Fitch Affirms Hillenbrand, Inc. at 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed its Issuer Default Rating (IDR) for Hillenbrand, Inc. (HI) at 'BBB-' following its announcement that it has agreed to acquire ABEL Pumps LP (ABEL) from Roper Technologies for EUR95 million. Fitch has also affirmed HI's senior unsecured credit facility (revolver and term loan) and senior unsecured notes at 'BBB-'. The Rating Outlook is Stable. $530 million of debt was outstanding as of June 30, 2015. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The acquisition of ABEL provides an entry for HI into the flow control industry. The acquisition is of a manageable size and is consistent with HI's strategy to grow its Process Equipment Group (PEG) through the acquisition of companies that manufacture process and material handling equipment and systems. HI will pay EUR95 million for Abel, which is 11.9x its LTM EBITDA of EUR8 million.

The acquisition is expected to be financed with a draw on HI's revolver, which will cause HI's gross debt/EBITDA to increase to a pro forma level of around 2.1x from 1.8x at June 30, 2015. Fitch expects leverage to move below 2x in fiscal 2016 (ended September) as the company uses FCF to pay down the revolver, and that mid-cycle leverage will remain around 2.0x. Leverage could move higher in connection with acquisitions, but Fitch anticipates an increase in leverage above the expected mid-cycle range would be reduced relatively quickly as HI has shown the willingness and ability to pay down debt following leveraging transactions.

The ratings incorporate HI's financial flexibility, consistently positive free cash flow (FCF), conservative financial strategy, and broad customer and geographic base. Significant aftermarket revenue in the Process Equipment Group (PEG) generates attractive margins and mitigates the segment's cyclical end-markets and exposure to long-term projects. The Batesville segment provides additional stability, generating consistently strong EBITDA margins of over 25% and a substantial part of Hillenbrand's free cash flow (FCF).

Rating concerns include the potential for increased leverage and execution risk related to acquisitions, cyclical end-markets, operating risks associated with diversifying into adjacent product markets and geographies, and declining industry trends at Batesville. HI's acquisition strategy contributes to opportunities for operating synergies, but PEG's short operating history creates some uncertainty about its performance through economic cycles.

PEG, which accounted for 65% of sales and half of EBITDA in fiscal 2014, has grown through the acquisition of companies that manufacture process and material handling equipment and systems. Recent growth within PEG has brought both diversification and incremental risk from leveraging acquisitions and cyclical end markets. Approximately one-third of PEG's revenues come from recurring parts and services business and is expected to remain steady.

PEG will continue to be the source of HI's growth, both organically and through acquisitions. Growth of the PEG segment has resulted in greater geographical diversification and contributed to fairly balanced revenue among EMEA, Asia, and the Americas. Plastics machinery has become the largest end market and generates over half of PEG revenues.

The Batesville segment, which generated 35% of revenues and half of EBITDA in fiscal 2014, is a leader in the North American death care industry, producing burial caskets and other products and services for funeral professionals. Batesville's business offers a dependable profit stream and healthy cash flow that supports acquisitions within the PEG segment. The Batesville segment is expected to produce steady results through the rating horizon while it reduces fixed costs in a declining industry. Cost cutting is typically focused on distribution and timely capacity adjustments. Margins are expected to remain relatively stable in the mid-20s for the intermediate term.

Fitch expects steady EBITDA margins in fiscal 2015 and modest improvement in fiscal 2016 largely due to consolidation of manufacturing facilities and continued cost cutting at Batesville. Fitch expects FCF will track at around 4-7% of revenues going forward with capex estimated at 1.5-2.5% of revenues and flat to slightly increasing dividends. FCF will be used for acquisitions, debt reduction and a modest level of share repurchases.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for HI include:

--The acquisition of ABEL is completed as of the last day of fiscal 2015.

--PEG's revenues decline approximately 4% in fiscal 2015 due to currency pressures but grow at a low single digit pace in fiscal 2016. Batesville grows an estimated 1.5% in fiscal 2015 but declines 1% annually thereafter representing the continued trend of increased cremations, lower burials, and the increased life expectancy.

--EBITDA margins are relatively steady in fiscal 2015 as improvement at PEG offsets pressure at Batesville and improve modestly in fiscal 2016.

--Capital intensity remains in line at 1.5-2.5% of revenues.

Dividends grow slowly, and share repurchases are kept at modest levels, used only to offset stock option dilution.

--Debt/EBITDA increases to 2.4x at FYE 2015 (2.1x on a pro forma basis) before improving to around 1.8x at FYE 2016.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Inability to maintain mid-cycle leverage (gross debt/EBITDA) near 2.0x; post-acquisition leverage may increase to 2.5-2.75 with short term debt repayment focus getting leverage to more mid-cycle levels;

--Inability to maintain FCF margin at or above 4-6%;

--A sustained decline in the EBITDA margin to below 15%;

--Deterioration in Batesville's revenue and cash flow.

Positive: An upgrade of the issuer's ratings is unlikely within the near term given the risks associated with the acquisition growth strategy and cyclicality at PEG.

LIQUIDITY

Liquidity was adequate at June 30, 2015 and included $46 million of cash and cash equivalents (of which $36 million was overseas) plus $444 million in availability under Hillenbrand's revolving credit facility that matures in December 2019. Revolver availability will fluctuate with acquisition activity, but should be adequate, together with operating cash flow, to sustain the company's operations through cycles. Maturities over the next few years are minimal until the company's term loan and revolver mature in 2019.

FULL LIST OF RATING ACTIONS

Fitch affirms its ratings on Hillenbrand, Inc. as follows:

--IDR at 'BBB-';

--Senior unsecured revolving credit facility at 'BBB-';

--Senior unsecured term loan at 'BBB-';

--Senior unsecured notes at 'BBB-'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Sept. 3, 2015

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990387

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Contacts

Fitch Ratings
Primary Analyst
Philip Zahn
Senior Director
+1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eric Ause
Senior Director
+1-312-606-2302
or
Committee Chairperson
Steve Brown
Senior Director
+1-312-368-3139
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Philip Zahn
Senior Director
+1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eric Ause
Senior Director
+1-312-606-2302
or
Committee Chairperson
Steve Brown
Senior Director
+1-312-368-3139
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com