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Fiscal Fourth Quarter 2019 Highlights:
Fiscal Year 2019 Highlights:
Hillenbrand, Inc. (NYSE: HI) reported results today for the fourth quarter and full fiscal year, which ended September 30, 2019.
Fourth Quarter Results
Revenue of $486 million grew 2% compared to the prior year. Excluding the negative impact of foreign currency exchange, revenue increased 4%. The growth was driven primarily by an increase of 3% in the Process Equipment Group segment, including 1% from the acquisition of BM&M Screening Solutions Ltd. Batesville revenue was essentially flat.
Net income of $25 million, or $0.39 per share, decreased $0.31 per share over the prior year, primarily as a result of business acquisition costs and restructuring charges.
Adjusted net income of $48 million, or $0.76 per share, increased $0.09, or 13%, year over year. Adjusted EBITDA of $87 million increased 7% over the prior year, and adjusted EBITDA margin of 17.9% expanded 80 basis points, primarily driven by pricing and productivity improvements, which more than offset the impacts of product mix and cost inflation.
“We finished the fiscal year with solid fourth quarter financial results, including record revenue and adjusted earnings per share. We are encouraged by the growth in large systems for the production of plastics, as well as Batesville’s performance in delivering healthy margins in the face of lower volume and higher input costs,” said Joe A. Raver, President and Chief Executive Officer of Hillenbrand. “Our teams remain focused on executing our strategy as we begin the new fiscal year. With a strong order backlog and a robust project pipeline bolstered by investments in polyolefin production capacity globally, we anticipate continued organic growth in the Process Equipment Group.”
Process Equipment Group
Process Equipment Group fourth quarter revenue of $350 million grew 3% compared to the same period in the prior year. Excluding the impact of foreign currency exchange, revenue increased 6%. Revenue growth was primarily driven by continued demand for large systems projects for plastics production and was partially offset by slower demand in other industrial end markets. Adjusted EBITDA margin of 19.0% increased 70 basis points, primarily driven by pricing and productivity improvements, partially offset by the increased proportion of lower margin, large systems projects and cost inflation. Order backlog of $864 million at the end of the fourth quarter increased 6% over the prior year. Backlog decreased 8% sequentially compared to the third quarter.
Batesville fourth quarter revenue of $136 million was essentially flat compared to the prior year. Adjusted EBITDA margin of 22.6% was 150 basis points higher than the prior year mainly driven by pricing and productivity gains, which more than offset cost inflation and lower volume.
Fiscal Year 2019 Results
Hillenbrand’s revenue of $1.81 billion for fiscal 2019 increased 2%. Excluding the impact of foreign currency exchange, revenue increased 5%. Process Equipment Group revenue of $1.27 billion increased 5%, or 8% excluding the impact of foreign currency, as demand for plastics projects remained strong throughout the year. The growth in the Process Equipment Group was partially offset by lower demand for burial caskets in the Batesville segment. Batesville revenue of $533 million was down 3% for the year. The acquisition of BM&M Screening Solutions Ltd. in November 2018 contributed approximately 1% to revenue growth.
Net income of $121 million increased 59%, resulting in GAAP earnings per share of $1.92. The increase was mainly driven by non-cash goodwill and trade name impairment charges taken in the prior year that did not repeat. On an adjusted basis, net income of $155 million resulted in adjusted earnings per share of $2.45, an increase of 1%. Adjusted EBITDA was essentially flat at $295 million and, as a percentage of revenue, was 16.3%, 30 basis points lower than the prior year. The lower adjusted EBITDA margin was primarily driven by cost inflation and unfavorable product mix resulting from an increased proportion of lower margin, large systems sales in plastics, partially offset by pricing and productivity gains supported by the Hillenbrand Operating Model. Process Equipment Group adjusted EBITDA margin of 17.5% decreased 20 basis points and Batesville adjusted EBITDA margin of 21.4% decreased 50 basis points. Full year operating cash flow of $179 million was $69 million lower than the prior year, primarily due to expenses related to the acquisition of Milacron and an increase in cash paid for taxes. Free cash flow was approximately 122% of net income for the year.
Hillenbrand’s effective tax rate was 28.6% in 2019 compared to 44.6% in 2018. The higher tax rate in 2018 primarily resulted from the nondeductible portion of the impairment charges and the resulting loss before tax and the impact of the Tax Cuts and Jobs Act in 2018. The adjusted effective tax rate of 26.9% increased 100 basis points compared to 25.9% in 2018, primarily due to the unfavorable geographic mix of pretax income.
On July 12, 2019, Hillenbrand announced it had entered into a definitive agreement to acquire Milacron Holdings Corp. (NYSE: MCRN) in a cash and stock transaction valued at approximately $2 billion. When completed, the transaction will add new strategic businesses to Hillenbrand’s portfolio, including hot runner systems and injection molding through Milacron’s leading Mold-Masters and Milacron brands. Together, the combined company is expected to have increased scale and meaningful product diversification, enhancing its ability to serve customers through complementary technologies across the plastics value chain, including polyolefin production, compounding, processing both extruded and injection molded products, and recycling.
The completion of the merger is conditioned upon the approval of the Milacron stockholders and other customary conditions. Milacron is holding a special meeting of its stockholders on November 20, 2019 to seek their approval. Hillenbrand has secured the financing necessary to fund the transaction.
“The Milacron acquisition advances our vision of becoming a world-class global diversified industrial company,” said Raver. “We see significant strategic value in expanding our presence across the plastics value chain and expect to achieve $50 million of run-rate synergies by year three. We think we’ll be in a great position to drive innovation and capitalize on emerging trends across the industry. In addition, we expect this combination will drive significant financial benefits for all shareholders.”
Fiscal 2020 Guidance
Hillenbrand introduces 2020 guidance:
Note: Guidance excludes impacts of Milacron transaction and will be updated during the first quarter FY20 earnings, contingent upon closing of the transaction.
Conference Call Information
Date/Time: 8:00 a.m. ET, Thursday, November 14, 2019
Dial-In for U.S. and Canada: 1-833-241-7251
Dial-In for International: +1-647-689-4215
Conference call ID number: 2084256
Webcast link: https://ir.hillenbrand.com (archived through Friday, December 13, 2019)
Replay – Conference Call
Date/Time: Available until midnight ET, Thursday, November 28, 2019
Replay ID number: 2084256
Dial-In for U.S. and Canada: 1-800-585-8367
Dial-In for International: +1-416-621-4642
Hillenbrand’s financial statements on Form 10-K are expected to be filed jointly with this release and will be available on the company’s website (https://ir.hillenbrand.com).
In addition to the financial measures prepared in accordance with accounting principles generally accepted in the U.S. (GAAP), this earnings release also contains non-GAAP operating performance measures. These non-GAAP measures are referred to as “adjusted” measures and exclude impairment charges, inventory step-up, expenses associated with business acquisition, development, and integration, restructuring and restructuring related charges, backlog amortization, and debt financing activities related to the acquisition of Milacron (including the loss on settlement of interest rate swaps and deferred financing costs incurred in connection with temporary bridge financing). The related income tax for all of these items is also excluded. These non-GAAP measures also exclude the non-recurring tax benefits and expenses related to the U.S. government enacted tax legislation referred to as the Tax Cuts and Jobs Act (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.
Hillenbrand uses this non-GAAP information internally to make operating decisions and believes it is helpful to investors because it allows more meaningful period-to-period comparisons of 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. Hillenbrand believes this information provides a higher degree of transparency.
An important non-GAAP measure Hillenbrand uses is adjusted earnings before interest, income tax, depreciation, and amortization (“adjusted EBITDA”). A part of Hillenbrand’s strategy is to pursue acquisitions that strengthen or establish leadership positions in key markets. Given that strategy, it is a natural consequence to incur related expenses, such as amortization from acquired intangible assets and additional interest expense from debt-funded acquisitions. Accordingly, we use adjusted EBITDA, among other measures, to monitor business performance.
Another important non-GAAP operational measure used is backlog. Backlog is not a term recognized under GAAP; however, it is a common measurement used in industries with extended lead times for order fulfillment (long-term contracts), like those in which our Process Equipment Group competes. Backlog represents the amount of consolidated revenue that we expect to realize on contracts awarded to the Process Equipment Group. For purposes of calculating backlog, 100% of estimated revenue attributable to consolidated subsidiaries is included. Backlog includes expected revenue from large systems and equipment, as well as replacement parts, components, and service. The length of time that projects remain in backlog can span from days for replacement parts or service to approximately 18 to 24 months for larger system sales. Backlog includes expected revenue from the remaining portion of firm orders not yet completed, as well as revenue from change orders to the extent that they are reasonably expected to be realized. We include in backlog the full contract award, including awards subject to further customer approvals, which we expect to result in revenue in future periods. In accordance with industry practice, our contracts may include provisions for cancellation, termination or suspension at the discretion of the customer.
Hillenbrand expects 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.
Hillenbrand calculates the foreign currency impact on net revenue 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.
See below for a reconciliation from GAAP operating performance measures to the most directly comparable non-GAAP (adjusted) performance measures. Given that there is no GAAP financial measure comparable to backlog, a quantitative reconciliation is not provided. In addition, forward-looking adjusted earnings per share for fiscal 2020 excludes potential charges or gains that may be recorded during the fiscal year, among other things, expenses associated with business acquisition, development, and integration, restructuring and restructuring related charges, backlog amortization, inventory step-up, and certain tax matters. Hillenbrand also does not attempt to provide reconciliations of forward-looking non-GAAP earnings guidance to the comparable GAAP measure, as permitted by Item 10(e)(1)(i)(B) of Regulation S-K, because the impact and timing of these potential charges or gains is inherently uncertain and difficult to predict and is unavailable without unreasonable efforts. In addition, the company believes such reconciliations would imply a degree of precision and certainty that could be confusing to investors. Such items could have a substantial impact on GAAP measures of Hillenbrand’s financial performance.