Hubbell Inc.'s (HUB.B) fourth quarter earnings of 97 cents (96 cents available for Hubbell shareholders) that beat the Zacks consensus by 9 cents, or 10.2% on revenues that beat by 2.9%.
Total Revenue
For the fourth quarter, Hubbell reported revenue of $639.3 million, down 6.7% sequentially and up 8.0% year over year. The increase from the year-ago quarter was on account of easy comps in the power systems business, which bottomed in the year-ago quarter.
Higher volumes (mainley industrial and utility markets), better prices and some impact of the Burndy acquisition contributed to the results. The sequential decline was seasonal.
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 Hubbell's revenue in the fourth quarter. Segment revenue was down 8.3% sequentially and up 3.1% year over year. Although down sequentially based on seasonality, the industrial market performed strongly in comparison to the December 2009 quarter.
Non-residential construction markets were also better than expected. What disappointed was the residential side of the business, which performed in fits and starts through the year. Hubbell's sales growth typically lags the residential market by a couple of quarters, so sustained growth in the area will be slow to come.
The wiring and lighting businesses did well in the last quarter. Both volumes and pricing helped results.
Power Systems sales were down 2.6% sequentially, but jumped 21.8% from last year, as Hubbell saw demand on the distribution side. Transmission-side also improved, but given the fact that the company derives the majority of segment revenue from distribution-side products, this increase is very good news. Management stated that larger projects that could have been particularly beneficial for Hubbell continued to be put off.
Operating Performance
Gross margin for the quarter was 32.3%, down 199 basis points (bp) from the previous quarter's 34.3%. The gross margin was down 6 bps from the year-ago quarter. Hubbell saw gross margin pressure from higher commodity costs and mix that offset the positive effect of higher volumes, productivity enhancements and stronger pricing.
Hubbell's pperating expenses of $115.8 million were lower than the previous quarter. However, theoperating margin of 14.2% was down 293 bps sequentially, as cost of sales and SG&A increased 199 bps and 95 bps, respectively (as a percentage of sales). The operating margin was up 80 bps from the year-ago quarter.
Operating Profit by Segment
Operating margin in the Electrical Products segment was 14.1%, down 297 bps sequentially and up 192 bps year over year. Higher volumes, a favorable mix and a positive impact from the Burndy acquisition that Hubbell acquired in 2009 contributed to the margin expansion from the year-ago quarter.
However, commodity costs that more than offset the pricing gains were a headwind. This, along with seasonally lower volumes were responsible for the sequential decline.
The Power Systems operating margin of 14.5% was down 287 bps sequentially and 238 bps year over year. The disappointing performance was due to commodity cost increases (particularly steel), a higher mix of lower-margin construction business and inventory adjustments in the year-ago quarter that overcame the positive impact of higher volumes and production efficiencies.
Net Income
On a pro forma basis, Hubbell had a net income of $59.3 million, or a 9.3% net income margin, compared to $71.7 million, or 10.5% in the previous quarter and a profit of $50.1 million or an 8.5% net income margin in the prior-year quarter. Fully diluted pro forma earnings per share (EPS) available to Hubbell shareholders were 96 cents, compared to $1.18 in the September 2010 quarter and 84 cents in the same quarter last year.
On a fully diluted GAAP basis, the company recorded a net profit of $49.7 million 81 cents per share compared to $71.3 million ($1.18 per share) in the previous quarter and a net profit of $49.6 million (84 cents per share) in the prior-year quarter.
Balance Sheet
The balance sheet is highly leveraged, with a net debt position (including short-term debt and long term liabilities) of $5.10 a share. The cash balance at quarter-end was $529.5 million, up $175.3 million during the quarter. Cash generated from operations was $266.2 million. Excluding capex of $47.3 million, Hubbell ugenerated a free cash flow of $218.9 million.
Inventories were up 1.5% to $298.4 million, with annualized inventory turns dropping from 6.5x to 5.8x. Days sales outstanding (DSOs) were down sequentially by a couple of days to around 49.
Outlook
Management does not provide quarterly guidance and provides only very limted guidance for the year. Accordingly, the current expectations for 2011 are for revenue growth of 3-5%. Hubbell's business is generally highly correlated to GDP growth.
Real GDP growth rates increased in both the third and fourth quarters of 2010 and the trend is for further improvement this year. Therefore, there seems little risk to these modest expectations.
Our Recommendation
Hubbell is a very well-entrenched player in a highly fragmented market. The company generates very stable revenue, although the margin profile is not that great - common for all players in the market, such as Cooper Industries (CBE), Thomas & Betts (TNB) and Tyco International (TYC).
Still, management steered Hubbell very effectively through the downturn, lowering the cost structure through restructuring and consolidation of facilities, as well as increasing production efficiencies. As a result, margins stayed comparable to pre-recession levels.
Since we remain cautious about immediate results we have assigned a Zacks Rank of #3 (short-term Hold recommendation) to the shares.
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