HUBB

Hubbell Inc. 10-Q Summary: Period Ended September 30, 2001

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2001, and the nine-month period ended on the same date. Hubbell Inc. operates in three primary segments: Electrical, Power, and Industrial Technology. The reporting period was significantly impacted by widespread economic weakness, reduced order rates in industrial and telecommunications markets, and the terrorist events of early September 2001, which further dampened economic activity in the third quarter.

Key Financial Metrics

Margins (9 Months 2001 vs 2000): Gross margin declined from 25.8% to 24.9%. Operating margin declined from 13.6% to 8.3%.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated net sales decreased 10% in the quarter and 6% year-to-date compared to 2000. Adjusted for acquisitions, sales declined 11% and 10%, respectively.
• Profitability Drop: Operating income fell 44% in the quarter and 43% year-to-date. This decline exceeded the sales drop due to unabsorbed fixed manufacturing costs and a shift toward lower-margin products.
• Segment Performance:
  • Electrical: Sales down 10% (quarter) and 9% (YTD); operating income down 45% (quarter) and 35% (YTD) excluding special items.
  • Power: Sales down 10% (quarter) and 8% (YTD); operating income down 39% (quarter) and 32% (YTD).
  • Industrial Technology: Sales up 26% YTD due to the GAI-Tronics acquisition, though Q3 sales were lower than 2000 due to recessionary pressures.
• Balance Sheet: Working capital improved to $217.0 million from $130.6 million at year-end 2000. Total borrowings decreased to $250.8 million, reducing the debt-to-equity ratio to 33% from 47%.

Guidance, Outlook, and Risks

• 2001 Capacity Reduction Plan: Management is developing a plan to reduce manufacturing capacity and fixed costs. This is expected to result in a fourth-quarter pre-tax charge in the range of $45 million to $55 million. This will include asset write-downs and severance costs.
• 1997 Streamlining Program: A remaining reserve of $3.4 million exists, primarily for a plant closing in the Electrical Segment. Senior management is reassessing these plans, which may alter the timing or cost of the action.
• Subsequent Events:
  • A major Power Segment customer filed for Chapter 11 bankruptcy in October 2001. Hubbell has provided for the $3.7 million exposure in its September 30 financials.
  • Acquisition of MyTech Corporation for $13.6 million completed in October 2001.
• Capital Allocation: The company has postponed share repurchases under its $300 million authorization. Capital expenditures were reduced by approximately $20 million compared to 2000.
• Accounting Changes: The company will adopt FAS 142 (Goodwill) effective January 1, 2002, ceasing goodwill amortization and requiring annual impairment testing.

Investor Verification Checklist

• Q4 Special Charge: Verify the final magnitude and composition of the anticipated $45-55 million capacity reduction charge in the upcoming 10-K.
• Bankruptcy Exposure: Confirm the final recovery rate on the $3.7 million receivable from the Power Segment customer that filed for bankruptcy in October 2001.
• Streamlining Reassessment: Monitor the outcome of the management review regarding the 1997 streamlining plant closing to determine if the $3.4 million reserve will be utilized or reversed.
• Order Trends: Assess whether the "progressively lower levels of economic activity" cited in Q3 have stabilized or continued into Q4.
• Acquisition Integration: Evaluate the performance contribution of the GAI-Tronics and MyTech acquisitions in the full-year 2001 results.