Hubbell Q1 Earnings In Line, Revs Beat - Analyst Blog

Hubbell Inc.'s (HUB.B) first quarter earnings of $1.08 per share were at par with the Zacks Consensus Estimate. However, earnings decreased 2.4% on a year-over-year basis due to foreign exchange losses in the quarter.

Total Revenue

Hubbell reported revenues of $759.5 million for the quarter, which was up 2.6% on a year-over-year basis but down 5.8% sequentially. This was just ahead of the Zacks Consensus Estimate of $759.0 million. The year-over-year increase was primarily attributed to five acquisitions, two each in the Power and Electrical systems businesses and one in the Lighting business.
 
There were pockets of strength within different end markets, although overall performance was more or less consistent with last year. One of Hubbell's most important end markets is non-residential construction where flattish new construction activity was supported by relative strength in renovation and relighting at some large national accounts.

The industrial business had a weaker quarter as Hubbell's harsh and hazardous business was flat and test equipment business weak.

Management said that both the transmission and distribution sides of the utility business were flattish. However, residential construction, which is a relatively smaller side of the business right now, grew on all fronts (single-family, multi-family, big-box renovation).

Hubbell has two operating segments—Electrical and Power Systems, which generated 71% and 29% of revenues, respectively in the quarter.

Revenues by Segment

Electrical revenues were up 4.6% on a on a year-over-year basis to $538.8 million. About 4 percentage points of the year-over-year increase were due to acquisitions. Residential lighting was strong, while commercial and institutional was generally weak. Overall, organic volume was flat due to hostile weather in the months of January and February, which had an adverse impact on demand.

Power Systems sales were down 1.8% on a year-over-year basis to $220.7 million in the reported quarter. The year-over-year decrease was mainly due to inclement weather conditions, which resulted in poor demand for construction associated goods. Moreover, project related transmission spending and distribution sales were flat. However, the acquisitions compensated for the fall in organic volume to some extent.

Operating Performance

Hubbell's gross margin for the quarter was 32.3%, up 33 basis points (bps) from the year-ago quarter's 31.9% but down 133 bps from 33.6% in the preceding quarter. The year-over-year increase was attributable to an increase in productivity coupled with lesser capacity consolidation costs. The sequential decline was primarily due to poor pricing and basic material costs.

Hubbell's operating income of $104.8 million was higher than the year-ago quarter. Hubbell's operating margin of 13.8% was up 60 bps from the year-ago quarter. However, the operating margin declined from 15.7% in the prior quarter.

Operating Profit by Segment

Operating income in the Electrical segment was $68.1 million or 12.6% of net sales, up 10.6% from the year-ago quarter.

The Power Systems operating margin increased 1.7% on a year-over-year basis to $36.7 million. The operating margin was 16.6% compared with 16.1% in the year-ago quarter.

Hubbell stated that stringent cost control and higher production volume were the main factors responsible for this rise in operating income.

Net Income

Hubbell's net income was $64.2 million (excluding non-controlling interest) or a 8.5% net income margin, compared with $65.9 million or 8.9% net income margin in the year-ago quarter. Reported earnings per share were $1.08 compared with $1.11 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 $655.1 million, down from $750.8 million in the previous quarter. Accounts receivables were $468.3 million versus $440.9 million in the prior quarter. Total debt was $598.2 million with $597.5 million in the prior quarter. The debt-equity ratio in the quarter was 30.9% compared with 23.7% in the quarter ago.

Free cash flow (defined as cash flow from operations less capital expenditures) was $30.7 million in the reported quarter versus $137.5 million in the prior quarter.

Outlook

Management does not provide a quarterly guidance and provides only limited guidance for the year.

Accordingly, for 2014, while the Electrical segment is expected to be up 6-7%, the Power segment is expected to grow 3%. The Electrical business will be helped by growth in the residential market as well as acquisitions. Therefore, management expects overall sales to be up 5 to 6%.

Overall market growth is expected to be in the range of 2-3%. The utilities market is expected to be flat. The industrial market is expected to grow 2-3% while the residential market is likely to be up 10%. Management stated that it is starting to see some signs of growth in the non-residential commercial business, its largest end-market and expects it to grow 3-4%.

Management expects an operating margin improvement of 20 bps to 30 bps for Hubbell.

Recommendation

Hubbell reported decent first quarter results with the top line beating the Zacks Consensus Estimate and the bottom line matching the same. Revenues also increased year over year while its earnings declined.

Although the end markets remained flat in the quarter, management expects all the markets to improve in the second quarter of 2014. Margins are also expected benefit from pricing programs and material cost management.

Moreover, we believe that its investments in resources as a part of the company's growth idea will materialize in future. Also, Hubbell's aggressive acquisition strategy will help in enhancing growth and profitability going forward.

Currently, Hubbell has a Zacks Rank #3 (Hold). Some better-ranked stocks in the technology sector include Conversant, Inc. CNVR, Interxion Holding NV INXN and Facebook Inc. FB. While Conversant and Interxion Holding sport a Zacks Rank #1 (Strong Buy), Facebook holds a Zacks Rank #2 (Buy).