2008 Annual Report - Hubbell Wiring Device-Kellems

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsEXECUTIVE OVERVIEW OF THE BUSINESSOur Company is primarily engaged in the design, manufacture and sale of quality electrical and electronicproducts for a broad range of non-residential and residential construction, industrial and utility applications. Duringthe first quarter of 2008, the Company realigned its internal organization and operating segments. This reorganizationincluded combining the electrical products business (included in the Electrical segment) and the industrialtechnology business (previously its own reporting segment) into one operating segment. This combined operatingsegment is part of the Electrical reporting segment. Effective in the first quarter of 2008, the Company’s reportingsegments consist of the Electrical segment (comprised of wiring, electrical and lighting products) and the Powersegment. Previously reported data has been restated to reflect this change. Results for 2008, 2007 and 2006 bysegment are included under “Segment Results” within this Management’s Discussion and Analysis.In December 2008, a decision was made to further consolidate the businesses within the Electrical segment.The wiring products and electrical products businesses were combined to form the electrical systems business. Thecombination of these two businesses did not have an impact on the Company’s reporting segments.In 2008, we continued to execute a business strategy with four primary areas of focus: price realization, costcontainment, productivity and revenue growth. These efforts resulted in sales growth of 7% and operating marginsincreasing by 100 basis points compared to 2007.• Price RealizationIn 2008, we experienced unprecedented volatility in commodity costs, steel and fuel in particular. During 2008,the cost of certain types of steel nearly doubled by the middle of the year. These increases were followed by asharp decline as the year ended due to the dramatic events of the fourth quarter including the credit market crisisand rapid decline in overall market activity. We believe these cost increases were recovered through selling priceincreases.• Cost ContainmentGlobal sourcing. We remained focused on expanding our global product and component sourcing and suppliercost reduction program. We continued to consolidate suppliers, utilize reverse auctions, and partner with vendorsto shorten lead times, improve quality and delivery and reduce costs.Freight and Logistics. Transporting our products from suppliers, to warehouses, and ultimately to our customers,is a major cost to our Company. In 2008, we recognized opportunities to further reduce costs and increasethe effectiveness of our freight and logistics processes through capacity utilization and network optimization.These efforts resulted in a 40 basis point reduction in our freight and logistics expenses as a percentage of netsales.• ProductivityWe continued to leverage the benefits of the SAP system, including standardizing best practices in inventorymanagement, production planning and scheduling to improve manufacturing throughput and reduce costs. Inaddition, value-engineering efforts and product transfers to lower cost locations contributed to our productivityimprovements. We plan to continue to reduce lead times and improve service levels to our customers.Working Capital Efficiency. Working capital efficiency is principally measured as the percentage of tradeworking capital (inventory plus accounts receivable, less accounts payable) divided by annual net sales. In 2008,trade working capital as a percentage of net sales improved to 19.4% compared to 19.8% in 2007 primarily due toimprovements in both inventory and accounts payable management.Transformation of business processes. We continued our long-term initiative of applying lean processimprovement techniques throughout the enterprise, with particular emphasis on reducing supply chain complexityto eliminate waste and improve efficiency and reliability.18