Hubbell Incorporated — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Hubbell designs, manufactures and sells electrical and electronic products for construction, industrial and utility markets. Its two reportable segments are Electrical and Power.
Key financial results
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $3,505.2 million | $3,390.4 million |
| Gross profit / margin | $1,100.7 million / 31.4% | $1,091.8 million / 32.2% |
| Operating income / margin | $477.8 million / 13.6% | $474.6 million / 14.0% |
| Adjusted operating income / margin (non-GAAP) | $512.8 million / 14.6% | $513.5 million / 15.1% |
| Net income attributable to Hubbell | $293.0 million | $277.3 million |
| Diluted EPS | $5.24 | $4.77 |
| Adjusted diluted EPS (non-GAAP) | $5.66 | $5.52 |
| Cash from operating activities | $398.2 million | $331.1 million |
| Capital expenditures / free cash flow (non-GAAP) | $67.2 million / $331.0 million | $77.1 million / $254.0 million |
| Total debt at year-end | $993.7 million | $644.1 million |
| Cash and investments at year-end | $505.2 million | $405.2 million |
| Working capital | $961.7 million | $784.7 million |
FY2016 sales rose 3%: acquisitions contributed 3 percentage points, organic volume including pricing contributed 1 point, and foreign currency translation reduced sales by 1 point. GAAP net income attributable to Hubbell increased 6%, while adjusted net income declined 1%. Results include $35.0 million of restructuring and related costs in 2016; adjusted measures exclude specified costs and are non-GAAP.
Fourth-quarter results
Q4 2016 net sales were $854.2 million versus $829.7 million in Q4 2015. Net income attributable to Hubbell was $64.4 million versus $61.5 million, and diluted EPS was $1.16 versus $1.06.
Segments and material changes
- Electrical: Sales increased 3% to $2,460.2 million, largely reflecting acquisitions. Operating income fell 4% to $267.4 million; operating margin declined to 10.9% from 11.7%. Management cited mix, foreign exchange, pricing pressure in Lighting and cost increases, partly offset by restructuring savings and lower material costs.
- Power: Sales increased 4% to $1,045.0 million, principally from acquisitions. Operating income rose 8% to $210.4 million; operating margin improved to 20.1% from 19.5%. Favorable pricing, material costs and productivity supported results.
- Management said end markets were mixed: construction-related sales grew, while industrial and energy-related markets remained weak, though weakness moderated. Utility sales were approximately flat amid project delays.
- Cash from operations increased, primarily due to higher net income after non-cash adjustments and lower working-capital and restructuring cash uses. Cash used for acquisitions, net of cash acquired, was $173.4 million. Hubbell repurchased shares for an aggregate purchase price of $237.8 million and paid $144.0 million in dividends during 2016.
Liquidity, debt and capital resources
Year-end cash and cash equivalents were $437.6 million; total debt was $993.7 million and net debt was $488.5 million. Debt to total capital was 38%, compared with 27% in 2015. The increase in debt primarily reflected a March 2016 issuance of $400 million of 3.35% fixed-rate notes due 2026. The $750 million revolving credit facility was undrawn, and the company reported compliance with its debt covenants. Its stated 2017 free-cash-flow target was an amount equal to net income attributable to Hubbell.
Outlook, risks and unusual items
- 2017 outlook: Hubbell expected aggregate end-market growth of approximately 2%, including 2–4% non-residential and 4–6% residential growth. It expected transmission and distribution, industrial, and oil and gas markets to be flat to up 2%. Management forecast diluted EPS of $5.60–$5.80, including approximately $0.25 of restructuring and related costs, and expected $0.20 of incremental savings from prior restructuring actions.
- Management expected organic sales growth to outperform end markets, with acquisitions continuing to contribute. It identified Lighting pricing pressure, foreign exchange and material costs as headwinds; restructuring savings and higher sales were expected to support margins.
- Restructuring costs included a $12.5 million Q4 charge for an estimated liability related to an anticipated withdrawal from a multi-employer pension plan. Hubbell estimated potential additional liability of up to $28 million, depending on third-party actions. Negotiations were expected in 2017.
- Pension plan amendments generated a $34.1 million curtailment gain recorded in accumulated other comprehensive income, not as an operating-income gain. The defined-benefit pension plans had a reported funded deficit of $212.3 million at year-end.
- Key risks include economic and end-market weakness, competitive pricing, raw-material availability and costs, execution of restructuring and acquisitions, foreign exchange, customer credit, tax-law changes and audits, pension assumptions, cybersecurity and legal or environmental contingencies. Environmental liabilities were $5.2 million at year-end. The company said it did not expect environmental matters to have a material impact, while noting outcomes of legal claims are uncertain.
- The company reported no material off-balance-sheet arrangements and stated that its internal control over financial reporting was effective at a reasonable assurance level.
Important facts for investors to verify
- Whether forecast end-market growth, $5.60–$5.80 diluted EPS and expected restructuring savings are achieved, especially given continued Lighting pricing pressure.
- The ultimate multi-employer pension withdrawal liability, including whether exposure exceeds the $12.5 million accrual and approaches the stated potential additional amount.
- Whether operating margins stabilize as restructuring savings offset mix, pricing, foreign-exchange and material-cost pressures.
- How acquisitions contribute to organic growth and profitability, and whether higher debt and interest expense remain manageable.
- Developments in pension funding, tax audits and legal or environmental matters; the filing does not provide a clear quantified estimate for all possible outcomes.