Hubbell Incorporated — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; financial statements are unaudited. Hubbell designs, manufactures, and sells electrical and electronic products for construction, industrial, and utility markets through its Electrical and Power segments. Amounts below are in millions except per-share data.
Financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $685.0 | $593.9 | $1,901.9 | $1,763.7 |
| Gross profit | $235.2 | $192.9 | $621.9 | $534.1 |
| Gross margin | 34.3% | 32.5% | 32.7% | 30.3% |
| Operating income | $117.6 | $91.3 | $276.8 | $215.2 |
| Operating margin | 17.2% | 15.4% | 14.6% | 12.2% |
| Net income attributable to Hubbell | $71.3 | $57.3 | $167.5 | $130.5 |
| Diluted EPS | $1.18 | $1.01 | $2.77 | $2.31 |
- Q3 sales increased 15%; management attributed approximately nine percentage points to the Burndy acquisition and six points to organic volume. Nine-month sales rose 8%, including about nine points from Burndy; organic volume declined 1%.
- Q3 net income attributable to Hubbell increased 24% and diluted EPS increased 17%. For the nine months, they increased 28% and 20%, respectively. EPS growth was partly offset by higher average shares outstanding following shares issued in Q4 2009.
- Q3 results benefited from productivity, factory utilization, industrial mix, and Burndy; higher commodity costs partly offset gross-margin gains. The effective tax rate rose to 34.3% in Q3 and 33.2% for the nine months, from 31.5% in each 2009 comparable period.
Segments and material comparisons
- Electrical: Q3 sales were $490.6, up 18%, and operating income was $83.9, up 63%; margin increased to 17.1% from 12.4%. For nine months, sales rose 12% to $1,358.3 and operating income rose 68% to $185.1; margin improved to 13.6% from 9.1%. Burndy, productivity, and factory utilization supported results. Lighting sales remained weak, particularly commercial and industrial lighting.
- Power: Q3 sales rose 8% to $194.4, but operating income declined 15% to $33.7 and margin fell to 17.3% from 22.1%, reflecting commodity costs, mix, and higher S&A. Nine-month sales fell 1% to $543.6 and operating income fell 13% to $91.7; margin declined to 16.9% from 19.1%, amid higher commodity costs, unfavorable pricing, and lower storm-related volume.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $176.0, down from $297.1. Higher working capital—accounts receivable and inventory in particular—was the main reason; working capital used $67.3 of cash versus providing $89.6 in 2009.
- Capital expenditures were $33.8 versus $19.3; reported free cash flow, defined by the company as operating cash flow less capital expenditures, was approximately $142.2. Investing activities used $43.5 and financing activities used $52.1.
- Cash and cash equivalents were $342.8 at September 30, 2010, versus $258.5 at December 31, 2009. Cash plus investments totaled $385.2. Total debt was $504.4; net debt was $119.2, down from $210.6. Debt to total capital was 26%, versus 28%; net debt to capital was 6%, versus 12%.
- Long-term debt was $502.1, mainly fixed-rate notes of $200 due 2012 and $300 due 2018. The $350 committed credit facility was undrawn; the separate Brazilian real credit line was fully drawn, equivalent to $2.3, and expires in March 2011. Management stated available resources were expected to fund operations, dividends, capital spending, and working-capital needs.
- Quarterly dividends increased from $0.35 to $0.36 per share in 2010. The company paid $64.0 in dividends during the first nine months and repurchased $2.9 of shares; about $158 remained authorized under the repurchase program.
Outlook, risks, and unusual items
- For 2010, management expected sales to increase approximately 7%, largely due to Burndy; organic volume was expected to be comparable to 2009, with foreign currency contributing about one percentage point. It forecast operating-margin improvement of approximately 180 basis points and free cash flow approximately equal to net income.
- For 2011, management expected modest sales growth, while forecasting mid-single-digit decline in non-residential construction. It anticipated support from utility, industrial, and residential demand, but characterized residential recovery as slow.
- Management cited competitive pricing, weak non-residential construction, commodity and freight costs, foreign-exchange exposure, sourcing and supply-chain execution, customer and distributor conditions, acquisition integration, pension assumptions, and possible credit-market disruption among key risks. It warned actual results may differ from forward-looking estimates.
- The IRS concluded its audit of 2006–2007 federal returns; Hubbell recorded $2.2 of additional Q3 tax expense and paid $12.7 in October 2010. A balance-sheet classification error in deferred taxes related to a 2009 acquisition was corrected retrospectively; management said it was not material and did not affect income statements or cash flows.
- Product warranty accrual was $6.6 at September 30, 2010. Guarantee fair value and maximum potential payments were reported as not material. The filing reported no material change in risk factors and no material quarter-end changes to internal control over financial reporting.
Important facts for investors to verify
- How much of reported sales and margin improvement is sustainable organic growth versus the Burndy acquisition and productivity actions.
- Whether working-capital investment converts to cash and whether full-year free cash flow meets management’s forecast.
- Whether Power-segment margin pressure from commodities, pricing, mix, and storm-related volume persists.
- Progress against 2010 guidance and the assumptions behind the modest 2011 growth outlook, especially construction and residential demand.
- Final Burndy tax-attribute accounting, subsequent tax payments or audit developments, and the company’s capacity to fund dividends, capital spending, and potential acquisitions while maintaining leverage.