Hubbell Inc. 10-Q Summary: Quarter Ended September 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, for Hubbell Inc., a manufacturer of electrical and electronic products for non-residential, residential, industrial, and utility applications. The company operates through two primary segments: Electrical (electrical systems and lighting products) and Power. The reporting period reflects ongoing weakness in served markets due to recessionary conditions, resulting in lower overall demand.
Key Financial Metrics
| Metric (in millions) | Q3 2009 | Q3 2008 | YTD 9M 2009 | YTD 9M 2008 |
|---|---|---|---|---|
| Net Sales | $593.9 | $734.8 | $1,763.7 | $2,052.3 |
| Gross Profit | $192.9 | $220.2 | $534.1 | $617.5 |
| Gross Margin | 32.5% | 30.0% | 30.3% | 30.1% |
| Operating Income | $91.3 | $103.3 | $215.2 | $273.6 |
| Operating Margin | 15.4% | 14.1% | 12.2% | 13.3% |
| Net Income (Attributable to Hubbell) | $57.3 | $66.5 | $130.5 | $176.4 |
| Diluted EPS | $1.01 | $1.18 | $2.31 | $3.11 |
| Cash and Cash Equivalents | $412.4 (Sep 30, 2009) | |||
| Long-Term Debt | $497.5 (Sep 30, 2009) | |||
| Net Cash from Operating Activities (9M) | $297.1 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 19% in Q3 and 14% YTD compared to 2008, driven primarily by a 21% volume decline in Q3 and 17% YTD due to recessionary market conditions. Acquisitions contributed approximately 3% to Q3 sales and 4% to YTD sales.
- Margin Expansion: Despite lower sales, gross margins improved to 32.5% in Q3 (from 30.0% in 2008) and 30.3% YTD (from 30.1% in 2008). This was driven by lower commodity costs (adding ~3 percentage points in Q3), productivity improvements, and price realization, partially offset by lower manufacturing overhead absorption.
- Profitability: Operating income declined 12% in Q3 and 21% YTD. Net income attributable to Hubbell fell 14% in Q3 and 26% YTD. The decline reflects lower sales volume, higher net interest expense, and a higher effective tax rate (31.5% vs. 30.5% in 2008).
- Segment Performance:
- Electrical: Sales dropped 21% in Q3 and 19% YTD. Operating income fell 25% in Q3 and 40% YTD due to volume declines and workforce reduction costs (~$7M YTD).
- Power: Sales were down 15% in Q3 but flat YTD. Operating income increased 15% in Q3 and 15% YTD, driven by commodity cost decreases and productivity gains.
- Liquidity: Cash and cash equivalents increased significantly from $178.2 million (Dec 31, 2008) to $412.4 million (Sep 30, 2009), aided by strong operating cash flow ($297.1M YTD) and reduced inventory levels.
Guidance, Outlook, and Risks
- 2009 Outlook: Full-year 2009 net sales are expected to decline approximately 13% compared to 2008. Q4 sales are anticipated to be comparable to Q3, including a ~7% boost from the Burndy acquisition. Excluding Burndy, Q4 sales are expected to be lower than Q3 due to fewer shipping days and market weakness. Operating margins in Q4 are expected to be lower than Q3 due to volume and commodity cost pressures.
- 2010 Outlook: End market demand is forecast to be mixed. Non-residential construction is expected to decline in the high teens, while utility and industrial markets may see slight growth. The Burndy acquisition is expected to add ~6% to net sales in 2010 and be accretive to earnings. Productivity initiatives are expected to add ~100 basis points to operating margins.
- Recent Acquisition: On October 2, 2009, Hubbell acquired Burndy (FCI Americas, Inc.) for approximately $360 million in cash (net of cash acquired), funded by $278 million in cash and $82 million in commercial paper.
- Risks and Contingencies:
- Continued weakness in end markets, particularly non-residential construction.
- Uncertainty regarding the timing and magnitude of benefits from the Federal stimulus package.
- Foreign currency exchange rate fluctuations.
- Integration risks associated with the Burndy acquisition.
- Disruption in credit markets, though management does not currently expect a material impact on liquidity.
Key Facts for Investor Verification
- Verify the integration progress and accretion timeline of the $360 million Burndy acquisition completed in October 2009.
- Monitor the sustainability of gross margin improvements given the volatility of commodity costs and the impact of lower production volumes on overhead absorption.
- Assess the company's ability to maintain free cash flow generation (expected to be double net income in 2009) amidst declining sales volumes.
- Review the impact of the $7 million in workforce reduction costs included in the Electrical segment's YTD operating income.
- Track the utilization of the $160 million remaining stock repurchase authorization, noting no repurchases have occurred since August 2008.