Hubbell Incorporated — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are to Q1 2015 unless otherwise stated. Hubbell designs, manufactures and sells electrical and electronic products through its Electrical and Power segments. Amounts are in millions of dollars, except per-share data.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Net sales | $834.8 | $809.7 | Up 3%; acquisitions added 3 percentage points and organic volume 2 points, offset by 2 points of currency impact |
| Gross profit / margin | $259.9 / 31.1% | $251.8 / 31.1% | Margin unchanged; adjusted margin was 31.4% versus 31.6% |
| Operating income / margin | $101.9 / 12.2% | $105.0 / 13.0% | Income down 3%; adjusted operating income was $108.6 versus $109.4 |
| Net income attributable to Hubbell | $60.9 | $62.4 | Down 2% |
| Diluted EPS | $1.08 | $1.07 | Up 1%; adjusted diluted EPS was $1.16 versus $1.12 |
| Cash dividends per share | $0.63 | $0.56 | Increased |
| Operating cash flow | $58.4 | $25.8 | Higher principally because Q1 2015 included a $20.0 pension contribution |
| Capital expenditures | $15.3 | $16.3 | Free cash flow, defined as operating cash flow less capital expenditures, was $43.1 |
Segments
- Electrical: Sales of $582.7, up 2%; operating income of $55.4 versus $63.4 and margin of 9.5% versus 11.1%. Adjusted margin declined to 10.6% from 11.7%, reflecting mix, currency, price/cost/productivity effects and investment spending.
- Power: Sales of $252.1, up 5%; operating income of $46.5 versus $41.6 and margin of 18.4% versus 17.3%. Adjusted margin increased to 18.6% from 17.8%, primarily on higher volume and favorable price/cost/productivity.
Balance sheet and liquidity
- At March 31, 2016, cash and cash equivalents were $320.8; current assets were $1,425.4 and current liabilities $565.5.
- Long-term debt was $989.5, up from $595.9 at December 31, 2015; short-term debt was zero, compared with $48.2 at year-end. Total debt to total capital was 39% versus 27%; net debt was $602.4 versus $238.9.
- In March, Hubbell issued $400 million of 3.35% notes due 2026, receiving $393.4 net. Its $750 million revolving facility was undrawn, and the company reported compliance with its financial covenant and debt indenture covenants.
- Cash declined by $22.7 during the quarter. Investing cash use was $188.0, including $172.2 for acquisitions; financing cash inflow was $108.4, including debt proceeds and offsetting substantial share repurchases and dividends.
Material changes and unusual items
- Q1 acquisitions were R.W. Lyall & Company for $129.2 net of cash acquired, added to Electrical, and Electric Motion Company and related entities for $43.0, added to Power. Combined purchase consideration was $172.2; acquired businesses’ Q1 results were not material. Purchase-price allocations remained preliminary.
- Restructuring and related costs were $6.7, versus $4.4 in Q1 2015. Hubbell expects approximately $0.35 per diluted share of such costs for full-year 2016; $9.0 of total restructuring costs remained at March 31.
- Share repurchases were $202.5 in Q1. By April 26, 2016, the company said it had completed the $250 million repurchase under its previously announced plan.
- The 2015 comparative income statement was revised for a $0.9 cost classification between cost of goods sold and selling and administrative expense; management considered the misclassification immaterial.
- A shareholder lawsuit challenges the 2015 dual-class stock reclassification and asserts direct and derivative claims. Defendants intended to move to dismiss. The filing does not quantify a probable loss.
- Other guarantees were not material. The company reported no material change in risk factors or market-risk exposures from its 2015 Form 10-K.
Outlook, management commentary and risks
- 2016 diluted EPS guidance was $5.20–$5.40, including approximately $0.35 per share of restructuring and related costs and $0.30 per share of incremental savings from prior restructuring actions.
- Management expected aggregate end markets to be flat: construction-related residential and nonresidential markets growing at low- to mid-single digits, utility transmission and distribution up 1%–2%, oil and gas down approximately 15%–20%, and industrial markets flat to down approximately 2%.
- The company expected organic sales to outperform end markets, with acquisitions supporting growth; foreign exchange and possible price erosion amid weak commodity costs were expected headwinds. Mix, currency, pricing, investment spending and pension expense were expected to pressure margins.
- Management expected 2016 free cash flow to be at least 90% of net income and cited acquisitions and capital deployment as priorities. The filing cautions that actual outcomes may differ from forecasts.
- Principal cited risks include demand and market weakness, competition and pricing, raw-material and purchased-component costs, achieving savings, foreign exchange, pension assumptions, acquisition integration and synergies, operational or IT disruptions, and legal, environmental and tax contingencies.
Key facts investors should verify
- Whether the $5.20–$5.40 EPS outlook and at-least-90% free-cash-flow target were achieved, and how restructuring costs and savings developed.
- Whether acquisitions delivered expected growth and synergies, and whether preliminary purchase accounting changed materially.
- Whether Electrical segment margin pressures, end-market forecasts, currency effects and commodity-related pricing risks evolved as management expected.
- How debt, repurchases, dividends and cash generation affected leverage and liquidity after the 2026 notes issuance.
- The status and potential financial consequences of the stock-reclassification litigation; the filing gives no clear loss estimate.