Hillenbrand Reports Fiscal Third Quarter 2023 Results

Q3 Highlights:

• Revenue from continuing operations of $717 million increased 24% compared to prior year; organic revenue from continuing operations increased 5%
• GAAP EPS from continuing operations of $0.60 compared to $0.42 in the prior year; adjusted EPS from continuing operations of $0.95 increased 36% compared to prior year
• Operating cash flow of $89 million increased $104 million compared to prior year; 112% free cash flow conversion in the quarter
• Entered into agreement to acquire Schenck Food and Performance Materials business, significantly expanding Hillenbrand's presence in food end market; transaction expected to close in fiscal Q4

FY23 Outlook:

• Updating FY23 adjusted EPS from continuing operations to $3.40 - $3.50 from $3.30 - $3.50

BATESVILLE, Ind., Aug. 2, 2023 /PRNewswire/ -- Hillenbrand, Inc. (NYSE: HI) reported results for the third quarter, which ended June 30, 2023.

"We delivered double-digit organic growth in our Advanced Process Solutions segment, saw strong demand for our leading food processing solutions, and generated solid operating cash flow in the quarter. Despite the ongoing macroeconomic uncertainty, I'm proud of the continued execution by our global teams in managing costs and driving productivity. While we are seeing customer delays continue in our Molding Technology Solutions segment and an increase in customer delays of orders for large plastics projects in our Advanced Process Solutions segment, we remain focused on executing our strong backlog and deploying the Hillenbrand Operating Model to drive operating efficiencies across the enterprise," said Kim Ryan, President and Chief Executive Officer of Hillenbrand.

"During the quarter, we announced that we entered into a definitive agreement to acquire the Schenck Food and Performance Materials business, which will further position us as a global leader of highly-engineered, mission-critical processing equipment and solutions in the attractive end markets of food, durable plastics, and chemicals, which are supported by long-term secular growth trends. I'm excited about the opportunity this acquisition creates in allowing us to offer greater value to our customers, our associates, and our shareholders."

Third Quarter 2023 Results of Continuing Operations¹

Revenue from continuing operations of $717 million increased 24% compared to the prior year, primarily due to acquisitions. On an organic basis, which excludes the impacts of acquisitions and foreign currency exchange, revenue increased 5% year over year, as favorable pricing and higher volume in the Advanced Process Solutions segment was partially offset by lower volume in the Molding Technology Solutions segment.

Net income from continuing operations of $44.0 million, or $0.60 per share, increased $0.18 compared to the prior year primarily due to favorable pricing, the impact of acquisitions, higher APS volume, and productivity improvements, partially offset by cost inflation and lower MTS volume. Adjusted net income from continuing operations of $67 million resulted in adjusted EPS of $0.95, an increase of $0.25, or 36%. The adjusted effective tax rate for the quarter was 30.6%, an increase of 70 basis points compared to the prior year primarily due to the geographic mix of income.

Adjusted EBITDA of $126 million increased 25% year over year. On an organic basis, adjusted EBITDA increased 7% as favorable pricing, productivity improvements, and higher APS volume were partially offset by cost inflation and lower MTS volume. Adjusted EBITDA margin of 17.6% increased 20 basis points, primarily due to favorable pricing and productivity improvements, partially offset by cost inflation.

Advanced Process Solutions (APS)

Revenue of $465 million increased 50% compared to the prior year, primarily due to acquisitions. On an organic basis, revenue increased 14% year over year, primarily due to favorable pricing, higher aftermarket parts and service revenue, and an increase in large plastics systems sales.

Adjusted EBITDA of $94 million increased 55% year over year, or 23% organically, as favorable pricing, higher volume, and productivity improvements were partially offset by cost inflation. Adjusted EBITDA margin of 20.1% increased 60 basis points as favorable pricing, operating leverage from higher volume, and productivity improvements were partially offset by cost inflation and the dilutive effect of the acquisitions. As previously highlighted, the recently acquired businesses have lower relative margins but are expected to be brought in line with the historical Advanced Process Solutions segment margins over the next few years through the deployment of the Hillenbrand Operating Model.

Backlog of $1.6 billion increased 31% compared to the prior year primarily due to acquisitions. On an organic basis, backlog increased 7%, primarily driven by large plastics systems and aftermarket parts and service. Sequentially, backlog decreased 4% due to customer delays of orders for large plastics systems and the execution of existing backlog.

Molding Technology Solutions (MTS)

Revenue of $252 million decreased 7% year over year. On an organic basis, which excludes the impact of foreign currency exchange, revenue decreased 6% as a decrease in injection molding and hot runner equipment sales was partially offset by higher aftermarket parts and service revenue and favorable pricing.

Adjusted EBITDA of $51 million decreased 7%, or 5% on an organic basis, as lower volume, cost inflation, and unfavorable product mix were offset by favorable pricing, lower variable compensation, productivity improvements, and cost containment actions. Adjusted EBITDA margin of 20.2% was flat compared to the prior year.

Backlog of $266 million decreased 37% compared to the prior year primarily due to lower orders for injection molding equipment and the execution of existing backlog. Sequentially, backlog decreased 11%.

Balance Sheet, Cash Flow and Capital Allocation

The Company generated operating cash flow from continuing operations of $89 million, an increase of $104 million compared to prior year, primarily due to favorable timing of working capital and higher earnings. Capital expenditures were approximately $14 million in the quarter. During the quarter, the Company paid approximately $15 million in quarterly dividends.

As of June 30, 2023, net debt was approximately $1.05 billion, and the net debt to pro forma adjusted EBITDA ratio was 2.3x. Liquidity was approximately $1.08 billion, including $291 million in cash on hand and the remainder available under the Company's revolving credit facility.

As previously announced, the Company entered into a definitive agreement to acquire the Schenck Food and Performance Materials business ("FPM") from Blackstone for an enterprise value of approximately $730 million. The transaction is expected to close during Hillenbrand's fiscal fourth quarter of 2023, subject to customary closing conditions. Hillenbrand intends to finance the acquisition of FPM using cash on hand and by drawing on its revolving credit facility and borrowing under its recently announced €185.0 term loan. Following the closing of the transaction, Hillenbrand's projected fiscal Q4 net debt to adjusted EBITDA ratio is expected to be approximately 3.2x, with a plan to return to its communicated target net leverage range of 1.7x to 2.7x within 15 months after closing.

Updated Fiscal 2023 Outlook - Continuing Operations

Hillenbrand is narrowing its annual guidance for fiscal year 2023 based on year-to-date performance and its outlook for the fiscal fourth quarter. Revenue estimates have been lowered modestly due to ongoing customer order delays within the MTS segment, particularly in China, and an increase in customer delays for large plastics projects within the APS segment. The Company is raising the midpoint of its full year adjusted EPS range primarily due to lower interest expense and a more favorable expected tax rate of 29% compared to the previous estimate of 31%, primarily due to the benefit of a strategic tax initiative that will take effect in the fiscal fourth quarter.

Note: Year-over-Year ("YOY") growth figures presented in the guidance table above are on a continuing operations basis, which exclude the discontinued operations of Batesville.

¹Batesville financial results are reported as discontinued operations for all periods presented

Conference Call Information
Date/Time: Thursday, August 3, 2023, 8:00 a.m. ET
Dial-In for U.S. and Canada: 1-866-682-6100
Dial-In for International: +1-862-298-0702
Conference call ID number: 13740206
Webcast link: http://ir.hillenbrand.com under the News & Events tab (archived through Thursday, August 31, 2023)

Replay - Conference Call
Date/Time: Available until midnight ET, Thursday, August 17, 2023
Replay ID number: 13740206
Dial-In for U.S. and Canada: 1-877-660-6853
Dial-In for International: +1-201-612-7415

Hillenbrand's financial statements on Form 10-Q are expected to be filed jointly with this release and will be made available on the company's website (https://ir.hillenbrand.com).

In addition to the financial measures prepared in accordance with United States generally accepted accounting principles (GAAP), this earnings release also contains non-GAAP operating performance measures. These non-GAAP measures are referred to as "adjusted" measures and exclude the following items:

• business acquisition, disposition, and integration costs;
• restructuring and restructuring-related charges;
• intangible asset amortization;
• inventory step-up charges;
• gains and losses on divestitures;
• other individually immaterial one-time costs;
• the related income tax impact for all of these items; and
• certain tax items related to acquisitions and divestitures, the revaluation of deferred tax balances resulting from fluctuations in currency exchange rates and non-routine changes in tax rates for certain foreign jurisdictions, and the impact that the Molding Technology Solutions reportable operating segment's loss carryforward attributes have on tax provisions related to the imposition of tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries, the Foreign Derived Intangible Income Deduction (FDII), and the Base Erosion and Anti-Abuse Tax (BEAT).

Refer to the Reconciliation of Non-GAAP Measures for further information on these adjustments. 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 measure operating segment performance and 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 items such as the above excluded items. Hillenbrand believes this information provides a higher degree of transparency.

One important non-GAAP measure Hillenbrand uses is adjusted earnings before interest, income tax, depreciation, and amortization ("adjusted EBITDA"). A part of our strategy is to pursue acquisitions that strengthen or establish leadership positions in key markets. Given that strategy, it is a natural consequence to incur related expenses, such as amortization from acquired intangible assets and additional interest expense from debt-funded acquisitions. Accordingly, we use adjusted EBITDA, among other measures, to monitor our business performance. We also use "adjusted net income" and "adjusted diluted earnings per share (EPS)," which are defined as net income and earnings per share, respectively, each excluding items described in connection with adjusted EBITDA. Adjusted EBITDA, adjusted net income, and adjusted diluted EPS are not recognized terms under GAAP and therefore do not purport to be alternatives to net income or to diluted EPS, as applicable. Further, Hillenbrand's measures of adjusted EBITDA, adjusted net income, and adjusted diluted EPS may not be comparable to similarly titled measures of other companies.

Organic revenue and organic adjusted EBITDA are defined respectively as net revenue and adjusted EBITDA excluding net revenue and adjusted EBITDA directly attributable to TerraSource, which was divested on October 22, 2021, as well as recent acquisitions, including Linxis, Herbold Meckesheim, Peerless Food Equipment, and Gabler Engineering, and adjusting for the effects of foreign currency exchange. In addition, the ratio of net debt to pro forma adjusted EBITDA is a key financial measure that is used by management to assess Hillenbrand's borrowing capacity (and is calculated as the ratio of total debt less cash and cash equivalents to the trailing twelve months pro forma adjusted EBITDA). Hillenbrand uses organic and pro forma measures to assess performance of its reportable operating segments and the Company in total without the impact of recent acquisitions and divestitures.

Hillenbrand calculates the foreign currency impact on net revenue, adjusted EBITDA, and backlog 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.

Another important 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 reportable operating segments compete. Backlog represents the amount of consolidated net revenue that we expect to realize on contracts awarded to our reportable operating segments. For purposes of calculating backlog, 100% of estimated net revenue attributable to consolidated subsidiaries is included. Backlog includes expected net revenue from large systems and equipment, as well as aftermarket parts, components, and service. The length of time that projects remain in backlog can span from days for aftermarket parts or service to approximately 18 to 24 months for larger system sales within the Advanced Process Solutions reportable operating segment. The majority of the backlog within the Molding Technology Solutions reportable operating segment is expected to be fulfilled within the next twelve months. Backlog includes expected net revenue from the remaining portion of firm orders not yet completed, as well as net 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 net revenue associated with our reportable operating segments will be influenced by order backlog because of the lead time involved in fulfilling engineered-to-order equipment for customers. Although backlog can be an indicator of future net 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 net revenue. Net revenue attributable to backlog may also be affected by foreign exchange fluctuations for orders denominated in currencies other than U.S. dollars.

See below for a reconciliation from GAAP operating performance measures to the most directly comparable non-GAAP (adjusted) performance measures. Given that backlog is an operational measure and that the Company's methodology for calculating backlog does not meet the definition of a non-GAAP measure, as that term is defined by the U.S. Securities and Exchange Commission, a quantitative reconciliation is not required or provided. In addition, forward-looking revenue, adjusted EBITDA, and adjusted earnings per share for fiscal 2023 exclude potential charges or gains that may be recorded during the fiscal year, including among other things, items described above in connection with these and other "adjusted" measures. Hillenbrand thus also does not attempt to provide reconciliations of such 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.