Hubbell Incorporated — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Hubbell designs, manufactures and sells electrical and electronic products through its Electrical and Power segments. Figures below are unaudited; dollars are in millions except per-share amounts.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $907.4 | $877.0 | $2,651.0 | $2,560.7 |
| Gross margin | 31.8% | 33.1% | 31.8% | 32.2% |
| Operating income | $136.0 | $131.0 | $370.0 | $362.7 |
| Operating margin | 15.0% | 14.9% | 14.0% | 14.2% |
| Net income attributable to Hubbell | $86.7 | $73.3 | $228.6 | $215.8 |
| Diluted EPS | $1.56 | $1.27 | $4.08 | $3.71 |
| Operating cash flow | Not separately reported | Not separately reported | $260.7 | $193.1 |
| Capital expenditures | Not separately reported | Not separately reported | $45.8 | $52.3 |
Q3 sales grew 3%; acquisitions contributed four percentage points, foreign exchange reduced sales by one point, and organic volume including pricing was flat. Q3 net income attributable to Hubbell rose 18% and diluted EPS rose 23%. For the first nine months, sales rose 4%, reported net income rose 6%, and diluted EPS rose 10%.
Adjusted, non-GAAP Q3 diluted EPS was $1.63 versus $1.53; adjusted nine-month diluted EPS was $4.31 versus $4.21. Adjusted nine-month net income attributable to Hubbell declined to $241.5 from $244.9. These measures exclude restructuring and related costs and, for 2015, reclassification costs; they are not substitutes for GAAP results.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $364.5 at September 30, 2016, compared with $343.5 at December 31, 2015. Current assets were $1,521.7 and current liabilities $577.5.
- Total debt was $995.9, including $990.1 of long-term debt and $5.8 of short-term debt, versus $644.1 at year-end 2015. Total debt to total capital increased to 38% from 27%; net debt was $565.3 versus $238.9.
- In March, Hubbell issued $400 million of 3.35% notes due 2026, receiving net proceeds of $393.4. Its $750 million revolving credit facility was undrawn, and the company reported compliance with debt covenants.
- Nine-month operating cash flow was $260.7; investing cash outflow was $219.1 and financing cash outflow was $6.0. Cash increased $21.0 over the period. Cash flow benefited partly from no domestic pension contribution in 2016, compared with a voluntary $20 million contribution in 2015.
- Nine-month cash dividends were $105.1 and cash used for share repurchases was $246.8. The company repurchased $237.8 of shares during the period and had $153.6 of authorization remaining at September 30. In October, the board raised the quarterly dividend from $0.63 to $0.70 per share, beginning with the December payment.
Material changes and operating drivers
- Q3 GAAP gross margin fell 1.3 percentage points. Management cited unfavorable product and business mix, pricing and material-cost headwinds, and acquisitions; restructuring savings partly offset these pressures. Adjusted gross margin was 32.3%, down from 33.9%.
- Q3 S&A expense fell to $152.7 from $159.0, and its share of sales declined to 16.8% from 18.1%, reflecting cost controls and restructuring savings, partly offset by market-development investment.
- Nine-month Electrical sales grew 3%, but operating income declined 1% and reported operating margin fell to 11.5% from 12.0%. Power sales rose 4%, operating income rose 7%, and reported margin increased to 19.8% from 19.3%.
- Three 2016 acquisitions—Lyall, EMC and Longbow—added $185.8 of purchase consideration net of cash received and generated $66.9 of goodwill. Their reported contribution to consolidated sales and earnings through September was not significant.
- Long-term debt increased following the 2026 notes issuance. Higher interest expense reduced earnings; nine-month adjusted total other expense rose to $37.5 from $27.4, principally due to interest on the new debt.
- The filing notes an immaterial 2015 classification correction: $1.1 for Q3 and $3.0 for the first nine months were shifted from S&A to cost of goods sold. Prior-period gross profit and S&A comparisons reflect the revised classification.
Outlook, risks and contingencies
- 2016 outlook: Hubbell expected aggregate end markets to be flat: non-residential and residential markets up 3%–5%, transmission and distribution up 1%–2%, oil and gas down approximately 15%–20%, and industrial flat to down approximately 2%. Acquisitions were expected to add about 3% to sales; foreign exchange and potential price erosion remained headwinds.
- Management forecast 2016 diluted EPS of $5.25–$5.35, including approximately $0.35 of restructuring and related costs and $0.30 of incremental savings from earlier restructuring actions. It targeted free cash flow of at least 90% of net income.
- Preliminary 2017 view: Modest aggregate end-market growth; management expected operating earnings to benefit from volume, restructuring savings and lower related costs, with pricing, material costs and pension expense as potential headwinds. No 2017 EPS guidance was provided.
- Restructuring and related costs totaled $13.9 in the first nine months, with $6.1 of expected remaining costs across 2015 and 2016 actions. Actions include facility consolidation and workforce reductions; 2016 actions were expected to be completed in 2017.
- A shareholder lawsuit challenging the 2015 common-stock reclassification was subject to a proposed settlement. The court preliminarily approved it; final approval was scheduled for November 22, 2016. The settlement includes restrictions on certain Bessemer stock sales and company repurchases from Bessemer, subject to final approval.
- Management cited demand and market conditions, price competition, raw-material and freight costs, restructuring savings, pensions, foreign exchange, acquisition integration, operational disruption, legal and environmental contingencies, and cybersecurity as risks. The filing reported no material change in risk factors from the 2015 Form 10-K; guarantees were not material.
Important facts for investors to verify
- Whether the $5.25–$5.35 full-year 2016 EPS outlook and free-cash-flow target were achieved, and how much restructuring cost was ultimately incurred.
- Whether margin pressure from mix, pricing, materials and acquisitions persisted, particularly in Electrical, and whether restructuring savings offset it.
- How acquisition performance and integration affected sales, margins, cash flow and the preliminary purchase-price allocations.
- Debt, interest expense and net leverage after the 2026 notes issuance, alongside cash generation and share repurchases.
- The final court disposition of the reclassification lawsuit settlement and any resulting restrictions.