Hubbell Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated. Hubbell designs, manufactures and sells electrical and electronic products through its Electrical and Power segments. The results are unaudited interim financial statements; management cautions that quarterly results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Net sales | $1,087.3 million | $991.2 million | Up 10%; acquisitions contributed 5 percentage points, organic growth 5 points, and foreign exchange was a headwind of less than 1 point. |
| Gross profit / margin | $307.3 million / 28.3% | $282.9 million / 28.5% | Margin down 20 basis points. Adjusted gross margin was 28.8% versus 29.6%. |
| Operating income / margin | $120.9 million / 11.1% | $99.6 million / 10.0% | Adjusted operating income was $139.1 million versus $130.7 million; adjusted margin was 12.8% versus 13.2%. |
| Net income attributable to Hubbell | $72.3 million | $58.3 million | Up 24%; reported results include acquisition-related intangible amortization. |
| Diluted EPS | $1.32 | $1.05 | Adjusted diluted EPS was $1.57 versus $1.51. |
| Operating cash flow | $78.1 million | $(0.4) million | Improved primarily with working-capital improvements and higher net income, partly offset by higher employee compensation payments. |
| Capital expenditures | $23.3 million | $22.0 million | Higher investment in facilities and equipment. |
Segments
- Electrical: Sales of $630.2 million, up 2%; operating income of $68.6 million, up 12%, and operating margin of 10.9% versus 9.9%. Organic sales growth was approximately 3%, partly offset by foreign exchange.
- Power: Sales of $457.1 million, up approximately 23%; operating income of $52.3 million, up 36%, and operating margin of 11.4% versus 10.3%. Acquisitions contributed approximately 14 percentage points of sales growth and organic growth 9 points. Adjusted operating margin fell to 14.2% from 17.0%, reflecting Aclara operating results for an additional month and unfavorable Aclara sales mix.
Balance sheet, debt and liquidity
- At March 31, 2019, cash and cash equivalents were $205.3 million, short-term investments $9.5 million, and total debt $1,808.8 million. Net debt, as defined by the company, was $1,536.5 million, versus $1,538.7 million at year-end 2018.
- Total debt to total capital was 50%; net debt to total capital was 42%, compared with 43% at December 31, 2018. Long-term debt on the balance sheet was $1,731.5 million, with $77.3 million of short-term debt and current maturities.
- The $750 million revolving credit facility was undrawn. Hubbell reported compliance with its debt covenants. Its term loan includes a covenant limiting total debt to 65% of total capitalization.
- Cash increased $16.3 million during the quarter. Investing used $20.1 million; financing used $43.7 million, including $45.8 million of common dividends and $10.0 million of share repurchases.
- The company paid a quarterly dividend of $0.84 per share, up from $0.77. It had $350 million remaining under its $400 million share repurchase authorization, which expires October 2020.
Changes, outlook and notable items
- Aclara comparison: Acquired in February 2018 for approximately $1.1 billion and added to the Power segment. Q1 2018 included $10.3 million of Aclara transaction costs; these did not recur in 2019. Aclara contributed sales of approximately $90.4 million and an operating loss of approximately $4.9 million from acquisition through March 31, 2018. Acquisition timing and related amortization affect year-over-year comparisons.
- Margins and costs: Management said favorable pricing exceeded material-cost increases, but consolidated and adjusted gross margins declined. Tariffs, material inflation, mix, and Aclara integration and performance remain relevant considerations. Management says productivity and pricing programs are intended to offset inflation and support growth investments.
- Restructuring: Q1 GAAP restructuring costs were $3.0 million; the company estimated $7.0 million of remaining costs for actions underway at quarter-end. Hubbell expects restructuring and related spending to increase in 2019 and 2020 as it pursues further footprint consolidation and cost reductions.
- Outlook: The filing provides no specific 2019 revenue, earnings or cash-flow guidance. It identifies expected market conditions, productivity, restructuring, Aclara integration, and capital allocation as forward-looking matters, subject to risks.
- Contingency: Hubbell disputes a multi-employer pension plan trustees’ demand for $23.3 million. The company estimated potential additional liability of up to $23 million as of March 31, 2019. Arbitration was stayed after the remaining employer filed for Chapter 11; Hubbell intends to pursue arbitration after the bankruptcy proceedings.
- Accounting and other items: Adoption of the lease standard on January 1, 2019 recognized $109.3 million of operating lease right-of-use assets and liabilities, with no material income-statement or cash-flow impact. The quarter-end balance sheet showed $102.1 million of lease assets and $105.6 million of lease liabilities. Hubbell also reclassified approximately $30 million of stranded tax effects from accumulated other comprehensive income to retained earnings, with no effect on total equity.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. The filing reported no material change to risk factors from the 2018 Form 10-K.
Investor verification priorities
- Assess underlying performance using both GAAP and adjusted measures, noting that adjusted results exclude acquisition-related amortization and that Q1 2018 included Aclara transaction costs.
- Track Power segment adjusted margins, Aclara sales mix and integration, and whether pricing and productivity continue to offset material costs and tariffs.
- Monitor operating cash conversion, working capital, capital spending, dividends, repurchases and debt levels.
- Follow the pension-plan dispute and potential additional withdrawal liability, along with the timing and cash costs of restructuring.
- Review subsequent filings for updated business outlook, market conditions, and any changes to contingencies or liquidity needs.