Hubbell Incorporated — FY 2014 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2014; the filing also provides unaudited fourth-quarter results. Hubbell designs, manufactures and sells electrical and electronic products for construction, industrial and utility markets. Its Electrical segment generated 71% of 2014 revenue and its Power segment 29%.
Financial performance and position
- Revenue: $3,359.4 million, up 5.5% from $3,183.9 million in 2013. Acquisitions contributed about four percentage points and volume about two; pricing was flat and currency was slightly unfavorable.
- Profit and margins: Gross profit was $1,109.0 million, with gross margin of 33.0% versus 33.6%. Operating income rose 1.9% to $517.4 million, while operating margin declined to 15.4% from 15.9%. Net income attributable to Hubbell fell to $325.3 million from $326.5 million; diluted EPS edged up to $5.48 from $5.47.
- Fourth quarter: Sales were $848.8 million versus $806.6 million in Q4 2013; gross profit was $275.3 million versus $270.9 million. Net income attributable to Hubbell was $81.3 million versus $82.0 million, and diluted EPS was $1.38 in both periods.
- Segments: Electrical sales increased 6% to $2,398.2 million, but operating income declined to $337.9 million and margin to 14.1% from 15.1%. Power sales increased 4% to $961.2 million; operating income rose 8% to $179.5 million and margin improved to 18.7% from 18.1%.
- Cash flow: Operating cash flow was $391.5 million, compared with $381.8 million. Capital expenditures were $60.3 million, implying free cash flow of approximately $331.2 million (operating cash flow less capital expenditures), versus approximately $323.0 million in 2013. Acquisitions used $183.8 million; dividends and share repurchases used $121.2 million and $105.5 million, respectively.
- Liquidity and debt: Cash and cash equivalents were $653.9 million; working capital was $1,130.3 million. Total debt was $599.0 million, and reported net debt (debt less cash and investments) was negative $106.8 million. The $500 million revolving facility was undrawn; the company reported covenant compliance.
- Other metrics: Total assets were $3,322.8 million. Pension benefit obligations exceeded plan assets by $140.6 million at year-end, compared with $64.2 million a year earlier. The company declared $2.06 per common share in dividends for 2014 and increased the quarterly rate to $0.56 in October.
Material changes versus the prior year
- Acquisitions supported revenue growth, while cost inflation, higher materials costs and unfavorable product mix reduced gross margin. Electrical results also reflected restructuring and higher warranty costs.
- Power profitability improved on productivity and lower facility-closure costs, partly offset by material costs and negative pricing.
- Net income was nearly flat despite higher operating income, in part because the effective tax rate increased to 32.6% from 30.4%.
- Cash declined by $86.8 million during 2014, versus an increase of $95.7 million in 2013, reflecting higher acquisition spending, repurchases, dividends and currency effects.
Outlook, risks and unusual items
- For 2015, management expected net sales growth of 5%–7%, including a 5%–6% contribution from acquisitions. Three acquisitions completed in January 2015 cost approximately $126 million and were expected to add about $100 million to annual sales.
- Management forecast 2015 diluted EPS of $5.35–$5.55, including approximately $0.25 per share of restructuring and related costs. It expected free cash flow at about 90% of net income and anticipated restructuring savings in 2016 exceeding those costs.
- Management cited weaker energy-related markets, forecasting a 15%–20% decline in Harsh and Hazardous product sales, and expected foreign exchange to be a headwind. Acquisitions were expected to dilute operating margin by about 30 basis points in 2015.
- Key risks include competitive pricing, raw-material availability and inflation, global economic weakness, customer credit exposure, foreign currency, execution and integration of acquisitions, restructuring delivery, pension funding, information-system disruptions, and legal, environmental and tax contingencies. The top ten customers represented about one-third of sales.
- In Q4 2014, Hubbell settled Powerweb litigation concerning wiHUBB wireless lighting technology; the payment did not exceed amounts previously reserved. A revised pension mortality assumption increased the projected U.S. pension benefit obligation by approximately $40 million. Environmental liabilities were $13.9 million at year-end.
- The filing reports a nonmaterial prior-period misstatement in the presentation of certain share repurchases, with no effect on total shareholders’ equity. The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether 2015 sales and EPS guidance was achieved, particularly given energy-market weakness, currency headwinds and acquisition contribution.
- Whether margin pressure in Electrical reversed and whether productivity and restructuring savings materialized.
- Cash conversion and working-capital trends, alongside acquisition, dividend and share-repurchase spending.
- Pension funding exposure, including sensitivity to discount rates, asset returns and the higher reported obligation.
- Final purchase accounting, integration results and returns from the 2014 and January 2015 acquisitions.
- Developments in environmental, product-liability, tax and other contingencies, and the effect of customer concentration.