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HI > SEC Filings for HI > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for HILLENBRAND, INC.


8-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements and Factors That May Affect Future Results

Throughout this Form 10-Q, 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-Q, 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
targeted   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.

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-Q. We assume no obligation to update or revise any forward-looking statements.

Executive Overview

(financial amounts in millions, except share and per share data, throughout Management's Discussion and Analysis)

The following discussion provides information regarding significant activity and compares our results for the three-and six-month periods ending March 31, 2013, to the same periods in the prior fiscal year. 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" and exclude expenses associated with backlog amortization, inventory step-up, business acquisitions, restructuring, and antitrust litigation. The measures also exclude the tax benefit of the international integration in the prior year and expenses associated with long-term incentive compensation related to the international integration. The related income tax for all of these items is also excluded. This non-GAAP information is provided as a supplement, 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 items. We believe this information provides a higher degree of transparency.


Table of Contents

See page 33 for a reconciliation of non-GAAP measures to the closest GAAP-equivalent of each measure.

Coperion Acquisition

The most significant event in the first six months of fiscal year 2013 was our acquisition of Coperion Capital GmbH ("Coperion"), effective December 1, 2012, in a transaction valued at $540.7. Based in Stuttgart, Germany, Coperion is a global leader in the manufacture of compounding, extrusion, and bulk material handling equipment used in a broad range of industries, including plastics, chemicals, food processing, pharmaceutical, and aluminum. Coperion has been in business since 1879, and has nine manufacturing sites in Germany, the United States ("U.S."), China, and India, and sales offices in approximately 30 locations in the Americas, Europe, and Asia. Coperion had approximately 2,000 employees worldwide as of March 31, 2013. Approximately 30% of Coperion's revenue is derived from replacement parts and service, generating a large portion of recurring business due to its well-positioned service network and active installed base of equipment across the world.

Coperion revenues consist of large system sales, equipment, components, replacement parts, and service. Large system sales are fulfilled over 12 to 18 months on average, whereby customers generally pay a deposit and make progress payments before and during the manufacture of the order, reducing or eliminating extensive working capital investments otherwise necessary to finance the manufacturing process. System sales include many components, including those manufactured by Coperion as well as materials manufactured by third parties. The Coperion business model includes a higher proportion of third-party-sourced products compared to the rest of the Process Equipment Group. As a result, we expect gross profit margins in the Process Equipment Group to be lower on certain systems projects. Hillenbrand believes that selling complete systems provides a significant competitive advantage and increases margin dollars.

This acquisition is the largest in the Company's history and represents an important step in our strategic plans to further diversify Hillenbrand and accelerate the growth of the Process Equipment Group business platform. The integration of Coperion with the Process Equipment Group will be a key initiative for the next 18 to 24 months. Combining our product offerings to provide a more complete system solution is our highest priority from an integration perspective. In addition, we believe leveraging Coperion's global infrastructure will enable the existing businesses within the Process Equipment Group platform to enter new global markets more quickly. Additionally, we expect the Process Equipment Group's existing strong U.S. sales network will enhance Coperion's expansion in North America. Finally, the application of the Company's lean tools and principles to Coperion's operations is expected to contribute to improved margins and increased customer satisfaction.

The calculation of fair value of Coperion's assets and liabilities is preliminary and subject to adjustment based on finalization of the closing balance sheet. The fair value assigned to Coperion's backlog was $34.3 and will be amortized over approximately 10 months. The fair values assigned to Coperion's customer relationships and technology total $201.9 and will be amortized on a straight-line basis over their estimated useful lives, resulting in $12.0 of ongoing annual amortization expense. The fair value assigned to Coperion's inventory resulted in a step-up in value of $21.6, and will be amortized through cost of goods sold over approximately 10 months. The fair value assigned to Coperion's property, plant and equipment resulted in a step-up in value of $19.5, and will be depreciated over the useful lives of the assets. The acquisition resulted in preliminary goodwill of $234.0.


Table of Contents

Consolidated



                         Three Months Ended March 31,               Six Months Ended March 31,
                           2013                 2012                 2013                 2012
                                % of                 % of                 % of                 % of
                     Amount    Revenue    Amount    Revenue    Amount    Revenue    Amount    Revenue
Revenue             $  398.5     100.0   $  259.7     100.0   $  703.7     100.0   $  491.3     100.0
Gross profit           136.6      34.3      104.3      40.2      247.2      35.1      198.0      40.3
Operating
expenses               111.0      27.9       60.5      23.3      197.5      28.1      120.8      24.6
Operating profit        25.6       6.4       43.8      16.9       49.7       7.1       77.2      15.7
Interest expense         6.8       1.7        2.8       1.1       11.3       1.6        5.7       1.2
Other income
(expense), net          (0.3 )     0.1       (0.3 )     0.1        0.6       0.1       (0.8 )     0.2
Income taxes             5.3       1.3       13.3       5.1       11.2       1.6       12.0       2.4
Net income(1)           12.7       3.2       27.4      10.6       27.0       3.8       58.7      11.9



(1) Net income attributable to Hillenbrand

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Consolidated revenue grew $138.8 (53.4%). Foreign currency exchange rates did not have a material impact on revenue.

Process Equipment Group's revenue increased $131.2 (136.4%). The revenue increase was due to the acquisition of Coperion on December 1, 2012, offset in part by an 18% decrease in revenue in the rest of the Process Equipment Group. The decrease in the base business was driven by reduced demand for equipment that processes proppants (used in hydraulic fracturing) and potash (used largely in the agricultural industry), as well as a large base resins project that occurred in the prior year.

Batesville's revenue increased $7.6 (4.6%). The increase was primarily driven by volume, as estimated North American deaths were at a record high in January 2013.

Consolidated gross profit margin was 34.3%, a decrease of 590 basis points. On an adjusted basis, which excludes items described below, the consolidated gross profit margin was 36.7%, a decrease of 430 basis points.

Process Equipment Group's gross profit margin decreased from 44.0% in the prior year to 30.1%. Excluding $8.2 of inventory step-up related to the Coperion acquisition and restructuring charges, the adjusted gross profit margin was 33.7% compared to 44.3% in the prior year. This decrease was due primarily to the Coperion acquisition, as gross profit margins for Coperion are lower given the higher proportion of third-party-sourced products on certain systems projects compared to the rest of the Process Equipment Group. Gross profit margin in the second quarter of fiscal year 2013 was also lower compared to the same period in the prior year due to the decrease in volume in the base business.

Batesville's gross profit margin increased from 37.9% to 39.9%. Excluding $1.5 of restructuring charges, the adjusted gross profit margin was 40.7%, a 160-basis-point improvement over the prior year. The improvement was primarily due to higher volumes, offset in part by changes in employee benefits that reduced expense in the prior year.


Table of Contents

Operating expenses as a percentage of sales increased 460 basis points to 27.9%. On an adjusted basis, our operating expense ratio was 24.0%, an increase of 190 basis points, due primarily to the decrease in revenue for the Process Equipment Group excluding Coperion, as well as ongoing amortization expense related to the Coperion acquisition ($3.2). Adjusted operating expenses exclude the following items:

                                 Three months Ended March 31,
                                  2013                 2012
Business acquisition costs   $           1.9      $           0.5
Backlog amortization                    12.9                    -
Restructuring charges                    0.4                  2.4

Our continued focus on the application of Hillenbrand's Lean Business principles and practices continues to increase efficiencies across the organization. This is evident both in the Process Equipment Group, where they are continuing to mature in these practices, and Batesville, where lean has evolved to an advanced level with projects such as single-point scheduling to connect their entire value chain.

Interest expense increased $4.0 due primarily to higher weighted-average principal borrowings and higher interest rates on the revolving credit facility and the new term loan entered into in connection with the Coperion acquisition.

Other income (expense), net was $0.3 of expense in the second quarter of fiscal years 2013 and 2012. See Item 1, Note 11 for more detailed information.

The income tax rate was 28.6% compared to 32.7%. Excluding the tax effect of all adjustments, our adjusted effective income tax rate was 29.3% compared to 32.8% for the prior year. The adjusted effective income tax rate was favorably impacted by the acquisition of Coperion, which produces a larger percentage of income from foreign sources in lower tax rate jurisdictions.

Six Months Ended March 31, 2013 Compared to Six Months Ended March 31, 2012

Consolidated revenue grew $212.4 (43.2%). Foreign currency exchange rates did not have a material impact on revenue.

Process Equipment Group's revenue increased $199.2 (109.5%). The revenue increase was due to the acquisition of Coperion, offset in part by a 10% decrease in revenue in the rest of the Process Equipment Group. The decrease in the base business was driven by reduced demand for equipment that processes proppants (used in hydraulic fracturing), potash (used largely in the agricultural industry), and coal (used in the coal power and mining industries), as well as a large base resins project that occurred in the prior year.

Batesville's revenue increased $13.2 (4.3%). The increase was primarily driven by volume, as the year-over-year growth rate of North American deaths returned to historical levels for the entire period, with the exception of record high estimated North American deaths reported during January 2013.

Consolidated gross profit margin was 35.1%, a decrease of 520 basis points. On an adjusted basis, which excludes items described below, the consolidated gross profit margin was 36.9%, a decrease of 390 basis points.

Process Equipment Group's gross profit margin decreased from 43.0% to 31.6%. Excluding $10.9 of inventory step-up related to the Coperion acquisition and restructuring charges, the adjusted gross profit margin decreased from 43.2% to 34.5%. This decrease was due primarily to the Coperion acquisition, as gross profit margins for Coperion are lower given the higher proportion of third-party-sourced products on certain systems projects compared to the rest of our Process Equipment Group. Gross profit margin in the first six months of fiscal year 2013 was also lower compared to the same period in the prior year due to the decrease in volume in the base business.

Batesville's gross profit margin increased 60 basis points to 39.3%. Excluding $1.8 of restructuring charges, the adjusted gross profit margin was 39.9%, a 50-basis-point improvement over the prior year. The increase was primarily due to higher volumes, offset in part by changes in employee benefits that reduced expense in the prior year.


Table of Contents

Operating expenses as a percentage of sales increased 350 basis points to 28.1%.
On an adjusted basis, our operating expense ratio was 24.0% compared to 22.8% in the prior year. The 120 basis point increase is primarily due to four months of amortization expense ($4.2) related to intangible assets acquired in the Coperion acquisition and changes in employee benefits that reduced expense ($1.9) in the prior year. Adjusted operating expenses exclude the following items:

                                                              Six months Ended March 31,
                                                                2013               2012
Business acquisition costs                                 $          10.9     $         1.0
Backlog amortization                                                  17.1               2.5
Restructuring charges                                                  0.7               2.4
Antitrust litigation                                                   0.1               0.5
Long-term incentive compensation related to the
international integration                                                -               2.2

The vesting of our long-term performance-based stock awards is contingent upon the creation of shareholder value as measured by the cumulative cash returns and final period net operating profit after tax compared to the established hurdle rate over a three-year period. As such, the tax benefit from the international integration resulted in additional compensation expense related to performance-based stock awards in fiscal year 2012.

Interest expense increased $5.6 due primarily to higher weighted-average principal borrowings and higher interest rates on the revolving credit facility and the new term loan entered into in connection with the Coperion acquisition.

Other income (expense), net was $0.6 of income in the first half of fiscal year 2013 compared to $0.8 of expense in fiscal year 2012, representing a variance of $1.4. Excluding $0.9 of income primarily from acquisition-related foreign currency transactions, adjusted other income (expense), net was $0.3 of expense in fiscal year 2013 compared to $0.8 of expense in fiscal year 2012. See Item 1, Note 11 for more detailed information.

The income tax rate was 28.7% compared to 17.0%. The year-over-year change in the effective tax rate was largely due to a $10.4 reduction of income tax expense in the six months ended March 31, 2012, attributable to the permanent reinvestment assertion on historical earnings of certain Swiss operations.
Excluding this tax benefit as well as the tax effect of all other adjustments, our adjusted effective income tax rate was 28.7% compared to 32.0% for the prior year. The adjusted effective income tax rate was favorably impacted by the acquisition of Coperion, which produces a larger percentage of income from foreign sources in lower tax rate jurisdictions.

Process Equipment Group



                         Three Months Ended March 31,             Six Months Ended March 31,
                           2013                2012                2013                2012
                                % of                % of                % of                % of
                     Amount    Revenue   Amount    Revenue   Amount    Revenue   Amount    Revenue
Net revenue          $ 227.4     100.0   $  96.2     100.0   $ 381.1     100.0   $ 181.9     100.0
Gross profit            68.4      30.1      42.3      44.0     120.4      31.6      78.2      43.0
Operating expenses      76.2      33.5      28.8      29.9     120.7      31.7      56.6      31.1
Operating profit        (7.8 )    (3.4 )    13.5      14.0      (0.3 )    (0.1 )    21.6      11.9

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenue increased $131.2 (136%), attributable to the Coperion acquisition that closed on December 1, 2012. Excluding the Coperion business, revenue decreased 18%. The decrease in the base business was driven by reduced demand for equipment that processes proppants (used in hydraulic fracturing) and potash (used largely in the agricultural industry), as well as a large base resins project that occurred in the prior year.

We believe that the industries that the Process Equipment Group serves have attractive long-term growth prospects because demand for their products and services will continue to grow as countries such as China and India greatly expand their middle class. While overall demand is expected to increase over the long run, we expect shifts in year-to-year sources of such demand. For example, in fiscal year 2012, demand for equipment that processes proppants used in hydraulic fracturing spiked dramatically in the second quarter and continued at relatively high levels before dropping off dramatically at the end of the year. As a result, revenue in fiscal year 2013 compared to the prior year has been negatively impacted and we expect this trend to continue for the remainder of the fiscal year.


Table of Contents

We expect future revenue for the Process Equipment Group will 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 might not include many 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 is also affected by foreign exchange fluctuations for orders denominated in currencies other than U.S. dollars. Based upon new orders accepted, less orders completed and shipped, backlog decreased from $556.6 on December 31, 2012 to $544.3 on March 31, 2013.

Gross profit increased 61.7% to $68.4, primarily as a result of the Coperion acquisition. Gross profit margin decreased from 44.0% to 30.1%.

On an adjusted basis, the gross profit margin decreased to 33.7% and excludes $8.2 of inventory step-up related to the Coperion acquisition and restructuring charges. Step-ups in inventory value were recorded at the time of the Coperion acquisition and will be expensed when the inventory is sold.

The decrease in adjusted gross profit margin was primarily due to the Coperion acquisition, as gross profit margins for Coperion are lower given the higher proportion of third-party-sourced products on certain systems projects compared to the rest of the Process Equipment Group. As a result, we expect gross profit margins in the Process Equipment Group to be lower following the Coperion acquisition. Gross profit margin in the second quarter of fiscal year 2013 was also lower compared to the same period in the prior year due to the decrease in volume in the base business. In general, gross profit margin for the Process Equipment Group is influenced by a variety of factors, including the timing and size of orders, the mix of products and services sold, and market factors that impact pricing.

Operating expenses increased $47.4 to $76.2 and our operating expense to sales ratio increased by 360 basis points, from 29.9% to 33.5%.

On an adjusted basis, our operating expense ratio was 27.7% compared to 27.3% in the prior year. The 40 basis point increase is primarily due to the decrease in revenue for the Process Equipment Group excluding Coperion, as well as $3.1 of amortization expense related to intangible assets acquired in the Coperion acquisition. The Coperion acquisition will add $12.0 of annual ongoing amortization expense. This increase in the operating expense to sales ratio was offset in part by the addition of Coperion, which has a lower operating expense to sales ratio than the rest of the Process Equipment Group. Adjusted operating expenses exclude $12.9 of backlog amortization in the second quarter of fiscal year 2013 related to the Coperion acquisition. Adjusted operating expenses in the second quarter of fiscal year 2012 exclude $2.4 in restructuring costs.

Six Months Ended March 31, 2013 Compared to Six Months Ended March 31, 2012

Fiscal year 2013 includes four months of Coperion results related to the acquisition on December 1, 2012.

Revenue increased $199.2 (109.5%), attributable to the Coperion acquisition. Excluding the Coperion business, revenue decreased 10%. The decrease in the base business was driven by reduced demand for equipment that processes proppants (used in hydraulic fracturing), potash (used largely in the agricultural industry), and coal (used in the coal power and mining industries), as well as a large base resins project that occurred in the prior year.

Backlog increased by $423.8 over the past six months from $120.5 on September 30, 2012 to $544.3 on March 31, 2013.

Gross profit increased 54.0% to $120.4, primarily as a result of the Coperion acquisition, which added four months of Coperion results in fiscal year 2013. Gross profit margin decreased from 43.0% to 31.6%.


Table of Contents

Adjusted gross profit margin decreased by 870 basis points to 34.5% and excludes $10.7 of inventory step-up related to the Coperion acquisition and restructuring charges. As discussed above in the quarter results, the decrease in adjusted gross profit margin was primarily due to the Coperion acquisition, as gross profit margins for Coperion are lower given the higher proportion of third-party-sourced products on certain systems projects compared to the rest of the Process Equipment Group. Gross profit margin in the first six months of fiscal year 2013 was also lower compared to the same period in the prior year due to the decrease in volume in the base business.

Operating expenses increased $64.1 to $120.7, and our operating expense to sales ratio increased by 60 basis points, from 31.1% to 31.7%.

On an adjusted basis, our operating expense ratio decreased to 27.1% from 28.3% in fiscal year 2012. The 120 basis point improvement was attributable to the Coperion business model, which has a lower operating expense to sales ratio than the rest of the Process Equipment Group. This ratio also includes four months of ongoing amortization expense ($4.2) related to the intangible assets acquired in the Coperion acquisition. Adjusted operating expenses exclude backlog amortization of $17.1 in fiscal year 2013 and $2.5 in fiscal year 2012.

Batesville



                         Three Months Ended March 31,             Six Months Ended March 31,
                           2013                2012                2013                2012
                                % of                % of                % of                % of
                     Amount    Revenue   Amount    Revenue   Amount    Revenue   Amount    Revenue
Net revenue          $ 171.1     100.0   $ 163.5     100.0   $ 322.6     100.0   $ 309.4     100.0
Gross profit            68.2      39.9      62.0      37.9     126.8      39.3     119.8      38.7
Operating expenses      25.4      14.8      23.2      14.2      49.6      15.4      46.7      15.1
Operating profit        42.8      25.0      38.8      23.7      77.2      23.9      73.1      23.6

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenue increased $7.6 (4.6%) and was driven primarily by higher volumes.
Average sales prices increased by approximately 1% compared to the prior year. The number of estimated deaths was at a record high in the month of January. . . .

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