SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

HILLENBRAND, INC.

The aggregate market value of voting stock (consisting solely of shares of common stock) held by non-affiliates of the registrant as of March 31, 201630, 2018 was $1,880,989,474.$2,868,342,913.  As of November 11, 2016, 63,055,7018, 2018, 62,347,253 shares of common stock were outstanding.

 

 

 

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,

 

 

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:

 

 

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.

 

 

 

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.

 

 

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 eightten 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. 

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:

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, selection room display fixtures, other personalization and memorialization products, and web-based technology applications.

We believe Batesville has attractive fundamentals including:

How We Operate

We strive to provide superior return for our shareholders, exceptional value for our customers, and 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.

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 that are focused on building platforms with leadership positions in our core markets and near adjacencies, both organically and inorganically, in order to create shareholder value.

 

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, processed food and pharmaceuticals, chemicals, fertilizers, industrial minerals and mining, energy, wastewater treatment, forest products, and forest products.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.

 

 

The Process Equipment Group product portfolio has grown through a series of acquisitions over the past sixeight 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 37%33% of the group’s total revenue.  Products are offered under brand names that are recognized among the leaders in their respective categories.

 

 

 

 

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. In situations where a representative purchases equipment and resells it as a distributor, the product is sold at a price net of commission, depending on the type of product sold.

 

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.

 

The Process Equipment Group has customers in a wide range of industries, including plastics, processed food and pharmaceuticals, chemicals, fertilizers, industrial 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 2016.2018.  For large or customized orders, customers generally pay a deposit and make progress payments in advance of delivery.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

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

 

 

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 leading marketleadership positions even during economic downturns.

 

 

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 solesingle 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.

 

 

The Process Equipment Group seeks profitable growth by deployingthrough the HOM to:following strategic initiatives:

Batesville

 

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, or may be read and copied at the SEC Public Reference Room at 100 F Street, NE, Washington, DC 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.www.sec.gov.

 

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 our stock or debt.securities.  This information should be assessed along with the other information we provide you in this Form 10-K.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

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 from (e.g. the overall Company or a specific segment).

 

 

All acquisitions involve inherent uncertainties, which may include, among other things, our ability to:

 

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, and our business could be materially impacted as a result.acquisitions. Under such circumstances, management could be required to spend significant amounts of time and resources in the transition of the acquired business.  In addition, anybusiness, and we may not fully realize benefits we anticipateanticipated from application of the HOMHOM. We may notalso 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 fully realized.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.

 

 

Our business is sensitive to changes in general economic conditions, both inside and outside the U.S.  Although we have seen stability or growth in some geographies since the global economic turmoil that began in 2008, we cannot assure you that these improvements will be sustainable or predict when the next recession will occur.  In addition, continuingContinuing uncertainties in the eurozone, including future implications from the voluntary exit of the United Kingdom from the European Union (commonly referred to as “Brexit”) and recent 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.

 

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.

 

We derived approximately 44%48%, 43%44%, and 48%44% of our revenue from our operations outside the U.S. for the years ended September 30, 2016, 2015,2018, 2017, and 2014.2016.  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:

 

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.

 

 

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 the laws governing payments to government officials, bribery, fraud, anti-kickback, and false claims, competition, export and import compliance, moneytrade 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 governmental 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.

 

 

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.

 

 

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

 

As of September 30, 2016,2018, approximately 41%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.

 

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.

 

 

As of September 30, 2016,2018, our outstanding debt was $610.1.$344.6.  This level of debt and additional debt we may incur in the future could have important consequences to our businesses.  For example:

 

 

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.

In addition, securitycybersecurity 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 may adversely impact the Company’scould have a material adverse effect on our business, financial condition, and results of operations.

11.13. 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. Our deferred tax assets, net of valuation allowances, totaled approximately $153.3 and $144.4 at September 30, 2016 and 2015. 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. Certain changes to U.S. tax laws, including limitations on the ability to defer U.S. taxation on earnings outside of the United States until those earnings are repatriated to the United States, could affect the tax treatment of our foreign earnings. 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.

 

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

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:

 

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.

 RiskRisks Related to the Process Equipment Group

 

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.

 

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. 

 

 

The Process Equipment Group sells equipment, including extruders and compounding systems, to the plastics industry.  A significant portion of its sales areSales volume is tied to the consumption of plastic products.  Theneed for equipment used to produce plastics products, which may be significantly influenced by the demand for plastics, is dependent upon the consumer’s choice.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.

 

 

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 localforeign 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.

 

 

The life expectancy of U.S. citizens has increased steadily since the 1950s and is expected to continue to do so for the foreseeable future.1950s.  However, we do anticipate a modest increase in deaths every yearfor 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. 

 

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. 

 

 

Non-traditionalSome 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. In addition, a few foreign manufacturers, mostly from China, import caskets into the U.S. and Canada.  For the past several years, salesSales from these foreign and non-traditional and foreign providers currently represent approximately 5%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 nearly twice the necessary domestic production capacity.over-capacity.  Such competitive developments could have a negative impact on our results of operations and cash flows.

 

We have not received any comments from the staff of the SEC regarding our periodic or current reports that remain unresolved.

 

Our corporate headquarters is located in Batesville, Indiana, in a facility that we own.  At September 30, 2016,2018, 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, 2016,2018, Batesville operated fivefour significant manufacturing facilities located in Indiana, Tennessee, Mississippi, and Mexico.  FourThree 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.

 

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.

 

Not applicable.

 

AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Hillenbrand common stock is traded on the New York Stock Exchange under the ticker symbol “HI.” The following table reflects the quarterly range of high and low closing sales prices of our common stock for 2016 and 2015.

  

As of November 11, 2016,8, 2018, we had approximately 2,0001,800 shareholders of record.

  

Share Repurchases

The following table summarizes repurchases of common stock during the quarter ended September 30, 2016:2018:

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

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, 2016,2018, we had repurchased approximately 2,800,0004,950,000 shares for approximately $71.4$160.4 in the aggregate. Such shares were classified as treasury stock.  We repurchased approximately 700,0001,385,600 shares of our common stock during 2016, for2018, at a total cost of approximately $21.2.$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, 2016,2018, we had approximately $28.6$39.6 remaining for share repurchases under the existing Board authorization.

 (in millions, except per share data):

 

(1)  Net income attributable to Hillenbrand

OF OPERATIONS

The following discussion compares our results for the year ended September 30, 2016,2018, to the year ended September 30, 2015,2017, and also compares our results for the year ended September 30, 2015,2017, to the year ended September 30, 2014.2016.  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 backlog intangible amortization, inventory step-up, business acquisition, development, and integration, and restructuring a pension settlement charge, trade name impairment, and certain litigation costs.restructuring related charges.  The related income tax for all of these items is also excluded.  This non-GAAPThe 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 thethese types of items for which we adjust.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”).  As previously discussed, aA part of Hillenbrand’s strategy is to selectively acquire companiespursue acquisitions that we believe can benefit from the HOM to spur faster and more profitable growth.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.

 

AnAnother 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

in which our Process Equipment Group competes.  Order backlogBacklog 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

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, and 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. OurWe use of other non-GAAP measures in certain other instances includesand 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.

 

 

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 24%25%, 25%, and 25%24% of Hillenbrand’s revenue was attributable to these long-term manufacturing contracts for 2016, 2015,2018, 2017, and 2014.2016.

 

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.

 

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 4.9%5.2%, 5.9%5.2%, and 6.3%4.9% at the end of 2016, 2015,2018, 2017, and 2014, and the2016. The weighted-average discount rate at the end of 20162018 was 2.3%3.3% for the domestic and international pension planplans and 3.1%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 $0.8.$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, 2016,2018, we expect the aggregate expense associated with our defined benefit and postretirement plans to decrease from $11.9$3.6 in 20162018 to $8.2$3.3 in 2017.2019. The expected decrease in expense is primarily driven by the one-time, $80.0 cash contribution we made into our U.S. defined benefit pension plan (“the Plan”) on October 3, 2016. That contribution was made subsequentdue to the Consolidated Balance Sheet date, with cash on hand and funds borrowed from our revolving creditincreasing discount rates.

facility and term loan. However, the majority of the pension expense savings inDuring 2017, related to this action is expected to be offset by the additional interest expense on the funds borrowed and certain potential tax effects from the transaction.

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.

 

 

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.

 

Goodwill and other intangible assets with indefinite lives, primarily trade names, are not amortized; rather, they 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 analysisanalysis. If the qualitative test is elected, qualitative factors are assessed to determine ifwhether 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, entity-specificCompany-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, the first step is towe 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, then a second step must be completed, which involves allocatingan impairment charge is recognized for the difference between carrying amount and fair value, ofnot to exceed the reporting unit to each asset and liability, with the excess being implied goodwill.  An impairment loss occurs if theoriginal amount of the recorded goodwill exceeds the implied 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.

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 will monitor any changes to our assumptions and will 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 (10-12.5(7.2-14.5 times adjusted EBITDA), discount rates (10%(7.6-12.5%), and terminal growth rates (2.5-3.0%(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 useduse 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.

WeTesting for impairment of goodwill and indefinite lived assets must be performed our requiredannually, 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 testsassessment was performed at the reporting unit in 2016the Process Equipment Group segment most directly impacted by domestic coal power and determinedcoal 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 allocated to ourimpairment 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, was not impaired.  Further, we determined that the estimated fair value substantially exceededof goodwill was determined to exceed the carrying value, for eachresulting in no further impairment of goodwill. As of September 30, 2018, the fair value of the reporting units for which we performed a quantitative analysis.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 aan 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.

As a resultIn the third quarter of 2016, the required impairment assessment performed in 2016, weCompany recorded a trade name impairment charge of $2.2, included in operating expenses, on two trade names related to the Process Equipment Group segment on two trade names. See Note 2 to our financial statements includedsegment. The decline in Part II, Item 8 of this Form 10-K for more information on the trade name impairment. The estimated fair value of the remainder of ourthese trade names exceedswas largely driven by the decreased demand for equipment and parts used in coal mining and coal power.

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 by at least 15%. There can befor all trade names, resulting in no assurance that goodwill or indefinite-lived intangiblesfurther impairment will not occur in the future.to trade names.

 

 

OPERATIONS REVIEW — BATESVILLE

 

 

 

 

Gross profit decreased $9.5 (4%$14.3 (7%), and gross profit margin improveddecreased 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.

Gross profit included restructuring and restructuring related charges ($0.56.8 in 20162017 and $1.7$0.5 in 2015)2016). Excluding restructuring and restructuring relatedthese charges, adjusted gross profit decreased $10.7 (5%$6.5 (3%) and adjusted gross profit margin improved 20decreased 40 basis points to 39.0%38.6% in 2016.2017.

 

Operating expenses included restructuring and restructuring related charges ($1.1of $1.1 in 2016 and $0.2 in 2015) and $0.5 of certain litigation costs in 2015.2016. Excluding these costs,charges, adjusted operating expenses decreased 7%$6.4 (7%) and our adjusted operating expense-to-revenue ratio improved 80 basis points to $90.3 in 2016, which was14.9%, primarily due to lower compensation and benefits resulting from current yearfiscal 2016 restructuring actions and lower variable compensation expense. Adjusted operating expense-to-revenue ratio improved 40 basis points to 15.7%.

 

REVIEW OF CORPORATE EXPENSES

 

 

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.

 

Core operatingOperating expenses increased $1.5 (4%$8.4 (20%) in 20152018, primarily due to higheran increase in growth investments, business acquisition, development, and integration costs, and variable compensation, partially offset by a decrease in restructuring and benefits and corporate project costs.restructuring related charges. These expenses as a percentage of net revenue were 2.2%2.9%, an increase of 20 basis points from 2017.  

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 2.0% in 2014.2016.

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.

Consolidated net income for 20152018 compared to 2014 increased $2.0 (2%2017 decreased $47.2 (37%),. The decrease was primarily driven by a litigation settlementdue to the impairment charges recorded in 2014 that did not recur in 2015, increased volume of equipment sales, favorable mix for equipment and replacement parts and service at 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 indirect taxesrestructuring and variable compensation, partially offsetrestructuring related charges. Foreign currency impact increased consolidated net income by a pension settlement charge in 2015 and a decline in income on limited partnership investments, from a $2.8 gain in 2014 to a $2.1 loss in 2015. There were also two one-time transactions that occurred in 2014 that resulted in a $5.2 gain on the exercise of warrants to purchase common stock of Forethought Financial Group, Inc. (“Forethought”) and a $2.5 gain related to the cancellation of a service agreement at Batesville. There was also a $2.9 increase in foreign currency exchange loss in 2015.2%.

AdjustedConsolidated adjusted EBITDA for 20152018 compared to 2014 decreased $6.8 (2%2017 increased $13.3 (5%),. The increase was primarily due to unfavorable foreign currency impact ($8.4)driven by higher volume in the Process Equipment Group, as well as pricing and a decline in income on limited partnership investments, from a $2.8 gain in 2014 to a $2.1 loss in 2015.productivity improvements. This decreaseincrease in adjusted EBITDA was partially offset by cost inflation, an increased volumeproportion of equipment sales, favorable mix for equipment and replacement parts and service at the Process Equipment Group,large plastics projects with lower margins, an increase in variable compensation, and a decrease in indirect taxesvolume 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. As noted above, there were also two one-time transactionsForeign 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 occurredprocesses proppants for hydraulic fracturing), and equipment and systems used in 2014 that resulted in a $5.2 gain onfood and pharmaceutical applications, as well as increased earnings associated with the exerciseacquisition of warrants to purchase common stock of ForethoughtRed Valve, pricing and a $2.5 gainproductivity improvements, and savings related to the cancellation of a service agreement at Batesville. There was also a $2.9restructuring actions taken in 2016. This increase in foreignconsolidated 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 exchange loss in 2015.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 20162018 to 2015.2017.  Finally, we identify other significant matters, such as contractual obligations and contingent liabilities and commitments that could affect liquidity on an ongoing basis.

 

Our debt financing includes long-term notes including the 4.60% Series A unsecured notes (“Series A Notes”), and our revolving credit facility and term loan (collectively, the “Facility”)Facility as part of our overall financing strategy. We believe we continue to 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 $492.0$797.0 of maximum borrowing capacity available under the Facility as of September 30, 2016,2018, of which $359.6$769.2 of borrowing capacity is immediately available based on our leveragemost restrictive covenant at September 30, 2016,2018, with additional amounts available in the event of a qualifying acquisition. The available borrowing capacity reflects a reduction of $9.5$7.3 for outstanding letters of credit issued under the Facility. The Company may request an increase of up to $300.0$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 are required to maintain adequate capacity to provide the guarantees. As of September 30, 2016,2018, we had guarantee arrangements totaling $212.6,$248.4, under which $111.7$196.5 was utilized for this purpose. These arrangements include athe €150.0 Syndicated Letter of Guarantee Facility (as amended,Agreement entered into on March 8, 2018 (the “L/G Facility Agreement”) by and among the “LG Facility”) under whichCompany 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 LG facilityL/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 areis 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. Accordingly, no U.S. federal and state income taxesPursuant to the Tax Act, we have beenrecognized a provisional accrued Transition Tax of $29.2 on the portionunrepatriated earnings of our foreign earnings that is consideredsubsidiaries to be indefinitely reinvested inpartially offset by current year foreign jurisdictions.

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 grow at least partially through acquisitions and to continue to focus on building platforms based on highly engineered equipment and systems for diverse niche markets. Therefore, we expect to continue to use a combination of some of our cash flows from operations and our Facility to fund these acquisitions. When we considerIn 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.

Our anticipated contribution to our pension plans in 20172019 is $89.5, $80.0 of which was contributed to the Plan on October 3, 2016.  See Note 5 to our financial statements included in Part II, Item 8, of this Form 10-K for more detail. To fund this contribution we utilized cash on hand and funds borrowed from the Facility, which bears interest at variable rates plus a margin amount based upon our leverage. The weighted-average interest rates on borrowings under the Facility were 1.48% for 2016.

We currently expect to pay quarterly cash dividends in the future comparable to those we paid in 2016,2018, which will require approximately $12.9$13.0 each quarter based on our outstanding common stock at September 30, 2016.2018. We are authorized by our Board of Directors to purchase up to $100.0$200.0 of our common stock in total under our existing share repurchase program, and may elect to do so,make such purchases, depending on market conditions and other needs for cash consistent with our growth strategy. We repurchased approximately 700,000 shares of our common stock in 2016, for a total cost of approximately $21.2. At September 30, 2016,2018, we had approximately $28.6$39.6 remaining for share repurchases under the existing authorization by the Board authorization.

We believe existing cash, cash flows from operations, and the issuance of debt will continue to 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.

 

 

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, in contrast to providing $105.0 of cash during 2015, a $133.2an $8.0 (3%) increase.

Working capital requirements for Coperionthe 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.

The $9.6 increase in cash used in investing activities provided $105.0 of cash during 2015, in contrast to providing $179.6 of cash during 2014, a $74.6 decrease.

Cash used in investing activities in 20162017 compared to 2015 increased $2242016 decreased $240.0 primarily due to the 2016 acquisitions of Abel and Red Valve, partially offset by lower capital expenditures.

 

Financing Activities

 

Cash provided by (used in)used in financing activities was largely impacted by ournet borrowing activities.activity.  Our general practice is to utilize our cash to pay down debt unless it is needed forto 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 provided byused in financing activities during 2018 was $232.5, including $120.2 of debt repayments, net of proceeds.  Cash used in financing activities in 20162017 was $21.6 compared to$215.1. The increase in cash used in financing activities was primarily due to an increase in 2015payments on the Facility and an increase in repurchases of $83.2.  We had net borrowings of $83.6common stock in 2016 compared to net repayments of $26.2 in 2015, due primarily to the acquisitions of Abel and Red Valve,2018. This increase was partially offset by borrowings used to fund the improvement$80.0 contribution to the Company’s U.S. defined benefit pension plan in working capital needs at Coperion.2017 that did not repeat in 2018 and a decrease in net proceeds on stock plans.

Cash used in financing activities in 20152017 was $83.2$215.1 compared to cash used inprovided by financing activities in 20142016 of $155.5.$21.6. We had net repayments of $26.2$147.2 in 20152017 compared to $104.1net borrowings of $83.6 in 2014,2016. The decrease in cash provided by financing activities was due primarily to increased working capital needs at Coperionborrowings used to fund the acquisitions of Abel and Red Valve in 2015.2016 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 $51.1$52.1 to shareholders in 20162018 in the form of quarterly dividends.  We increased our quarterly dividend in 20162018 to $0.2025$0.2075 per common share from $0.2000$0.2050 paid during 20152017 and $0.1975$0.2025 paid in 2014.2016.  We repurchased approximately 700,0001,385,600 shares of our common stock during 2016,2018, for a total cost of approximately $21.2.$61.0.

 

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

 

 

The following table summarizes our future obligations as of September 30, 2016.2018.  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. 

 

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. 

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.

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 and term loan;facility; volatility in the fair value of the assets held by our investments;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, 2016,2018, we had $198.5$95.7 outstanding under our $700.0$900.0 revolving credit facility and $162.0 outstanding under a related term loan.facility. We are subject to interest rate risk associated with our revolving credit facility, and related term loan, which bearbears 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 $360.5$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 $3.6.

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, 2016,2018 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 $63$53 and $55 as of September 30, 2016.2018 and 2017.