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
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six 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.