Quarterly report pursuant to Section 13 or 15(d)

Business Acquisitions

v2.4.0.8
Business Acquisitions
9 Months Ended
Jun. 30, 2013
Business Acquisitions  
Business Acquisitions

3.              Business Acquisitions

 

We completed the acquisition of Coperion on December 1, 2012, in a transaction valued at $540.7.  The aggregate purchase consideration consisted of $269.1 of cash, net of cash acquired, and the assumption of $146.0 of debt and $125.6 of pension liabilities.  We utilized $426.3 of borrowings under our revolving credit facility and cash on hand to finance the acquisition, including the repayment of $146.0 of debt outstanding under Coperion’s prior financing arrangements.

 

Based in Stuttgart, Germany, Coperion is a global leader in the manufacture of compounding, extrusion, and bulk material handling equipment used in a broad range of industries, including plastics, chemicals, food processing, pharmaceutical, and aluminum.  Coperion has been in business since 1879, and has nine manufacturing sites in Germany, the United States (“U.S.”), China, and India, and sales offices in approximately 30 locations in the Americas, Europe, and Asia.  Coperion had approximately 2,000 employees worldwide as of June 30, 2013.  Approximately 30% of Coperion’s revenue is derived from replacement parts and service, generating a large portion of recurring business due to its well-positioned service network and active installed base of equipment across the world.

 

Coperion revenues consist of large system sales, equipment, components, replacement parts, and service.  Large system sales are fulfilled over 12 to 18 months on average, whereby customers generally pay a deposit and make progress payments before and during the manufacture of the order.  Working capital requirements for Coperion have ranged from an optimal negative working capital position, where cash received from customers is more heavily weighted toward the beginning of the project, to our current position where a larger portion of the cash will be received in later stages of manufacturing.

 

The Coperion business model includes large system projects, where strong application and processing engineering expertise is used to create an entire system for customers.  These system projects include Coperion-manufactured proprietary equipment, such as extruders and compounders, as well as components manufactured by third parties, such as gears and motors.  Coperion earns attractive gross profit margins similar to the rest of the Process Equipment Group on their proprietary equipment and replacement parts and service (approximately 2/3 of their revenue).  About 1/3 of their revenue is generated from third-party-sourced products that carry only a small up-charge, resulting in low single-digit gross profit margins on these products. 

 

Hillenbrand believes that selling these complete systems provides a significant competitive advantage and increases margin dollars.

 

This acquisition is the largest in the Company’s history and represents an important step in the execution of our strategic plans to further diversify Hillenbrand and accelerate the growth of the Process Equipment Group business platform.  The integration of Coperion with the Process Equipment Group will be a key initiative for the next 12 to 18 months.  Combining our product offerings to provide a more complete system solution is our highest priority from an integration perspective.  In addition, we believe leveraging Coperion’s global infrastructure will enable the existing businesses within the Process Equipment Group platform to enter new global markets more quickly.  We also expect the Process Equipment Group’s existing strong U.S. sales network will enhance Coperion’s expansion in North America.  Finally, the application of the Company’s lean tools and other core competencies to Coperion’s operations is expected to contribute to improved margins and increased customer satisfaction.

 

The following table summarizes preliminary estimates of fair values of the assets acquired and liabilities assumed in the Coperion acquisition:

 

 

 

December 1,
2012

 

Cash and cash equivalents

 

$

32.8

 

Inventory

 

109.1

 

Current assets, excluding cash and cash equivalents and inventory

 

179.9

 

Property, plant, and equipment

 

54.4

 

Identifiable intangible assets

 

291.8

 

Goodwill

 

234.0

 

Other assets

 

2.1

 

Total assets acquired

 

904.1

 

 

 

 

 

Current liabilities

 

284.0

 

Accrued pension obligations

 

125.6

 

Deferred income taxes

 

33.4

 

Other long-term liabilities

 

6.7

 

Total liabilities assumed

 

449.7

 

 

 

 

 

Noncontrolling interest assumed

 

6.5

 

 

 

 

 

Aggregate purchase price

 

$

447.9

 

 

The estimation of fair value of Coperion’s assets and liabilities is preliminary and subject to adjustment based on finalization of the closing balance sheet, including deferred tax balances.

 

Goodwill is not deductible for tax purposes and was allocated entirely to our Process Equipment Group.  Excluding the acquisition of Coperion, the change in goodwill during the nine months ended June 30, 2013, was due to fluctuation in foreign currency rates.

 

Fair value amounts assigned to identifiable definite-lived intangible assets are being amortized on a straight-line basis over their estimated useful lives. The amounts and useful lives assigned to each asset type at the time of acquisition were:

 

 

 

Fair Values

 

Estimated
Useful Lives

(years)

 

Trade names

 

$

55.6

 

Indefinite

 

Customer relationships

 

157.7

 

20

 

Technology, including patents

 

44.2

 

12

 

Backlog

 

34.3

 

<1

 

Total identifiable intangible assets

 

$

291.8

 

 

 

 

The unaudited pro forma information for the periods set forth below gives effect to the Coperion acquisition as if it had occurred at the beginning of the earliest period presented.  It includes adjustments for additional interest expense, depreciation, and amortization.  The unaudited pro forma information for the three and nine months ended June 30, 2012, includes acquisition costs of $2.8 and $13.5 as well as backlog amortization and inventory step-up costs of $14.4 and $56.6.  Acquisition costs, backlog amortization, and inventory step-up costs are not included in the pro forma information for the three and nine months ended June 30, 2013.  The unaudited pro forma information is presented for informational purposes only and does not necessarily reflect the results of operations that would actually have been achieved had the acquisition been consummated as of that time.

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Pro forma net revenue

 

$

408.8

 

$

389.5

 

$

1,227.7

 

$

1,249.4

 

Pro forma net income(1)

 

29.9

 

5.6

 

87.9

 

37.9

 

Pro forma basic earnings per share

 

$

0.48

 

$

0.09

 

$

1.40

 

$

0.61

 

Pro forma diluted earnings per share

 

$

0.47

 

0.09

 

$

1.40

 

0.61

 

 

 

(1) Pro forma net income attributable to Hillenbrand

 

We incurred $2.8 and $13.5 of net business acquisition costs associated with the acquisition during the three and nine months ended June 30, 2013.  These costs consist of $2.5 and $13.4 of operating expenses and $0.5 and $1.1 of interest expense for the three and nine months ended June 30, 2013, partially offset by $0.2 and $1.0 of other income for the three and nine months.

 

Coperions results are included in our Process Equipment Group results.  The acquisition of Coperion included a few small subsidiaries where the 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 Consolidated Balance Sheets. Income attributable to the noncontrolling interests was $0.4 and $1.2 for the three and nine months ended June 30, 2013, is separately reported within the Consolidated Statements of Income, and is also excluded from Total Hillenbrand Shareholder’s Equity.