Hubbell Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. Hubbell designs, manufactures and sells electrical and electronic products through its Electrical and Power segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $950.5 million | $907.4 million | $2,751.1 million | $2,651.0 million |
| Gross margin | 32.3% | 31.8% | 31.4% | 31.8% |
| Operating income | $146.4 million | $136.0 million | $381.1 million | $370.0 million |
| Operating margin | 15.4% | 15.0% | 13.9% | 14.0% |
| Net income attributable to Hubbell | $80.8 million | $86.7 million | $222.7 million | $228.6 million |
| Diluted EPS | $1.47 | $1.56 | $4.02 | $4.08 |
Q3 sales increased 5%, supported by organic volume and acquisitions. GAAP net income attributable to Hubbell fell 7% in Q3, primarily reflecting a $10.1 million pretax debt-extinguishment loss and a higher tax rate. Excluding restructuring and related costs and that debt loss, adjusted diluted EPS was $1.65 versus $1.63. For the first nine months, adjusted diluted EPS was $4.39 versus $4.31. These are non-GAAP measures.
Segment results: Q3 Electrical sales rose 3% to $654.0 million and operating margin increased to 13.1% from 12.7%. Nine-month Electrical sales rose 2%, but margin declined to 10.9% from 11.5%, reflecting pricing and material-cost pressure and acquisition effects. Q3 Power sales rose 9% to $296.5 million and margin increased to 20.5% from 20.2%; nine-month sales rose 8% and margin increased to 20.5% from 19.8%. Power growth included storm-related sales.
Cash, debt and liquidity
For the first nine months, operating cash flow was $228.6 million, down from $269.2 million, primarily due to inventory growth and payment timing. Capital expenditures were $53.2 million; operating cash flow less capital expenditures was $175.4 million, calculated from the reported figures. Cash declined by $51.2 million to $386.4 million. Investing activities used $161.6 million, including $110.3 million for acquisitions; financing activities used $139.9 million, including $115.5 million of dividends and $92.6 million of share repurchases.
At September 30, total debt was $1,080.5 million, including $93.8 million of short-term debt, mostly commercial paper. Cash and investments were $456.5 million; reported net debt was $624.0 million, or 23% of total capital, compared with 19% at year-end 2016. Cash and short-term investments on the balance sheet totaled $400.0 million. The $750 million revolving credit facility was undrawn, and Hubbell was in compliance with its debt covenants.
Hubbell issued $300 million of 3.15% notes due 2027 and used the net proceeds to redeem $300 million of 5.95% notes due 2018, recognizing a $10.1 million pretax loss. The quarterly dividend was $0.70 per share during the period; in October, the board raised it to $0.77, beginning with the December 2017 payment.
Outlook, commentary and risks
- For 2017, management expected aggregate end-market growth of 2.5%–3%, acquisitions to contribute about 2% to sales growth, diluted EPS of $5.40–$5.50, and free cash flow equal to net income attributable to Hubbell. EPS guidance included approximately $0.30 per share of restructuring and related costs and $0.11 per share from the debt-extinguishment loss.
- Management expected 2018 end-market growth of approximately 2%–4% and targeted a return to double-digit diluted EPS growth. Expected supports included lower restructuring spending, savings from restructuring, and lower interest costs after refinancing. iDevices was expected to dilute operating margin in 2017.
- Recent hurricanes were expected to benefit results through storm-related sales but also create a temporary production outage at the Vega Baja, Puerto Rico facility.
- Key exposures include demand and pricing, raw-material and other input costs, execution of productivity and restructuring plans, acquisition integration, foreign exchange, facility disruption and natural disasters. Management reported no material change in risk factors from the 2016 Form 10-K.
- Restructuring costs were $13.5 million for the first nine months; $6.8 million of additional costs were expected. A previously accrued $12.5 million multi-employer pension withdrawal liability may be paid over approximately 19 years or as a lump sum, subject to negotiations.
- Legal proceedings arise in the ordinary course of business; the filing provides no clear estimate of potential losses. The fair value and maximum potential payment under guarantees were not material.
Material changes and notable items
Q3 gross margin improved year over year, but nine-month gross margin and operating margin declined. Productivity and restructuring savings helped offset price and material-cost pressure; acquisitions also weighed on margins. Four 2017 acquisitions had aggregate consideration of $100.3 million, net of cash received, including IoT developer iDevices and gas-components manufacturer AEC. Their nine-month contribution to consolidated sales and earnings was not significant.
Hubbell adopted cash-flow presentation guidance in Q3 and share-based payment guidance in 2017, with no material financial-statement impact. It expected to adopt the new revenue standard in Q1 2018; management anticipated the revenue-recognition pattern would remain unchanged for most businesses, with likely balance-sheet classification effects. The company estimated adoption of the lease standard would add less than $100 million of right-of-use assets and corresponding liabilities.
Investor facts to verify
- Whether full-year EPS and free-cash-flow targets are achieved, including the effect of the identified one-time charges.
- Whether Power’s storm-related demand persists and how the Puerto Rico outage affects production and earnings.
- Whether Electrical segment margins recover amid pricing, material-cost and acquisition-related pressures.
- Working-capital trends, particularly inventory, and the ability to convert earnings into operating cash flow.
- Acquisition integration and iDevices’ expected margin dilution, along with the final purchase-price allocations.
- Debt, commercial-paper usage, the pension withdrawal settlement and deployment of the new $400 million share-repurchase authorization.