Fitch Affirms Hubbell's Ratings at 'A/F1'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings for Hubbell Incorporated (NYSE: HUB/B), including the Long- and Short-Term Issuer Default Ratings (IDRs) at 'A/F1'. The Rating Outlook is Stable. Fitch's actions affect $1.1 billion of debt, including the undrawn $500 million revolving credit facility (RCF). A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The company's ratings and Outlook reflect Fitch's expectations for solid operating performance over the long term, driven by its strategy of augmenting low organic net sales growth with acquisitions within fragmented end-markets. Hubbell's integration strategy and restructuring should provide consistent profit margin and annual free cash flow (FCF), enabling the company to maintain a balance of organically funded acquisitions and share repurchases.

Fitch expects current strength in both residential and non-residential construction markets, as well as a stable utility market, will offset significant weakness in harsh and hazardous markets and a general slowdown in industrial. Nonetheless, Fitch believes long-term demand drivers remain intact and expects low single-digit organic revenue growth. Construction lighting markets will benefit from retrofit demand. An aging utility infrastructure will drive Power segment demand and rig growth will continue driving industrial demand.

Fitch continues to expect consistent operating EBIT margin in the mid- to upper-teens through the cycle, despite near-term sales mix-related headwinds. The company will continue its model of acquiring smaller competitors that typically come with lower profit margins and using Hubbell's footprint and distribution network to drive productivity. Fitch expects operating EBIT in the 15% to 16% range, versus a Fitch estimated 15.5% for the latest 12 months (LTM) ended June 30, 2015.

Hubbell recently announced a common-stock reclassification that will eliminate the company's existing two-class structure and significantly increase the voting power of the former Class B common stockholders to 88% from 26% currently. The reclassification simplifies the company's equity ownership structure and could intensify shareholder returns, which Fitch believes may be debt financed in order for the company to continue its acquisition-oriented growth strategy.

In connection with the reclassification transaction, Hubbell will pay Class A common stockholders $200 million. Also in connection with the transaction, Hubbell's Board of Directors increased the prevailing share repurchase authorization by $250 million and the company will buy back the full $250 million of incremental authorization soon after the transaction's close, which is anticipated for the fourth quarter of 2015. In addition to $76 million of stock buybacks year-to-date, Fitch estimates total spending on share repurchases of at least $450 million for 2015.

Credit protection measures are expected to be in line with Fitch's rating sensitivities, including total leverage (total debt-to-operating EBITDA) below 1.5x. Fitch estimates total leverage was 1x for the LTM ended June 30, 2015, and could increase to 1.4x if the company funds incremental share repurchases during 2015 with debt. Operating EBITDA-to-interest expense should remain in excess of 10x and was a Fitch-estimated 20x at June 30, 2015.

The ratings are supported by Hubbell's:

--Meaningful end-market, product and customer diversification contributing to operating stability, despite the company's significant exposure to the U.S. (more than 80% of net sales);

--Expectations Hubbell will continue benefitting from significant exposure to long-cycle businesses, particularly for construction markets which constitute 45% of total net sales, and enhance top-line visibility;

--Solid operating model underpinned by acquiring smaller players within fragmented markets and leveraging Hubbell's footprint and distribution network to drive profitability growth.

Ratings concerns center on Hubbell's:

--Small scale for the rating, given expectations only for more than $200 million of annual FCF, although Fitch expects profit margins and FFO-adjusted leverage will remain solid for the rating;

--Increased shareholder returns that Fitch believes could result in less conservative financial policies over the longer term. The company increased and accelerated stock buybacks in connection with the common stock reclassification, which Fitch believes will need to be at least meaningfully debt-financed and could limit headroom under Fitch's negative rating sensitivities;

--Low organic growth prospects, given focus on mature end-markets and exposure to the U.S.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Hubbell include:

--Flat organic growth, 2% from acquisitions and -2% from FX headwinds for 2015, resulting in flat overall net sales growth;

--The resumption of low-single-digit growth in 2016;

--Slight operating EBITDA margin deterioration for 2015 from a lower sales mix, but modest profit margin expansion beyond the near term from the company's restructuring;

--Capex remains at 2% of net sales, given low-single-digit organic growth;

--$100 million to $200 million of annual acquisition spending, contributing 2% of inorganic annual revenue growth from acquisitions; and

--More than $500 million of cash used in 2015 for share repurchases but that stock buybacks will be normalized to roughly $100 million per year beyond 2015.

RATING SENSITIVITIES

Negative rating actions could result from Fitch's expectations for:

--Total leverage sustained above 1.5x, driven by increased borrowings to support share repurchases and slowing profitability growth; or

--Annual FCF below $200 million from lower than anticipated sales growth and profitability.

Fitch does not expect positive rating action in the absence of meaningfully higher revenues and FCF.

LIQUIDITY

Fitch believes Hubbell's liquidity was sufficient at June 30, 2015 and consisted of:

--$444 million of cash and cash equivalents, of which approximately 69% was held outside the U.S.; and

--An undrawn and fully available $500 million RCF, which serves as a backstop to Hubbell's commercial paper (CP) program, expiring in 2018.

Fitch's expectation for more than $200 million of annual FCF also supports liquidity.

Hubbell's pension plans were approximately 86% funded at Dec. 31, 2014, which was down from 92% at Dec. 31, 2013. Hubbell plans to contribute an additional $3 million to its foreign plans in 2015 in addition to $20 million the company contributed in January 2015.

At June 30, 2015, total debt was approximately $600 million and the company had no meaningful short-term debt outstanding or debt maturities until 2018.

FULL LIST OF RATING ACTIONS

Fitch affirms Hubbell's ratings as follows, with a Stable Outlook:

--IDR at 'A';

--Senior unsecured credit facilities at 'A';

--Senior unsecured debt at 'A';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990130

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990130

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eric Ause
Senior Director
+1-312-606-2302
or
Committee Chairperson
Philip Zahn
Senior Director
+1-312-606-2336
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eric Ause
Senior Director
+1-312-606-2302
or
Committee Chairperson
Philip Zahn
Senior Director
+1-312-606-2336
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com