1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1999 / / 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) STATE OF CONNECTICUT 06-0397030 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 584 DERBY MILFORD ROAD, ORANGE, CT 06477 (Address of principal executive offices) (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 X NO --- --- The number of shares of registrant's classes of common stock outstanding as of May 7, 1999 were: Class A ($.01 par value) 10,612,000 Class B ($.01 par value) 54,445,000
2 HUBBELL INCORPORATED PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET (IN MILLIONS) <TABLE> <CAPTION> (Unaudited) March 31, 1999 December 31, 1998 -------------- ----------------- <S> <C> <C> ASSETS Current Assets: Cash and temporary cash investments $ 15.5 $ 30.1 Accounts receivable (net) 227.8 200.2 Inventories 308.1 300.9 Prepaid taxes 24.5 24.0 Other 13.2 9.6 ---------- ---------- TOTAL CURRENT ASSETS 589.1 564.8 Property, Plant and Equipment (net) 316.3 310.1 Other Assets: Investments 201.0 197.3 Purchase price in excess of net assets of companies acquired (net) 239.3 232.6 Property held as investment 11.6 12.0 Other 74.0 73.6 ---------- ---------- $ 1,431.3 $ 1,390.4 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Commercial paper and notes $ 148.8 $ 113.3 Accounts payable 67.1 69.8 Accrued salaries, wages and employee benefits 26.8 26.6 Accrued income taxes 43.3 31.1 Dividends payable 20.2 20.4 Accrued consolidation and streamlining charge 10.0 10.0 Other accrued liabilities 71.0 73.8 ---------- ---------- TOTAL CURRENT LIABILITIES 387.2 345.0 Long-Term Debt 99.6 99.6 Other Non-Current Liabilities 100.8 104.1 Deferred Income Taxes .9 1.1 Shareholders' Equity 842.8 840.6 ---------- ---------- $ 1,431.3 $ 1,390.4 ========== ========== </TABLE> See notes to consolidated financial statements 2
3 HUBBELL INCORPORATED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 ------------------ 1999 1998 --------- --------- <S> <C> <C> NET SALES $ 367.5 $ 339.7 Cost of goods sold 260.5 235.3 --------- --------- GROSS PROFIT 107.0 104.4 Selling & administrative expenses 55.2 51.3 --------- --------- OPERATING INCOME 51.8 53.1 --------- --------- OTHER INCOME (EXPENSE): Investment income 3.4 4.1 Interest expense (3.6) (1.7) Other income (expense), net 2.0 (.5) --------- --------- TOTAL OTHER INCOME, NET 1.8 1.9 --------- --------- INCOME BEFORE INCOME TAXES 53.6 55.0 Provision for income taxes 13.9 15.1 --------- --------- NET INCOME $ 39.7 $ 39.9 ========= ========= EARNINGS PER SHARE - BASIC $ 0.61 $ 0.60 ========= ========= EARNINGS PER SHARE - DILUTED $ 0.60 $ 0.58 ========= ========= </TABLE> See notes to consolidated financial statements. 3
4 HUBBELL INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN MILLIONS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 ------------------ CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998 ------- ------- <S> <C> <C> Net income $ 39.7 $ 39.9 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14.2 12.7 Deferred income taxes (.7) 1.4 Expenditures for streamlining, consolidation and restructuring (2.1) (.6) Changes in assets and liabilities, net of the effect of business acquisitions: (Increase)/Decrease in accounts receivable (25.5) (9.3) (Increase)/Decrease in inventories (4.0) (6.8) (Increase)/Decrease in other current assets (2.3) 15.6 Increase/(Decrease) in current operating liabilities 1.7 (2.6) (Increase)/Decrease in other, net (.4) 1.1 ------- ------- Net cash provided by operating activities 20.6 51.4 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of businesses (13.3) (7.3) Additions to property, plant and equipment (18.3) (21.8) Purchases of investments (11.1) (8.9) Repayments and sales of investments 7.4 5.1 Other, net 1.6 1.1 ------- ------- Net cash used in investing activities (33.7) (31.8) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Payment of dividends (20.4) (19.5) Commercial paper and notes - borrowings (repayments) 35.5 (.2) Exercise of stock options 2.0 .7 Acquisition of treasury shares (18.6) (24.5) ------- ------- Net cash used in financing activities (1.5) (43.5) ------- ------- Decrease in cash and temporary cash investments (14.6) (23.9) CASH AND TEMPORARY CASH INVESTMENTS Beginning of period 30.1 75.2 ------- ------- End of period $ 15.5 $ 51.3 ======= ======= </TABLE> See notes to consolidated financial statements 4
5 HUBBELL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) 1. Inventories are classified as follows: (in millions) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ <S> <C> <C> Raw Material $ 111.6 $ 104.9 Work-in-Process 87.3 79.6 Finished Goods 155.1 162.0 -------- -------- 354.0 346.5 Excess of current production costs over LIFO cost basis 45.9 45.6 -------- -------- $ 308.1 $ 300.9 ======== ======== </TABLE> 2. Shareholders' Equity comprises: (in millions) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ <S> <C> <C> Common Stock, $.01 par value: Class A-authorized 50,000,000 shares, outstanding 10,659,183 and 10,781,483 shares $ .1 $ .1 Class B-authorized 150,000,000 shares outstanding 54,507,900 and 54,813,287 shares .5 .5 Additional paid-in-capital 381.0 397.8 Retained earnings 475.0 455.7 Unrealized holding gains (losses) on securities .1 .1 Cumulative translation adjustments (13.9) (13.6) -------- -------- $ 842.8 $ 840.6 ======== ======== </TABLE> 5
6 HUBBELL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) 3. During the first quarter of 1999, the Company's Power Segment acquired assets used in the manufacture and supply of high voltage underground cable accessory products and technology for the electrical utility market for a cash purchase price of $13.3 million. During the first quarter of 1998, the Company also acquired two product lines and associated assets for an aggregate cash purchase price of $7.3 million. The costs of the acquired businesses have been allocated to assets acquired and liabilities assumed based on fair values with the residual amount assigned to goodwill, which is being amortized over forty years. The businesses have been included in the financial statements as of their respective acquisition date and had no material effect on the Company's financial position and reported earnings. 4. The following table sets forth the computation of earnings per share for the three months ended March 31 (in millions except per share data): <TABLE> <CAPTION> MARCH 31 -------- 1999 1998 ---- ---- <S> <C> <C> Net Income $ 39.7 $ 39.9 Weighted average number of common shares outstanding during the period 65.2 66.9 Common equivalent shares 1.1 2.0 -------- -------- Average number of shares outstanding 66.3 68.9 Earnings per share: Basic $ 0.61 $ 0.60 Diluted $ 0.60 $ 0.58 </TABLE> 5. The following table sets forth the computation of comprehensive income for the three months ended March 31 (in millions): <TABLE> <CAPTION> MARCH 31 -------- Comprehensive Income 1999 1998 - -------------------- ---- ---- <S> <C> <C> Net Income $ 39.7 $ 39.9 Changes in: Cumulative Translation Adjustment (.3) (.2) Unrealized gains (losses) on securities -- -- ------- ------- Comprehensive Income $ 39.4 $ 39.7 ======= ======= </TABLE> 6
7 HUBBELL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) 6. The following table sets forth financial information by industry segment for the three months ended March 31 (in millions): <TABLE> <CAPTION> March 31 -------- Industry Segment 1999 1998 ---- ---- <S> <C> <C> Net Sales Electrical $ 220.1 $ 191.1 Power 97.5 94.1 Telecommunications 33.0 34.8 Other 16.9 19.7 -------- -------- Total $ 367.5 $ 339.7 Operating Income Electrical $ 36.3 $ 33.9 Power 12.5 12.2 Telecommunications 1.8 5.6 Other 1.2 1.4 -------- -------- Segment Total $ 51.8 $ 53.1 Interest Expense (3.6) (1.7) Investment and Other Income, Net 5.4 3.6 -------- -------- Income Before Income Taxes $ 53.6 $ 55.0 </TABLE> 7. The issuance of FAS No. 133 - "Accounting for Derivative Instruments and Hedging Activity" effective in 2000 requires the recognition of all derivatives as either assets or liabilities on the consolidated balance sheet at fair value. This will change the current practices of the Company, but it is not expected to have a significant impact on the financial position or the results of operations. 8. In the opinion of management, the information furnished in Part I-Financial Information on Form 10-Q reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial statements for the periods indicated. 9. The results of operations for the three months ended March 31, 1999 and 1998 are not necessarily indicative of the results to be expected for the full year. 7
8 HUBBELL INCORPORATED ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1999 FINANCIAL CONDITION At March 31, 1999, the Company's financial position remained strong with working capital of $201.9 million and a current ratio of 1.5 to 1. Total borrowings at March 31, 1999, were $248.4 million, 29.5% of shareholder's equity. The net decline in cash and temporary cash investments of $14.6 million for the three months ended March 31, 1999, reflects the following: expenditures for plant and equipment as part of the consolidation and streamlining initiative, the acquisition of treasury shares under the Company's $300 million share repurchase program, and the quarterly dividend payment offset by cash provided from operating activities and additional borrowings. The decline in net cash provided by operating activities reflects an increase in cash used for working capital requirements primarily due to an increase in accounts receivable resulting from higher sales in March. The increase in inventories is to provide adequate stock to maintain customer service levels during relocation of manufacturing operations, as a result of the consolidation and streamlining initiatives. The Company believes that currently available cash, borrowing facilities, and its ability to increase its credit lines if needed, combined with internally generated funds, should be more than sufficient to fund capital expenditures as well as any increase in working capital that would be required to accommodate a higher level of business activity. RESULTS OF OPERATIONS Consolidated net sales increased by 8% on greater shipments of high voltage underground cable accessory product assets combined with the acquisition in 1999 and six product lines in 1998. Offsetting these improvements was a decline in orders from telephone companies to the Telecommunications Segment, which combined with investment in new product development, resulted in a 2% decline in operating income. Electrical Segment sales increased by 15% primarily due to greater shipments in generally all product lines and due to the effect of the acquisition of the three lighting businesses during 1998. Operating income increased 7% from the benefits of improved performance in Wiring products, which was partly offset by a change in product mix, price competition and a weaker Canadian market. Power Segment sales increased 4%, with the inclusion of sales generated by the underground cable accessory product business. Operating income increased only by 2%, due to price competition for surge arresters and the effects of weaker international markets. Telecommunications Segment sales, which included for the first quarter of 1999 Siescor Technologies product line, were impacted by the lower demand for existing product lines sold to the Regional Bell Operating Companies (RBOC). Operating profit also declined as the segment's investment in new product development increased substantially over prior year. Other Industry Segment sales decreased 14% due to the slow down in the steel industry coupled with the Asian economic problems. Operating income declined in line with the lower sales volume. 8
9 HUBBELL INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1999 (CONTINUED) Sales through the Company's International units decreased 15% reflecting the weakened economies of the Canadian and Asian markets. Operating income from International units decreased in line with sales and was further impacted by unfavorable translation rates due to the strengthening of the U.S. dollar against foreign currencies. The effective income tax rate for 1999 was 26.0% versus 27.5% in 1998. The decrease in the effective tax rate reflects a higher level of tax benefit from Puerto Rico operations. Net income decreased 1% while diluted earnings per share increased 3%. The Company's consolidation and streamlining program is proceeding according to management's plan. At March 31, 1999, the accrual balance was $22.8 million. Through March 31, 1999, cumulative costs charged to the consolidation and streamlining accrual were $21.8 million as follows (in millions): <TABLE> <CAPTION> Employee Asset Exist Other Benefits Disposals Costs Costs Total -------- --------- ----- ----- ----- <S> <C> <C> <C> <C> <C> 1997 Streamlining Charge $ 15.6 $ 18.0 $ 6.1 $ 4.9 $ 44.6 Amounts Utilized in 1997 (.6) (7.3) (0.1) (4.9) (12.9) Amounts Utilized in 1998 (3.8) (2.4) (0.6) -- (6.8) Amounts Utilized in 1999 (.3) (1.8) -- -- (2.1) ------- ------- ------ ------ ------- Remaining Reserve $ 10.9 $ 6.5 $ 5.4 $ -- $ 22.8 ======= ======= ====== ====== ======= </TABLE> IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. During 1995, the Company established a task force to assess the impact the Year 2000 could have on the Company's operations and its relationship with customers and vendors and to develop appropriate action plans. The action plans address the required modification or replacement of software and equipment utilized in the Company's operations along with a timetable and estimated costs. Cost for replacement of software and equipment are capitalized in accordance with Company policies while costs of modifications are expensed as incurred. Total expenditures are estimated to be $20 million with approximately 80% having been spent to date. 9
10 HUBBELL INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1999 (CONTINUED) The action plans also address the impact that suppliers and customer Year 2000 issues may have on the Company. The Company relies on third party suppliers for materials, utilities, transportation, banking and key services. Efforts are underway to evaluate supplier's Year 2000 readiness and to determine alternatives and contingency plans such as alternate supply sources and accumulation of inventory. Approaches to reducing supply disruptions will vary by business and facility and are intended as a means of managing the risk but cannot eliminate the potential for disruption due to a third party. The Company is also dependent upon its customers for sales and cashflow. Interruptions in our customers' operation from Year 2000 issues could result in reduced sales, increased inventories or receivables and lower cashflows. While these events are possible, the diversity of the Company's customer base is broad enough to minimize the effects of a single occurrence. Steps are being taken to monitor customers' Year 2000 readiness, including testing of transactions, as a means of determining risks and alternatives. At this time, activities have been progressing in accordance with the action plans and executive management is monitoring programs. While the Company believes its efforts to address the Year 2000 Issue will be successful in avoiding any material adverse effect on the Company's operations or financial condition, it recognizes that failing to resolve Year 2000 issues on a timely basis would, in a "most reasonably likely worst case scenario", significantly limit its ability to manufacture and distribute its products and process its daily business transactions for a period of time, especially if such failure is coupled with third party or infrastructure failures. Similarly, the Company could be significantly affected by the failure of one or more significant suppliers, customers or components of the infrastructure to conduct their respective operations after 1999. Adverse effects on the Company could include, among other things, business disruption, increased costs, loss of business and other similar risks. MARKET RISKS In the operation of its business, the Company has identified market risk exposures to foreign currency exchange rates, raw material prices and interest rates. There have not been any material changes effecting the identified risks or the Company's strategy for managing the exposures from the preceding fiscal year. FORWARD-LOOKING STATEMENTS Certain statements made in the discussion of Financial Condition and Results of Operations are forward-looking. Certain statements under the caption "Impact of the Year 2000 Issue" are also forward-looking. These may be identified by the use of forward-looking words or phrases, such as "believe", "expect", "anticipate", "should", "plan", "estimated", "potential", "target", "goals", and "scheduled", among others. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in the specified statements. The Company notes that a variety of factors could cause the Company's assessment of Year 2000 issues to differ materially from the actual impact of Year 2000 issues. The risks and uncertainties that may affect the Company's assessment of Year 2000 issues includes (1) the complexity involved in ascertaining all situations in which Year 2000 issues may arise; (2) the ability of the Company to obtain the services of sufficient personnel to implement the program; (3) possibe increases in the cost of personnel required to implement the program; (4) absence of delays in scheduled deliveries of new hardware and software from third party suppliers; (5) the receipt and the reliability of responses from suppliers, customers and others to whom compliance inquiries are being made; (6) the ability of material third parties to bring their affected systems into compliance and (7) absence of unforeseen events which could delay timely implementation of the program. 10
11 HUBBELL INCORPORATED PART II -- OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS NUMBER DESCRIPTION 3b* By-laws, as amended on March 8, 1999. 27. Financial Data Schedule (Electronic filings only) - ----------------------------- * Filed hereunder REPORTS ON FORM 8-K There were no reports on Form 8-K filed for the three months ended March 31, 1999. 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: May 14, 1999 /s/ T. H. Powers ---------------------------- Timothy H. Powers Senior Vice President and Chief Financial Officer 11