Hubbell Incorporated — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Figures are unaudited and in millions of dollars except per-share amounts. Hubbell designs, manufactures and sells electrical and electronic products. Its reporting segments are Electrical and Power.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $895.3 | $835.9 | $2,510.6 | $2,377.3 |
| Gross profit / margin | $296.2 / 33.1% | $291.3 / 34.8% | $833.7 / 33.2% | $799.6 / 33.6% |
| Operating income / margin | $142.8 / 15.9% | $151.6 / 18.1% | $391.3 / 15.6% | $381.4 / 16.0% |
| Net income attributable to Hubbell | $89.6 | $96.5 | $244.0 | $244.5 |
| Diluted EPS | $1.51 | $1.62 | $4.10 | $4.09 |
| Cash dividends per share | $0.50 | $0.45 | $1.50 | $1.35 |
- Quarterly comparison: Sales rose 7%, driven by 4 percentage points of organic volume and 3 points from acquisitions. Hubbell-attributable net income and diluted EPS each fell 7%.
- Nine-month comparison: Sales rose 6% (4 points from acquisitions and 2 from organic volume); net income attributable to Hubbell was essentially flat, while diluted EPS edged up to $4.10 from $4.09.
- Margins and costs: Q3 gross margin fell 170 basis points and operating margin fell 220 basis points year over year. Management cited cost inflation exceeding productivity, unfavorable mix, negative price realization, higher materials and warranty costs, and legal expense. For the nine months, gross and operating margins declined 40 basis points each.
- Segments: Q3 Electrical sales were $641.6 and operating margin was 14.4% (17.5% prior year); operating income declined to $92.6. Power sales were $253.7 and operating margin held at 19.8%; operating income increased to $50.2. For the nine months, Electrical sales were $1,792.8 and margin 14.3%; Power sales were $717.8 and margin 18.8%.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $238.3, compared with $225.9; capital expenditures were $42.6, compared with $40.4. Operating cash flow less capital expenditures was $195.7. Investing cash use was $202.9, including $163.9 for acquisitions; financing cash use was $115.8, including $88.6 in dividends and $35.0 in share repurchases.
- Cash and equivalents were $653.8 at September 30, down from $740.7 at year-end 2013. Working capital items included higher accounts receivable ($542.8 versus $440.9) and inventory ($445.9 versus $385.7).
- Total debt was $598.5, including $597.5 of long-term debt and $1.0 of short-term debt. Cash and investments totaled $698.5; reported net debt was negative $100.0, and debt-to-capital was 23%. Hubbell had not drawn on its $500 revolving credit facility and was in compliance with its covenant.
- Approximately 51% of cash was held outside the United States; the company said it intended to indefinitely reinvest most undistributed international earnings and cash internationally.
Material developments, outlook and risks
- Acquisitions: Six businesses were acquired in 2014 for total net cash consideration of $163.9, adding $80.7 of goodwill and $59.4 of intangible assets. Their reported-period contribution was not significant to consolidated results.
- Legal contingency: In the Powerweb litigation, the company increased its accrual by $4.0 in Q3 following settlement discussions. Some claims, including lost profits, were resolved in Hubbell’s favor; other claims remained. No trial date had been set, negotiations were not assured of success, and the ultimate outcome remained uncertain and could materially affect financial position, liquidity or results. The filing does not provide a clear total accrued amount for this matter.
- 2014 outlook: Management expected sales growth at the low end of 5%–6%, with balanced contributions from acquisitions and organic volume; operating margin was expected to decline 60–70 basis points versus 2013; and the tax rate was expected to be about 33%. Management anticipated lower 2014 net income and diluted EPS than in 2013, despite sales growth. Free cash flow was expected to approximate net income.
- Management expected 2014 end-market growth of about 2%–3%, led by residential, with utility markets mostly flat. Restructuring actions were planned, with benefits expected as the company exited 2015. For 2015, management cited third-party forecasts of 3%–4% end-market growth but noted margin uncertainties, including market mix and higher cost-action expenses.
- In October 2014, the board authorized a new $300 share repurchase program, with the full amount still authorized as of October 24. It also raised the quarterly dividend from $0.50 to $0.56, beginning with the December 2014 payment.
- Key stated risks include demand and price pressure, raw-material and other cost inflation, execution of productivity and restructuring measures, acquisition integration, warranty claims, foreign exchange, tax changes, and legal, environmental and other contingencies. The company reported no material change in its previously disclosed risk factors and no significant change in market-risk exposure.
Investor verification priorities
- Track whether organic demand, pricing and productivity can offset material-cost inflation and unfavorable mix, particularly in Electrical margins.
- Monitor warranty costs and the Powerweb litigation, including any changes to the accrual, settlement discussions or trial schedule.
- Assess acquisition integration, returns and cash use against the expected sales and earnings contribution.
- Compare full-year sales, margin, tax-rate and earnings outcomes with management’s 2014 outlook, and evaluate restructuring costs and expected benefits.
- Review cash conversion and working-capital trends, international cash availability, and capital allocation across dividends, repurchases and acquisitions.