Hubbell Inc.’s (HUB.B) third quarter earnings beat the Zacks Consensus Estimate by 29 cents. Revenue beat by 1.2%.
Total Revenue
Revenue for the period was $593.9 million, up 1.7% sequentially down 19.2% year over year. The year-over-year decline was the net result of the benefit from acquisitions that was offset by the negative impact of currency and a 21% decline in the core volume.
The volume decline was attributable to broad-based weakness in the electrical products business, particularly in 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 70% of total revenue in the third quarter. Segment revenue was up 4.3% sequentially and down 20.8% year over year. The year-over-year decline was the net effect of broad-based weakness across all business lines (particularly residential lighting, which was down 27%), approximately two percentage points of decline related to foreign currency losses, offset by two percentage points gain from the acquisitions.
The residential business remains a drag despite relative improvement in the residential market, as the company’s sales growth typically lags the residential market by a couple of quarters. Wiring and C&I lighting also remained weak in the third quarter, although C&I lighting performed better than other business lines. 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 4.0% sequentially and 15.2% year over year. Acquisitions had a 7-percentage-point positive impact on year-over-year growth, offset by a six percentage point decline in storm-related volume. Overall volumes were down 15% from the year-ago quarter. Core demand remained weak, as utility spending remained focused on the distribution side.
Operating Profit by Segment
Operating margin in the Electrical Products segment was 12.4%, up 457 bps sequentially and down 70 bps year over year. The 21% volume decline had a significant impact on quarterly performance, and the lower commodity costs and productivity gains could not offset the volume headwind. The sequential improvement was reflective of cost-cutting actions (inventory and workforce reductions) implemented in preceding quarters.
The Power Systems operating margin of 22.1% was up 324 bps sequentially and 582 bps year over year. The increase was related to production efficiencies, restructuring benefits, commodity cost reductions (particularly steel) and neutral pricing.
Operating Performance
Gross margin for the quarter was 32.5%, up 266 basis points (bp) from the previous quarter’s 29.8%. The gross margin was up 251 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, partially offset by the very significant decline in volume.
Operating expenses of $99.4 million were lower than the previous quarter. The operating margin of 15.7% was up 400 bps sequentially. This was due to significantly lower COGS and SG&A expenses (as a percentage of sales). SG&A expenses were negatively impacted by higher pension costs and the Burndy acquisition-related costs. The operating margin was also up 132 bps from the year-ago quarter.
Net Income
On a pro forma basis, Hubbell had a net income of $59.7 million, or a 10.1% net income margin, compared to $41.6 million, or 7.1% in the previous quarter and a profit of $69.2 million or a 9.4% net income margin in the prior-year quarter. Fully diluted pro forma earnings per share (EPS) were $1.05, compared to 73 cents in the June quarter and $1.23 in the same quarter last year. Our pro forma estimate excludes stock compensation expenses.
On a fully diluted GAAP basis, the company recorded a net profit of $57.3 million ($1.01 per share) compared to $39.6 million (70 cents per share) in the previous quarter and a net profit of $66.5 million ($1.18 per share) in the prior-year quarter.
Balance Sheet
The balance sheet is highly leveraged, with a net debt position (including long-term liabilities) of $5.63 a share. The cash balance at quarter-end was $412.4 million, up $130.3 million during the quarter. Cash generated from operations was $297.1 million. Hubbell used $19.7 million for dividend payments and $19.3 million for capital expenditure. There were no share repurchases in the last quarter.
Inventories were down 11.3% to $247.9 million, with annualized inventory turns increasing from 5.9x to 6.5x. Days sales outstanding (DSOs) were flat sequentially at around 51 days.
Outlook
Management does not provide quarterly guidance. The outlook for 2009 is weak, with revenu expected to decline 13% from 2008, including a 7% increase related to Burndy sales in the fourth quarter. Lower volumes will have a negative impact on margins, as cost absorption remains difficult. This will be partially offset by restructuring and cost reduction initiatives.
Management expects a slightly better year in 2010, although its largest market, non-residential construction, expected to decline in mid-teen percentage points. Residential markets are expected to improve, although the company’s business will remain slow, as it typically lags residential construction by a couple of quarters.
The industrial market is also expected to improve, with utilization rates rising. This is expected to result in low to mid-single-digit growth for Hubbell. The utility market is also expected to be up slightly, with some modest improvement in distribution products, as housing construction picks up. Transmission side spending should also improve. Margins are expected to improve by 100 bps.
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