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
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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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Fitch RatingsPrimary AnalystJason PompeiiSenior
Director+1-312-368-3210Fitch Ratings, Inc.70 W. Madison
StreetChicago, IL 60602orSecondary AnalystEric AuseSenior
Director+1-312-606-2302orCommittee ChairpersonPhilip ZahnSenior
Director+1-312-606-2336orMedia RelationsAlyssa Castelli, +1
212-908-0540alyssa.castelli@fitchratings.com