Hubbell Incorporated — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 14, 2020. Hubbell designs, manufactures and sells electrical and electronic products. Its reporting segments are Electrical and Power. The statements were audited by PwC, which issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $4,591.0 million | $4,481.7 million | +2% |
| Gross profit / margin | $1,352.7 million / 29.5% | $1,300.4 million / 29.0% | Margin +0.5 pts |
| Operating income / margin | $596.6 million / 13.0% | $556.9 million / 12.4% | Income +7% |
| Net income attributable to Hubbell | $400.9 million | $360.2 million | +11% |
| Diluted EPS | $7.31 | $6.54 | +12% |
| Operating cash flow | $591.6 million | $517.1 million | +$74.5 million |
| Free cash flow (non-GAAP) | $497.7 million | $420.9 million | +$76.8 million |
Organic sales growth was approximately 2%, including favorable price realization; acquisitions contributed about 1 percentage point, offset by approximately 1 point from the Haefely disposal and foreign exchange. Management cited pricing and productivity gains exceeding cost inflation as drivers of margin improvement. Adjusted operating income was $668.7 million and adjusted operating margin 14.6%, versus $642.3 million and 14.3% in 2018. Adjusted net income was $445.7 million and adjusted diluted EPS $8.12, increases of 4% and 5%, respectively. These are non-GAAP measures; the company’s definition excludes specified acquisition amortization and other items.
Fourth quarter: Net sales were $1,103.3 million, compared with $1,144.1 million in Q4 2018. Net income attributable to Hubbell was $101.9 million versus $88.0 million; diluted EPS was $1.85 versus $1.60.
Segments
- Electrical: Sales of $2,625.7 million, down from $2,660.6 million. Operating income was $320.1 million versus $320.8 million; operating margin rose to 12.2% from 12.1%. Non-residential and residential markets had modest growth, gas distribution remained solid, and industrial and oil-related markets were soft. Lighting sales declined about 4%.
- Power: Sales of $1,965.3 million, up 8%, including 5.5% organic growth, about 3% from acquisitions and a foreign-exchange headwind of about 0.5%. Operating income increased to $276.5 million from $236.1 million; operating margin increased to 14.1% from 13.0%. T&D demand was the main organic growth driver.
Cash, debt and liquidity
- Cash and cash equivalents were $182.0 million at year-end; cash and investments were $251.9 million. Working capital was $729.3 million, down from $804.4 million.
- Total debt was $1,571.4 million, down from $1,793.2 million. Debt-to-total-capital was 45% versus 50%; net debt was $1,319.5 million versus $1,538.7 million.
- Hubbell repaid $225.0 million of long-term debt in 2019, including a discretionary $200 million Term Loan payment. Its $750 million revolving credit facility was undrawn at year-end; the facility expires in February 2023. The company reported compliance with debt covenants.
- Capital expenditures were $93.9 million. Dividends paid were $186.6 million, and share repurchases were $35.0 million. The quarterly dividend rate was raised from $0.84 to $0.91 per share in October 2019.
Material changes, unusual items and outlook
- The 2018 comparison includes the acquisition of Aclara, completed in February 2018 for approximately $1.1 billion. Its contribution and acquisition financing affect year-over-year comparisons; 2019 sales also included an additional month of Aclara results.
- In 2019 Hubbell sold Haefely and recorded a $21.7 million pretax gain. It also recorded an $8.5 million net charge for settlement of a multi-employer pension withdrawal obligation and a $5.0 million investment loss. These items affect the relationship between GAAP and adjusted results.
- Restructuring and related costs were $37.0 million in 2019, including $32.0 million of GAAP restructuring costs. The company expected $16.3 million of additional costs for initiated actions and said restructuring and related investment would continue in 2020, including further footprint consolidation and cost reduction initiatives.
- Fourth-quarter acquisitions included Cantega and CPI. Their combined 2019 earnings and sales were not material to consolidated results.
- The filing provides no specific 2020 revenue or earnings guidance. Management emphasized cost control, productivity, pricing, acquisitions and investment in growth areas. Firm backlog was approximately $1,037.0 million at year-end, down from $1,250.8 million a year earlier; $395 million related to multi-year contracts, primarily Aclara. Most Electrical backlog was expected to ship in 2020.
Risks and contingencies
Key disclosed risks include economic weakness and end-market volatility; competitive pricing and inability to recover raw-material, component or tariff costs; supply-chain disruption and foreign sourcing; execution of restructuring, ERP initiatives and acquisitions; Aclara integration and expected benefits; cybersecurity, IT system and data-privacy failures; foreign exchange, interest-rate and LIBOR transition exposure; tax uncertainty; Brexit and trade-policy changes; pension funding and goodwill impairment; and legal, product-liability and environmental matters. The top ten customers represented about 41% of sales, although no single customer exceeded 10%. Hubbell reported $8.0 million in environmental liabilities and stated it did not expect its legal and environmental matters to have a material adverse effect, based on current information and reserves. Goodwill and other intangible assets totaled approximately $2.6 billion, making impairment assumptions material to monitor.
Important facts for investors to verify
- Whether Power-segment growth and utility T&D demand continue, and whether Electrical weakness in lighting, industrial and oil-related markets persists.
- Whether pricing and productivity continue to offset tariffs, material inflation and restructuring costs, and how GAAP margins compare with adjusted margins.
- Debt reduction, interest costs, cash conversion and liquidity, including the remaining Term Loan payments and refinancing or benchmark-rate exposure.
- Whether Aclara integration, long-term contract execution and acquisition synergies meet expectations; monitor the lower year-end backlog.
- Assumptions supporting the approximately $2.6 billion of goodwill and intangible assets, as well as pension, tax, legal and environmental estimates.
- Progress and actual costs of 2020 restructuring actions; the filing does not provide numerical full-year 2020 sales or EPS guidance.