Hubbell Incorporated — Q2 2016 Form 10-Q
Business context and period: Hubbell designs, manufactures and sells electrical and electronic products for construction, industrial and utility markets. This unaudited filing covers the quarter and six months ended June 30, 2016. Its reporting segments are Electrical and Power.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $908.8 million | $874.0 million | $1,743.6 million | $1,683.7 million |
| Gross margin | 32.3% | 32.4% | 31.7% | 31.8% |
| Operating income / margin | $132.1 million / 14.5% | $126.7 million / 14.5% | $234.0 million / 13.4% | $231.7 million / 13.8% |
| Net income attributable to Hubbell | $81.0 million | $80.1 million | $141.9 million | $142.5 million |
| Diluted EPS | $1.45 | $1.37 | $2.53 | $2.44 |
| Cash dividends per common share | $0.63 | $0.56 | $1.26 | $1.12 |
Q2 sales rose 4%, with acquisitions contributing four percentage points, organic volume one point, and foreign exchange reducing growth by one point. Q2 GAAP diluted EPS increased 6%, while adjusted diluted EPS was $1.53, down 2% from $1.56. For the first half, sales increased 4%, but adjusted net income declined 4% to $150.8 million; adjusted diluted EPS was $2.69 versus $2.68.
Q2 adjusted gross margin was 32.7%, down from 33.5%; adjusted operating margin was 15.2%, down from 16.3%. For the first half, adjusted gross margin was 32.1% versus 32.6%, and adjusted operating margin was 14.2% versus 15.0%. Management cited product and business mix, foreign exchange, pricing pressure, and costs outpacing productivity gains; savings from restructuring and favorable material costs provided partial offsets.
Segment results: Q2 Electrical sales increased 4% to $641.4 million; operating margin was 12.0% versus 12.1%, and adjusted margin was 12.9% versus 14.3%. Q2 Power sales increased 3% to $267.4 million; operating margin improved to 20.6% from 20.2%, while adjusted margin was 20.9% versus 21.1%. For the first half, Electrical sales rose 3% but operating margin fell to 10.8% from 11.6%; Power sales rose 4% and operating margin improved to 19.5% from 18.8%.
Cash flow, liquidity and debt
- First-half operating cash flow was $122.2 million, up from $98.7 million; capital expenditures were $29.9 million. Investing cash outflow was $200.5 million, including $171.6 million for acquisitions. Financing provided $86.3 million, versus $142.0 million used in the prior-year period.
- Cash and cash equivalents were $338.5 million at June 30, 2016, compared with $343.5 million at year-end 2015. Cash, short-term investments and investments totaled $404.0 million. The filing states about 6% of cash was held in the U.S., with the remainder held internationally.
- Total debt was $1,048.0 million, up from $644.1 million; long-term debt was $989.7 million and short-term debt $58.3 million. Total debt to total capital was 40%, versus 27% at year-end; net debt was $644.0 million, versus $238.9 million. The company reported compliance with debt covenants.
- In March, Hubbell issued $400 million of 3.35% senior notes due 2026, receiving $393.4 million net proceeds. Its $750 million revolving facility was undrawn at quarter-end.
- First-half cash returned to shareholders included $246.8 million of share repurchases and $70.3 million of dividends. The company completed its planned $250 million repurchase by April 26 and reported $153.6 million remaining authorization at June 30.
Outlook, commentary and notable items
- For 2016, management forecast diluted EPS of $5.20–$5.40, including about $0.35 per share of restructuring and related costs and $0.30 per share of incremental savings from earlier actions. It targeted free cash flow of at least 90% of net income.
- Management expected aggregate end markets to be flat: low-to-mid-single-digit growth in residential and non-residential markets and 1%–2% growth in electrical transmission and distribution, offset by an estimated 15%–20% decline in oil and gas and industrial markets flat to down about 2%. Acquisitions were expected to add approximately 3% to sales; foreign exchange and potential price erosion were headwinds.
- Two first-quarter acquisitions—Lyall for $129.1 million and EMC for $42.5 million, net of cash received—added $64.0 million of goodwill and $86.5 million of intangible assets. Their reported-period sales and earnings were not significant. Hubbell acquired China-based Longbow on July 7 for approximately £9 million.
- First-half restructuring and related costs were $13.1 million. Expected remaining costs for 2015 and 2016 actions totaled $10.9 million at June 30; certain facility exits were expected in 2016 and 2017.
- Other expense increased, primarily due to higher interest expense following the debt offering and a write-off of an acquisition-related escrow receivable; the filing says the effect was offset in income taxes by release of a related liability. The Q2 effective tax rate decreased to 29.8% from 31.1%, principally reflecting the research and development tax credit, earnings mix and discrete tax items.
- A shareholder lawsuit challenging the 2015 common-stock reclassification was subject to a settlement stipulation, pending court approval. The settlement included temporary restrictions on certain sales and company repurchases involving Bessemer Trust.
- Management reported no material change in risk factors or market-risk exposure from the 2015 Form 10-K, and concluded disclosure controls were effective. Risks discussed include demand and pricing, input costs, foreign exchange, execution of savings and ERP initiatives, acquisitions, pension assumptions, operational disruption, cybersecurity, and legal, environmental and tax contingencies.
Important facts for investors to verify
- Whether demand, especially in oil and gas and industrial markets, and the expected pricing and foreign-exchange headwinds develop as forecast.
- Whether margin pressure reverses and restructuring savings meet management’s targets, particularly in Electrical.
- Progress toward the $5.20–$5.40 EPS outlook and free-cash-flow target; first-half operating cash flow was $122.2 million against net income of $144.0 million.
- Integration and purchase-accounting outcomes for Lyall, EMC and the subsequent Longbow acquisition, including realized synergies and acquisition-related costs.
- Debt and capital deployment following the note issuance, acquisitions and repurchases, including remaining repurchase authorization and liquidity availability.
- Court approval and final terms of the reclassification litigation settlement.
- The filing notes a 2015 cost-classification misstatement: Q2 and first-half 2015 cost of goods sold, gross profit and S&A were revised by $1.0 million and $1.9 million, respectively; management considered the misclassifications immaterial to previously issued quarterly statements.