HUBB

Business Context and Reporting Period

Company: Hubbell Incorporated
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2007
Business Overview: Hubbell designs, manufactures, and sells electrical and electronic products for commercial, industrial, residential, utility, and telecommunications markets. Operations are divided into three segments: Electrical, Power, and Industrial Technology.

Key Financial Metrics

Note: Free Cash Flow calculated as Operating Cash Flow ($33.6M) less Capital Expenditures ($20.7M).

Liquidity and Debt

• Cash and Cash Equivalents: $64.5 million (March 31, 2007) vs. $45.3 million (Dec 31, 2006).
• Short-term Debt: $76.0 million (primarily commercial paper).
• Long-term Debt: $199.4 million (fixed-rate senior notes maturing in 2012).
• Net Debt: $174.5 million (Total Debt of $275.4M less Cash/Investments of $100.9M).
• Debt to Total Capital: 21% (up from 18% at year-end 2006).

Material Changes vs. Prior Period

• Sales Growth: Net sales increased 9% year-over-year, driven by acquisitions (approx. 4 percentage points), price increases (4-5 percentage points), and modest volume growth.
• Segment Performance:
  • Power: Sales up 24% and Operating Income up 26%, driven by the Hubbell Lenoir City acquisition and storm-related demand.
  • Industrial Technology: Sales up 27% and Operating Income up 31%, aided by the Austdac acquisition and strong oil/gas project activity.
  • Electrical: Sales up 2% but Operating Income declined 6% due to a 21% drop in residential lighting fixture sales and unfavorable product mix.
• Cost Structure: Selling & Administrative expenses rose 10% due to acquisitions and new product launches, though as a percentage of sales, they remained stable (17.4% vs 17.3%).
• Special Charges: Q1 2007 had no special charges, compared to $1.5 million in Q1 2006 related to the Lighting Business Integration Program, which was substantially completed in 2006.

Guidance, Outlook, and Risks

2007 Outlook

• Sales Growth: Expected to be in the range of 6%-8% (excluding foreign currency fluctuations), led by Power and Industrial Technology segments.
• Operating Margin: Expected to increase approximately one percentage point compared to 2006.
• Effective Tax Rate: Estimated at 29.7% (up from 28.6% in 2006) due to higher U.S. taxable income.
• Earnings Per Share: Diluted EPS expected in the range of $2.90 - $3.15.
• Capital Allocation: Free cash flow expected to be $175-$190 million. Capital spending expected to be $15-$20 million lower than 2006. Share repurchases and acquisitions expected to total $150-$200 million.

Risks and Contingencies

• Residential Market: Significant decline expected in U.S. residential construction and lighting fixture sales due to inventory oversupply.
• Commodity Costs: Volatility in raw material and energy prices; management expects to offset these via price increases, though full offset is not guaranteed.
• Foreign Currency: Exposure to exchange rate fluctuations, particularly regarding procurement from China and India.
• Accounting Changes: Adoption of FIN 48 (Accounting for Uncertainty in Income Taxes) on Jan 1, 2007, resulted in a $4.7 million net reduction in unrecognized tax benefits liability, increasing retained earnings.

Investor Verification Checklist

• Residential Exposure: Verify the extent of the decline in residential lighting sales and its impact on the Electrical segment's margin recovery.
• Price Realization: Confirm the ability to pass through commodity cost increases to customers without losing market share.
• Acquisition Integration: Monitor the integration progress of 2006 acquisitions (Hubbell Lenoir City, Austdac) to ensure projected synergies are realized.
• Debt Levels: Track the increase in short-term debt and the resulting rise in the debt-to-capital ratio (21%).
• Stock Repurchases: Verify the execution of the new $200 million repurchase program authorized in February 2007.