Hubbell Incorporated — FY2017 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2017; quarterly figures are unaudited. Hubbell designs, manufactures and sells electrical and electronic products for construction, industrial, energy and utility markets. Electrical generated 69% of 2017 sales and Power 31%.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $3,668.8 million | $3,505.2 million | +5% |
| Gross margin | 31.4% | 31.4% | Flat |
| Operating income / margin | $503.7 million / 13.7% | $477.8 million / 13.6% | Income +5%; margin +10 bps |
| Adjusted operating income / margin | $534.1 million / 14.6% | $512.8 million / 14.6% | Income +4%; margin flat |
| Net income attributable to Hubbell | $243.1 million | $293.0 million | -17% |
| Adjusted net income attributable to Hubbell | $328.0 million | $316.8 million | +4% |
| Diluted EPS / adjusted diluted EPS | $4.39 / $5.93 | $5.24 / $5.66 | GAAP -16%; adjusted +5% |
| Operating cash flow / free cash flow | $379.0 / $299.3 million | $411.0 / $343.8 million | Operating cash flow -8%; FCF -13% |
| Total debt / cash and investments | $1,055.2 / $447.2 million | $993.7 / $505.2 million | Net debt rose to $608.0 million from $488.5 million |
Working capital was $898.0 million, down from $961.7 million. Total assets were $3,720.6 million and Hubbell shareholders’ equity was $1,634.2 million. Debt to total capital was 39%, compared with 38% in 2016. The $750 million revolving facility was undrawn at year-end; Hubbell reported compliance with its debt covenants.
In the fourth quarter, sales were $917.7 million versus $854.2 million in 2016. Net income attributable to Hubbell was $20.4 million versus $64.4 million, including an approximately $57 million, or $1.02 per share, tax-reform charge.
Material changes and operating performance
- 2017 sales growth reflected two percentage points from acquisitions and three from organic volume, including pricing effects.
- Electrical sales rose 3% to $2,532.8 million; adjusted operating margin declined 30 bps to 11.9%, pressured by pricing, materials and acquisitions, partly offset by productivity and restructuring savings.
- Power sales rose 9% to $1,136.0 million, including 6 percentage points of organic growth and 3 from acquisitions. Adjusted operating margin increased 20 bps to 20.6%.
- Operating cash flow declined primarily due to higher working-capital use, including inventory buildup. Capital expenditures increased to $79.7 million from $67.2 million.
- Hubbell paid $157.6 million in dividends and repurchased $92.5 million of shares. The quarterly dividend was raised from $0.70 to $0.77 per share; a new $400 million repurchase authorization was approved in October.
Outlook, notable items and risks
- For 2018, management expected end-market growth of approximately 2%–4%, with sales expected to modestly outperform end-market growth. Acquisitions, including Aclara, were expected to contribute approximately 15% to sales growth.
- Management forecast 2018 diluted EPS of $6.10–$6.50 and adjusted diluted EPS of $6.95–$7.35. The adjusted outlook excludes Aclara acquisition-related and transaction costs. The company targeted free cash flow equal to net income attributable to Hubbell.
- On February 2, 2018, after year-end, Hubbell acquired Aclara for approximately $1.1 billion. It was funded with a $500 million term loan, $450 million of 2028 notes and commercial paper. At February 12, 2018, commercial paper outstanding was $263 million. This materially increases leverage relative to the December 31, 2017 balance sheet.
- TCJA accounting remained provisional. The 2017 effective tax rate was 43.6%, including approximately $57 million of tax expense; the adjusted effective tax rate was 30.8%. Accounting adjustments could be material, and no estimate was recorded for tax on the remaining $720 million of unremitted foreign earnings.
- Other notable costs included a $10.1 million pretax loss on early debt extinguishment and $23.7 million of restructuring and related costs. Management expected restructuring activity to continue at a lower, more consistent run-rate.
- Risks include acquisition integration and realization of Aclara benefits, higher debt service and variable-rate exposure, raw-material costs and supply interruptions, competitive pricing, economic and end-market weakness, cybersecurity and IT-system disruptions, tax uncertainty, foreign exchange, pensions, and legal and environmental claims. A possible additional multi-employer pension withdrawal liability was estimated at up to $23 million beyond amounts already recognized.
- Environmental liabilities were $4.9 million at year-end; the company said it did not expect environmental matters, considering reserves and past experience, to materially affect its financial position or results. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Track post-Aclara debt, interest expense, covenant headroom and cash generation against management’s 2018 outlook.
- Monitor integration costs, acquired sales and earnings, and whether Aclara delivers expected growth and strategic benefits.
- Review final TCJA accounting, including transition-tax and foreign-earnings estimates, and their effect on cash taxes and reported earnings.
- Compare GAAP results with adjusted measures and assess recurring restructuring, acquisition and other excluded costs.
- Assess working-capital and inventory trends, margin recovery, and the timing of material-cost recovery through pricing and productivity.
- Review pension funding assumptions and potential multi-employer plan exposure, along with updates to legal and environmental contingencies.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2017.