Business context and reporting period
Hubbell Incorporated filed this unaudited Form 10-Q for the quarter ended June 30, 2013. It designs, manufactures and sells electrical and electronic products for construction, industrial and utility markets. Its reporting segments are Electrical and Power.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $801.3 million | $778.4 million | $1,541.4 million | $1,502.2 million |
| Gross margin | 33.9% | 33.4% | 33.0% | 32.9% |
| Operating income | $132.1 million | $124.5 million | $229.8 million | $226.2 million |
| Operating margin | 16.5% | 16.0% | 14.9% | 15.1% |
| Net income attributable to Hubbell | $82.1 million | $77.5 million | $148.0 million | $140.7 million |
| Diluted EPS | $1.37 | $1.29 | $2.47 | $2.34 |
- Revenue and earnings: Q2 sales rose 3%; acquisitions contributed three percentage points, while organic volume and pricing gains were largely offset by currency translation. Hubbell-attributable net income and diluted EPS each rose 6%. First-half sales rose 3%; attributable net income rose 5% and diluted EPS 6%.
- Margins and costs: Q2 gross margin improved on favorable Power mix, price realization and productivity, partly offset by cost increases. First-half operating margin declined 20 basis points as higher S&A costs, including acquired-business expenses, outpaced operating-income growth.
- Cash flow: First-half operating cash flow was $108.5 million versus $104.6 million. Capital expenditures were $26.0 million; acquisitions used $81.7 million. Cash declined $58.4 million to $586.6 million, including an $8.4 million adverse currency impact. Working capital used $90.2 million, primarily reflecting higher receivables.
- Liquidity and debt: At June 30, cash and investments totaled $633.1 million against $596.9 million of long-term debt, leaving reported net cash of $36.2 million. Debt to total capital was 26%. The $500 million revolving credit facility was undrawn and extended to March 2018; the company reported compliance with its covenant.
- Shareholder returns: First-half dividends paid were $53.3 million; cash dividends per share were $0.45 in Q2 and $0.90 for the half. Share repurchases used $6.5 million year to date, with $117.9 million remaining authorized.
Material changes and segment results
- Electrical: Q2 sales increased 5% to $564.5 million and operating income rose 9% to $88.9 million; margin expanded to 15.7%. Lighting sales grew on stronger renovation-related demand, while industrial sales, particularly high-voltage products, remained weaker. First-half sales rose 4%, but margin was unchanged at 13.9%.
- Power: Q2 sales decreased 2% to $236.8 million and operating income was essentially flat at $43.2 million; margin increased to 18.2%. First-half sales were flat, while operating income fell 2% and margin contracted 40 basis points to 17.2%, reflecting lower volume, pricing and material-cost pressure, and $4.3 million of facility consolidation costs.
- Acquisitions: Hubbell acquired Continental Industries in Q1 and Connector Manufacturing Company and Canadian Connector Corporation in Q2 for total consideration of $81.7 million, net of cash acquired. Both were added to Electrical; their reported-period sales and earnings were not material.
Outlook, commentary and risks
- Management expected 2013 sales growth of 4%–6% versus 2012, including three percentage points from acquisitions; operating margin expansion of about 30 basis points; and a tax rate of approximately 31.5%. First-half tax benefits included $6.3 million, of which $4.3 million related to retroactive tax provisions under the 2012 Relief Act.
- Management expected 2013 free cash flow, defined as operating cash flow less capital expenditures, to approximate net income. It anticipated about $5 million of 2013 facility consolidation costs and continued acquisitions, productivity initiatives and investment in growth.
- Market expectations included low-single-digit growth in non-residential and utility markets, slightly higher industrial activity, and double-digit residential growth. Transmission investment was expected to remain high but decline from its 2012 peak; utility distribution spending was expected to be flat.
- Key risks include demand and market conditions, pricing and input-cost volatility, execution of productivity and facility-consolidation plans, acquisition integration and benefits, foreign exchange, pensions, and legal, tax and environmental contingencies. The filing reported no material change in risk factors or market-risk exposure. Guarantees’ fair value and maximum potential payment were not material.
Important facts for investors to verify
- Whether full-year sales, margin, tax-rate and free-cash-flow expectations were achieved, particularly given first-half working-capital use.
- Whether acquired businesses deliver the expected growth and benefits, and how acquisition spending affects cash and leverage.
- Whether weaker Power demand, lower high-voltage sales and the anticipated decline in transmission investment persist.
- Whether pricing and productivity continue to offset materials, wage, healthcare and other cost increases, including facility-consolidation costs.
- That approximately 40% of cash and cash equivalents was held outside the United States; the company intended to indefinitely reinvest most undistributed international earnings and cash.