Hubbell Inc.’s (HUB.B) second quarter earnings of $1.51 per share missed the Zacks Consensus Estimate by a penny. However, earnings increased 39.3% sequentially and 9.8% on a year-over-year basis. Higher volumes, driven partly by acquisitions and improved profitability led to the increase in earnings.
Shares were up over 2% during the day primarily due to strong year-over-year increase in revenues and a positive guidance indicating enhanced growth prospects in all the segments.
Total Revenue
Hubbell reported revenues of $855.8 million for the quarter, which was up 12.7% sequentially and 6.8% on a year-over-year basis. However, this was below the Zacks Consensus Estimate of $860.0 million. The year-over-year increase was primarily attributed to seven acquisitions over the past one year (three in power systems and two each in lighting platform and electrical system), which contributed 5% of the total revenues. Organic volume, up 2% from the previous quarter, also contributed to the year-over-year growth in revenues.
There were pockets of strength within different end markets as demand improved in most of the markets. 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 mixed quarter as Hubbell’s harsh and hazardous business showed strength while the test equipment business was 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, was the major contributor to organic growth.
Hubbell has two operating segments—Electrical and Power Systems, which generated 72% and 28% of revenues, respectively in the quarter.
Revenues by Segment
Electrical revenues were up 0.9% sequentially and 1.6% on a on a year-over-year basis to $612.4 million. About 5 percentage points of the year-over-year increase was attributed to acquisitions. Organic volume was also strong, contributing 3 percentage points to revenues. The residential market within lighting as well as commercial construction, was the major contributor to organic growth.
Power Systems sales were up 10.3% from the previous quarter but down 3.8% on a year-over-year basis to $243.4 million. The year-over-year increase was mainly due to acquisitions. Project-related transmission spending and distribution sales were flat. Organic volume in the utility market also improved with respect to the previous quarter.
Operating Performance
Hubbell’s gross margin for the quarter was 34.2%, up 23 basis points (bps) from the year-ago quarter’s 33.9% and 192 bps from 32.3% in the preceding quarter. The year-over-year increase was attributable to production efficiencies and favorable comps (capacity consolidation costs were lower than in the year-ago quarter). However, it was partially offset by unfavorable product mix that the company has been seeing for quite some time now.
Hubbell’s operating income of $143.7 million was higher than the previous quarter’s $104.8 million as well as the year-ago quarter’s 132.1 million. Hubbell’s operating margin of 16.8% was up 299 bps from the prior quarter and 31 bps from the year-ago quarter.
Operating Profit by Segment
Operating income in the Electrical segment was $95.5 million or 15.6% of net sales, up 7.4% from the year-ago quarter.
Power Systems operating income increased 11.6% on a year-over-year basis to $48.2 million. Operating margin was 19.8% compared with 18.2% in the year-ago quarter.
Net Income
Hubbell’s net income was $89.9 million (excluding non-controlling interest and earnings allocated to participating securities) or a 10.5% net income margin, compared with $81.8 million or 10.2% net income margin in the year-ago quarter. Reported earnings per share were $1.51 compared with $1.37 per share 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 $605.8 million, down from $655.1 million in the previous quarter. Accounts receivables were $506.0 million versus $468.3 million in the prior quarter. Total debt was $597.4 million as against $597.2 million at the end of the prior quarter. The debt-to-total capital ratio at quarter-end was 22.9% compared to 23.8% at the beginning of the quarter.
Free cash flow (defined as cash flow from operations less capital expenditures) was $43.4 million in the reported quarter versus $30.7 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 low single-digit 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 disappointing second quarter results with both the top and bottom lines missing the Zacks Consensus Estimate. However, both revenues and earnings increased year over year.
Although the end markets remained more or less flat in the quarter, management expects all the markets to improve in the third quarter of 2014. Margins are also expected to benefit from pricing programs and material cost management. Hubbell’s aggressive acquisition strategy will also help growth and profitability going forward.
Currently, Hubbell has a Zacks Rank #3 (Hold). Some better-ranked stocks in the technology sector include Charter Communications, Inc. (CHTR), First Solar, Inc. (FSLR) and Silicon Motion Technology Corp. (SIMO), all sporting a Zacks Rank #1 (Strong Buy).
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