Hubbell Incorporated — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report; it also presents unaudited fourth-quarter results. Hubbell designs, manufactures and sells electrical and electronic products for construction, industrial and utility markets. Its segments are Electrical and Power.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net sales | $3,044.4 million | $2,871.6 million | +6% |
| Gross profit / margin | $1,012.2 million / 33.2% | $923.7 million / 32.2% | Margin +100 bps |
| Operating income / margin | $471.8 million / 15.5% | $423.8 million / 14.8% | Income +11%; margin +70 bps |
| Net income attributable to Hubbell | $299.7 million | $267.9 million | +12% |
| Diluted EPS | $5.00 | $4.42 | +13% |
| Cash from operations | $349.1 million | $335.0 million | +$14.1 million |
| Capital expenditures | $49.1 million | $55.4 million | -$6.3 million |
Operating cash flow less capital expenditures was approximately $300 million in 2012. Cash and cash equivalents were $645.0 million; total debt was $596.7 million. Cash plus investments of $690.5 million exceeded debt by $93.8 million. Working capital was $1,008.8 million, up from $861.4 million. The $500 million revolving credit facility was undrawn, and the company reported compliance with its debt covenant.
Segments: Electrical sales were $2,114.6 million (+6%) and operating income was $303.7 million (+8%), with a 14.4% margin. Power sales were $929.8 million (+7%) and operating income was $168.1 million (+19%), with an 18.1% margin. Power margin rose 180 bps; Electrical margin rose 30 bps.
Fourth quarter: Sales were $752.5 million versus $740.0 million in Q4 2011. Net income attributable to Hubbell was $71.9 million versus $70.0 million; diluted EPS was $1.20 versus $1.17.
Changes and drivers
- Organic demand was 5% higher year over year; reported sales growth also reflected acquisitions and pricing, partly offset by foreign-currency translation.
- Gross and operating margins improved mainly through price realization, productivity gains, higher volume and slightly lower material costs. These benefits were partly offset by higher wages, benefits and other inflationary costs.
- Utility, energy-related industrial, retrofit/relight and residential demand strengthened; non-residential new construction remained weak and overall non-residential markets were flat.
- Operating cash flow rose, but working-capital use increased to $45.3 million from $21.5 million, driven mainly by inventory and, to a lesser extent, receivables.
- Hubbell completed four acquisitions for $90.7 million. They contributed approximately $28 million of 2012 sales, with earnings not significant. It acquired Continental Industries for approximately $37 million in January 2013.
Outlook, risks and notable items
- 2013 outlook: Net sales expected to grow 3%–5% versus 2012, including about two percentage points from acquisitions. Management expected operating margin to expand approximately 40 bps, an effective tax rate of about 31.5%, and free cash flow approximately equal to net income.
- Management anticipated challenging non-residential new construction, stronger growth in the second half, retrofit/relight growth of 6%–8%, utility market growth of 2%–4%, and industrial markets flat to slightly higher. Residential housing was expected to continue strengthening.
- Key risks include economic and market weakness, competitive pricing, raw-material and purchased-component costs or supply interruptions, foreign sourcing and political/currency risks, customer credit deterioration, acquisition integration, information-system implementation, pension assumptions, tax audits, and litigation and environmental liabilities. The top ten customers account for about one-third of sales, although no single customer exceeded 10%.
- Environmental liabilities were $12.5 million. Management said legal and environmental matters were not expected to have a material adverse effect, while noting outcomes could differ from estimates. The filing reports approximately $13.5 million of unrecognized tax benefits and $550 million of indefinitely reinvested international earnings; estimated tax if those earnings were not reinvested was approximately $100 million.
- Defined-benefit pension plans had a $153.2 million underfunded status; other postretirement benefits were underfunded by $30.4 million. Pension expense from amortization of unrecognized losses increased to $17.4 million from $8.4 million.
- The quarterly dividend increased twice during 2012, reaching $0.45 per share. Hubbell spent $75.6 million on share repurchases during the year. CEO succession took effect January 1, 2013, with David Nord succeeding Timothy Powers, who remained Chairman.
- The company and its auditor concluded internal control over financial reporting was effective at December 31, 2012. No material impairment charges were reported for 2012.
Investor verification priorities
- Check whether the forecast 2013 sales growth, 40-bp margin expansion, 31.5% tax rate and free-cash-flow expectation were achieved.
- Assess whether working-capital use, especially inventory, improved and whether operating cash flow remained aligned with earnings.
- Review segment demand and margin trends, including utility growth and continued weakness in non-residential construction.
- Evaluate acquisition integration and returns, including the 2012 acquisitions and Continental Industries.
- Monitor pension funding and sensitivity to discount rates and asset returns, tax exposures and repatriation implications, and environmental/legal reserves.