HUBB

Business Context and Reporting Period

Company: Hubbell Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2002
Overview: Hubbell Inc. manufactures and distributes electrical, power, and industrial technology products. The quarter was characterized by general economic weakness, particularly in industrial and telecommunications markets, leading to reduced incoming orders. The company executed a significant acquisition of Hawke Cable Glands Limited and entered into an agreement to acquire the LCA Group, Inc. (completed April 2002).

Key Financial Metrics

Note: Total Debt calculated as Commercial paper/notes ($74.8M) + Long-Term Debt ($99.8M). Working Capital calculated as Current Assets ($507.0M) - Current Liabilities ($292.9M).

Material Changes vs. Prior Period

• Sales Decline: Net sales decreased 12% year-over-year. On a pro forma basis (adjusting for acquisitions), sales declined 13% due to lower order input in industrial, telecommunications, and commercial markets.
• Profitability: Operating income fell 12%. Pro forma operating income (excluding special items and accounting changes) declined 20%, driven by unabsorbed manufacturing costs and a shift toward lower-margin products.
• Segment Performance:
  • Electrical: Sales down 12%; pro forma operating income down 18%.
  • Power: Sales down 9%; pro forma operating income down 16%.
  • Industrial Technology: Sales down 23%; pro forma operating income down 52% due to recessionary conditions in steel and heavy industry.
• Interest Expense: Decreased 58% to $2.2 million due to lower average debt levels and interest rates.
• Inventory: Inventory levels decreased by $13.5 million ($242.6M to $229.1M), contributing $14.9 million to operating cash flow.

Guidance, Outlook, and Unusual Items

Unusual Items and Accounting Changes

• Special Charges: A $0.7 million special charge was recorded in Q1 2002 related to the ongoing streamlining and cost reduction program. The total program is expected to cost $62.0 million cumulatively, with approximately $6.0 million expected to be charged in 2002.
• Gain on Sale: A $1.4 million gain was recognized from a favorable adjustment to the adverse commitment accrual related to the 2000 sale of WavePacer DSL assets.
• Goodwill Amortization: The company adopted SFAS No. 142 on January 1, 2002, eliminating goodwill amortization. This added $1.6 million (pre-tax) to earnings compared to Q1 2001.

Acquisitions and Subsequent Events

• Hawke Cable Glands: Acquired in March 2002 for $25.5 million. Expected to add $18-20 million in annual net sales.
• LCA Group, Inc.: Agreement signed in March 2002 and closed April 26, 2002, for approximately $252 million. The company expects lighting operations to generate over $800 million in annual sales post-acquisition. Financing includes $200 million in long-term notes expected by May 15, 2002.

Outlook and Risks

• Market Conditions: Management does not forecast a recovery in Industrial Technology markets until 2003. Power segment bookings are not expected to reach substantially higher levels for the balance of the year.
• Liquidity: The company maintains strong liquidity with $214.1 million in working capital and access to $150 million in bank credit facilities. Cash flow from operations is expected to remain strong due to continued inventory reduction.
• Risks: Exposure to foreign currency exchange rates, raw material prices, and interest rates. A significant deterioration in operations could restrict access to commercial paper markets.

Investor Verification Checklist

• Acquisition Integration: Verify the timeline and financial impact of the LCA Group acquisition, specifically the $200 million debt issuance and projected $800 million lighting sales.
• Cost Reduction Program: Monitor the execution of the $62 million streamlining program, specifically the remaining $18 million in expected cash expenditures and the timeline for completion (Dec 31, 2002).
• Segment Recovery: Track order activity in the Industrial Technology segment, which is not expected to recover until 2003, and the Power segment's ability to offset utility investment shifts.
• Goodwill Impairment: Watch for the results of the initial SFAS 142 goodwill impairment tests, expected to be reported in Q3 2002.
• Inventory Management: Confirm continued inventory reduction as a primary driver of operating cash flow for the remainder of 2002.