HUBB

Business Context and Reporting Period

Company: Hubbell Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: Hubbell operates in three segments: Electrical, Power, and Industrial Technology. The quarter was characterized by slowing demand in industrial, commercial, and utility markets, partially offset by revenue growth from acquisitions completed in 2002 (LCA Group, Hawke Cable Glands, and a pole-line hardware business).

Key Financial Metrics

Note: Q1 2002 Net Income included a $25.4 million non-cash charge for the cumulative effect of an accounting change (SFAS 142 goodwill impairment). Q1 2002 also included a $1.4 million gain on the sale of a business.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 39% year-over-year, driven primarily by acquisitions. On an organic basis (excluding acquired sales), net sales decreased 4% due to weakness in industrial, commercial, and utility markets.
• Profitability: Operating income rose 29% to $33.8 million. Gross margin improved to 26.2% due to facility consolidation and cost reduction programs.
• Expense Increases: Selling & Administrative expenses increased as a percentage of sales (17.8% vs 16.8%) due to higher employee benefit costs (pension, 401k, insurance) and integration costs at acquired businesses.
• Interest Expense: Doubled to $5.2 million from $2.2 million due to debt incurred to fund the LCA acquisition in 2002.
• Segment Performance:
  • Electrical: Sales up 62% to $312.1M; Operating income up to $25.7M.
  • Power: Sales down 2% to $79.0M due to lower utility spending; Operating income declined to $6.4M.
  • Industrial Technology: Sales flat at $28.3M; Operating income improved to $1.7M due to cost savings.

Guidance, Outlook, and Risks

Management Commentary: Management views current economic difficulties as temporary, citing the military conflict in Iraq as a contributing factor. While order inputs suggest no immediate turnaround, the company remains confident in its long-term prospects due to productivity improvements and a strong market position.

Restructuring and Integration:

• The company is executing a lighting integration plan. $1.1 million in special charges were recorded in Q1 2003.
• Management expects to expense an additional $5–$7 million in 2003 and $5–$8 million in 2004 related to this plan.
• Substantially all actions for the current plan are scheduled for completion by June 30, 2003.

Liquidity and Capital:

• Working capital increased to $354.8 million.
• Net debt to total capital improved to 15%.
• The company maintains $200 million in committed bank credit facilities, though none were drawn in Q1 2003.

Risks and Contingencies:

• Market Risk: Exposure to foreign currency exchange rates, raw material prices, and interest rates.
• Economic Conditions: Continued weakness in non-residential construction and utility markets could delay recovery.
• Goodwill Impairment: Annual impairment testing is scheduled for Q2 2003; a $25.4 million charge was taken in 2002 for a reporting unit in the Industrial Technology segment.

Investor Verification Checklist

• Organic Growth: Verify the 4% decline in organic sales to confirm the extent of market weakness versus acquisition impact.
• Restructuring Costs: Monitor the execution of the lighting integration plan and the realization of the projected $5–$8 million in additional charges for 2003-2004.
• Utility Market Recovery: Assess the Power segment's exposure to utility capital spending delays and storm-related order volatility.
• Goodwill Testing: Review the Q2 2003 results for the outcome of the annual goodwill impairment test required by SFAS 142.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the $524.6 million shareholders' equity minimum and $750 million total debt cap.