Hubbell Incorporated — 2010 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2010; it is not a standalone fourth-quarter filing. Hubbell designs, manufactures and sells electrical and electronic products serving construction, industrial and utility markets. Its Electrical segment generated 71% of 2010 revenue and its Power segment 29%.
Financial results and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $2,541.2 million | $2,355.6 million |
| Gross profit / margin | $828.7 million / 32.6% | $725.9 million / 30.8% |
| Operating income / margin | $367.8 million / 14.5% | $294.7 million / 12.5% |
| Net income attributable to Hubbell | $217.2 million | $180.1 million |
| Diluted EPS | $3.59 | $3.15 |
| Cash from operating activities | $266.2 million | $397.7 million |
| Capital expenditures | $47.3 million | $29.4 million |
| Total debt | $597.7 million | $497.2 million |
Annual sales rose 8%; management attributed the increase to the Burndy acquisition (approximately six percentage points), favorable currency translation (one point) and higher organic volume (one point). Operating income rose 25%, while Hubbell-attributable net income increased 21%. The effective tax rate was 31.7%, up from 30.7%.
Fourth-quarter 2010 sales were $639.3 million versus $591.9 million in fourth-quarter 2009. Hubbell-attributable net income was $49.7 million versus $49.6 million; diluted EPS was $0.81 versus $0.84. The 2010 quarter included a $14.7 million pretax debt-extinguishment charge, with a $0.15 per-share impact.
At year-end, cash and cash equivalents were $520.7 million and investments totaled $39.0 million. Working capital was $781.1 million, compared with $492.8 million. Management reported net debt of $38.0 million, down from $210.6 million, and debt to total capitalization of 29%, compared with 28%. Operating cash flow declined as working capital used $38.9 million in 2010, versus providing $126.9 million in 2009.
Material changes versus prior periods
- Electrical segment sales increased 10% to $1,808.2 million and operating income increased 52% to $248.7 million; reported growth included Burndy and currency effects.
- Power segment sales increased 4% to $733.0 million, but operating income declined 9% to $119.1 million and margin fell to 16.2% from 18.6%, reflecting commodity and inflationary costs, product mix and weaker price realization.
- Hubbell issued $300 million of 3.625% senior notes due 2022 and retired its $200 million 6.375% notes due 2012. The refinancing generated the reported extinguishment loss.
- Capital expenditures increased, while cash used in investing fell substantially because 2009 included acquisition spending, notably $355.2 million for Burndy.
- The company revised the presentation of 2009 deferred-tax balance-sheet classifications; it said the correction was immaterial and did not affect income or cash flows.
Outlook, commentary and risks
For 2011, Hubbell expected sales growth of 3%–5%, slightly higher organic sales, and operating-margin expansion of approximately 50 basis points. Management expected Power demand to grow in the mid-single digits; non-residential construction to be slightly lower and residential markets relatively flat. It anticipated commodity, pension, healthcare and other cost increases, with competitive pricing making cost recovery challenging. The company expected free cash flow approximately equal to net income and planned to continue pursuing acquisitions. It also expected the tax rate to rise approximately 50 basis points.
Key risks include uncertain economic and end-market demand, competitive pricing and delayed recovery of commodity costs, supply availability and quality (including low-cost-country sourcing), customer credit exposure, foreign exchange, pension funding and assumptions, tax audits, and integration or execution risks from acquisitions and enterprise systems. The top 10 customers represented approximately 31% of year-end receivables. Hubbell disclosed environmental, product-liability, patent and other claims; management believed the ultimate outcome would not materially affect consolidated results, but noted liabilities could exceed recorded amounts. The company reported compliance with debt covenants, an undrawn $350 million primary credit facility, and no material off-balance-sheet arrangements.
Other notable items: backlog rose to approximately $271.5 million from $253.7 million, driven by renovation/relight demand and stronger transmission and distribution spending. The board approved an increase in the quarterly dividend from $0.36 to $0.38 per share, beginning in April 2011. Class A shares held approximately 73% of voting power at year-end despite representing about 12% of equity value.
Important facts for investors to verify
- Whether 2011 sales and margin guidance were achieved, particularly given weak non-residential and residential markets and cost inflation.
- How much of reported growth and margin improvement was sustainable organically versus attributable to Burndy, mix, productivity and currency.
- Whether cash generation recovers after the 2010 working-capital outflow, and how cash is allocated among acquisitions, dividends and repurchases.
- Debt and refinancing costs, including the 2022 notes, covenant headroom and the company’s net-debt position.
- Pension funded status and sensitivity to discount rates and investment returns; the reported pension funded deficit increased to $100.5 million from $71.2 million.
- Developments in tax examinations and uncertain tax positions, as well as environmental, product-liability and other contingencies.