Hubbell Inc.’s (HUB.A) first quarter earnings beat the Zacks Consensus by $0.09.
Total Revenue
Revenue for the period was $570.5 million, down 3.6% sequentially and 2.6% year over year. A number of factors impacted revenue in the last quarter, the most significant being the weakness in the commercial and industrial (C&I) lighting business, where volumes declined 17% from the year-ago quarter. This was partially offset by a 7% revenue benefit from the Burndy acquisition. Pricing and lower storm volumes had a 2% net negative impact on sales, which was offset by a 2% positive impact of currency compared to the year-ago quarter.
Overall, the company continued to see significant weakness in the non-residential business, which impacted volumes in the last quarter. The residential business has started to show some signs of recovery. Spending by utilities remained conservative. The only market that showed some strength was industrial, as businesses started increasing the utilization rate and spending more on equipment.
Revenue by Segment
Electrical Products accounted for around 72% of total revenue in the first quarter. Segment revenue was down 6.2% sequentially, but up 1.7% year over year. The increase was the net effect of the core business, which was down 11%, the Burndy acquisition, which added 11%, currency, which had a positive impact of 2% and flat pricing.
The sequential decline was on account of persistent weakness in the non-residential construction market. Non-residential construction markets were down double-digits, as wiring went up 5%, other electrical products (including high-voltage test, which was particularly weak last quarter) down 10% and overall lighting down 14%.
The company’s sales typically lag 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.
Power Systems sales were up 3.7% sequentially, but down 12% year over year. The sequential increase was due to a slight improvement in utilities’ spending. The decline from the year-ago quarter was on account of weak storm sales (4% of the revenue decline) and weaker demand at utilities when compared to the year-ago quarter.
Margins
Gross margin for the quarter was 30.8%, down 161 basis points (bps) from the previous quarter’s 32.4%. The gross margin was up 228 bps from the year-ago quarter.
The improvement compared to the year-ago quarter was due to cost-reduction initiatives implemented in the first quarter of 2009, which started benefiting results in the back half of the year. These included actions for productivity gains, such as enhancements in the areas of freight and logistics, better plant operations, restructuring actions and staff reduction initiatives.
The decline from the previous quarter was on account of the persistent pressure on pricing. The decline from the previous quarter was the result of rising commodity costs that management was unable to pass on to customers.
Operating expenses of $110.0 million were lower than the previous quarter. The operating margin of 11.5% was down 192 bps sequentially and up 173 bps year over year. SG&A expenses were negatively impacted by incremental costs related to the Burndy acquisition. Management stated that Burndy’s selling costs as a percentage of sales were higher than the corporate average.
Segment Margins
Operating margin in the Electrical Products segment was 9.8%, down 242 bps sequentially and up 292 bps year over year. A significant volume decline negatively impacted year-over-year comparisons, but was more than offset by productivity gains and slightly lower commodity costs.
The Power Systems operating margin of 15.9% was down 97 bps sequentially and 29 bps year over year. This business, while benefiting from production efficiencies and price increases across some product lines, has been hit by increases in commodity costs.
Net Income
Hubbell reported a net income of $39.0 million in the first quarter, or a 6.8% net income margin, compared to $50.1 million, or 8.5% in the previous quarter and a profit of $34.1 million or a 5.8% net income margin in the prior-year quarter. There were no one-time adjustments in any of the above quarters.
Consequently, the fully diluted GAAP EPS was $0.64 compared to $0.84 in the Dec 2009 quarter and $0.60 in the Mar quarter of 2009.
Balance Sheet
The balance sheet is highly leveraged, with a net debt position (including short term debt and long term liabilities) of $14.21 a share. The cash balance at quarter-end was $264.7 million, up $6.2 million during the quarter. Cash generated from operations was $23.9 million. Hubbell spent $20.98 million on dividends and $11.1 million on capital expenditure in the last quarter.
Inventories were up 2.6% to $270.4 million, with annualized inventory turns decreasing from 6.1X to 5.8X. Days sales outstanding (DSOs) were up from 51 to around 56.
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 they expect revenue from this market to shrink 20%.
Management did not give specific growth numbers for the other markets, although they did state that residential construction markets are improving and industrial markets are rebounding. The previous guidance was for industrial market revenue to be up 2-5% in 2010, residential markets to be up 5-10% and utilities to be up low- to mid-single-digits, in expectation of a resumption in regular maintenance activity.
Read the full analyst report on “HUB.A”
Zacks Investment Research
