Hubbell Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Hubbell designs, manufactures and sells electrical and electronic products. Its reporting segments are Electrical and Power.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $740.1 million | $723.8 million |
| Gross profit / margin | $236.3 million / 31.9% | $234.1 million / 32.3% |
| Operating income / margin | $97.7 million / 13.2% | $101.7 million / 14.1% |
| Net income attributable to Hubbell | $65.9 million | $63.2 million |
| Diluted EPS | $1.10 | $1.05 |
| Operating cash flow | $42.7 million | $45.1 million |
| Capital expenditures | $13.0 million | $11.4 million |
Sales increased 2%, with acquisitions adding three percentage points, partly offset by a one-point decline in organic volume. Hubbell-attributable net income rose 4% and diluted EPS rose 5%; operating income declined about 4%. Gross margin fell 40 basis points and operating margin 90 basis points. The effective tax rate decreased to 26.8% from 32.8%, including a $4.3 million benefit from retroactive tax provisions under the 2012 Relief Act.
Segments and material changes
- Electrical: Sales of $515.3 million, up 2%; operating income of $61.6 million, down 3%; margin fell to 12.0% from 12.6%. Lower industrial demand, particularly in high-voltage products and extractive industries, weighed on results; residential sales grew, while non-residential sales were affected by lower public spending.
- Power: Sales of $224.8 million, up 3%; operating income of $36.1 million, down 5%; margin fell to 16.1% from 17.3%. Acquisition contribution and international organic growth supported sales. Transmission sales declined year over year due to project timing.
- Facility consolidation costs were $1.9 million in the quarter. Unfavorable mix, inflation and higher material costs pressured profitability; productivity and price realization partly offset these effects.
- Hubbell acquired the majority of Continental Industries’ net assets for $37.5 million, net of cash acquired. The acquisition added $19.3 million of goodwill and $10.9 million of intangible assets; its Q1 sales and earnings were not significant to consolidated results.
Cash, debt and liquidity
Cash and cash equivalents were $606.2 million at March 31, down $38.8 million from year-end. Operating cash flow was $42.7 million; working capital used $47.9 million of cash, primarily reflecting higher receivables and inventory and lower tax accruals. Investing activities used $55.8 million, including the Continental acquisition; financing activities used $21.7 million, mainly for dividends. Cash flow less capital expenditures was approximately $29.7 million for the quarter.
Long-term debt was $596.8 million. Cash and investments totaled $657.7 million, producing reported net cash of $60.9 million under the company’s definition of net debt. Debt to total capital was 26%. The undrawn $500 million revolving credit facility was extended to March 2018; the company reported compliance with its covenant. Current assets were $1,470.5 million and current liabilities $444.6 million. Cash dividends were $0.45 per common share, versus $0.41 a year earlier.
Outlook, commentary and risks
- For 2013, management expected sales growth of 3%–5% versus 2012, including two percentage points from 2012 and Q1 2013 acquisitions; operating margin expansion of approximately 40 basis points; and a tax rate of approximately 31.5%.
- Management expected low-single-digit non-residential market growth, utility market growth of 2%–4%, slight industrial growth and double-digit residential growth. It anticipated about $5 million of facility consolidation costs for the year, primarily in the first half.
- Management expected 2013 free cash flow, defined as operating cash flow less capital expenditures, to approximate net income, and said it would continue to evaluate acquisitions.
- Key risks include weaker product demand or pricing, raw-material and purchased-component costs, failure to achieve productivity savings, facility disruptions or consolidation costs, acquisition integration and synergy execution, foreign currency changes, tax-law or geographic income-mix changes, and pension, warranty, legal, environmental and other contingencies. Management reported no material changes to the risk factors in its 2012 Form 10-K and no significant changes in market-risk exposure.
Important facts for investors to verify
- Whether the projected 3%–5% sales growth and approximately 40-basis-point margin expansion were achieved, and how much depended on acquisitions.
- Whether industrial demand, product mix, material inflation and facility consolidation costs continued to affect margins.
- Whether working-capital use—especially receivables—moderated and cash conversion supported the free-cash-flow outlook.
- Continental acquisition integration, realized synergies and the contribution of acquired businesses to earnings.
- Tax-rate assumptions and the effect of the Q1 $4.3 million tax benefit on year-over-year earnings comparability.