Hubbell Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Hubbell designs, manufactures, and sells electrical and electronic products. Its reporting segments are Electrical and Power. Results are unaudited.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $1,196.4 million | $1,166.7 million | $2,283.7 million | $2,157.9 million |
| Gross margin | 29.9% | 29.8% | 29.1% | 29.2% |
| Operating income | $166.9 million | $156.9 million | $287.8 million | $256.5 million |
| Operating margin | 14.0% | 13.4% | 12.6% | 11.9% |
| Net income attributable to Hubbell | $96.0 million | $100.3 million | $168.3 million | $158.6 million |
| Diluted EPS | $1.75 | $1.82 | $3.07 | $2.87 |
| Operating cash flow | Not stated for the quarter | $209.6 million | $152.3 million |
- Q2 sales rose 3%, primarily from favorable pricing; foreign exchange reduced sales growth by less than one percentage point. Hubbell-attributable net income and diluted EPS fell 4%, largely due to a $22.9 million pre-tax multi-employer pension charge.
- Excluding acquisition-related intangible amortization and the pension charge, Q2 adjusted net income attributable to Hubbell was $126.6 million versus $115.0 million, and adjusted diluted EPS was $2.31 versus $2.09. These are non-GAAP measures.
- First-half sales increased 6%, reflecting 4 percentage points of organic growth and 2 percentage points from acquisitions, including an additional month of Aclara results compared with 2018. First-half diluted EPS increased 7%.
- First-half operating cash flow improved by $57.3 million, which management attributed primarily to improved working capital, especially receivables collections, and higher net income. Capital expenditures were $47.7 million; dividends paid were $91.5 million and share repurchases were $30.0 million.
Segments and operating performance
- Electrical: Q2 sales were $688.2 million, approximately flat year over year; operating income was $88.0 million versus $91.3 million, and margin declined to 12.8% from 13.3%. Lower unit volume and higher restructuring costs offset pricing and productivity gains. For the first half, sales rose 1% and operating margin improved to 11.9% from 11.7%.
- Power: Q2 sales increased 6% to $508.2 million, with organic growth in transmission, distribution, and Aclara. Operating income rose 20% to $78.9 million and margin increased to 15.5% from 13.7%. First-half sales grew 13%, including Aclara’s acquisition contribution; adjusted first-half operating margin was 16.2% versus 16.7%.
- Management cited favorable pricing and productivity savings, which generally offset cost increases. End-market performance was mixed: natural gas distribution was strong, oil-related markets had unfavorable volumes, and non-residential markets were mixed.
Liquidity, debt, and balance sheet
- At June 30, 2019, cash and cash equivalents were $209.9 million, short-term investments were $10.5 million, and total current assets and liabilities were $1,729.0 million and $874.1 million, respectively.
- Total debt was $1,777.0 million; debt to total capital was 49%. Cash and investments were $277.3 million, and net debt was $1,499.7 million. Hubbell had $1,722.8 million of long-term debt on the balance sheet, plus $54.2 million of short-term debt and current maturities.
- The $750 million revolving credit facility was undrawn at quarter-end. Hubbell reported compliance with its debt covenants. Cash and investments include balances held internationally; approximately 7% of cash and cash equivalents was held in the United States.
- Cash increased $20.9 million in the first half to $209.9 million. Investing cash outflow was $41.5 million, compared with $1,155.1 million in 2018, when the Aclara acquisition was completed. Financing cash outflow was $148.2 million.
Outlook, risks, and unusual items
- The filing provides no specific full-year 2019 revenue or earnings guidance. Management said restructuring, footprint consolidation, and cost-reduction activity would continue in 2019 and 2020; expected remaining restructuring costs at June 30 were $13.6 million, with expected completion dates extending through 2020.
- The $22.9 million pension charge relates to anticipated mass-withdrawal liability after another employer in the multi-employer plan entered bankruptcy and was expected to liquidate. The related liability is payable in scheduled installments over 58 years unless settled in a lump sum; $0.6 million had been paid in the first half.
- Other risks highlighted include demand and market conditions, pricing competition, tariffs and trade restrictions, raw-material and freight costs, execution of productivity and restructuring plans, acquisition integration, foreign exchange, pensions, product warranties, cybersecurity and IT disruption, and legal or environmental contingencies. Hubbell reported no material change in risk factors from its 2018 Form 10-K.
- Adoption of lease accounting added $109.3 million of operating-lease right-of-use assets and liabilities at adoption; at June 30, operating lease liabilities were $102.4 million. The filing says adoption had no material effect on income or cash flows.
Important facts for investors to verify
- Assess the pension withdrawal liability, its installment terms, and the possibility of further plan-related exposure.
- Reconcile GAAP results with management’s adjusted measures, particularly acquisition amortization, restructuring costs, and the pension charge.
- Monitor Electrical segment volumes and margins, Power segment growth and Aclara performance, and whether pricing and productivity continue to offset cost inflation.
- Review cash conversion and working-capital trends, debt maturities and covenant headroom, and planned capital returns and restructuring spending.
- Consider that first-half comparisons include an additional month of Aclara sales in 2019; the filing cautions that interim results are not necessarily indicative of full-year results.