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Hubbell’s (HUB.B - Analyst Report) second quarter earnings of $1.37 per share were above the Zacks Consensus Estimate of $1.30 on the back of a lower tax rate and outstanding share count.

Total Revenue

Hubbell reported revenues of $801.3 million for the quarter, which was up 8.3% sequentially and 2.9% year over year driven by acquisitions.

Hubbell’s end markets were essentially flat in the quarter. Non-residential construction was relatively mixed and a flat bag. On the residential side, however, Hubbell saw good growth in the last quarter. However, Utilities were weaker sequentially due to transmission and distribution.

Hubbell has two operating segments—Electrical and Power Systems, which generated 70.4% and 29.6% of revenues, respectively in the quarter.

Revenues by Segment

Electrical revenueswere up 9.5% sequentially and 5.3% year over year to $564.5 million. About 3 percentage points of the year-over-year increase were due to acquisitions, partially offset by notable weakness in high-voltage test.

Power Systems saleswere up 5.3% sequentially but down 2.2% from last year. The year-over-year decrease was due to lower levels of project related transmission spending and weaker distribution sales, partially offset by the favorable impact of an acquisition.

Operating Profit by Segment

Operating margin in the Electrical segment was 15.7%, up 9% from the year-ago quarter. Hubbell stated that better pricing and improved productivity led to strong margin performance in the quarter.

Power Systems operating margin of 18.2% was up 30 basis points (bps) year over year. The increase from last year was on account of a favorable product mix, partially offset by facility consolidation costs.

Operating Performance

Hubbell’s gross margin for the quarter was 33.9%, up 200 bps from the previous quarter’s 31.9%. Gross margin was up 50 bps from the year-ago quarter.

Hubbell’s operating expenses of $139.9 million were higher than the year-ago quarter. Operating margin of 16.5% was up 50 bps sequentially and 160 bps from the year-ago quarter as selling, general and administrative (SG&A) expenses increased as a percentage of sales.

Net Income

On a pro forma basis, Hubbell’s net income was $83.0 million or a 10.4% net income margin, compared to $66.8 million or 9.0% in the previous quarter and a profit of $78.0 million or 10.0% net income margin in the year-ago quarter. Reported earnings per share were $1.37 compared to $1.10 in the prior quarter and $1.29 in the same quarter last year. There were no one-time items.

Balance Sheet

The cash and short-term investments balance at quarter end was $593.6 million, down $22.9 million during the quarter. Accounts receivables were $468.8 million versus $443.6 million in the prior quarter.

Cash generated from operations was $65.8 million versus $42.7 million in the prior quarter. The company spent $13.0 million on capex, $26.6 million on dividends and $6.5 million on share repurchases.

Outlook

Management does not provide a quarterly guidance and provides only limited guidance for the year. Accordingly, for 2013, the Electrical segment is expected to be up 5-7% and the Power segment is expected to be up 2-4%. The Electrical business will be helped by growth in residential market and new deals.

The increase in the Power segment will be driven by benefits from the Trinetics deal. Therefore, management expects overall sales to be up 4 to 6%, driven by the recent acquisition.

The utilities market is expected to grow 0-2%, the industrial market is expected to grow in low-single digits while the residential market is likely to be up 15%, same as expected earlier. Management stated that it is starting to see some signs of growth in the non-residential commercial business and expects growth of 1% to 3% (same as previous expectations).

Management expects an operating margin improvement of 30 bps for Hubbell.

Recommendation

The company’s earnings exceeded our expectations with both revenues and earnings up year over year. Though the end markets remained flat in the quarter, management expects all the markets to improve in the second half of the year. While uncertainty persists in non-residential construction markets, the trend is positive and likely to remain so throughout the year. Management also expects non-residential market to improve going forward driven by strength in the renovation mark.

Currently, Hubbell has a Zacks Rank #3 (Hold). Investors can also consider some other stocks with a positive Zacks Rank and expected surprise prediction or ESP Read: Zacks Earnings ESP: A Better Method).

InvenSense Inc. (INVN - Snapshot Report), Earnings ESP of +8.33% and a Zacks Rank #2 (Buy)

Gartner Inc.(IT - Snapshot Report), Earnings ESP of +1.96% and a Zacks Rank #2 (Buy)

Scientific Games Corporation(SGMS - Analyst Report), with an ESP of +100.0% and a Zacks Rank #3 (Hold)

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