Hubbell Incorporated — FY2018 Form 10-K
Business context and period: The filing covers the fiscal year ended December 31, 2018; quarterly figures below identify Q4 specifically. Hubbell designs, manufactures and sells electrical and electronic products. Its Electrical and Power segments serve construction, industrial, energy and utility markets. Aclara, acquired in February 2018, expanded the Power segment into smart metering and utility infrastructure solutions.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $4,481.7 million | $3,668.8 million |
| Gross profit / margin | $1,300.4 million / 29.0% | $1,155.1 million / 31.5% |
| Operating income / margin | $556.9 million / 12.4% | $518.8 million / 14.1% |
| Adjusted operating income / margin | $607.2 million / 13.5% | $525.5 million / 14.3% |
| Net income attributable to Hubbell | $360.2 million | $243.1 million |
| Diluted EPS | $6.54 | $4.39 |
| Operating cash flow / capital expenditures | $517.1 million / $96.2 million | $379.0 million / $79.7 million |
| Free cash flow | $420.9 million | $299.3 million |
| Total debt / cash and investments | $1,793.2 million / $254.5 million | $1,055.2 million / $447.2 million |
| Debt to total capital | 50% | 39% |
FY2018 sales increased 22.2%; acquisitions contributed 17.8 percentage points, chiefly Aclara, and organic volume including pricing contributed 4.4 points. The effective tax rate was 21.6%, versus 43.6% in 2017; the prior year included a $56.5 million provisional TCJA tax charge. Reported net income and EPS therefore benefited from both stronger operating results and a more favorable tax comparison.
Segments: Electrical sales were $2,660.6 million, up about 5%, with operating income of $320.8 million and a 12.1% margin. Power sales were $1,821.1 million, up about 60%, largely from Aclara; operating income was $236.1 million and margin was 13.0%, down from 19.8%. Excluding Aclara acquisition-related and transaction costs, Power operating income was $286.4 million and margin 15.7%.
Q4: Sales were $1,144.1 million, versus $917.7 million in Q4 2017. Net income attributable to Hubbell was $88.0 million, versus $20.4 million, and diluted EPS was $1.60 versus $0.37. Q4 2017 net income included an approximately $57 million, or $1.02 per share, tax-reform charge.
Cash used for the Aclara acquisition was $1,118.0 million. Hubbell financed it with a $500 million term loan, $450 million of 3.50% senior notes due 2028, commercial paper and operating cash flow; it repaid $150 million of term-loan principal during 2018. Cash at year-end was $189.0 million. A $750 million revolving credit facility was undrawn, and the company reported compliance with its debt covenants. The quarterly dividend was increased from $0.77 to $0.84 per share in October 2018.
Material changes, outlook and risks
- Management reported strong end-market growth, especially in energy-related, core industrial, non-residential and utility markets, and accelerating residential lighting growth in the second half. Aclara added revenue, backlog and a project pipeline.
- Material inflation and tariffs outpaced pricing during 2018 and pressured margins. Management cited pricing actions and productivity initiatives to mitigate cost increases; recovery of higher input costs may lag.
- Backlog was approximately $1,250.8 million at year-end, compared with $355.5 million a year earlier. About $530 million comprised multi-year Aclara performance obligations, most expected to be completed over the next three years. Most Electrical backlog was expected to ship in 2019.
- No quantified FY2019 earnings or revenue guidance is provided in the supplied filing text. Management expected restructuring and related spending to increase in 2019 and 2020 as it pursued further footprint consolidation and cost reduction; $7.9 million of additional costs remained expected for disclosed restructuring actions.
- Key risks include economic and end-market weakness; competition and pricing; material costs, tariffs and supply disruption; Aclara integration and realization of expected benefits; increased debt and floating-rate exposure, including LIBOR transition; cybersecurity and privacy; tax uncertainty; Brexit and foreign exchange; and environmental, product-liability and other litigation.
- Unusual items and contingencies include $53.6 million of Aclara acquisition-related and transaction costs in 2018, a $4.7 million after-tax pension curtailment gain recorded in accumulated other comprehensive income, and a disputed $23.3 million multi-employer pension withdrawal demand that Hubbell is contesting in arbitration. Environmental liabilities were $8.5 million at year-end; management did not expect environmental matters to have a material impact.
- Management and the auditor concluded internal control over financial reporting was effective, but Aclara—representing 14% of 2018 sales—was excluded from their assessment and audit while integration of its controls remains underway. The financial statements received an unqualified audit opinion.
Investor verification priorities
- Review the full-year and Q4 results against the prior-year tax-reform charge, and distinguish GAAP results from management’s adjusted measures.
- Track whether pricing and productivity offset material inflation and tariffs, and whether margins improve, particularly in Power after Aclara’s inclusion.
- Assess Aclara’s integration, margins, cash contribution, long-term contract execution and realization of expected synergies.
- Monitor debt reduction, interest expense, covenant headroom, liquidity and the effects of variable rates and the LIBOR transition.
- Follow the $23.3 million pension-withdrawal arbitration, environmental and other legal exposures, and Aclara’s control integration.