Hubbell Inc. — Q2 2015 Form 10-Q
Business context and period: Hubbell designs, manufactures and sells electrical and electronic products for construction, industrial and utility markets. This unaudited filing covers the three and six months ended June 30, 2015. Its reporting segments are Electrical and Power.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $874.0m | $855.8m | $1,683.7m | $1,615.3m |
| Gross profit margin | 32.5% | 34.2% | 31.9% | 33.3% |
| Operating income | $126.7m | $143.7m | $231.7m | $248.5m |
| Operating margin | 14.5% | 16.8% | 13.8% | 15.4% |
| Net income attributable to Hubbell | $80.1m | $90.2m | $142.5m | $154.4m |
| Diluted EPS | $1.37 | $1.51 | $2.44 | $2.59 |
| Cash dividends per common share | $0.56 | $0.50 | $1.12 | $1.00 |
Q2 sales grew 2%; acquisitions contributed 3 percentage points and organic volume 1 point, partly offset by 2 points of unfavorable currency translation. For the first half, sales grew 4%, with acquisitions contributing 4 points and organic volume 2 points, offset by 2 points from currency.
Segment results, Q2: Electrical sales were $615.0m, up slightly, while operating income fell to $74.5m from $95.5m and margin contracted to 12.1% from 15.6%. Power sales rose 6% to $259.0m; operating income increased to $52.2m from $48.2m and margin improved to 20.2% from 19.8%. For the first half, Electrical sales were $1,184.8m and operating margin was 11.6%, versus 14.2%; Power sales were $498.9m and operating margin was 18.8%, versus 18.3%.
Cash flow and balance sheet: First-half operating cash flow was $98.7m (prior year $101.2m); capital expenditures were $34.5m, leaving free cash flow of $64.2m before the company’s stated 2015 outlook. Investing used $161.5m, including $127.0m for acquisitions; financing used $142.0m, including $64.9m of dividends and $76.0m of share repurchases. Cash declined $209.6m to $444.3m. At June 30, total debt was $598.0m, cash and investments were $497.8m, and net debt was $100.2m, compared with net cash of $106.8m at year-end 2014. Debt-to-capital was 24%. The $500m revolving facility was undrawn, and the company reported compliance with its covenant.
Material changes and key drivers
- Q2 operating income declined $17.0m and Hubbell-attributable net income fell 11%. First-half attributable net income declined 8%.
- Q2 and first-half gross margins fell 1.7 and 1.4 percentage points, respectively. Management cited restructuring and related costs, unfavorable product and business mix, and foreign-exchange effects on material costs; pricing, cost and productivity actions partly offset pressures.
- Restructuring and related costs were $15.8m in Q2 and $20.2m in the first half, reducing reported diluted EPS by approximately $0.19 and $0.24, respectively. The first-half total included $11.6m of restructuring costs and $8.6m of related costs.
- Three businesses—Acme, Turner and EC&M—were acquired in Q1 for $126.8m net of cash received. Their 2015 results were not material to consolidated results. Acquisitions added $40.7m of goodwill.
- Working capital absorbed cash: receivables and inventories increased during the first half. Operating cash flow also reflected a voluntary $20m pension contribution.
Outlook, risks and contingencies
Management expected 2015 sales growth of approximately 3%–4%, including about 4% from acquisitions and a 1% currency headwind, with aggregate end markets expected to be flat. It forecast diluted EPS of $4.95–$5.15, including approximately $0.45 per share of restructuring and related costs. Restructuring actions were expected to generate incremental savings of about $0.10 per share in 2015 and $0.30 per share in 2016. The company expected free cash flow of approximately 90% of net income and raised its expected 2015 share repurchases to approximately $150m.
Management forecast 5%–6% growth in residential and non-residential markets and 1%–2% growth in utility transmission and distribution products, but expected industrial markets to be flat to up 2% and Harsh and Hazardous markets to decline 20%–25%. It warned that product mix, weaker industrial and energy-related demand, material and other inflationary costs, pension costs, and a strong U.S. dollar could pressure margins and results. Other disclosed risks include raw-material availability and pricing, execution of productivity and restructuring initiatives, acquisition integration, customer and distributor relationships, operational disruptions, and legal, environmental and tax contingencies.
The company reported ordinary-course legal proceedings and self-insured exposures; it did not quantify a clear material loss estimate. Guarantee fair values and maximum potential payments were reported as not material. No material changes to previously disclosed risk factors or market-risk exposure were reported. Management concluded disclosure controls were effective as of June 30, 2015.
Important facts for investors to verify
- Whether the full-year sales and EPS outlook was achieved, particularly given the weakness forecast in industrial and Harsh and Hazardous markets.
- Whether restructuring costs, completion timing and projected savings remain on plan, and how much of the EPS outlook is attributable to those costs.
- Whether margin pressure in Electrical improves and whether pricing, productivity and mix offset foreign-exchange and inflationary costs.
- Whether acquisitions deliver expected earnings and integration benefits while limiting margin dilution.
- Whether operating cash generation supports planned dividends, capital spending, acquisitions and approximately $150m of 2015 repurchases while cash balances decline.