HUBB

Hubbell Inc. 10-Q Summary: Period Ended June 30, 2002

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2002, and the six-month period ended on the same date. Hubbell Inc. operates in three segments: Electrical, Power, and Industrial Technology. The reporting period was significantly impacted by two major acquisitions: LCA Group, Inc. (completed April 26, 2002) and Hawke Cable Glands Limited (completed March 2002). The company also adopted Statement of Financial Accounting Standards (SFAS) No. 142, which eliminated goodwill amortization effective January 1, 2002.

Key Financial Metrics

Margins: Gross margin was 25.6% for the quarter and 25.5% for the six months. Operating margin was 8.6% for the quarter and 8.7% for the six months.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 21.4% in the quarter and 4.4% year-to-date compared to 2001. However, excluding acquisitions, organic sales declined 9% in the quarter and 11.2% year-to-date due to weakness in commercial, telecommunications, and utility markets.
• Profitability: Operating income rose 25.6% in the quarter and 6.3% year-to-date, driven primarily by the acquisitions. Pro forma operating income (excluding acquisitions and accounting changes) actually declined 13.7% in the quarter and 17.3% year-to-date.
• Debt Structure: Total borrowings increased to $415.8 million (55% of equity) from $167.5 million (23% of equity) at year-end 2001. This increase was funded by the issuance of $200 million in senior notes and commercial paper to finance the LCA acquisition.
• Accounting Changes: The adoption of SFAS 142 eliminated goodwill amortization, which previously reduced net income by $1.6 million in the quarter and $3.2 million year-to-date.

Outlook, Risks, and Unusual Items

• Goodwill Impairment Risk: The company identified a potential goodwill impairment in the Industrial Technology Segment. An estimated impairment charge of $20-25 million (net of tax) is expected to be recorded as a cumulative effect of a change in accounting principle in the third quarter of 2002.
• Tax Settlement: A $5.0 million tax benefit was recorded in the second quarter following a settlement with the IRS, reducing the effective tax rate to 8.1% for the quarter. The company expects to resume a 23% effective tax rate in the third quarter.
• Streamlining Program: The company continues a cost reduction program initiated in 2001. An additional $1.7 million in charges was recorded year-to-date, with approximately $10.3 million remaining in the accrual balance.
• Market Conditions: Management cites ongoing economic weakness, particularly in the utility and industrial sectors, as a headwind. The Power segment saw sales declines due to postponed infrastructure spending, while the Industrial Technology segment reported operating losses due to inventory write-downs and sales slipping below break-even.

Investor Verification Checklist

• Impairment Charge Timing: Verify the final amount and timing of the $20-25 million goodwill impairment charge expected in Q3 2002.
• Organic Sales Trends: Monitor organic sales performance, which declined double-digits excluding acquisitions, to assess underlying business health.
• Debt Servicing: Review the impact of the new $200 million note issuance (6.375% interest) on future interest expense and cash flow.
• Inventory Levels: Track inventory reduction efforts, which contributed over $30 million to operating cash flow year-to-date, to ensure no further write-downs are necessary.
• Integration Synergies: Assess the realization of cost synergies from the LCA and Hawke acquisitions to offset the higher debt load and integration costs.