Hubbell Incorporated — Q3 2012 Form 10-Q
Business context and period. Hubbell designs, manufactures and sells electrical and electronic products for construction, industrial and utility markets. This unaudited report covers the quarter and nine months ended September 30, 2012. Its reporting segments are Electrical and Power.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $789.7 million | $764.3 million | $2,291.9 million | $2,131.6 million |
| Gross profit / margin | $268.5 million / 34.0% | $252.3 million / 33.0% | $762.4 million / 33.3% | $687.4 million / 32.2% |
| Operating income / margin | $135.1 million / 17.1% | $125.3 million / 16.4% | $361.3 million / 15.8% | $314.0 million / 14.7% |
| Net income attributable to Hubbell | $87.1 million | $82.4 million | $227.8 million | $197.9 million |
| Diluted EPS | $1.45 | $1.37 | $3.80 | $3.25 |
Revenue and margins. Q3 sales rose 3%; management attributed growth to organic volume, acquisitions and price realization, partly offset by unfavorable currency translation. For the nine months, sales rose 8%, driven by organic volume, acquisitions and pricing. Lower commodity costs, price realization and productivity supported gross-margin expansion; higher pension, benefit and personnel costs contributed to higher selling and administrative expenses.
Segments. Q3 Electrical sales were $551.8 million, up 5%, and operating income was $90.7 million, up 11%; margin improved to 16.4% from 15.5%. Power sales were $237.9 million, essentially flat, while operating income was $44.4 million, up 1%; margin rose to 18.7% from 18.4%. For the nine months, Electrical sales and operating income increased 7% and 13%, respectively; Power increased 9% and 19%.
Cash flow and liquidity. Nine-month operating cash flow was $192.0 million, down from $217.2 million, primarily reflecting greater working-capital use and higher pension contributions. Investing used $61.9 million, including $53.0 million for acquisitions; financing used $97.5 million. Cash increased $36.0 million to $605.6 million. At September 30, current assets were $1,492.6 million and current liabilities $493.0 million. Total debt was $596.8 million; reported net cash (cash and investments less debt) was $55.8 million. Debt to total capital was 27%. The $500 million revolver was undrawn, and the company reported compliance with its covenant.
Material changes, outlook and risks
- Acquisitions and capital allocation: Hubbell acquired TayMac and Cableform for a combined $53.0 million, net of cash acquired; their reported contribution to consolidated results was not significant. It repurchased $55.6 million of shares during the first nine months, with $144.4 million remaining under authorization, and paid $71.3 million in cash dividends.
- 2012 outlook: Management expected full-year sales growth of approximately 6%, including 5–7% growth in Electrical and 6–8% in Power; acquisitions were expected to contribute two percentage points and currency to reduce growth by approximately one point. It expected annual operating-margin expansion of approximately 70 basis points, a tax rate near 32%, and free cash flow approximately equal to net income.
- 2013 commentary: Management anticipated modest sales growth amid some global-market weakness, but expected margin expansion through sales growth, pricing discipline and productivity. It cited longer-term support from recovering construction markets and energy and transmission spending.
- Markets and costs: Management described nonresidential new construction as weak, industrial markets as mixed, and expected continued improvement in residential housing and utility markets. Pension, healthcare and other inflationary costs were anticipated; material costs represented about two-thirds of cost of goods sold.
- Taxes and unusual items: The effective tax rate was 32.1% in Q3 and 32.5% year to date, versus 29.4% and 30.6%, respectively, mainly reflecting expiration of the federal R&D tax credit and a higher domestic-income mix. Hubbell made $20.0 million of voluntary domestic pension contributions in the first nine months. The fair value and maximum potential payment under guarantees were reported as not material.
- Risks and controls: The filing identifies exposure to demand, pricing, raw-material costs, productivity execution, acquisitions and integration, pensions, foreign exchange, and legal, tax and environmental contingencies. A new risk concerns potential costs and supplier/customer challenges related to conflict-minerals sourcing and disclosure requirements. Management reported no material change in market-risk exposures or internal controls, and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the 2012 sales and operating-margin guidance was achieved, particularly given weak nonresidential new construction and slower industrial growth.
- Whether working-capital requirements and pension funding continue to constrain operating cash flow and the stated free-cash-flow expectation.
- How the TayMac and Cableform acquisitions perform and whether they deliver expected strategic benefits.
- Whether pricing and productivity continue to offset commodity, wage, benefit and other inflationary costs.
- Potential cost or sourcing effects of conflict-minerals compliance, and developments in the company’s disclosed legal, tax, environmental and pension exposures.