Hubbell's
(
HUB.B
) fourth quarter earnings of $1.20 were in line with the Zacks
Consensus Estimate.
Total Revenue
Hubbell reported revenue of $452.5 million for the quarter,
which was down 4.7% sequentially and up 1.7% year over year.
Hubbell's served end markets are showing signs of improvement.
Non-residential construction was a mixed bag, with the lighting
business the lone bright spot. On the residential side, however,
Hubbell saw good growth in the last quarter.
Utilities were essentially flat, despite the effects of Sandy
because of relatively warmer weather. The industrial market was
slow, as technology providers
Linear Technology
(
LLTC
) and
Texas Instruments
(
TXN
) have commented during their quarterly earnings
announcements.
Hubbell has two operating segments-Electrical and Power
Systems, which generated 69% and 31% of revenue, respectively, in
the last quarter.
Revenue by Segment
Electrical revenue was down 5.5% sequentially and up 1.5% year
over year. About 2 percentage points of the year-over-year
increase was due to acquisitions, which was partially offset by
notable weakness in high-voltage test. Sales were helped by
improved demand in the energy and residential markets.
Power Systems sales were down 2.9% sequentially and up 2.1%
from last year. Increased spending on the transmission side and
higher storm spending were almost entirely offset by lower
spending on the distribution side. However, acquisitions
contributed 2% growth.
Operating Profit by Segment
The operating margin in the Electrical segment was 13.0%, down
340 bps sequentially and 131 bps year over year. Hubbell stated
that a lower mix of higher-margin high-voltage test business
impacted the margin performance in the last quarter.
Additionally, higher cost (especially pension and benefit-related
expenses) was again a negative.
The Power Systems operating margin of 18.4% was down 27 bps
sequentially and up 245 bps year over year. The improvement from
last year was on account of productivity improvements and better
pricing, as offset by cost increases.
Operating Performance
Hubbell's gross margin for the quarter was 33.2%, down 80
basis points (bps) from the previous quarter's 34.0%. The gross
margin was up 126 bps from the year-ago quarter.
Hubbell's operating expenses of $139.3 million were higher
than the previous quarter. The operating margin of 14.7% was down
242 bps sequentially, as all costs increased as a percentage of
sales. The operating margin was down 15 bps from the year-ago
quarter with the 126 bp decline in cost of sales offset by a 142
bp decline each in R&D and SG&A.
Net Income
On a pro forma basis, Hubbell had a net income of $72.9
million, or a 9.7% net income margin, compared to $87.6 million,
or 11.1% in the previous quarter and a profit of $70.5 million or
9.5% net income margin in the year-ago quarter. Since there were
no one-time items, the pro forma EPS was the same as the GAAP EPS
of $1.20 compared to $1.45 cents in the Sep 2012 quarter and
$1.18 in the same quarter last year.
Balance Sheet
The net debt position (including short-term debt and long term
liabilities) was $3.41 a share. The cash and short-term
investments balance at quarter-end was $653.8 million, up $39.2
million during the quarter. Cash generated from operations was
$192.0 million.
Excluding capex of $31.3 million, Hubbell generated free cash
flow of $160.7 million. Hubbell also spent $53.0 million on
acquisitions, $71.3 million on dividends and $55.6 million on
share repurchases during the quarter.
Inventories were down 4.1% to $341.7 million, with annualized
inventory turns up slightly to 5.9X. Days sales outstanding
(DSOs) were down sequentially to around 49.
Outlook
Management does not provide quarterly guidance and provides
only very limited guidance for the year. Accordingly, the
Electrical segment is expected to be up 3-5% and the Power
segment up 4-6%. The Electrical business will be helped by
stronger residential and industrial markets, offset by softer
recovery in non-residential construction.
The increase in the Power segment will be driven by
acquisitions. Management also stated that the second half is
likely to be stronger than the first.
The utilities market is expected to be up 2-4%, the
residential market is expected to be up 10% and industrial 2%.
Management did not comment on non-residential, but a gradual
improvement through the year is on the cards.
Management expects of an operating margin improvement of 50
bps for Hubbell.
Recommendation
Hubbell reported a satisfactory quarter that was supported by
improving end markets. While significant uncertainty remains in
non-residential construction markets, the trend is positive and
likely to remain so through the year. Industrial and utility
markets are also expected to have a stronger year. Given
Hubbell's product breadth and market position, we think that the
company will benefit from a recovery across its served
markets.
Hubbell shares currently carry a Zacks Rank #3 (Hold), similar
to peer
Ameresco Inc
(
AMRC
).
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