HUBBELL INC quarterly report, Q2 FY2012

Hubbell Incorporated — Q2 2012 Form 10-Q

Reporting period: Three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. Hubbell designs, manufactures and sells electrical and electronic products. Its reporting segments are Electrical and Power.

Financial performance

MetricQ2 2012Q2 2011Six months 2012Six months 2011
Net sales$778.4 million$709.2 million$1,502.2 million$1,367.3 million
Gross profit / margin$259.8 million / 33.4%$229.9 million / 32.4%$493.9 million / 32.9%$435.1 million / 31.8%
Operating income / margin$124.5 million / 16.0%$105.1 million / 14.8%$226.2 million / 15.1%$188.7 million / 13.8%
Net income attributable to Hubbell$77.5 million$65.2 million$140.7 million$115.5 million
Diluted EPS$1.29$1.07$2.34$1.89

Sales increased 10% in both the quarter and first half. Q2 diluted EPS increased 21%; first-half diluted EPS increased 24%. Management attributed growth to higher organic volume, acquisitions and pricing. Price realization, lower commodity costs and volume leverage contributed to margin improvement; productivity largely offset inflationary costs. The effective tax rate was 32.8% in both periods, up from 31.5% a year earlier.

Segments

  • Electrical: Q2 sales rose 8% to $536.3 million and operating margin increased to 15.1% from 13.9%. First-half sales rose 8% to $1,041.4 million; margin was 13.9% versus 13.2%. Commercial and industrial lighting remained soft, while residential lighting grew.
  • Power: Q2 sales rose 15% to $242.1 million and margin increased to 17.9% from 17.0%. First-half sales rose 14% to $460.8 million; margin was 17.6% versus 15.3%. Management cited strong transmission and distribution demand.

Cash flow, debt and liquidity

First-half operating cash flow was $104.6 million, down from $116.4 million. Management cited increased working-capital use, higher tax payments and pension funding, partly offset by higher earnings. Working capital used $76.1 million, compared with $50.4 million in the prior-year period. Capital expenditures were $21.0 million versus $31.1 million; acquisitions used $53.0 million. Cash declined by $25.0 million to $544.6 million.

At June 30, cash and investments totaled $598.3 million, compared with total debt of $596.7 million; reported net debt was negative $1.6 million. Debt to total capital was 28%. The $500 million revolving credit facility was undrawn, and the company reported compliance with its covenant. Long-term debt was $596.5 million; the filing states that $300 million of notes are due in each of 2018 and 2022. Cash dividends paid in the first half were $46.9 million; declared dividends were $0.82 per share versus $0.76 a year earlier.

Material changes and notable items

  • Hubbell acquired TayMac in Q2 for $42.1 million and Cableform in Q1 for $10.9 million, net of cash received. Both were added to Electrical; their reported sales and earnings were not significant. The acquisitions added $20.3 million of goodwill.
  • First-half share repurchases were $42.1 million; none occurred during Q2. Of the $200 million authorization, $157.9 million remained at June 30.
  • Foreign currency translation reduced Q2 and first-half sales by about one percentage point. Q2 comprehensive income included a $16.1 million foreign-currency translation loss.
  • Goodwill impairment testing as of April 1 found estimated fair values above carrying values for all reporting units, with excesses of approximately 75% to 320% of carrying value.

Outlook, risks and contingencies

For 2012, management expected overall sales growth of 6%–8% versus 2011, including 6%–8% growth in Electrical and 7%–9% in Power. Acquisitions were expected to add two percentage points; foreign currency translation was expected to reduce sales by about one percentage point. Management expected annual operating-margin expansion of at least 50 basis points, a tax rate of approximately 32.5%, and free cash flow approximately equal to net income. It cited slightly growing non-residential demand, continued utility-market growth, slower industrial expansion and improvement in residential markets. These are forward-looking expectations, not guarantees.

Key risks include demand and economic conditions, commodity and other input costs, pricing and productivity execution, tax-law changes, foreign exchange, pension costs, acquisition integration and realization of synergies, and disruptions to facilities or supply. Management said market-risk exposures had not changed significantly and that risk factors were not materially changed from the 2011 Form 10-K. Guarantee exposure was not material; the warranty accrual was $7.0 million at June 30. The company reported effective disclosure controls and no material change in internal control over financial reporting.

Important facts for investors to verify

  • Whether sales growth, margin expansion and the 2012 free-cash-flow outlook were achieved, particularly given working-capital cash use.
  • How much of growth and future earnings came from organic demand, pricing and acquisitions, and whether acquisition synergies materialized.
  • Whether commodity, wage, healthcare and pension costs affected margins and cash generation as anticipated.
  • Whether the higher tax rate and expiration of the federal research and development tax credit affected full-year earnings.
  • Debt maturities, covenant compliance, liquidity availability and the pace of share repurchases and dividends.