Hubbell Incorporated — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. Hubbell designs, manufactures and sells electrical and electronic products through its Electrical and Power segments. The February 2, 2018 acquisition of Aclara added smart-infrastructure and advanced-metering businesses to Power.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,179.7 million | $950.5 million | $3,337.6 million | $2,751.1 million |
| Gross margin | 29.6% | 32.4% | 29.4% | 31.5% |
| Operating income | $163.8 million | $150.1 million | $420.3 million | $392.3 million |
| Operating margin | 13.9% | 15.8% | 12.6% | 14.3% |
| Net income attributable to Hubbell | $113.6 million | $80.8 million | $272.2 million | $222.7 million |
| Diluted EPS | $2.06 | $1.47 | $4.93 | $4.02 |
| Operating cash flow | Not separately provided | Not separately provided | $339.2 million | $228.6 million |
Q3 adjusted diluted EPS was $2.22 versus $1.58; nine-month adjusted diluted EPS was $5.58 versus $4.14. Adjusted results exclude Aclara acquisition-related and transaction costs and, for 2017 comparisons, the debt-extinguishment loss. These are non-GAAP measures.
- Growth drivers and margins: Q3 sales rose 24.1%; acquisitions contributed 19.4 percentage points, while organic volume including price contributed about 5 points. Nine-month sales rose 21.3%, with acquisitions contributing about 16.9 points. Hubbell reported gross-margin pressure as material-cost inflation and tariffs outpaced price realization.
- Segments: Q3 Electrical sales were $687.4 million, up 5%, with a 13.7% operating margin versus 13.5%. Power sales were $492.3 million, up 66%, largely due to Aclara; reported margin fell to 14.2% from 20.8%. Nine-month Electrical margin improved to 12.4% from 11.3%; Power reported margin declined to 12.9% from 20.8%.
- Cash and liquidity: Cash and cash equivalents were $228.8 million at September 30, 2018, down from $375.0 million at year-end 2017. Nine-month investing cash use was $1,185.5 million, primarily reflecting the $1,118.0 million acquisition outlay; financing provided $704.7 million. Capital expenditures were $70.7 million.
- Debt: Total debt was $1,922.8 million and cash and investments were $301.2 million; net debt was $1,621.6 million. Debt-to-capital was 52.3%, versus 39.2% at year-end 2017. The $750 million revolving facility was undrawn, and Hubbell reported compliance with the 65% debt-to-capital covenant. It made a $100 million discretionary term-loan repayment in Q3.
- Other: The quarterly dividend was $0.77 per share, compared with $0.70 a year earlier. The nine-month effective tax rate was 21.4%, versus 31.3%; Q3 rate was 19.5%, including an approximately $4 million provisional tax benefit related to the 2017 Tax Cuts and Jobs Act.
Outlook, commentary and risks
- Management expected aggregate end-market growth and stated that new product development should allow sales to modestly outperform end-market expectations; acquisitions, including Aclara, were expected to contribute to 2018 sales growth. No numerical full-year revenue or EPS guidance is provided in the supplied filing text.
- Management expected Q4 price realization to accelerate and the combined impact of pricing and material-cost inflation to be neutral, including Lighting and Section 301 tariffs. Results remained exposed to tariffs, raw-material and freight costs, price competition, end-market demand, acquisition integration and productivity execution.
- Hubbell recorded $45.5 million of Aclara acquisition-related and transaction costs during the first nine months. Purchase-price allocation was preliminary; goodwill and other acquired-asset valuations could change. Aclara contributed approximately $429.7 million in sales and $12.8 million in operating income from acquisition through September 30.
- On October 4, 2018, multi-employer pension plan trustees demanded an additional $23.3 million withdrawal payment. Hubbell disputes the demand and initiated arbitration. The filing states the outcome is uncertain.
- Management said TCJA provisional tax estimates could require further adjustments, potentially material. Hubbell had not estimated tax on approximately $250 million of undistributed earnings it intended to reinvest outside the United States.
- Restructuring actions were expected to continue at a lower, more consistent cost and savings run-rate. Expected remaining restructuring costs at September 30 were $7.9 million. Management stated disclosure controls were effective; Aclara-related internal-control changes had not yet been fully evaluated.
Important facts for investors to verify
- How much reported sales growth and earnings improvement reflects Aclara versus organic growth, and whether integration benefits emerge.
- Whether pricing and productivity can offset continued material-cost inflation and tariffs, particularly given the decline in consolidated gross margin.
- Debt reduction, interest costs, cash conversion and covenant headroom following the acquisition financing.
- Resolution and potential financial impact of the $23.3 million pension-plan demand and arbitration.
- Final Aclara purchase accounting and any material changes to tax estimates under the TCJA.