Hubbell Incorporated — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Hubbell designs, manufactures and sells electrical and electronic products serving construction, industrial and utility markets. Results are compared with Q1 2013 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $759.5 | $740.1 |
| Gross profit / margin | $245.0 / 32.3% | $236.3 / 31.9% |
| Operating income / margin | $104.8 / 13.8% | $97.7 / 13.2% |
| Net income attributable to Hubbell | $64.2 | $65.9 |
| Diluted EPS | $1.08 | $1.10 |
| Operating cash flow | $43.4 | $42.7 |
| Capital expenditures | $12.7 | $13.0 |
Sales rose 3%, primarily from acquisitions; acquisitions added four percentage points, foreign exchange reduced sales by about one point, and organic sales were essentially flat. Adverse weather weighed on demand. Gross and operating margins improved as productivity and price realization more than offset cost inflation; Q1 2013 also included approximately $1.9 million of facility-closure costs. Higher taxes and foreign-currency transaction losses more than offset increased operating income, reducing Hubbell-attributable net income 3% and diluted EPS 2%. The effective tax rate was 32.0%, versus 26.8%.
Segments: Electrical sales increased 5% to $538.8; operating income rose 11% to $68.1 and margin improved to 12.6% from 12.0%. Power sales declined 2% to $220.7; operating income increased 2% to $36.7 and margin improved to 16.6% from 16.1%. Electrical growth reflected acquisitions and favorable pricing, while organic volume was flat. Power sales were affected by weaker construction-related demand, adverse currency and negative price realization.
Cash, debt and liquidity
Cash and cash equivalents were $647.3 at March 31, 2014, down from $740.7 at year-end 2013. Cash used in investing was $103.0, including $90.9 for acquisitions; financing used $35.6, including $29.6 in dividends and $11.5 in share repurchases. Operating cash flow less capital expenditures was $30.7 for the quarter. Working-capital changes used $47.6 of cash.
Total debt was $598.2, including $597.3 of long-term debt and $0.9 of short-term debt. The filing reports net cash (cash and investments less debt) of $95.2, compared with $189.1 at December 31, 2013. Debt-to-capital was 24%. The $500 million revolving credit facility was undrawn, and Hubbell reported compliance with its covenant. About 45% of cash was held outside the United States; the company intends to indefinitely reinvest most undistributed international earnings and cash abroad.
Acquisitions, outlook and notable matters
- Q1 acquisitions were Powerohm Resistors, Pen-Cell and Fiber and Cable Accessories, for total net cash consideration of $90.9. They added $48.9 of goodwill and $31.8 of intangible assets; their reported-quarter results were not significant.
- For 2014, management expected net sales growth of 5%–6%, with acquisitions contributing 3%–4%. It forecast end-market growth of approximately 2%–3%, including double-digit residential growth, low-single-digit industrial and non-residential growth, and a flat utility market.
- Management expected operating-margin expansion of approximately 20–30 basis points, a tax rate of about 32.5%, and free cash flow approximately equal to net income. It planned continued productivity and growth investment, with capital deployment emphasizing acquisitions.
- Key risks include demand and weather, raw-material and purchased-product costs, pricing, foreign exchange, productivity execution, acquisition integration and benefits, tax changes, pensions, and legal or environmental contingencies.
- In the Powerweb Energy litigation, Hubbell said it had defenses and had accrued the low end of its estimated range in 2013. The ultimate outcome remained uncertain and could materially adversely affect financial position, liquidity or results.
- Product warranty accrual was $6.9 at quarter-end. The fair value and maximum potential payment under guarantees were reported as not material. No material change in risk factors or market-risk exposure was reported.
Important facts for investors to verify
- Whether the expected 2014 sales growth, margin expansion, tax rate and free-cash-flow outlook were achieved.
- How much of subsequent growth came from acquisitions versus organic volume, and whether acquired businesses delivered expected benefits.
- Whether cash conversion and working-capital trends improved after the quarter’s $47.6 working-capital cash use.
- How the higher tax rate, material inflation, pricing and adverse weather affected earnings and margins.
- Updates on the Powerweb litigation, including any change to the accrual or assessment of potential exposure.