Zacks_Analysts' Blog : Hubbell Beats, 2009 Cloudy - Analyst Blog

Revenue was flat sequentially (down 0.2%) and down 15.3% from the year-ago period. Excluding the effect of acquisitions, pricing actions and currency, revenue was down 18% from the year-ago period.

The Electrical Products segment was entirely responsible for the weak results. The segment, which generated 68% of revenue, declined 1.4% sequentially and 21.7% from the year-ago period. There was broad-based weakness across the residential, commercial and industrial markets, and both wiring and lighting product sales were weak. The high-voltage test equipment business was again the sole bright spot, growing on a year-over-year basis. Currency headwinds also contributed to the decline. We continue to believe that price realization will be difficult in this environment, and could even result in lost sales.

Power Systems sales increased 2.2% sequentially and 2.4% year over year. Acquisitions were the major driver here, contributing 12 percentage points of growth. The core business continued to be impacted by weakness on the distribution side, as utilities remained focused on transmission activities. Pricing actions generated some gains in the last quarter.

Gross margin for the quarter was 29.8%, up 130 basis points (bps) sequentially and down 62 bps from the year-ago quarter. The main reason for the year-over-year decline was lower volumes, which made cost absorption difficult.

The total operating expenses of $105.6 million were lower than the previous and year-ago quarters. The operating margin of 11.7% was up 162 bps sequentially, as both COGS and SG&A expenses declined as a percentage of sales. The operating margin declined 243 bps, as both COGS and SG&A were significantly higher than the year-ago quarter. Management initiated workforce reductions, and severance charges will continue to impact results for the next few quarters.

The Electrical Products operating margin increased 98 basis points sequentially, but declined 475 basis points from the June quarter of 2008. The Power Systems operating margin increased 274 basis points sequentially and 190 bps year over year.

The pro forma net income of $41.6 million, or a 7.1% net income margin, compares favorably with $36.1 million, or 6.2% in the previous quarter and $64.2 million, or 9.3%, in the prior-year quarter. Excluding stock based payments, the fully diluted GAAP EPS was 70 cents per share, compared to 60 cents in the previous quarter and $1.09 in the year-ago quarter.

The balance sheet improved. Inventories were down 12.7%, and annualized inventory turns increased from 5.2x to 5.9x. Days sales outstanding (DSOs) went down slightly from 52 to 51. Hubbell ended with a cash balance of $282.1 million, up 90.1 million from the first quarter. The company used roughly $19.7 million for dividend payments and did not repurchase any shares during the quarter. Capex was nil. Cash generated from operations was $107.7 million. Hubbell is highly leveraged, with $684.6 million in debt and other long-term liabilities, and a net debt position of $402.5 million.

Management did not provide a specific guidance for 2009. The decline in non-residential construction is expected to be sharper in the second half than in the first (in-line with our expectations). Utilities revenue is expected to decline 12-15%, driven by continued weakness on the distribution side.

We believe that the company's performance is in-line with the market and other companies in the electrical products sector, such as WESCO International (WCC), Anixter International (AXE), W.W. Grainger (GWW) and privately held Graybar Electric Company will report/has reported similar results and guidance.