10-K 1 hi201893010-k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the year ended September 30, 2018
Commission File No. 001-33794
 
HILLENBRAND, INC.
(Exact name of registrant as specified in its charter)
Indiana
26-1342272
(State of incorporation)
(I.R.S. Employer Identification No.)
 
 
One Batesville Boulevard
 
Batesville, Indiana
47006
(Address of principal executive offices)
(Zip Code)
 Registrant’s telephone number, including area code: (812) 934-7500
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, without par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 ý
 
 
Accelerated filer
 o
Emerging growth company
 o
Non-accelerated filer
 
 o
 
 
Smaller reporting company
 o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The aggregate market value of voting stock (consisting solely of shares of common stock) held by non-affiliates of the registrant as of March 30, 2018 was $2,868,342,913.  As of November 8, 2018, 62,347,253 shares of common stock were outstanding.
Documents Incorporated by Reference
Portions of our definitive proxy statement for the 2019 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. The proxy statement will be filed no later than January 5, 2019.
 



TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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(monetary amounts in millions, except per share data)
 
PART I
 
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
 
Throughout this Form 10-K, we make a number of “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  As the words imply, these are statements about future plans, objectives, beliefs, and expectations that might or might not happen in the future, as contrasted with historical information.  Forward-looking statements are based on assumptions that we believe are reasonable, but by their very nature are subject to a wide range of risks.
 
Accordingly, in this Form 10-K, we may say something like,
 
“We expect that future revenue associated with the Process Equipment Group will be influenced by order backlog.”
 
That is a forward-looking statement, as indicated by the word “expect” and by the clear meaning of the sentence.
 
Other words that could indicate we are making forward-looking statements include:
 
intend
believe
plan
expect
may
goal
would
 
 
 
 
 
 
 
become
pursue
estimate
will
forecast
continue
could
 
 
 
 
 
 
 
target
encourage
promise
improve
progress
potential
should
 
This is not an exhaustive list, but is intended to give you an idea of how we try to identify forward-looking statements.  The absence of any of these words, however, does not mean that the statement is not forward-looking.
 
Here is the key point: Forward-looking statements are not guarantees of future performance, and our actual results could differ materially from those set forth in any forward-looking statements. 

Any number of factors, many of which are beyond our control, could cause our performance to differ significantly from what is described in the forward-looking statements. This includes the impact of the Tax Cuts and Jobs Act (the “Tax Act”), enacted by the U.S government on December 22, 2017, on the Company’s financial position, results of operations, and cash flows. For a discussion of factors that could cause actual results to differ from those contained in forward-looking statements, see the discussions under the heading “Risk Factors” in Item 1A of this Form 10-K.  We assume no obligation to update or revise any forward-looking statements.
 
Item 1.        BUSINESS
 
In this section of the Form 10-K, we provide you a general overview of the Company, including a high-level review of our reportable segments and how we operate. We then present our reportable segments in greater detail, including the products we manufacture and sell, how those products are distributed and to whom, with whom we compete, the key inputs to production, and an explanation of our business strategies.  We also provide you information on any key patents, trademarks, and regulatory matters important to our business.  Finally, we provide you a brief background on our executive officers so that you can understand their experience and qualifications.
 
GENERAL
 
Hillenbrand (www.Hillenbrand.com) is a global diversified industrial company with multiple leading brands that serve a wide variety of industries around the world. Hillenbrand’s portfolio is composed of two business segments: the Process Equipment Group and Batesville®. The Process Equipment Group businesses design, develop, manufacture, and service highly engineered industrial equipment around the world. Batesville is a recognized leader in the death care industry in North America. Hillenbrand was incorporated on November 1, 2007, in the state of Indiana and began trading on the New York Stock Exchange

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under the symbol “HI” on April 1, 2008.  “Hillenbrand,” “the Company,” “we,” “us,” “our,” and similar words refer to Hillenbrand, Inc. and its subsidiaries unless context otherwise requires.

Although Hillenbrand has been a public company for a little more than ten years, the businesses owned by Hillenbrand have been in operation for many decades.

Between 2010 and 2014, Hillenbrand completed three major acquisitions of companies that formed the foundation of our Process Equipment Group:  K-Tron International, Inc. (“K-Tron”) in April 2010, Rotex Global, LLC (“Rotex”) in August 2011, and Coperion Capital GmbH (“Coperion”) in December 2012. 

TerraSource Global, also part of our Process Equipment Group, was organized in July 2012 from three brands, Gundlach Equipment Corporation, Jeffrey Rader Corporation, and Pennsylvania Crusher Corporation, each acquired as part of the K-Tron acquisition. The remaining K-Tron brands merged with Coperion during 2013.

On October 2, 2015, Hillenbrand acquired Abel Pumps LP, Abel GmbH & Co. KG, and certain of their affiliates (collectively “Abel”). Additionally, on February 1, 2016, Hillenbrand acquired Red Valve Company, Inc. (“Red Valve”). Both Abel and Red Valve are now included in our Process Equipment Group segment.

See Note 3 to our financial statements included in Part II, Item 8 of this Form 10-K for more information on the Abel and Red Valve acquisitions.

Business Segments

Process Equipment Group

The Process Equipment Group is a leading global provider of compounding, extrusion, and material handling; size reduction; screening and separating; and flow control products and services for a wide variety of manufacturing and other industrial processes.

We believe the Process Equipment Group has attractive fundamentals including:
Geographic diversification;
A parts and service business with historically stable revenue and attractive margins;
A customer base that is highly diversified and has a strong history of long-term relationships with blue-chip end user customers; and
Proven products with substantial brand value and recognition, combined with industry-leading applications and engineering expertise.

Batesville

Batesville is a leader in the North American death care industry through the manufacture and sale of funeral service products, including burial caskets, cremation caskets, containers and urns, other personalization and memorialization products, and web-based technology applications.
 
We believe Batesville has attractive fundamentals including:
Historically predictable strong cash flow and attractive margins;
Historically high return on invested capital; and
Substantial brand value and recognition, combined with quality service, a nationwide distribution network, and a strong customer base.

How We Operate

We strive to provide superior return for our shareholders, exceptional value for our customers, great professional opportunities for our employees, and to be responsible to our communities through deployment of the Hillenbrand Operating Model (HOM). The HOM is a consistent and repeatable framework designed to produce sustainable and predictable results.  The HOM describes our mission, vision, values and mindset as leaders; applies our management practices in Strategy Management, Segmentation, Lean, Talent Development, and Acquisitions; and prescribes three steps (Understand, Focus, and Grow) designed to make our businesses both bigger and better.  Our goal is to continue developing Hillenbrand as a world-class global diversified industrial company through the deployment of the HOM.


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Our strategy is to leverage our historically strong financial foundation and the implementation of the HOM to deliver sustainable profit growth, revenue expansion and substantial free cash flow and then reinvest available cash in new growth initiatives focused on building platforms with leadership positions in our core markets and near adjacencies, both organically and inorganically, in order to create shareholder value.

REPORTABLE SEGMENTS

Process Equipment Group
 
The Process Equipment Group designs, engineers, manufactures, markets, and services differentiated process and material handling equipment and systems for a wide variety of industries, including plastics, food and pharmaceuticals, chemicals, fertilizers, minerals and mining, energy, wastewater treatment, forest products, and other general industrials.  The Process Equipment Group uses its strong applications and process engineering expertise to solve problems for customers.  Its highly engineered capital equipment and systems offerings require after-market service and/or parts replacement, providing an opportunity for ongoing revenue at attractive margins.
 
Process Equipment Group:  Products and Services
 
The Process Equipment Group product portfolio has grown through a series of acquisitions over the past eight years and now includes products and services for compounding, extrusion, and material handling; size reduction; screening and separating; and flow control.  The Process Equipment Group businesses are supported by replacement parts and services that represent approximately 33% of the group’s total revenue.  Products are offered under brand names that are recognized among the leaders in their respective categories.
 
Compounding, Extrusion, and Material Handling Equipment, and Equipment System Design
 
Twin screw compounding and extrusion machines range from small laboratory compounding machines to high performance, high throughput extrusion systems. Small and mid-sized compounders are used by customers in engineering plastics, masterbatch, PVC, and other applications for the plastics, chemical, and food and pharmaceutical industries.  Extrusion systems are sold to customers in the polyolefin industry for base resin production.  All of these extrusion products are sold under the Coperion® brand.
Material handling equipment includes pneumatic and hydraulic conveying equipment for difficult-to-move materials; high-precision feeders that can operate at both very high and very low fill rates; blenders for pellets and powders; and rotary valves, diverter valves, and slide-gate valves used for feeding, dosing, discharge, and distribution during pneumatic conveying.  The proprietary equipment is highly engineered and designed to solve the needs of customers for customized solutions.  Material handling equipment is sold to a variety of industries, including plastics, food and pharmaceuticals, chemicals, and minerals and mining.  These products are sold under the Coperion® and Coperion K-Tron® brands.
Compounding, extrusion, and material handling equipment can be sold as a complete system, where strong application and process engineering expertise is used to design and create a broad system solution for customers.  Systems can range from a single manufacturing line to large scale manufacturing lines and turnkey systems.  Larger system sales are generally fulfilled over 12 to 18 months.  Some portion of revenue for large system sales typically comes from third-party-sourced products that carry only a small up-charge. As a result, margin percentages tend to be lower on these large system sales when compared to the rest of the business. 

Size Reduction Equipment

Size reduction equipment is used to reduce the size of friable materials.  Pennsylvania Crusher® and Gundlach® products are used to crush materials in the power generation, mining, quarrying, glass making, salt processing, and fertilizer manufacturing industries.  Jeffrey Rader® products are used in industries including forest products, pulp and paper, biomass power and energy generation, and plastics/base resin manufacturing. Jeffrey Rader also designs and provides complete material handling and pneumatic or mechanical conveying systems to meet product specifications, including boiler feed, resource recovery, rail and truck loading/unloading, and recycling systems.





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Screening and Separating Equipment
 
Screening and separating equipment sorts dry, granular products based on the size of the particles being processed.  This equipment is sold under the Rotex® brand to customers in a variety of industries including proppants, fertilizers, chemicals, agricultural goods, plastics, and food processing.  The equipment uses a unique technology based on a specific gyratory-reciprocating motion that provides an optimal material distribution on the screens, gentle handling of particles, and accurate separations.
 
Flow Control Solutions

Pump solutions mainly consist of piston and piston diaphragm pump technologies that transfer abrasive or corrosive fluids and fluids with a high sludge or solids content for mission critical applications. This equipment is sold under the ABEL® Pump Technology brand into the power generation, wastewater treatment, mining, general industry, and marine markets. This equipment lends itself to a superior total cost of ownership over time compared to other pumping technologies.
Valve solutions mainly consist of pinch valves and duckbill check valves that manage fluids for mission-critical, severe service applications. These valves, among others, are sold under Red Valve®, Tideflex Technologies, and RKL Controls brands into the water and wastewater, drainage and storm water, mining, chemicals, and power markets. These engineered valves are designed for long life in the toughest municipal and industrial applications, lending themselves to superior total costs of ownership over time.

Replacement Parts and Service
 
Replacement parts and service are a major component of most of the Process Equipment Group business lines.  Service engineers and technicians are located around the globe to better respond to customers’ machines and systems service needs.  The parts and service division offers customers service consulting, training, maintenance and repairs, spare parts, and modernization solutions. 

Process Equipment Group:  Sales, Distribution, and Operations
 
The Process Equipment Group sells equipment and systems throughout the world using a combination of direct sales and a global network of independent sales representatives and distributors.  A part of the Process Equipment Group’s sales, especially in North America, is made through independent sales representatives who are compensated by commission. 
 
Equipment and systems orders are often for unique, engineered-to-order items.  Therefore, the Process Equipment Group does not typically maintain significant amounts of raw material and component stock inventory on hand at any one time, except to cover replacement part orders.  Products are either assembled and tested at Process Equipment Group facilities and then shipped to a customer or are assembled at the customer’s desired location.
 
We expect that future revenue associated with the Process Equipment Group will be influenced by order backlog because of the lead time involved in fulfilling engineered-to-order equipment for customers. Backlog represents the amount of consolidated revenue that we expect to realize on contracts awarded to the Process Equipment Group.   Though backlog can be an indicator of future revenue, it does not include projects and parts orders that are booked and shipped within the same quarter.  The timing of order placement, size of order, extent of customization, and customer delivery dates can create fluctuations in backlog and revenue.  Revenue attributable to backlog may also be affected by foreign exchange fluctuations for orders denominated in currencies other than United States (“U.S.”) dollars.

Process Equipment Group:  Customers
 
The Process Equipment Group has customers in a wide range of industries, including plastics, food and pharmaceuticals, chemicals, fertilizers, minerals and mining, energy, wastewater treatment, and forest products.  These customers range from large, Fortune 500 global companies to regional and local businesses.  No one Process Equipment Group customer accounted for more than 10% of Hillenbrand’s consolidated revenue during 2018.  For large or customized orders, customers generally pay a deposit and make progress payments in accordance with the project progress.  Often, long-term relationships are established with these customers.
 
The Process Equipment Group’s sales are diversified by end markets, and further penetration of these end markets is an important element of its strategy.  Currently, projects in the plastics industry represent greater than half of the Process

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Equipment Group’s sales.  Geographically, approximately two-thirds of the revenue in the Process Equipment Group comes from the Americas and EMEA (Europe, the Middle East, and Africa), with the remaining third coming from Asia.

We believe that long-term growth for this segment is driven by megatrends such as a rapidly growing middle class in China and India and a growing global population, resulting in rising demand for products sold in many of the end markets the Process Equipment Group serves.  While overall demand for these products is expected to increase over the long run, we expect short-term periodic fluctuations in demand from time-to-time.
 
Process Equipment Group:  Competition
 
We believe the Process Equipment Group holds leading positions in key industries because of design and quality of products, extensive application and process engineering expertise, product support services, brand name recognition, and commitment to serving the needs of customers.
 
The Process Equipment Group brands face strong competition in the markets where they compete. Competitors range in size from small, privately-held companies serving narrow market segments or geographical areas to larger, well-known global companies serving national and international markets with multiple product lines.  We believe the Process Equipment Group’s diversification into multiple industries and markets, its base of replacement parts business, and its strong worldwide network of suppliers and dealers will allow it to maintain leadership positions even during economic downturns.
 
Process Equipment Group:  Raw and Component Materials
 
The manufacturing of the Process Equipment Group’s products involves the machining and welding of raw materials (primarily sheet metals and steel) and castings that are assembled with other component parts that generally require particular specifications or qualifications purchased from third-party suppliers.  Although most of these raw materials and components are generally available from several sources, some of these items are currently purchased from single sources.  Volatility in the prices the Process Equipment Group pays for raw materials used in its products, including sheet metals and steel, has a direct effect on profitability. The Process Equipment Group regularly takes steps designed to mitigate the impact of volatility in raw and component material prices, including executing Lean initiatives and various pricing and sourcing actions.  In instances where third-party suppliers are depended upon for outsourced products or components, there is risk of customer dissatisfaction with the quality or performance of the products sold due to supplier failure.  In addition, difficulties experienced by third-party suppliers can interrupt the ability to obtain the outsourced product and ultimately to supply products to customers.  Regardless, we believe the Process Equipment Group will generally be able to continue to obtain adequate supplies of key products or appropriate substitutes at reasonable costs.
 
Process Equipment Group:  Strategy
 
The Process Equipment Group seeks profitable growth through the following strategic initiatives:

Build and grow leadership positions in our current platforms

Build leadership positions in core and near adjacent markets through the introduction of new products and services leveraging our process expertise.
Leverage our geographic presence to improve access to underpenetrated channels and local regions in developed and emerging markets.
Pursue acquisitions that strengthen or establish our leadership position in key markets.

Utilize the Hillenbrand Operating Model principles and tools to strengthen our competitive position and maintain an optimal cost structure to support profitability

Continually improve processes to be more consistent and cost efficient and to yield industry leading quality products and services that our customers value.
 
Batesville

Batesville® is a recognized leader in the death care industry in North America, where it has been designing, manufacturing, distributing, and selling funeral service products and solutions to licensed funeral directors operating licensed funeral homes for more than 100 years. 


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Batesville:  Products and Services

As the needs of funeral professionals and consumers have evolved, Batesville has expanded its offerings with innovative products, value-added services, and digital tools to help funeral directors assist families in creating meaningful services.  Today, the company provides solutions under three primary platforms: (1) Burial Solutions, which accounts for the majority of Batesville’s revenue, (2) Cremation Options®, and (3) Technology Solutions. 
 

Burial Solutions

As a recognized leader in the death care industry in North America, Batesville has been on the forefront of product innovation for more than 60 years. The company has introduced new interior and exterior design elements, materials, finishes, and proprietary features that align with consumer trends and preferences, while adding value for funeral professionals and consumers. Batesville’s product portfolio covers the full spectrum in variety and value, with metal and wood caskets to appeal to different consumers.
 
Cremation Options® 

The Cremation Options® platform is focused on helping funeral professionals profitably serve the growing number of consumers choosing cremation.  In addition to a broad line of cremation caskets, containers, urns, remembrance jewelry, and keepsakes, Batesville offers training, merchandising, packaging support, and marketing support materials to educate funeral directors and consumers on product and service options. 

Technology Solutions

Batesville’s technology solutions enhance the consumer experience and create business efficiencies for over 6,000 funeral homes and cemeteries across North America. The company offers a suite of integrated, easy-to-use technology products and services, including funeral home websites, e-commerce solutions, digital selection and arrangement software, and business management systems for funeral homes and cemeteries.


Batesville also offers an expansive assortment of personalization and memorialization elements that can be incorporated into products and services to capture the individuality of the loved one and create a unique and meaningful experience for the family. Personalization is available on both burial and cremation products using Batesville’s proprietary LifeSymbols® designs, LifeStories® medallions and keepsakes, LifeView® panels, embroidered tribute panels, and MemorySafe® Drawer. Funeral directors can also create themed obituaries, personalize video tributes and provide other tailored offerings for families using Batesville’s web technology.

Batesville:  Sales, Distribution, and Operations

Batesville-branded caskets are marketed by a direct sales force only to licensed funeral professionals operating licensed funeral establishments throughout the U.S., Puerto Rico, Canada, Mexico, and Australia.  Batesville also markets its products to select independent distribution facilities as well as full-service funeral establishments offering funeral products in conformance with state law in states that do not have specific licensing requirements.

Batesville has sales contracts in place with certain national death care service providers and also serves more than 11,500 independent, privately owned funeral homes across North America.  None of Batesville’s customers accounted for more than 10% of Hillenbrand’s consolidated revenue during 2018.

Batesville:  Customer Preferences and Demographics

The death of a family member causes most people to seek the services of a state-licensed funeral director.  Although caskets and urns can be purchased from a variety of sources, including internet sellers and casket stores, the overwhelming majority of consumers who arrange a funeral purchase these products directly from a funeral home. Consumer spending on caskets and urns has not kept pace with inflation, negatively impacting product mix. We anticipate this trend in consumer spending will continue, which would result in mix decline in the foreseeable future.


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Demand for Batesville products and services is partially impacted by a few key external factors: U.S. and Canadian population demographics, the number of deaths annually, and the rate at which consumers select cremation. The combination of these primary factors has negatively impacted the burial volume trend in recent years, although periodic fluctuations can impact demand and revenue in a given quarter and year. We anticipate the negative trend in burial demand will continue in the foreseeable future as the higher number of deaths among the aging post-World War II baby boomer generation is more than offset by the continued shift toward cremation. As a percentage of total deaths, the estimated cremation rate in 2018 was approximately 52% in the U.S. and 71% in Canada (Source: Cremation Association of North America). 

Batesville:  Competition

Batesville is a recognized leader in the death care products industry, competing with several national and regional casket manufacturers, as well as more than 100 independent casket distributors, most of whom serve fairly narrow geographic segments.  Some non-traditional death care providers, such as large discount retail stores, casket stores, and internet casket retailers also sell caskets directly to consumers.  The industry has seen foreign manufacturers, mostly from China, import caskets into the U.S. and Canada.  Sales from these non-traditional and foreign providers collectively currently represent less than 10% of total casket sales in North America. We expect declining casket demand and existing domestic over-capacity to continue to put added economic pressures on casket manufacturers and distributors.

Batesville:  Raw Materials

Batesville uses carbon and stainless steel, copper and bronze sheets, wood, fabrics, finishing materials, rubber gaskets, plastic and zinc in the manufacture of its caskets.  Although most of these raw materials are generally available from several sources, some are currently procured from a single source.

Volatility in raw material prices, including steel, fuel, and petroleum-based products, has a direct effect on Batesville’s profitability.  The company generally does not engage in hedging transactions for these purchases but does enter into fixed-price supply contracts at times.  Batesville regularly takes steps designed to mitigate the impact of volatility in raw material and fuel prices, including executing Lean initiatives and various sourcing actions.

Most of Batesville’s sales are made pursuant to supply agreements with its customers, and historically it has instituted annual price adjustments to help offset some, but not necessarily all, raw material cost increases.

Batesville:  Strategy

While we believe there are opportunities to generate additional revenue within a wider range of death care products and services, sustaining volume in the burial casket space continues to be a top priority.  Batesville’s leadership team is focused on two strategic initiatives to sustain burial volume:

Grow leadership position in the death care industry

Focus on building and delivering value propositions that align with the needs of each customer segment to continue Batesville’s mission of helping families honor the lives of those they love®.

Utilize the Hillenbrand Operating Model principles and tools to strengthen our leadership position and maintain an optimal cost structure to support profitability

Continually improve processes to be more consistent and efficient and to yield industry leading quality products and services that our customers value.

HILLENBRAND INTELLECTUAL PROPERTY
 
We own a number of patents on our products and manufacturing processes and maintain trade secrets related to manufacturing processes.  These patents and trade secrets are of importance, but we do not believe any single patent or trade secret or related group of patents or trade secrets is of material significance to our business as a whole. We also own a number of trademarks and service marks relating to products and services which are of importance.  We believe the marks Coperion®, Coperion K-Tron®, TerraSource Global®, Pennsylvania Crusher®, Gundlach®, Jeffrey Rader®, K-Tron®, Rotex®, ABEL® Pump Technology, and Red Valve® are of material significance to the Process Equipment Group.  We believe the trademark Batesville® is of material significance to our Batesville segment.
 

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Our ability to compete effectively depends, to an extent, on our ability to maintain the proprietary nature of our intellectual property. In the past, certain of our products have been copied and sold by others and could continue to be.  Hillenbrand vigorously seeks to enforce its intellectual property rights.  However, we may not be sufficiently protected by our various patents, trademarks, and service marks, and they may be challenged, invalidated, cancelled, narrowed, or circumvented.  Beyond that, we may not receive the pending or contemplated patents, trademarks, or service marks for which we have applied or filed.
 
HILLENBRAND REGULATORY MATTERS
 
Both the Process Equipment Group and Batesville are subject to a variety of federal, state, local, and foreign laws and regulations relating to environmental, health, and safety concerns, including the handling, storage, discharge, and disposal of hazardous materials used in or derived from our manufacturing processes.  We are committed to operating all our businesses in a manner that protects the environment and makes us good corporate citizens in the communities in which we operate.  While we believe that continued compliance with federal, state, local and foreign laws relating to the protection of the environment will not have a material effect on our capital expenditures, earnings or competitive position, future events or changes in existing laws and regulations or their interpretation may require us to make additional expenditures in the future.  The cost or need for any such additional expenditure is not known.
 
HILLENBRAND EMPLOYEES
 
At September 30, 2018, we had approximately 6,500 employees worldwide.  Approximately 3,100 employees were located within the U.S. and 3,400 employees were located outside of the U.S., primarily throughout Europe and China.  Approximately 2,700 employees in North America and Europe work under collective bargaining agreements.  Hillenbrand strives to maintain satisfactory relationships with all its employees, including the unions and workers’ councils representing those employees.  As a result, we have not experienced a significant work stoppage due to labor relations in more than 20 years.

EXECUTIVE OFFICERS OF THE REGISTRANT
 
Our Board of Directors is responsible for electing the Company’s executive officers annually and from time to time as necessary.  Executive officers serve in the ensuing year and until their respective successors are elected and qualified.  There are no family relationships between any of our executive officers or between any of them and any members of the Board of Directors.  The following is a list of our executive officers as of November 13, 2018.
 
Joe A. Raver, 52, has served as a director and as President and Chief Executive Officer of the Company since September 2013. He has served as President of the Company’s Process Equipment Group since March 2011. Mr. Raver was elected as a director of Applied Industrial Technologies, Inc. (“AIT,”) a leading industrial distributor serving MRO and OEM customers in virtually every industry in August 2017. In October 2017, Mr. Raver was appointed to both the Audit and the Corporate Governance committees of AIT. He previously served as President of Batesville Casket Company from 2008 to 2011.  He also previously served as Vice President and General Manager of the respiratory care division of Hill-Rom Holdings (“Hill-Rom,” f/k/a Hillenbrand Industries, Inc.), a leading global provider of medical equipment and services and the Company’s former parent, as well as Hill-Rom’s Vice President of Strategy and Shared Services.  Prior to that, Mr. Raver spent 10 years in a variety of leadership positions at Batesville Casket Company and Hill-Rom.
 
Kristina A. Cerniglia, 52, was elected Senior Vice President, Chief Financial Officer effective August 2014. Ms. Cerniglia has more than 30 years of industrial experience. Before assuming the role as Hillenbrand’s Chief Financial Officer, she spent 17 years serving in a variety of leadership roles, most recently as Vice President and Corporate Controller (2010-2014), at Stanley Black & Decker, a global provider of power and hand tools, mechanical access solutions, and electronic monitoring systems. Prior to that, she spent nine years of her career at United Technologies Corporation in various financial roles.

Kimberly K. Ryan, 51, was elected President of Coperion GmbH effective September 2015. Since August 2018, she also oversees the Company’s Rotex business. Ms. Ryan has also been a Senior Vice President of Hillenbrand since April 2011. Prior to being appointed President of Coperion, Ms. Ryan served as President of Batesville effective April 2011. Ms. Ryan has also served as a member of the Board of Directors of Kimball International, Inc. since 2014, including as a member of the Audit Committee during that time and as Chair of the Board since November 2018. Prior to joining Hillenbrand from 2006 until 2011, Ms. Ryan served as Senior Vice President, North America, Post-Acute Care of Hill-Rom Holdings. Prior to that, she held various senior and leadership roles at Hillenbrand Industries, Inc., our former parent, and its subsidiaries, including leading its Turnaround Program, Shared Services, and Information Technology from 2005 to 2007, and from 2000 to 2005 serving in roles including Vice President, Shared Services; Vice President, Batesville Business Information Systems; and Director, Enterprise Systems. Ms. Ryan began

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her career with Batesville in 1989, holding positions of increasing responsibility within Batesville and the Company’s former parent in finance, strategy, operations, logistics, and information technology.

Christopher H. Trainor, 48, was elected President of Batesville Casket Company effective September 2015, after having served as Senior Vice President, CFO and Chief Administrative Officer. Mr. Trainor has also been a Senior Vice President of Hillenbrand since December 2015. Mr. Trainor joined Batesville in 2010 as Vice President and Chief Financial Officer and was later assigned additional responsibilities for oversight of Human Resources and Information Technology. Prior to joining Batesville, Mr. Trainor spent 17 years with Kraft Foods where he held a variety of finance roles in both the United States and United Kingdom.
J. Michael Whitted, 46, was elected Senior Vice President Strategy and Corporate Development effective June 2018. Prior to joining the Company, Mr. Whitted served as Vice President, Corporate Development for SPX Corporation and SPX Flow, Inc. from 2001 to 2015. Prior to that, he served as a Vice President for Bear Stearns from 1998 to 2001, where he led corporate finance and M&A advisory transactions. Mr. Whitted’s experience prior to Bear Stearns included corporate finance and M&A advisory roles at CIBC World Markets, Bankers Trust, and First Chicago NBD.

Glennis A. Williams, 42, was elected Senior Vice President & Chief Human Resources Officer effective July 2017. Ms. Williams brings with her nearly 20 years of experience in human resources, serving most recently as Vice President, Global Human Resources for Welbilt Inc. in New Port Richey, Florida, from 2016 to 2017. Prior to that, she served as Vice President of Human Resources at Joy Global from 2013 to 2016 and as a Human Resources Leader at Westinghouse Electric.

Nicholas R. Farrell, 39, was elected Vice President, General Counsel and Secretary effective October 2015, and in December 2016 was also named as the Company's Chief Compliance Officer.  Mr. Farrell began his career with the Company in 2011 as Corporate and Securities Counsel, and prior to his current role served as Vice President, Associate General Counsel and Assistant Secretary, beginning in 2014.  Prior to joining Hillenbrand, Mr. Farrell was in private practice for six years with global law firm Troutman Sanders. 

James A. Hooven, 47, was elected Vice President, Hillenbrand Operating Model effective June 2017. Mr. Hooven has over 20 years of experience with diversified industrial manufacturing companies. He most recently served as General Manager with SL Industries (purchased by Handy & Harman in 2016). Prior to that, he served as Vice President of Operational Excellence at SL Industries and served in various operational roles at Danaher and Trane.

Timothy C. Ryan, 46, was elected Vice President, Chief Accounting Officer and Controller effective September 2018. Mr. Ryan joined the Company from Martin Marietta Materials, where he served as Assistant Corporate Controller from 2015 to 2018. Prior to that, he served as Global Controller for Robert Bosch GmbH (formerly the Service Solutions division of SPX Corporation) from 2011 to 2015 and as Business Unit Controller, SPX Service Solutions America, from 2008 to 2011. Prior to SPX Service Solutions, Mr. Ryan spent seven years in various accounting and reporting roles at public and private manufacturing companies. Mr. Ryan spent the first six years of his career, beginning in 1995, in public accounting at Deloitte & Touche LLP. Mr. Ryan is a Certified Public Accountant.

AVAILABILITY OF REPORTS AND OTHER INFORMATION
 
Our website is www.hillenbrand.com.  We make available on this website, free of charge, access to press releases, conference calls, our annual and quarterly reports, and other documents filed with or furnished to the Securities and Exchange Commission (SEC) as soon as reasonably practicable after these reports are filed or furnished.  We also make available through the “Investors” section of this website information related to the corporate governance of the Company, including position specifications for the Chairperson and each of the members of the Board of Directors, as well as for committee chairpersons; the Corporate Governance Standards of our Board of Directors; the charters of each of the standing committees of the Board of Directors; our Code of Ethical Business Conduct; our Global Anti-Corruption Policy; and our Supply Chain Transparency Policy.  All of these documents are also available to shareholders in print upon request.

All reports and documents filed with the SEC are also available via the SEC website, www.sec.gov.

Item 1A.    RISK FACTORS
 
In this section of the Form 10-K, we describe the risks we believe are most important for you to think about when you consider investing in, selling, or owning securities.  This information should be assessed along with the other information we provide you in this Form 10-K and that we file from time to time with the SEC.  Like most companies, our business involves risks.  The risks described below are not the only risks we face, but these are the ones we currently think have the potential to significantly

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affect stakeholders in our Company if they were to develop adversely (due to size, volatility, or both).  We exclude risks that we believe are inherent in all businesses broadly as a function of simply being “in business.”  Additional risks not currently known or considered immaterial by us at this time and thus not listed below could also result in adverse effects on our business.  We have assigned the risks into categories to help you understand from where they emanate (e.g. the overall Company or a specific segment).

Risks Related to Hillenbrand
 
1.A key component of our growth strategy is making significant acquisitions, some of which may be outside the industries in which we currently operate.  We may not be able to achieve some or all of the benefits that we expect to achieve from these acquisitions.  If an acquisition were to perform unfavorably, it could have an adverse impact on our business and results of operations.
 
All acquisitions involve inherent uncertainties, which may include, among other things, our ability to:
 
successfully identify the most suitable targets for acquisition;
negotiate reasonable terms;
properly perform due diligence and determine all the significant risks associated with a particular acquisition;
successfully transition the acquired company into our business and achieve the desired performance;
avoid diversion of Company management’s attention from other important business activities; and
where applicable, implement restructuring activities without an adverse impact to business operations.

We may acquire businesses with unknown liabilities, contingent liabilities, internal control deficiencies, or other risks.  We have plans and procedures to review potential acquisition candidates for a variety of due diligence matters, including compliance with applicable regulations and laws prior to acquisition.  Despite these efforts, realization of any of these liabilities or deficiencies may increase our expenses, adversely affect our financial position, or cause us to fail to meet our public financial reporting obligations.
 
We generally seek indemnification from sellers covering these matters; however, the liability of the sellers is often limited, and certain former owners may be unable to meet their indemnification responsibilities.  We cannot be assured that these indemnification provisions will fully protect us, and as a result we may face unexpected liabilities that adversely affect our profitability and financial position.
 
We may not achieve the intended benefits of our acquisitions. Under such circumstances, management could be required to spend significant amounts of time and resources in the transition of the acquired business, and we may not fully realize benefits anticipated from application of the HOM. We may also decide to sell previously acquired businesses, or portions thereof, that no longer meet our strategic objectives, potentially resulting in a loss, accounting charge, or other negative impact.  As a result of these factors, our business, cash flows, and results of operations could be materially impacted.
 
If we acquire a company that operates in an industry that is different from the ones in which we currently operate, our lack of experience with that company’s industry could have a material adverse impact on our ability to manage that business and realize the benefits of that acquisition.
 
2.Global market and economic conditions, including those related to the financial markets, could have a material adverse effect on our operating results, financial condition, and liquidity.
 
Our business is sensitive to changes in general economic conditions, both inside and outside the U.S.  Continuing uncertainties in the eurozone, including future implications from the voluntary exit of the United Kingdom from the European Union and uncertainties in China and emerging markets may depress demand in these areas and create additional risk to our financial results.
 
Instability in the global economy and financial markets can adversely affect our business in several ways, including limiting our customers’ ability to obtain sufficient credit or pay for our products within the terms of sale.  Competition could further intensify among the manufacturers and distributors with whom we compete for volume and market share, resulting in lower net revenue due to steeper discounts and product mix-down.  In particular, if certain key or sole suppliers were to become capacity constrained or insolvent, it could result in a reduction or interruption in supplies or a significant increase in the price of supplies.
 

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Substantial losses in the equity markets could have an adverse effect on the assets of the Company’s pension plans.  Volatility of interest rates and negative equity returns could require greater contributions to the defined benefit plans in the future.

3.International economic, political, legal, and business factors could negatively affect our operating results, cash flows, financial condition, and growth.
 
We derived approximately 48%, 44%, and 44% of our revenue from our operations outside the U.S. for the years ended September 30, 2018, 2017, and 2016.  This revenue is primarily generated in Europe, the Middle East, Asia, South America, and Canada.  In addition, we have manufacturing operations, suppliers, and employees located outside the U.S.  Since our growth strategy depends in part on our ability to further penetrate markets outside the U.S., we expect to continue to increase our sales and presence outside the U.S., including in emerging markets.
 
Our international business is subject to risks that are often encountered in non-U.S. operations, including:
 
interruption in the transportation of materials to us and finished goods to our customers, including conditions where recovery from natural disasters may be delayed due to country-specific infrastructure and resources;
differences in terms of sale, including payment terms;
local product preferences and product requirements;
changes in a country’s or region’s political or economic condition, including with respect to safety and health issues;
trade protection measures and import or export licensing requirements;
unexpected changes in laws or regulatory requirements, including unfavorable changes with respect to tax, trade, or sanctions compliance matters;
limitations on ownership and on repatriation of earnings and cash;
difficulty in staffing and managing widespread operations;
differing labor regulations;
difficulties in enforcing contract and property rights under local law;
difficulties in implementing restructuring actions on a timely or comprehensive basis; and
differing protection of intellectual property.

Such risks may be more likely or pronounced in emerging markets, where our operations may be subject to greater uncertainty due to increased volatility associated with the developing nature of their economic, legal, and governmental systems.
 
If we are unable to successfully manage the risks associated with expanding our global business or to adequately manage operational fluctuations, it could adversely affect our business, financial condition, or results of operations.

4.
Uncertainty in the United States political environment and in trade policy could negatively impact our business.

The political environment in the United States has created significant uncertainty with respect to, and has resulted in and could result in additional changes in, legislation, regulation, international relations, and government policy. While it is not possible to predict whether and when any such additional changes will occur, changes at the local, state or federal level could significantly impact our business and the industries in which we compete.  Specific legislative and regulatory developments and proposals that could have a material impact on us involve matters including (but not limited to) changes to existing trade agreements or entry into new trade agreements, sanctions policies, import and export regulations, tariffs, taxes and customs duties, public company reporting requirements, environmental regulation, and antitrust enforcement.  In addition, certain countries that are central to our businesses have imposed and/or been subject to imposition or have threatened imposition of retaliatory tariffs in response to tariffs imposed by the U.S. upon various raw materials and finished goods, including steel and others that are important to our businesses. To the extent changes in the political or regulatory environment have a negative impact on the Company or the markets in which we operate, it may materially and adversely impact our business, results of operations and financial condition in the periods to come.

The U.S. government has at times indicated a willingness to significantly change, and has in some cases significantly changed, trade policies and/or agreements. This exposes us to risks of disruption and cost increases in our established patterns for sourcing our raw materials, and creates increased uncertainties in planning our sourcing strategies and forecasting our margins. Changes in U.S. tariffs, quotas, trade relationships or agreements, or tax law could reduce the supply of goods available to us or increase our cost of goods. Although such changes would in many cases have implications across the entire industry, we may fail to effectively adapt to and manage the adjustments in strategy that would be necessary in response to those changes. In addition to the general uncertainty and overall risk from potential changes in U.S. laws and policies, as we make business decisions in the face of uncertainty, we may incorrectly anticipate the outcomes, miss out on business opportunities or fail to

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effectively adapt our business strategies and manage the adjustments that are necessary in response to those changes. These risks could materially and adversely impact our business, results of operations and financial condition in the periods to come.
 
5.We rely upon our employees, agents, and business partners to comply with laws in many different countries and jurisdictions.  We establish policies and provide training to assist them in understanding our policies and the regulations most applicable to our business; however, our reputation, ability to do business, and financial results may be impaired by improper conduct by these parties.
 
We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by our employees, agents, or business partners that would violate U.S. and/or non-U.S. laws, including laws governing payments to government officials, bribery, fraud, anti-kickback, false claims, competition, export and import compliance, trade sanctions promulgated by the Office of Foreign Asset Control (“OFAC”), anti-money laundering, and data privacy.  In particular, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other parties for the purpose of obtaining or retaining business, and we operate in many parts of the world that have experienced corruption to some degree.  Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions; could lead to substantial civil and criminal, monetary and non-monetary penalties, and related shareholder lawsuits; could cause us to incur significant legal fees; and could damage our reputation.
 
6.We are subject to risks arising from currency exchange rate fluctuations, which may adversely affect our results of operations and financial condition.
 
We are subject to currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues.  In addition, since our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of operations.  The Company’s predominant exposures are in European, Canadian, Swiss, Mexican, and Asian currencies, including the Chinese Renminbi. In preparing financial statements for foreign operations with functional currencies other than the U.S. dollar, asset and liability accounts are translated at current exchange rates, and income and expenses are translated using weighted-average exchange rates. With respect to the effects on translated earnings, if the U.S. dollar strengthens relative to local currencies, the Company’s earnings could be negatively impacted. Although we address currency risk management through regular operating and financing activities and through the use of derivative financial instruments, those actions may not prove to be fully effective.
 
7.Increased prices for, or unavailability of, raw materials used in our products could adversely affect profitability.
 
Our profitability is affected by the prices of the raw materials used in the manufacture of our products.  These prices fluctuate based on a number of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, fuel-related delivery costs, competition, import duties, tariffs, currency exchange rates, and, in some cases, government regulation.  Significant increases in the prices of raw materials that cannot be recovered through increases in the price of our products could adversely affect our results of operations and cash flows.
 
We cannot guarantee that the prices we are paying for raw materials today will continue in the future or that the marketplace will continue to support current prices for our products or that such prices can be adjusted to fully or partially offset raw material price increases in the future.  Any increases in prices resulting from a tightening supply of these or other commodities could adversely affect our profitability.  We do not engage in hedging transactions for raw material purchases, but we do enter into some fixed-price supply contracts.
 
Our dependency upon regular deliveries of supplies from particular suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made.  Several of the raw materials used in the manufacture of our products currently are procured from a single source.  If any of these sole-source suppliers were unable to deliver these materials for an extended period of time as a result of financial difficulties, catastrophic events affecting their facilities, or other factors, or if we were unable to negotiate acceptable terms for the supply of materials with these sole-source suppliers, our business could be adversely affected.  We may not be able to find acceptable alternatives, and any such alternatives could result in increased costs.  Extended unavailability of a necessary raw material could cause us to cease manufacturing one or more products for a period of time, which could also lead to loss of customers.

8. The Company could face labor disruptions that would interfere with operations.
 

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As of September 30, 2018, approximately 42% of Hillenbrand’s employees work under collective bargaining agreements.  Although we have not experienced any significant work stoppages in the past 20 years as a result of labor disagreements, we cannot ensure that such a stoppage will not occur in the future.  Inability to negotiate satisfactory new agreements or a labor disturbance at one or more of our facilities could have a material adverse effect on our operations.

9. Increasing competition for highly skilled and talented workers could adversely affect our business.
The successful implementation of our business strategy depends, in part, on our ability to attract and retain a skilled workforce. Because of the complex nature of many of our products and services, we are generally dependent on a thoroughly trained and highly skilled workforce, including, for example, our engineers. In many of the geographies where we operate, we face a potential shortage of qualified employees. The increasing competition for highly skilled and talented employees could result in higher compensation costs, difficulties in maintaining a capable workforce, and leadership succession planning challenges. Although we believe we will be able to attract and retain talented personnel and replace key personnel should the need arise, our inability to do so could have a material adverse effect on our business, financial condition, and results of operations.
 
10. We are involved from time to time in claims, lawsuits, and governmental proceedings relating to our operations, including environmental, antitrust, patent infringement, business practices, commercial transactions, and other matters.  The ultimate outcome of these claims, lawsuits, and governmental proceedings cannot be predicted with certainty but could have a material adverse effect on our financial condition, results of operations, and cash flows.
 
We are also subject to other potential claims, including product and general liability, workers compensation, auto liability, and employment-related matters. While we maintain insurance for certain of these exposures, the policies in place are often high-deductible policies.  It is difficult to measure the actual loss that might be incurred related to litigation or other potential claims, and the ultimate outcome of claims, lawsuits, and proceedings could have a material adverse effect on our financial condition, results of operations, and cash flows. For a more detailed discussion of claims, see Note 11 to our financial statements included in Part II, Item 8, of this Form 10-K.
 
11. Our capital allocation strategy could result in a significant amount of debt, which could adversely affect the Company and limit our ability to respond to changes in our business or make future desirable acquisitions.
 
As of September 30, 2018, our outstanding debt was $344.6.  This level of debt and additional debt we may incur in the future could have important consequences to our businesses.  For example:
 
We may be more vulnerable to general adverse economic and industry conditions, because we have lower borrowing capacity.
We may be required to dedicate a larger portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for other purposes, including business development efforts and acquisitions.
We will continue to be exposed to the risk of increased interest rates, because a portion of our borrowings is at variable rates of interest.
We may be more limited in our flexibility in planning for, or reacting to, changes in our businesses and the industries in which they operate, thereby placing us at a competitive disadvantage compared to competitors that have less indebtedness.
We may be more vulnerable to credit rating downgrades which could have an impact on our ability to secure future financing at attractive interest rates.
 
12. The performance of the Company may suffer from business disruptions associated with information technology, cyber-attacks, or catastrophic losses affecting infrastructure.

The Company relies heavily on computer systems to manage and operate its businesses and record and process transactions. Computer systems are important to production planning, customer service, and order management, as well as other critical processes.

Despite efforts to prevent such situations and the existence of established risk management practices that partially mitigate these risks, the Company’s systems may be affected by damage or interruption from, among other causes, power outages, system failures, or computer viruses. Computer hardware and storage equipment that is integral to efficient operations, such as email, telephone and other functionality, is concentrated in certain physical locations in the various geographies in which the Company operates.

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In addition, cybersecurity threats and sophisticated computer crime pose a potential risk to the security of the Company’s information technology systems, networks, and services, as well as the confidentiality and integrity of the Company’s data. Cyber-attacks, security breaches, and other cyber incidents could include, among other things, computer viruses, malicious or destructive code, ransomware, social engineering attacks (including phishing and impersonation), hacking, denial-of-service attacks, and other attacks. Sensitive information is also stored by our vendors and on the platforms and networks of third-party providers. Cyber-attacks on the Company, our vendors, or our third-party providers could result in inappropriate access to intellectual property, personally identifiable information of our global workforce, suppliers, or customers, or personal credit card or other payment information of our customers. Potential consequences of a successful cyber-attack or other cybersecurity incident include remediation costs, increased cybersecurity protection costs, lost revenues resulting from the unauthorized use of proprietary information or the failure to retain or attract customers following an attack, litigation and legal risks including governmental or regulatory enforcement actions, increased insurance premiums, reputational damage that adversely affects customer or investor confidence, and damage to the Company’s competitiveness, stock price, and long-term shareholder value. While we have taken steps to maintain and enhance the appropriate cybersecurity and address these risks by implementing enhanced security technologies, internal controls, and business continuity plans, these measures may not be adequate.

Regulators globally are increasingly imposing greater fines and penalties for privacy and data protection violations. For example, in 2018 the European Union enacted a new and expanded set of compliance requirements on companies, like ours, that collect or process personal data from citizens living in the European Union. Failure to comply with these or other data protection regulations could expose us to potentially significant liabilities. If the Company suffers a loss or disclosure of business or stakeholder information due to security breaches, and if business continuity plans do not effectively address these issues on a timely basis, the Company may suffer interruption in its ability to manage operations, as well as reputational, competitive, or business harm, which could have a material adverse effect on our business, financial condition, and results of operations.

13. The effective tax rate of the Company may be negatively impacted by economic downturns as well as future changes to tax laws in global jurisdictions in which we operate.

We are subject to income taxes in the United States and various other global jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings by jurisdiction and the valuation of deferred tax assets and liabilities. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Significant judgment is required in determining our provision for income taxes. We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. If we are unable to generate sufficient future taxable income, if there is a material change in the actual effective tax rates, or if there is a change to the time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowance against our deferred tax assets, which could result in a material increase in our effective tax rate.

In addition, the recently enacted Tax Act makes significant changes to the U.S. Internal Revenue Code. Such changes include a reduction in the domestic corporate tax rate, limitations on certain corporate deductions and credits, and a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (the “Transition Tax”). Some of the Tax Act changes could have a negative impact on our business. The estimated impact of the new law is based on management’s current knowledge and assumptions; recognized 2018 impacts could be materially different from current provisional amounts based on our further analysis of our international operations and data gathering efforts. We continue to analyze the impacts of certain provisions of the Tax Act as it pertains to provisions that are effective beginning with our fiscal year ending September 30, 2019. Changes in other tax laws or tax rulings could also have a material impact on our effective tax rate. Additionally, many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, are actively considering changes to existing tax laws. Certain proposals could include recommendations that could increase our tax obligations in many countries where we do business. Any changes in the taxation of our activities in such jurisdictions may result in a material increase in our effective tax rate.

14. Provisions in our Articles of Incorporation and By-laws and facets of Indiana law may prevent or delay an acquisition of the Company, which could decrease the trading price of our common stock.
 
Our Articles of Incorporation and By-laws, as well as Indiana law, contain provisions that could delay or prevent changes in control if our Board of Directors determines that such changes in control are not in the best interests of our shareholders.  While these provisions have the effect of encouraging persons seeking to acquire control of our Company to negotiate with our Board of Directors, they could enable our Board of Directors to hinder or frustrate a transaction that the Board of Directors believes is

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not in the best interests of shareholders, but which some, or a majority, of our shareholders might believe to be in their best interests.
 
These provisions include, among others:
 
the division of our Board of Directors into three classes with staggered terms;
the inability of our shareholders to act by less than unanimous written consent;
rules regarding how shareholders may present proposals or nominate directors for election at shareholder meetings;
the right of our Board of Directors to issue preferred stock without shareholder approval; and
limitations on the right of shareholders to remove directors.

Indiana law also imposes some restrictions on mergers and other business combinations between the Company and any holder of 10% or more of our outstanding common stock.

We believe these provisions are important for a public company and protect our shareholders from coercive or otherwise potentially unfair takeover tactics by encouraging potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with appropriate time to assess any acquisition proposal.  These provisions are not intended to make our Company immune from takeovers; however, they may apply if the Board of Directors determines that a takeover offer is not in the best interests of our shareholders, even if some shareholders believe the offer to be beneficial.

 Risks Related to the Process Equipment Group

1.A significant portion of our investments in the Process Equipment Group includes goodwill and intangible assets that are subject to periodic impairment evaluations.  An impairment loss on these assets could have a material adverse impact on our financial condition and results of operations.
 
We acquired intangible assets with the acquisitions of Coperion, K-Tron (including TerraSource Global), Rotex, Abel, and Red Valve, portions of which were identified as either goodwill or indefinite-lived assets.  We periodically assess these assets to determine if they are impaired.  Significant negative industry or economic trends, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets, divestitures, and market capitalization declines may impair these assets.  Any charges relating to such impairments could adversely affect our results of operations in the periods recognized.

2.The Process Equipment Group operates in cyclical industries.
 
As an industrial capital goods supplier, the Process Equipment Group serves industries that are cyclical.  During periods of economic expansion, when capital spending normally increases, the Process Equipment Group generally benefits from greater demand for its products.  During periods of economic contraction, when capital spending normally decreases, the Process Equipment Group generally is adversely affected by declining demand for new equipment orders, and it may be subject to increases in uncollectible receivables from customers who become insolvent.  There can be no assurance that economic expansion or increased demand will be sustainable, and our financial condition, results of operations, and cash flows could be materially adversely affected. 
 
3.The Process Equipment Group derives significant revenues from the plastics industry.  Any decrease in demand for plastics or equipment used in the plastics industry, changes in technological advances, and changes in laws or regulations could have a material adverse effect on our business, financial condition, and results of operations.
 
The Process Equipment Group sells equipment, including extruders and compounding systems, to the plastics industry.  Sales volume is tied to the need for equipment used to produce plastics products, which may be significantly influenced by the demand for plastics, the capital investment needs of companies in the plastics industry, changes in technological advances, and changes in laws or regulations. As a result, any downturn in or disruption to the plastics industry or decrease in the demand for plastics could have a material adverse effect on our business, financial condition, and results of operations.
 
4.The Process Equipment Group derives revenues from the energy industry.  Any decrease in demand for electricity, oil, natural gas, coal, and mining equipment or an increase in regulation of the energy industry could have a material adverse effect on our business, financial condition, and results of operations.
 
A portion of the Process Equipment Group’s sales are affected by the consumption of resources including oil, natural gas, and coal.  The demand for oil, natural gas, coal, and mining equipment is dependent upon, among other things, the availability and cost of alternative sources of energy, such as solar, wind, or nuclear power.  Additionally, the cost of compliance with federal, state, local, and foreign laws and regulations on the energy industry may impact the demand for our products.  As a result, any downturn in or disruption to the oil, natural gas, or international coal and mining industries or decrease in the demand for electricity could have a material adverse effect on our business, financial condition, and results of operations.

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Risks Related to Batesville
 
1.Continued fluctuations in mortality rates and increased cremations may adversely affect the sales volume of our burial caskets.
 
The life expectancy of U.S. citizens has increased since the 1950s.  However, we do anticipate a modest increase in deaths for the foreseeable future driven by the aging U.S. population.
 
Cremations as a percentage of total U.S. deaths have increased steadily since the 1960s and are expected to continue to increase for the foreseeable future.  The increase in the number of cremations in the U.S. has resulted in a contraction in the demand for burial caskets.  This has been a contributing factor to lower burial casket sales volumes for Batesville in recent years.  We expect these trends will continue in the foreseeable future and will likely continue to negatively impact burial casket volumes.

Finally, the number of deaths can vary over short periods of time and among different geographical areas due to a variety of factors, including the timing and severity of seasonal outbreaks of illnesses such as pneumonia and influenza.  Such variations could cause the sale of burial caskets and cremation products to fluctuate from quarter to quarter and year to year, which could have a material adverse effect on our financial condition, results of operations, and cash flows. 

2.Batesville’s business is dependent on several major contracts with large national funeral providers. The relationships with these customers pose several risks.
 
Batesville has contracts with a number of national funeral home customers that constitute a sizeable portion of its overall sales volume.  Also, while contracts with national funeral service providers give Batesville important access to purchasers of death care products, they may obligate Batesville to sell products at contracted prices for extended periods of time, therefore limiting Batesville’s ability, in the short or medium term, to raise prices in response to significant increases in raw material prices or other factors. Any decision by national funeral home customers to discontinue or limit purchases from Batesville could have a material adverse effect on our financial condition, results of operations, and cash flows. 
 
3.Batesville is facing competition from caskets manufactured abroad and imported into North America and from a number of non-traditional sources.
 
Some foreign casket manufacturers, mostly from China, import caskets into the U.S. and Canada.  In addition, non-traditional death care product providers, such as large discount retail stores, casket stores, and internet casket retailers could present more of a competitive threat to Batesville and its sales channel than is currently anticipated. Sales from these foreign and non-traditional providers currently represent less than 10% of total casket sales in North America, but this percentage could grow.  It is not possible to quantify the financial impact that these competitors will have on Batesville in the future.  These competitors and any new entrants into the funeral products business may drive pricing and other competitive actions in an industry that already has domestic production over-capacity.  Such competitive developments could have a negative impact on our results of operations and cash flows.


Item 1B.    UNRESOLVED STAFF COMMENTS
 
We have not received any comments from the staff of the SEC regarding our periodic or current reports that remain unresolved.

Item 2.        PROPERTIES
 
Our corporate headquarters is located in Batesville, Indiana, in a facility that we own.  At September 30, 2018, the Process Equipment Group operated 17 significant manufacturing facilities located in the U.S. (New Jersey, Kansas, Ohio, Illinois, North Carolina and Virginia), Germany, Switzerland, China, India, and the United Kingdom.  Nine of these facilities are owned and eight are leased.  The Process Equipment Group also leases or owns a number of sales offices in Europe, Asia, Canada, and South America.
 
At September 30, 2018, Batesville operated four significant manufacturing facilities located in Indiana, Tennessee, Mississippi, and Mexico.  Three of these facilities are owned and one is leased.  Batesville also leases or owns a number of warehouse distribution centers, service centers, and sales offices in the U.S., Mexico, Canada, and Australia.
 
Facilities often serve multiple purposes, such as administration, sales, manufacturing, testing, warehousing, and distribution.  We believe our current facilities will provide adequate capacity to meet expected demand for the next several years. 

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Item 3.        LEGAL PROCEEDINGS
 
We are involved from time to time in claims, lawsuits, and government proceedings relating to our operations, including environmental, antitrust, patent infringement, business practices, commercial transactions, and other matters.  We are also subject to other claims and potential claims, including those relating to product and general liability, workers’ compensation, auto liability, and employment-related matters.  The ultimate outcome of claims, lawsuits, and proceedings cannot be predicted with certainty.  We carry various forms of commercial, property and casualty, product liability, and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us.  It is difficult to measure the actual loss that might be incurred related to litigation, and the ultimate outcome of these claims, lawsuits, and proceedings could have a material adverse effect on our financial condition, results of operations, and cash flows.
 
For more information on various legal proceedings, see Note 11 to our financial statements included in Part II, Item 8, of this Form 10-K.  That information is incorporated into this Item by reference.

Item 4.        MINE SAFETY DISCLOSURES
 
Not applicable.

PART II
 


Item 5.        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Hillenbrand common stock is traded on the New York Stock Exchange under the ticker symbol “HI.” 
  
As of November 8, 2018, we had approximately 1,800 shareholders of record.
  
Share Repurchases

The following table summarizes repurchases of common stock during the quarter ended September 30, 2018:

 (in millions, except per share data):
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Dollar Amount that May Yet be Purchased Under Plans or Programs
 
 
 
 
 
 
 
 
 
July
 
7,865

 
$
47.46


7,865


$
39.6

August
 
650

 
$
49.03


650


$
39.6

September
 

 
$




$
39.6

Total
 
8,515

 
$
47.58


8,515


$
39.6

 
 
 
 
 
 
 
 
 

On July 24, 2008, our Board of Directors approved a stock repurchase program for the repurchase of up to $100.0 of our common stock. On February 23, 2017, our Board of Directors approved an increase of $100.0 to the existing stock repurchase

18


program. The authorization brings the maximum cumulative repurchase authorization up to $200.0. The repurchase program has no expiration date, but may be terminated by the Board of Directors at any time.  As of September 30, 2018, we had repurchased approximately 4,950,000 shares for approximately $160.4 in the aggregate. Such shares were classified as treasury stock.  We repurchased approximately 1,385,600 shares of our common stock during 2018, at a total cost of approximately $61.0.  We repurchased approximately 8,500 shares of our common stock during the quarter ended September 30, 2018 at a total cost of approximately $0.4. At September 30, 2018, we had approximately $39.6 remaining for share repurchases under the existing Board authorization.

Item 6.        SELECTED FINANCIAL DATA

 (in millions, except per share data):
 
 
2018
 
2017
 
2016
 
2015
 
2014
Net revenue
$
1,770.1

 
$
1,590.2

 
$
1,538.4

 
$
1,596.8

 
$
1,667.2

Gross profit
$
642.9

 
$
591.3

 
$
570.6

 
$
570.4

 
$
589.2

Net income(1)
$
76.6

 
$
126.2

 
$
112.8

 
$
111.4

 
$
109.7

Earnings per share - basic
$
1.21

 
$
1.99

 
$
1.78

 
$
1.76

 
$
1.74

Earnings per share - diluted
$
1.20

 
$
1.97

 
$
1.77

 
$
1.74

 
$
1.72

Cash dividends per share
$
0.83

 
$
0.82

 
$
0.81

 
$
0.80

 
$
0.79

Total assets
$
1,864.6

 
$
1,956.5

 
$
1,959.7

 
$
1,808.1

 
$
1,918.5

Long-term obligations
$
588.8

 
$
678.9

 
$
879.8

 
$
798.1

 
$
833.6

Cash flows provided by operating activities
$
248.3

 
$
246.2

 
$
238.2

 
$
105.0

 
$
179.6

Cash flows used in investing activities
$
(23.1
)
 
$
(13.5
)
 
$
(253.5
)
 
$
(29.5
)
 
$
(8.3
)
Cash flows provided by (used in) financing activities
$
(232.5
)
 
$
(215.1
)
 
$
21.6

 
$
(83.2
)
 
$
(155.5
)
Capital expenditures
$
27.0

 
$
22.0

 
$
21.2

 
$
31.0

 
$
23.6

Depreciation and amortization
$
56.5

 
$
56.6

 
$
60.4

 
$
54.3

 
$
58.4

 
 
(1)  Net income attributable to Hillenbrand


Item 7.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

(dollar amounts in millions throughout Management’s Discussion and Analysis)

The following discussion compares our results for the year ended September 30, 2018, to the year ended September 30, 2017, and also compares our results for the year ended September 30, 2017, to the year ended September 30, 2016.  Unless otherwise stated, references to years relate to fiscal years. We begin the discussion at a consolidated level and then provide separate detail about the Process Equipment Group, Batesville, and Corporate.  These financial results are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”).
 
We also provide certain non-GAAP operating performance measures.  These non-GAAP measures are referred to as “adjusted” measures and exclude impairment charges, inventory step-up, expenses associated with business acquisition, development, and integration, and restructuring and restructuring related charges.  The related income tax for all of these items is also excluded.  The measures also exclude the non-recurring tax benefits and expenses related to the Tax Act. Non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP.
 
We use this non-GAAP information internally to make operating decisions and believe it is helpful to investors because it allows more meaningful period-to-period comparisons of our ongoing operating results.  The information can also be used to perform trend analysis and to better identify operating trends that may otherwise be masked or distorted by these types of excluded items.  We believe this information provides a higher degree of transparency.
 
An important non-GAAP measure that we use is adjusted earnings before interest, income tax, depreciation, and amortization (“adjusted EBITDA”).  A part of Hillenbrand’s strategy is to pursue acquisitions that strengthen or establish leadership positions in key markets.  Given that strategy, it is a natural consequence to incur related expenses, such as amortization from acquired intangible assets and additional interest expense from debt-funded acquisitions.  Accordingly, we use adjusted EBITDA, among other measures, to monitor our business performance.
 
Another important non-GAAP operational measure used is backlog.  Backlog is not a term recognized under GAAP; however, it is a common measurement used in industries with extended lead times for order fulfillment (long-term contracts), like those

19


in which our Process Equipment Group competes.  Backlog represents the amount of consolidated revenue that we expect to realize on contracts awarded to the Process Equipment Group.  For purposes of calculating backlog, 100% of estimated revenue attributable to consolidated subsidiaries is included. Backlog includes expected revenue from large systems and equipment, as well as replacement parts, components, and service. The length of time that projects remain in backlog can span from days for replacement parts or service to approximately 18 to 36 months for larger system sales.  Backlog includes expected revenue from the remaining portion of firm orders not yet completed, as well as revenue from change orders to the extent that they are reasonably expected to be realized.  We include in backlog the full contract award, including awards subject to further customer approvals, which we expect to result in revenue in future periods. In accordance with industry practice, our contracts may include provisions for cancellation, termination or suspension at the discretion of the customer.
 
We expect that future revenue associated with the Process Equipment Group will be influenced by backlog because of the lead time involved in fulfilling engineered-to-order equipment for customers. Although backlog can be an indicator of future revenue, it does not include projects and parts orders that are booked and shipped within the same quarter. The timing of order placement, size, extent of customization, and customer delivery dates can create fluctuations in backlog and revenue.  Revenue attributable to backlog may also be affected by foreign exchange fluctuations for orders denominated in currencies other than U.S. dollars.
 
We calculate the foreign currency impact on net revenue, gross profit, operating expenses, consolidated net income and consolidated adjusted EBITDA, in order to better measure the comparability of results between periods. We calculate the foreign currency impact by translating current year results at prior year foreign exchange rates. This information is provided because exchange rates can distort the underlying change in sales, either positively or negatively. The cost structures for Corporate and Batesville are generally not significantly impacted by the fluctuation in foreign exchange rates, and we do not disclose the foreign currency impact in the Operations Review below where the impact is not significant.
 
See page 30 for reconciliation of adjusted EBITDA to consolidated net income, the most directly comparable GAAP measure. We use non-GAAP measures in certain other instances and include information reconciling such non-GAAP measures to the respective most directly comparable GAAP measures. Given that there is no GAAP financial measure comparable to backlog, a quantitative reconciliation is not provided.

CRITICAL ACCOUNTING ESTIMATES
 
Our financial results are affected by the selection and application of accounting policies and methods.  Significant accounting policies which require management’s judgment are discussed below.  A detailed description of our accounting policies is included in the notes to our financial statements included in Part II, Item 8, of this Form 10-K.

2017 Tax Cuts and Jobs Act — On December 22, 2017, the Tax Act was enacted. While certain of the provisions of the Tax Act are effective for tax years beginning after December 31, 2017 (which corresponds to Hillenbrand’s fiscal year ending September 30, 2019), several provisions are effective for the fiscal year ending September 30, 2018. The Tax Act reduced the federal corporate tax rate from 35% to 21% and became effective on January 1, 2018. The Internal Revenue Code provides that our fiscal year ending September 30, 2018 had a blended U.S. corporate tax rate of 24.5%, which is based on a proration of the applicable tax rates before and after effective date of the Tax Act. The statutory tax rate of 21% will apply to future years.

Furthermore, Hillenbrand is subject to the Transition Tax. This Transition Tax is imposed on the deferred accumulated earnings of foreign subsidiaries at an effective rate of 15.5% of foreign earnings attributable to cash and cash equivalents and 8% of the residual foreign earnings. It is anticipated that Hillenbrand will elect to pay the Transition Tax over eight years. We have recorded tax expense based on an estimate of the annual effective rate taking into account the reduced corporate tax rate for the year. Additionally, during 2018, we recorded a deferred tax benefit for the impact of the reduced corporate tax rate on the U.S. net deferred tax liability and a provisional tax liability for the Transition Tax. We will not be able to precisely determine the amount of the Transition Tax until December 31, 2018 because certain required information is not yet available, including cumulative foreign earnings, as well as actual foreign taxes paid, to precisely compute the amount of the Transition Tax. Therefore, tax expense associated with this provision may be adjusted during the quarter ended December 31, 2018. During the quarter ended September 30, 2018, we have recorded an adjustment to the provisional tax expense recognized during the quarter ended December 31, 2017. We expect to recognize final adjustments to the provisional tax expense once we have determined the final actual tax impact, pursuant to SAB 118.
 
Revenue Recognition — Net revenue includes 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 estimate these allowances based upon historical rates and projections of customer purchases toward contractual rebate thresholds.

20


 
A portion of Hillenbrand’s revenue is derived from long-term manufacturing contracts.  The majority of this revenue is 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%, 25%, and 24% of Hillenbrand’s revenue was attributable to these long-term manufacturing contracts for 2018, 2017, and 2016.
 
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 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.
 
Retirement and Postretirement Plans — We sponsor retirement and postretirement benefit plans covering some of our employees.  Expense recognized for the plans is based upon actuarial valuations.  Inherent in those valuations are key assumptions including discount rates, expected returns on assets, and projected future salary rates.  The actuarial assumptions we use may differ significantly from actual results due to changing economic conditions, participant life span, and withdrawal rates. These differences may result in a material impact to the amount of net periodic pension expense to be recorded in our financial statements in the future. The discount rates used in the valuation of our defined benefit pension and postretirement benefit plans are evaluated annually based on current market conditions. 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.

Our overall expected long-term rate of return on pension assets 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.  Our rate of assumed compensation increase for pension benefits is also based on our specific historical trends of past wage adjustments in recent years and expectations for the future.

Changes in retirement and postretirement benefit expense and the recognized obligations may occur in the future as a result of a number of factors, including changes to key assumptions such as the weighted-average expected rate of return on pension assets and the weighted-average discount rate.  Our weighted-average expected rate of return on domestic and international pension plan assets was 5.2%, 5.2%, and 4.9% at the end of 2018, 2017, and 2016. The weighted-average discount rate at the end of 2018 was 3.3% for the domestic and international pension plans and 4.0% for the postretirement healthcare plan.  A 50 basis-point change in the expected rate of return on domestic and international pension plan assets would change annual pension expense by $1.4.  A 50 basis-point change in the discount rate would change the annual domestic and international pension expense by $2.0 and the annual postretirement healthcare plan expense by less than $0.1.  Impacts from assumption changes could be positive or negative depending on the direction of the change in rates.  Based upon rates and assumptions at September 30, 2018, we expect the aggregate expense associated with our defined benefit and postretirement plans to decrease from $3.6 in 2018 to $3.3 in 2019. The expected decrease in expense is primarily due to increasing discount rates.

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 remeasurement events 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.


21


See Note 5 to our financial statements included in Part II, Item 8, of this Form 10-K, for key assumptions and other information regarding our retirement and postretirement benefit plans.

Uncertain Income Tax Positions — In assessing the need for reserves for uncertain tax positions, we make judgments regarding the technical merit of a tax position and, when necessary, an estimate of the settlement amount based upon the probability of the outcome.  At September 30, 2018, we had reserves of $12.1 established for uncertain tax positions based upon our estimates.  Our ability to make and update these estimates is limited to the information we have at any given point in time.  This information can include how taxing authorities have treated the position in the past, how similar cases have settled, or where we are in discussions or negotiations with taxing authorities on a particular issue, among others.  As information available to us evolves, we update our reserves quarterly.  These updates can result in volatility to our income tax rate (particularly in a given quarter) if new information or developments result in a significant change in our estimate.
 
Business Combinations — Estimating fair value for acquired assets and liabilities as part of a business combination typically requires us to exercise judgment, particularly for those assets and liabilities that may be unique or not easily determined by reference to market data.  Often estimates for these types of acquired assets and liabilities will be developed using valuation models that require both historical and forecasted inputs, as well as market participant expectations.  Thus, the valuation is directly affected by the inputs we judge as best under the given circumstances.  When material, we expect to seek assistance of competent valuation professionals when the underlying valuation is more complex or unique.
 
We anticipate that in most cases, we will exercise significant judgment in estimating the fair value of intangible assets, contingent liabilities, and contingent consideration.  This list is not exhaustive, but is designed to give you a better understanding of where we think a larger degree of judgment will be required due to the nature of the item and the way it is typically valued.
 
Asset Impairment Determinations — We have updated our critical accounting estimate for Asset Impairment Determinations to reflect the adoption of ASU 2017-04.

Goodwill and other intangible assets with indefinite lives, primarily trade names, are tested for impairment at least annually and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value may be impaired.

Impairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment. For the purpose of the goodwill impairment test, the Company can elect to perform a quantitative or qualitative analysis. If the qualitative test is elected, qualitative factors are assessed to determine whether it is more likely than not that the fair values of its reporting units are less than the respective carrying values of those reporting units. Such factors we consider in a qualitative analysis include, but are not limited to, macroeconomic conditions, industry and market considerations, cost factors, Company-specific events, events affecting the reporting unit, and the overall financial performance of the reporting unit. If after performing the qualitative analysis, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company must perform the quantitative goodwill impairment test.

If we elect to perform or are required to perform a quantitative analysis, we compare the carrying amount of the reporting unit’s net assets, including goodwill, to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further evaluation is required and no impairment loss is recognized. If the carrying amount exceeds the fair value, an impairment charge is recognized for the difference between carrying amount and fair value, not to exceed the original amount of goodwill.

In determining the estimated fair value of the reporting units when performing a quantitative analysis, we consider both the market approach and the income approach. Weighting is equally attributed to both the market and income approaches in arriving at the fair value of the reporting units.

Under the market approach, we utilize the guideline company method, which involves calculating valuation multiples based on operating data from comparable publicly traded companies. Multiples derived from these companies provide an indication of how much a knowledgeable investor in the marketplace would be willing to pay for a company. These multiples are then applied to the operating data for our reporting units to arrive at an indication of value.

Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows utilizing a market-based weighted-average cost of capital determined separately for each reporting unit.


22


To determine the reasonableness of the calculated fair values of our reporting units, the Company reviews the assumptions described below to ensure that neither the market approach nor the income approach yields significantly different valuations. We selected these valuation approaches because we believe the combination of these approaches, along with our best judgment regarding underlying assumptions and estimates, provides us with the best estimate of fair value of our reporting units. We believe these valuation approaches are appropriate for the industry and widely accepted by investors.

Determining the fair value of a reporting unit requires us to make significant judgments, estimates, and assumptions. While we believe that the estimates and assumptions underlying our valuation methodology are reasonable, these estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also on the magnitude of any such charge. The results of an impairment analysis are as of a point in time. There is no assurance that actual future earnings or cash flows of our reporting units will not decline significantly from our projections. We monitor any changes to our assumptions and evaluate goodwill as required or otherwise deemed warranted during future periods.

The key assumptions for the market and income approaches we use to determine fair value of our reporting units are updated at least annually. Those assumptions and estimates include market data and market multiples (7.2-14.5 times adjusted EBITDA), discount rates (7.6-12.5%), and terminal growth rates (0.0-3.0%), as well as future levels of revenue growth, operating margins, depreciation, amortization, and working capital requirements, which are based upon the Company’s strategic plan. Hillenbrand’s strategic plan is updated as part of its annual planning process and is reviewed and approved by management and the Board of Directors. The strategic plan may be revised as necessary based on changes in market conditions or other changes in the reporting units. The discount rate assumption is based on the overall after-tax rate of return required by a market participant whose weighted-average cost of capital includes both equity and debt, including a risk premium.

Although there are always changes in assumptions to reflect changing business and market conditions, our overall valuation methodology and the types of assumptions we use have remained consistent. While we use the best available information to prepare the cash flow and discount rate assumptions, actual future cash flows or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances.

Testing for impairment of goodwill and indefinite lived assets must be performed annually, or on an interim basis upon the occurrence of triggering events or substantive changes in circumstances that indicate carrying value is impaired.  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 in the Process Equipment Group segment most directly impacted by domestic coal power and coal mining. 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. The pre-impairment goodwill balance for the reporting unit was $71.3.  A 10% further reduction in the fair value of this reporting unit would indicate a potential additional impairment of $7.4

As a result of the required annual impairment assessment performed in the third quarter of 2018, 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 further impairment of goodwill. As of September 30, 2018, the fair value of the reporting unit in the Process Equipment Group segment that is most directly impacted by domestic coal mining and coal power exceeded its carrying value by less than 10%.

Similar to goodwill, the Company can elect to perform the impairment test for indefinite-lived intangibles other than goodwill (primarily trade names) using a qualitative analysis, considering similar factors as outlined in the goodwill discussion in order to determine if it is more likely than not that the fair values of the trade names are less than the respective carrying values. If we elect to perform or are required to perform a quantitative analysis, the test consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. We estimate the fair value of indefinite-lived intangibles using the relief-from-royalty method, which we believe is an appropriate and widely used valuation technique for such assets. The fair value derived from the relief-from-royalty method is measured as the discounted cash flow savings realized from owning such trade names and not being required to pay a royalty for their use.

In the third quarter of 2016, the Company recorded a trade name impairment charge of $2.2, included in operating expenses, on two trade names related to the Process Equipment Group segment. The decline in the estimated fair value of these trade names was largely driven by the decreased demand for equipment and parts used in coal mining and coal power.


23


An impairment charge of $4.6 pre-tax ($3.5 after tax) was recorded during the quarter ended March 31, 2018 for trade names most directly impacted by domestic coal mining and coal power. As of September 30, 2018, we had approximately $4 of trade name book value remaining in the Process Equipment Group segment most directly impacted by domestic coal mining and coal power. In conjunction with our impairment testing, we also reassessed the useful lives of other definite-lived intangible assets specific to the intangibles impacted by domestic coal mining and coal power, resulting in no significant changes in amortization.

As a result of the required annual impairment assessment performed in the third quarter of 2018, the fair value of trade names was determined to meet or exceed the carrying value for all trade names, resulting in no further impairment to trade names.

EXECUTIVE OVERVIEW
 
Hillenbrand is a global diversified industrial company with multiple leading brands that serve a wide variety of industries around the world.  Hillenbrand’s portfolio is composed of two business segments: the Process Equipment Group and Batesville®. The Process Equipment Group businesses design, develop, manufacture, and service highly engineered industrial equipment around the world. Batesville is a recognized leader in the death care industry in North America. 
 
We strive to provide superior return for our shareholders, exceptional value for our customers, great professional opportunities for our employees, and to be responsible to our communities through deployment of the HOM. The HOM is a consistent and repeatable framework designed to produce sustainable and predictable results.  The HOM describes our mission, vision, values and mindset as leaders; applies our management practices in Strategy Management, Segmentation, Lean, Talent Development, and Acquisitions; and prescribes three steps (Understand, Focus, and Grow) designed to make our businesses both bigger and better.  Our goal is to continue developing Hillenbrand as a world-class global diversified industrial company through the deployment of the HOM.

Our strategy is to leverage our historically strong financial foundation and the HOM to deliver sustainable profit growth, revenue expansion and substantial free cash flow and then reinvest available cash in new growth initiatives focused on building platforms with leadership positions in our core markets and near adjacencies, both organically and inorganically, in order to create shareholder value.

OPERATIONS REVIEW — CONSOLIDATED
 
 
 
Year Ended September 30,
Hillenbrand
 
2018
 
2017
 
2016
Net revenue
 
$
1,770.1

 
$
1,590.2

 
$
1,538.4

Gross profit
 
642.9

 
591.3

 
570.6

Operating expenses
 
378.9

 
344.4

 
346.5

Amortization expense
 
30.2

 
29.2

 
33.0

Impairment charge
 
63.4

 

 

Interest expense
 
23.3

 
25.2

 
25.3

Other (expense) income, net
 
(0.6
)
 
(4.2
)
 
(1.7
)
Income tax expense
 
65.3

 
59.9

 
47.3

Net income(1)
 
76.6

 
126.2

 
112.8

 
 
(1) Net income attributable to Hillenbrand
 
Year Ended September 30, 2018 Compared to Year Ended September 30, 2017
 
Net revenue increased $179.9 (11%), which included favorable foreign currency impact (3%).

The Process Equipment Group’s net revenue increased $191.3 (19%) primarily due to higher volume (14%). Foreign currency impact increased net revenue by 4%.

Batesville’s net revenue decreased $11.4 (2%) primarily due to a decrease in volume (2%).


24


Gross profit increased $51.6 (9%), which included favorable foreign currency impact (2%). Gross profit margin decreased 90 basis points to 36.3%. On an adjusted basis, which excluded restructuring and restructuring related charges, gross profit increased $45.0 (8%), and adjusted gross profit margin decreased 120 basis points to 36.4%.

The Process Equipment Group’s gross profit increased $65.9 (17%), primarily due to higher volume (14%). Foreign currency impact increased gross profit by 4%. Gross profit margin decreased 50 basis points to 36.6% in 2018, primarily driven by the increased proportion of lower margin, large systems projects in plastics, partially offset by productivity and pricing improvements.
 
The Process Equipment Group’s gross profit included restructuring and restructuring related charges of $0.3 in 2018 and $0.6 in 2017. Excluding these charges, adjusted gross profit increased $65.6 (17%), which included favorable foreign currency impact (4%). Adjusted gross profit margin decreased 40 basis points to 36.7% compared to prior year.

Batesville’s gross profit decreased $14.3 (7%) and gross profit margin decreased 180 basis points to 35.6%. The decrease in gross profit and gross profit margin was primarily due to inflation in commodities, fuel, wages and benefits, and the decline in volume, along with supply chain inefficiencies. These items were partially offset by productivity gains, including benefits resulting from the manufacturing footprint reduction in the prior year.
 
Batesville’s gross profit included restructuring and restructuring related charges ($0.5 in 2018 and $6.8 in 2017). Excluding these charges, adjusted gross profit decreased $20.6 (9%) and adjusted gross profit margin decreased 290 basis points to 35.7%.
 
Operating expenses increased $34.5 (10%) primarily due to an increase in variable compensation, cost inflation, litigation expenses, and growth investments, as well as higher business acquisition, development, and integration costs, partially offset by a decrease in restructuring and restructuring related charges. Foreign currency impact increased operating expenses by 3%. Operating expenses as a percentage of net revenue improved 30 basis points to 21.4%. Operating expenses included the following items:
 
 
Year Ended September 30,
 
2018
 
2017
Business acquisition, development, and integration costs
$
3.5

 
$
1.1

Restructuring and restructuring related charges
1.7

 
4.9

 
On an adjusted basis, which excludes business acquisition, development, and integration costs and restructuring and restructuring related charges, operating expenses increased $35.3 (10%), which included unfavorable foreign currency impact (3%). Adjusted operating expenses as a percentage of net revenue improved 20 basis points to 21.1% compared to the prior year.

Amortization expense increased $1.0 (3%), due to unfavorable foreign currency impact of (3%).

Impairment charge increased $63.4 due to the goodwill and trade name impairments recorded in the second quarter of 2018. For more information, see Note 2 to our financial statements included in Part II, Item 8, of this Form 10-K.

Interest expense decreased $1.9, primarily due to lower average borrowings and a reduction in the fee for our revolving credit facility (the “Facility”).
 
Other (expense) income, net was $0.6 of other expense in fiscal 2018, compared to $4.2 of other expense in fiscal 2017. The decrease in expense was primarily driven by higher equity earnings from affiliates.

The effective tax rate was 44.6% in fiscal 2018 compared to 31.8% in fiscal 2017. The higher effective tax rate in the period primarily results from the nondeductible portion of the impairment charge recorded in the Process Equipment Group segment. Additionally, the impact of the Tax Act resulted in a higher tax rate as compared to the prior year driven by the items discussed below. The Tax Act resulted in a reduced domestic statutory rate (21% versus 35%). The Internal Revenue Code provides that our fiscal year ending September 30, 2018 had a domestic blended corporate tax rate of 24.5%, which is based on a proration of the applicable tax rates before and after effective date of the Tax Act. The domestic statutory tax rate of 21% will apply to

25


future years. The impact of the tax rate reduction was recognized in the rate applied to earnings as well as a tax benefit of $13.7 related to the revaluation of our domestic net deferred tax liability.

The favorable adjustments related to the revaluation of our domestic net deferred tax liability were more than offset by the provisional recognition of $29.2 tax expense for the Transition Tax to be partially offset by current year foreign tax credits and foreign tax credit carryforwards of approximately $4.6. We will not be able to precisely determine the amount of the Transition Tax until the quarter ended December 31, 2018, because certain required information is not yet available, including cumulative foreign earnings, as well as actual foreign taxes paid, to precisely compute the amount of the Transition Tax. Therefore, tax expense associated with this provision may be adjusted during the quarter ended December 31, 2018.

Our adjusted effective income tax rate, which excludes the impact of the impairment charge, Transition Tax, and the revaluation of the deferred tax balances as a result of the Tax Act, was 25.9% in fiscal 2018, compared to 32.1% in fiscal 2017. The reduction in the effective tax rate resulting from the Tax Act was partially offset by an increase in the reserve for unrecognized tax benefits.

Year Ended September 30, 2017 Compared to Year Ended September 30, 2016
 
Net revenue increased $51.8 (3%), which included an unfavorable foreign currency impact of less than 1%.
 
The Process Equipment Group’s revenue increased $63.5 (7%) primarily due to higher volume (7%) and four additional months of Red Valve revenue (1%) in 2017. Foreign currency impact decreased net revenue by 1%.
 
Batesville’s revenue decreased $11.7 (2%) primarily due to a decrease in volume (3%), partially offset by an increase in average selling price (1%).
 
Gross profit increased $20.7 (4%), which included an unfavorable foreign currency impact (0.2%). Gross profit margin improved 10 basis points to 37.2%. On an adjusted basis, which excluded restructuring and restructuring related charges and inventory step-up charges, gross profit increased $22.0 (4%), and adjusted gross profit margin improved 10 basis points to 37.6%.
 
The Process Equipment Group’s gross profit increased $33.5 (10%), primarily driven by higher volume. Foreign currency decreased gross profit by less than 1%. Gross profit margin improved 110 basis points to 37.1%, primarily driven by pricing and productivity improvements, the higher margin associated with Red Valve, a decrease in restructuring and restructuring related charges, inventory step-up charges related to the Abel and Red Valve acquisitions in fiscal 2016 that did not repeat in fiscal 2017, and savings related to restructuring actions taken in 2016, partially offset by unfavorable product mix.

Gross profit included restructuring and restructuring related charges ($0.6 in 2017 and $3.2 in 2016) and inventory step-up charges related to the Abel and Red Valve acquisitions ($2.4 in 2016). Excluding these items, adjusted gross profit increased $28.5 (8%) and adjusted gross profit margin improved 50 basis points to 37.1% in 2017.
 
Batesville’s gross profit decreased $12.8 (6%), and gross profit margin decreased 150 basis points to 37.4%. The decrease in gross profit and gross profit margin was primarily due to an increase in restructuring and restructuring related charges, higher commodity and fuel costs, and the decline in volume, partially offset by productivity improvements across the supply chain including the impact of one-time projects, along with an increase in average selling price.
Gross profit included restructuring and restructuring related charges ($6.8 in 2017 and $0.5 in 2016). Excluding these charges, adjusted gross profit decreased $6.5 (3%) and adjusted gross profit margin decreased 40 basis points to 38.6%, primarily driven by higher commodity and fuel costs and the decline in volume, partially offset by the increase in average selling price.
 
Operating expenses decreased $2.1 (1%) primarily due to lower compensation and benefits resulting from fiscal 2016 restructuring actions, current year productivity initiatives, a decrease in acquisition and integration costs, a decrease in restructuring and restructuring related charges, and a trade name impairment in 2016 that did not repeat in 2017, partially offset by four additional months of Red Valve operating expenses in 2017, an increase in variable compensation, and an increase in sales and marketing investments. Foreign currency impact decreased operating expenses by 0.3%. Operating expenses as a percentage of net revenue improved by 80 basis points to 21.7% in 2017. Operating expenses included the following items:
 

26


 
Year Ended September 30,
 
2017
 
2016
Business acquisition, development, and integration costs
$
1.1

 
$
3.7

Restructuring and restructuring related charges
4.9

 
6.4

Trade name impairment

 
2.2

 
On an adjusted basis, which excluded business acquisition, development, and integration costs, restructuring and restructuring related charges, and a trade name impairment, operating expenses increased $4.2 (1%) which included favorable foreign currency impact (0.1%). Our adjusted operating expense-to-revenue ratio improved by 40 basis points to 21.3% in 2017.
 
Amortization expense decreased $3.8 (12%) primarily due to backlog amortization related to Abel and Red Valve in fiscal 2016 that did not repeat in fiscal 2017, partially offset by amortization on the acquired intangibles of Red Valve.

Interest expense was flat compared to 2016, primarily due to higher interest rates on lower debt balances.
 
Other (expense) income, net increased $2.5 from $1.7 of expense in 2016 to $4.2 of expense in 2017, primarily driven by an increase in foreign exchange loss.

The income tax rate was 31.8% in 2017 compared to 28.8% in 2016. The increase was primarily a result of the recognition of a deferred tax liability for unremitted earnings, a one-time reduction in the domestic manufacturer’s deduction, and a change in the geographic mix of income. These unfavorable items were partially offset by a decrease in the valuation allowance against deferred tax assets in 2017. For more information, see Note 7 to our financial statements included in Part II, Item 8, of this Form 10-K. Excluding the tax effect of the adjustments discussed above, our adjusted effective income tax rate was 32.1% in 2017 compared to 29.5% in 2016.

OPERATIONS REVIEW — PROCESS EQUIPMENT GROUP
 
 
Year Ended September 30,
 
2018
 
2017
 
2016
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
Net revenue
$
1,219.5

 
100.0
 
$
1,028.2

 
100.0
 
$
964.7

 
100.0
Gross profit
446.9

 
36.6
 
381.0

 
37.1
 
347.5

 
36.0
Operating expenses
244.0

 
20.0
 
218.1

 
21.2
 
212.5

 
22.0
Amortization expense
30.2

 
2.5
 
29.0

 
2.8
 
32.7

 
3.4
Impairment Charge
63.4

 
5.2
 

 
 

 

Year Ended September 30, 2018 Compared to Year Ended September 30, 2017
 
Net revenue increased $191.3 (19%) primarily due to higher volume (14%) largely driven by increased demand for plastics projects, screening and separating equipment (including equipment that processes proppants for hydraulic fracturing), and parts and service. Foreign currency impact increased net revenue by 4%.

We expect future revenue for the Process Equipment Group to continue to be influenced by order backlog because of the lead time involved in fulfilling engineered-to-order equipment for customers. Though backlog can be an indicator of future revenue, it does not include projects and parts orders that are booked and shipped within the same quarter. The timing of order placement, size of orders, extent of order customization, and customer delivery dates can create fluctuations in backlog and revenue. Revenue attributable to backlog is also affected by foreign exchange rate fluctuations for orders denominated in currencies other than U.S. dollars. Backlog increased $182.6 (29%) from $632.2 on September 30, 2017, to $814.8 on

27


September 30, 2018, primarily driven by an increase in orders for large polyolefin projects in the plastics industry. We expect the majority of backlog at September 30, 2018 to be realized as revenue in 2019. Foreign currency impact decreased order backlog by 3%.

Gross profit increased $65.9 (17%) primarily due to higher volume largely driven by increased demand for plastics projects, screening and separating equipment (including equipment that processes proppants for hydraulic fracturing), and parts and service. Foreign currency impact increased gross profit by 4%. Gross profit margin decreased 50 basis points to 36.6% in 2018, primarily driven by the increased proportion of lower margin, large systems projects in plastics, partially offset by productivity and pricing improvements.

The Process Equipment Group’s gross profit included restructuring and restructuring related charges ($0.3 in 2018 and $0.6 in 2017). Excluding these charges, adjusted gross profit increased $65.6 (17%), which included favorable foreign currency impact (4%). Adjusted gross profit margin decreased 40 basis points to 36.7% compared to prior year.
  
Operating expenses increased $25.9 (12%), primarily driven by an increase in variable compensation, litigation expenses, and cost inflation. Foreign currency impact increased operating expenses by 4%. Operating expenses as a percentage of net revenue improved 120 basis points to 20.0% in 2018.

Operating expenses included business acquisition, development, and integration costs ($0.1 in 2018 and $0.6 in 2017) and restructuring and restructuring related charges ($0.5 in 2018 and $2.2 in 2017).  Excluding these items, adjusted operating expenses increased $28.1 (13%), which included unfavorable foreign currency impact (4%). Adjusted operating expenses as a percentage of net revenue improved 90 basis points to 20% in 2018.

Amortization expense increased $1.2 (4%) primarily due to unfavorable foreign currency impact of (4%).
 
Impairment charge increased $63.4 due to the goodwill and trade name impairments recorded in the second quarter of 2018. For more information, see Note 2 to our financial statements included in Part II, Item 8, of this Form 10-K.

Year Ended September 30, 2017 Compared to Year Ended September 30, 2016
 
Net revenue increased $63.5 (7%), primarily due to higher volume (7%) largely driven by increased demand for plastics projects and screening and separating equipment (including equipment that processes proppants for hydraulic fracturing), and four additional months of Red Valve revenue (1%) in 2017. Foreign currency impact decreased net revenue by 1%.

Gross profit increased $33.5 (10%), primarily driven by higher volume. Gross profit included restructuring and restructuring related charges ($0.6 in 2017 and $3.2 in 2016) and inventory step-up charges related to the Abel and Red Valve acquisitions ($2.4 in 2016). Excluding these items, adjusted gross profit increased $28.5 (8%) and adjusted gross profit margin improved 50 basis points to 37.1% in 2017.

Operating expenses increased $5.6 (3%) primarily driven by four additional months of Red Valve operating expenses in fiscal year 2017, an increase in variable compensation, and an increase in sales and marketing investments, partially offset by a decrease in restructuring and restructuring related charges, and a trade name impairment recorded in 2016 that did not repeat in 2017. Our operating expense-to-revenue ratio improved by 80 basis points to 21.2%.

Operating expenses included business acquisition, development, and integration costs ($0.6 in 2017 and $0.3 in 2016), restructuring and restructuring related costs ($2.2 in 2017 and $4.8 in 2016), and a trade name impairment in 2016 of $2.2. Excluding these items, adjusted operating expenses increased $10.1 (5%), primarily driven by four additional months of Red Valve operating expenses in fiscal year 2017, an increase in variable compensation, and an increase in sales and marketing investments. Adjusted operating expenses as a percentage of net revenue improved 40 basis points to 20.9% in 2017.

Amortization expense decreased $3.7 (11%) primarily due to backlog amortization related to Abel and Red Valve in fiscal
2016 that did not repeat in fiscal 2017, partially offset by amortization on the acquired intangibles of Red Valve.







28


OPERATIONS REVIEW — BATESVILLE
 
 
Year Ended September 30,
 
2018
 
2017
 
2016
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
Net revenue
$
550.6

 
100.0
 
$
562.0

 
100.0
 
$
573.7

 
100.0
Gross profit
196.0

 
35.6
 
210.3

 
37.4
 
223.1

 
38.9
Operating expenses
84.1

 
15.3
 
83.9

 
14.9
 
91.4

 
15.9
Amortization expense

 
 
0.2

 
 
0.3

 
0.1
 
Year Ended September 30, 2018 Compared to Year Ended September 30, 2017
 
Net revenue decreased $11.4 (2%), primarily due to a decrease in volume (2%). The decrease in volume was primarily driven by the estimated increased rate at which families opted for cremation.
 
Gross profit decreased $14.3 (7%), and gross profit margin decreased 180 basis points to 35.6%. The decrease in gross profit and gross profit margin was primarily due to inflation in commodities, fuel, wages and benefits, and the decline in volume, along with supply chain inefficiencies. These items were partially offset by productivity gains, including benefits resulting from the manufacturing footprint reduction in the prior year.
 
Batesville’s gross profit included restructuring and restructuring related charges ($0.5 in 2018 and $6.8 in 2017). Excluding restructuring and restructuring related charges, adjusted gross profit decreased $20.6 (9%) and adjusted gross profit margin decreased 290 basis points to 35.7% in 2018.

Operating expenses increased $0.2 (0.2%) to $84.1 in 2018, and operating expenses as a percentage of net revenue increased 40 basis points to 15.3%, primarily due to wage and benefit inflation and an increase in restructuring and restructuring related charges, partially offset by current year productivity improvements.
 
Operating expenses included $0.5 of restructuring and restructuring related charges in 2018. Excluding these charges, adjusted operating expenses decreased $0.3 (0.4%), and adjusted operating expenses as a percentage of net revenue increased 30 basis points to 15.2% in 2018.

Year Ended September 30, 2017 Compared to Year Ended September 30, 2016
 
Net revenue decreased $11.7 (2%), primarily due to a decrease in volume (3%), partially offset by an increase in average selling price (1%).  Lower volume was driven by a decrease in burial sales resulting from what we estimate to be a decrease in North American burials driven by the increased rate at which families opted for cremation, as well as product line simplification initiatives.

Gross profit decreased $12.8 (6%), and gross profit margin decreased 150 basis points to 37.4%. The decrease in gross profit and gross profit margin was primarily due to an increase in restructuring and restructuring related charges, higher commodity and fuel costs, and the decline in volume, partially offset by productivity improvements across the supply chain including the impact of one-time projects, along with an increase in average selling price.
Gross profit included restructuring and restructuring related charges ($6.8 in 2017 and $0.5 in 2016). Excluding these charges, adjusted gross profit decreased $6.5 (3%) and adjusted gross profit margin decreased 40 basis points to 38.6% in 2017.
 
Operating expenses decreased $7.5 (8%) to $83.9 in 2017, and operating expenses as a percentage of net revenue improved 100 basis points to 14.9%, primarily due to lower compensation and benefits resulting from fiscal year 2016 restructuring actions, fiscal year 2017 productivity initiatives, and a decrease in restructuring and restructuring related charges.

Operating expenses included restructuring and restructuring related charges of $1.1 in 2016. Excluding these charges, adjusted operating expenses decreased $6.4 (7%) and our adjusted operating expense-to-revenue ratio improved 80 basis points to 14.9%, primarily due to lower compensation and benefits resulting from fiscal 2016 restructuring actions and fiscal year 2017 productivity initiatives.


29


 
REVIEW OF CORPORATE EXPENSES
 
 
Year Ended September 30,
 
2018
 
2017
 
2016
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
Core operating expenses
$
46.7

 
2.7
 
$
39.2

 
2.5
 
$
38.7

 
2.5
Business acquisition, development, and integration costs
3.4

 
0.2
 
0.5

 
 
3.4

 
0.2
Restructuring and restructuring related charges
0.7

 
 
2.7

 
0.2
 
0.5

 
0.1
Operating expenses
$
50.8

 
2.9
 
$
42.4

 
2.7
 
$
42.6

 
2.8
 
Core operating expenses primarily represent operating expenses excluding restructuring and restructuring related charges and costs related to business acquisition, development, and integration, which we incur as a result of our strategy to grow through selective acquisitions.

Business acquisition, development, and integration costs include legal, tax, accounting, and other advisory fees and due diligence costs associated with investigating opportunities (including acquisition and disposition) and integrating completed acquisitions.


Year Ended September 30, 2018 Compared to Year Ended September 30, 2017
 
Operating expenses increased $8.4 (20%) in 2018, primarily due to an increase in growth investments, business acquisition, development, and integration costs, and variable compensation, partially offset by a decrease in restructuring and restructuring related charges. These expenses as a percentage of net revenue were 2.9%, an increase of 20 basis points from 2017.  
 
Core operating expenses increased $7.5 (19%) in 2018, primarily due to an increase in growth investments and variable compensation. These expenses as a percentage of net revenue were 2.7%, an increase of 20 basis points from 2017.

Year Ended September 30, 2017 Compared to Year Ended September 30, 2016
 
Operating expenses decreased $0.2 (0.5%) in 2017, primarily due to a decrease in business acquisition, development, and integration costs, partially offset by an increase in restructuring and restructuring related charges and an increase in variable compensation.

Core operating expenses increased $0.5 (1%) in 2017, primarily due to an increase in variable compensation. These expenses as a percentage of net revenue were flat compared to 2016.

NON-GAAP OPERATING PERFORMANCE MEASURES

The following is a reconciliation from consolidated net income, the most directly comparable GAAP operating performance measure, to our non-GAAP adjusted EBITDA.

30


 
Year Ended September 30,
 
2018
 
2017
 
2016
Consolidated Net Income
$
81.2

 
$
128.4

 
$
116.8

Interest income
(1.4
)
 
(0.9
)
 
(1.2
)
Interest expense
23.3

 
25.2

 
25.3

Income tax expense
65.3

 
59.9

 
47.3

Depreciation and amortization
56.5

 
56.6

 
60.4

EBITDA
$
224.9

 
$
269.2

 
$
248.6

Impairment charges
63.4

 

 
2.2

Business acquisition, development, and integration
3.5

 
1.1

 
3.7

Inventory step-up

 

 
2.4

Restructuring and restructuring related
2.5

 
10.7

 
10.2

Adjusted EBITDA
$
294.3

 
$
281.0

 
$
267.1


Consolidated net income for 2018 compared to 2017 decreased $47.2 (37%). The decrease was primarily due to the impairment charges recorded in the Process Equipment Group segment in 2018 of $63.4. In addition, net income was negatively impacted by cost inflation, an increased proportion of large plastics projects with lower margins, an increase in variable compensation, a decrease in volume at Batesville, and the unfavorable impact of the Tax Act on the effective tax rate. This decrease in consolidated net income was partially offset by higher volume in the Process Equipment Group, as well as pricing and productivity improvements, and a decrease in restructuring and restructuring related charges. Foreign currency impact increased consolidated net income by 2%.

Consolidated adjusted EBITDA for 2018 compared to 2017 increased $13.3 (5%). The increase was primarily driven by higher volume in the Process Equipment Group, as well as pricing and productivity improvements. This increase in adjusted EBITDA was partially offset by cost inflation, an increased proportion of large plastics projects with lower margins, an increase in variable compensation, and a decrease in volume at Batesville. Foreign currency impact increased adjusted EBITDA by 2%.

Consolidated net income for 2017 compared to 2016 increased $11.6 (10%), primarily driven by the increased demand for plastics projects, screening and separating equipment (including equipment that processes proppants for hydraulic fracturing), and equipment and systems used in food and pharmaceutical applications, as well as increased earnings associated with the acquisition of Red Valve, pricing and productivity improvements, backlog amortization related to Abel and Red Valve in fiscal 2016 that did not repeat in fiscal 2017, savings related to restructuring actions taken in 2016, a reduction in business acquisition, development, and integration costs, inventory step-up charges related to Abel and Red Valve in 2016 that did not repeat in 2017, and a trade name impairment in 2016 that did not repeat in 2017. This increase in consolidated net income was partially offset by unfavorable product mix, lower demand for industrial equipment and parts used in power and mining (including coal), a decrease in volume at Batesville, an increase in the effective tax rate, increased commodity and fuel costs at Batesville, and an increase in variable compensation. Foreign currency impact increased consolidated net income by less than 1%.

Adjusted EBITDA for 2017 compared to 2016 increased $13.9 (5%), primarily driven by the increased demand for plastics projects, screening and separating equipment (including equipment that processes proppants for hydraulic fracturing), and equipment and systems used in food and pharmaceutical applications, as well as increased earnings associated with the acquisition of Red Valve, pricing and productivity improvements, and savings related to restructuring actions taken in 2016. This increase in consolidated adjusted EBITDA was partially offset by unfavorable product mix, lower demand for industrial equipment and parts used in power and mining (including coal), a decrease in volume at Batesville, increased commodity and fuel costs at Batesville, and an increase in variable compensation. Foreign currency impact decreased adjusted EBITDA by less than 1%.

LIQUIDITY AND CAPITAL RESOURCES
 
In this section, we discuss our ability to access cash to meet business needs.  We discuss how we see cash flow being affected for the next twelve months and how we intend to use it.  We describe actual results in generating and utilizing cash by comparing 2018 to 2017.  Finally, we identify other significant matters, such as contractual obligations and contingent liabilities and commitments that could affect liquidity on an ongoing basis.
 
Ability to Access Cash

Our debt financing includes long-term notes and our Facility as part of our overall financing strategy. We believe we have ready access to capital markets and regularly review the optimal mix of fixed-rate and variable-rate debt. In addition to cash balances and our ability to access additional long-term financing, we had $797.0 of borrowing capacity available under the Facility as of September 30, 2018, of which $769.2 of borrowing capacity is immediately available based on our most restrictive covenant at September 30, 2018, with additional amounts available in the event of a qualifying acquisition. The available borrowing capacity reflects a reduction of $7.3 for outstanding letters of credit issued under the Facility. The Company may request an increase of up to $450.0 in the total borrowing capacity under the Facility, subject to approval of the lenders.

In the normal course of business, the Process Equipment Group provides to certain customers bank guarantees and other credit arrangements in support of performance, warranty, advance payment, and other contractual obligations. This form of trade finance is customary in the industry and, as a result, we maintain adequate capacity to provide the guarantees. As of September 30, 2018, we had guarantee arrangements totaling $248.4, under which $196.5 was utilized for this purpose. These arrangements include the €150.0 Syndicated Letter of Guarantee Facility Agreement entered into on March 8, 2018 (the “L/G Facility Agreement”) by and among the Company and certain of its affiliates, the lenders party thereto, and Commerzbank Finance & Covered Bond S.A., acting as agent. Under the L/G Facility Agreement, unsecured letters of credit, bank guarantees, or other surety bonds may be issued. The Company may request an increase to the total capacity under the L/G Facility Agreement by an additional €70.0, subject to approval of the lenders.

We have significant operations outside the U.S. The majority of foreign earnings is considered to be indefinitely reinvested in foreign jurisdictions where the Company has made, and intends to continue to make, substantial investments to support the ongoing development and growth of our international operations. Pursuant to the Tax Act, we have recognized a provisional accrued Transition Tax of $29.2 on the unrepatriated earnings of our foreign subsidiaries to be partially offset by current year foreign tax credits and foreign tax credit carryforwards of approximately $4.6. The cash at our international subsidiaries totaled $48.7 at September 30, 2018. With the enactment of the Tax Act, we continue to actively evaluate our future plans for deployment of this cash.


31


12-month Outlook

We believe the 12-month outlook for our business remains positive. Although cash flow from operations in the Process Equipment Group naturally experiences substantial fluctuations driven by changes in working capital requirements at Coperion (due to the type of product and geography of customer projects in process at any point in time), we believe we have significant flexibility to meet our financial commitments, including working capital needs, capital expenditures, and financing obligations.

We expect to continue to use a combination of some of our cash flows from operations and our Facility to fund acquisitions. In considering attractive targets, we often look for companies with a relatively low physical asset base, in order to limit the need to invest significant additional cash into targets post-acquisition.

The Tax Act will require the Company to pay tax on remitted earnings of its foreign subsidiaries in an estimated net amount of $24.6. The portion of this tax we anticipate to pay in the next twelve months is $2.0, with the remainder to be paid over the next seven years. In addition, we expect the lower corporate tax rate of 21% to benefit our cash flow in current and future periods; however, the amount and use of those benefits has not yet been determined.

Our anticipated contribution to our pension plans in 2019 is $10.0. We will continue to monitor plan funding levels, performance of the assets within the plans, and overall economic activity, and we may make additional discretionary funding decisions based on the net impact of the above factors.

We currently expect to pay quarterly cash dividends in the future comparable to those we paid in 2018, which will require approximately $13.0 each quarter based on our outstanding common stock at September 30, 2018. We are authorized by our Board of Directors to purchase up to $200.0 of our common stock in total under our existing share repurchase program, and may make such purchases, depending on market conditions and other needs for cash consistent with our growth strategy. At September 30, 2018, we had approximately $39.6 remaining for share repurchases under the existing authorization by the Board of Directors. See Part II, Item 5 within this Form 10-K for more information on share repurchases.

We believe existing cash, cash flows from operations, and the issuance of debt will be sufficient to fund our operating activities and cash commitments for investing and financing activities. Based on these factors, we believe our current liquidity position is strong and will continue to meet all of our financial commitments for the foreseeable future.

 
Cash Flows
 
 
Year Ended September 30,
(in millions)
 
2018
 
2017
 
2016
Cash flows provided by (used in)
 
 

 
 

 
 

Operating activities
 
$
248.3

 
$
246.2

 
$
238.2

Investing activities
 
(23.1
)
 
(13.5
)
 
(253.5
)
Financing activities
 
(232.5
)
 
(215.1
)
 
21.6

Effect of exchange rate changes on cash and cash equivalents
 
(2.7
)
 
(3.6
)
 
(2.6
)
(Decrease) increase in cash and cash equivalents
 
$
(10.0
)
 
$
14.0

 
$
3.7

 
Operating Activities
 
Operating activities provided $248.3 of cash during 2018, and provided $246.2 of cash during 2017, a $2.1 (0.9%) increase.  The increase in operating cash flow was primarily due to our $80.0 contribution to the Company’s U.S. defined benefit pension plan in 2017 that did not repeat in 2018, partially offset by the timing of working capital requirements during 2018, and an increase of $20.7 in cash paid for taxes.

Operating activities provided $246.2 of cash during 2017, in contrast to providing $238.2 of cash during 2016, an $8.0 (3%) increase. This increase was primarily due to a decrease in working capital requirements within the Process Equipment Group, which was partially offset by the $80 contribution to our U.S. defined benefit pension plan in 2017. In addition, as a result of the pension contribution, tax payments were lower in 2017 by approximately $30. The decrease in working capital requirements was primarily driven by the timing of project orders, the associated advanced payments, and decreased payables to suppliers that were outstanding at the end of 2017.


32


Working capital requirements for the Process Equipment Group may continue to fluctuate in this manner due primarily to the type of product and geography of customer projects in process at any point in time.  Working capital needs are lower when advance payments from customers are more heavily weighted toward the beginning of the project.  Conversely, working capital needs are higher when a larger portion of the cash is to be received in later stages of manufacturing.

Investing Activities
 
The $9.6 increase in cash used in investing activities during 2018 was primarily due to an increase in capital expenditures, a decrease in return on investment capital from affiliates, and a decrease in proceeds from sales of property, plant, and equipment.

Cash used in investing activities in 2017 compared to 2016 decreased $240.0 primarily due to the 2016 acquisitions of Abel and Red Valve, partially offset by higher capital expenditures in 2017.
 
Financing Activities
 
Cash used in financing activities was largely impacted by net borrowing activity.  Our general practice is to utilize our cash to pay down debt unless it is needed to fund an acquisition.  Daily borrowing and repayment activity under the Facility may fluctuate significantly between periods as we fulfill the capital needs of our business units. Cash used in financing activities during 2018 was $232.5, including $120.2 of debt repayments, net of proceeds.  Cash used in financing activities in 2017 was $215.1. The increase in cash used in financing activities was primarily due to an increase in payments on the Facility and an increase in repurchases of common stock in 2018. This increase was partially offset by borrowings used to fund the $80.0 contribution to the Company’s U.S. defined benefit pension plan in 2017 that did not repeat in 2018 and a decrease in net proceeds on stock plans.

Cash used in financing activities in 2017 was $215.1 compared to cash provided by financing activities in 2016 of $21.6. We had net repayments of $147.2 in 2017 compared to net borrowings of $83.6 in 2016. The decrease in cash provided by financing activities was due primarily to borrowings used to fund the acquisitions of Abel and Red Valve in 2016 that did not repeat in 2017 and an increase in repurchases of common stock, partially offset by the borrowings used to fund the $80.0 contribution to the Company’s U.S. defined benefit pension plan in 2017 and an increase in proceeds from stock plans.

We returned $52.1 to shareholders in 2018 in the form of quarterly dividends.  We increased our quarterly dividend in 2018 to $0.2075 per common share from $0.2050 paid during 2017 and $0.2025 paid in 2016.  We repurchased approximately 1,385,600 shares of our common stock during 2018, for a total cost of approximately $61.0.

Off-Balance Sheet Arrangements
 
We have no significant off-balance sheet arrangements outside of those disclosed previously in the Ability to Access Cash section or the Contractual Obligations and Contingent Liabilities and Commitments section below.

 

33


Contractual Obligations and Contingent Liabilities and Commitments
 
The following table summarizes our future obligations as of September 30, 2018.  This will help give you an understanding of the significance of cash outlays that are fixed beyond the normal accounts payable we have already incurred and have recorded in the financial statements. 
 
 
Payment Due by Period
(in millions)
 
Total
 
Less
Than 1
Year
 
1-3
Years
 
4-5
Years
 
After 5
Years
10 year, 5.5% fixed rate senior unsecured notes
 
$
150.0

 
$

 
$
150.0

 
$

 
$

Revolving credit facility (1)
 
95.7

 

 

 
95.7

 

Series A Notes
 
100.0

 

 

 

 
100.0

Interest on financing agreements (2)
 
53.9

 
15.4

 
20.7

 
12.2

 
5.6

Operating lease obligations (noncancelable)
 
104.3

 
20.4

 
30.0

 
20.2

 
33.7

Purchase obligations (3)
 
290.6

 
258.6

 
31.5

 
0.5

 

Defined benefit plan funding (4)
 
127.8

 
10.6

 
20.9

 
20.2

 
76.1

Other long-term liabilities (5)
 
39.6

 
6.6

 
7.9

 
5.6

 
19.5

Total contractual obligations (6)
 
$
961.9

 
$
311.6

 
$
261.0

 
$
154.4

 
$
234.9

 
(1)
Our revolving credit facility expires in December 2022. Although we may make earlier principal payments, we have reflected the principal balance due at expiration.
(2)
Cash obligations for interest requirements relate to our fixed-rate debt obligation at its contractual rate and borrowings under the variable-rate revolving credit facility at its current rate at September 30, 2018.
(3)
Agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
(4)
Includes both projected contributions to achieve minimum funding objectives and additional discretionary contributions, where currently planned.
(5)
Includes the estimated liquidation of liabilities related to both our short-term and long-term casket pricing obligation, self-insurance reserves, and severance payments.
(6)
We have excluded from the table our $12.1 liability related to uncertain tax positions as the current portion is not significant and we are not able to reasonably estimate the timing of the long-term portion.

Recently Issued and Adopted Accounting Standards
 
For a summary of recently issued and adopted accounting standards applicable to us, see Note 2 to our financial statements included in Part II, Item 8, of this Form 10-K. 

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In this section, we tell you about market risks we think could have a significant impact on our bottom line or the financial strength of our Company.  The term “market risk” generally means how results of operations and the value of assets and liabilities could be affected by market factors such as interest rates, currency exchange rates, the value of commodities, and debt and equity price risks.  If those factors change significantly, it could help or hurt our bottom line, depending on how we react to them.


34


We are exposed to various market risks.  We have established policies, procedures, and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.  Our primary exposures are to:  fluctuations in market prices for purchases of certain commodities; volatility in interest rates associated with our revolving credit facility; volatility in the fair value of the assets held by our pension plans; and variability in exchange rates in foreign locations.
 
We are subject to market risk from fluctuating market prices of certain purchased commodity raw materials including steel, wood, red metals, and fuel.  While these materials are typically available from multiple suppliers, commodity raw materials are subject to market price fluctuations.  We generally buy these commodities based upon market prices that are established with the supplier as part of the purchasing process.  We generally attempt to obtain firm pricing from our larger suppliers for volumes consistent with planned production.  To the extent that commodity prices increase and we do not have firm pricing from our suppliers, or if our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain supply chain efficiencies to offset increases in commodity costs.
 
At September 30, 2018, we had $95.7 outstanding under our $900.0 revolving credit facility. We are subject to interest rate risk associated with our revolving credit facility, which bears a variable rate of interest that is based upon the lender’s base rate or the LIBOR rate.  The interest we pay on our borrowings is dependent on interest rate conditions and the timing of our financing needs.  Assuming these borrowings remain at $95.7 for 12 months, a one percentage point change in the related interest rates would increase or decrease our annual interest expense by approximately $1.0. Based upon debt balances as of September 30, 2017, a one percentage point change in the related interest rates would have increased or decreased our annual interest expense by approximately $1.7 (net of related interest rate swap impact).
 
Our pension plans’ assets are also subject to volatility that can be caused by fluctuations in general economic conditions.  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.  Favorable or unfavorable investment performance over the long term will impact our pension expense if it deviates from our assumption related to future rate of return.

We are subject to variability in foreign currency exchange rates in our international operations.  Exposure to this variability is periodically managed through the use of natural hedges and also by entering into currency exchange agreements.  As of September 30, 2018 and 2017, a 10% change in the foreign exchange rates affecting unhedged balance sheet exposures would have impacted pre-tax earnings by less than 1%.
 
The translation of the financial statements of our non-U.S. operations from local currencies into U.S. dollars is also sensitive to changes in foreign exchange rates.  These translation gains or losses are recorded as cumulative translation adjustments (“CTA”) within accumulated other comprehensive loss on our balance sheet.  The hypothetical change in CTA is calculated by multiplying the net assets of our non-U.S. operations by a 10% change in the applicable foreign exchange rates.  The result of the appreciation or depreciation of all applicable currencies against the U.S. dollar would be a change in shareholders’ equity of approximately $53 and $55 as of September 30, 2018 and 2017.


35


Item 8.        Financial Statements and Supplementary Data
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Page
 
 
 
 
 
 
 
Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Statement Schedule for years ended September 30, 2018, 2017, and 2016:
 
 
 
 
 


36


MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  In order to evaluate the effectiveness of internal control over financial reporting, management has conducted an assessment, including testing, using the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control — Integrated Framework (2013 Framework).  The Company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on our assessment under the criteria established in Internal Control — Integrated Framework (2013 Framework), issued by the COSO, management has concluded that the Company maintained effective internal control over financial reporting as of September 30, 2018.
 
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2018, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein.
 
By:
/s/ Timothy C. Ryan
 
Timothy C. Ryan
 
Vice President, Controller and Chief Accounting Officer
 
 
By:
/s/ Kristina A. Cerniglia
 
Kristina A. Cerniglia
 
Senior Vice President and Chief Financial Officer
 
 
By:
/s/ Joe A. Raver
 
Joe A. Raver
 
President and Chief Executive Officer


37


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Hillenbrand, Inc.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Hillenbrand, Inc. and its subsidiaries (the “Company”) as of September 30, 2018 and 2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 30, 2018, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for goodwill impairment in 2018.


Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to

38


permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



 
/s/PricewaterhouseCoopers LLP
Indianapolis, Indiana
November 13, 2018

We have served as the Company’s auditor since 2007.

39


HILLENBRAND, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
 
 
Year Ended September 30,
 
2018
 
2017
 
2016
Net revenue
$
1,770.1

 
$
1,590.2

 
$
1,538.4

Cost of goods sold
1,127.2

 
998.9

 
967.8

Gross profit
642.9

 
591.3

 
570.6

Operating expenses
378.9

 
344.4

 
346.5

Amortization expense
30.2

 
29.2

 
33.0

Impairment charge
63.4

 

 

Interest expense
23.3

 
25.2

 
25.3

Other (expense) income, net
(0.6
)
 
(4.2
)
 
(1.7
)
Income before income taxes
146.5

 
188.3

 
164.1

Income tax expense
65.3

 
59.9

 
47.3

Consolidated net income
81.2

 
128.4

 
116.8

Less: Net income attributable to noncontrolling interests
4.6

 
2.2

 
4.0

Net income(1)
$
76.6

 
$
126.2

 
$
112.8

 
 
 
 
 
 
Net income(1) — per share of common stock
 

 
 

 
 

Basic earnings per share
$
1.21

 
$
1.99

 
$
1.78

Diluted earnings per share
$
1.20

 
$
1.97

 
$
1.77

Weighted-average shares outstanding — basic
63.1

 
63.6

 
63.3

Weighted-average shares outstanding — diluted
63.8

 
64.0

 
63.8

 
 
 
 
 
 
Cash dividends per share
$
0.8300

 
$
0.8200

 
$
0.8100

 
 
(1) Net income attributable to Hillenbrand
 
See Notes to Consolidated Financial Statements


40



HILLENBRAND, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
Year Ended September 30,
 
2018
 
2017
 
2016
Consolidated net income
$
81.2

 
$
128.4

 
$
116.8

Other comprehensive (loss) income, net of tax
 

 
 

 
 

Currency translation
(7.9
)
 
24.9

 
(9.8
)
Pension and postretirement (net of tax of $1.3, $10.9, and $4.8)
4.3

 
22.2

 
(13.1
)
Net unrealized (loss) gain on derivative instruments (net of tax of $0.0, $1.0, and $0.2)
(0.1
)
 
1.7

 
0.7

Total other comprehensive income (loss), net of tax
(3.7
)
 
48.8

 
(22.2
)
Consolidated comprehensive income
77.5

 
177.2

 
94.6

Less: Comprehensive income attributable to noncontrolling interests
3.9

 
2.4

 
3.7

Comprehensive income(2)
$
73.6

 
$
174.8

 
$
90.9

 
 
(2) Comprehensive income attributable to Hillenbrand
 
See Notes to Consolidated Financial Statements


41


HILLENBRAND, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
 
 
September 30,
 
2018
 
2017
ASSETS
 

 
 

Current Assets
 

 
 

Cash and cash equivalents
$
56.0

 
$
66.0

Trade receivables, net
218.5

 
206.1

Receivables from long-term manufacturing contracts
120.3

 
125.2

Inventories
172.5

 
151.6

Prepaid expenses
25.2

 
28.2

Other current assets
18.1

 
16.5

Total current assets
610.6

 
593.6

Property, plant, and equipment, net
142.0

 
150.4

Intangible assets, net
487.3

 
523.9

Goodwill
581.9

 
647.5

Other assets
42.8

 
41.1

Total Assets
$
1,864.6

 
$
1,956.5

 
 
 
 
LIABILITIES
 

 
 

Current Liabilities
 

 
 

Trade accounts payable
$
196.8

 
$
158.0

Liabilities from long-term manufacturing contracts and advances
125.9

 
132.3

Current portion of long-term debt

 
18.8

Accrued compensation
71.9

 
66.9

Other current liabilities
137.1

 
135.7

Total current liabilities
531.7

 
511.7

Long-term debt
344.6

 
446.9

Accrued pension and postretirement healthcare
120.5

 
129.6

Deferred income taxes
76.4

 
75.7

Other long-term liabilities
47.3

 
26.7

Total Liabilities
1,120.5

 
1,190.6

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
SHAREHOLDERS’ EQUITY
 

 
 

Common stock, no par value (63.9 and 63.8 shares issued, 62.3 and 63.1 shares outstanding)

 

Additional paid-in capital
351.4

 
349.9

Retained earnings
531.0

 
507.1

Treasury stock (1.6 and 0.7 shares)
(67.1
)
 
(24.4
)
Accumulated other comprehensive loss
(84.2
)
 
(81.2
)
Hillenbrand Shareholders’ Equity
731.1

 
751.4

Noncontrolling interests
13.0

 
14.5

Total Shareholders’ Equity
744.1

 
765.9

 
 
 
 
Total Liabilities and Equity
$
1,864.6

 
$
1,956.5

 
See Notes to Consolidated Financial Statements


42


HILLENBRAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 
Year Ended September 30,
 
2018
 
2017
 
2016
Operating Activities
 

 
 

 
 

Consolidated net income
$
81.2

 
$
128.4

 
$
116.8

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 

 
 

Depreciation and amortization
56.5

 
56.6

 
60.4

Impairment charges
63.4

 

 
2.2

Deferred income taxes
3.7

 
37.1

 
(4.7
)
Net loss (gain) on disposal or impairment of property
0.7

 
(4.6
)
 
0.3

Equity in net loss (income) from affiliates

 
0.4

 
(0.3
)
Share-based compensation
12.1

 
10.5

 
8.5

Trade accounts receivable and receivables on long-term manufacturing contracts
(13.0
)
 
10.7

 
9.7

Inventories
(24.0
)
 
5.4

 
11.3

Prepaid expenses and other current assets
(0.1
)
 
(6.2
)
 
5.5

Trade accounts payable
41.6

 
17.2

 
30.2

Accrued expenses and other current liabilities
5.8

 
64.6

 
(10.7
)
Income taxes payable
23.0

 
4.8

 
3.8

Defined benefit plan funding
(10.9
)
 
(90.6
)
 
(15.5
)
Defined benefit plan expense
3.6

 
6.4

 
11.9

Other, net
4.7

 
5.5

 
8.8

Net cash provided by operating activities
248.3

 
246.2

 
238.2

 
 
 
 
 
 
Investing Activities
 

 
 

 
 

Capital expenditures
(27.0
)
 
(22.0
)
 
(21.2
)
Proceeds from sales of property, plant, and equipment
3.7

 
5.7

 
2.0

Acquisitions of businesses, net of cash acquired

 

 
(235.4
)
Return of investment capital from affiliates

 
3.2

 
1.1

Other, net
0.2

 
(0.4
)
 

Net cash used in investing activities
(23.1
)
 
(13.5
)
 
(253.5
)
 
 
 
 
 
 
Financing Activities
 

 
 

 
 

Repayments on term loan
(148.5
)
 
(13.5
)
 
(9.0
)
Proceeds from revolving credit facility, net of financing costs
1,094.0

 
819.3

 
719.8

Repayments on revolving credit facility
(1,065.7
)
 
(953.0
)
 
(627.2
)
Payment of dividends on common stock
(52.1
)
 
(51.9
)
 
(51.1
)
Repurchases of common stock
(61.0
)
 
(28.0
)
 
(21.2
)
Net proceeds on stock plans
7.1

 
13.7

 
11.1

Other, net
(6.3
)
 
(1.7
)
 
(0.8
)
Net cash (used in) provided by financing activities
(232.5
)
 
(215.1
)
 
21.6

 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(2.7
)
 
(3.6
)
 
(2.6
)
 
 
 
 
 
 
Net cash flows
(10.0
)
 
14.0

 
3.7

 
 
 
 
 
 
Cash and cash equivalents:
 

 
 

 
 

At beginning of period
66.0

 
52.0

 
48.3

At end of period
$
56.0

 
$
66.0

 
$
52.0

 
 
 
 
 
 
Cash paid for interest
$
20.7

 
$
20.3

 
$
22.7

Cash paid for income taxes
$
38.9

 
$
18.2

 
$
48.0


 See Notes to Consolidated Financial Statements

43


HILLENBRAND, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
 
 
Shareholders of Hillenbrand, Inc.
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
 
Shares
 
 
 
Shares
 
Amount
 
 
 
Balance at September 30, 2015
63.6

 
$
350.9

 
$
372.1

 
0.7

 
$
(21.0
)
 
$
(107.9
)
 
$
11.7

 
$
605.8

Total other comprehensive loss, net of tax

 

 

 

 

 
(21.9
)
 
(0.3
)
 
(22.2
)
Net income

 

 
112.8

 

 

 

 
4.0

 
116.8

Issuance/retirement of stock for stock awards/options
0.1

 
(11.2
)
 

 
(0.7
)
 
22.3

 

 

 
11.1

Share-based compensation

 
8.5

 

 

 

 

 

 
8.5

Purchases of common stock

 

 

 
0.7

 
(21.2
)
 

 

 
(21.2
)
Dividends

 
0.5

 
(51.6
)
 

 

 

 
(1.5
)
 
(52.6
)
Balance at September 30, 2016
63.7

 
348.7

 
433.3

 
0.7

 
(19.9
)
 
(129.8
)
 
13.9

 
646.2

Total other comprehensive loss, net of tax

 

 

 

 

 
48.6

 
0.2