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Hubbell’s (HUB.B - Analyst Report) 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 - Analyst Report) and Texas Instruments (TXN - Analyst Report) 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 - Snapshot Report).

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