Hubbell Sees Strength at Utilities

Hubbell’s (HUB.B - Analyst Report) fourth quarter earnings of $1.29 beat the Zacks consensus by a 6 cents, or 4.9%.

Total Revenue

For the second quarter, Hubbell reported revenue of $778.4 million, up 7.5% sequentially and 9.8% year over year. The company’s performance varied by end market, although most markets showed signs of recovery.

The construction market, which is Hubbell’s largest, is showing signs of improvement on the private side, although public remains soft. The construction business was helped by renovation and relighting. The industrial market was also a mixed bag, with strength in harsh and hazardous products offset by weakness in high-voltage test.

Utilities were positive for Hubbell overall, with both transmission and distribution contributing. Management was also positive about growth in the residential market, with multi-family showing stronger signs of recovery than single family.

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 up 6.2% sequentially and 7.7% year over year. About 3 percentage points of the year-over-year increase was due to acquisitions, while positive pricing was totally offset by negative foreign exchange.

The improved trends in residential spending, renovation spending in the construction market and increased demand for harsh and hazardous products helped the organic growth. The transition to LED lighting solutions remains on track and Hubbell is seeing some pricing pressure here.

Power Systems sales were up 10.7% sequentially and 14.6% from last year, benefiting from increased spending by utilities, acquisitions and the Midwest and mid-Atlantic storms toward the end of the quarter. Both the transmission and distribution sides of the business grew double-digits.

Operating Profit by Segment

Operating margin in the Electrical segment was 15.1%, up 251 bps sequentially and 56 bps year over year. Hubbell stated that pricing and commodity costs were favorable in the last quarter and helped by higher volumes. Higher cost (especially pension and benefit-related expenses) was an offsetting factor.

The Power Systems operating margin of 17.9% was up 124 bps sequentially and 90 bps year over year. Higher volumes were the main reason for the increase from last year, although price realization and productivity improvements also played a part.

Operating Performance

The gross margin for the quarter was 33.4%, up 103 basis points (bp) from the previous quarter’s 32.3%. The gross margin was up 96 bps from the year-ago quarter.

Hubbell’s operating expenses of $135.3 million were higher than the previous quarter. The operating margin of 16.0% was up 194 bps sequentially, as all costs declined as a percentage of sales. The operating margin was up 117 bps from the year-ago quarter with the 96 bp decrease in cost of sales complemented by the 22 bp decline in SG&A.

Net Income

On a pro forma basis, Hubbell had a net income of $78.0 million, or a 10.0% net income margin, compared to $63.6 million, or 8.8% in the previous quarter and a profit of $65.7 million or 9.3% 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 $1.29 compared to $1.05 cents in the March 2012 quarter and $1.07 in the same quarter last year.

Balance Sheet

The net debt position (including short-term debt and long term liabilities) was $6.09 a share. The cash and short-term investments balance at quarter-end was $559.8 million, down $16.5 million during the quarter. Cash generated from operations was $59.5 million. Excluding capex of $9.6 million, Hubbell generated a free cash flow of $49.9 million. Hubbell also spent $42.1 million on acquisitions during the quarter.

Inventories were up 5.3% to $355.3 million, with annualized inventory turns remaining flat at 5.8X. Days sales outstanding (DSOs) were down sequentially to around 51.

Outlook

Management does not provide quarterly guidance and provides only very limited guidance for the year. Accordingly, the revenue expectations for 2012 were raised to growth 6-8% from 5-7% guided previously. The Electrical segment is expected to be up 6-8% and the Power segment up 7-9%.

The utilities market is expected to be up 6-8% (up a point from the last guidance), the residential market is expected to be up 10-15%, non-residential 2-4% and industrial 3-5% (down a point from the last guidance). Management reiterated expectations of an operating margin improvement of 50 bps.

Recommendation

Hubbell’s business is generally highly correlated to GDP growth. Real GDP growth rates have been showing a moderately positive trend, indicating that there is little risk to these modest expectations. We therefore have a Zacks Rank of #3 on Hubbell shares, indicating a Hold rating in the next 1-3 months.