Hubbell Incorporated — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are reported below. Hubbell designs, manufactures and sells electrical and electronic products. Its segments are Electrical and Power.
Financial performance and liquidity
- Full-year revenue: $3,183.9 million, up 5% from $3,044.4 million in 2012. Acquisitions contributed three percentage points and volume two; price realization was largely offset by unfavorable currency translation.
- Profitability: Gross profit was $1,070.5 million, with a 33.6% gross margin versus 33.2% in 2012. Operating income rose 8% to $507.6 million; operating margin increased to 15.9% from 15.5%. Net income attributable to Hubbell was $326.5 million, up 9%, and diluted EPS was $5.47 versus $5.00.
- Cash flow: Operating cash flow was $381.8 million, compared with $349.1 million in 2012. Capital expenditures were $58.8 million, leaving approximately $323.0 million of operating cash flow less capital expenditures. Cash and cash equivalents increased to $740.7 million from $645.0 million.
- Debt and liquidity: Total debt was $597.5 million; debt to total capital was 24%. Cash and investments were $786.6 million, producing reported net debt of negative $189.1 million. The $500 million revolving credit facility was undrawn and extended to March 2018; the company reported covenant compliance.
- Working capital and assets: Working capital was $1,165.4 million, up from $1,008.8 million. Total assets were $3,187.2 million and Hubbell shareholders’ equity was $1,906.4 million.
- Segments: Electrical revenue increased 7% to $2,262.6 million and operating income rose 12% to $341.1 million, with margin expanding to 15.1%. Power revenue declined 1% to $921.3 million; operating income fell 1% to $166.5 million and margin remained 18.1%.
- Fourth quarter: Net sales were $806.6 million versus $752.5 million in the 2012 fourth quarter; net income attributable to Hubbell was $82.0 million versus $71.9 million, and diluted EPS was $1.38 versus $1.20.
Changes and notable items
- Three 2013 acquisitions—Norlux, CMC and Continental—were completed for $96.5 million net of cash acquired and added to Electrical. Their 2013 contribution to consolidated sales and earnings was described as not significant.
- Three additional acquisitions were completed in January 2014 for approximately $92 million; two were assigned to Power and one to Electrical.
- Power operating income included $5.0 million of facility consolidation costs. Its year-over-year volume decline was largely attributed to elevated fourth-quarter 2012 sales related to Superstorm Sandy.
- The effective tax rate declined to 30.4% from 31.6%, primarily reflecting research and development tax-credit provisions enacted in 2013, including a retroactive 2012 credit benefit. The quarterly dividend increased from $0.45 to $0.50 per share beginning with the December 2013 payment.
Outlook, risks and contingencies
- 2014 outlook: Management expected net sales growth of 5%–6%, with balanced contributions from acquisitions and organic volume; market growth of approximately 2%–3%; and operating-margin expansion of approximately 20–30 basis points. It expected a tax rate of about 32.5%, partly due to expiration of the R&D tax credit, and free cash flow approximately equal to net income.
- Management expected residential markets to grow at a double-digit rate, industrial and non-residential markets at low-single-digit rates, and utility markets to remain flat. It highlighted productivity, sourcing, product redesign, lean initiatives, pricing and acquisitions as priorities, while anticipating material, healthcare and other cost inflation.
- Powerweb litigation: Powerweb Energy alleges claims including breach of contract and trade-secret misappropriation relating to wiHUBB wireless lighting technology. Hubbell moved for summary judgment and says it will defend the matter. The company recorded an accrual at the low end of its estimated range, but stated that the outcome remains uncertain and could materially adversely affect financial position, liquidity and results. No trial date had been set.
- Other risks: Competitive pricing and demand, economic weakness, raw-material availability and costs, foreign sourcing and currency movements, customer credit quality, acquisitions and integration, information-system implementation, pension funding, tax audits, environmental and product claims, and potential goodwill or intangible impairment. The top ten customers represented about one-third of sales; foreign-currency movements reduced 2013 sales by approximately $13.2 million and operating income by $2.2 million.
- Environmental liabilities were $12.3 million at year-end. Management stated that environmental matters, considering reserves and past experience, were not expected to have a material impact. The company reported no material off-balance-sheet arrangements and no material goodwill impairment in 2013.
- Management and the independent auditor concluded that internal control over financial reporting was effective at December 31, 2013. The auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Whether 2014 sales, margin, tax-rate and free-cash-flow expectations were achieved, particularly given the anticipated expiration of the R&D tax credit.
- How the January 2014 acquisitions performed and whether expected growth and synergies justified the approximately $92 million purchase price.
- The status and financial exposure of the Powerweb litigation, including the recorded accrual and any subsequent developments.
- Whether Electrical growth can continue and Power can recover from weaker organic volume, while productivity and pricing offset inflation.
- Cash deployment, including acquisitions, dividends and remaining share-repurchase authorization, and the company’s cash availability given that approximately 40% of cash was held outside the United States.