10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2005
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-2958
HUBBELL
INCORPORATED
(Exact name of registrant as specified in its charter)
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State of Connecticut
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06-0397030 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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584 Derby Milford Road, Orange, CT
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06477 |
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(Address of principal executive offices)
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(Zip Code) |
(203) 799-4100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o
The number of shares outstanding of the Class A Common Stock and Class B Common Stock as of July
29, 2005 were 9,264,647 and 51,456,151 respectively.
HUBBELL INCORPORATED
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statement of Income
(unaudited)
(in millions, except per share amounts)
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Three Months Ended |
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Six Months Ended |
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June 30 |
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June 30 |
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2005 |
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2004 |
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2005 |
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2004 |
Net sales |
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$ |
520.5 |
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$ |
502.9 |
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$ |
1,008.1 |
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$ |
968.1 |
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Cost of goods sold |
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377.4 |
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362.7 |
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728.3 |
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695.2 |
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Gross profit |
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143.1 |
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140.2 |
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279.8 |
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272.9 |
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Selling & administrative expenses |
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88.0 |
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83.2 |
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180.4 |
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163.6 |
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Special charges |
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2.2 |
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9.5 |
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4.1 |
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10.7 |
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Operating income |
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52.9 |
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47.5 |
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95.3 |
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98.6 |
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Other income (expense): |
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Investment income |
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2.2 |
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1.0 |
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4.5 |
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2.2 |
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Interest expense |
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(5.0 |
) |
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(5.1 |
) |
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(10.1 |
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(10.2 |
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Other income (expense), net |
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— |
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(0.5 |
) |
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0.1 |
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(0.5 |
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Total other income (expense) |
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(2.8 |
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(4.6 |
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(5.5 |
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(8.5 |
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Income before income taxes |
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50.1 |
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42.9 |
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89.8 |
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90.1 |
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Provision for income taxes |
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14.4 |
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11.5 |
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25.3 |
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24.7 |
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Net Income |
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$ |
35.7 |
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$ |
31.4 |
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$ |
64.5 |
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$ |
65.4 |
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Earnings Per Share-Diluted |
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$ |
0.58 |
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$ |
0.51 |
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$ |
1.04 |
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$ |
1.07 |
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Average number of common shares outstanding — Diluted |
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61.9 |
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61.6 |
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62.3 |
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61.4 |
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Cash Dividends Per Common Share |
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$ |
0.33 |
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$ |
0.33 |
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$ |
0.66 |
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$ |
0.66 |
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See notes to consolidated financial statements.
3
HUBBELL INCORPORATED
Consolidated Balance Sheet
(in millions)
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(unaudited) |
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June 30, 2005 |
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December 31, 2004 |
ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
179.9 |
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$ |
125.9 |
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Short-term investments |
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127.2 |
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215.6 |
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Accounts receivable, net |
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300.9 |
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288.5 |
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Inventories, net |
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229.6 |
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216.1 |
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Deferred taxes and other |
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44.2 |
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46.3 |
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Total current assets |
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881.8 |
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892.4 |
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Property, Plant, and Equipment, net |
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260.0 |
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261.8 |
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Other
Assets |
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Investments |
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48.2 |
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65.7 |
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Goodwill |
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323.8 |
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326.6 |
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Intangible assets and other |
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112.9 |
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95.9 |
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Total Assets |
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$ |
1,626.7 |
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$ |
1,642.4 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities |
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Current portion of long-term debt |
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$ |
100.0 |
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$ |
99.9 |
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Accounts payable |
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129.5 |
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132.1 |
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Accrued salaries, wages and employee benefits |
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36.1 |
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46.8 |
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Accrued income taxes |
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32.1 |
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24.4 |
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Dividends payable |
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20.0 |
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20.2 |
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Other accrued liabilities |
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79.5 |
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85.9 |
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Total current liabilities |
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397.2 |
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409.3 |
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Long-Term Debt |
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199.1 |
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199.1 |
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Other Non-Current Liabilities |
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94.4 |
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89.7 |
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Total liabilities |
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690.7 |
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698.1 |
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Commitments and contingencies |
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Shareholders’ Equity |
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936.0 |
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944.3 |
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Total Liabilities and Shareholders’ Equity |
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$ |
1,626.7 |
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$ |
1,642.4 |
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See notes to consolidated financial statements.
4
HUBBELL INCORPORATED
Consolidated Statement of Cash Flows
(unaudited)
(in millions)
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Six Months Ended |
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June 30 |
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2005 |
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2004 |
Cash flows from Operating Activities |
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Net income |
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$ |
64.5 |
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$ |
65.4 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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24.4 |
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25.7 |
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Deferred income taxes |
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1.4 |
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0.6 |
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Non-cash special charges |
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0.5 |
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7.7 |
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Changes in assets and liabilities: |
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(Increase) in accounts receivable |
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(11.0 |
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(58.3 |
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(Increase) in inventories |
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(11.7 |
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(15.5 |
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Decrease in other current assets |
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1.5 |
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6.9 |
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Increase (decrease) in accounts payable |
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(2.7 |
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29.9 |
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Increase (decrease) in other current operating liabilities |
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(12.1 |
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8.6 |
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Contribution to domestic, qualified, defined benefit pension plans |
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(10.0 |
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— |
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Changes in other assets and liabilities, net |
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3.8 |
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5.5 |
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Other, net |
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2.7 |
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3.3 |
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Net cash provided by operating activities |
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51.3 |
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79.8 |
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Cash flows from Investing Activities |
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Acquisition of business, net of cash acquired |
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(5.5 |
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— |
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Capital expenditures |
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(28.6 |
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(14.9 |
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Purchases of available-for-sale investments |
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(113.1 |
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(100.0 |
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Proceeds from sale of available-for-sale investments |
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219.1 |
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69.0 |
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Other, net |
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2.9 |
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4.1 |
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Net cash provided by (used in) investing activities |
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74.8 |
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(41.8 |
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Cash flows from Financing Activities |
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Payment of dividends |
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(40.5 |
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(39.8 |
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Proceeds from exercise of stock options |
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14.7 |
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13.4 |
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Acquisition of common shares |
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(45.5 |
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(2.8 |
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Net cash used in financing activities |
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(71.3 |
) |
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(29.2 |
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Effect of exchange rate changes on cash |
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(0.8 |
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(0.2 |
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Increase in cash and cash equivalents |
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54.0 |
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8.6 |
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Cash and cash equivalents |
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Beginning of period |
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125.9 |
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104.2 |
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End of period |
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$ |
179.9 |
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$ |
112.8 |
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See notes to consolidated financial statements.
5
HUBBELL INCORPORATED
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Hubbell Incorporated
(“Hubbell”, the “Company”, or “registrant”) have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally accepted in the
United States of America (“U.S.”) for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included. Operating results
for the six months ended June 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005.
The balance sheet at December 31, 2004 has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required by accounting
principles generally accepted in the U.S. for complete financial statements.
Auction rate securities are classified as Short-term investments in the Consolidated Balance
Sheet and, accordingly, related purchases and sales have been classified as available-for-sale
investments in the Consolidated Statement of Cash Flows. Auction rate securities were classified as
Cash and cash equivalents as of June 30, 2004. Classification of prior year amounts in the
Consolidated Statement of Cash Flows has been revised to conform to the current year presentation.
Certain other prior year amounts in the Consolidated Statement of Cash Flows have been reclassified
to conform with the current year presentation.
For further information, refer to the consolidated financial statements and footnotes thereto
included in the Hubbell Incorporated Annual Report on Form 10-K for the year ended December 31,
2004.
Recently Issued Accounting Standards
In
March 2005, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation (“FIN”) No. 47,
“Accounting for Conditional Asset Retirement Obligations, an
interpretation of SFAS No. 143” ("FIN 47"). FIN 47 clarifies the term
conditional asset retirement obligation as used in Statement of Financial Accounting Standards
(“SFAS”) No. 143,
“Accounting for Asset Retirement Obligations.” The term
refers to a legal obligation to perform an asset retirement activity
in which the timing and/or method of settlement are conditional on a
future event that may or may not be within the Company's control. FIN 47
is effective no later than December 31, 2005 for the Company. The
Company is currently evaluating the effect of FIN 47 on its financial
position, results of operations and cash flows.
In
May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). This statement
changes the requirements for the accounting and reporting of a change in accounting principle. SFAS
No. 154 requires retrospective application to prior periods’ financial statements of changes in
accounting principle, where practical to do so. This statement is applicable for fiscal years
beginning after December 15, 2005. The Company does not anticipate that this standard will have a
material effect on its financial position, results of operations or cash flows.
2. Business Acquisition
In January 2005, the Company, through a wholly-owned subsidiary, completed the purchase of
certain assets and the assumption of certain liabilities of the foundation anchoring business (
hereinafter referred to as “Atlas”) of Atlas Systems, Inc. for $5.5 million in cash, including fees
and expenses and net of cash acquired. Atlas designs and manufactures helical and push pier civil
anchors which are sold to dealers and installers throughout the U.S. Atlas complements the product
offering of the Company’s Power segment and is expected to add approximately $8-$10 million in
annual net sales. In total, $2.2 million of the purchase price has been allocated to identifiable
intangible assets consisting primarily of tradenames and a non-compete agreement which will be
amortized over useful lives of 30 years and 3 years, respectively.
3. Stock-Based Compensation
The Company accounts for employee stock option and performance plans using the intrinsic value
based method of accounting for such plans in accordance with APB Opinion No. 25 where compensation
expense per option granted is measured as the excess, if any, of the quoted market price of the
Company’s stock at the measurement date over the exercise price.
In December 2004, FASB issued SFAS No. 123 (revised), “Share-Based Payment” (“SFAS No. 123
(R)”). SFAS No. 123(R), which requires expensing of stock options and other share-based payments,
replaces FASB’s earlier SFAS No. 123 and supersedes
Accounting Principles Board (“APB”) Opinion No.
25, “Accounting for Stock Issued to Employees”. This standard will require the Company to measure the cost of employee services
received in exchange for an award of equity instruments based on a grant-date fair value of the
award (with
6
limited exceptions), and that cost will be recognized over the vesting period. In March 2005,
the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”)
No. 107 (“SAB No. 107”) regarding the Staff’s interpretation of
SFAS No. 123(R). This interpretation provides the Staff’s views regarding interactions between SFAS
No. 123(R) and certain SEC rules and regulations and provides interpretations of the valuation of
share-based payments for public companies. The interpretive guidance is intended to assist
companies in applying the provisions of SFAS No. 123(R) and investors and users of the financial
statements in analyzing the information provided. In April 2005, the
SEC delayed the
effective date of SFAS No. 123(R) for public companies until fiscal
years beginning after June 15, 2005. Accordingly, the Company expects
to adopt the standard on January 1, 2006 and will follow the guidance prescribed
in SAB No. 107 in connection with its adoption.
The following table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based
Compensation” for stock options for the three and six months ended June 30, 2005 and 2004 (in
millions, except per share amounts):
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Three Months Ended |
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Six Months Ended |
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June 30 |
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June 30 |
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2005 |
|
2004 |
|
2005 |
|
2004 |
Net income, as reported |
|
$ |
35.7 |
|
|
$ |
31.4 |
|
|
$ |
64.5 |
|
|
$ |
65.4 |
|
Deduct: Stock-based employee compensation expense determined
under Black-Scholes option pricing model, net of related tax effects |
|
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(1.6 |
) |
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(1.3 |
) |
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(3.1 |
) |
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(2.8 |
) |
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Pro forma Net income |
|
$ |
34.1 |
|
|
$ |
30.1 |
|
|
$ |
61.4 |
|
|
$ |
62.6 |
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Earnings per share: |
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Basic — as reported |
|
$ |
0.58 |
|
|
$ |
0.52 |
|
|
$ |
1.05 |
|
|
$ |
1.08 |
|
Basic — pro forma |
|
$ |
0.56 |
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$ |
0.50 |
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$ |
1.00 |
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$ |
1.04 |
|
Diluted — as reported |
|
$ |
0.58 |
|
|
$ |
0.51 |
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|
$ |
1.04 |
|
|
$ |
1.07 |
|
Diluted — pro forma |
|
$ |
0.55 |
|
|
$ |
0.49 |
|
|
$ |
0.99 |
|
|
$ |
1.02 |
|
4. Inventories
Inventories are comprised of the following (in millions):
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|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Raw Material |
|
$ |
78.5 |
|
|
$ |
77.9 |
|
Work-in-Process |
|
|
45.9 |
|
|
|
49.7 |
|
Finished Goods |
|
|
153.5 |
|
|
|
136.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
277.9 |
|
|
|
263.8 |
|
Excess of FIFO costs over LIFO cost basis |
|
|
(48.3 |
) |
|
|
(47.7 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
229.6 |
|
|
$ |
216.1 |
|
|
|
|
|
|
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|
|
5. Earnings Per Share
The following table sets forth the computation of earnings per share for the three and six
months ended June 30, 2005 and 2004 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net income |
|
$ |
35.7 |
|
|
$ |
31.4 |
|
|
$ |
64.5 |
|
|
$ |
65.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding—Basic |
|
|
61.0 |
|
|
|
60.6 |
|
|
|
61.2 |
|
|
|
60.5 |
|
Potential dilutive shares |
|
|
0.9 |
|
|
|
1.0 |
|
|
|
1.1 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of shares outstanding — Diluted |
|
|
61.9 |
|
|
|
61.6 |
|
|
|
62.3 |
|
|
|
61.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — Basic |
|
$ |
0.58 |
|
|
$ |
0.52 |
|
|
$ |
1.05 |
|
|
$ |
1.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — Diluted |
|
$ |
0.58 |
|
|
$ |
0.51 |
|
|
$ |
1.04 |
|
|
$ |
1.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of common stock are not included in the computation of diluted
earnings per share when the effect would be anti-dilutive. For the three months ended June 30, 2005
and 2004 there were 1.4 million and 1.6 million anti-dilutive options outstanding, respectively.
For the six months ended June 30, 2005 and 2004 there were zero and 1.6 million anti-dilutive
options outstanding, respectively.
7
6. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the six months ended June 30, 2005, by segment,
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
|
|
|
|
Electrical |
|
Power |
|
Technology |
|
Total |
Balance December 31, 2004 |
|
$ |
172.3 |
|
|
$ |
112.7 |
|
|
$ |
41.6 |
|
|
$ |
326.6 |
|
Translation adjustments |
|
|
(2.8 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2005 |
|
$ |
169.5 |
|
|
$ |
112.7 |
|
|
$ |
41.6 |
|
|
$ |
323.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s policy is to perform its annual impairment testing in the second quarter of each
year, unless circumstances dictate the need for more frequent assessments. In 2005, this testing
resulted in implied fair values for each reporting unit which exceeded the reporting unit’s
carrying value, including goodwill. Consequently, there were no impairments of goodwill. Similarly,
there were no impairments of indefinite-lived intangible assets.
Identifiable intangible assets are recorded in “Intangible assets and other” in the
Consolidated Balance Sheet and at June 30, 2005 include approximately $21.5 million of
indefinite-lived intangible assets not subject to amortization and $12.1 million of intangibles
with definite lives that are being amortized and are presented net of accumulated amortization of
$3.2 million. Amortization expense is expected to be approximately $1.2 million per year over the
next five years. Indefinite-lived intangible assets primarily represent tradenames, while
definite-lived intangible assets primarily represent trademarks and patents.
7. Shareholders’ Equity
Shareholders’ equity is comprised of the following (in millions, except share and per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Common stock, $.01 par value: |
|
|
|
|
|
|
|
|
Class A—authorized 50,000,000 shares; Outstanding 9,284,647 and 9,350,747 shares |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
Class B—authorized 150,000,000 shares; Outstanding 51,433,319 and 51,864,128 shares |
|
|
0.5 |
|
|
|
0.5 |
|
Additional paid-in capital |
|
|
254.0 |
|
|
|
280.7 |
|
Retained earnings |
|
|
688.7 |
|
|
|
664.5 |
|
Accumulated other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
Pension liability adjustment |
|
|
(1.9 |
) |
|
|
(1.9 |
) |
Cumulative translation adjustment |
|
|
(4.3 |
) |
|
|
2.1 |
|
Cash flow hedge loss |
|
|
(1.1 |
) |
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
Total Accumulated other comprehensive loss |
|
|
(7.3 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
Total Shareholders’ equity |
|
$ |
936.0 |
|
|
$ |
944.3 |
|
|
|
|
|
|
|
|
|
|
8. Special Charges
Special charges in the second quarter of 2005 and 2004 reflect pretax expenses of $2.7 million
and $10.4 million, respectively. Included in these amounts are
$0.5 million and $0.9 million,
respectively, of second quarter 2005 and 2004 inventory write-downs which were recorded in Cost of
goods sold in the Consolidated Statement of Income.
Special charges for the first six months of 2005 and 2004 reflect pretax expenses of $4.6
million and $11.8 million, respectively. Included in the year-to-date 2005 and 2004 special charges
are $0.5 million and $1.1 million, respectively, of inventory write-downs which were recorded in
Cost of goods sold in the Consolidated Statement of Income.
Special charges for the second quarter and first six months of 2005 and 2004 were the result
of actions taken in connection with the programs discussed below.
8
Lighting
Business Integration and Rationalization Program
The
Company’s ongoing lighting business integration and
rationalization program (“the Program”) was initiated in
2002 following the Company’s acquisition of Lighting Corporation of America (“LCA”) and relates to
both the integration and rationalization of the Company’s acquired and legacy lighting operations.
The Program accounted for $1.8 million and $3.7 million, respectively, of the 2005 and 2004
second quarter charges. The 2005 second quarter special charge consisted of $1.0 million of
severance costs, $0.2 million of inventory write-downs and $0.6 million of facility exit costs in
connection with the consolidation of office functions and transition of the manufacturing and
assembly of commercial lighting fixture products to low cost
countries. The 2004 second quarter special charge primarily consisted of costs
associated with the closure of a domestic manufacturing facility and the consolidation of these
operations into an existing factory in Virginia. This action resulted
in the recording of $2.7 million of asset impairments,
including inventory write-downs, and $0.3 million of severance costs.
Additional 2004 second quarter charges of $0.7 million were recorded for
ongoing integration actions.
Special charges year-to-date related to the Program amounted to $3.7 million and $5.1 million
in 2005 and 2004, respectively. Included in the year-to-date 2005 special charges were $1.9 million
of severance costs and $1.6 million of facility exits costs related to the consolidation of
manufacturing, sales and administrative functions occurring throughout the commercial and
industrial lighting business. In addition, $0.2 million was
associated with inventory write-downs for
discontinued products. The 2004 year-to-date special charges consisted of $0.7 million of
severance costs, $1.2 million of facility exit costs, $2.1 million
of asset impairments and $1.1 million
of inventory write-downs. The 2004 costs resulted from the closure of a
manufacturing facility in the second quarter as noted above and
ongoing costs incurred in connection with the Program which
were expensed as incurred. In total, a reduction of
approximately 520 employees is expected as a result of these actions, of which approximately 470
had left the Company as of June 30, 2005.
Closure of a Wiring Device Factory
In the second quarter of 2004, the Company announced plans to close a wiring device factory in
Puerto Rico. The factory closed during the second quarter of 2005 and production activities have
been transferred to existing facilities or outsourced. Approximately 220 employees were affected by
this closure. Substantially all affected employees had left the Company as of June 30, 2005.
In the second quarter of 2005, the Company recorded $0.9 million of pretax special charges for
final cost of closing this facility consisting of $0.3 million of inventory write-downs and $0.6
million of facility related exit costs. The second quarter 2004 charge of $6.7 million consisted of
$4.5 million of asset impairments and $2.2 million of severance costs. The severance amounts are
expected to be fully paid during the third quarter of 2005.
The following table sets forth activity with respect to special charges recorded for the six
months ended June 30, 2005 and the status of amounts accrued at June 30, 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
Balance at |
|
2005 |
|
2005 Cash |
|
Non-cash |
|
Balance at |
|
|
December 31, 2004 |
|
Provision |
|
Expenditures |
|
Write-downs |
|
June 30, 2005 |
Lighting
Business Integration and Rationalization Program: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory write-downs |
|
$ |
— |
|
|
$ |
0.2 |
|
|
$ |
— |
|
|
$ |
(0.2 |
) |
|
$ |
— |
|
Employee termination costs |
|
|
1.3 |
|
|
|
1.9 |
|
|
|
(1.9 |
) |
|
|
— |
|
|
|
1.3 |
|
Exit and integration costs |
|
|
— |
|
|
|
1.6 |
|
|
|
(1.3 |
) |
|
|
— |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3 |
|
|
|
3.7 |
|
|
|
(3.2 |
) |
|
|
(0.2 |
) |
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wiring Device Factory Closure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory write-downs |
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
(0.3 |
) |
|
|
— |
|
Employee termination costs |
|
|
1.7 |
|
|
|
— |
|
|
|
(1.0 |
) |
|
|
— |
|
|
|
0.7 |
|
Other facility exit costs |
|
|
0.3 |
|
|
|
0.6 |
|
|
|
(0.5 |
) |
|
|
— |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
0.9 |
|
|
|
(1.5 |
) |
|
|
(0.3 |
) |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3.3 |
|
|
$ |
4.6 |
|
|
$ |
(4.7 |
) |
|
$ |
(0.5 |
) |
|
$ |
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
more detailed description of the business objectives associated with these programs is included
in “Special Charges” within Management’s Discussion and Analysis.
9
9. Comprehensive Income:
Total comprehensive income and its components are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net income |
|
$ |
35.7 |
|
|
$ |
31.4 |
|
|
$ |
64.5 |
|
|
$ |
65.4 |
|
Foreign currency translation adjustments |
|
|
(3.5 |
) |
|
|
(1.3 |
) |
|
|
(6.4 |
) |
|
|
(0.3 |
) |
Unrealized gain (loss) on investments |
|
|
0.1 |
|
|
|
(0.5 |
) |
|
|
— |
|
|
|
(0.3 |
) |
Cash flow hedge net gain |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
32.6 |
|
|
$ |
29.7 |
|
|
$ |
58.7 |
|
|
$ |
64.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Segment Information
The following table sets forth financial information by business segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical |
|
$ |
376.4 |
|
|
$ |
375.3 |
|
|
$ |
729.8 |
|
|
$ |
720.6 |
|
Power |
|
|
109.9 |
|
|
|
96.0 |
|
|
|
208.6 |
|
|
|
183.8 |
|
Industrial Technology |
|
|
34.2 |
|
|
|
31.6 |
|
|
|
69.7 |
|
|
|
63.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
520.5 |
|
|
$ |
502.9 |
|
|
$ |
1,008.1 |
|
|
$ |
968.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical |
|
$ |
35.2 |
|
|
$ |
45.4 |
|
|
$ |
68.5 |
|
|
$ |
84.0 |
|
Special charges |
|
|
(2.7 |
) |
|
|
(10.4 |
) |
|
|
(4.6 |
) |
|
|
(11.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electrical |
|
|
32.5 |
|
|
|
35.0 |
|
|
|
63.9 |
|
|
|
72.2 |
|
Power |
|
|
16.2 |
|
|
|
9.1 |
|
|
|
26.9 |
|
|
|
19.6 |
|
Industrial Technology |
|
|
4.2 |
|
|
|
3.4 |
|
|
|
9.1 |
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
52.9 |
|
|
|
47.5 |
|
|
|
99.9 |
|
|
|
98.6 |
|
Unusual item |
|
|
— |
|
|
|
— |
|
|
|
(4.6 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income |
|
|
52.9 |
|
|
|
47.5 |
|
|
|
95.3 |
|
|
|
98.6 |
|
Other income (expense), net |
|
|
(2.8 |
) |
|
|
(4.6 |
) |
|
|
(5.5 |
) |
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
50.1 |
|
|
$ |
42.9 |
|
|
$ |
89.8 |
|
|
$ |
90.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unusual item of $4.6 million, pretax, represents transactional expenses consisting of
legal, accounting and consulting fees incurred in support of the Company’s strategic growth
initiatives. These costs are included in selling and administrative expenses and are not allocated
to any one business segment for management reporting purposes.
11. Net Periodic Benefit Cost
The
following table sets forth the components of pension and other benefits cost for the three
and six months ended June 30, 2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
|
|
Three Months Ended |
|
Six Months Ended |
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
4.0 |
|
|
$ |
3.5 |
|
|
$ |
7.9 |
|
|
$ |
7.1 |
|
|
$ |
— |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
Interest cost |
|
|
7.1 |
|
|
|
6.8 |
|
|
|
14.2 |
|
|
|
13.7 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
1.1 |
|
|
|
1.3 |
|
Expected
return on plan assets |
|
|
(8.2 |
) |
|
|
(7.2 |
) |
|
|
(16.4 |
) |
|
|
(14.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization
of prior service cost |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
Amortization
of actuarial losses |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.8 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
3.4 |
|
|
$ |
3.5 |
|
|
$ |
6.7 |
|
|
$ |
7.1 |
|
|
$ |
0.6 |
|
|
$ |
0.8 |
|
|
$ |
1.3 |
|
|
$ |
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Employer
Contributions
The Company previously disclosed in its financial statements for the year ended December 31,
2004 that it expected to contribute between $10-$25 million to its domestic, defined benefit
pension plans and $2-$3 million to its international plans in 2005. In the
10
second quarter of 2005, the Company made a $10 million voluntary contribution to its domestic,
non-qualified defined benefit pension plans. Contributions made to the Company’s international
plans consisted of normal recurring payments and are not significant.
12. Guarantees
The Company accrues for costs associated with guarantees when it is probable that a liability
has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred
is accrued based on an evaluation of currently available facts and, where no amount within a range
of estimates is more likely, the minimum is accrued. In accordance with FASB Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others,” (“FIN 45”) for guarantees issued after December 31, 2002, the Company
records a liability equal to the fair value of guarantees in the Consolidated Balance Sheet.
The Company may extend certain financial guarantees to third parties, the most common of which
are performance bonds and bid bonds. As of June 30, 2005 the fair value and maximum potential
payment related to the Company’s guarantees were not material. The Company may enter into various
hedging instruments which are subject to disclosure in accordance with FIN 45. As of June 30, 2005,
the Company had six individual forward exchange contracts outstanding each for the purchase of $1.0
million U.S. dollars which expire ratably each month through December 2005. These contracts were
entered into in order to hedge the exposure to fluctuating rates of exchange on inventory
purchases. These contracts have been designated as cash flow hedges in accordance with SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities.”
The Company offers a product warranty which covers defects on most of its products. These
warranties primarily apply to products that are properly used for their intended purpose, installed
correctly, and properly maintained. The Company generally accrues estimated warranty costs at the
time of sale. Estimated warranty expenses are based upon historical information such as past
experience, product failure rates, or the number of units to be repaired. Adjustments are made to
the product warranty cost accrual as claims are incurred or as historical experience indicates. The
product warranty cost accrual is reviewed for reasonableness on a quarterly basis and is adjusted
as additional information regarding expected warranty costs become known. Changes in the accrual
for product warranties in the first six months of 2005 are set forth below (in millions):
|
|
|
|
|
Balance at December 31, 2004 |
|
$ |
4.0 |
|
Provision |
|
|
0.6 |
|
Expenditures |
|
|
(1.0 |
) |
|
|
|
|
|
Balance at June 30, 2005 |
|
$ |
3.6 |
|
|
|
|
|
|
11
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW AND SUMMARY OF BUSINESS STRATEGY
Overview
In the second quarter of 2005, net sales increased 3.5% compared with the second quarter of
2004 primarily as a result of higher shipments and selling price levels at our Power and Industrial
Technology segments. Within the Electrical segment, sales were essentially unchanged as increases
in selling prices year-over-year were substantially offset by lower unit volumes. For the first
six months of 2005, net sales increased 4.1% compared to the first six months of 2004 as all
business segments reported higher sales. The year-over-year increase is primarily due to the impact
of selling price increases.
During 2004 and continuing into the first six months of 2005, many of the business units
within each segment announced and implemented selling price increases. These announcements were a
result of significant increases in the cost of materials and components used in our products such
as steel, copper, aluminum, zinc, bronze and lighting ballasts. In addition, higher energy related
costs due to record high oil prices also negatively impacted transportation and utility costs.
While the cost of certain commodities have moderated throughout the second quarter, particularly
steel, these costs remain on average 50%-60% higher than the cost levels experienced at the start of 2004.
Energy related costs including freight and utilities have
escalated throughout the first six months of 2005. Many of our
businesses have been successful at realizing these price increases to offset these higher costs,
while other businesses have encountered more resistance in the market to pricing adjustments,
particularly within the Electrical segment.
The ongoing recovery in the general economy had a positive effect on the level of customer
orders in the second quarter of 2005, although the pace of recovery within our served markets is
mixed. Industrial markets have improved year-over year on higher capital spending and higher
domestic plant and equipment investment levels. The utility market has improved, as utility capital
and maintenance, repair, and operations (“MRO”) spending continues to increase, both domestically
and in overseas markets. The residential markets have been stronger than predicted through the
first six months of 2005 as low mortgage interest rates continue to fuel new home sales. Throughout
the year, these positive trends have been offset by weakness in non-residential construction
markets which are below prior year levels and have yet to show any signs of sustained recovery from
lower levels of market activity.
Operating income increased and operating margin improved by eight-tenths of one percent for
the second quarter of 2005 compared to the second quarter of 2004. Higher operating margin was
primarily due to a reduction in special charges partially offset by
unabsorbed manufacturing costs, the effect of increased energy and freight costs not fully
offset by selling price increases, and higher selling and administrative costs. For the first six
months of 2005, operating income declined and operating margins were lower by seven-tenths of one
percent compared to the first six months of 2004 despite a lower level of expense related to
special charges. The lower operating margin was primarily due to unabsorbed manufacturing costs as
a result of lower unit volumes, higher transportation and utility costs and higher selling and
administrative costs. Part of the increase in administrative expenses in the first six months of
2005 was due to the recording of an unusual item of $4.6 million, pretax, in the first quarter of
2005 for transactional expenses consisting of legal, accounting and consulting fees incurred in
support of our strategic growth initiatives.
Summary of Business Strategy
|
|
Our business strategy continues to incorporate the following objectives: |
|
• |
|
Transformation of business processes. The Company has committed to
applying lean process improvement techniques throughout the enterprise
to eliminate waste, improve efficiency and create speed and certainty
in decision making. We are now in our fourth year of a long-term
project to implement lean initiatives throughout the Company. We have
been successful at transforming major areas of our factories,
warehouses and offices. As a result, we have reduced inventories and
floor space, and generated productivity gains in our processes. |
|
• |
|
Working capital efficiency. We continue to focus on improving our
working capital efficiency which emphasizes improved inventory
management, faster collection of accounts receivable and negotiation
of more favorable supplier payment terms. Working capital efficiency
is principally measured as the percentage of trade working capital
(inventory, plus accounts receivable, less accounts payable) divided
by annual net sales. In the first half of 2005, average trade working
capital as a percentage of sales was 19.3% versus 18.6% in 2004. The
increase is primarily attributable to higher trade working capital
balances throughout the first half of 2005 in connection with our
strategic initiatives including the SAP implementation and lighting
business |
12
|
|
restructuring. Inventory reduction continues to be our largest area of focus to improve working
capital efficiency and we continue to see opportunity to reduce inventory days. During
the second quarter of 2005, average inventory days supply on-hand of 56 days was up slightly from
the prior year second quarter but was down from the first quarter of 2005. Accounts receivable
days outstanding (“DSO”)increased to approximately 52 days in the second quarter of 2005 compared to 49
days in the second quarter of 2004 primarily due to the mix of sales
within our lighting business as well as process inefficiencies related to our new business system. See the
further discussion under “Cash Flow” within this Management’s Discussion and Analysis. |
|
• |
|
Lighting integration and cost reduction. We continue to execute a
multi-year program to integrate and rationalize our lighting business
following the acquisition of LCA in 2002. Actions include facility
consolidations, workforce reductions and product rationalizations.
Integral to this initiative is increased product and component
sourcing from low cost countries. Annualized savings from these
actions are expected to range from $20-$30 million, pretax, when fully
implemented in 2007. Savings are expected to primarily be realized in
the form of higher manufacturing productivity and lower administrative
costs in the affected lighting businesses. However, a portion of these
savings has been and will be used to offset cost increases and other
competitive pressures as opposed to adding directly to the
profitability of the Electrical segment. Also see the discussion under
“Outlook” included in this Management’s Discussion and Analysis. |
|
• |
|
Global sourcing. We continue to focus on expanding our global product
and component sourcing and supplier cost reduction program. We
continue to consolidate suppliers, utilize reverse auctions, and
partner with vendors to shorten lead times, improve quality and
delivery and reduce costs. Approximately 20% of the total value of
procured material is currently sourced from low cost countries and we
expect to increase this amount over the next several years. |
|
• |
|
Acquisitions in our core markets. We continue to seek prospective
acquisitions that would enhance our core electrical component
businesses — wiring systems, lighting fixtures and controls, rough-in
electrical products, and utility products. Our ability to finance
substantial growth continues to be strong. In the first quarter of
2005, we completed one small business acquisition in the Power
segment. |
|
• |
|
Common, enterprise-wide information system. A multi-year program is
underway to provide a state-of-the-art information system to meet the
needs of our business. SAP software is being installed across all
businesses in a series of staged implementations expected to occur
over the next eighteen months. The first implementation took place in
the fourth quarter of 2004 with additional implementations planned for
later this year. The enterprise-wide business system is expected to
provide several benefits: |
|
|
|
—Standardization of business processes and information with improved analysis of business
drivers and operational performance. |
|
|
|
—Common, standardized interfaces with our customers and suppliers. |
|
|
|
—Improved support of our cost reduction and process improvement initiatives. |
|
|
|
—Rapid integration of acquired businesses. |
In connection with this program, we expensed as administrative costs approximately $3.5
million and $5.1 million in the first six months of 2005 and 2004, respectively. In the first six
months of 2005 and 2004, we capitalized $9.7 million and $3.5 million, respectively, of costs
(recorded in “Intangible assets and other” in the Consolidated Balance Sheet) primarily related to
implementation consulting fees and expenses associated with the
program. Management estimates full year 2005
expense associated with this program will be in a range of $10-$12 million, pretax, with an
additional $16-$18 million of cost being capitalized. Total program spending should approximate
$50-$60 million, pretax, on the business system initiative — from inception in late 2003 through
the end of 2006 — of which approximately $30-$35 million will be capitalized (and subsequently
amortized over 5 years) and $20-$25 million will be expensed as incurred.
13
SUMMARY OF CONSOLIDATED RESULTS
In millions, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
2005 |
|
Net sales |
|
2004 |
|
Net sales |
|
2005 |
|
Net sales |
|
2004 |
|
Net sales |
Net sales |
|
$ |
520.5 |
|
|
|
|
|
|
$ |
502.9 |
|
|
|
|
|
|
$ |
1,008.1 |
|
|
|
|
|
|
$ |
968.1 |
|
|
|
|
|
Cost of goods sold |
|
|
377.4 |
|
|
|
72.5 |
% |
|
|
362.7 |
|
|
|
72.1 |
% |
|
|
728.3 |
|
|
|
72.2 |
% |
|
|
695.2 |
|
|
|
71.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
143.1 |
|
|
|
27.5 |
% |
|
|
140.2 |
|
|
|
27.9 |
% |
|
|
279.8 |
|
|
|
27.8 |
% |
|
|
272.9 |
|
|
|
28.2 |
% |
Selling & administrative expenses |
|
|
88.0 |
|
|
|
16.9 |
% |
|
|
83.2 |
|
|
|
16.5 |
% |
|
|
180.4 |
|
|
|
17.9 |
% |
|
|
163.6 |
|
|
|
16.9 |
% |
Special charges |
|
|
2.2 |
|
|
|
0.4 |
% |
|
|
9.5 |
|
|
|
1.9 |
% |
|
|
4.1 |
|
|
|
0.4 |
% |
|
|
10.7 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
52.9 |
|
|
|
10.2 |
% |
|
|
47.5 |
|
|
|
9.4 |
% |
|
|
95.3 |
|
|
|
9.5 |
% |
|
|
98.6 |
|
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — diluted |
|
$ |
0.58 |
|
|
|
|
|
|
$ |
0.51 |
|
|
|
|
|
|
$ |
1.04 |
|
|
|
|
|
|
$ |
1.07 |
|
|
|
|
|
Net Sales
Net sales for the second quarter and first six months of 2005 increased 3.5% and 4.1%,
respectively, versus the comparable periods of 2004. The majority of the increase in both periods
is a result of the carryover effect of price increases implemented throughout 2004 and, to a lesser
extent, 2005. Although underlying demand in many of our core markets has improved year-over-year,
continued softness in commercial construction markets, which represents our largest served market,
negatively affected orders and sales in the Electrical segment and substantially offset higher
shipments in the Power and Industrial Technology segments. One additional shipping day in the
second quarter of 2005 also increased net sales by approximately
1.5 percentage points versus the second quarter of 2004. Currency translation had no material impact on sales
in the second quarter or in the first six months of 2005 versus the comparable periods of 2004.
Sales to the residential market increased approximately 6% in the second quarter
of 2005 compared to the same period in 2004 primarily resulting from
higher shipments. Residential sales represented approximately 15% of the Company’s
consolidated net sales for the first six months of 2005.
Gross Profit
Gross profit margin in the second quarter of 2005 decreased to 27.5% compared to 27.9% in the
second quarter of 2004. On a year-to-date basis, gross profit margin declined to 27.8% compared to
28.2% for the first six months of 2004. The decline both in the quarter and year-to-date versus
the comparable periods of 2004 is primarily attributable to the impact of unabsorbed factory costs as a
result of lower unit volumes in certain of our manufacturing plants and higher year-over-year
energy prices, which have negatively impacted costs including
transportation and utilities. Partially offsetting these declines both in the quarter and
year-to-date were the favorable effects of higher selling prices, lower product costs from strategic sourcing initiatives and productivity gains
and cost savings from our lighting integration program.
Selling & Administrative (S&A) Expenses
S&A expenses increased in the second quarter and first six months of 2005 versus the
comparable periods in 2004 primarily as a result of higher expenses related to our enterprise-wide
information systems initiative, costs associated with new product initiatives and, on a
year-over-year basis, an unusual item recorded in the first quarter of 2005. The unusual item
consisted of $4.6 million, pretax, of transactional expenses in support of our strategic growth
initiatives. The information systems initiative generated approximately $3.0 million of higher
year-over-year costs for the first six months of 2005 compared to 2004 primarily due to higher
resource needs in support of both legacy and SAP information platforms and amortization of
capitalized implementation costs.
Special Charges
Special charges recorded in the 2005 second quarter and year-to-date reflect expenses of $2.7
million and $4.6 million, respectively, of which $0.9 million in the second quarter and
year-to-date is related to the 2004 closure of a wiring device factory in Puerto Rico. The
remaining charges of $1.8 million in the second quarter and $3.7 million on a year-to-date basis
related to the ongoing lighting business integration and
rationalization program. Special charges recorded in the 2004
second quarter and year-to-date reflected
14
expenses of $10.4 million and $11.8 million, respectively, of which $6.7 million in the second
quarter and year-to-date pertained to the closure of the Puerto Rico factory with the remainder
related to the lighting program.
The following table summarizes activity with respect to special charges for the six months
ending June 30, 2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CATEGORY OF COSTS |
|
|
|
|
|
|
Facility Exit |
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
Inventory |
|
|
|
|
Year/Program |
|
Severance |
|
Integration |
|
Write-Downs* |
|
Asset Impairments |
|
Total |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting integration |
|
$ |
1.9 |
|
|
$ |
1.6 |
|
|
$ |
0.2 |
|
|
$ |
— |
|
|
$ |
3.7 |
|
Other capacity reduction |
|
|
— |
|
|
|
0.6 |
|
|
|
0.3 |
|
|
|
— |
|
|
|
0.9 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting integration |
|
|
0.7 |
|
|
|
1.2 |
|
|
|
1.1 |
|
|
|
2.1 |
|
|
|
5.1 |
|
Other capacity reduction |
|
|
2.2 |
|
|
|
— |
|
|
|
— |
|
|
|
4.5 |
|
|
|
6.7 |
|
|
|
|
* |
|
Included in Cost of goods sold |
Lighting
Business Integration and Rationalization Program
The integration and streamlining of our lighting operations is a multi-year initiative.
Individual projects within the Program consist of factory, office and warehouse closures, personnel
realignments, and costs to streamline and combine product offerings. Total costs from the start of
the Program in 2002 through its expected completion in 2006 are expected to range from $65-$80
million. In addition, capital expenditures of $35-$50 million are forecast, most of which have not
been spent. State and local tax incentives are expected to be available to offset certain of
these costs. Program costs related to severance, asset
impairments, and facility closures in conjunction with
exit activities are generally reflected as Special charges within the
Consolidated Statement of Income. Inventory write downs
related to exit activities are recorded as a component of Cost of goods sold. Other additional costs associated with the
Program are recorded as Cost of goods sold or S&A depending on the nature of the cost.
The Program is comprised of three phases. Phase I began in 2002 soon after the LCA acquisition
was completed and consisted of many individually identified actions totaling approximately $30
million. In accordance with applicable accounting rules, amounts were expensed either as actions
were approved and announced or as costs were incurred. Reorganization actions primarily consisted
of factory closures, warehouse consolidations and workforce realignment in connection with
integrating the acquired operations with Hubbell’s legacy lighting operations. Through June 30,
2005, these programs are substantially completed. Approximately $1.9 million of severance and exit
costs in the first six months of 2005 relate to these initiatives. See further detail of these
actions in the Company’s Annual Report on Form 10-K for the year ending December 31, 2004.
Phase II of the Program began in the 2004 second quarter. Many of the actions contemplated
were similar to actions completed or underway from Phase I. However,
these actions were increasingly focused on rationalizing the combined businesses. In the second quarter of 2004, a commercial
products plant closure was announced and charges of $3.0 million were recorded, primarily for asset
impairments. In the third quarter of 2004, we announced two actions: (1) consolidation of selling,
administrative and engineering office support functions within the commercial lighting business,
and (2) the selection of Greenville, SC as the site for a new $36 million lighting headquarters
facility to be constructed over the next two years. Finally, in the fourth quarter, a further move
of commercial lighting manufacturing to Mexico was approved. The cost of the office functions
consolidation is estimated at $2-$3 million, consisting of primarily cash expenditures for employee
severance and relocation, the latter of which is included in S&A expenses as incurred. The cost of the plant
consolidations is estimated at $20-$25 million, consisting of approximately $5 million of capital
expenditures and $15-$20 million of expense, occurring over the next eighteen months. Through
December 31, 2004, approximately $6 million of expenses were recorded consisting of $5 million for
the plant consolidations and $1 million for the consolidation of support functions.
In 2005, we announced the final Phase II action consisting of the consolidation and closure of
a commercial lighting leased office complex. In the second quarter of 2005, $0.6 million of costs,
primarily severance, were recorded in connection with the announcement. Approximately 40 people are
expected to be affected by this action which will be completed by the end of the third quarter of
2005. In total, Phase II costs in the first six months of 2005 totalled approximately $3.0 million.
These and additional Phase II actions are, in total, expected to result in $20-$25 million of
expenses through the end of 2006. Approximately 70%-80% of the total amount to be expensed is
expected to be associated with cash outlays. Excluding the new
15
headquarters facility, an additional $5-$7 million of capital expenditures are forecast to be
required for these projects. Cash outlays in 2005 are expected to range from $10-$15 million,
excluding capital costs of $10-$15 million.
In 2006, an additional $15-$20 million of final program costs are expected to be approved
under the Program. Cash expenditures are estimated to be approximately 60% of this amount.
Other Capacity Reduction Actions
In addition to the Program within the lighting business, in June 2004, we announced the
closure of a 92,000 square foot wiring device factory in Puerto Rico. Increased productivity
facilitated by lean initiatives and cost savings opportunities resulting from low cost country
sourcing contributed to the decision to close this leased facility. As a result, $7.2 million in
special charges were recorded in the prior year in the Electrical segment of which $4.9 million
related to impairments to fixed assets, $2.0 million provided for severance costs and $0.3 million
related to facility exit costs. During the second quarter of 2005, the factory closed and
substantially all employees left the Company. In the second quarter and for the
first six months of 2005, we recorded special charges of $0.9 million associated with this closure,
of which $0.3 million was inventory write-downs and $0.6 million related to additional facility
exit costs. Only the severance and exit costs will result in a cash outlay. Annual, pretax savings
from these actions are expected to be $3-$5 million when fully implemented in 2006, with the entire
amount benefiting Cost of goods sold in the Electrical segment. Net benefits realized in the
segment are likely to be lower and will be used to offset cost increases and other competitive
pressures.
Additional information with respect to special charges is included in Note 8 — Special Charges
included in the Notes to Consolidated Financial Statements.
Other Income/Expense
In the second quarter and first six months of 2005, investment income increased compared to
the second quarter and first six months of 2004 due to higher average investment balances and higher
average interest rates earned on cash and investments. Interest expense was essentially unchanged
in the second quarter and first six months of 2005 versus the comparable periods in 2004 as a
result of a consistent amount of fixed rate indebtedness.
Income Taxes
The effective tax rate for the second quarter of 2005 was 28.7% compared to 26.8% in the
second quarter of 2004. The effective tax rate for the first six
months of 2005 was 28.2% compared
to 27.4% in the first six months of 2004.
The increase in the effective tax rate in the second quarter and first six months of 2005
versus the comparable periods of 2004 reflects a higher year-over-year annual effective tax rate
estimate as a result of anticipated higher U.S.-based income in 2005.
The U.S. federal tax benefits derived from our Puerto Rico operations are currently set to
expire on December 31, 2005. We have certain operations in Puerto Rico that are eligible for U.S.
tax benefits under Section 936/30A of the Internal Revenue Code. With the impending December 31,
2005 expiration of these U.S. federal tax benefits, we are taking steps to maintain a portion of
the favorable tax rate effect these benefits currently provide. Specifically, we intend to convert
our Puerto Rico operations to a wholly-owned, controlled foreign corporation and shift more
production to low cost sources. We also intend to permanently reinvest the earnings from these
operations outside the U.S. As permitted in APB Opinion No. 23, “Accounting for Income Taxes,” we
do not provide U.S. income taxes on a controlled foreign corporation’s undistributed earnings
that are intended to be permanently reinvested outside the U.S. Therefore, our effective tax rate
following expiration of these tax benefits should reflect the permanent reinvestment of these
foreign earnings outside the U.S. See further information with regards to these tax benefits in
Note 13 of the Company’s Annual Report on Form 10-K for the year ending December 31, 2004.
Net Income and Earnings Per Share
Net income and diluted earnings per share increased in the second quarter of 2005 compared to
the second quarter of 2004 due to higher sales and lower special charges, partially offset by lower
gross profit margins and higher S&A expenses. Net income and diluted earnings per share decreased
slightly for the first six months of 2005 compared to the first six months of 2004 as a result of
lower gross profit margins and higher S&A expenses. Average shares outstanding have increased
year-over-year for the first six months of 2005 by approximately 0.9 million shares as a result
of employee stock option exercises partially offset by shares repurchased under our stock
repurchase program.
16
Segment Results
Electrical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(In millions) |
Net sales |
|
$ |
376.4 |
|
|
$ |
375.3 |
|
|
$ |
729.8 |
|
|
$ |
720.6 |
|
Operating income |
|
|
32.5 |
|
|
|
35.0 |
|
|
|
63.9 |
|
|
|
72.2 |
|
Operating margins |
|
|
8.6 |
% |
|
|
9.3 |
% |
|
|
8.8 |
% |
|
|
10.0 |
% |
Electrical segment sales were essentially unchanged in the second quarter and increased 1.3%
for the first six months of 2005, respectively, versus the 2004 comparable periods as higher sales
from selling price increases were substantially offset by lower unit volumes. Higher selling prices have
been realized in most of the businesses within the segment as a result of cost increases, primarily
related to higher raw material, energy and freight costs, which have risen over the past eighteen
months. Sales in our lighting business declined in the 2005 second quarter and year-to-date versus
the comparable prior year periods primarily due to lower levels of market activity resulting in
lower order levels in the commercial lighting businesses. Lower levels of market activity have
intensified competitiveness and made price realization difficult. Shipments of residential lighting
fixture products improved as a result of continued year-over-year growth in the underlying market,
partially offsetting the commercial businesses sales decline.
Sales of wiring systems in the second quarter and for the first six months of 2005 were level
with sales reported in the comparable prior year periods, as stronger
industrial market demand was offset by weak commercial markets. For the first six months of 2005, Raco rough-in electrical
products posted higher sales as a result of higher selling prices which offset the effects of weak
commercial markets. Harsh and hazardous products reported double digit increases in sales for the
quarter and first six months of 2005 due to strong oil and gas markets worldwide.
Operating margin was lower in the second quarter and first six months of 2005 versus the
comparable periods in 2004 primarily due to unabsorbed costs in
our manufacturing facilities resulting from lower unit volumes, as well as higher commodity raw material, freight and utility costs
which were not fully offset by price increases. In addition, operating margins in our wiring
systems business were negatively affected in the quarter and
year-over-year versus 2004 by higher costs and training and processing inefficiencies associated with the implementation of
the SAP business system. Harsh and hazardous margins were higher year-over-year, consistent with
sales, due to higher order input levels and a better mix of sales. Special charges in the second
quarter of 2005 for the lighting integration were $1.8 million compared to $3.7 million in the
second quarter of 2004. Special charges in the second quarter of 2005 related to the wiring device
business were $0.9 million compared to $6.7 million in the second quarter of 2004. See discussions
above under “Special Charges”.
Power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(In millions) |
Net sales |
|
$ |
109.9 |
|
|
$ |
96.0 |
|
|
$ |
208.6 |
|
|
$ |
183.8 |
|
Operating income |
|
|
16.2 |
|
|
|
9.1 |
|
|
|
26.9 |
|
|
|
19.6 |
|
Operating margins |
|
|
14.7 |
% |
|
|
9.5 |
% |
|
|
12.9 |
% |
|
|
10.7 |
% |
Net
sales in the Power segment increased 14.5% and 13.5%, respectively, in the second quarter and
first six months of 2005 versus the comparable periods in 2004. The increase in both the quarter
and first six months was due to increased project and maintenance spending by domestic and
international utility accounts, the carry-over effect of price increases and a small acquisition.
Numerous price increases were implemented across all product lines throughout 2004 and into 2005
where costs have risen due to increased metal and energy costs. We estimate that price increases
accounted for approximately 6% of the quarter-over-quarter sales increase. The acquisition of a
civil anchor business in January 2005 accounted for another 2% of incremental year-over-year sales.
Operating margins improved in the second quarter and for the first six months of 2005 versus the
comparable periods of 2004 as a result of increased volume of higher
margin products, productivity improvements including strategic sourcing and lean programs and
achieving parity between the level of
selling price increases realized and cost increases being experienced.
17
Industrial Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(In millions) |
Net sales |
|
$ |
34.2 |
|
|
$ |
31.6 |
|
|
$ |
69.7 |
|
|
$ |
63.7 |
|
Operating income |
|
|
4.2 |
|
|
|
3.4 |
|
|
|
9.1 |
|
|
|
6.8 |
|
Operating margins |
|
|
12.3 |
% |
|
|
10.8 |
% |
|
|
13.1 |
% |
|
|
10.7 |
% |
Net sales in the Industrial Technology
segment increased 8.2% in the second quarter of 2005
compared to the second quarter of 2004. Many of the businesses within this segment benefited from
strong oil and gas markets and improvement in industrial activity as evidenced by rising capacity
utilization rates. Our reels business, Gleason, reported strong year-over-year sales growth due to
increased spending by customers in the steel industry. For the first six months of 2005, net sales
increased 9.4% compared with the same period of 2004 as a result
of increased shipments by the businesses which provide controls and reels for
industrial markets. These businesses benefited from the general increase in industrial activity
which increased the level of incoming customer orders. Operating margins improved in the second quarter and for the first
six months of 2005 versus the comparable periods in 2004 as a result of increased volume,
productivity improvements and a more favorable product mix.
Outlook
Our outlook for full-year 2005 is as follows:
Markets
We expect overall conditions in the major markets served by our businesses to continue to
slowly improve, with the exception of residential markets, which are
expected to stay at their current
levels or begin to modestly decline from recent highs. Industrial demand related to MRO
activities has increased year-over-year and is expected to remain above year-ago levels.
Commercial construction markets have followed their 2004 trend with weak activity levels in
the first half of 2005. However, we expect to see an increase in the level of non-residential
construction in the second half of 2005. Domestic utility markets are expected to move at or above
the level of growth exhibited by the general economy. The investment required to modernize the
domestic energy transmission and distribution infrastructure is not expected to generate
significant increases in demand for our products until 2006 or beyond.
Sales and Profits
Our outlook for full-year 2005 net sales is for an increase of 4%-6% over 2004 reflecting the
impact of higher levels of market activity, price increases and, to a lesser extent, the effect of
new product programs. Foreign currency exchange rates are not expected to have a material impact on
year to year sales comparisons.
Full year operating income is expected to be affected by increased costs of commodities used
in the production of our products including steel, aluminum, copper and bronze, as well as higher
energy and freight costs. While some of these costs have moderated in recent months, particularly
steel, others have continued to increase and remain highly volatile. In addition, competition and
overall market conditions are expected to effect the level of price realization. The extent to
which the current rate of cost increases change and price increases offset these higher costs will
be significant factors affecting profitability for the remainder of 2005. Full year 2005 operating
margins are forecast to be near the margin levels reported in 2004, before special charges, which
includes anticipated favorable effects in the second half of 2005 of higher sales, cost reduction actions taken
in the six months ended June 30, 2005 and the impact of productivity programs. Productivity
improvement activities primarily consist of cost savings from our strategic initiatives including application
of “lean” principles, restructuring and low cost country sourcing.
We are forecasting 2005 diluted earnings per share in a range of $2.55 — $2.80, excluding
special charges, although we believe we will likely be in the lower half of this range.
Special charges are expected to primarily consist of lighting business integration exit costs,
estimated to range from $8-$15 million, including inventory
write-downs recorded in Cost of goods
sold. However, actual charges recorded will be impacted by the nature and
18
timing of management decisions on integration actions and the nature of costs incurred.
Certain of these decisions are still under consideration at June 30, 2005.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30 |
|
|
2005 |
|
2004 |
|
|
(In Millions) |
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
51.3 |
|
|
$ |
79.8 |
|
Investing activities |
|
|
74.8 |
|
|
|
(41.8 |
) |
Financing activities |
|
|
(71.3 |
) |
|
|
(29.2 |
) |
Effect of
exchange rate changes on cash |
|
|
(0.8 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
54.0 |
|
|
$ |
8.6 |
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities for the six months ended June 30, 2005 decreased
$28.5 million from the comparable period in 2004. The overall decline in operating cash flow is
primarily due to higher uses of cash related to working capital
including a $10 million contribution to
our domestic pension plans. In addition, net income levels combined with non-cash special charges were lower in the first six months of 2005 versus the comparable period of 2004.
Higher
uses of cash in support of working capital were primarily caused by
decreases in accounts payable and current liability balances, offset
by a decline in cash used to fund accounts receivable. Lower accounts payable balances are a result of
both lower levels of business activity and the timing of supplier payments, with the latter being
partially related to our wiring systems business entering 2005 with a higher backlog of amounts due
to vendors and suppliers as a result of the 2004 systems conversion. The decrease in current
liabilities primarily reflects a decrease in current taxes payable, as well as higher cash
disbursements related to employee compensation and customer incentives in the first six months of 2005
compared to the first six months of 2004. Accounts receivable increased $11.0 million
in the first six months of 2005 compared to an increase of $58.3
million in the first six months of 2004 which resulted in a lower use of cash in the 2005 period.
However, our DSO has increased in the first six months of 2005
versus the comparable period of 2004 primarily due to the mix of
sales within lighting and the timing of customer payments and process
inefficiencies associated with the implementation of SAP at our wiring systems business. The
systems conversion specifically affected the level of resources devoted to accounts receivable
collection efforts, although this situation has improved throughout 2005.
Cash flows from investing activities provided cash of $74.8 million in the first six months of
2005 compared to a $41.8 million use of cash in the first six months of 2004 as a result of higher
proceeds from the sale of investments in the first six months of 2005. Net cash used for financing
activities increased $42.1 million in the first six months of 2005 when compared to the same period
in 2004 as a result of an increase to $45.5 million in repurchases of common shares in the first
six months of 2005 compared to $2.8 million of repurchases in the comparable period of 2004.
Investments in the Business
We define investment in our business to include both normal expenditures required to maintain
the operations of our equipment and facilities as well as expenditures in support of our strategic
initiatives.
In the first six months of 2005, we recorded a total of $29.9 million of capital expenditures
of which $20.2 million was additions to property, plant and equipment and other software and $9.7
million was capitalized software in connection with the enterprise-wide business system initiative.
Included in the $9.7 million of capitalized software is a net $1.3 million of accrued amounts not
yet expended, resulting in cash capital expenditures of $28.6 million.
We continue to invest in process improvement through our long-term lean initiatives. We are in
our fourth year of the lean program and we estimate that our benefits from this investment are at
least equal to the cost. In 2005, we expect to invest a similar amount of time and resources with
that of 2004.
19
In January 2005, we acquired the Atlas business for a total of $5.5 million including fees and
expenses and net of cash acquired. This business has been added to our Power segment and
complements the civil anchor product line of our A.B. Chance business. Although not significant to
our consolidated results, the acquisition is part of our core markets growth strategy.
In September 2003, our Board of Directors approved a stock repurchase program which authorized
the repurchase of up to $60.0 million of the Company’s Class A and Class B common stock. As of June
30, 2005, the Program was substantially completed with approximately $3.0 million remaining to
repurchase. This program is expected to be completed by the end of the third quarter of 2005. In
June 2005, our Board of Directors approved a new stock repurchase program which authorized the
repurchase of up to $60.0 million of the Company’s Class A and Class B common stock. Stock
repurchases are being implemented through open market and privately negotiated transactions. The
timing of such transactions depends on a variety of factors, including market conditions. As of
June 30, 2005 no shares have been repurchased under the new program.
Debt to Capital
Net Debt, which is defined as total debt less cash and investments, as disclosed below is a
non-GAAP measure that may not be comparable to definitions used by other companies. We believe that
Net Debt is more appropriate than Total Debt for measuring our financial leverage.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
(In Millions) |
Total Debt |
|
$ |
299.1 |
|
|
$ |
299.0 |
|
Total Shareholders’ Equity |
|
|
936.0 |
|
|
|
944.3 |
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
$ |
1,235.1 |
|
|
$ |
1,243.3 |
|
|
|
|
|
|
|
|
|
|
Debt to Total Capital |
|
|
24 |
% |
|
|
24 |
% |
Cash and Investments |
|
$ |
355.3 |
|
|
$ |
407.2 |
|
Net Debt (Total debt less cash and investments) |
|
$ |
(56.2 |
) |
|
$ |
(108.2 |
) |
At June 30, 2005, Cash and Investments exceeded Total Debt by $56.2 million compared to $108.2
million of excess Cash and Investments over Total Debt at December 31, 2004. The ratio of Total
Debt to Total Capital at June 30, 2005 was 24%, consistent with December 31, 2004.
At June 30, 2005 and December 31, 2004, our debt consisted of approximately $299 million of
senior notes, of which approximately $199 million was classified as “Long-term debt” and
approximately $100 million was classified as “Current portion of long-term debt” in our
Consolidated Balance Sheet. These notes are fixed rate indebtedness, with amounts of $100 million
and $200 million due in 2005 and 2012, respectively. We expect to retire the $100 million of senior
notes due October 1, 2005 utilizing a combination of cash and cash equivalents and short-term
investments.
These notes are not callable and are only subject to accelerated payment prior to maturity if
we fail to meet certain non-financial covenants, all of which were met at June 30, 2005. The most
restrictive of these covenants limits our ability to enter into mortgages and sale-leasebacks of
property having a net book value in excess of $5 million without the approval of the Note holders.
Borrowings were also available from committed bank credit facilities up to $200 million, although
these facilities were not used during the first six months of 2005. Borrowings under credit
agreements generally are available with an interest rate equal to the prime rate or at a spread
over the London Interbank Offered Rate (“LIBOR”).
Although not the principal source of liquidity, we believe our credit facilities are capable
of providing significant financing flexibility at reasonable rates of interest. However, a
significant deterioration in the results of our operations or cash flows, leading to deterioration
in financial condition, could either increase our borrowing costs or restrict our ability to
borrow. We have not entered into any other guarantees, commitments or obligations that could give
rise to material unexpected cash requirements.
Liquidity
We measure liquidity on the basis of our ability to meet short-term and long-term operational
funding needs, fund additional investments, including acquisitions, and make dividend payments to
shareholders. Significant factors affecting the management of liquidity are cash flows from
operating activities, capital expenditures, cash dividend payments, stock repurchases, access to
bank lines of credit and our ability to attract long-term capital with satisfactory terms.
20
Internal cash generation together with currently available cash and investments, available
borrowing facilities and an ability to access credit lines if needed, are expected to be more than
sufficient to fund operations, the current rate of cash dividends, capital expenditures, and any
increase in working capital that would be required to accommodate a higher level of business
activity. We actively seek to expand by acquisition as well as through the growth of our current
businesses. While a significant acquisition may require additional debt and/or equity financing, we
believe that we would be able to obtain acquisition financing based on our favorable historical
earnings performance and strong financial position.
Debt Ratings
Debt ratings on debt securities at June 30, 2005 appear below. These ratings have remained
consistent for more than two years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard & Poors |
|
Moody’s Investor Services |
|
Fitch |
Senior Unsecured Debt |
|
|
A+ |
|
|
|
A3 |
|
|
|
A |
|
Commercial Paper |
|
|
A-1 |
|
|
|
P-2 |
|
|
|
F1 |
|
Critical Accounting Policies
A summary of the our significant accounting policies is included in Management’s Discussion
and Analysis of Financial Condition and Results of Operations contained in our Annual Report on
Form 10-K for the year ended December 31, 2004. We believe that the application of these policies
on a consistent basis enables us to provide the users of our financial statements with useful and
reliable information about operating results and financial condition. There have been no changes to
these policies since December 31, 2004.
We are required to make estimates and judgments in the preparation of our financial statements
that affect the reported amounts of assets and liabilities, revenues and expenses and related
disclosures. We continually review these estimates and their underlying assumptions to ensure they
are appropriate for the circumstances. Changes in the estimates and assumptions we use could have a
significant impact on our financial results.
Forward-Looking Statements
Some of the information included in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations, and elsewhere in this Form 10-Q, contain “forward-looking
statements” as defined by the Private Securities Litigation Reform Act of 1995. These include
statements about capital resources, performance and results of operations and are based on our
reasonable current expectations. In addition, all statements regarding anticipated growth or
improvement in operating results, anticipated market conditions, and economic recovery are forward
looking. Forward-looking statements may be identified by the use of words or phrases, such as
“believe”, “expect”, “anticipate”, “intend”, “depend”, “should”, “plan”, “estimated”, “could”,
“may”, “subject to”, “continues”, “growing”, “prospective”, “forecast”, “projected”, “purport”,
“might”, “if”, “contemplate”, “potential”, “pending,” “target”, “goals”, “scheduled”, “will likely
be”, and variations thereof and similar terms. Discussions of strategies, plans or intentions often
contain forward-looking statements. Factors, among others, that could cause our actual results and
future actions to differ materially from those described in forward-looking statements include, but
are not limited to:
• |
|
Changes in demand for our products, changes in market conditions, or product availability adversely affecting sales levels. |
|
• |
|
Changes in markets or competition adversely affecting realization of price increases. |
|
• |
|
The amounts of net cash expenditures, benefits—including available state
and local tax incentives, and the timing of actions in connection with
the ongoing lighting business integration and rationalization program and
other special charges. |
|
• |
|
Failure to achieve projected levels of efficiencies, cost savings and cost reduction measures, including those expected as a
result of our lean initiative and strategic sourcing plans. |
|
• |
|
The amounts of cash expenditures, benefits and the timing of actions in connection with our enterprise-wide business system implementation. |
|
• |
|
Availability and costs of raw materials, purchased components, energy and freight. |
21
• |
|
Changes in expected levels of operating cash flow and uses of cash. |
|
• |
|
General economic and business conditions in particular industries or markets. |
|
• |
|
Regulatory issues, changes in tax laws or changes in geographic profit mix affecting tax rates and availability of tax incentives. |
|
• |
|
A major disruption in one of our manufacturing or distribution facilities. |
|
• |
|
Impact of productivity improvements on lead times, quality and delivery of product. |
|
• |
|
Future levels of indebtedness and capital spending. |
|
• |
|
Anticipated future contributions and assumptions with respect to pensions. |
|
• |
|
Unexpected costs or charges, certain of which might be outside of our control. |
|
• |
|
Changes in strategy, economic conditions or other conditions outside of our control affecting anticipated future global product
sourcing levels. |
|
• |
|
Intense or new competition in the markets in which we compete. |
|
• |
|
Ability to carry out future acquisitions in our core businesses and costs relating to acquisitions and acquisition integration
costs. |
|
• |
|
Future repurchases of common stock under our common stock repurchase program. |
|
• |
|
Changes in customers’ credit worthiness adversely affecting the ability to continue business relationships with major customers. |
|
• |
|
The outcome of environmental, legal and tax contingencies or costs compared to amounts provided for such contingencies. |
|
• |
|
Changes in accounting principles, interpretations, or estimates, including the impact of expensing stock options pursuant to SFAS
No. 123 (R) and the effect of FIN 47 on financial position, results of operations and cash flows. |
|
• |
|
Adverse changes in foreign currency exchange rates. |
|
• |
|
And other factors described in our Securities and Exchange Commission filings, including the “Business” Section in the Annual
Report on Form 10-K for the year ended December 31, 2004. |
Any such forward-looking statements are not guarantees of future performances and actual
results, developments and business decisions may differ from those contemplated by such
forward-looking statements. The Company disclaims any duty to update any forward-looking statement,
all of which are expressly qualified by the foregoing, other than as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the operation of its business, the Company has exposures to fluctuating foreign currency
exchange rates, availability and changes in raw material prices, foreign sourcing issues, and
interest rates. As noted throughout Management’s Discussion and Analysis, we have seen significant
increases in the cost of certain metals used in our products, along with higher energy and freight
costs. In addition, the Company’s procurement strategy continues to emphasize an increased level of
purchases from international locations, primarily China and India, which subjects the Company to
increased political and exchange risk. Recent changes in the Chinese
government's policy regarding the value of
the Chinese currency versus the U.S. dollar are not expected to have
any significant impact on our financial condition, results of
operations or cash flows. However, strengthening of the
Chinese currency could increase the cost of the Company's products
procured from this country. There has been no significant change in the Company’s
strategies to manage these exposures during the first six months of 2005. For a complete discussion
of the Company’s exposure to market risk, refer to Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, contained in the Company’s Annual Report on Form 10-K for the year
ending December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms,
22
and that such information is accumulated and communicated to management, including the Chief
Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objective.
The Company carried out an evaluation, under the supervision and with the participation of
management, including the Chief Executive Officer and Interim Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s disclosure controls and procedures
pursuant to Exchange Act Rules 13a-15(f) and 15d-15(f), as of the end of the period covered by this
report on Form 10-Q. Based upon that evaluation, each of the Chief Executive Officer and Interim
Chief Financial Officer concluded that, as of June 30, 2005, the Company’s disclosure controls and
procedures were effective.
There have been no changes in the Company’s internal control over financial reporting that
occurred during the Company’s most recently completed quarter that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Dollar Value of |
|
|
Total |
|
|
|
|
|
Total |
|
|
|
|
|
Shares |
|
Shares |
|
|
Number of |
|
|
|
|
|
Number of |
|
|
|
|
|
Purchased as |
|
that May Yet Be |
|
|
Class A |
|
|
|
|
|
Class B |
|
|
|
|
|
Part of Publicly |
|
Purchased Under |
|
|
Shares |
|
Average |
|
Shares |
|
Average |
|
Announced |
|
the 2003 |
|
|
Purchased |
|
Price Paid per |
|
Purchased |
|
Price Paid per |
|
Program |
|
Program |
Period |
|
(000’s) |
|
Class A Share |
|
(000’s) |
|
Class B Share |
|
(000’s) |
|
(000’s) |
Total for
the quarter ended March 31, 2005 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
48,500 |
|
April 2005 |
|
|
3 |
|
|
$ |
40.58 |
|
|
|
57 |
|
|
$ |
43.63 |
|
|
|
60 |
|
|
$ |
45,900 |
|
May 2005 |
|
|
34 |
|
|
$ |
42.03 |
|
|
|
896 |
|
|
$ |
44.87 |
|
|
|
930 |
|
|
$ |
4,300 |
|
June 2005 |
|
|
29 |
|
|
$ |
43.37 |
|
|
|
— |
|
|
|
— |
|
|
|
29 |
|
|
$ |
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for
the quarter ended June 30, 2005 |
|
|
66 |
|
|
$ |
42.55 |
|
|
|
953 |
|
|
$ |
44.79 |
|
|
|
1,019 |
|
|
$ |
3,000 |
|
In September 2003, the Company’s Board of Directors approved a stock repurchase program and
authorized the repurchase of up to $60.0 million of the Company’s Class A and Class B common stock.
This program is expected to be completed in the third quarter of 2005. In June 2005, the Company’s
Board of Directors approved a new stock repurchase program and authorized the repurchase of up to
an additional $60.0 million of the Company’s Class A and Class B common stock. Stock repurchases
under the September 2003 program are being implemented through open market and privately negotiated
transactions. The timing of such transactions depends on a variety of factors, including market
conditions. No repurchases have been made under the June 2005 program. The Company has no other
stock repurchase programs.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 2, 2005:
1. |
|
The following nine (9) individuals were elected directors of the Company for the ensuing year
to serve until the next Annual Meeting of Shareholders of the Company and until their
respective successors may be elected and qualified, each Director being elected by plurality
vote: |
|
|
|
|
|
|
|
|
|
Name of Individual |
|
Votes For |
|
Votes Withheld |
E. Richard Brooks |
|
|
201,467,594 |
|
|
|
12,111,084 |
|
George W. Edwards, Jr. |
|
|
201,460,209 |
|
|
|
12,118,469 |
|
Joel S. Hoffman |
|
|
203,217,451 |
|
|
|
10,361,227 |
|
Andrew McNally IV |
|
|
200,323,989 |
|
|
|
13,254,689 |
|
Daniel J. Meyer |
|
|
202,815,049 |
|
|
|
10,763,629 |
|
Timothy H. Powers |
|
|
203,517,842 |
|
|
|
10,060,836 |
|
G. Jackson Ratcliffe |
|
|
203,329,434 |
|
|
|
10,249,244 |
|
Richard J. Swift |
|
|
211,170,091 |
|
|
|
2,408,587 |
|
Daniel S. Van Riper |
|
|
212,504,561 |
|
|
|
1,074,117 |
|
2. |
|
PricewaterhouseCoopers LLP was ratified as independent registered public accountants to
examine the annual financial statements for the Company for the year 2005 receiving
212,081,814 affirmative votes, being a majority of the votes cast on the matter all voting as
a single class, with 1,336,246 negative votes and 160,619 abstained. |
3. |
|
The proposal relating to approval of the Company’s 2005 Incentive Award Plan, which appeared
on pages 30 to 36 of the proxy statement, dated March 16, 2005, which proposal is incorporated
herein by reference, has been approved with 157,925,312 affirmative votes, being a majority of
the votes cast on the matter all voting as a single class (and representing a majority of the
votes entitled to be cast), with 21,550,167 negative votes and 631,081 votes abstained. |
ITEM 6. EXHIBITS
EXHIBITS
|
|
|
Number |
|
Description |
10.1†
|
|
Hubbell Incorporated Incentive Compensation Plan 2005 Annual
Incentive Guidelines. Exhibit 10.1 of the registrant’s report on
Form 8-K, filed February 24, 2005, is incorporated by reference. |
|
|
|
10.2†
|
|
Amended and Restated Continuity Agreement, dated as of March 14,
2005, between Hubbell Incorporated and Timothy H. Powers. Exhibit
10.1 to the registrant’s report on Form 8-K, filed March 15,
2005, is incorporated by reference. |
|
|
|
10.3†
|
|
Continuity Agreement, dated as of March 14, 2005, between Hubbell
Incorporated and Gregory F. Covino. Exhibit 10.2 to the
registrant’s report on Form 8-K, filed March 15, 2005, is
incorporated by reference. |
|
|
|
10.4†
|
|
Continuity Agreement, dated as of March 14, 2005, between Hubbell
Incorporated and Scott H. Muse. Exhibit 10.3 to the registrant’s
report on Form 8-K, filed March 15, 2005, is incorporated by
reference. |
|
|
|
10.5†
|
|
Continuity Agreement, dated as of March 14, 2005, between Hubbell
Incorporated and Thomas P. Smith. Exhibit 10.4 to the
registrant’s report on Form 8-K, filed March 15, 2005, is
incorporated by reference. |
|
|
|
10.6†
|
|
Amendment, dated as of March 14, 2005, to Continuity Agreement,
dated as of December 27, 1999, between Hubbell Incorporated and
Richard W. Davies. Exhibit 10.5 to the registrant’s report on
Form 8-K, filed March 15, 2005, is incorporated by reference. |
|
|
|
10.7†
|
|
Amendment, dated as of March 14, 2005, to Continuity Agreement,
dated as of December 27, 1999, between Hubbell Incorporated and
W. Robert Murphy. Exhibit 10.6 to the registrant’s report on Form
8-K, filed March 15, 2005, is incorporated by reference. |
24
|
|
|
Number |
|
Description |
|
|
|
10.8†
|
|
Amendment, dated as of March 14, 2005, to Continuity Agreement,
dated as of December 27, 1999, between Hubbell Incorporated and
James H. Biggart. Exhibit 10.7 to the registrant’s report on Form
8-K, filed March 15, 2005, is incorporated by reference. |
|
|
|
10.9†
|
|
Amendment, dated as of March 14, 2005, to Continuity Agreement,
dated as of December 27, 1999, between Hubbell Incorporated and
Gary N. Amato. Exhibit 10.8 to the registrant’s report on Form
8-K, filed March 15, 2005, is incorporated by reference. |
|
|
|
10.10†
|
|
Grantor Trust For Senior Management Plans Trust Agreement, dated
as of March 14, 2005, between Hubbell Incorporated and The Bank
of New York, as Trustee. Exhibit 10.9 to the registrant’s report
on Form 8-K, filed March 15, 2005, is incorporated by reference. |
|
|
|
10.11†
|
|
Grantor Trust For Non-Employee Director Plans Trust Agreement,
dated as of March 14, 2005, between Hubbell Incorporated and The
Bank of New York, as Trustee. Exhibit 10.10 to the registrant’s
report on Form 8-K, filed March 15, 2005, is incorporated by
reference. |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to Item
601(b)(31) of Regulation S-K, as Adopted Pursuant to Section 302
of the Sarbanes – Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of Interim Chief Financial Officer Pursuant to Item
601(b)(31) of Regulation S-K, as Adopted Pursuant to Section 302
of the Sarbanes – Oxley Act of 2002. |
|
|
|
32.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes–Oxley Act of 2002. |
|
|
|
32.2*
|
|
Certification of Interim Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes – Oxley Act of 2002. |
|
|
|
* |
|
Filed herewith |
|
† |
|
This exhibit constitutes a management contract, compensatory plan, or arrangement |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
HUBBELL INCORPORATED |
|
|
|
|
Dated: August 4, 2005 |
|
|
|
/s/ Gregory F. Covino
|
|
|
Gregory F. Covino |
|
|
Corporate Controller and Interim Chief Financial Officer |
|
25