Hubbell Incorporated — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2017. Comparisons are with the three months ended March 31, 2016 unless otherwise noted. Financial amounts are in U.S. dollars.
Business context and results
Hubbell designs, manufactures and sells electrical and electronic products for construction, industrial and utility markets. Its reporting segments are Electrical and Power. First-quarter sales rose 2%, reflecting organic volume and acquisitions, partly offset by foreign-currency translation.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $852.3 million | $834.8 million | +2% |
| Gross profit / margin | $261.8 million / 30.7% | $259.9 million / 31.1% | Margin −0.4 pts |
| Operating income / margin | $104.1 million / 12.2% | $101.9 million / 12.2% | Income +2% |
| Net income attributable to Hubbell | $62.8 million | $60.9 million | +3% |
| Diluted EPS | $1.13 | $1.08 | +5% |
| Operating cash flow | $63.0 million | $62.3 million | Nearly flat |
Adjusted diluted EPS, a non-GAAP measure excluding restructuring and related costs, was $1.23 versus $1.16. Adjusted operating income was $112.4 million versus $108.6 million. See the filing’s reconciliations for these measures.
Segments
- Electrical: Sales of $587.5 million, up 1%; operating income of $50.0 million, down 10%, and reported margin of 8.5% versus 9.5%. Adjusted margin fell to 9.7% from 10.6%, primarily due to pricing and material cost headwinds, unfavorable mix and foreign exchange, partly offset by productivity and restructuring savings. Commercial construction improved; Lighting sales declined 3%.
- Power: Sales of $264.8 million, up 5%; operating income of $54.1 million, up 16%, and reported margin of 20.4% versus 18.4%. Adjusted margin rose to 21.0% from 18.6%. Acquisitions drove most sales growth; distribution-market volume also improved.
Financial position, cash flow and capital
- At March 31, cash and cash equivalents were $381.0 million, short-term investments $9.8 million, and total debt $996.0 million ($5.1 million short-term and $990.9 million long-term). Net debt was $546.0 million, compared with $488.5 million at year-end 2016; net debt to total capital was 21%, up from 19%.
- Current assets were $1,517.6 million and current liabilities $576.0 million. Cash declined $56.6 million during the quarter.
- Operating cash flow was $63.0 million. Investing used $32.9 million, including $19.2 million for acquisitions and $13.6 million for capital expenditures. Financing used $94.1 million, including $52.6 million for share repurchases and $38.8 million for dividends.
- Long-term notes include $300 million due in 2018, $300 million due in 2022 and $400 million due in 2026. The $750 million revolving credit facility was undrawn; Hubbell reported compliance with its covenants. No commercial paper was outstanding at quarter-end.
Material changes, outlook and management commentary
- Gross margin declined as material costs and pricing pressures, unfavorable product mix and higher restructuring-related costs outweighed productivity and savings. S&A expense was slightly lower; its share of sales improved to 18.5% from 18.9%.
- The effective tax rate declined to 29.7% from 32.3%, primarily due to a tax examination settlement and tax effects from vesting and exercise of share-based awards. Higher interest expense, associated mainly with the March 2016 debt offering, increased total other expense to $13.2 million from $10.3 million.
- Management increased its 2017 aggregate end-market growth outlook to approximately 2%–3% (previously approximately 2%), including expected 2%–4% growth in industrial and oil and gas markets. Acquisitions completed through April are expected to add approximately 2% to 2017 sales growth.
- 2017 diluted EPS guidance was revised down by $0.20 to $5.40–$5.60. The range includes about $0.25 of restructuring and related costs, approximately $0.10 of iDevices dilution, and $0.20 of incremental restructuring savings from actions initiated before 2017. Management expects free cash flow—operating cash flow less capital expenditures—to equal net income attributable to Hubbell.
- Management cited expected near-term inefficiencies from Lighting facility consolidations, persistent Lighting pricing challenges and material-cost headwinds. Cost-structure improvements and lower restructuring costs are expected to help offset these pressures. Guidance and other forward-looking statements are subject to market, execution, cost, acquisition and other risks.
Acquisitions, restructuring and other notable items
- Two first-quarter acquisitions were completed for $9.3 million net of cash received and added to Power; their reported sales and earnings were not significant. Cash-flow acquisition spending also included installment payments related to a prior-year acquisition.
- In April, Hubbell completed two additional acquisitions for approximately $90 million: AEC, a gas-components manufacturer, for about $30 million, and iDevices, an IoT technology developer, for about $60 million. These were subsequent events and were not included in the March 31 financial statements. Hubbell issued commercial paper to fund them; $96.0 million was outstanding as of April 21.
- First-quarter restructuring and related costs were $8.3 million, compared with $6.7 million a year earlier. Total expected costs for ongoing actions were $51.6 million, of which $11.1 million remained at March 31. A previously recorded $12.5 million multi-employer pension withdrawal liability is expected to be paid over approximately 19 years; negotiations were expected in 2017.
- The filing reports ordinary-course legal proceedings involving product, intellectual-property, workers’ compensation and environmental matters; guarantee exposure was not material. Management reported no material change in risk factors from the 2016 Form 10-K, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the revised $5.40–$5.60 EPS outlook and 2%–3% end-market growth expectations remain achievable, given margin pressures and consolidation inefficiencies.
- Actual acquisition contribution, integration progress and iDevices’ effect on margins, including the funding and cost of the April transactions.
- Progress in Electrical segment margins, Lighting pricing, material-cost recovery, productivity and restructuring savings.
- Cash generation, working-capital needs, net-debt movement, share repurchases and the plan for the $300 million note maturity in June 2018.
- Potential changes to the multi-employer pension withdrawal liability, restructuring costs and other legal or environmental contingencies.