Hubbell Incorporated — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. Hubbell manufactures electrical products and utility solutions. Its reporting segments are Electrical and Utility Solutions (renamed from Power in Q1 2020).
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,108.6m | $1,204.0m | $3,148.1m | $3,487.7m |
| Gross margin | 29.7% | 30.1% | 29.3% | 29.4% |
| Operating income | $162.9m | $172.9m | $413.2m | $460.7m |
| Operating margin | 14.7% | 14.4% | 13.1% | 13.2% |
| Net income attributable to Hubbell | $107.1m | $130.7m | $270.3m | $299.0m |
| Diluted EPS | $1.96 | $2.38 | $4.95 | $5.45 |
| Adjusted diluted EPS (non-GAAP) | $2.30 | $2.34 | $5.81 | $6.21 |
Q3 organic sales fell 8.2%; GAAP sales declined 7.9%. For the first nine months, organic sales fell 9.8% and GAAP sales declined 9.7%. Q3 S&A expense was $166.7m, down $22.4m year over year; the effective tax rate was 21.9% versus 21.1%. Interest expense was $15.0m in Q3 and $45.8m year to date, below prior-year levels.
Segment results: Q3 Electrical sales declined 14.2% to $591.2m and operating margin fell to 11.9% from 13.1%. Utility Solutions sales rose 0.5% to $517.4m, while operating margin increased to 17.8% from 16.1%. For nine months, Electrical sales fell 15.1% and margin was 10.9%; Utility Solutions sales fell 2.5% and margin was 15.8%.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $455.6m, up from $385.1m; capital expenditures were $51.7m, down from $72.6m. Cash and cash equivalents increased to $269.2m from $182.0m at year-end 2019.
- At September 30, total debt was $1,458.2m, including $21.9m short-term debt; total debt to total capital was 42%, versus 45% at year-end. Cash and investments were $338.6m; reported net debt was $1,119.6m, versus $1,319.5m at year-end.
- The company repaid the remaining $90.6m Term Loan principal in Q3. No borrowings were outstanding under its $750m revolving credit facility at quarter-end; the full facility was available. It reported compliance with debt covenants.
- Nine-month financing included $148.2m of common dividends and $41.3m of share repurchases. Quarterly dividend per share was $0.91, compared with $0.84 a year earlier.
Changes, outlook and notable items
- COVID-19: Management attributed weaker demand, plant and supply-chain interruptions, installation delays, operating inefficiencies and increased expected credit losses to the pandemic. Effects were most pronounced in Q2; manufacturing disruption was less significant and Aclara installation headwinds moderated in Q3. Electrical markets remained weak, while utility transmission and distribution demand was more resilient.
- Management withdrew 2020 guidance in April and reinstated revised guidance in July. The filing text does not provide a clear value for the revised guidance. Management expected significant 2020 volume declines in Electrical, continued uncertainty and possible future operational disruptions, and selective capital spending for the remainder of 2020.
- Q3 included a $6.6m pension settlement charge. Prior-year comparisons include the $21.7m Haefely disposal gain and a $5.0m investment loss; Haefely was sold in August 2019. Q3 adjusted net income was $125.9m, down 1.9%, and adjusted diluted EPS was $2.30, down 1.7%.
- Nine-month restructuring costs were $12.5m, with $11.5m of additional expected costs for actions underway; total restructuring and related costs were $16.6m, a non-GAAP measure. The company expects capital spending to remain below the prior year amid economic uncertainty.
- In October 2020, Hubbell acquired AccelTex for approximately $45m, after the balance-sheet date. Also after quarter-end, the board approved a new share repurchase program of up to $300m, expiring in October 2023.
- COVID-19’s scope and duration, customer demand and collections, supply-chain continuity, cost inflation, pensions, legal and environmental contingencies, and foreign exchange are among the identified risks. Management said disclosure controls were effective as of September 30, 2020.
Investor verification priorities
- Confirm the revised 2020 guidance issued in July and any subsequent update; the values are not clear in this filing text.
- Track recovery in Electrical demand and Aclara project deployments, and whether COVID-related disruptions or cost inefficiencies recur.
- Assess the sustainability of operating cash flow and margins, including the effects of working capital, payroll-tax deferrals, bad-debt reserves and restructuring savings.
- Verify debt, liquidity and capital-return developments, including the use of the available revolver and the new repurchase authorization.
- Review the AccelTex acquisition’s integration and contribution, and monitor pension, warranty and other contingency exposures.