May 11 - Fitch Ratings has affirmed the ratings for Hubbell Incorporated (NYSE: HUB/B) including its Issuer Default Ratings (IDR) at 'A/F1'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
The ratings are supported by Hubbell's solid, strong operating performance including healthy margins and positive free cash flow (FCF), established position in niche markets, good product diversification, and steady operating margins through economic cycles. The company maintains sufficient financial flexibility to deploy excess cash for mid-sized acquisitions and / or share repurchases. Leverage (debt to EBITDA) has been relatively stable at solid levels for the rating and was 1.14x at March 31, 2012, down from 1.32x at the end of 2010. Fitch expects Hubbell to maintain leverage within its recent range.
The company generated approximately $190 million FCF in 2011, up from $133 million in 2010. The increase was driven by higher sales and strong operating margins. Fitch expects the company to generate approximately $170 to $200 million FCF annually in the near future, reflecting effective cost controls and a recovery in Hubbell's primary electrical and power markets. Discretionary cash deployment is largely directed towards acquisitions, although the company also makes share repurchases to offset dilution. Fitch's ratings incorporate expectations for continued moderately-sized acquisitions, growth in the dividend payout and a near term increase in capital expenditures to support growth in emerging markets.
The company contributed $23 million to domestic and foreign qualified plans in 2011. Hubbell is not required to make mandatory contributions to its US qualified pension plans in 2012; however, it plans to contribute approximately $2 million to foreign plans. Hubbell's global pension plans were underfunded by $185 million at Dec. 31, 2011 compared to $100 million at Dec. 31, 2010. Much of the deterioration in the funded status of the plans was attributable to lower discount rates
Rating concerns include a slow recovery in the company's construction markets, commodity price fluctuations which may affect Hubbell's profitability and acquisitions which involve integration risk and the potential for an increase in leverage. These concerns are mitigated by the company's disciplined acquisition strategy and solid liquidity. The ratings or outlook could be negatively affected if Hubbell undertakes a large debt-funded acquisition which results in a significant weakening of its credit profile or if operating results deteriorate due to an economic downturn. However, Hubbell adjusted effectively to the previous recession and can be expected to weather future business cycles. The potential for an upward revision to the ratings is limited in the near term due to uncertainties surrounding the global economy and the company's small scale relative to some of its peers.
Fitch expects Hubbell's revenues to increase in the mid-single digit range in 2012 due to improving demand in the industrial and utility end markets. Margin should benefit from improving pricing and ongoing cost controls. During the first quarter of 2012, Hubbell's revenues grew approximately 10%, reflecting growth in most of its end markets. Economic weakness and challenging financial markets in Europe are not expected to have a material impact.
Liquidity at March 31, 2012 was comprised of $562 million of cash and a $500 million bank credit facility that matures in 2016. The company has a conservative debt structure, with no significant maturities scheduled before 2018.
Fitch affirms Hubbell's ratings as follows:
--Issuer Default Rating (IDR) at 'A';
--Senior unsecured credit facilities at 'A';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
The ratings affect approximately $600 million of debt outstanding at March 31, 2012.