Hillenbrand Announces Fiscal Third Quarter 2020 Results
Date 2020-08-06 | Earning Reports
• Revenue of $608 million was 36% higher year over year given the addition of Milacron and strength in Batesville; organic revenue decreased 6%
• GAAP EPS of $0.32 decreased 33% primarily due to acquisition-related expenses and higher interest expense; adjusted EPS1 of $0.81 increased 25% largely driven by Milacron and Batesville
• Order backlog increased 20% year over year to $1.12 billion driven primarily by the addition of Milacron; Process Equipment Group backlog of $939 million was roughly flat year over year and decreased 4% sequentially
• Cash flow from operations of $75 million increased 19% compared to prior year
• Milacron 3-year cost synergy target increased from $50 million to $75 million and is on track to achieve $20-$25 million in cost synergies in the current fiscal year
• Portfolio simplification via the exit of TerraSource and Flow Control businesses to be undertaken, pending economic and market conditions
• Continued focus on protecting the health and safety of associates, serving customers globally, and successfully running the business in a challenging environment; as of August 5, 2020, all major global production locations are operating at or near normal production levels
• Elected Jennifer Rumsey to Board of Directors; brings complementary experience and skills in support of long-term strategic goals
BATESVILLE, Ind., August 5, 2020 --/PRNewswire/ --Hillenbrand, Inc. (NYSE: HI) (the “Company”) reported results today for the third quarter of fiscal 2020, which ended June 30, 2020.
“Our vision at Hillenbrand is to build a world-class global diversified industrial company with a proven record of success, driven by the Hillenbrand Operating Model. We took a meaningful strategic step forward with the Milacron acquisition, which significantly changed our company profile and portfolio. We added two complementary businesses to our portfolio, with value-added product and technology positions across the plastics value chain,” said Joe Raver, President and CEO of Hillenbrand.
“Since the Milacron acquisition, our team has done a great job executing our strategy in a challenging environment. We have focused on leveraging our operating model to improve profitability, drive free cash flow, pay down debt, and integrate Milacron. These efforts are evident in our third quarter results with strong organic margin expansion and cash generation. The integration remains on track, and we’ve made significant progress toward achieving the full strategic and financial benefits of the deal, while accelerating the realization of announced synergies and identifying incremental opportunities.
“Finally, from a strategic perspective and following the most recent review of our portfolio, we have made the decision to exit the TerraSource and Flow Control businesses, pending economic and market conditions. We have a process in place with the Board to review our portfolio on a regular basis, and following the transformational acquisition of Milacron and with the integration under way, we believe these businesses are now sub-scale within our portfolio. Our focus continues to be driving shareholder value as we execute our long-term strategy to position Hillenbrand for success in the future.”
THIRD QUARTER 2020 FINANCIAL HIGHLIGHTS
Revenue of $608 million increased 36% in total compared to the prior year. The addition of Milacron drove 42% growth in revenue, which was partially offset by a decrease of 6% in organic sales across the rest of the portfolio. Excluding the impact of foreign currency exchange, total revenue increased 37%.
Net income of $24 million, or $0.32 per share, decreased $0.16 per share, or 33%, compared to the prior year, primarily as a result of acquisition-related expenses and higher interest expense. Adjusted net income of $61 million resulted in adjusted EPS1 of $0.81, an increase of $0.16, or 25%, mainly driven by the addition of Milacron and Batesville performance. The adjusted effective tax rate was 26.7%, an increase of 10 basis points from the prior year.
Adjusted EBITDA increased 74% to $121 million, primarily due to the Milacron acquisition, which contributed $38 million, and an increase of $11 million from Batesville. Adjusted EBITDA margin of 19.9% expanded 430 basis points compared to a year ago. On an organic basis, adjusted EBITDA increased 19% and adjusted EBITDA margin increased 410 basis points compared to last year, with strong margin expansion in the Process Equipment Group and Batesville segments.
Raver continued, “We delivered solid operating results in a challenging market environment while maintaining a constant focus on keeping our employees safe, serving our customers, and executing on our strategy as we navigated through the COVID-19 pandemic. Batesville delivered strong top- and bottom-line results while quickly adapting to more stringent health and safety requirements and responding to the needs of local communities deeply affected by the pandemic. Demand remains soft across many of the industrial end markets we serve; however, despite current market dynamics, we were able to expand margins through cost mitigation and procurement initiatives.
“As evidenced by our results, we continued to leverage the Hillenbrand Operating Model to improve margins and drive cash flow. I’m proud of the way our team has come together to overcome the challenges brought on by COVID-19. As we look ahead, we believe our strategy and the actions we have taken have positioned us well for the opportunities to come.”
BALANCE SHEET, LIQUIDITY AND CAPITAL USES
Hillenbrand generated cash flow from operations of $75 million in the quarter, an increase of 19% year over year, primarily due to cash generated by Milacron and a reduction in cash paid for taxes, partially offset by increases in working capital and interest payments. During the quarter, the Company returned nearly $16 million to shareholders in the form of quarterly dividends.
On May 19, 2020, the Company entered into an amendment to its existing credit agreement to, among other things, increase the leverage ratio permitted by the debt covenants. Additionally, on June 16, 2020, the Company completed its previously announced public offering of $400 million aggregate principal amount of 5.75% senior notes due 2025. Offering proceeds were used for repayment of the Company’s revolving credit facility. The Company then used cash and available borrowing capacity from the revolving credit facility to repay the entire $150 million aggregate principal amount outstanding on its 5.5% senior notes upon maturity in July 2020.
Net debt at the end of the quarter was $1.4 billion, and the net debt to adjusted EBITDA ratio was 3.3x, an improvement of 0.5x from December 31, 2019. As of June 30, 2020, the Company had liquidity of approximately $905 million, including $263 million in cash on hand and $642 million of borrowing capacity immediately available under its revolving credit facility.
Hillenbrand continues to prioritize paying down debt following the Milacron acquisition, reinvesting for growth, and supporting the dividend. The Company previously announced a suspension of share repurchases and a pause on acquisition activity, both of which remain in effect.
THIRD QUARTER 2020 SEGMENT PERFORMANCE
Process Equipment Group
Process Equipment Group revenue of $281 million decreased 11% compared to the same period in the prior year. Excluding the impact of foreign currency exchange, revenue decreased 10%. The revenue decline was driven by lower demand for capital equipment and aftermarket parts and service across the segment, partially offset by favorable pricing. Adjusted EBITDA margin of 20.5% increased 310 basis points mainly due to pricing and productivity improvements, cost containment actions, and improved cost of quality, partially offset by cost inflation. Order backlog of $939 million was roughly flat compared to the prior year and increased 1% excluding the impact of foreign currency. Sequentially, backlog decreased 4%, with order softness across the segment due primarily to the impact of the COVID-19 pandemic.
Milacron revenue of $186 million for the quarter decreased 23% on a pro forma basis year over year, primarily driven by lower demand for injection molding equipment, largely due to the pandemic-related shutdown in India and weakness in the automotive end market. The decline was partially offset by increased hot runner sales in the medical and electronics end markets. Adjusted EBITDA of $38 million decreased 24%, and adjusted EBITDA margin of 20.5% decreased 20 basis points. Order backlog of $185 million decreased 3% year over year driven by lower injection molding and extrusion equipment orders. Order backlog decreased 1% sequentially. For purposes of this earnings release and comparative purposes only, all prior year comparisons for Milacron are made on a pro forma basis and excluding the Cimcool business, which the Company divested in March of this year.
Batesville revenue of $140 million grew 7% year over year. The increase was primarily driven by higher volume, largely due to higher deaths from the COVID-19 pandemic, partially offset by an estimated increased rate at which families opted for cremation. Adjusted EBITDA margin of 26.0% was 670 basis points higher than the prior year, due to operating leverage, productivity initiatives, cost containment actions, and deflation in commodities and fuel, partially offset by inflation in wages and benefits.
The overall integration of Milacron is proceeding as planned despite limitations on some integration activities due to the COVID-19 pandemic. Hillenbrand is on track to realize targeted year-one cost synergies of $20 million to $25 million in the current fiscal year and now expects to generate annual run-rate cost synergies of $75 million within three years of the transaction close, a 50% increase from the original target of $50 million, driven by incremental procurement savings and operational efficiencies. Our dedicated Integration Management Office team is leveraging the Hillenbrand Operating Model and continually looking for additional opportunities to realize value for the combined company and shareholders.
Raver concluded, “With this integration, we are building a scalable foundation using the Hillenbrand Operating Model to drive both operational efficiency and growth. Team members across our businesses are committed to this effort and are working tirelessly under the current unprecedented circumstances. Our results to date give us increased confidence in our ability to deliver a higher level of cost synergies than previously announced. We look forward to capturing the full strategic and financial benefits of the combined companies, and I’m confident that the strong foundational work currently being executed will position Hillenbrand for continued profitable growth and drive long-term shareholder value.”
Hillenbrand is committed to protecting the health and well-being of employees and their families, serving customers’ critical needs, and supporting the communities in which we work and live. Many of our businesses manufacture products essential to critical infrastructure, including health and safety, food and agriculture, energy, and death care. As of August 5, 2020, all significant global production locations are open and operating at or near normal production levels. All sites are following current protocols on the use of personal protective equipment, temperature checks and symptom screening, social distancing and frequent handwashing. We are closely managing our supply chain and have not experienced any significant disruptions to date.
FISCAL 2020 OUTLOOK
Hillenbrand is providing guidance for the fourth quarter of fiscal 2020. The following estimates are based on our expectations for sequential changes from the third quarter. Our projections assume that a gradual stabilization of the global economy continues, with no increase in pandemic-related disruptions.
• Total revenue is expected to be relatively flat sequentially.
◦ Process Equipment Group revenue is expected to be modestly higher, driven by sequential growth in large plastics projects and aftermarket parts and service.
◦ Milacron revenue is expected to decrease modestly. Hot runner sales for medical projects related to COVID-19 are expected to decrease in the fourth quarter, and injection molding sales are expected to remain weak.
◦ Batesville revenue is forecasted to decrease modestly as a result of lower expected mortality associated with COVID-19.
• Adjusted EPS1 is expected to be in the range of $0.60 to $0.70 for the fourth quarter.
1 As previously noted, beginning with fiscal third quarter results, the Company updated adjusted EPS to exclude after-tax acquisition-related intangible amortization. The Company believes reporting adjusted EPS in this manner better reflects its core operating results and offers greater consistency and transparency. For comparison purposes, applying the previous approach to the third quarter would have resulted in adjusted earnings per share of $0.65, including $16 million of intangible asset amortization, which is excluded under the new methodology. A full reconciliation between GAAP and adjusted measures is included at the end of this release.
The full release is available on Hillenbrand's Investor Relations site.