Hubbell Incorporated — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. Hubbell designs, manufactures and sells electrical and electronic products serving construction, industrial and utility markets. Electrical contributed 70% of 2015 revenue and Power 30%.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net sales | $3,390.4 million | $3,359.4 million | Up 0.9% |
| Gross margin | 32.2% | 33.0% | Down 80 bps |
| Operating income / margin | $474.6 million / 14.0% | $517.4 million / 15.4% | Income down 8%; margin down 140 bps |
| Net income attributable to Hubbell | $277.3 million | $325.3 million | Down 14.8% |
| Diluted EPS | $4.77 | $5.48 | Down 13.1% |
| Adjusted operating income (non-GAAP) | $513.5 million; 15.1% margin | $522.5 million; 15.6% margin | Income down 2% |
| Adjusted diluted EPS (non-GAAP) | $5.52 | $5.54 | Slightly lower |
Revenue growth included three percentage points from acquisitions, offset by two points from foreign currency; organic volume was flat. Adjusted measures exclude restructuring and, for adjusted earnings, reclassification costs. FY 2015 included $38.9 million of restructuring and related costs and $19.7 million of reclassification costs.
Fourth-quarter context: 2015 net sales were $829.7 million, Hubbell-attributable net income was $61.5 million and diluted EPS was $1.06, compared with $848.8 million, $81.3 million and $1.38, respectively, in Q4 2014.
Segments and material changes
- Electrical: Sales were $2,388.3 million, approximately flat year over year. Operating income was $279.0 million versus $337.9 million; adjusted operating margin declined to 13.1% from 14.3%. Lighting sales rose 6%, while electrical systems sales fell 4%, with weakness in energy-related and industrial markets, particularly harsh-and-hazardous products.
- Power: Sales increased 4% to $1,002.1 million, largely reflecting acquisitions. Operating income rose 9% to $195.6 million; adjusted operating margin improved to 20.1% from 18.7%, primarily on productivity and favorable material costs.
- Management cited stronger non-residential and modestly stronger residential construction, offset by deteriorating oil-and-gas and broader industrial markets. Utility markets were approximately flat.
Cash flow, debt and liquidity
- Operating cash flow was $331.1 million, down from $391.5 million. Capital expenditures were $77.1 million; cash used in investing activities was $249.2 million, including $163.4 million for acquisitions.
- Cash and cash equivalents were $343.5 million, down from $653.9 million. Working capital was $784.7 million versus $1,130.3 million.
- Total debt was $644.1 million, including $595.9 million of long-term debt and $48.2 million of short-term debt. Net debt was $238.9 million, compared with net cash of $109.5 million a year earlier; debt to total capital increased to 27% from 24%.
- The company had a $750 million revolving credit facility, undrawn at year-end, and reported compliance with its debt covenants. Commercial paper outstanding was $48 million at year-end and $362 million as of February 16, 2016.
- Cash used in financing was $371.1 million, including $200.7 million paid in connection with the share-class reclassification and $133.7 million of dividends.
Outlook, risks and unusual items
- For 2016, management expected aggregate end markets to be flat: construction-related non-residential and residential markets growing low to mid-single digits; utility transmission and distribution up 1%–2%; oil-and-gas markets down approximately 15%–20%; and industrial markets flat to down approximately 2%.
- Management forecast 2016 diluted EPS of $5.20–$5.40, including approximately $0.35 per share of restructuring and related costs and $0.30 per share of incremental savings from prior restructuring actions. It expected free cash flow, defined as operating cash flow less capital expenditures, of approximately 90% of net income.
- Management expected up to $250 million of share repurchases in 2016 and continued acquisition activity, partly funded with borrowing. Two post-year-end acquisitions were completed for approximately $130 million and $43 million.
- Key risks include continued oil-and-gas weakness, unfavorable product mix, foreign-exchange and pricing pressure, competition, raw-material availability and costs, customer credit risk, pension assumptions, acquisition integration, information-system disruption, and legal and environmental claims. The top ten customers represented about one-third of sales, although no single customer exceeded 10%.
- The December 2015 reclassification consolidated the dual-class shares into one voting class and paid Class A holders $28 per share. A shareholder lawsuit challenging the transaction was amended in February 2016; defendants said they intended to seek dismissal. Environmental liabilities were $14.2 million at year-end. Management did not expect environmental matters to have a material impact, but litigation outcomes remain uncertain.
- The company revised the presentation of certain costs in its first three 2015 quarterly reports, moving amounts between cost of goods sold and selling and administrative expenses. Management concluded the misclassifications were immaterial to those previously issued quarterly statements. The auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether 2016 market assumptions, particularly the projected oil-and-gas decline, and the $5.20–$5.40 EPS outlook were achieved.
- How restructuring costs and savings affect reported versus adjusted margins and earnings, and whether the forecast savings materialize.
- Cash generation, working-capital trends, and funding needs after the reclassification payment, planned repurchases and acquisitions.
- Integration results and returns from 2015 and 2016 acquisitions, including purchase-accounting estimates and goodwill/intangible-asset exposure.
- Developments in the shareholder litigation, environmental and other contingencies, pension funding, and tax audits.