Hubbell Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Hubbell designs, manufactures and sells electrical and electronic products. Results include Aclara from its February 2, 2018 acquisition.
Financial performance
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Net sales | $1,166.7 million; up 23% | $2,157.9 million; up 20% |
| Gross margin | 29.8%, down from 31.2% | 29.2%, down from 31.0% |
| Operating income | $156.9 million; up from $134.4 million | $256.5 million; up from $242.2 million |
| Operating margin | 13.4%, down from 14.2% | 11.9%, down from 13.5% |
| Net income attributable to Hubbell | $100.3 million; up 27% | $158.6 million; up 12% |
| Diluted EPS | $1.82; up from $1.43 | $2.87; up from $2.56 |
| Operating cash flow | Not stated separately | $152.3 million, versus $131.2 million |
Q2 adjusted diluted EPS was $1.97, up 38%; first-half adjusted diluted EPS was $3.36, up 31%. These non-GAAP measures exclude Aclara acquisition-related and transaction costs. Q2 sales growth reflected 18 percentage points from acquisitions, primarily Aclara, and five points from organic volume. First-half growth included 16 points from acquisitions and four from organic volume.
Cash and cash equivalents were $195.1 million at June 30, down from $375.0 million at year-end 2017. Six-month capital expenditures were $47.5 million. Cash used in investing was $1,155.1 million, principally the $1,116.0 million net cash acquisition outlay for Aclara.
Segments and material changes
- Electrical: Q2 sales rose 5% to $688.6 million; operating income increased 23% to $91.3 million and margin improved to 13.3% from 11.3%. First-half sales rose 5% to $1,306.7 million; operating income rose 20% to $152.5 million and margin increased to 11.7% from 10.2%.
- Power: Q2 sales increased 64% to $478.1 million, largely due to Aclara; reported operating income was $65.6 million and margin was 13.7%, versus 20.7%. First-half sales increased 53% to $851.2 million; operating income was $104.0 million and margin 12.2%, versus 20.7%. Acquisition costs and Aclara’s lower operating margin contributed to the decline.
- Hubbell acquired Aclara for approximately $1.1 billion. It contributed about $254.1 million in sales and $2.6 million in operating income from acquisition through June 30. Purchase accounting remained preliminary; goodwill recorded was $679.0 million.
- Gross margin pressure reflected acquisition mix and costs, material inflation outpacing pricing, and other costs; management said productivity gains partly offset these pressures. Higher debt-related interest expense also reduced earnings growth.
Debt, liquidity and capital allocation
Total debt was $1,988.7 million and net debt was $1,726.1 million at June 30, 2018, compared with $1,055.2 million and $608.0 million, respectively, at December 31, 2017. Debt-to-total-capital was 54% and net debt-to-total-capital was 47%, versus 39% and 23%. The increase primarily financed Aclara, including $450 million of 3.50% senior notes due 2028 and a $500 million term loan. A $750 million revolving credit facility was undrawn; Hubbell reported compliance with its 65% debt-to-capital covenant. Six-month dividends paid were $84.4 million and share repurchases were $10.0 million.
Outlook, risks and unusual items
- Management expected aggregate growth across end markets, with new products to drive modest outperformance versus end-market expectations, and expected acquisitions, including Aclara, to contribute to 2018 sales growth. No specific earnings or revenue guidance was provided in the supplied filing text.
- Management expected pricing actions to accelerate in the second half and a positive pricing-versus-material-inflation spread by Q4, excluding Lighting and the potential effects of Section 301 tariffs.
- Key risks include tariffs and trade retaliation, raw-material and freight inflation, ability to pass through price increases, end-market demand, acquisition integration and realization of benefits, foreign exchange, and legal, environmental and tax contingencies.
- The company recorded no material first-half adjustments to its provisional tax accounting for the 2017 Tax Cuts and Jobs Act, but further adjustments could be material. The reported effective tax rate fell to 23.6% in Q2 and 22.7% for the half, primarily reflecting the lower U.S. federal tax rate.
- Restructuring costs were $0.7 million net for the first half; approximately $6.0 million of additional costs were expected for ongoing actions. Legal proceedings arose in the ordinary course; guarantee exposure was reported as not material.
- Management stated disclosure controls were effective. It had not fully evaluated any internal-control changes arising from Aclara’s inclusion.
Investor verification points
- Check subsequent filings for final Aclara purchase-price allocation, integration progress, and whether expected synergies materialized.
- Track Power segment margins and the effect of Aclara, acquisition amortization, material costs, and pricing.
- Verify whether price increases offset inflation and tariff-related costs, particularly the stated Q4 outlook and its exclusions.
- Monitor debt, cash generation, covenant headroom, and use of the revolving credit facility following the acquisition.
- Review later tax disclosures for final TCJA accounting and any material provisional adjustments.