Hubbell Incorporated — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Hubbell designs, manufactures and sells electrical and electronic products. Its reporting segments are Electrical and Power. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $877.0 million | $895.3 million | $2,560.7 million | $2,510.6 million |
| Gross profit / margin | $291.1 million / 33.2% | $296.2 million / 33.1% | $827.9 million / 32.3% | $833.7 million / 33.2% |
| Operating income / margin | $131.0 million / 14.9% | $142.8 million / 15.9% | $362.7 million / 14.2% | $391.3 million / 15.6% |
| Net income attributable to Hubbell | $73.3 million | $89.6 million | $215.8 million | $244.0 million |
| Diluted EPS | $1.27 | $1.51 | $3.71 | $4.10 |
Q3 sales fell 2% year over year; lower organic volume and unfavorable currency each reduced sales by about two percentage points, partly offset by a two-point contribution from acquisitions. For the nine-month period, sales rose 2%, reflecting acquisitions (+3 points) and organic volume (+1 point), partly offset by currency (-2 points).
Q3 Electrical sales were $617.5 million and operating income $78.8 million, down from $641.6 million and $92.6 million; margin fell to 12.8% from 14.4%. Q3 Power sales were $259.5 million and operating income $52.2 million, versus $253.7 million and $50.2 million; margin improved to 20.1% from 19.8%. Weakness in industrial and energy-related markets, especially Harsh and Hazardous products, weighed on Electrical; Power benefited from telecommunications sales, while transmission project deferrals offset growth.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $193.1 million, down from $238.3 million. Management cited lower operating earnings and a $20 million voluntary pension contribution; working-capital investment also included increases in receivables and inventory.
- Capital expenditures were $52.3 million, versus $42.6 million. Investing cash outflow was $219.6 million, including $163.3 million for acquisitions. Financing cash outflow was $174.7 million, including $97.2 million of dividends and $76.0 million of share repurchases.
- Cash and cash equivalents were $433.8 million at September 30, 2015, versus $653.9 million at year-end 2014. Current assets were $1,566.1 million and current liabilities $553.5 million.
- Total debt was $598.3 million, including $597.9 million of long-term debt and $0.4 million of short-term debt. Debt-to-capital was 24%; net debt was $107.2 million, compared with net cash of $106.8 million at year-end 2014.
- The $500 million revolving credit facility was undrawn. Hubbell reported compliance with its debt covenant and investment-grade ratings. It targeted 2015 free cash flow, defined as operating cash flow less capital expenditures, at approximately 90% of net income.
Outlook, material developments and risks
- For 2015, management expected sales growth of about 1%: acquisitions contributing about 3%, currency reducing sales about 2%, and aggregate end-market growth flat. Adjusted full-year diluted EPS guidance was $4.95–$5.05, including approximately $0.45 per share of restructuring and related costs but excluding reclassification costs. If the reclassification closed by year-end, GAAP EPS was estimated at $4.60–$4.70.
- Management expected 2016 aggregate end markets to grow modestly and organic sales to outperform them. It forecast 5%–7% growth in residential and non-residential markets, 1%–2% in utility transmission and distribution, and flat-to-2% industrial growth, partly offset by an anticipated 10% decline in Harsh and Hazardous markets. Expected 2016 restructuring and related costs were $0.25–$0.35 per diluted share, with incremental savings of about $0.30 per share.
- Restructuring and related costs were $11.9 million in Q3 and $32.2 million for nine months. Management cited facility consolidation, workforce reductions and process initiatives; actions included exiting eight facilities. Remaining expected costs at September 30 were $8.9 million, with current-year actions expected to be completed in 2016.
- The announced share-class reclassification would convert Class A and Class B shares into one class, with Class A holders receiving $28 per share in cash; aggregate cash consideration was estimated at approximately $200 million. Completion, then expected in Q4 2015 or Q1 2016, depended on shareholder and other approvals. Hubbell had incurred $7.4 million in Q3 costs and estimated another $13 million of contingent costs. The company also had approximately $400 million of total repurchase authorization and intended discretionary purchases of up to $250 million after completion or if the transaction did not occur.
- In October 2015, the board approved increasing the quarterly dividend from $0.56 to $0.63 per share, beginning with the December 2015 payment. This is a subsequent event, not a Q3-period cash payment.
- Principal risks include continued industrial and energy-market weakness, foreign-exchange headwinds, materials and other inflation, execution of restructuring and acquisition integration, and the proposed reclassification’s approvals and completion. A putative shareholder class action sought to block or delay the reclassification; its outcome was uncertain. The filing also describes ordinary-course legal, product, environmental and other contingencies; guarantee exposures were reported as not material.
Important facts for investors to verify
- Whether sales, margins and cash generation recover as projected, particularly in Electrical and energy-related end markets.
- Whether restructuring produces the forecast savings and whether remaining costs, including 2016 costs, stay within estimates.
- Reclassification approval, litigation outcome, timing, total cash and transaction costs, and effects on capital allocation.
- Ability to fund dividends, planned repurchases and acquisitions while cash declined and net debt increased.
- Actual 2015 EPS and free cash flow against management’s guidance; guidance and forward-looking estimates are not guarantees.