Hubbell Incorporated — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited. Hubbell designs, manufactures and sells electrical and electronic products for construction, industrial and utility markets. Its reporting segments are Electrical and Power.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $764.3 million | $685.0 million | $2,131.6 million | $1,901.9 million |
| Gross profit / margin | $252.3 million / 33.0% | $235.2 million / 34.3% | $687.4 million / 32.2% | $621.9 million / 32.7% |
| Operating income / margin | $125.3 million / 16.4% | $117.6 million / 17.2% | $314.0 million / 14.7% | $276.8 million / 14.6% |
| Net income attributable to Hubbell | $82.4 million | $71.3 million | $197.9 million | $167.5 million |
| Diluted EPS | $1.37 | $1.18 | $3.25 | $2.77 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $217.2 million | $176.0 million |
Q3 sales rose 12% year over year: organic volume contributed about 8 percentage points, while foreign currency translation and price realization each contributed about 2 points. Q3 gross margin fell as commodity costs exceeded price realization and product mix was less favorable. Selling and administrative expense was $127.0 million, or 16.6% of sales, versus $117.6 million, or 17.2%.
For the first nine months, sales increased 12%, with organic volume contributing 8 percentage points and currency and price realization contributing 2 points each. Gross margin declined 0.5 percentage point, primarily on less favorable industrial sales mix; productivity largely offset commodity and other cost increases. Operating margin improved 0.1 percentage point, and S&A declined to 17.5% of sales from 18.1%.
Segments
- Electrical, Q3: Sales rose 7% to $526.6 million; operating income declined 3% to $81.5 million and margin fell to 15.5% from 17.1%, mainly because of mix and commodity costs. Nine-month sales rose 10% to $1,490.6 million; operating income rose 13% to $208.3 million and margin increased to 14.0% from 13.6%.
- Power, Q3: Sales rose 22% to $237.7 million, largely from stronger distribution and transmission volume; operating income rose 30% to $43.8 million and margin improved to 18.4% from 17.3%. Nine-month sales rose 18% to $641.0 million; operating income rose 15% to $105.7 million, while margin declined to 16.5% from 16.9% on costs outpacing price and productivity.
Cash, debt and liquidity
- Nine-month operating cash flow was $217.2 million, compared with $176.0 million. Capital expenditures were $41.3 million, up $7.5 million year over year. Operating cash flow less capital expenditures was approximately $175.9 million; this is a simple calculation, not a company-reported non-GAAP measure.
- Working-capital changes used $60.2 million of cash. Higher receivables were partly offset by increased accounts payable. Cash and cash equivalents were $511.8 million at September 30, versus $520.7 million at year-end 2010.
- Investing activities used $41.6 million; financing activities used $184.2 million, including $137.7 million for share repurchases and $67.7 million of dividends paid. The 2007 repurchase program was completed; a new $200 million authorization was approved in September, with the full amount still authorized at quarter-end.
- Total debt was $598.5 million, including $596.2 million long-term debt and $2.3 million short-term debt. Debt to total capital was 29%; reported net debt was $40.7 million, or 2% of total capital. Current assets were $1,364.5 million and current liabilities $529.8 million.
- The existing $350 million credit facility was undrawn at quarter-end. In October 2011, Hubbell replaced it with a $500 million revolving facility expiring in October 2016, serving as backup for its commercial paper program. Its covenant limits total debt to 55% of total capitalization.
Outlook, commentary and risks
- 2011 outlook: Management expected sales growth of approximately 12% versus 2010, operating-margin expansion of approximately 20–30 basis points, an effective tax rate of approximately 31%, and free cash flow approximately equal to net income. Management expected commodity cost increases to exceed price realization for the year, although Q4 price realization was expected to reach parity with commodity increases.
- 2012 outlook: Management expected low-single-digit organic sales growth and higher earnings, supported by sales, pricing discipline and productivity. Utility and retrofit/relighting demand were expected to help, while new construction remained weak; management did not expect significant residential-market improvement.
- Key risks include weaker product demand or construction markets, inability to recover commodity and freight cost increases through pricing, execution shortfalls in productivity and sourcing programs, foreign-exchange and international sourcing exposure, customer or distributor issues, pension and other inflationary costs, and acquisition integration or financing risks. Management said risk factors had not materially changed from the 2010 Form 10-K.
- Q3 effective tax rate was 29.4%, versus 34.3% a year earlier; the decrease included a $2.5 million benefit primarily from a change in estimates and the research tax credit, while Q3 2010 included $2.2 million of expense related to the conclusion of an IRS audit.
- Goodwill impairment testing as of April 1, 2011 found reporting-unit fair values above carrying values; no impairment was recorded. Product-warranty accrual was $6.6 million at September 30. The filing said guarantee exposure was not material. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether price increases catch up with commodity, fuel and purchased-component inflation, and whether margin recovery follows.
- Whether Power-segment growth and transmission-related projects persist, and how Electrical margins respond to mix and costs.
- Working-capital conversion and cash generation, particularly receivables and inventory growth relative to sales.
- Execution against 2011 margin, tax-rate and free-cash-flow expectations and the more modest 2012 sales outlook.
- Use of the new $200 million repurchase authorization, dividend capacity and compliance with the new credit facility’s leverage covenant.