News Column

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

August 25, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings for Hubbell Incorporated (NYSE:HUB/B) including its Issuer Default Ratings (IDRs) at 'A/F1'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

The ratings and Outlook reflect Fitch's expectations for solid operating performance over the longer term, despite near-term organic growth headwinds. Recent acquisitions will augment top line growth and ongoing integration will drive profit margin expansion. Annual free cash flow should exceed $200 million, enabling Hubbell to organically fund smaller acquisitions.

Fitch expects acquisitions to drive low- to mid-single digit revenue growth for 2014. Organic growth will be tepid with strong demand from higher building permits and retrofits in residential lighting markets offset by minimal growth in non-residential markets. Within the cyclical but more profitable industrial businesses, high voltage will be down but offset by positive demand in harsh and hazardous.

Fitch believes long-term demand drivers remain intact and expects low single digit organic revenue growth. Non-residential and residential lighting markets will benefit from retrofit demand. The Power segment will benefit from an aging utility infrastructure, although growth will be metered by funding constraints. Rig growth will continue driving industrial demand.

Fitch expects operating EBIT margin in the mid to upper teens through the cycle. Solid profitability and lower working capital requirements during a downturn will drive more than $200 million of annual FCF. Over the near-term, Fitch expects the full integration of recent acquisitions to drive operating profit margin toward 17% from a Fitch estimated 16.6% for the latest 12 months (LTM) ended June 30, 2014.

Fitch expects Hubbell to use FCF mainly for acquisitions, spending for which totaled $150 million for 6 transactions in 2014. Transactions spanned Hubbell's key end markets. Fitch expects Hubbell will use remaining FCF to buy back shares under the company's prevailing $200 million authorization, of which $70.1 million remained outstanding as of June 30, 2014.

Fitch expects credit protection measures will remain solid for the rating. Fitch believes Hubbell's total debt to operating EBITDA will remain below 1.5x. Leverage has steadily improved since Dec. 31, 2010 and reached a Fitch estimated 1.0x at June 30, 2014. Operating EBITDA to interest expense should remain in excess of 10x and was a Fitch estimated 20x at June 30, 2014.

KEY RATING DRIVERS

The ratings are supported by: i) consistent annual free cash flow (FCF) through the business cycle; ii) solid credit protection measures, driven by steady profitability and conservative financial policies; and iii) diversified product and customer portfolios.

Fitch's concerns include: i) significant exposure to residential and non-residential construction markets, which remain at pressured levels despite more recent upturn in residential; ii) vulnerability of gross profit margin to commodity price fluctuations, requiring an ongoing ability to increases prices; and iii) large customer base in long-cycle businesses that typically recover from recession more slowly.

RATINGS SENSITIVITIES

Positive rating action is unlikely in the absence of a commitment to maintaining more conservative financial policies, given the scale of Hubbell's FCF and financial flexibility necessary to support acquisitions.

Negative rating actions could result from: i) sustained periods of negative organic revenue growth, signaling less competitive market positions or ii) profitability pressures, either as a result of poor acquisition integration or exacerbated pricing pressure, resulting in expectations for annual pre-dividend FCF below $300 million.

Fitch believes Hubbell's liquidity was sufficient at June 30, 2014 and consisted of:

--$597 million of cash and cash equivalents, of which approximately 54% was held outside the U.S.

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

Fitch expectation for more than $200 million of annual FCF also supports liquidity. Fitch anticipates minimal voluntary pension contributions, given Hubbell's pension plans were approximately 89% funded at Dec. 31, 2013.

At June 30, 2014, total debt was approximately $600 million and the company had no meaningful short-term debt outstanding or debt maturities until 2018.

Fitch affirms Hubbell's ratings as follows:

--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 at www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 14, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=856995

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



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

Michael Zbinovec

Senior Director

+1-312-368-3164

or

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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