Hubbell’s (HUB.B) fourth quarter earnings of $1.38 per share were above the Zacks Consensus Estimate of $1.36.
Hubbell reported revenues of $806.6 million for the quarter, which was up 7.0% on a year over year basis. On a sequential basis, revenues declined 3.5%. However, it missed the Zacks Consensus Estimate of $816.0 million.
Demand in the end markets during the fourth quarter was mixed. Non-residential construction experienced good growth due to renovation. However, Utilities were weaker sequentially due to regulatory issues, weak electricity usage and few rate increases.
Hubbell has two operating segments—Electrical and Power Systems, which generated 72.6% and 27.4% of revenues, respectively in the quarter.
Revenues by Segment
Electrical revenues were up 12.0% on a year over year basis to $585.2 million. About 5 percentage points of the year-over-year increase were due to acquisitions, the remnant addition to net sales in the quarter was on account of higher shipments of residential products and high voltage test equipment.
Power Systems sales were down 4.2% on a year over year basis to $221.4 million in the reported quarter. The year-over-year decrease was due to lower levels of project related transmission spending and weaker distribution sales.
Hubbell’s gross margin for the quarter was 33.6%, up 40 bps from the year ago quarter’s 33.2% but down 120 bps from the last quarter’s 34.8%.
Hubbell’s operating income of $126.2 million was higher than the year-ago quarter. Hubbell’s operating margin of 15.6% was up 90 bps from the year-ago quarter as selling, general and administrative (SG&A) expenses decreased as a percentage of sales. However, operating margin declined from 18.1% in the prior quarter.
Operating Profit by Segment
Operating income in the Electrical segment was $86.1 million or 14.7% of net sales, up 27% from the year-ago quarter. Hubbell stated that stringent cost control and production in higher volume were the main factors responsible for this rise in operating income.
Power Systems operating margin decreased 6% on a year over year basis to $40.1 million. Operating margin was 18.1%, compared to 18.4% reported in the year ago quarter. The decrease in operating margin was primarily due to lower volume partially offset by productivity.
On a pro forma basis, Hubbell’s net income was $82.0 million or a 10.2% net income margin, compared to $71.6 million or 9.5% net income margin in the year ago quarter. Reported earnings per share were $1.38 compared to $1.20 in the same quarter last year. There were no one-time items.
The cash and short-term investments balance at quarter end was $750.8 million, up from 640.9 million in the prior quarter. Accounts receivables were $440.9 million versus $499.5 million in the prior quarter. Long term debt was $597.5 million compared to that of $597.2 million in the prior quarter. The debt-equity ratio in the quarter was 23.7% as compared to 24.8% in the quarter ago.
Free cash flow (defined as cash flow from operations less capital expenditures) was $137.5 million in the reported quarter versus $103.0 million in the prior quarter.
Management does not provide a quarterly guidance and provides only limited guidance for the year.
Accordingly, for 2014, the Electrical segment is expected to be up 6-7% and the Power segment is expected to be up 2-3%. The Electrical business will be helped by growth in residential market and new deals. Therefore, management expects overall sales to be up 5 to 6%.
The utilities market is expected to be flat, the industrial market is expected to grow 2-3% 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.
Management expects an operating margin improvement of 20bps to 30bps for Hubbell.
The company’s earnings exceeded our expectations with both revenues and earnings up year over year. Though the end markets remained flat in the quarter, management expects all the markets to improve in the first quarter of fiscal 2014. While uncertainty persists in non-residential construction markets, the trend is positive and likely to remain so throughout the year. Management also expects non-residential market to improve going forward driven by strength in the renovation mark.
We believe that its aggressive acquisition strategy will help in enhancing growth and profitability going forward.
Currently, Hubbell has a Zacks Rank #2 (Buy). Some other top ranked stocks in the sector include Facebook Inc. (FB), Micron Tech (MU) and Baidu Inc (BIDU), all with a Zacks Rank # 2 (Buy).