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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