August 17, 2016 - 10:06 AM EDT
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Fitch Affirms Hubbell at 'A'; Outlook Revised to Negative

Fitch Ratings has affirmed the ratings of Hubbell Incorporated, including the Long- and Short-Term Issuer Default Ratings (IDRs) at 'A/F1'. The Rating Outlook is revised to Negative from Stable. Fitch's actions affect $1 billion of debt outstanding as of June 30, 2016. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The ratings consider Hubbell's solid operating performance over the long term balanced against recently softer results and more aggressive financial policies. The Negative Outlook reflects a shift in Hubbell's credit metrics to levels that are at the weak end of Fitch's expectations for the 'A' rating. Fitch believes that Hubbell's credit metrics could be sustained at these levels for an extended period or weaken further should sales or margins come under additional pressure or acquisition spending exceed FCF.

A reclassification of Hubbell's shares completed in December 2015 triggered a $200 million payment to the 'A' shareholders. In addition, the company completed a $250 million share repurchase authorization in the first half of 2016. Higher debt levels to finance this spending pushed debt/EBITDA up to 1.7x at June 30, 2016 from 1.0x at the end of 2015. Fitch believes leverage will gradually improve as EBITDA recovers but that debt/EBITDA will remain in the mid-1x range over the medium term, and FCF/adjusted debt will track in the mid-teens compared with a level in excess of 20% prior to 2015. These levels leave limited cushion in the rating for additional leveraging actions or further operating weakness.

Hubbell's sales growth slowed to 0.9% in 2015 from a recent run rate of 5-6% due primarily to weakness in oil and gas and industrial markets offsetting growth in commercial and residential construction markets. Fitch expects moderate sales growth of around 3% in 2016, driven primarily by recent acquisitions.

Hubbell's exposure to a variety of end-markets helps to moderate cyclical swings. Current strength in both residential and non-residential construction as well as a stable utility market will continue to offset significant weakness in upstream oil and gas markets and a general slowdown in demand from industrial customers. Longer-term, Fitch expects low single-digit organic revenue growth, augmented by acquisitions. Growth drivers include construction lighting markets that will benefit from retrofit demand, an aging utility infrastructure that will drive power segment demand, and an expected stabilization of oil and gas production in 2017, potentially returning to a growth mode in 2018.

Hubbell's EBIT margin before restructuring charges narrowed by 40 basis points to 15.1% in 2015 as weakness in the electrical segment offset margin expansion in the power segment. A shift in sales away from harsh and hazardous products sold to oil and gas producers toward lower-margin products sold to the construction sector, as well as shift from projects to maintenance activity, is also constraining margins. Fitch believes that EBIT margins will narrow further in 2016, but remain in the 15% to 16% range longer-term.

Fitch expects free cash flow (FCF) after dividends of $150 - $200 million annually, or around 5% of sales, and that Hubbell will use this FCF for acquisitions and share repurchases. Acquisitions have typically been smaller in size and have aggregated around $100 - $200 million annually in recent years. Share repurchases are expected to moderate to a level that will offset option dilution. Pension contributions are expected to continue to be manageable.

The ratings are supported by Hubbell's:

--Meaningful end-market, product and customer diversification contributing to operating stability;

--Significant exposure to healthy U.S. construction market, which constitute around 45% of total net sales;

--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:

--Potential for continued aggressive shareholder returns and/or acquisition activity, causing Hubbell's credit metrics to be sustained at current levels or weaken further;

--Small scale for the rating on a revenue and cash flow basis;

--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:

--Sales growth of around 3% in 2016, driven primarily by acquisitions, improving to 4% in 2017 and 5% in 2018.

--Around 80bps of EBIT margin deterioration in 2016 due to continue pressure on industrial and oil and gas markets, offset in part by savings from the company's restructuring. Margins recover gradually thereafter.

--$150-200 million of FCF after dividends is used for acquisitions and share repurchases.

--Debt levels are flat over the forecast horizon. Debt/EBITDA increases to around 1.6x at end-2016 from 1.0x at end-2015, and improves slowly thereafter.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to a downgrade include:

--Total debt/EBITDA and FFO adjusted leverage sustained above 1.5x and 2.5x, respectively, due to increased borrowings to support share repurchases/acquisitions or slowing profitability growth.

--A free cash flow margin consistently below 5%.

Factors that could, individually or collectively, lead to a Stable Outlook include:

--Consistent application of financial policies that lead to a reduction in total debt/EBITDA and FFO adjusted leverage to below 1.5x and 2.5x, respectively.

--A free cash flow margin that is sustained above 5%.

LIQUIDITY

Hubbell's liquidity as of June 30, 2016 consisted of healthy cash balances of $339 million, 94% of which is held in foreign accounts. The company also has a $750 million commercial paper program backed by a $750 million revolving credit facility expiring in Dec. 2020. Liquidity is further supported by FCF after dividends which Fitch expects will track at $150 - $200 million annually, or around 5% of sales. While most of the company's cash is overseas, the vast majority of its operations and cash flow generation are in the U.S.

FULL LIST OF RATING ACTIONS

Fitch affirms Hubbell's ratings as follows:

--Long-Term IDR at 'A';

--Senior unsecured credit facilities at 'A';

--Senior unsecured debt at 'A';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

The Rating Outlook has been revised to Negative from Stable.

Date of Relevant Rating Committee: Aug. 16, 2016

Summary of Financial Statement Adjustments - EBITDA is adjusted to exclude restructuring charges.

Additional information is available at '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=1010467

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010467

Endorsement Policy

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

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Fitch Ratings
Primary Analyst
Philip Zahn
Senior Director
+1-312-606-2336
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eric Ause
Senior Director
+1-312-606-2302
or
Committee Chairperson
Mark Sadeghian
Managing Director
+1-312-368-2090
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]


Source: Business Wire (August 17, 2016 - 10:06 AM EDT)

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