Hubbell Incorporated — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Hubbell designs, manufactures, and sells electrical and electronic products across construction, industrial, and utility markets through its Electrical and Power segments.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $948.3 million | $908.8 million | $1,800.6 million | $1,743.6 million |
| Gross margin | 31.1% | 32.3% | 30.9% | 31.7% |
| Operating income | $130.6 million | $132.1 million | $234.7 million | $234.0 million |
| Operating margin | 13.8% | 14.5% | 13.0% | 13.4% |
| Net income attributable to Hubbell | $79.1 million | $81.0 million | $141.9 million | $141.9 million |
| Diluted EPS | $1.43 | $1.45 | $2.56 | $2.53 |
Q2 sales increased 4%, driven by organic volume and acquisitions, partly offset by foreign-exchange effects. Gross margin fell 1.2 percentage points; management cited price and material-cost headwinds and acquisition mix, partly offset by restructuring savings. Q2 adjusted diluted EPS, a non-GAAP measure excluding restructuring and related costs, was $1.51 versus $1.53. For the first half, adjusted diluted EPS was $2.74 versus $2.69.
Segments: Q2 Electrical sales rose 2% to $656.4 million, while operating income declined 8% to $71.0 million and margin fell to 10.8%. Power sales rose 9% to $291.9 million; operating income increased 8% to $59.6 million, with margin of 20.4%. First-half Electrical operating income declined 9%; Power operating income increased 12%.
Cash, debt, and liquidity
- First-half operating cash flow was $132.1 million, up from $126.6 million; capital expenditures were $33.0 million. Investing activities used $139.9 million, including $108.5 million for acquisitions. Financing activities used $74.7 million. Cash declined $69.9 million to $367.7 million.
- At June 30, total debt was $1,095.2 million and cash plus investments was $438.6 million; reported net debt was $656.6 million. Net debt-to-capital was 24%, compared with 19% at year-end 2016. Current liabilities included $299.5 million of notes due June 1, 2018; commercial paper outstanding was $98.0 million.
- The company had an undrawn $750 million revolving credit facility expiring in December 2020 and reported compliance with its covenants. Approximately 95% of cash and cash equivalents was held outside the United States.
- First-half dividends paid were $77.2 million and share repurchases were $92.6 million. Cash dividends per share were $0.70 in Q2, versus $0.63 a year earlier.
Material developments, outlook, and risks
- Hubbell completed four acquisitions for aggregate consideration of $100.2 million, including iDevices, an IoT technology developer, and AEC, a gas-components manufacturer. Acquired-business results were not significant to first-half consolidated results. Management expects the iDevices investment to dilute 2017 operating margin.
- Restructuring and related costs were $6.4 million in Q2 and $14.7 million in the first half. The company expected approximately $0.30 per diluted share of such costs for full-year 2017. Ongoing actions include facility consolidation and workforce reductions.
- Management raised expected 2017 aggregate end-market growth to approximately 2.5%–3.0%, from 2%–3%, citing an improved transmission and distribution outlook. Acquisitions completed through Q2 were expected to add about 2% to sales growth. Full-year diluted EPS guidance remained $5.40–$5.60, including restructuring costs; management targeted free cash flow equal to net income attributable to Hubbell.
- Key stated risks include demand and pricing changes, raw-material and other cost inflation, execution of productivity and restructuring plans, acquisition integration and synergies, foreign exchange, pension assumptions, and legal, environmental, tax, and product-warranty matters. The filing reports no material change in risk factors; legal proceedings arise in the ordinary course. A previously accrued $12.5 million multi-employer pension withdrawal liability may be settled over about 19 years or in a lump sum; possible additional liability was not included in remaining restructuring-cost estimates.
Most important facts for investors to verify
- Whether price and materials inflation continue to pressure gross margins, particularly in Electrical, and whether productivity savings offset those costs.
- Progress toward the $5.40–$5.60 EPS and free-cash-flow targets, including the expected impact of iDevices and restructuring charges.
- Funding and refinancing plans for the $300 million notes due June 2018, alongside rising commercial-paper borrowings and net debt.
- Final purchase-accounting allocations and integration results for the 2017 acquisitions, plus any change in the multi-employer pension withdrawal exposure.