Casket maker evolves into major manufacturer

• Hillenbrand is well known as holding company of Batesville Casket Co.
• Over the past five years, Hillenbrand has strategically acquired three new businesses in deals worth $1.2 billion
• CEO says acquisitions takes company from a mostly North American entity to a global one

BATESVILLE, Ind. -- For decades, Hillenbrand has been known for the beautiful caskets it manufactures and sells across the U.S. and North America.

In a dramatic transformation, the company now is making most of its sales from businesses far removed from death, like:

— Machinery that ensures that the right amount of salt goes on every Fritos corn chip.

— Equipment that measures food coloring so precisely that all M&Ms come out the same shades of green, blue and yellow.

— Instruments that process salt for winter roads and tools that refine sand for fracking to open the nation's underground natural gas fields.

Over the past five years, Hillenbrand has strategically acquired three new businesses in deals worth $1.2 billion that have remade the casket maker into a major manufacturer of processing equipment.

The latest acquisition was the biggest: A $545 million purchase of German equipment-maker Coperion Capital that closed Dec. 3.

That deal means that two-thirds of Hillenbrand's sales now come from producing heavy equipment, compared to one-third previously.

"This is a transformational acquisition," chief executive Kenneth Camp says. "This takes us from a mostly North American company to a global one with customers in almost every country."

Founded in 1906, Hillenbrand thrived for decades as the holding company for the Batesville Casket Co., which became North America's largest provider of caskets and funeral products.

Batesville Casket, based in Batesville, Ind., has for years commanded about 40 percent market share of a $1.5 billion industry.

Despite strong profitability, growth was flat as cremation gained favor worldwide. So Hillenbrand executives started looking around.

As far back as 2008, the company spun off its health care equipment operation into Hill-Rom Holdings Inc.

Hillenbrand officials said at the time they also planned to diversify into a manufacturing segment with a stronger growth potential than funeral products.

New Jersey-based K-Tron was the first big acquisition, a $435.2 million deal in 2010. That purchase took Hillenbrand into the production of industrial feeders serving food, pharmaceutical, chemical and plastics industries. In addition to Frito Lay, K-Tron equipment ensures that the right mix of ingredients goes into products like tortillas, ice cream and laundry detergent.

One year after the K-Tron deal, Hillenbrand acquired Cincinnati-based Rotex for $240.4 million. That purchase took Hillenbrand even further into heavy manufacturing, helping companies like Cargill process salt for winter roads.

The company's state-of-the-art sifting equipment also generates the finest grains of sand — once a waste byproduct — that are now used by energy companies for fracking.

Coperion was the third and pivotal acquisition. The company's mixers ensure that the right cocktail of medicine goes into every pill for pharmaceutical companies.

Coperion equipment mixes and pelletizes pet food, and it makes wood-plastic composites that become durable decking and floors.

Analysts say Hillenbrand's diversification strategy was a shrewd escape from flattening growth in the funeral services segment.

Sales from that segment had dropped 4.8 percent to $606.8 million in the fiscal year that ended Sept. 30.

"These acquisitions help reduce Hillenbrand's dependence on the mature casket business," Hilliard Lyons analyst Stephen O'Neil wrote in a note to investors. "We feel these (new) businesses have attractive features."

O'Neil cautioned that moving into manufacturing equipment would make Hillenbrand vulnerable to bust periods when factories aren't expanding or upgrading machines.

He also said, though, that the new segment has stronger growth potential, offering the prospect of lucrative repeat business as clients eventually need specialized replacement parts.

The acquisitions of K-Tron and Rotex made processing equipment a significant source of Hillenbrand sales: $376.4 million — 38.3 percent of the company's $983.2 million in total revenue for the past fiscal year.

Adding Coperion's $675 million in annual sales will make processing equipment Hillenbrand's dominant business — about 63 percent of all sales.

Staying true to core company values

The transformation of Hillenbrand came only after months of soul-searching and careful consideration.

Hillenbrand executives had split off Hill-Rom because its culture as a health-care equipment maker, with a focus on government regulation, no longer fit with the parent company.

As Hillenbrand embarked on shopping for a new growth vehicle, executives identified the cultural strengths they wanted to apply in new fields. One of them was Hillenbrand's relentless focus on reviewing all of its production processes for potential improvements, known as "lean manufacturing."

Even on a bad day, Camp says, a company dedicated to continuous efficiency improvements will thrive regardless of what the latest strategy may be.

"Culture eats strategy for lunch," Camp says.

Company officials also wanted to move into another type of manufacturing that had similarly high profit margins to casket making but that wasn't dependent on the auto industry or government reimbursements. The company further wanted an industry with growth potential to slightly outpace growth domestic product (GDP).

Camp recalls that Hillenbrand executives were deeply influenced by former CEO Gus Hillenbrand's decision to implement Japanese "lean" productivity methods into the company's factories in the early 1990s.

Camp himself spent a month in Tokyo working in a stereo factory to observe the techniques in action.

After identifying a list of financial and cultural attributes, Hillenbrand officials spent months working with an investment bank and other consultants that pitched more than 400 possible deals.

For months, Camp said executives took home stacks of confidential disclosures and financials each weekend. Every Monday, half a dozen Hillenbrand officials met to hash out the pros and cons of possible prospects.

Hillenbrand executives closely reviewed about 80 deals. Two dozen companies warranted on-site visits. Ten or 12 companies made it to serious negotiations.

Eventually, K-Tron, Rotex and Coperion rose to the top.

Said Camp: "We kissed a thousand frogs before we found a princess."

ABOUT HILLENBRAND INC.

Founded: 1906

Business: Manufacturing funeral products and heavy factory equipment

Headquarters: Batesville, Ind.

Reach: Operations in 40 countries including China, Mexico and the United Kingdom

Chief executive: Kenneth Camp

Employees: 6,000 worldwide; 1,200 locally

Fiscal year 2012: $104.8 million profit on $983.2 million in revenue

Fiscal year 2013 projection: $1.6 billion in revenue