Hubbell Incorporated — Q2 2010 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 six months ended June 30, 2010, compared with the corresponding 2009 periods. Its reporting segments are Electrical and Power.
Financial results and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $646.4 million | $584.2 million | $1,216.9 million | $1,169.8 million |
| Gross margin | 32.6% | 29.8% | 31.8% | 29.2% |
| Operating income | $93.5 million | $66.6 million | $159.2 million | $123.9 million |
| Net income attributable to Hubbell | $57.6 million | $39.4 million | $96.2 million | $73.2 million |
| Diluted EPS | $0.95 | $0.70 | $1.59 | $1.30 |
For the six months, operating cash flow was $93.1 million, down from $153.7 million. Capital expenditures were $22.3 million, implying free cash flow of $70.8 million using the company’s definition of operating cash flow less capital expenditures. Cash increased $29.3 million to $287.8 million. At June 30, total debt was $504.0 million, cash and investments were $325.9 million, net debt was $178.1 million, and net debt to total capital was 10%. The $350 million committed credit facility was undrawn. Quarterly dividends rose to $0.36 per share.
Material changes versus comparable periods
- Q2 sales rose 11%; the Burndy acquisition contributed about nine percentage points, organic volume one point, and foreign currency one point. For the first half, sales rose 4%, while organic volume fell 5%; Burndy contributed about eight percentage points.
- Q2 operating margin improved to 14.5% from 11.4%; first-half margin improved to 13.1% from 10.6%. Management attributed gains mainly to productivity, factory utilization and lower workforce-action costs.
- Electrical segment Q2 sales were $458.4 million and operating margin was 13.3%, versus $397.0 million and 7.9%. Power Q2 sales were $188.0 million and margin was 17.2%, versus $187.2 million and 18.9%.
- First-half operating cash flow declined as working capital used $51.9 million, compared with $34.1 million provided in the prior-year period. Accounts receivable and inventory increases were principal uses of cash.
- Burndy, acquired in October 2009 for $355.2 million net of cash acquired, materially affected year-over-year comparisons.
Outlook, commentary and risks
Management expected 2010 net sales to increase by mid-single digits, primarily due to Burndy, and organic volume to improve in the second half. It forecast a mid-teens decline in non-residential construction, while residential markets were expected to improve in the mid-single digits. Utility distribution demand was expected to rise slightly; transmission and substation spending was expected to remain constrained. The company anticipated 2010 free cash flow approximately equal to net income and continued to consider opportunistic acquisitions.
Management cited competitive pricing, higher commodity costs, uneven market demand, and ongoing focus on productivity, sourcing and cost containment. Identified risks include further market weakness, raw-material and freight costs, execution of cost-saving initiatives, acquisition integration, foreign-exchange exposure, pension assumptions, warranty costs, and credit-market disruption. The filing reports no material changes to previously disclosed risk factors or contractual obligations. Guarantees’ fair value and maximum potential payment were not material; the company’s April 2010 goodwill test found no reporting units at risk of impairment.
Disclosure controls were judged effective at a reasonable assurance level as of June 30, 2010; the filing reported no materially affecting changes in internal control over financial reporting.
Key facts for investors to verify
- Whether second-half organic volume improves as forecast, particularly in utility and high-voltage test equipment markets.
- How much margin improvement is sustained as commodity costs and pricing pressure evolve.
- Whether working-capital use reverses and cash generation approaches management’s free-cash-flow outlook.
- Burndy’s ongoing contribution to growth and operating performance relative to acquisition-related costs.
- Debt maturities: $200 million of notes due in 2012 and $300 million due in 2018; confirm liquidity and refinancing assumptions.