SHELTON, Conn. — Hubbell Incorporated reported operating results for the third quarter ended September 30, 2018.
Net sales in the third quarter of 2018 were $1.18 billion, an increase of 24% compared to the $951 million reported in the third quarter of 2017. Operating income in the quarter was $164 million as compared to $150 million in the same period of 2017. Excluding Aclara acquisition-related costs (which affected only the 2018 period), operating income was $174 million in the third quarter of 2018(1). The effective tax rate in the quarter of 19.5% benefited from adjustments related to U.S. Tax Reform and compares to 33.0% in the third quarter of 2017. Net income attributable to Hubbell in the third quarter of 2018 was $114 million compared to $81 million reported in the comparable period of 2017. Earnings per diluted share for the third quarter of 2018 were $2.06 compared to $1.47 reported in the third quarter of 2017. Adjusted earnings per diluted share were $2.22 in the third quarter of 2018 compared to $1.58 in the comparable period of 2017(1).
Net cash provided from operating activities was $187 million in the third quarter of 2018 versus $97 million provided in the comparable period of 2017. Free cash flow (defined as cash flow from operating activities less capital expenditures) was $164 million in the third quarter of 2018 compared to $77 million reported in the comparable period of 2017.
For the first nine months of 2018, net sales were $3.34 billion, an increase of 21% compared to the $2.75 billion reported in the comparable period of 2017. Operating income was $420 million as compared to $392 million in the same period of 2017. Excluding Aclara acquisition-related and transaction costs (which affected only the 2018 period), operating income was $463 million in the first nine months of 2018(1). The effective tax rate for the first nine months of 2018 was 21.4% and compares to 31.3% for the comparable period of 2017. Net income attributable to Hubbell in the first nine months of 2018 was $272 million compared to $223 million reported in the comparable period of 2017. Earnings per diluted share for the first nine months of 2018 were $4.93 compared to $4.02 reported in the comparable period of 2017. Adjusted earnings per diluted share were $5.58 in the first nine months of 2018 compared to $4.14 in the comparable period of 2017(1).
Net cash provided from operating activities was $339 million in the first nine months of 2018 versus $229 million provided in the comparable period of 2017. Free cash flow (defined as cash flow from operating activities less capital expenditures) was $269 million in the first nine months of 2018 versus $175 million reported in the comparable period of 2017(3).
OPERATIONS REVIEW
“Tailwinds from strong end markets and higher price realization fueled organic sales growth of 5% in the quarter,” said David G. Nord, Chairman, President and Chief Executive Officer. “All major end markets expanded and we saw notable strength in both core Industrial and outside-plant telecommunications. Lighting markets remained mixed, with strength in Residential and flat unit volumes and continued pricing pressure in C&I.” Nord stated, “In addition, acquisitions contributed 19 points to sales growth. We are encouraged by the continued strength in demand for Aclara’s products, with record orders in September and a robust backlog and project pipeline.
“As expected, on operating margins, price realization increased sequentially, and partially offset tariffs and material cost increases. The implementation of Section 301 Tariffs is putting pressure on margins, a dynamic we expect will continue as we mitigate with price, productivity and cost actions.” Nord continued, “Despite higher material and tariff costs, Electrical margins expanded year-over-year for the third consecutive quarter, supported by contributions from incremental volume, price and restructuring actions. Operating margins in the Power segment experienced approximately two points of headwind from material and tariff costs in excess of price. The Aclara acquisition was also unfavorable to Power margins, however, it was accretive to earnings in the third quarter, an exciting milestone.”
Nord added, “The tax favorability in the quarter versus prior expectations was due primarily to adjustments related to U.S. Tax Reform. Our underlying operating tax rate is running at approximately 23%.
“Free cash flow performance was a highlight of the quarter, with the Company’s ongoing focus on working capital visible in improved inventory management. With year-to-date free cash flow to net income conversion at approximately 100%, we are on track to deliver free cash flow in excess of net income for the full year.”
SEGMENT REVIEW
The comments and year-over-year comparisons in this segment review are based on third quarter results in 2018 and 2017.
Electrical segment net sales in the third quarter of 2018 increased 5% to $687 million compared to $654 million reported in the third quarter of 2017, with organic sales growth of 5%. Operating income was $94 million, or 13.7% of net sales, compared to $88 million, or 13.5% of net sales, in the same period of 2017. The increases in operating income and operating margin were due primarily to incremental volume contribution and productivity gains in excess of cost increases, which were partially offset by material cost increases and tariff impacts.
Power segment net sales in the third quarter of 2018 increased 66% to $492 million compared to $297 million reported in the third quarter of 2017. Acquisitions contributed 62% to net sales in the quarter, while organic sales grew 5%. Operating income was $70 million, or 14.2% of net sales, compared to $62 million, or 20.8% of net sales, in the same period of 2017 (1). Excluding Aclara acquisition-related (which affected only the 2018 period), operating income was $80 million, or 16.3% of net sales, in the third quarter of 2018 (1). Changes in operating income and operating margin were primarily due to the impacts of acquisitions and increases in material costs and tariffs.
SUMMARY & OUTLOOK
For the full year 2018, Hubbell anticipates 3% – 4% growth in end markets and approximately 18% growth from acquisitions, primarily driven by Aclara. The end market outlook includes growth of 2% – 3% in non-residential markets, 5% – 6% in residential markets, 6% – 7% in oil and gas markets, and 3% – 4% in Electrical T&D and industrial markets. The Company now expects 2018 reported diluted earnings per share in the range of $6.40-$6.50, compared to prior expectations of $6.25-$6.55, and adjusted diluted earnings per share (“adjusted EPS”) in the range of $7.20-$7.30 compared to prior expectations of $7.05-$7.35(1). Adjusted EPS excludes approximately $0.80 of acquisition-related and transaction costs of the Aclara acquisition. The Company believes adjusted EPS is an insightful measure of underlying financial performance and cash flow generation in light of the effects of the Aclara acquisition. These ranges include approximately $0.50 of legacy intangible asset amortization.
These ranges also include the impact of Section 301 Tariff Lists 1, 2 and 3, and related remediation actions.
The Company expects free cash flow for the year to be greater than net income.
“Given our year-to-date results, we are confident in raising and tightening our expected range for full year 2018 earnings per share. The tax favorability in the third quarter will allow us to neutralize higher tariff costs in the fourth quarter and increase the midpoint of our full year EPS expectation.” Mr. Nord concluded, “As we look ahead to next year, we expect to see expansion in each of our primary end markets amounting to 2% – 4% in the aggregate. We also expect a benefit from the wrap-around impact of the Aclara acquisition, which closed in February 2018. We are taking actions today to position Hubbell to outperform in any environment, despite several uncertainties such as the impact of tariffs on global demand and supply chains. With pricing and innovation initiatives, as well as productivity and cost-takeout efforts, we are confident in our ability to get ahead of these anticipated challenges, while remaining committed to producing quality products, providing reliable service for our customers, and deploying capital efficiently.”
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