Hubbell Incorporated — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Interim financial statements are unaudited. Hubbell designs, manufactures and sells electrical and electronic products through its Electrical and Power segments.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $855.8 million | $801.3 million | $1,615.3 million | $1,541.4 million |
| Operating income | $143.7 million | $132.1 million | $248.5 million | $229.8 million |
| Operating margin | 16.8% | 16.5% | 15.4% | 14.9% |
| Net income attributable to Hubbell | $90.2 million | $82.1 million | $154.4 million | $148.0 million |
| Diluted EPS | $1.51 | $1.37 | $2.59 | $2.47 |
- Q2 sales rose 7%, with acquisitions contributing five percentage points and organic volume two. Six-month sales rose 5%, with acquisitions contributing four percentage points and organic volume one.
- Q2 gross margin improved to 34.2% from 33.9%; six-month gross margin rose to 33.3% from 33.0%. Productivity and lower facility-closure costs helped, partly offset by higher material costs, mix and acquisition dilution.
- Q2 S&A was $148.8 million, or 17.4% of sales, versus $139.9 million, or 17.5%. Six-month S&A was $289.0 million, or 17.9% of sales, versus $278.5 million, or 18.1%.
- Q2 total other expense declined to $7.3 million from $9.3 million, aided by foreign-currency transaction gains. The six-month total was $16.0 million versus $15.8 million.
- Effective tax rates increased to 33.4% in Q2 from 32.4%, and to 32.9% for the first half from 30.0%. The filing cites the expiration of certain tax provisions, including the research and development credit, and discrete tax items.
- Segments, Q2: Electrical sales were $612.4 million (+8%) and operating margin was 15.6% (15.7% prior year); Power sales were $243.4 million (+3%) and margin was 19.8% (18.2%). For the first half, Electrical sales were $1,151.2 million and margin 14.2%; Power sales were $464.1 million and margin 18.3%.
Cash flow, debt and liquidity
- First-half operating cash flow was $101.2 million, down from $108.5 million. Capital expenditures were $27.1 million, yielding free cash flow of approximately $74.1 million, compared with $82.5 million in the prior-year period. The company attributed lower operating cash flow mainly to higher tax payments.
- Investing cash use was $174.3 million, including $147.3 million for acquisitions; financing cash use was $76.0 million, including $59.1 million of dividends and $23.3 million of share repurchases.
- Cash and cash equivalents were $597.4 million at June 30, versus $740.7 million at year-end 2013. Cash plus investments totaled $645.6 million; total debt was $598.5 million, leaving reported net cash of $47.1 million. Long-term debt was $597.4 million and short-term debt $1.1 million.
- The $500 million revolving credit facility was undrawn; the company reported compliance with its debt covenant. Approximately 54% of cash was held outside the U.S., and the company intends to indefinitely reinvest most undistributed international earnings and cash abroad.
- Current assets were $1,603.4 million and current liabilities $464.5 million. Accounts receivable and inventory rose from year-end to $506.0 million and $429.8 million, respectively.
Material changes, outlook and risks
- Hubbell completed five acquisitions in the first half—Reuel, Litecontrol, Powerohm, Pen-Cell and FCA—for $147.3 million net of cash acquired. Their combined contribution to reported sales and earnings was not significant in the period. Goodwill increased to $873.2 million, including $69.9 million from these acquisitions.
- Management expected 2014 sales growth of 5%–6% versus 2013, with acquisitions contributing more than half. It forecast end-market growth of approximately 2%–3%, led by mid- to high-single-digit residential growth; utility demand was expected to remain relatively flat.
- Management expected full-year operating-margin expansion of approximately 20–30 basis points, while warning of second-half pressure from mix, acquisition dilution and competitive pricing. It expected a 2014 tax rate of approximately 33% and free cash flow approximately equal to net income. Acquisitions remained a capital-deployment priority.
- Key sensitivities include demand, pricing and competition, material and purchased-component costs, productivity execution, foreign exchange, acquisition integration and expected synergies, tax changes, and pension and warranty estimates. Management reported no significant change in market-risk exposures or material change in risk factors during the period.
- Litigation: Powerweb Energy alleges claims related to Hubbell’s wiHUBB wireless lighting technology. The court granted summary judgment for Hubbell on certain claims, including unjust enrichment, conversion and lost profits, but denied judgment on others. No trial date had been set. Hubbell believes it has meritorious defenses, but says the ultimate outcome remains uncertain and could materially affect financial position, liquidity or results.
- The annual goodwill impairment test found estimated fair values for each reporting unit above carrying values, with headroom ranging from approximately 100% to 400%. The filing reports no material guarantee exposure. Adoption of new revenue-recognition guidance was still under assessment; the company did not expect the new discontinued-operations guidance to have a material impact.
Important facts for investors to verify
- Whether organic sales and end-market growth support management’s 2014 sales outlook, given the large acquisition contribution.
- Whether pricing, productivity and cost reductions can offset material inflation, competitive pressure and second-half mix/acquisition margin dilution.
- How operating cash flow and working-capital requirements develop relative to management’s free-cash-flow expectation.
- Progress integrating the five acquisitions, including realized earnings contributions, synergies and any resulting goodwill or intangible-asset risks.
- Developments in the Powerweb litigation, including potential exposure beyond the existing accrual.