DEAR FELLOW SHAREHOLDER:
Our 2011 fiscal year was a successful one, characterized by strong revenue growth and worldwide expansion as we continued our transformation into a global diversified manufacturing enterprise. Our progress over the past three years has been substantial.
2008: Batesville Provides a Solid Foundation for Growth
In 2008 we became a public company, well-known for the strong leadership, high-quality products and unparalleled service standards of the funeral service industry’s most iconic brand: Batesville. For more than a century, we’ve been committed to making the funeral process better for funeral directors and the families they serve.
As the leader in the casket industry, we have a proven history of generating strong, predictable cash flow by operating effectively and efficiently. Three enduring core competencies drive these high levels of achievement:
- Strategy management, which sharpens our focus on the critical objectives that provide the greatest competitive leverage and generate the best results;
- Lean business, a philosophy that allows us to continuously find ways to eliminate waste, improve quality and increase operational efficiencies; and
- Intentional talent development, which ensures we consistently recruit, develop and retain top talent, while providing a strong pipeline for succession planning.
Although the impact of baby boomers on the casket industry should increase demand in the coming years, our growth prospects are limited in this mature market. It was clear when we looked at the future of our company that we would need to seek expansion outside the funeral products business. We believed we could invest our considerable cash and leverage our core competencies in other business-to-business manufacturing companies to help them grow, increase their profitability and generate shareholder value. It became our mission not just to acquire, but to use our core competencies to help each of our companies realize its full potential.
2011: Our Dual-Platform Enterprise Provides Strong Results
In April 2010, we acquired K-Tron International, which makes gravimetric and volumetric feeders, pneumatic conveyors and size reduction equipment used in a wide variety of industries. This was followed 17 months later by our acquisition of Rotex, a leading manufacturer of screening and separation equipment. Together, they comprise a single business platform, the Process Equipment Group, which gives us access to a more diverse domestic and global marketplace in growing industries. Previously, we derived 100 percent of our revenue from Batesville. In fiscal 2011, nearly one-third of our sales came from the new process equipment business platform. It was a big step for us, and we are excited about the opportunities it has opened up for us.
The Process Equipment Group already had a vision for global growth. Through the clear lens of our strategy management process, we quickly realized that the growth potential was even greater than we had originally envisioned. With the implementation of lean business processes, talent development and an infusion of capital, we set in motion a number of initiatives that could take the business to a new level.
It was also important to continue nurturing Batesville, investing in areas that would help us maintain our relative market share in the core casket business, develop revenue streams that were independent of the number of burials and continue improving the quality of funerals for North American families.
Ultimately, the proof of any strategy is in the results. Since we began our journey nearly four years ago, revenue has grown at a compounded annual rate of more than 9 percent. In this past year alone, revenue grew 18 percent as we continued to layer in the revenues from these acquisitions. I’m especially pleased with our businesses’ ability to generate organic revenue. Batesville maintained relatively flat results despite challenging market conditions. The Process Equipment Group grew nearly 20 percent, excluding the effects of foreign currency.
When you’re an acquisitive company, you can grow the top line very quickly, but it’s the bottom-line results and cash flow that really matter. Our 2011 net income of $106 million was negatively affected by continuing expenses tied to acquisitions and acquisition accounting. To get a better picture of our operational performance, we assess adjusted gross margin and EBITDA results. Both continue to reflect our company’s strength, with adjusted gross margins exceeding 42 percent and adjusted EBITDA of $208 million representing an EBITDA margin of 24 percent. While profit is an accountant’s opinion, cash is a fact, and our operating cash flow of $190 million further strengthens our balance sheet and enables the company to execute our strategy and pay an attractive dividend.
While I’m pleased with our 2011 operating results, our biggest success has been the increase in shareholder value. Our strategy to continue growing the core business while diversifying our portfolio of companies has allowed us to deliver $360 million of incremental shareholder value over the past three years, demonstrating our commitment to providing careful stewardship over your investment in Hillenbrand. (For more detail on how we calculate shareholder value, refer to our 2012 Proxy Statement.)
The Future: We Continue to Build a Multi-Platform Global Enterprise
Just like many of our investors, we take a long-term view of our business, starting with the growth strategy we introduced in 2008. Our strong results to date prove this is the right path for your company. During the coming year, we expect to surpass another significant milestone by achieving $1 billion in total enterprise revenue.
We will continue to execute on our strategy to become a global diversified manufacturing enterprise. We intend to use what we’ve learned in the past several years to continue growing, both organically and through acquisitions, including tuck-ins to our existing businesses and additional platforms. Through disciplined execution, we expect to achieve double-digit growth in both revenue and profit in the long term, further enhancing your shareholder value.
Our talented people around the world are dedicated to taking care of our customers, making high-quality innovative products and continuously improving our processes. Regardless of what happens in today’s complicated, uncertain and rapidly evolving world economy, we’re doing the right things to position us for another 100 years of growth and success.
