Hubbell Incorporated — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; interim financial statements are unaudited. Hubbell designs, manufactures and sells electrical and electronic products. Its reporting segments are Electrical and Power.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $723.8 million | $658.1 million |
| Gross profit / margin | $234.1 million / 32.3% | $205.2 million / 31.2% |
| Operating income / margin | $101.7 million / 14.1% | $83.6 million / 12.7% |
| Net income attributable to Hubbell | $63.2 million | $50.3 million |
| Diluted EPS | $1.05 | $0.82 |
| Operating cash flow | $45.1 million | $53.5 million |
Sales increased 10%, reflecting approximately 7 percentage points from organic volume, 2 from price realization and 1 from acquisitions. Gross margin improved through productivity and pricing, partly offset by inflation and slightly higher commodity costs. Net income attributable to Hubbell rose 26% and diluted EPS rose 28%; lower average shares outstanding also benefited EPS. The effective tax rate increased to 32.8% from 31.5%.
Segments
- Electrical: Sales of $505.1 million, up 8%; operating income of $63.8 million, up 11%; margin increased to 12.6% from 12.4%. Electrical systems sales grew 11%; lighting sales grew 3%, with continued weakness in new construction lighting partly offset by stronger retrofit, relight, controls and residential demand.
- Power: Sales of $218.7 million, up 14%; operating income of $37.9 million, up 46%; margin increased to 17.3% from 13.5%. Growth reflected strong domestic transmission and distribution and international demand, alongside productivity and price realization.
Financial position and liquidity
- At March 31, cash and cash equivalents were $562.4 million; short-term investments were $13.9 million. Cash and investments totaled $617.8 million, including other investments.
- Total debt was $596.7 million, comprising $596.4 million of long-term debt and $0.3 million of short-term debt. Debt to total capital was 28%. The company reported net cash of $21.1 million under its stated non-GAAP definition.
- Current assets were $1,384.9 million and current liabilities were $488.7 million. The $500 million revolving credit facility was undrawn; Hubbell reported compliance with its financial covenant. Its senior-note covenants were also met.
- Operating cash flow declined year over year, primarily because working capital used $38.6 million versus $20.0 million in Q1 2011. Investing activities used $16.3 million, including $10.9 million for the Cableform acquisition; capital expenditures were $11.4 million. Financing activities used $40.6 million, including $42.1 million for share repurchases and $22.4 million in dividends paid.
Material changes, outlook and risks
- Hubbell acquired Cableform for $10.9 million, net of cash received; its Q1 contribution was not material. The acquisition added $4.5 million each in intangible assets and goodwill to the Electrical segment.
- Management forecast 2012 sales growth of 6%–8% overall, 5%–7% in Electrical and 7%–9% in Power. Acquisitions were expected to contribute 2 percentage points, including the April 2012 TayMac acquisition for approximately $42 million.
- Management expected operating margin to expand approximately 50 basis points in 2012, a tax rate of approximately 32.5%, and free cash flow approximately equal to net income. It cited anticipated cost increases in commodities, pensions, healthcare and other inflationary costs, with productivity, pricing and higher sales expected to support results.
- The quarterly dividend rate was raised from $0.38 to $0.41 per share, with the increased payment beginning in April. Of the $200 million repurchase authorization, $157.9 million remained at quarter-end.
- Key stated uncertainties include demand and construction-market conditions, competition and pricing, commodity and other input costs, execution of productivity and sourcing initiatives, pension assumptions, acquisition integration and benefits, foreign exchange, taxes, and environmental, legal and tax contingencies. Management reported no material changes in risk factors from the 2011 Form 10-K and no significant change in market-risk exposure during the quarter. Guarantees’ fair value and maximum potential payment were not material.
Important facts for investors to verify
- Whether organic demand, especially utility and industrial growth, and the outlook for non-residential and residential markets support the 2012 sales forecast.
- Whether pricing and productivity can offset commodity, wage, pension, healthcare and other cost pressures and deliver the projected margin expansion.
- Whether working-capital demands improve and cash generation meets management’s free-cash-flow expectation.
- The realized contribution, integration and expected benefits of Cableform and TayMac, and the pace and funding of any further acquisitions or share repurchases.
- Whether the higher tax-rate expectation and pension contribution plans affect full-year earnings and cash flow as anticipated.