Hubbell Incorporated — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. The unaudited filing covers Hubbell’s Electrical and Power segments, which design, manufacture and sell electrical and electronic products for construction, industrial and utility markets.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $809.7 million | $759.5 million | Up 7% |
| Gross profit / margin | $252.7 million / 31.2% | $245.0 million / 32.3% | Margin down 110 bps |
| Operating income / margin | $105.0 million / 13.0% | $104.8 million / 13.8% | Income roughly flat; margin down 80 bps |
| Net income attributable to Hubbell | $62.4 million | $64.2 million | Down 3% |
| Diluted EPS | $1.07 | $1.08 | Down 1 cent |
| Cash dividends per common share | $0.56 | $0.50 | Up 12% |
| Operating cash flow | $25.8 million | $43.4 million | Down $17.6 million |
Revenue growth reflected four percentage points each from organic volume and acquisitions, partly offset by one percentage point from unfavorable foreign currency translation. Gross margin was pressured by mix, pricing, cost increases and productivity, including restructuring-related costs, which contributed about 50 basis points to the margin decline. The effective tax rate rose to 33.1% from 32.0%.
Segments
- Electrical: Sales of $569.7 million, up 6%; operating income of $63.4 million, down 7%; operating margin fell to 11.1% from 12.6%. Margin pressures included restructuring costs, unfavorable mix and pricing/cost/productivity effects. A charge tied to a commercial negotiation contributed an estimated 90 basis points to the margin decline.
- Power: Sales of $240.0 million, up nearly 9%; operating income of $41.6 million, up 13%; operating margin rose to 17.3% from 16.6%. Organic volume and acquisitions supported sales; higher volume aided margin, partly offset by acquisition dilution and restructuring costs.
Cash, debt and liquidity
- Cash and cash equivalents were $413.3 million at quarter-end, down from $653.9 million at December 31, 2014. Cash and investments totaled $468.4 million.
- Operating cash flow was $25.8 million; capital expenditures were $16.3 million, implying quarterly free cash flow of approximately $9.5 million (cash from operations less capital expenditures).
- Investing cash outflow was $144.7 million, including $126.8 million for acquisitions, net of cash acquired. Financing cash outflow was $109.2 million, including $76.0 million of share repurchases and $32.5 million of dividends.
- Long-term debt was $597.7 million; there was no short-term debt outstanding. Debt to total capital was 24%. Net debt was $129.3 million, versus net cash of $106.8 million at year-end.
- The $500 million revolving credit facility was undrawn; Hubbell reported compliance with its financial covenant. Management said available cash, operating cash generation and credit facilities should be sufficient for foreseeable funding needs, including the next 12 months.
Material changes, outlook and risks
- Hubbell acquired Acme, Turner and EC&M for a combined $126.5 million, net of cash received. Acquired results were not significant to Q1 consolidated results. The acquisitions added $42.3 million of goodwill and $57.3 million of intangible assets.
- Restructuring and related costs were $4.4 million in Q1. Management expected approximately $0.25 per diluted share of such costs for full-year 2015, with savings from the actions anticipated in 2016.
- For 2015, management forecast sales growth of 5%–7%, with acquisitions contributing mid-single digits and foreign currency translation reducing sales by about 1%. Full-year diluted EPS guidance was $5.35–$5.55, including the expected restructuring and related costs. Free cash flow was forecast at approximately 90% of net income.
- Management anticipated overall end-market growth of flat to approximately 2%, but expected Harsh and Hazardous product markets to decline 20%–25% amid continued energy-market weakness. Other noted pressures included inflation in materials, healthcare and pensions, strong-dollar effects, product mix, and acquisition amortization.
- Other expense rose to $10.3 million from $8.7 million, primarily due to higher foreign-currency transaction losses. Foreign currency movements reduced cash by $12.5 million. A voluntary $20 million domestic pension contribution also weighed on operating cash flow.
- The filing reports ordinary-course legal proceedings, including product, intellectual-property, workers’ compensation and environmental matters; management did not provide a clear quantified exposure. The fair value and maximum potential payment for guarantees were reported as not material. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether organic demand and acquisition contributions deliver the forecast 5%–7% sales growth, particularly given the expected contraction in energy-related markets.
- Whether Electrical-segment margin pressures—including the commercial-negotiation charge, mix and cost/productivity effects—persist, and whether Power-segment margin improvement holds.
- Execution, integration and expected returns from the three acquisitions, and the timing and realization of restructuring savings relative to forecast costs.
- Cash conversion and capital allocation: quarterly operating cash flow was below net income, while acquisitions, repurchases and dividends reduced cash and moved Hubbell from net cash to net debt.
- Developments in foreign exchange, material and other inflationary costs, pension funding, and legal or environmental contingencies.