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Rating Action: Moody's affirms Hillenbrand's Ba1 CFR, changes outlook to stableGlobal Credit Research - 23 Feb 2021New York, February 23, 2021 -- Moody's Investors Service ("Moody's") affirmed the ratings of Hillenbrand, Inc., including the corporate family rating ("CFR) of Ba1, the probability of default rating of Ba1-PD and the senior unsecured debt rating of Ba1. The SGL-2 speculative grade liquidity rating remains unchanged. Moody's also changed the outlook to stable from negative.RATINGS RATIONALEHillenbrand's ratings benefit from the predictable Batesville segment (about 20% of revenue), which --although experiencing above-average demand from the effects of COVID-19 -- is on a secular decline but has high margins and low capital spending needs that result in solid free cash flow. The ratings also reflect the increased scale, geographic and end-market diversification provided by the industrial businesses, including the addition of Milacron (now the Molding Technology Solutions segment, "MTS"), a leading manufacturer of plastic technology and processing equipment.At the same time, Hillenbrand faces the challenge of managing through the shrinking Batesville business over time, given its importance to Hillenbrand's cash flow and diversification. The ongoing transformation to higher growth, industrial businesses makes the company more susceptible to economic cycles. The Advanced Process Solutions ("APS") segment likely will remain pressured by delayed customer spending particularly for large capital equipment into calendar 2022. MTS, which has doubled Hillenbrand's exposure to the global plastics industry (over 60% of revenue), also experienced weakness over the past year amid end market pressures and the negative effects of COVID-19. However, with improving order rates for its higher margin hot runner systems and signs of stabilizing demand for injection molding equipment, this should support a modest upward inflection in the company's top-line over the next year.Despite recent cost reduction efforts, Moody's anticipates Hillenbrand will face rising margin pressures from commodity inflation (including steel), labor-related costs and investments in technology and research and development. As well, the increased backlog of injection molding products will result in a lower margin product mix.The stable outlook recognizes Hillenbrand's accelerated debt reduction, aided by the cash flow strength of Batesville and sale proceeds from certain business divestitures. This has helped to offset demand and earnings pressures in the industrial segments, lowering adjusted debt/EBITDA to the low 3x range, which Moody's expects to remain moderate. The outlook also reflects Moody's expectation of good liquidity and for stabilizing to modest growth in the industrial segments over the next year as economic conditions recover, although likely to remain tenuous amid the lingering uncertainty of the coronavirus.The SGL-2 liquidity rating indicates good liquidity driven by Moody's expectation for Hillenbrand to maintain meaningful revolver availability and generate solid free cash flow over the next year, with free cash flow to debt (including Moody's standard adjustments) of over 10%. Cash balances of around $265 million (at December 31, 2020) will moderate as business activity increases and working capital investments ramp up to meet order rates. Moody's notes that the variable timing of APS segment projects and demand can lead to large swings in working capital. The $900 million revolving credit facility expiring in August 2024 had roughly $829 million available as of December 31, 2020, net of borrowings and letters of credit. Except for the aforementioned $500 million term loan due 2024, there are no near-term debt maturities.In terms of environmental risks, Hillenbrand faces the negative perception of plastic as toxic and an environmental pollutant and increasing regulation on the plastics industry, which could negatively impact the company's results. However, the company's equipment is less focused on the production of single use plastics and Hillenbrand is increasing its focus on innovation in biodegradable plastics and recycling.From a governance perspective, Moody's expects Hillenbrand's financial policy to remain focused on balance sheet prudence, including maintaining financial flexibility. The company recently announced it will resume share repurchase activity and focus on growth through M&A (besides organic growth) after a period of curtailed repurchases and acquisitions, following the Milacron acquisition in late 2019.Moody's took the following rating actions on Hillenbrand, Inc.:Affirmations:- Corporate Family Rating, affirmed at Ba1- Probability of Default Rating affirmed at Ba1-PD- Senior Unsecured Notes, affirmed at Ba1 (LGD4)- Senior Unsecured Shelf, affirmed at (P)Ba1Outlook Actions:- Outlook, changed to Stable from NegativeFACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be downgraded if margins weaken, driven by expectations for demand to worsen at Milacron and/or failure to improve performance of the industrial segments. A sharp decline in the Batesville business and/or material deterioration in free cash flow would also pressure ratings. Expectations for debt-to-EBITDA to exceed 4x with free cash flow-to-debt trending towards the mid-single digit range could also result in a downgrade.Prospects for upward ratings activity are limited over the near-to-intermediate term. Over time, the ratings could be upgraded with sustainable organic growth of the MTS business and outsized margin expansion that leads to expected metrics and cash flow consistent with higher rated peers. An increase in aftermarket revenues that sustainably lessens the company's vulnerability to capital equipment spending cycles would also be viewed favorably.Hillenbrand, Inc. is a diversified industrial company consisting of three segments: Advanced Process Solutions (previously the Process Equipment Group), Molding Technology Solutions (previously Milacron), and Batesville. APS manufactures process and material handling equipment and systems used in a wide variety of industries. MTS manufacturers and customizes equipment and supplies used in plastic technology and processing. Batesville is a market leader in the North American death care industry. Pro forma for divestitures of Milacron's fluid business and certain flow control businesses of Hillenbrand, revenues approximated $2.5 billion for the last twelve months ended December 31, 2020.The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Yvonne Njogu Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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