Hubbell Inc.’s (HUB.B) fourth quarter earnings beat the Zacks Consensus by $0.10.
Total Revenue
Revenue for the period was $591.9 million, flat sequentially (down 0.3%) and down 9.2% year over year. Core revenue excluding the contribution from acquisitions and negative currency impact was down 18%. The decline was attributable to broad-based weakness in the electrical products business, particularly related to non-residential construction, residential lighting, as well as declines in the power business. Pricing did not impact revenue in the last quarter.
Management combined the Electrical Products and Industrial Technology segments at the beginning of the year, and reported results according to the two new segments: Electrical Products and Power Systems. We have combined the revenue and profits of the Industrial Technology and Electrical Products segments into the Electrical Products segment in prior quarters to facilitate comparisons.
Revenue by Segment
Electrical Products accounted for around 74% of total revenue in the fourth quarter. Segment revenue was up 5.4% sequentially and down 4.8% year over year. The year-over-year decline was the net effect of broad-based weakness across all business lines. Non-residential construction markets were down 18%, electrical products down 13% and wiring down 8%, offset by twelve percentage point gain from acquisitions.
The residential construction market is sluggish at this point, although there are signs of improvement. The company’s sales typically lags the residential market by a couple of quarters. C&I lighting was down 20%. Price realization gains were minimal and are likely to remain difficult, as demand continues to be impacted by the macro weakness.
Power Systems sales were down 13.5% sequentially and 19.8% year over year. The decline was related to briad-based weakness on both the transmission and distribution sides of the business. Acquisitions did not impact revenue in the last quarter.
Gross margin for the quarter was 32.4%, down 8 basis points (bp) from the previous quarter’s 32.5%. The gross margin was up 390 bps from the year-ago quarter. The improvement in gross margin was the result of lower commodity costs, which are now at more normal levels, productivity enhancements in the the areas of freight and logistics, better plant operations, restructuring actions and staff reduction initiaves that have been going on for the past one year, as well as favorable inventory adjustments, partially offset by the very significant decline in volume.
Operating expenses of $112.3 million were lower than the previous quarter. The operating margin of 13.4% was down 231 bps sequentially and up 164 bps year over year. SG&A expenses were negatively impacted by Burndy acquisition-related costs. If integration costs related to Burndy were excluded, the year-over-year comparison would be even more favorable.
Segment Margins
Operating margin in the Electrical Products segment was 12.2%, down 22 bps sequentially and up 246 bps year over year. The significant volume decline negatively impacted quarterly performance, and the lower commodity costs and productivity gains could not offset the volume headwind. However cost-cutting actions (inventory and workforce reductions) implemented in preceding quarters helped year-over-year comparisons.
The Power Systems operating margin of 16.8% was down 530 bps sequentially and up 256 bps year over year. The increase was related to production efficiencies, restructuring benefits, commodity cost reductions, offset by lower volumes and weaker pricing.
Net Income
On a pro forma basis, Hubbell reported a net income of $50.1 million, or a 8.5% net income margin, compared to $59.7 million, or 10.1% in the previous quarter and a profit of $50.8 million or a 7.8% net income margin in the prior-year quarter. There were no one-time adjustments in the last quarter.
Consequently, the fully diluted GAAP EPS was $0.84 compared to $1.01 in the Sep 2009 quarter and $0.82 in the Dec quarter of 2008.
Balance Sheet
The balance sheet is highly leveraged, with a net debt position (including long term liabilities) of $9.87 a share. The cash balance at quarter-end was $258.5 million, down $153.9 million during the quarter. Cash generated from operations was $397.7 million.
Hubbell spent $355.5 million on acquisitions, $19.8 million for dividend payments and $29.4 million for capital expenditure. There were no share repurchases in the last quarter. Inventories were up 6.3% to $263.5 million, with annualized inventory turns decreasing from 6.5X to 6.1X. Days sales outstanding (DSOs) were down from 51 to 48.
Outlook
Management did not provide guidance. However, it did provide some comments on the served end markets as they appear today. The largest market for the company is non-residential construction. Management expects weak demand and credit availability issues to continue to impact this business. Consequently it expects revenue from this market to shrink 20%.
Industrial markets are showing some movement, so they are expected to be up 2-5%. Although still very cautious, management projects a 5-10% increase in the residential business, provided housing starts continue to strengthen. The Utilities market is expected to be up low- to mid-single-digits, in expectation of a resumption in regular maintenance activity.
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