Hubbell Incorporated — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; figures are unaudited and in millions except per-share amounts. Hubbell designs, manufactures and sells electrical and electronic products serving construction, industrial and utility markets through its Electrical and Power segments.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $709.2 | $646.4 | $1,367.3 | $1,216.9 |
| Gross profit / margin | $229.9 / 32.4% | $211.0 / 32.6% | $435.1 / 31.8% | $386.7 / 31.8% |
| Operating income / margin | $105.1 / 14.8% | $93.5 / 14.5% | $188.7 / 13.8% | $159.2 / 13.1% |
| Net income attributable to Hubbell | $65.2 | $57.6 | $115.5 | $96.2 |
| Diluted EPS | $1.07 | $0.95 | $1.89 | $1.59 |
| Cash dividends per common share | $0.38 | $0.36 | $0.76 | $0.72 |
- Cash flow: First-half operating cash flow was $116.4, versus $93.1 in 2010. Investing used $28.0, including $31.1 in capital expenditures; financing used $106.5, primarily reflecting $82.2 in share repurchases and $44.9 in dividends paid. Cash declined $10.3 to $510.4.
- Liquidity and debt: At June 30, cash and cash equivalents were $510.4, short-term investments $6.8, and total debt $598.3 ($2.2 short-term and $596.1 long-term). Net debt was $46.4; total debt to total capital was 29%. The $350 committed bank facility was undrawn. Current assets were $1,307.9 and current liabilities $483.8.
- Segments, Q2: Electrical sales rose 9% to $497.9 and operating income rose 13% to $69.2; margin improved to 13.9% from 13.3%. Power sales rose 12% to $211.3 and operating income rose 11% to $35.9; margin eased to 17.0% from 17.2%.
- Segments, first half: Electrical sales increased 11% to $964.0; operating income increased 25% to $126.8 and margin rose to 13.2% from 11.7%. Power sales increased 15% to $403.3; operating income increased 7% to $61.9 while margin fell to 15.3% from 16.6%.
Material changes versus comparable periods
- Q2 sales increased 10%; management attributed about six percentage points to organic volume and about two points each to favorable currency translation and price realization. First-half sales rose 12%, driven by nine points of organic volume, two points of currency and one point of price.
- Q2 gross margin declined 0.2 percentage points as commodity and other inflationary costs slightly exceeded price realization and productivity benefits. First-half gross margin was unchanged year over year.
- Operating margin improved year over year, helped by sales-volume leverage and lower S&A as a share of sales. Higher foreign-currency transaction losses increased other expense in both comparison periods.
- First-half net income attributable to Hubbell rose 20% and diluted EPS rose 19%. The EPS increase was moderated by higher average diluted shares outstanding.
- Capital spending increased $8.8 year over year, mainly due to the approximately $13 purchase of a previously leased Swiss facility. Share repurchases were substantially higher than in the first half of 2010.
Outlook, commentary and risks
- 2011 outlook: Management expected sales growth of approximately 7%–9% versus 2010, operating-margin expansion of approximately 50 basis points, and a tax rate of approximately 31.5%. It expected full-year free cash flow approximately equal to net income and anticipated pursuing acquisitions.
- Management expected high-single-digit growth in power products and continued growth in industrial markets. Non-residential construction was expected to improve slightly, while residential markets were expected to decline by low single digits.
- Commodity, fuel, pension, healthcare and other inflationary costs remained pressures. Management expected price increases to offset commodity cost increases for the year despite a competitive pricing environment; this outcome was not assured.
- Liquidity was expected to support operations, dividends, capital expenditures and higher working capital needs. A significant acquisition could require additional financing. Management noted that deteriorating results or cash flows could raise borrowing costs or restrict access to credit.
- Key stated risks include demand and market conditions, pricing and input costs, execution of productivity and sourcing initiatives, foreign exchange and political exposure, customer and distributor relationships, pension assumptions, warranty costs, acquisitions and integration, disruptions to facilities, and legal, environmental or tax contingencies. Management reported no material change in risk factors from its 2010 Form 10-K.
- Guarantees’ fair value and maximum potential payment were reported as not material. Product warranty accrual was $6.7 at June 30, unchanged from year-end after $3.3 of provisions and $3.3 of expenditures/other during the half.
- The April 2011 goodwill impairment test found each reporting unit’s estimated fair value above carrying value, with cushions of approximately 75%–225%. No impairment was reported.
Important facts for investors to verify
- Whether organic demand and pricing keep pace with commodity, freight and other inflation, particularly given Q2 gross-margin pressure.
- Whether Power-segment profitability stabilizes after its first-half margin decline, and whether Electrical’s margin improvement is sustained.
- Whether management achieves its 2011 sales, margin, tax-rate and free-cash-flow expectations; the filing cautions that interim results are not necessarily indicative of full-year results.
- Cash conversion and working-capital needs: receivables and inventory increased during the first half, while operating cash flow benefited from higher earnings.
- Capital allocation and financing: share repurchases, remaining authorization of approximately $56, dividend commitments, and the planned renewal of the Brazilian credit line expiring in August 2011.
- Exposure to foreign exchange, global sourcing, acquisition execution and the broader credit environment. Management reported disclosure controls effective at a reasonable-assurance level and no material internal-control changes during the quarter.