Overview
In this section of the Form 10-K, entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," we provide a discussion of trends in our industry related to customers, competition, and product costs, among others. We also explain our current strategy and the qualitative results we have experienced. Finally, we attempt to give you a look at our Company "through the eyes of management" so that you can assess the financial condition and results of operations of our Company in a quantitative fashion. The discussion that follows should give you information that will help you understand our business and its performance. We intend for the discussion to be clear and to explain the drivers of our results so that you can assess the quality of our earnings and the predictability of our future results. Discussion and analysis of our financial condition and operating results includes Hillenbrand, Inc. ("Hillenbrand") and Batesville Services, Inc. (together with its subsidiaries, "Batesville"), currently Hillenbrand's only operating business.
Background
We are the leader in the North American death care industry through the manufacture, distribution, and sale of funeral service products to licensed funeral directors who operate licensed funeral homes. We sell primarily burial caskets, but also provide cremation caskets, containers, urns, and product merchandising systems that include selection room display fixturing for funeral establishments. Our mission is to provide funeral directors with the highest quality products and services; in a phrase, "helping families honor the lives of those they love®." In line with our mission, we provide personalization and memorialization products and services, as well as creating and hosting websites for funeral establishments.
After the close of business on March 31, 2008, we became a separate publicly traded company as the result of the distribution of our shares to the former stockholders of Hillenbrand Industries, Inc. (now named "Hill-Rom Holdings, Inc." and referred to herein as "Hill-Rom" or "Former Parent"), our former parent company. We have retained the Hillenbrand name because of its heritage as a family-built business and the close affiliation of that name with Batesville and its customers.
The consolidated financial statements included in this Form 10-K do not include all expenses that would have been incurred had we been a separate, stand-alone entity prior to April 1, 2008, and do not reflect our results of operations, financial position, and cash flows had we been a stand-alone company during the periods prior to April 1, 2008. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with our consolidated financial statements and the notes thereto included in Part II, Item 8 of this Form 10-K.
Death Care Industry Trends
The death of a family member or loved one causes most people to seek the services of a state licensed funeral director to provide specific services regarding handling and preparing the deceased. Most consumers have only limited familiarity with funeral-related products and usually expect funeral directors to provide information on product and service alternatives. Although caskets and urns can be purchased from a variety of sources, including directly from internet sellers and casket stores, the overwhelming majority of those who arrange a funeral purchase these products directly from the funeral home as a matter of choice and convenience.
Demographics and Consumer Preferences. For the past several years the total number of deaths in North America (where most of our products are sold) has been relatively flat. During the same period the rate of cremation selection has been slowly but steadily increasing to the point where cremations as a percentage of total deaths now represent more than one-third in the United States and more than one-half in Canada. These consolidated factors have yielded a slow but steady decline in the total number of casketed deaths in North America. The current trends are expected to continue for the foreseeable future until the post-WWII spike in births causes an increase in deaths. While the primary driver of market size is population and age, the actual number of deaths (and, therefore, the actual number of caskets sold) is affected by a variety of additional factors, including improving healthcare and the varying timing and severity of seasonal pneumonia and influenza outbreaks. The unpredictability of these factors can cause periodic fluctuations in industry demand patterns and revenue generated in any given fiscal period. While it is difficult to predict precisely the number of deaths on a month-to-month or even a year-to-year basis, we anticipate that the number of deaths in North America will remain relatively flat and the cremation rate will continue to gradually increase, resulting in a modest, but steady decline in the demand for burial caskets for the foreseeable future.

Along with the declining number of casketed deaths, the casket industry has experienced a long-term gradual decline in the product mix of burial caskets sold, a trend that has also affected our financial results. One of the factors that has affected mix is the pricing practice of many funeral homes to place most of the margin expectation on the sale of products instead of the services provided. However, we are observing changes in the pricing practices of many funeral homes, wherein they are recovering margin on their services and reducing the mark-up of products, primarily caskets. Additionally, more consumers are expecting higher levels of personalization, both in products and services. Our response to this changing consumer preference is described below. Competition. Competition in the casket industry is based on product quality, design features, personalization, price, and delivery service. We compete in the sale of burial and cremation containers with several national casket manufacturers/distributors, regional manufacturers/distributors, and more than 100 independent casket distributors, most of whom serve fairly narrow geographic segments. The industry also has seen a few foreign manufacturers, mostly from China, import caskets into the U.S. and Canada. Additionally, some retail stores, and internet retailers sell caskets directly to consumers, although we believe that total sales among this latter group are a minor portion of annual burial casket volume. Most recently, Wal-Mart has entered the market and has begun selling caskets online. Initially, it appears that Wal-Mart is testing this product offering online, but not in stores. However, it is too early to estimate the impact Wal-Mart might have on the industry.
The effect of gradually declining casket demand has resulted in economic pressures on casket manufacturers and distributors as they seek to maintain volume by increasing market share. The industry has approximately twice the necessary domestic production capacity, which further increases these pressures. Additionally, our costs associated with commodities used in our manufacturing processes have increased significantly, resulting in higher per unit costs. Many established manufactures and distributors have responded to these competitive pressures by increasing discounts to obtain volume.
Over the past decade, funeral homes have sought to minimize their inventory costs by shifting the inventory burden to their suppliers. Today, many funeral homes maintain minimal casket inventory and expect their casket suppliers to provide same day or next day delivery to satisfy their funeral requirements. Our high velocity distribution system enables us to meet these customer expectations with lower inventory investment per dollar of sales. This system enables us to deliver the majority of our volume, including uniquely personalized caskets, within 24 hours of receiving the customer's order. Over the last three years, we delivered the "right casket at the right time" in excess of 99% of the time. We believe this highly effective distribution system is aligned with the increasing time demands of families and the inventory reduction expectations of our customers.
Industry Consolidation. The underlying industry trends are leading to consolidations, acquisitions, and partnerships among casket manufacturers and distributors. In the past several years, two of the larger casket manufacturers have merged and several independent distributors have been acquired. Over the past four years, we acquired two small regional distributors. We continue to be interested in the possibility of acquiring high-quality distributors and will remain selective in this process.
The demographic and economic pressures that have been driving consolidations among casket manufacturers and distributors have also been driving consolidations among funeral homes. Recently, we have seen regional funeral home operators expanding through selected acquisitions. We responded to this trend early in fiscal 2007 by establishing a dedicated sales team focused on this regional consolidator customer segment. Since that time, we have increased the resources devoted to this area, and we believe our efforts have been successful in obtaining the majority of this group as customers. In fiscal 2010, we plan to continue our marketing efforts to this regional group and expand our efforts to other key accounts that have not been fully penetrated. As funeral homes continue to consolidate and operate multiple locations, we believe that our competitive advantages and value proposition will be able to serve these new customers best.

Costs of Raw Material and Energy. The primary raw materials used in our products include steel, wood, and red metals (i.e., copper and bronze). Although the key materials have fluctuated in price from time to time, current economic conditions are such that we expect that we will continue to be affected by the volatility in costs of raw materials and other commodities used in production over the next few years. In addition, we have exposure to prices we pay for diesel fuel primarily through our distribution operations. Increases in diesel prices have also impacted our operations in the form of surcharges on many of our materials and services used in production.
We generally do not engage in hedging transaction with respect to raw material purchases, but do enter into some fixed price supply contracts. These contracts generally are aligned with near-term production needs and, with few exceptions, do not obligate us to any material non-cancelable commitments in the long term. Additionally, our wide use of lean business principles has enabled us to reduce waste in many areas of our business. We intend to continue our focus on operational improvement, using practices based on the Toyota Production System, to better serve our customers, increase efficiencies, improve quality, and reduce costs.
Strategy and Results
In an industry that has historically been recognized as recession resistant, the severity of the current economic recession, combined with a relatively mild influenza and pneumonia season in 2009, has challenged us to take a closer look at additional ways we can continue to build shareholder value. For many years, we have seen a relatively flat number of deaths and a consistent increase in cremations, resulting in a steady decline in burials. The economy in 2009 further affected the cremation rate, drove product mix-down, and we are uncertain about the long-term impact of these changes in customer behavior. In addition, the volatility in commodity prices and the lack of consistent data about the upcoming 2010 flu season have made our ability to predict future performance less certain.
In the process of developing our business strategy for fiscal 2010, we recognized that our strategy, approach and actions in fiscal 2009 have been reasonably successful in maintaining our market position, even when faced with challenging industry and economic conditions. With some modifications (discussed below), our existing long-term Hillenbrand strategy has been reaffirmed. We believe we can deliver increasing revenue and earnings streams by building a strong, diversified enterprise with strong positions in multiple growth-oriented industries. Our long-term value creation strategy consists of:
• Maintaining and building upon our leading position in the death care industry through Batesville (consisting of Batesville Services, Inc. and its subsidiaries);

• Deploying acquisition capabilities that form the basis of our growth platform and enable us to acquire and integrate new businesses; and

• Continuing to invest in our people, building a strong base of talent to help us successfully execute our acquisition and business strategies.

Maintain and Build on Batesville's Industry Leadership:
Our Batesville business is the leader in the death care industry, primarily in the production and distribution of burial caskets and cremation products. While volume growth in the burial casket space is limited, there are still opportunities to generate additional business within a wider range of funeral services. Leadership of this operating division is focusing on four categories of strategic initiatives to drive this growth.

Optimize core burial business for the long term
• The Batesville® brand is widely recognized as the premier brand in the industry among funeral professionals, offering the broadest range of metal and wood caskets. Our legacy of innovation and leadership in the funeral industry has allowed our customers and the families they serve to commemorate the lives of those they love through quality construction and compelling designs that provide personal expressions of a life well lived. To enhance our leadership position, we will continue to invest in our marketing capabilities, specifically in research, new product development, and brand promotion.

• The landscape of casket manufacturers has dwindled over the years, but there are opportunities to capitalize on acquisitions and alliances in other parts of the death care space. We will continue to remain alert to these opportunities and capitalize on them when it's prudent to do so.

• We have responded to the consolidation trend in our industry and the growth of regional funeral home consolidators by creating a sales team that differentially serves customers whose business spans multiple sales territories. We have been successful in developing new customer relationships with many of these regional customers by demonstrating the value our Batesville-branded products and services can bring to their operations and the families they serve. In fiscal 2010, we will apply this same approach to other less-penetrated large key accounts that operate multiple funeral homes within a single geographical area. In addition, we are focused on improving the quality of our sales organization through better call management and compensation alignment.

• Our ability to apply proven merchandising principles and proprietary database tools enables us to help our customers increase their average mix and drive greater profitability, all while increasing the satisfaction of their clients. In 2009, we began to focus on moving customers farther up the merchandising ladder, emphasizing the value of using our full system. Fully merchandised accounts not only had a higher rate of revenue growth than customers at lower levels of implementation, but also have a higher retention rate.

Grow profitable revenue streams outside the core burial casket business
• Our Options® by Batesville product line consists of cremation caskets, containers, urns, and other cremation products. We expect continued growth in these product lines as more consumers choose cremation over burial. In fiscal 2009, we established a dedicated sales and marketing team to focus on developing new products and services for these consumers. Based upon that knowledge, in fiscal 2010 we will implement a number of new initiatives aimed at improving revenue performance through new product introductions, increased customer margin per call, customized package solutions and after-market programs for our funeral home customers.

• Batesville is the largest provider of funeral home Websites in the world, a service that many small, family-owned funeral homes would not otherwise spend the time and money to develop on their own. In 2010, we will provide funeral directors with additional ways to generate revenue streams and connect grieving families that may be geographically dispersed. Through Batesville Interactive we offer integrated online products that include WebLink™, TributeLink™ online videos, and ObitLink™, an alliance with Legacy.com that will give funeral directors access to the largest networked obituary system in the nation.

• Fiscal 2009 was our third full year offering the NorthStar® product line to independent casket distributors, and we continue to be satisfied with our progress. These are private-label burial caskets manufactured in our existing facilities using distinctive tooling. Because these products do not contain any of the Batesville proprietary features, designs, or specs they are differentiated from the premium Batesville brand. Based on our success in this small product line, we do not anticipate any changes to this strategy.

Improve cost structure
• Our leadership position as the largest manufacturer and distributor of caskets and containers in North America provides scale and scope. We intend to continue to utilize our scale and scope to enable us to capitalize on our efficiencies and compete with a low cost structure.

• Our highly integrated manufacturing facilities in the United States and Mexico employ "pull production" and "one-piece flow" to feed our high-velocity replenishment system with products quickly and efficiently to meet the growing time demands of our customers and their client families. We intend to continue to leverage our processes to allow us to carry less inventory per sales dollar than our competitors, enabling customers to carry few or no products in their funeral homes, and still achieve on-time delivery more than 99% of the time.

• Our effective execution of Hillenbrand Lean Business (derived from the Toyota Production System) enables further cost reductions in our operations, distribution and administrative functions.

Execute Our Acquisition Strategy:
We intend to use our strong cash flows, culture of execution, and core competencies in manufacturing, distribution, and lean business practices to create an enterprise with strong positions in multiple growth-oriented businesses. This will reduce our reliance on the number of burials as our primary source of revenues. Ideally, we are targeting companies that have revenues in excess of $100 million, demonstrated profitable growth, established sales and marketing capabilities, a strong business-to-business brand, and a capable management team. We are targeting one or more acquisitions over the next few years with purchase prices aggregating several hundred million dollars. We are committed to being a disciplined buyer and will continue to be discriminating in our evaluations of potential acquisition targets. Continue to Invest in People:
The foundation of our success has always been our people, and we have a long history at Batesville and now in the Hillenbrand enterprise of hiring, developing and retaining successful, multi-functional leaders. Our talent management process helps us to identify and develop our people through exposure to lean business principles, participation in strategic projects, and planned multifunctional assignments allowing us to meet the management and talent requirements of our business strategy. We intend to build upon our current team, and also attract and develop a diverse group of people who can continue carrying out our strategy. We plan to selectively add operating and analytical talent in order to have the necessary management strength available for acquisitions as needed.
Results of Operations
The following table presents comparative operating results for the fiscal years discussed in detail below (amounts in millions of dollars):

                               Year Ended                           Year Ended                           Year Ended
                              September 30,          % of          September 30,          % of          September 30,          % of
                                  2009             Revenues            2008             Revenues            2007             Revenues
Net revenues                 $         649.1           100.0      $         678.1           100.0      $         667.2           100.0
Cost of goods sold                     374.7            57.7                397.6            58.6                388.6            58.2

Gross profit                           274.4            42.3                280.5            41.4                278.6            41.8
Operating expenses
(excluding separation
costs)                                 119.3            18.4                115.3            17.0                117.9            17.7
Separation costs                         0.1               -                 15.6             2.3                  5.1             0.8

Operating profit                       155.0            23.9                149.6            22.1                155.6            23.3
Interest expense                        (2.1 )          (0.3 )               (2.2 )          (0.3 )                  -               -
Investment income and
other                                    7.9             1.2                  5.9             0.8                  1.4             0.2

Income before income
taxes                                  160.8            24.8                153.3            22.6                157.0            23.5
Income tax expense                      58.5             9.0                 60.1             8.9                 57.5             8.6

Net income                   $         102.3            15.8      $          93.2            13.7      $          99.5            14.9

Fiscal Year Ended September 30, 2009 Compared to Fiscal Year Ended September 30, 2008
Revenue - Our net revenues for the year were down from the same period last year, decreasing $29.0 million or 4.3%. Burial unit volume decreased 6.5% or $45.8 million compared to the same period last year and was the primary contributor to our reduction in net revenue, although improved volume on non-burial products helped limit the impact. We believe this volume decrease was attributable to a lower number of reported deaths year-over-year, increased cremation rates, and aggressive price competition. We suspect the higher than anticipated increase in cremation rates was fueled by the economic recession, which in turn caused the aggressive price competition for the remaining volume. Offsetting this impact was an increase in our average selling price, which contributed $24.5 million to revenue. We believe that our merchandising initiatives and new product launches helped improve average selling prices and slow the downward trend in product mix, especially in locations that used the Batesville merchandising system. Finally, we also experienced the unfavorable impact of currency fluctuations during the year from a stronger U.S. dollar, mainly compared to the Canadian dollar. This resulted in decreased revenue of $7.7 million over the prior year. We can't predict how currency rates will move either to help or hurt our results in the future.

Cost of Goods Sold - Our cost of goods sold decreased $22.9 million, or 5.8%, including a $14.5 million decrease largely attributable to lower burial unit volume. In our manufacturing operations, we experienced cost increases over fiscal year 2008 of $1.2 million related primarily to higher commodity costs, most notably on carbon steel and red metals. An aggregate cost decrease of $1.0 million was attributable to a number of other categories across our manufacturing activities, primarily driven by employee benefit costs that were partially offset by reduced prices we were paid for our production scrap. In our distribution operations, we benefited from a $5.9 million reduction in fuel cost as compared to the prior year. We also experienced a $2.7 million decrease in other distribution cost categories which were mainly related to lower employee benefit costs in similar fashion to our manufacturing operations. We are continuing to execute lean business initiatives to further optimize our costs. Operating Expenses - Our operating expenses increased $4.0 million, or 3.5%, excluding one-time separation costs. We are better able to analyze our operating cost structure without non-recurring effects of the separation.
In fiscal 2008 we realized a $2.6 million decrease in our bad debt expense as a result of collecting a customer balance that had previously been nearly fully reserved (causing this year's expenses to be relatively higher). This increased expense was offset by a decrease in variable sales compensation and benefits of $1.0 million (tied to our lower revenues) and a decrease of $1.1 million in legal fees related to our antitrust lawsuit. The remaining decrease in our core operating expenses of $1.3 million was attributable to other components of Batesville's operating expense categories.
During fiscal 2009, we substantially completed building teams and processes to support ourselves as a new, stand-alone public company. We also initiated our acquisition strategy and have put in place people, processes and resources to enable successful execution of the strategy. As a result of these activities, we incurred an increase of $12.2 million in Hillenbrand corporate operating costs during fiscal year 2009 as compared to the previous year. This increase was partially offset by the fact that we are no longer being allocated corporate costs from Hill-Rom (which ceased at the end of the second fiscal quarter of 2008). These allocated costs decreased by $7.4 million compared to last year. Thus our corporate costs were $4.8 million higher than last year. Separation Costs - In fiscal year 2008, we incurred or were allocated $15.6 million in separation costs associated with the separation of the Company from Hill-Rom. Included in these non-recurring costs were $3.2 million tied to the acceleration of previously unvested stock grants, $1.1 million in stock option modification charges, and $4.4 million of investment banking and advisory fees. The balance of the costs represented primarily legal and professional fees.
Interest Expense - As fiscal 2009 marked our first full year as a stand-alone public company, we incurred a full year of financing costs under our credit facility. These costs have since decreased. We have been paying down the credit facility since the time of the separation and have experienced lower interest rates on the balances that were outstanding during fiscal 2009. The weighted average interest rate of the credit facility was 1.5% and 3.0% during the fiscal years 2009 and 2008, respectively.
Investment Income & Other - As was the case with interest expense described above, we incurred a full year of investment earnings or losses from assets that were transferred to us by Hill-Rom at the time of the separation. During fiscal year 2009, net losses from investments in affiliates (limited partnership investments) were $5.4 million due to write-downs within the affiliates' investment portfolios. In comparison, we had no net earnings or losses from these investments in fiscal 2008. However, in the last quarter of fiscal year . . .