Hubbell Inc. Q2 2009 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Hubbell Inc., a manufacturer of electrical and electronic products for non-residential, residential, industrial, and utility applications. The report covers the three and six-month periods ended June 30, 2009. The company operates through two primary segments: Electrical (electrical systems and lighting) and Power (utility distribution products).
Key Financial Metrics
(In millions, except per share data)
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Sales | $584.2 | $689.6 | $1,169.8 | $1,317.5 |
| Gross Profit | $174.2 | $209.9 | $341.2 | $397.3 |
| Gross Margin | 29.8% | 30.4% | 29.2% | 30.2% |
| Operating Income | $66.6 | $95.0 | $123.9 | $170.3 |
| Net Income (Attributable to Hubbell) | $39.4 | $61.5 | $73.2 | $109.9 |
| Diluted EPS | $0.70 | $1.09 | $1.30 | $1.93 |
| Cash & Equivalents | $282.1 | N/A | $282.1 | N/A |
| Long-Term Debt | $494.7 | N/A | $494.7 | N/A |
| Operating Cash Flow (YTD) | N/A | N/A | $153.7 | $125.1 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 15% in Q2 and 11% YTD compared to 2008. This was driven by an 18% volume decrease in Q2 and 15% YTD due to recessionary market conditions, partially offset by acquisitions (+4% Q2, +5% YTD) and price realization (+2% YTD).
- Profitability Compression: Operating income fell 30% in Q2 and 27% YTD. Operating margins declined to 11.4% (Q2) and 10.6% (YTD) from 13.8% and 12.9% respectively, primarily due to lower absorption of manufacturing overhead from reduced volumes.
- Segment Performance:
- Electrical Segment: Sales dropped 22% (Q2) and 18% (YTD). Operating income fell 51% (Q2) and 48% (YTD) due to weak demand in commercial/industrial and residential construction markets.
- Power Segment: Sales increased 2% (Q2) and 9% (YTD), driven by acquisitions and storm-related shipments. Operating income rose 14% (Q2) and 15% (YTD) due to price realization and productivity gains.
- Cost Management: Selling & Administrative (S&A) expenses decreased in absolute dollars ($7.3M Q2, $9.7M YTD) due to workforce reductions, but increased as a percentage of sales due to higher pension costs and legal fees.
- Working Capital: Significant cash generation from working capital improvements, specifically a $56.8M decrease in inventories and $36.7M decrease in accounts receivable YTD.
Outlook, Risks, and Unusual Items
- Outlook: Management anticipates continued market weakness through the remainder of 2009. Non-residential construction is expected to decline further. Domestic utility markets are projected to be down 10-12%. The company expects free cash flow to exceed net income in 2009 due to inventory reduction efforts.
- Acquisition Activity: On July 21, 2009 (subsequent to period end), Hubbell signed an agreement to acquire FCI Americas (Burndy) for $360 million in cash, expected to close around October 1, 2009.
- Unusual Items:
- Workforce Reductions: Approximately $4 million in Q2 and $7 million YTD costs associated with workforce reductions and facility consolidations.
- LIFO Liquidation: Inventory reductions resulted in a LIFO liquidation benefit of approximately $2.5 million, increasing earnings per share by $0.03 YTD.
- Interest Rate Swap: Entered a $200 million interest rate swap in May 2009 to hedge fixed-rate debt, reducing interest expense by $0.3 million in Q2.
- Risks: Key risks include continued decline in construction markets, commodity price volatility, foreign currency fluctuations, and potential disruption in credit markets affecting liquidity.
Investor Verification Checklist
- Verify the sustainability of the $153.7M operating cash flow given the significant inventory drawdown ($56.8M) which may not be repeatable.
- Monitor the integration and financial impact of the pending $360M Burndy acquisition and its effect on leverage.
- Assess the trajectory of the Electrical segment, which saw a 51% drop in operating income, versus the resilient Power segment.
- Review the company's ability to maintain price realization in a deflationary environment with lower commodity costs.
- Confirm the status of the $160M remaining stock repurchase authorization and whether market conditions will trigger buybacks.