HILLENBRAND, INC. – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.

Executive Overview

(in millions throughout Management's Discussion and Analysis)

                                               Fiscal Year Ended September 30 Hillenbrand                                 2011           2010         2009 Net revenue                              $     883.4    $     749.2    $ 649.1 Gross profit                                   369.9          313.3      274.4 Operating expenses                             211.3          175.4      119.4 Operating profit                               158.6          137.9      155.0 Interest expense                               (11.0 )         (4.2 )     (2.1 ) Investment income and other                     10.2           12.7        7.9 Income tax expense                              51.7           54.1       58.5 Net income                                     106.1           92.3      102.3  Reconciliation of Net Income to EBITDA Net income                               $     106.1    $      92.3    $ 102.3 Interest income                                 (7.4 )        (13.0 )    (14.1 ) Interest expense                                11.0            4.2        2.1 Income tax expense                              51.7           54.1       58.5 Depreciation and amortization                   36.1           28.2       18.5 EBITDA                                   $     197.5    $     165.8    $ 167.3    

2011 results include $2.8 inventory step-up classified as cost of goods sold; and $6.3 business acquisition costs, $1.3 antitrust litigation expenses, $1.3 restructuring charges, and $0.8 backlog amortization, classified as operating expenses. Hillenbrand recognized $0.8 of sales tax recoveries as a benefit within operating expenses. The total net income tax benefit related to these items was $4.0.

2010 results include $11.6 inventory step-up classified as cost of goods sold; and $10.5 business acquisition costs, $5.0 antitrust litigation expenses, $3.0 restructuring charges, and $1.7 backlog amortization, classified as operating expenses. Hillenbrand recognized $4.7 of sales tax recoveries as a benefit within operating expenses. The total net income tax benefit related to these items was $7.8.

2009 results include $2.2 antitrust litigation expenses and $0.1 separation costs classified as operating expenses. The total net income tax benefit related to these items was $0.8.

While we report financial results in accordance with accounting principles generally accepted in the U.S. ("GAAP"), we also provide a non-GAAP measure, Earnings Before Interest, Income Tax, Depreciation, and Amortization ("EBITDA"). We have previously discussed our strategy to seek to prudently acquire selected manufacturing businesses that have a record of success and could benefit from our core competencies to spur faster and more profitable growth. 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 EBITDA, among other measures, to monitor our business performance. While EBITDA is not in accordance with, nor is it a substitute for, a GAAP measure, we believe it enables investors to better understand the ongoing operating performance of the Company. Investors should consider non-GAAP measures in addition to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP.

For further detail, see the reconciliations provided on page 71.

Year Ended September 30, 2011, Compared to Year Ended September 30, 2010

† Consolidated revenue grew $134.2 (17.9%) or $122.3 (16.3%) on a constant currency basis compared to the prior year.

† Batesville's revenue was $637.5, a decrease of $2.8 (0.4%) or $5.6 (0.9%) on a constant currency basis compared to the prior year.

† Process Equipment Group's revenue increased $137.0 (125.8%) or $127.9 (117.4%) on a constant currency basis compared to the prior year. The revenue increase was due primarily to the acquisition of K-Tron in April 2010 (12 months of results included in fiscal year 2011 versus six months included in 2010) and Rotex in August 2011 (one month of results included in fiscal year 2011). Growth excluding acquisitions was 18.0% for the last six months of 2011

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compared to the same period in the prior year for K-Tron.

† Gross profit margin of 41.9% increased slightly from 41.8% in the prior year.

† Batesville's gross profit margin was 41.4% in fiscal year 2011 compared to 43.4% in fiscal year 2010, with the decline due primarily to rising commodity costs.

† Process Equipment Group's gross profit margin increased to 43.0% in fiscal year 2011 from 32.7% in fiscal year 2010, primarily due to inventory step-up charges related to acquisitions that were $8.8 higher in fiscal year 2010 compared to fiscal year 2011.

† Operating expenses as a percentage of sales increased 50 basis points compared to the prior year.

† Amortization of intangible assets acquired was $12.4 in fiscal year 2011 compared to $7.3 in the prior year primarily because fiscal year 2011 had 12 months of amortization related to the K-Tron acquisition versus six months in the prior year. These amounts include backlog amortization of $0.8 in 2011 and $1.7 in 2010.

† Batesville recorded $0.8 in recoveries from sales tax overpayments in fiscal year 2011 compared to $4.7 in the prior year that reduced operating expenses.

† Business acquisition costs were $6.3 in fiscal year 2011 compared to $10.5 in fiscal year 2010.

† Interest expense increased $6.8 compared to the prior year due primarily to the senior notes issued in July 2010. Fiscal year 2011 included 12 months of related interest expense versus only three months in fiscal year 2010. The proceeds from the notes were used to pay down our revolving credit facility, which has a lower interest rate than the senior notes.

† Investment income and other decreased $2.5 compared to the prior fiscal year.

† Interest income related to the Forethought Note was $5.6 less in fiscal year 2011 due to the early collection of the note in April 2011.

† Income from investments in auction rate securities and limited partnerships was $5.7 higher in fiscal year 2011 compared to the prior year.

† Bank charges primarily for customer payments by credit card were $1.2 higher in fiscal year 2011.

 †          See Note 14 for more detailed information.   

† The income tax rate was 32.8% compared to 37.0% in the prior year. The rate was favorably impacted by a decrease in the current and deferred state income tax rates due to enacted law changes, an increase in the percentage of foreign source income in lower rate jurisdictions, an increase in the domestic manufacturing deduction, and non-deductible business acquisition costs incurred in the previous period.

Year Ended September 30, 2010, Compared to Year Ended September 30, 2009

† Consolidated revenue grew $100.1 (15.4%) or $94.9 (14.6%) on a constant currency basis.

† Batesville's revenue was $640.3, a decrease of $8.8 (1.4%) compared to the prior year or $14.0 (2.2 %) on a constant currency basis.

† The acquisition of K-Tron added $108.9 of Process Equipment Group revenue in fiscal year 2010.

† Gross profit margin of 41.8% decreased by 50 basis points from 42.3% in the prior year.

† Batesville's gross profit margin increased to 43.4% in fiscal year 2010 from 42.3% in the prior year. The improvement was driven by lower commodity costs.

† Process Equipment Group's gross profit margin was 32.7% in fiscal year 2010, which included six months of operations for this group and reflected $11.6 of inventory step-up expensed shortly after the acquisition in 2010.

† Operating expenses increased $56.0 in fiscal year 2010 compared to the prior year, and on a percentage of sales basis, it increased to 23.4% from 18.4% in the prior year.

† The K-Tron acquisition added $33.4 of operating expenses in fiscal year 2010. This included $7.3 of amortization of acquired intangible assets, of which $1.7 was backlog step-up amortization.

† Batesville's operating expenses increased $6.7 due to increases in compensation and pension ($5.5), antitrust litigation ($2.8), and new business initiatives ($2.4), offset in part by $4.7 in recoveries from sales tax overpayments that served to reduce operating expenses.

† Business acquisition costs ($10.5) and restructuring charges ($3.0) were incurred in fiscal year 2010, but not in fiscal year 2009.

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† Interest expense increased $2.1 in fiscal year 2010 compared to the prior year due to increased borrowings to fund the K-Tron acquisition, including the issuance of the senior notes in July 2010.

† Investment income and other increased $4.8 in 2010 compared to the prior year. Our equity in the results of affiliates represented a $3.1 gain in fiscal year 2010 versus a $5.4 loss in the prior year. Partially offsetting this was a $3.1 loss on the sale of auction rate securities in fiscal year 2010. See Note 14 for more detailed information.

† Our income tax rate was 37.0% in fiscal year 2010 compared to 36.4% in the prior year. The increase in the tax rate was primarily due to non-deductible business acquisition costs, higher state income tax rates, and adjustments resulting from periodic reconciliation of our tax accounts to subsequent tax filings, offset in part by favorable changes in our income tax reserves.

    Results of Operations    

The sections that follow present comparative operating results for Batesville, Process Equipment Group, and corporate operations.

                                                Fiscal Year Ended September 30,                                       2011                2010                2009 Batesville Results                         % of                % of                % of (in millions)                   Amount    Revenue   Amount    Revenue   Amount    Revenue Revenue                         $ 637.5     100.0   $ 640.3     100.0   $ 649.1     100.0 Gross profit                      264.2      41.4     277.7      43.4     274.4      42.3 Operating expenses                101.5      15.9     102.6      16.0      95.9      14.8 Operating income                  162.7      25.5     175.1      27.3     178.5      27.5

Depreciation and amortization 17.8 2.8 17.6 2.7 17.6 2.7

Batesville - Fiscal Year Ended September 30, 2011, Compared to Fiscal Year Ended September 30, 2010

Revenue - Batesville's revenue for fiscal year 2011 decreased $2.8 (0.4%) compared to the prior year, or $5.6 (0.9%) on a constant currency basis. Burial unit volume decreased $8.5 (1.3%) and was the primary contributor to the reduction, although improved volume on non-burial products helped limit the impact. We believe the volume decrease was attributable to increased cremation rates. Offsetting this impact was a modest increase in average selling price that contributed $2.9 to revenue.

Gross profit - Batesville's gross profit margin for the year decreased 200 basis points to 41.4% from 43.4% in the prior year due primarily to increased commodity costs ($9.7), in particular, fuel and steel.

Operating expenses - Batesville operating expenses decreased by $1.1</money> (1.1%) over the prior year, a 10 basis point improvement in the ratio of operating expense to sales over the prior year. The primary drivers for this improvement were reductions in antitrust litigation expenses ($3.7), bad debt expense ($1.8), and incentive compensation ($1.5). This impact was partially offset by restructuring costs ($1.3) and less benefit from recoveries from sales tax overpayments ($3.9). In fiscal year 2011, we recovered $0.8 from sales tax recoveries compared to $4.7 recovered in the prior year. We do not expect additional recoveries.

Batesville - Fiscal Year Ended September 30, 2010, Compared to Fiscal Year Ended September 30, 2009

Revenue - Batesville's fiscal year 2010 revenue declined $8.8 (1.4%) compared to the prior year or $14.0 (2.2%) on a constant currency basis. Burial unit volume decreased $15.0 (2.5%) and was the primary contributor to the revenue reduction, although improved volume on non-burial products helped limit the impact. Offsetting this impact was a modest increase in average selling price that contributed $1.1 to revenue.

Gross profit - Batesville's gross profit margin increased to 43.4% in fiscal year 2010 from 42.3% in the prior year. Costs decreased $12.1 compared to the prior year driven by lower volumes ($4.1) and lower commodity costs

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($7.5). Commodity costs, particularly for steel, spiked in the first quarter of fiscal year 2009, then declined sharply toward the end of fiscal year 2009, and began to increase again in fiscal year 2010.

Operating expenses - Batesville operating expenses increased $6.7 (7.0%) compared to the prior year, an unfavorable 120 basis point change in the operating expense to sales ratio. This was primarily due to increased variable compensation and pension ($5.5), increased antitrust litigation expense ($2.8), additional spending on new business initiatives ($2.4), offset in part by recoveries from sales tax overpayments. During fiscal year 2010, Batesville discovered that it had over-remitted sales tax in certain jurisdictions and recorded $4.7 of sales tax recoveries, which lowered operating expenses in fiscal year 2010.

                                          Fiscal Year Ended September 30,                                         2011(a)              2010(b) Process Equipment Group Results                % of                % of (in millions)                      Amount     Revenue   Amount    Revenue Revenue                           $   245.9     100.0   $ 108.9     100.0 Gross profit                          105.7      43.0      35.6      32.7 Operating expenses                     72.3      29.4      33.4      30.7 Operating income                       33.4      13.6       2.2       2.0 Depreciation and amortization          17.5       7.1       9.7       8.9    

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(a) Fiscal year 2011 includes one month of Rotex operations since the acquisition on August 31, 2011.

(b) Fiscal year 2010 includes six months of K-Tron operations since the acquisition on April 1, 2010.

Comparative results are not presented for fiscal year 2009 as K-Tron was acquired on April 1, 2010.

Process Equipment Group - Fiscal Year Ended September 30, 2011, Compared to Fiscal Year Ended September 30, 2010

Revenue - Process Equipment Group revenue increased $137.0 (125.8%) in fiscal year 2011 compared to the prior year, or $127.9 (117.4%) on a constant currency basis. Fiscal year 2011 included 12 months of K-Tron operations and one month of Rotex operations compared to fiscal year 2010 that included only six months of K-Tron operations.

We expect that future revenue associated with Process Equipment Group will be influenced by order backlog. There is a lead time involved in manufacturing specialized equipment and parts for customers. Backlog can be an indicator of future revenue; however, it may not include many projects and parts orders that are booked and shipped within the same quarter. The timing of order placement, size, and customer delivery dates can create unusual fluctuations in backlog and revenue. Backlog is also affected by foreign exchange fluctuations for orders denominated in currencies other than U.S. dollars.

Based upon an increased level of new orders accepted, including those related to the Rotex acquisition, minus orders completed and shipped during the period, Process Equipment Group's backlog increased from $57.1 on September 30, 2010, to $119.0 on September 30, 2011.

Gross profit - Process Equipment Group's gross profit margin increased to 43.0% in fiscal year 2011 from 32.7% in fiscal year 2010. Step-ups in inventory value were recorded at the time of the K-Tron acquisition in April 2010 and were subsequently expensed when the inventory was sold in the third quarter of fiscal year 2010, resulting in a reduction to gross profit of $11.6. Similarly, $2.8 of inventory step-ups related to the Rotex acquisition were recorded in fiscal year 2011, representing 100% of the inventory step-up for this acquisition.

Operating expenses - Process Equipment Group operating expenses increased $38.9 compared to the prior year due to 12 months of operations from the K-Tron businesses and one month from the Rotex businesses included in fiscal year 2011 compared to only six months of business activity in the prior year. On an operating expense to sales ratio basis, this represents an improvement of 130 basis points. Amortization of intangible assets acquired was $12.4 in fiscal year 2011 compared to $7.3 in the prior year primarily because fiscal year 2011 had 12 months of

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    amortization related to the K-Tron acquisition and one month related to the Rotex acquisition versus six months related to the K-Tron acquisition in the prior year.    Corporate Results                    Fiscal Year Ended September 30, (in millions)                      2011           2010           2009 Operating expenses *            $      31.5    $      26.2    $      23.4 Business acquisition costs              6.0           10.2              - Restructuring costs                       -            3.0              - Separation costs                          -              -            0.1 Depreciation and amortization           0.8            0.9            0.9    

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* Excluding business acquisition, restructuring, and separation costs.

Operating expenses - Operating expenses excluding business acquisition and restructuring costs increased $5.3 (20.2%) for fiscal year 2011 compared to the prior year. Long-term incentive compensation increased by $1.7 in our corporate operations, $4.1 in total for the Company, due to having a total of three years of long-term incentive compensation grants outstanding in fiscal year 2011 versus two years in fiscal year 2010. Our annual grants began in fiscal year 2009 and vest over three years; therefore, fiscal year 2010 had two outstanding grants incurring expense and fiscal year 2011 had three outstanding grants incurring expense. Going forward, our year-over-year comparisons will both include three years of related expense.

Increases in employee compensation and benefits ($1.6) and legal expenses ($0.9) were incurred in fiscal year 2011 compared to 2010. As we continue to execute on our global growth strategy, we have incurred additional compensation expense related to our corporate infrastructure and the continued development of our international footprint.

Business acquisition costs - During fiscal year 2011, we incurred $6.3 of business acquisition costs related to our acquisitions of Rotex and K-Tron, of which $6.0 was incurred by our corporate operations. During fiscal year 2010, we incurred $10.5 of business acquisition costs related to our acquisition of K-Tron, of which $10.2 was incurred by our corporate operations.

Restructuring costs - During fiscal year 2010, we incurred $3.0 of restructuring charges related to our joint ownership interests in corporate aircraft distributed to us when we separated from Hill-Rom. These restructuring charges resulted from our collective plans with Hill-Rom to sell or dispose of two of our jointly owned aircraft and modifications to our aviation access and use agreements. The charges are primarily related to asset impairments for the two aircraft. This restructuring will reduce our future costs related to these aviation assets.

Liquidity and Capital Resources

We believe the ability to generate cash is critical to the value of the Company. In this section, we tell you about our ability to generate and access cash to meet our business needs. We will describe actual results in generating and utilizing cash by comparing the last three years. We will also talk about any significant trends to help you understand how this could impact us going forward.

We will tell you about how we see operating, investing, and financing cash flows being impacted for the next 12 months. While it is not a certainty, we will tell you where we think cash will come from and how we intend to use it. We will also talk about significant risks or possible changes that could impact those expectations. Finally, we will tell you about other significant matters that could affect our liquidity on an ongoing basis.

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   Table of Contents                                                         Fiscal Year Ended September 30, (in millions)                                      2011           2010           2009 Cash flows provided by (used in) Operating activities                            $     189.5    $     118.2    $     123.2 Investing activities                                 (154.5 )       (348.7 )         (5.3 ) Financing activities                                  (22.0 )        289.8          (97.4 ) Effect of exchange rate changes on cash and cash equivalents                                        4.1            3.9              - Increase in cash and cash equivalents           $      17.1    $      63.2    $      20.5     Operating Activities   

Cash provided by operating activities was $71.3 higher in fiscal year 2011 compared to fiscal year 2010.

† We received a $59.7 payment of interest in conjunction with the final settlement of the Forethought Note in 2011, compared to the $10.0 contractual payment received in the prior year.

† Process Equipment Group's core pre-tax operating cash flows contributed approximately $26.5 more to our consolidated operating cash flows in fiscal 2011 compared to the prior year, as 12 months of operations were included in 2011 compared to six months in the prior year.

† Cash payments for income taxes decreased $14.2 in fiscal year 2011.

Cash provided by operating activities was $5.0 lower in fiscal year 2010 compared to fiscal year 2009.

† Cash payments for income taxes increased $21.0 in fiscal year 2010 compared to the prior year, primarily due to the addition of K-Tron.

† K-Tron's core pre-tax operating cash flows contributed approximately $16.9 to our consolidated operating cash flows for the last six months of fiscal 2010.

 †          We paid $10.5 in business acquisition costs in fiscal year 2010.  †          We received a $10.0 interest payment from Forethought in 2010. 

† We made cash payments of $5.5 to fund our deferred compensation program in fiscal year 2010.

 †          We paid $3.0 less in defined benefit plan contributions in fiscal year 2010.    Investing Activities    

Cash used for investing activities was $194.2 lower in fiscal year 2011 compared to fiscal year 2010.

† The Rotex acquisition required a $240.4 net cash payment in fiscal year 2011 compared to $369.0 paid for K-Tron in the prior year.

† We received a repayment of $91.5 of principal on the Forethought Note in fiscal year 2011.

† Capital project spending was $5.6 more in fiscal year 2011 compared to the prior year.

† We received $12.4 from our auction rate securities and investments, representing a $24.8 decrease from the prior year.

Cash used for investing activities was $343.4 higher in fiscal year 2010 compared to fiscal year 2009.

   †          The K-Tron acquisition required a $369.0 net cash payout in 2010. 

† Capital project spending was $6.3 more in fiscal year 2010 compared to the prior year.

† We received $37.2 from the partial liquidation of our auction rate securities and investments, representing a $34.9 increase from the prior year.

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   Table of Contents    Financing Activities   

Cash used in financing activities was $22.0 in fiscal year 2011 compared to net cash receipts of $289.8 in the prior year.

† We used $150.9 of proceeds from the collection of the Forethought Note to pay down our revolving credit facilities.

† We borrowed $159.0 under our revolving credit facilities to fund the acquisition of Rotex.

Cash provided by financing activities increased $387.2 in fiscal year 2010 compared to the prior year.

† We borrowed $375.0 under our revolving credit facilities to fund the acquisition of K-Tron.

† We received $148.4 from the issuance of the 5.5% senior unsecured notes (Notes). These proceeds were subsequently used to pay $100.0 owed on our revolving credit facility and the remaining amount was used to fund working capital needs.

    12 Month Outlook    

We believe that our cash on hand, cash generated from operations, and cash available under our revolving credit facility will be sufficient to fund operations, working capital needs, capital expenditure requirements, and financing obligations. We may use additional cash generated by the business to pay down our revolving credit facility, depending on our working capital needs.

The cash at our foreign subsidiaries totaled $87.8 at September 30, 2011. Repatriation of these funds for use in domestic operations would expose us to a potential additional tax impact. Approximately $16.8 of these funds are permanently reinvested and we have no plans to repatriate these funds. We expect that our available borrowing capacity combined with cash flows expected from existing business will be sufficient to fund operating requirements in the U.S.

We expect to continue moving forward with our acquisition strategy; however, additional acquisitions will depend on whether suitable opportunities are available. We expect to fund future acquisitions primarily with cash on hand, although we may utilize availability under our revolving credit facilities. The covenants under the Distribution Agreement with Hill-Rom impose certain restrictions on incurring indebtedness to finance acquisitions. See Note 6 for further detail.

We did not make discretionary contributions to our pension plans in 2011. We are not required, nor do we currently have plans to do so in 2012. We will continue to monitor plan funding levels, performance of the assets within the plan, and overall economic activity, and will make potential funding decisions based on the net impact of the above factors.

We currently expect that comparable quarterly cash dividends will continue to be paid in the future and will require approximately $11.9 each quarter based on our outstanding common stock at September 30, 2011. We are currently authorized by our Board of Directors to purchase additional shares of our common stock, and may elect to do so, depending on market conditions and other needs for cash consistent with our growth strategy.

   Other Liquidity Matters   

In March 2008, we entered into a $400 five-year senior revolving credit facility (the "Facility") with a syndicate of banks (the "Banks"). The Facility expires in March 2013. Borrowings under the Facility bear interest at variable rates, based upon the Banks' base rate or LIBOR plus a margin amount based upon our public debt rating. For fiscal years ended September 30, 2011 and 2010, the weighted-average interest rates were 0.7% and 0.8%. The availability of borrowings under the Facility is subject to our ability at the time of borrowing to meet certain specified conditions. These conditions include compliance with covenants, absence of default, and continued accuracy of certain representations and warranties. Financial covenants include a maximum ratio of Consolidated

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Indebtedness to Consolidated EBITDA of 3.5 to 1.0 and a minimum ratio of Consolidated EBITDA to interest expense of 3.5 to 1.0.

As of September 30, 2011, we had $7.1 outstanding letters of credit under the Facility and were in compliance with all covenants. We had $109.9 of remaining borrowing capacity available under the Facility. Under the Distribution Agreement with Hill-Rom, the ability to borrow against the Facility for certain strategic transactions such as acquisitions may be limited. See Note 6 for more information.

Our Swiss location maintains additional availability of $19.7 through local credit facilities secured by cash or real property. As of September 30, 2011 and 2010, there were no borrowings under these facilities and availability was reduced by $5.3 and $3.1 for outstanding bank guarantees. At September 30, 2011 and 2010, we had additional outstanding letters of credit and bank guarantees with other financial institutions totaling $9.7 and $2.9. We had restricted cash of $0.3 at September 30, 2010.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements.

Contractual Obligations and Contingent Liabilities and Commitments

    In this section we will tell you about the things we have committed to pay. This will help give you an understanding of the significance of cash outlays that are fixed beyond the normal accounts payable we have already incurred and have on our books. The following table outlines our contractual obligations as of September 30, 2011:                                                      Payment Due by Period                                               Less                                              Than 1        1-3         4-5        After 5 (in millions)                    Total        Year        Years       Years        Years 10 year, 5.5% fixed rate senior unsecured notes          $  150.0    $       -    $      -    $      -    $   150.0 Revolving credit facility (1)                                283.0            -       283.0           -            - Interest on financing agreements (2)                      75.7         10.2        17.4        16.5         31.6 Operating lease obligations (noncancellable)                    12.8          6.7         5.4         0.6          0.1 Purchase obligations (3)            11.5         11.5           -           -            - Defined benefit plan funding (4)                                110.8          4.0         6.2         6.6         94.0 Other long-term liabilities (5)                                 24.0          4.6         5.8         3.4         10.2 Capital call arrangements (6)                                  3.0          3.0           -           -            - Total contractual obligations                     $  670.8    $    40.0    $  317.8    $   27.1    $   285.9    

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(1)  Our revolving credit facility expires in March 2013. Although we may make      earlier principal payments, we have reflected the principal balance due at      expiration. (2)  Cash obligations for interest requirements relate to our fixed-rate debt      obligation at its contractual rate and borrowings under the variable-rate      revolving credit facility at current rate at September 30, 2011. (3)  Consists of agreements to purchase goods or services that are enforceable      and legally binding on us and that specify all significant terms, including      fixed or minimum quantities to be purchased; fixed, minimum or variable      price provisions; and the approximate timing of the transaction. (4)  Defined benefit plan funding represents non-discretionary requirements      based upon plan funding at September 30, 2011, and excludes any      discretionary contributions. (5)  Other long-term liabilities include the estimated liquidation of      liabilities related to our casket pricing obligation, self-insurance      reserves, and long-term severance payments. (6)  We could be called upon by our private equity limited partnership      investments to provide a maximum of $3.0 in additional funds.                                            29 

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   Table of Contents    Critical Accounting Estimates   

Our financial results are affected by the selection and application of accounting policies and methods. Significant accounting policies which require management's judgment are discussed below. A detailed description of our accounting policies is included in the notes to our consolidated financial statements included in Part II, Item 8, of this Form 10-K.

Revenue Recognition - Net revenue includes gross revenue less sales discounts, customer rebates, sales incentives, and product returns, all of which require us to make estimates for the portion of these allowances that have yet to be credited or paid to our customers. We estimate these allowances based upon historical rates and projections of customer purchases toward contractual rebate thresholds.

Allowance for Doubtful Accounts - The accounting for our trade receivables requires us to estimate the net realizable value of these assets. Our allowance for doubtful accounts is our best estimate of the amount of probable credit losses and collection risk in our existing trade accounts receivable portfolio. Performing our evaluation of the allowance for doubtful accounts requires us to exercise significant judgment based on historical write-offs and individual customer collection experience. As a result, the historical experience and current trends we are using in our estimates may not be indicative of the collectability of these balances in the future.

Liabilities for Loss Contingencies Related to Claims and Lawsuits - The ultimate outcome of claims and lawsuits cannot be predicted with certainty. An estimated loss from these contingencies is recognized when we believe it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Making such an estimate requires us to exercise significant judgment. However, it is difficult to measure the actual loss that might be incurred related to litigation. The ultimate outcome of these lawsuits could have a material adverse effect on our financial condition, results of operations, and cash flows. For a more complete description of loss contingencies related to lawsuits, see Note 12 to our consolidated financial statements included in Part II, Item 8, of this Form 10-K.

We are also involved in other possible claims, including product and general liability, workers' compensation, auto liability, and employment-related matters. Outside insurance companies and third-party claims administrators establish individual claim reserves and an independent outside actuary provides estimates of ultimate projected losses, including incurred but not reported claims, which are used to establish reserves for losses. As our actuaries periodically provide us updated ultimate loss projections, we must increase or reduce previously recorded claim reserves. Thus, any one period's financial results could be significantly affected by the effect of this adjustment.

The recorded amounts represent our best estimate of the costs we will incur in relation to such exposures, but it is possible that actual costs could differ from those estimates.

Performance-Based Stock Compensation - The vesting of our performance-based stock awards is contingent upon the creation of shareholder value as measured by the cumulative cash returns and final period net operating profit after tax compared to the established hurdle rate over a three-year period. The hurdle rate is a reflection of our weighted-average cost of capital and targeted capital structure. The value of an award is based upon the fair value of our common stock at the date of grant. Based on the extent to which the performance criteria are achieved, it is possible for none of the awards to vest or for a range up to the maximum to vest, which is reflected in the performance-based stock award table in Note 11 to our consolidated financial statements included in Part II, Item 8, of this Form 10-K. We record expense associated with the awards on a straight-line basis over the vesting period based upon an estimate of projected performance. The actual performance of the Company is evaluated quarterly, and the expense is adjusted according to the new projection if it has changed significantly. As a result, depending on the degree to which we achieve the performance criteria or our projection changes, our expenses related to the performance-based stock awards may become more volatile as we approach the final performance measurement date at the end of the three years. This increase in volatility stems from the requirement to increase or reduce compensation expense as the projection of performance changes. Thus, any one period's financial results could be significantly affected by the cumulative effect of the adjustment. Preparing the projection of performance requires us to exercise significant judgment as to the expected outcome of final performance up to three years in the future. In making the projection, we consider both actual results and probable business plans for the future. At September 30, 2011, we have recorded cumulative compensation expense associated with unvested performance-based stock awards of $7.7,

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which continues to be subject to periodic adjustments as the related awards approach the final performance measurement date.

Retirement and Postretirement Plans - We sponsor retirement and postretirement benefit plans covering a majority of our employees. Expense recognized for the plans is based upon actuarial valuations. Inherent in those valuations are key assumptions including discount rates, expected returns on assets, and projected future salary rates. The discount rates used in the valuation of our defined benefit pension and postretirement benefit plans are evaluated annually based on current market conditions. In setting the discount rate, we use a yield curve approach to discount each expected cash flow of the liability stream at an interest rate applicable to the timing of each cash flow based on corporate bond rates. These present values are then converted into an equivalent weighted-average discount rate. Our overall expected long-term rate of return on pension assets is based on historical and expected future returns, which are inflation adjusted and weighted for the expected return for each component of the investment portfolio. Our rate of assumed compensation increase for pension benefits is also based on our specific historical trends of past wage adjustments in recent years and expectations for the future.

Changes in retirement and postretirement benefit expense and the recognized obligations may occur in the future as a result of a number of factors, including changes to any of these assumptions. Our weighted-average expected rate of return on pension assets was 6.9%, 7.6%, and 7.75% at the end of fiscal 2011, 2010, and 2009. A 25 basis point increase in the expected rate of return on domestic pension assets of $170.2 reduces annual pension expense by $0.4. The weighted-average discount rate decreased to 4.3% and 4.1% at the end of fiscal 2011 for the pension and postretirement healthcare plan expense. A 50 basis point decrease in the discount rate increases the annual domestic pension expense by $1.5. The impact of this decrease to our postretirement healthcare plan expense would be less than $0.1. Impacts from assumption changes could be positive or negative depending on the direction of the change in rates. Based upon the new rates and assumptions, we expect the aggregate expense associated with our defined benefit plans, not including the expense of the Rotex plans, to increase from $9.9 in fiscal 2011 to $12.9 in fiscal 2012. See Note 7 to our consolidated financial statements included in Part II, Item 8, of this Form 10-K, for key assumptions and other information regarding our retirement and postretirement benefit plans.

Uncertain Income Tax Positions - In assessing the need for reserves for uncertain tax positions, we have to make judgments regarding the technical merit of a tax position and, when necessary, an estimate of the settlement amount based upon what we think is the probability of the outcome. At September 30, 2011, we had reserves of $7.3 established for uncertain tax positions based upon our estimates. Our ability to make and update these estimates is limited to the information we have at any given point in time. This information can include how taxing authorities have treated the position in the past, how similar cases have settled, or where we are in discussions or negotiations with taxing authorities on a particular issue, among others. As information available to us evolves, we update our reserves quarterly. These updates can result in volatility to our income tax rate (particularly to a given quarter) if new information or developments result in a significant change in our estimate.

Business Combinations - On October 1, 2009, we adopted a new accounting standard that governs how to account for and disclose business combinations. With a few exceptions, the standard requires that we record the assets and liabilities of the acquired business at estimated fair value at the date of acquisition. Estimating fair value for acquired assets and liabilities as part of a business combination typically requires us to exercise judgment, particularly for those assets and liabilities that may be unique or not easily determined by reference to market data. Often estimates for these types of acquired assets and liabilities will be developed using valuation models that require both historical and forecasted inputs, as well as market participant expectations. Thus the valuation is directly affected by the inputs we judge as best under the given circumstances. When material, we expect to seek assistance of competent valuation professionals when the underlying valuation is more complex or unique.

We anticipate that in most cases, we will exercise significant judgment in estimating the fair value of intangible assets (customer lists or relationships, trademarks, etc., for example), contingent liabilities (loss reserves, for example), and contingent consideration (earn-outs, for example). This list is not exhaustive, but is designed to give you a better understanding of where we think a larger degree of judgment will be required due to the nature of the item and the way it is typically valued.

Depreciable and Amortizable Lives of Long-Lived Assets - The recording of depreciation and amortization expense requires management to exercise significant judgment in estimating the economic useful lives of long-lived assets,

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particularly intangible assets. Management's assumptions regarding the following factors, among others, affect the determination of estimated economic useful life: management's experience with similar assets; changes in technology, utilization, wear and tear; estimated cash flows expected to be generated by the asset; and changes in market demand. As our assessment is performed on a periodic basis, changes in any management assumptions may result in a shorter or longer estimated useful life for an asset than originally anticipated. In such a case, we would depreciate or amortize the remaining net book value of the asset over the new estimated remaining life, thereby increasing or decreasing depreciation or amortization expense per year on a prospective basis. As a result, our estimates at any point in time may not be indicative of future circumstances.

Asset Impairment Determinations - Accounting standards require that goodwill and indefinite-lived intangible assets be tested for impairment at least annually or when circumstances would suggest that impairment may have occurred. Testing of either goodwill or indefinite-lived assets requires that we estimate the fair value of the asset in question.

Estimating fair value for these assets typically requires us to exercise significant judgment, particularly for asset values that are not easily determined by reference to market data. Often estimates for these types of assets are developed using valuation models that require both historical and forecasted inputs, as well as market participant expectations. Thus the valuation is directly affected by the inputs we judge as best under the given circumstances. In analyzing the future cash flows of various assets, critical assumptions we make may include some of the following:

   †        The intended use of assets and the expected cash flows resulting          directly from such use; †        Industry-specific economic conditions; †        Customer preferences and behavior patterns; and †        The impact of applicable regulatory initiatives, if any.    

Our assumptions are sometimes subjective and can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we make are reasonable and appropriate, different assumptions and estimates could result in an impairment charge which could materially impact our reported financial results by decreasing operating income and lowering asset values on our consolidated balance sheet. When material, we expect to seek assistance of competent valuation professionals when the underlying valuation is more complex or unique.

Tangible and other intangible assets that are subject to depreciation and amortization are also evaluated when circumstances suggest that impairment may have occurred. Testing of these assets requires that we estimate future cash flows associated with the asset(s) in question.

Recently Issued and Adopted Accounting Standards

For a summary of recently issued and adopted accounting standards applicable to us, see Note 2 to our consolidated financial statements included in Part II, Item 8, of this Form 10-K.

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