and a sustained decrease in stock price, if applicable.  If after completing the qualitative assessment, the carrying value more likely than not exceeds the fair value, we must complete the quantitative assessment.

 

For reporting units where we perform the quantitative assessment, the first step requires us to compare the fair value of each reporting unit to the respective carrying value, which includes goodwill.  The fair value of the reporting unit and the implied fair value of goodwill are determined based upon a combination of an income approach utilizing a discounted cash flow analysis and a market approach utilizing market multiples.  The discounted cash flow analysis includes significant assumptions such as estimated growth rates, future operating margins, risk-adjusted discount rates, and terminal values.  The market multiple analysis utilizes EBITDA market multiples of peer companies from similar industries.  If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent that the implied fair value of the reporting unit goodwill is less than the carrying value of the reporting unit goodwill.  Based upon our assessments performed in 2012, 2011, and 2010, no impairment charge was required.  As expected, final tax-related purchase accounting adjustments for the Rotex acquisition were recorded as of June 30, 2012.  The adjustments increased goodwill and net deferred taxes and other liabilities by $6.4.

 

 

 

Batesville

 

Process
Equipment
Group

 

Total

 

 

 

 

 

 

 

 

 

Balance September 30, 2010

 

$

5.7

 

$

185.9

 

$

191.6

 

Acquisitions

 

 

102.7

 

102.7

 

Adjustments

 

 

(0.4

)

(0.4

)

Foreign currency adjustments

 

 

6.1

 

6.1

 

Balance September 30, 2011

 

5.7

 

294.3

 

300.0

 

Adjustments

 

 

6.4

 

6.4

 

Foreign currency adjustments

 

 

(2.7

)

(2.7

)

Balance September 30, 2012

 

$

5.7

 

$

298.0

 

$

303.7

 

 

Investments

 

Our investment portfolio consists primarily of investments in private equity limited partnerships and common stock with a carrying value of $15.8 and $17.4 at September 30, 2012 and 2011, included in other assets on the consolidated balance sheets.

 

We use the equity method of accounting for substantially all our private equity limited partnerships, with earnings or losses reported in “other income (expense), net” in the consolidated income statements.  This includes our share of any unrealized gains or losses experienced by these affiliates.  Earnings and carrying values for investments accounted for under the equity method are determined based upon the private equity limited partnerships’ financial statements.  Certain of these investments require commitments by us to provide additional funding of up to $3.0.  The timing of this funding is uncertain, but is expected to occur over the next three to five years.

 

When an investment is sold, we report the difference between the sales proceeds and the carrying value as an investment gain or loss.  We regularly evaluate all investments for possible impairment based on current economic conditions and other criteria.  If there is a decline in an investment’s net realizable value that is other than temporary, the decline is recognized as a realized loss, and the cost basis of the investment is reduced to its estimated fair value.  The evaluation of investments for impairment requires judgments to be made, including the identification of potentially impaired investments; the determination of their estimated fair value; and the assessment of whether any decline in estimated fair value is other than temporary.

 

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.  For each site in which a Company unit is involved, 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 general or specific inflation for environmental matters because the number of sites is small, 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 is not material to Hillenbrand.

 

Self-Insurance

 

We are self-insured 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.  These policies have deductibles and self-insured retentions ranging from $0.5 to $1.0 per occurrence, depending upon the type of coverage and policy period.  Our policy is to estimate reserves 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 estimated reserves are classified as other current liabilities and other long-term liabilities within the consolidated balance sheets.

 

Treasury Stock

 

Treasury stock consists of our common shares that have been issued but subsequently reacquired. We account for treasury stock purchases under the cost method.  In accordance with the cost method, we account for the entire cost of acquiring shares of our stock as treasury stock.  When these shares are reissued, we use an average cost method for determining cost.  Proceeds in excess of cost are then credited to additional paid-in capital.

 

On July 24, 2008, our Board of Directors approved the repurchase of up to $100 of common stock. The program has no expiration date, but may be terminated by the Board of Directors at any time. As of September 30, 2012, we had repurchased approximately 1,200,000 shares for $22.5, which were classified as treasury stock.  No shares were repurchased during fiscal year 2012.  We repurchased 200,000 of our shares in fiscal year 2011 for an aggregate $3.8.  During each of fiscal years 2012 and 2011, 100,000 shares were issued from treasury under our various stock compensation programs.  At September 30, 2012, we had $77.5 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, 2012 and 2011.

 

Accumulated Other Comprehensive Loss

 

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to our stockholders.

 

 

 

September 30,

 

 

 

2012

 

2011

 

Cumulative currency translation adjustments

 

$

16.2

 

$

20.4

 

Pension and postretirement (net of taxes of $34.9 and $36.3)

 

(58.5

)

(60.5

)

Unrealized gain (loss) on derivative instruments (net of taxes of $0.7 and $0.1)

 

(0.3

)

0.2

 

Unrealized gain on available for sale securities (net of taxes of $0.1 and $0.2)

 

0.2

 

0.4

 

Total accumulated other comprehensive loss

 

$

(42.4

)

$

(39.5

)

 

Revenue Recognition

 

Net revenue includes gross revenue less sales discounts, customer rebates, sales incentives, and product returns.  We record reserves for customer rebates based upon projected customer volumes.  In connection with obtaining long-term supply agreements from funeral home customers, we may offer sales incentives in the form of custom showrooms and fixtures.  Costs associated with these sales incentives are amortized over the term of the agreement, typically three to five years.  Our sales terms generally offer customers various rights of return, and we record reserves for estimated product returns based upon historical experience.

 

Revenue for our products is recognized when the risk of loss and other risks and rewards of ownership are transferred.  The standard terms for the Process Equipment Group products require recognition of revenue upon shipment of the product.  From time to time, at the customer’s request, Process Equipment Group may recognize revenue prior to shipment.  When this occurs, it is typically because the customer location is not ready to receive the large piece of equipment.  In these circumstances, revenue is only recognized when all specific criteria are met including, but not limited to:  1) risk of ownership has passed to buyer; 2) fixed and reasonable delivery date is established; 3) product is complete and segregated from other inventory; 4) custodial function is insurable and insured; and 5) no specific performance obligations by the seller remain.  Our standard terms for Batesville products require recognition of revenue upon delivery to the customer.

 

Cost of Goods Sold

 

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

 

Research and development costs are expensed as incurred as a component of operating expenses and were $5.2, $4.5, and $3.8 for fiscal years 2012, 2011, and 2010.

 

Warranty Costs

 

We provide for the estimated warranty cost of a product at the time revenue is recognized.  Warranty expense is normally accrued as a percentage of sales based upon historical information, but may include specific provisions for known conditions when identified.  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 our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.  The Process Equipment Group generally offers a one-year warranty on a majority of its products.  It engages in extensive product quality programs and processes, including the active monitoring and evaluation of the quality of its component suppliers, in an effort to minimize warranty obligations.  Warranty costs were not material to the consolidated financial results for fiscal years 2012, 2011, and 2010.

 

Income Taxes

 

We establish deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.  Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.  The majority of the cash at our foreign subsidiaries represents earnings considered to be permanently reinvested for which deferred taxes have not been provided.

 

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

 

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 no greater than 15 months.  The aggregate notional amount of these derivative instruments was $46.0 and $16.5 at September 30, 2012 and 2011.

 

We measure all derivative instruments at fair value and report them on our consolidated balance sheet as assets or liabilities, with an offsetting tax-adjusted amount in accumulated other comprehensive gain (loss).  The carrying value of these contracts, at fair value, resulted in liabilities of $0.4, included in other liabilities at September 30, 2012, and assets of $0.4, included in other assets at September 30, 2011.  See Note 13 for additional information on the fair value of our derivative instruments.

 

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.  Gains and losses on derivative instruments reported in accumulated other comprehensive gain (loss) are subsequently included in earnings in the periods in which earnings are affected by the hedged item.  Losses on financial derivative instruments were recognized in cost of goods sold of $0.3, $0.8, and $1.8 in fiscal years 2012, 2011, and 2010.

 

Business Acquisitions and Related Business Acquisition 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 various 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, not to exceed one year from the date of acquisition.

 

Business acquisition costs are expensed as incurred, and are reported as a component of operating expenses.  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 the evaluation and effort to acquire specific businesses.  Business acquisition 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 and other target evaluation costs.

 

Restructuring Costs

 

Restructuring charges can 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 effected assets, severance costs associated with reductions to the workforce, and charges for legal obligations for which no future benefit will be derived.

 

Recently Adopted Accounting Standards

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Topic 820, Fair Value Measurement).  The new standard provides updates to measurement guidance and enhanced disclosure requirements.  The most significant change is an expansion of the information required for Level 3 measurements based on unobservable inputs.  The new disclosure requirements were effective for Hillenbrand beginning January 1, 2012.  The adoption of this standard did not have a significant impact on our consolidated financial statements for the period presented.

 

In September 2011, the FASB issued an accounting standards update titled Intangibles — Goodwill and Other: Testing Goodwill for Impairment.  This update gives the option of performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and, in some cases, skip the two-step impairment test.  This standard is effective for fiscal years beginning after December 15, 2011, and early adoption is permitted.  The adoption of this standard did not have a significant impact on our consolidated financial statements for the period presented.

 

In July 2012, the FASB issued an accounting standards update titled Intangibles — Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment.  This update gives the option of performing a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If it is determined that it is more likely than not that the fair value of such an asset exceeds its carrying amount, it would not need to calculate the fair value of the asset in that year.  This standard is effective for fiscal years beginning after September 15, 2012, and early adoption is permitted.  The adoption of this standard did not have a significant impact on our consolidated financial statements for the period presented.

 

Recently Issued Accounting Standards

 

In June 2011, the FASB issued an accounting standards update titled Presentation of Comprehensive Income.  This update eliminates the current option to report other comprehensive income and its components in the statement of changes in equity.  An entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate consecutive statements.  Each component of net income and other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, must be displayed under either alternative. The new disclosure requirements will be effective for our fiscal year beginning October 1, 2012.  As the new standard relates to presentation only, we do not expect that the adoption of this standard will have a significant impact on our consolidated financial statements.