Hubbell Incorporated — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Hubbell designs and sells electrical and electronic products through its Electrical and Power segments. On February 2, 2018, it acquired Aclara, a smart utility infrastructure business, for approximately $1.1 billion; Aclara is included in Power from the acquisition date.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $991.2 million | $852.3 million |
| Gross profit / margin | $282.9 million / 28.5% | $262.6 million / 30.8% |
| Operating income / margin | $99.6 million / 10.0% | $107.8 million / 12.6% |
| Net income attributable to Hubbell | $58.3 million | $62.8 million |
| Diluted EPS | $1.05 | $1.13 |
| Operating cash flow | $(0.4) million | $62.9 million |
- Sales rose 16%: acquisitions contributed 13 percentage points, organic volume 3 points, and foreign exchange less than 1 point.
- GAAP gross margin fell 230 basis points, reflecting Aclara-related costs, acquisition mix, and price and material-cost headwinds; productivity gains partly offset these pressures. Adjusted gross margin was 29.6%.
- GAAP operating income and Hubbell-attributable net income declined 8% and 7%, respectively. Excluding Aclara acquisition-related and transaction costs, adjusted operating income was $121.5 million and adjusted net income was $76.9 million; adjusted diluted EPS was $1.39, up 23% year over year. These are non-GAAP measures.
- Effective tax rate was 21.1%, versus 29.7%, primarily reflecting the U.S. tax-law change and a favorable share-based-award tax impact. Q1 had no material adjustment to the provisional tax amounts recorded in 2017.
- Cash and cash equivalents were $216.3 million at March 31, down from $375.0 million at year-end. Capital expenditures were $22.0 million; cash dividends paid were $42.2 million, and dividends declared were $0.77 per common share.
- Total debt was $2.081 billion, versus $1.055 billion at year-end; net debt was $1.792 billion, versus $608.0 million. Debt to total capital was 56% (39% at year-end). The $750 million revolving credit facility was undrawn, and Hubbell reported compliance with its 65% debt-to-capital covenant.
Material changes and segment performance
- Aclara: Hubbell funded the acquisition with a $500 million term loan, $450 million of 3.50% senior notes due 2028, and commercial paper. Aclara contributed approximately $90.4 million of sales and an operating loss of approximately $4.9 million from closing through March 31. Purchase accounting remains preliminary; the company recorded $669 million of goodwill and $444 million of identifiable intangible assets.
- Electrical: Sales increased 5% to $618.1 million; operating income increased 16% to $61.2 million and margin improved to 9.9% from 9.0%, mainly on productivity and volume. Lighting sales declined 3%.
- Power: Sales increased 41% to $373.1 million, largely from Aclara. Reported operating income was $38.4 million and margin 10.3%, including $21.9 million of Aclara acquisition-related and transaction costs. Adjusted margin was 16.2%, down from 20.8% a year earlier, reflecting material-cost pressures and Aclara’s margin dilution.
- Working-capital use increased: receivables and inventories rose, contributing to the decline in operating cash flow. Investing cash outflow was $1.140 billion, principally for Aclara; financing cash inflow was $975.0 million, primarily from acquisition-related borrowing.
Outlook, commentary and risks
- For 2018, management expects aggregate end-market growth of approximately 2%–4%, with Hubbell sales expected to modestly outperform end markets through new products. Expected market growth: oil and gas 5%–7%; electrical transmission and distribution, industrial, and residential 2%–4%; non-residential 1%–3%. Acquisitions are expected to contribute approximately 15% to sales growth.
- Management targets 2018 free cash flow, defined as operating cash flow less capital expenditures, above Hubbell-attributable net income.
- Management says productivity, sourcing and restructuring actions are intended to offset material-cost and other inflation. Restructuring is expected to continue at a lower, more consistent level; approximately $6.8 million of additional costs remained expected at quarter-end for current and prior actions.
- Key stated risks include demand and pricing changes, raw-material and freight costs, tariffs and trade restrictions, execution and integration of acquisitions (including Aclara), realization of expected synergies and savings, tax-estimate changes, operational or IT disruptions, foreign exchange, and legal, environmental and warranty matters. The filing reported no material change in risk factors from the 2017 Form 10-K.
- The company noted that Aclara purchase-price allocation is preliminary and may change materially. Additional adjustments to provisional U.S. tax-reform accounting may also be required and could be material. Management had not fully evaluated any internal-control changes associated with Aclara’s inclusion.
Important facts for investors to verify
- Whether Aclara integration, growth and anticipated synergies support the acquisition rationale, and how its operating margins develop.
- Whether working-capital demands ease and operating cash flow recovers sufficiently to meet the free-cash-flow target while servicing higher debt.
- Whether pricing and productivity offset materials inflation and sustain margins, particularly in Power and Lighting.
- Final Aclara purchase accounting, including intangible-asset and goodwill valuations, and any consequential amortization or tax effects.
- Updates to provisional tax-reform estimates and the company’s ability to maintain covenant compliance and liquidity.