Net Income attributableAttributable to Hubbell and Earnings Per Diluted Share
Net income attributable to Hubbell was $243.1$351.2 million in 20172020 and decreased 17%12.4% as compared to 2016.2019. Adjusted net income attributable to Hubbell was $311.9$414.1 million in 20172020 and increased 6%decreased 7.1% as compared to 2016. Earnings2019 primarily as a result of lower operating income, driven by lower Net sales volumes and other COVID-19 pandemic effects (as detailed above), partially offset by a decrease in the effective tax rate, and lower non-service pension costs and interest expense. As a result, earnings per diluted share in 20172020 decreased 16%12.0% compared to 2016.2019. Adjusted earnings per diluted share in 2017 increased 8%2020 decreased 6.7% as compared to 2019.
Segment Results
Electrical Solutions
| | | | | | | | |
| For the Year Ended December 31, |
| (in millions) | 2020 | 2019 |
| Net sales | $ | 2,263.6 | | $ | 2,625.7 | |
| Operating income (GAAP measure) | $ | 234.8 | | $ | 320.1 | |
| Amortization of acquisition-related intangible assets | 24.2 | | 23.1 | |
| Adjusted operating income | $ | 259.0 | | $ | 343.2 | |
| Operating margin (GAAP measure) | 10.4 | % | 12.2 | % |
| Adjusted operating margin | 11.4 | % | 13.1 | % |
| | |
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and reflectspercentage change):
| | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| Electrical Solutions | 2020 | Inc/(Dec) % | 2019 | Inc/(Dec) % |
| Net sales growth (decline) (GAAP measure) | $ | (362.1) | | (13.8) | | $ | (34.9) | | (1.3) | |
| Impact of acquisitions | 18.8 | | 0.7 | | 0.8 | | — | |
| Impact of divestitures | (20.3) | | (0.8) | | (17.1) | | (0.6) | |
| Foreign currency exchange | (3.3) | | (0.1) | | (9.8) | | (0.4) | |
| Organic net sales growth (decline) (non-GAAP measure) | $ | (357.3) | | (13.6) | | $ | (8.8) | | (0.3) | |
| | | | |
Net sales of the increaseElectrical Solutions segment in adjusted operating income2020 were $2.3 billion and decreased by $362.1 million, or 13.8% as compared to 2019. Organic net sales in 2017 as well as a 0.6 million decline in the average number of diluted shares outstanding2020 declined by 13.6% as compared to the same prior year.
Segment Results
Electrical Segment
|
| | | | | | |
| (in millions) | 2017 |
| 2016 |
|
| Net sales | $ | 2,532.8 |
| $ | 2,460.2 |
|
| Operating income | $ | 294.0 |
| $ | 276.4 |
|
| Operating margin | 11.6 | % | 11.2 | % |
year period due to lower unit volume, primarily driven by the unfavorable effects of the COVID-19 pandemic on demand. Net sales in 2020 also declined, by less than 1% from the Electrical segment were $2.5 billion, up three percent in 2017effect of acquisitions and dispositions, as compared with 2016 due to two percentage pointsthe decline from the disposal of netthe Haefely business was greater than Net sales growth from higher organic volume, including the impact of pricing headwinds, and one percentage point contributedadded by acquisitions.
Within the segment, the aggregate netNet sales of our Commercial and Industrial and Construction and Energy business groups increaseddecreased in 2020 by sixapproximately 14 percentage points as compared to the prior year, primarily due to four percentage pointslower volume driven by the unfavorable impact of organic growth, and two percentage points of net sales growth from acquisitions. Organic net sales growth of these businesses was driven primarilythe COVID-19 pandemic on demand, partially offset by our products serving the energy-related markets as well as the non-residential and residential construction markets.favorable price realization. Net sales of our Lighting business group decreased one percent in 2017 as two2020 declined by approximately 14 percentage points as compared to the prior year period due to lower unit volumes also driven by the unfavorable effects of headwind from pricing, was only partially offset by one percentage point of volume growth.the COVID-19 pandemic on demand. Within the Lighting business group, netNet sales of commercial and industrial lighting products in 2020 decreased by approximately 22% compared to the prior year period driven by lower overall market demand, as well as softness in our national accounts. Net sales of residential lighting products increased by three percent,approximately 6% in 2020 as compared to the same prior year period due to strength in home center and e-commerce sales, partially offset by weakness in home builder markets in 2020 as compared to the prior year.
Operating income of the Electrical Solutions segment in 2020 was $234.8 million and decreased approximately 27% compared to 2019, while net salesoperating margin in 2020 decreased by 180 basis points to 10.4%. Excluding amortization of commercialacquisition-related intangibles, adjusted operating margin decreased by 170 basis points to 11.4% in 2020 as compared to 2019. The decrease in operating income and industrial lighting products declined by two percentage points,operating margin in 2020 is primarily due to headwinds on pricing.
Operating incomelower Net sales volume and inefficiencies related to the pandemic and higher stock based compensation expense due to the change in the Electrical segment for 2017 was $294.0 milliontiming of our annual equity grants. These items were partially offset by favorable price realization and increased 6.4% compared to 2016. Operating margin in 2017 increased 40 basis points compared to 2016 as greater realizedmaterial costs, higher savings from our restructuring and related activities, savings from productivity initiatives and lower costs due in part to the impact of compensation actions and other cost reductions associated with the COVID-19 pandemic.
| | | | | |
| 28 | HUBBELL INCORPORATED - Form 10-K |
Utility Solutions
| | | | | | | | |
| For the Year Ended December 31, |
| (in millions) | 2020 | 2019 |
| Net sales | $ | 1,922.4 | | $ | 1,965.3 | |
| Operating income | $ | 298.2 | | $ | 276.5 | |
| Amortization of acquisition-related intangible assets | 51.7 | | 49.0 | |
| | |
| Adjusted operating income | $ | 349.9 | | $ | 325.5 | |
| Operating margin (GAAP measure) | 15.5 | % | 14.1 | % |
| Adjusted operating margin | 18.2 | % | 16.6 | % |
The following table reconciles our Organic net sales to the directly comparable GAAP financial measure (in millions and percentage change):
| | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| Utility Solutions | 2020 | Inc/(Dec) % | 2019 | Inc/(Dec) % |
| Net sales growth (decline) (GAAP measure) | $ | (42.9) | | (2.2) | | $ | 144.2 | | 7.9 | |
| Impact of acquisitions | 26.0 | | 1.3 | | 53.7 | | 2.9 | |
| Impact of divestitures | — | | — | | — | | — | |
| Foreign currency exchange | (8.3) | | (0.4) | | (7.6) | | (0.4) | |
| Organic net sales growth (decline) (non-GAAP measure) | $ | (60.6) | | (3.1) | | $ | 98.1 | | 5.4 | |
Net sales in the Utility Solutions segment in 2020 were $1.9 billion, down 2.2% as compared to 2019, due to a 3.1% decline in Organic net sales resulting from restrictions associated with the pandemic on project deployments and installations, partially offset by higher end-market demand in the electrical transmission and distribution markets, an increase in storm-related sales as compared to the prior year, and favorable price realization. Acquisitions contributed 1.3% to Net sales growth in 2020 and foreign exchange was slightly unfavorable by 0.4%.
Within the Utility Solutions segment, Net sales of our Power Systems business group in 2020 increased by approximately 5% as compared to the prior year driven by domestic demand in the utility transmission and distribution markets as well as Net sales growth from acquisitions and higher storm-related sales as compared to the prior year. Net sales of the Aclara business group in 2020 decreased by approximately 15% as compared to the prior year primarily driven by restrictions associated with the pandemic on project deployments and installations.
Operating income in the Utility Solutions segment in 2020 increased by 8% to $298.2 million as compared to 2019. Operating margin in 2020 increased to 15.5% as compared to 14.1% in 2019. Excluding amortization of acquisition-related intangibles the adjusted operating margin in 2020 increased by 160 basis points to 18.2% as compared to the prior year. That increase was primarily driven by savings from our productivity initiatives and lower cost inflation, due in part to the impact of compensation actions and other cost reductions associated with the COVID-19 pandemic, favorable price realization, higher savings from restructuring programs and lower restructuring and related costs, and the benefit from higher netfavorable Net sales volume,mix. Those favorable items were partially offset by pricethe impact of lower volume, COVID-19 pandemic related inefficiencies and material cost headwinds and acquisitions. Acquisitions reduced the adjusted operating margin by approximately 50 basis points in 2017, and includes our investment in IoT capabilities through the acquisition of iDevices.
Power Segment
|
| | | | | | |
| (in millions) | 2017 |
| 2016 |
|
| Net sales | $ | 1,136.0 |
| $ | 1,045.0 |
|
| Operating income | $ | 224.8 |
| $ | 213.4 |
|
| Aclara transaction costs | 6.7 |
| — |
|
| Adjusted operating income | $ | 231.5 |
| $ | 213.4 |
|
| Operating margin | 19.8 | % | 20.4 | % |
| Adjusted operating margin | 20.4 | % | 20.4 | % |
Net sales in the Power segment were $1.1 billion, up nine percent compared to 2016, primarilyhigher stock based compensation expense due to higher organic volume and net sales from acquisitions. The increasethe change in organic volume contributed six percentage points driven by growth in the distribution and telecommunications markets, including storm-related sales associated with hurricanes in 2017, and acquisitions which contributed three percentage points to net sales growth.timing of our annual equity grants.
Operating income in the Power segment increased 5.3 percent to $224.8 million in 2017. Operating margin in 2017 decreased by 60 basis points to 19.8% primarily due to price and material cost headwinds, Aclara transaction costs, and higher restructuring and related costs. The impact of those items was partially offset by gains from productivity initiatives in excess of cost inflation as well as from incremental earnings on higher net sales volume. In 2016, operating margin included a benefit within cost inflation from the reduction of an environmental liability, and in 2017 operating margin includes a similarly-sized benefit within cost inflation from an insurance recovery.
The following table reconciles our cash flows from operating activities to free cash flows for 2018, 20172020, 2019 and 2016 (in millions):2018:
Cash used for investing activities of $245.6 million in 2017 increased compared to cash used of $230.2 million in 2016. This increase is primarily due to $12.5 million of higher capital expenditures and $10.7 million of higher cash paid for acquisitions, partially offset by a $7.6 million increase in the proceeds from disposition of assets in 2017 as compared to 2016.
Cash used for financing activities of $214.3 million in 2017 increased compared to $59.4 million of cash used in 2016. The increase in cash used in 2017 as compared to 2016 is primarily the result of higher net proceeds from long-term borrowings in 2016 and an increase in shareholder dividends paid in 2017, partially offset by a decrease in shares repurchased in 2017, as well as an increase in short term borrowings in 2017.
The favorable impact of foreign currency exchange rates on cash increased to $18.3was $2.6 million in 20172020 as compared to an unfavorable impacta favorable effect of $27.3$1.3 million in 2016.2019. The favorable impact in 20172020 was primarily related to a stronger Canadian Dollar, British Pound, Australian Dollar and Chinese Yuan versus the U.S. dollar weakening against the British pound, Canadian dollarDollar, partially offset by a weaker Mexican Peso and Australian dollar.Brazilian Real.
Investments in Ourthe Business
Investments in our business include cash outlays for the acquisition of businesses as well as expenditures to maintain the operation of our equipment and facilities and invest in restructuring activities.
| | | | | |
| 30 | HUBBELL INCORPORATED - Form 10-K |
In the fourth quarter of 2020, the Company acquired all of the issued and outstanding shares of Armorcast Products Company, Inc. (“Armorcast”) for $136.8 million, all of the issued and outstanding shares of Beckwith Electric Co., Inc., (“Beckwith”) for $54.3 million and all of the issued and outstanding shares of AccelTex Solutions, LLC (“AccelTex”) for $45.1 million, net of cash acquired in all cases.
In the fourth quarter of 2019, the Company acquired all of the issued and outstanding shares of Cantega Technologies Inc., including its wholly owned subsidiary Greenjacket Inc., and all of the issued and outstanding shares of Reliaguard Inc. (collectively “Cantega”) for $38.4 million, net of cash acquired, and the Company also acquired substantially all of the assets of Connector Products, Incorporated (“CPI”) for $27.9 million.
In February 2018, the Company completed the acquisition of Aclara for approximately $1.1 billion in an all-cash transaction. To fund the Aclara acquisition, on February 2, 2018 the Company borrowed $500 million under a Term Loan Agreement (fully repaid in 2020) with a syndicate of lenders, issued $450 million of unsecured, 3.50% senior notes maturing in 2028, and the remaining purchase price and transaction expenses were funded with commercial paper. Refer to Note 3 — Business Acquisitions and Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information.
We continuallycontinue to invest in restructuring and related programs to maintain a competitive cost structure, to drive operational efficiencyefficiencies and to mitigate the impact of rising material costs and administrative cost inflation. As a result of these programs we have exited a total of 29 manufacturing and warehousing facilities since those programs began in late 2014. We expect our investment in restructuring and related spendactivities to continue in 2019 and 2020 to increase2021 as we continue to invest in previously initiated actions and initiate further footprint consolidation and other cost reduction initiatives.
In connection with our restructuring and related programsactions, we incurhave incurred restructuring costs as defined by U.S. GAAP, which are primarily severance and employee benefits, asset impairments, accelerated depreciation, as well as facility closure, contract termination and certain pension costs that are directly related to restructuring actions. We also incurincurred restructuring-related costs, which are costs associated with our business transformation initiatives, including the consolidation of back-office functions and streamlining of our processes, and certain other costs and gains associated with restructuring actions. We refer to these costs on a combined basis as "restructuring and related costs", which is a non-GAAP measure.
We believe this non-GAAP measure provides investors with useful information regarding our underlying performance from period to period. Restructuring costs are predominantly settled in cash from our operating activities and are generally settled within one year, with the exception of asset impairments, which are non-cash. Restructuring costs in 2016 also included a $12.5 million charge to recognize the estimated liability associated with the withdrawal from a multi-employer pension plan, which may be settled either in periodic payments over approximately 19 years, or in a lump sum, subject to negotiation.
The table below presents the restructuring and related costs incurred in 2018,2020, additional expected costs, and the expected completion date for thoseof restructuring actions that werehave been initiated as of December 31, 2020 and in 2018 and prior years (in millions):
| | | | | | | | | | | |
| Costs Incurred in 2020 | Additional Expected Costs | Expected Completion Date |
| 2020 Restructuring Actions | $ | 18.4 | | $ | 7.7 | | 2021 |
| 2019 and Prior Restructuring Actions | 5.7 | | 1.9 | | 2021 |
| Restructuring cost (GAAP measure) | $ | 24.1 | | $ | 9.6 | | |
| Restructuring-related costs | 6.5 | | 1.1 | | |
| Restructuring and related costs (Non-GAAP) | $ | 30.6 | | $ | 10.7 | | |
|
| | | | | | | |
| | Costs Incurred in 2018 |
| Additional Expected Costs |
| Expected Completion Date |
| 2018 Restructuring Actions | $ | 12.9 |
| $ | 7.8 |
| 2020 |
2017 and Prior Restructuring Actions(a) | (0.9 | ) | 0.1 |
| 2019 |
| Restructuring cost (GAAP measure) | $ | 12.0 |
| $ | 7.9 |
| |
| Restructuring-related costs | 3.8 |
| — |
| |
| Restructuring and related costs (Non-GAAP) | $ | 15.8 |
| $ | 7.9 |
| |
(a) Additional expected cost does not include any potential future liability,During 2020, we invested $88.4 million in excesscapital expenditures, a decrease of amounts already recognized$5.5 million as compared to 2019 as we were selective with our 2020 capital expenditures as a result of the general slowdown in 2016,economic activity associated with the withdrawal from the multi-employer pension plan referred to in the preceding paragraph. Additional information about the estimated withdrawal liability associated with that multi-employer plan is included in Note 11 — Retirement Benefits in the Notes to Consolidated Financial Statements.
During 2018, we used cash of $96.2 million for capital expenditures, an increase of $16.5 million from 2017 as we made higher investments in facilities and equipment during 2018 to support our continuing focus on productivity, and due to the acquisition of Aclara.COVID-19 pandemic.
Stock Repurchase Program
On October 20, 2017, the Board of Directors approved a new stock repurchase program (the “October 2017 program”) that authorized the repurchase of up to $400$400.0 million of Common Stockcommon stock and expiresexpired on October 20, 2020. AsOn October 23, 2020 the Board of Directors approved a new stock repurchase program that authorized the repurchase of up to $300 million of common stock and expires in October 2023. At December 31, 2018,2020 our remaining share repurchase authorization under the October 2020 program is $300.0 million. The Company has repurchased $40.0$41.3 million and $35.0 million of shares of Common Stock, bringingcommon stock, in 2020 and 2019, respectively. All of the remaining share repurchase authorizationrepurchases in 2020 were completed prior to $360.0 million.expiration of the October 2017 program. Subject to numerous factors, including market conditions and alternative uses of cash, we may conduct discretionary repurchases through open market or privately negotiated transactions, which may include repurchases under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended.
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HUBBELL INCORPORATED- Form 10-K | 31 |
Debt to Capital
At December 31, 20182020 and 2017,2019, the Company had $1,737.1$1,436.9 million and $987.1$1,506.0 million, respectively, of long-term unsecured, unsubordinated notes,debt outstanding, net of unamortized discount and the unamortized balance of capitalized debt issuance costs. At December 31, 20182020 the Company had no long-term debt with maturities due within the next twelve months. At December 31, 2019 the Company also had $25.0$34.4 million of long-term debt classified as short-term on the Consolidated Balance Sheets, reflecting maturities due within the next 12 months.
Borrowings under Revolving Credit Facility
|
| |
HUBBELL INCORPORATED- Form 10-K
| 27 |
The Company has a five-year revolving credit agreement (the "2018 Credit Facility") with a syndicate of lenders that provides a $750.0 million committed revolving credit facility. Commitments under the 2018 Credit Facility may be increased (subject to certain conditions) to an aggregate amount not to exceed $1.250 billion. The interest rate applicable to borrowings under the 2018 Credit Facility is generally either the adjusted LIBOR plus an applicable margin (determined by a ratings-based grid) or the alternate base rate. The single financial covenant in the 2018 Credit Facility requires that total debt not exceed 65% of total capitalization as of the last day of each fiscal quarter of the Company. The 2018 Credit Facility expires in February 2023.
AtIn March 2020, the Company borrowed $100.0 million and in April 2020, the Company borrowed an additional $125.0 million under the 2018 Credit Facility. In the second quarter of 2020, the Company repaid $100.0 million of such borrowings. In July 2020, the Company repaid the remaining $125.0 million of outstanding borrowings, and as a result the Company has $750.0 million of borrowing capacity under the 2018 Credit Facility at December 31, 2017 long-term debt consisted of unsecured, senior notes in principal amounts of $300 million due in 2022 (the "2022 Notes"), $400 million due in 2026 (the "2026 Notes"), and $300 million due in 2027 (the "2027 Notes").2020. There were no borrowings outstanding at December 31, 2019.
In February 2018, the Company completed a public debt offering of $450 million principal amount of unsecured, senior notes maturing in February 2028 and bearing interest at a fixed rate of 3.50% (the "2028 Notes"). Net proceeds from the issuance were $442.6 million after deducting the discount on the notes and offering expenses paid by the Company.
The 2022 Notes, 2026 Notes, 2027 Notes and 2028 Notes are callable at any time at specified prices and are only subject to accelerated payment prior to maturity upon customary events of default under the indentures governing such Notes, or upon a change in control triggering event as defined in such indentures. Term Loan Agreement
The Company was in compliance with all covenants (none of which are financial) as of December 31, 2018.
On January 31, 2018, the Company entered intoalso a party to a Term Loan Agreement (the “Term Loan Agreement”) with a syndicate of lenders under which the Company borrowed $500 million on an unsecured basis to partially finance the Aclara acquisition on February 2, 2018. The interest rate applicable to borrowingsDuring the third quarter of 2020, the Company repaid in full the remaining principal outstanding under the Term Loan Agreement is generally either adjusted LIBOR plus an applicable margin (determined byAgreement. The Company paid $90.7 million in cash, composed of $90.6 million of principal and $0.1 million of accrued interest, also resulting in a ratings based grid) or the alternate base rate. The sole financial covenant$0.2 million loss on extinguishment of debt (recorded within Interest expense in the Term Loan Agreement requires that total debt not exceed 65%Consolidated Statement of total capitalization as of the last day of each fiscal quarter of the Company.
The principal amount of borrowings under the Term Loan Agreement amortize in equal quarterly installments of 5% per year in year one, 5% per year in year two, 7.5% per year in year three, 10% per year in year four, 10% per year in year five, and any remaining borrowings under the Term Loan Agreement are due and payable in full in February 2023. The Company may also make principal payments in excess of the amortization schedule at its discretion and, during 2018, the Company made $150 million of such payments.
PursuantIncome) primarily related to the contractual loan amortization schedule, $25.0 millionwrite-off of borrowings under the Term Loan are classified as short-term within current liabilities on the December 31, 2018 Consolidated Balance Sheets.capitalized debt issuance costs.
In August 2017, the Company completed a public debt offering of $300 million of long-term, unsecured, senior notes maturing in August 2027 and bearing interest at a fixed rate of 3.15% (the "2027 Notes"). Net proceeds from the issuance were $294.6 million after deducting the discount on the notes and offering expenses paid by the Company. In September 2017, the Company applied the net proceeds from the 2027
Unsecured Senior Notes to redeem all of its $300 million of long-term, unsecured, unsubordinated notes maturing in 2018 and bearing interest at a fixed rate of 5.95%. In connection with this redemption, the Company recognized a loss on the early extinguishment of the 2018 Notes of $6.3 million on an after-tax basis.
At December 31, 20182020 and 2017,December 31, 2019, long-term debt includes unsecured, senior notes in principal amounts of $300 million due in 2022, $400 million due in 2026, $300 million due in 2027, and $450 million due in 2028 (collectively, the "Notes").
The Notes are callable at any time at specified prices and are only subject to accelerated payment prior to maturity upon customary events of default under the indentures governing the Notes, or upon a change in control triggering event as defined in the indenture governing the notes, as supplemented. The Company was in compliance with all covenants (none of which are financial) as of December 31, 2020.
Short-term Debt
At December 31, 2020 and 2019, the Company had $56.1$153.1 million and $68.1$65.4 million, respectively, of short-term debt outstanding composed of;of:
| |
◦ | $26.0 million and $63.0 million of commercial paper borrowings outstanding at December 31, 2018 and 2017, respectively. |
◦$150.0 million of commercial paper borrowings outstanding at December 31, 2020 and $26.0 million of commercial paper borrowings outstanding at December 31, 2019.
| |
◦ | $25 million of long-term debt classified as short-term within current liabilities in the Consolidated Balance Sheets, reflecting maturities within the next 12 months relating to borrowing under the Term Loan at December 31, 2018. |
| |
◦ | $5.1 million of borrowings to support our international operations in China at December 31, 2018 and 2017, respectively. |
◦$34.4 million at December 31, 2019 of long-term debt classified as short-term within current liabilities in the Consolidated Balance Sheets, reflecting maturities within the next twelve months relating to our borrowing under the now fully repaid Term Loan Agreement.
◦$3.1 million at December 31, 2020 and $5.0 million at December 31, 2019, respectively, of borrowings to support our international operations in China.
Net debt, defined as total debt less cash and investments, is a non-GAAP measure that may not be comparable to definitions used by other companies. We consider net debt to be a useful measure of our financial leverage for evaluating the Company’s ability to meet its funding needs.
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| 32 | HUBBELL INCORPORATED - Form 10-K |
The following table sets forth the reconciliation of net debt at December 31, 20182020 and 2017:2019:
| | | | | | | | |
| | December 31, |
| (in millions) | 2020 | 2019 |
| Total Debt | $ | 1,590.0 | | $ | 1,571.4 | |
| Total Hubbell Shareholders’ Equity | 2,070.0 | | 1,947.1 | |
| TOTAL CAPITAL | $ | 3,660.0 | | $ | 3,518.5 | |
| Debt to Total Capital | 43 | % | 45 | % |
| Cash and Investments | $ | 340.0 | | $ | 251.9 | |
| NET DEBT | $ | 1,250.0 | | $ | 1,319.5 | |
| Net Debt to Total Capital | 34 | % | 38 | % |
|
| | | | | | |
| | December 31, |
| (in millions) | 2018 |
| 2017 |
|
| Total Debt | $ | 1,793.2 |
| $ | 1,055.2 |
|
| Total Hubbell Shareholders’ Equity | 1,780.6 |
| 1,634.2 |
|
| TOTAL CAPITAL | $ | 3,573.8 |
| $ | 2,689.4 |
|
| Debt to Total Capital | 50 | % | 39 | % |
| Cash and Investments | $ | 254.5 |
| $ | 447.2 |
|
| NET DEBT | $ | 1,538.7 |
| $ | 608.0 |
|
| Net Debt to Total Capital | 43 | % | 23 | % |
Liquidity
|
| |
28 | HUBBELL INCORPORATED - Form 10-K
|
Liquidity
We measure liquidity on the basis of our ability to meet short-term and long-term operational funding needs, to fund additional investments, including acquisitions, and to make dividend payments to shareholders. Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, cash dividend payments, stock repurchases, access to bank lines of credit and our ability to attract long-term capital with satisfactory terms.
In 2018,2020, we invested in the Aclara acquisitionacquisitions and also returned capital to our shareholders through dividends and share repurchases. These activities were funded primarily with additional debt financing and cash flows from operations, as further described below.however a portion of our fourth quarter 2020 acquisitions were funded by short-term commercial paper borrowings.
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◦ | Cash used for the acquisition of businesses in 2018, net of cash acquired was $1,118.0 million, including cash settlement of a deferred purchase price obligation and a net working capital adjustment related to acquisitions completed in prior years. Further discussion of our acquisitions can be found in Note 3 — Business Acquisitions in the Notes to Consolidated Financial Statements. |
◦Cash used for the acquisition of businesses in 2020 was $239.6 million. Further discussion of our acquisitions can be found in Note 3 — Business Acquisitions and Dispositions in the Notes to Consolidated Financial Statements.
| |
◦ | In 2018, cash used for share repurchases was $40.0 million. Dividends paid on our Common Stock in 2018 were $172.3 million. |
| |
◦ | In February of 2018, we increased our long-term and short-term borrowings to complete the acquisition of Aclara and we expect our cash flows from operations, (including those from Aclara), as well as our other sources of funds, will be sufficient to meet our obligations in respect of those borrowings. |
◦In 2020, cash used for share repurchases was $41.3 million. Dividends paid on our Common Stock in 2020 were $201.4 million.
We also require cash outlays to fund our operations, capital expenditures, and an increase in working capital that would be requiredrequirements to accommodate a higher levelanticipated levels of business activity, for the foreseeable future, as well as our rate of cash dividends and potential future acquisitions. We also have contractual obligations for long-term debt, operating leases, purchase obligations, and certain other long-term liabilities, that are summarized in the table of Contractual Obligations as of December 31, 2018,including defined benefit retirement obligations and asother benefits. As a result of the TCJA, we also have an obligation to fund, over the next seven years,by annual installments through 2025, the Company's liability for the transition tax on the deemed repatriation.repatriation of foreign earnings.
Our sources of funds and available resources to meet these funding needs are as follows:
| |
◦ | Cash flows from operations and existing cash resources: We held $189.0 million of cash and cash equivalents at December 31, 2018, of which approximately 9% was held inside the United States and the remainder held internationally. The Company repatriated a portion of its foreign earnings in 2018. The current period financials reflect the income tax effects of the repatriation of these earnings as well as as the income tax effects of certain anticipated future cash repatriations. |
◦Cash flows from operating activities and existing cash resources: In additional to our cash flows from operating activities, was also had $259.6 million of cash and cash equivalents at December 31, 2020, of which approximately 16% was held inside the United States and the remainder held internationally.
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◦ | On January 31, 2018, the Company entered into a five-year revolving credit agreement (the "2018 Credit Facility"), with a syndicate of lenders that provides a $750
◦Our 2018 Credit Facility provides a $750.0 million committed revolving credit facility and terminated all commitments under the 2015 Credit Facility. Commitments under the 2018 Credit Facility may be increased (subject to certain conditions) to an aggregate amount not to exceed $1.250 billion. The interest rate applicable to borrowings under the 2018 Credit Facility is generally either the adjusted LIBOR plus an applicable margin (determined by a ratings based grid) or the alternate base rate. The single financial covenant in the 2018 Credit Facility requires that total debt not exceed 65% of total capitalization as of the last day of each fiscal quarter of the Company. The 2018 Credit Facility expires in February 2023. As of December 31, 2018 the Company had not drawn against the facility. |
Annual commitment fees to support availability under the 2018 Credit Facility are not material. Although not the principal source of liquidity, we believe our 2018 Credit Facility is capable of providing significant financing flexibility at reasonable rates of interest.interest and is an attractive alternative source of funding in the event that commercial paper markets experience disruption. However, an increase in usage of the 2018 Credit Facility related to growth or a significant deterioration in the results of our operations or cash flows, could cause our borrowing costs to increase and/or our ability to borrow could be restricted. We have not entered into any guarantees that could give rise to material unexpected cash requirements.
In March 2020, the Company borrowed $100.0 million under the 2018 Credit Facility and in April 2020, the Company borrowed an additional $125.0 million. While the Company believes that it had sufficient liquidity to fund its operations and meet its obligations, the Company further increased its cash position as a precautionary measure in order to preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. During the second quarter the Company repaid $100.0 million of its borrowings under the 2018 Credit Facility and in July 2020, the Company repaid the remaining $125.0 million of the outstanding borrowings. As a result the full $750.0 million of borrowing capacity under the 2018 Credit Facility was available to the Company at December 31, 2020.
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◦HUBBELL INCORPORATED- Form 10-K | In addition to our commercial paper program and existing revolving credit facility, we also have the ability to obtain additional financing through the issuance of long-term debt. Considering our current credit rating, historical earnings performance, and financial position we believe that we would be able to obtain additional long-term debt financing on attractive terms.33 |
◦In addition to our commercial paper program and existing revolving credit facility, we also have the ability to obtain additional financing through the issuance of long-term debt. Considering our current credit rating, historical earnings performance, and financial position we believe that we would be able to obtain additional long-term debt financing on attractive terms.
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◦ | The Company also maintains other lines of credit that are primarily used to support the issuance of letters of credit. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions. At December 31, 2018 and 2017, total availability under these lines was $54.8 million and $53.9 million, respectively, of which $20.3 million and $21.5 million was utilized to support letters of credit and the remaining amount was unused. The annual commitment fees associated with these lines of credit are not material. |
◦The Company also maintains other lines of credit that are primarily used to support the issuance of letters of credit. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions. At December 31, 2020 and 2019, total availability under these lines was $32.1 million and $23.0 million, respectively, of which $19.3 million and $15.7 million was utilized to support letters of credit and the remaining amount was unused. The annual commitment fees associated with these lines of credit are not material.
Pension Funding Status
We have a number of funded and unfunded non-contributory U.S. and foreign defined benefit pension plans. Benefits under these plans are generally provided based on either years of service and final average pay or a specified dollar amount per year of service. The funded status of our qualified, defined benefit pension plans is dependent upon many factors including future returns on invested pension assets, the level of market interest rates, employee earnings and employee demographics.
In 2020, the Company recognized a $7.6 million settlement loss relating to retirees that elected to receive lump-sum distributions from the Company's defined benefit pension plans. This charge was the result of lump-sum payments which exceeded the threshold for settlement accounting under U.S. GAAP for 2020.
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HUBBELL INCORPORATED- Form 10-K
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In 2019, the Company approved amendments to one of its domestic qualified defined benefit pension plans, that froze service accruals for nearly all active participants within the plan effective January 1, 2020. As a result of the amendments, the Company recognized a $0.3 million curtailment charge, net of tax.
In 2018, the Company approved amendments to one of its foreign defined benefit pension plans, whichthat closed the plan to future service accruals effective August 31, 2018. As a result of the amendments, in the third quarter of 2018, the Company recognized a curtailment gain of approximately $4.7 million, net of tax, in accumulated other comprehensive income. In addition, effective August 31, 2018, the amortization of actuarial gains and losses is being recognized over the remaining life expectancy of the participants of this plan, as all participants are considered inactive as a result of the amendment.
In December 2016, the Company approved amendments to the domestic qualified defined benefit pension plan and non-qualified defined benefit plan, which froze service accruals for active participants effective February 28, 2017 and further will freeze compensation accruals effective December 31, 2020. The Company also froze all accruals in a second non-qualified defined benefit plan effective December 31, 2016. As a result of the amendments, the Company recognized a $34.1 million curtailment gain in accumulated other comprehensive income as of December 31, 2016 and recognized $0.2 million of pension expense in 2016. In addition, effective January 1, 2017, the amortization of unrecognized gains and losses of these plans is recognized over the remaining life expectancy of participants, as all participants are considered inactive as a result of the amendments.
In 2018, and 2016, we completed transactions with a third-party insurersinsurer to settle approximately $28 million and $40 million, respectively of projected benefit obligations of our domestic qualified defined benefit pension plans.
Changes in the value of the defined benefit plan assets and liabilities will affect the amount of pension expense ultimately recognized. Although differences between actuarial assumptions and actual results are no longer deferred for balance sheet purposes, deferral is still permitted for pension expense purposes. Unrecognized gains and losses in excess of an annual calculated minimum amount (the greater of 10% of the projected benefit obligation or 10% of the market value of assets) have been amortized and recognized in net periodic pension cost. Effective January 1, 2017,2020, the amortization of unrecognized gains and losses of our primary domesticall of the Company's qualified defined benefit planpension plans is being recognized over the remaining life expectancy of participants, which is approximately 20 years.as all participants are considered inactive as a result of plan amendments. During 20182020 and 2017,2019, we recorded $10.5$9.8 million and $11.4$9.6 million, respectively, of pension expense related to the amortization of these unrecognized losses.
In 2018, 20172020, 2019 and 2016,2018, we contributed $27.9$23.2 million, $1.7$10.4 million, and $18.0$27.9 million, respectively, to our qualified foreign and domestic defined benefit pension plans. These contributions have improved the funded status of those plans. Although not required by ERISA and the Internal Revenue Code, the Company may elect to make a voluntary contribution to its qualified domestic defined benefit pension plan in 2019. The Company expects to contribute approximately $0.5 million to its foreign plans in 2019.2021. The anticipated level of pension funding in 20192021 is not expected to have a significant impact on our overall liquidity.
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| 34 | HUBBELL INCORPORATED - Form 10-K |
Assumptions
The following assumptions were used to determine projected pension and other benefit obligations at the measurement date and the net periodic benefit costs for the year:
| | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| | 2020 | 2019 | | 2020 | 2019 |
| Weighted-average assumptions used to determine benefit obligations at December 31, | | | | | | Weighted-average assumptions used to determine benefit obligations at December 31, | | | | | |
| Discount rate | 4.24 | % | 3.67 | % | | 4.40 | % | 3.70 | % | Discount rate | 2.47 | % | 3.17 | % | | 2.50 | % | 3.30 | % |
| Rate of compensation increase | 3.25 | % | 3.24 | % | | 4.05 | % | 4.00 | % | Rate of compensation increase | 0.24 | % | 2.94 | % | | 3.99 | % | 4.00 | % |
| Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, | |
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| | |
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| Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, | | | | |
| Discount rate | 3.67 | % | 4.12 | % | | 3.70 | % | 4.10 | % | Discount rate | 3.17 | % | 4.24 | % | | 3.30 | % | 4.40 | % |
| Expected return on plan assets | 4.68 | % | 4.94 | % | | N/A |
| N/A |
| Expected return on plan assets | 4.69 | % | 4.75 | % | | N/A | N/A |
| Rate of compensation increase | 3.25 | % | 3.55 | % | | 4.00 | % | 3.93 | % | Rate of compensation increase | 2.94 | % | 3.25 | % | | 4.00 | % | 4.05 | % |
At the end of each year, we estimate the expected long-term rate of return on pension plan assets based on the strategic asset allocation for our plans. In making this determination, we utilize expected rates of return for each asset class based upon current market conditions and expected risk premiums for each asset class. A one percentage point change in the expected long-term rate of return on pension fund assets would have an impact of approximately $6.7$8.1 million on 20192021 pretax pension expense. The expected long-term rate of return is applied to the fair market value of pension fund assets to produce the expected return on fund assets that is included in pension expense.
The difference between this expected return and the actual return on plan assets was recognized at December 31, 20182020 for balance sheet purposes, but continues to be deferred for expense purposes. The net deferral of past asset gains (losses) ultimately affects future pension expense through the amortization of gains (losses) with an offsetting adjustment to Hubbell shareholders’ equity through Accumulated other comprehensive loss.
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30 | HUBBELL INCORPORATED - Form 10-K
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At the end of each year, we determine the discount rate to be used to calculate the present value of our pension plan liabilities. For our U.S. and Canadian pension plans, this discount rate is determined by matching the expected cash flows associated with our benefit obligations to the expected cash flows of a hypothetical portfolio of high quality, fixed income debt instruments with maturities that closely match the expected funding period of our pension liabilities. As of December 31, 2018,2020, we used a discount rate of 4.40%2.60% for our U.S. pension plans compared to a discount rate of 3.80%3.30% used in 2017.2019. For our Canadian pension plan, we used a discount rate of 3.60%2.55% in 2018,2020, compared to the 3.50%a 3.00% discount rate used in 2017.2019.
For our UK pension plan the discount rate was derived using a full yield curve fitted to the yields on AA bonds in the Barclays Capital Sterling Aggregate Corporate Index and uses sample plan cash flow data as a proxy to plan specific liability cash flows. The derived discount rate is the single discount rate equivalent to discounting these liability cash flows at the term-dependent spot rates of AA corporate bonds. This methodology resulted in a December 31, 20182020 discount rate for the UK pension plan of 2.90%1.40% as compared to a discount rate of 2.60%2.10% used in 2017.2019.
An increaseA decrease of one percentage point in the discount rate would lower our 20192021 pretax pension expense by approximately $1.4$0.6 million. A discount rate declineincrease of one percentage point would increase our 20192021 pretax pension expense by approximately $1.6$0.1 million.
In 20182019 we changed the mortality table used to calculate the present value of our pension plan liabilities from the RP-2014 mortality table, with generational projection from 2006 using Scale MP-2017MP-2018 to the RP-2014Pri-2012 mortality table, with generational projection from 20062012 using Scale MP-2018. That changeMP-2019. In 2020 we continued to use the Pri-2012 mortality table and adopted the MP-2020 projection scale. The Pri-2012 mortality table with adjustment for collar as appropriate and generational projection from 2012 using Scale MP-2020 was chosen as the best estimate based on the observed and anticipated experience of the plans after considering alternative tables. These changes did not have a material impact to the projected benefit obligation of our U.S. plans upon remeasurement at December 31, 2018. The RP-2014 mortality table with generational projection from 2006 using Scale MP-2018 was chosen as the best estimate based on the observed2019 and anticipated experience of the plans after considering alternative tables.
December 31, 2020.
Other Post Employment Benefits (“OPEB”)
The Company also has a number of health care and life insurance benefit plans covering eligible employees who reached retirement age while working for the Company. These benefits have been discontinued for substantially all future retirees. These plans are not funded and, therefore, no assumed rate of return on assets is required. We use a similar methodology to derive the yield curve for our post employment benefit plan obligations that we use for our pension plans. As of December 31, 2018,2020, the Company used a discount rate of 4.40%2.50% to determine the projected benefit obligation compared to a discount rate of 3.70%3.30% used in 2017.2019.
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HUBBELL INCORPORATED- Form 10-K | 35 |
In accordance with the accounting guidance for retirement benefits, we recorded to Accumulated other comprehensive loss, within Hubbell shareholders’ equity, a charge, net of tax, of approximately $0.3$0.6 million in 20182020 and a charge,benefit, net of tax, of approximately $1.6$0.9 million in 2017,2019, related to the annual remeasurement of the OPEB plans and the amortization of prior service credits and net actuarial gains.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are defined as any transaction, agreement or other contractual arrangement to which an entity that is not included in our consolidated results is a party, under which we, whether or not a party to the arrangement, have, or in the future may have: (1) an obligation under a direct or indirect guarantee or similar arrangement, (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets, (3) an obligation or liability, including a contingent obligation or liability, under a contract that would be accounted for as a derivative instrument, except that it is excluded from the scope of FASB ASC Topic 815, or (4) an obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to, the Company, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with, the Company.
We do not have any off-balance sheet arrangements as defined above which have or are likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, capital resources or cash flows.
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HUBBELL INCORPORATED- Form 10-K
| 31 |
Contractual Obligations
A summary of our contractual obligations and commitments at December 31, 20182020 is as follows (in millions):
| | | | Payments due by period | | Payments due by period |
| | Total | 2019 | 2020-2021 | 2022-2023 | 2024 and thereafter | | Total | 2021 | 2022-2023 | 2024-2025 | 2026 and
thereafter |
Debt obligations(a) | $ | 1,756.3 |
| $ | — |
| $ | 81.3 |
| $ | 525.0 |
| $ | 1,150.0 |
| Debt obligations(a) | $ | 1,450.0 | | $ | — | | $ | 300.0 | | $ | — | | $ | 1,150.0 | |
Short-term debt obligations(a) | 56.1 |
| 56.1 |
| — |
| — |
| — |
| Short-term debt obligations(a) | 153.1 | | 153.1 | | — | | — | | — | |
| Expected interest payments | 401.5 |
| 60.7 |
| 118.1 |
| 94.4 |
| 128.3 |
| Expected interest payments | 264.5 | | 49.5 | | 86.7 | | 77.2 | | 51.1 | |
| Operating lease obligations | 111.2 |
| 23.5 |
| 37.5 |
| 23.7 |
| 26.5 |
| Operating lease obligations | 114.5 | | 34.7 | | 45.0 | | 20.9 | | 13.9 | |
Retirement and other benefits(b) (c) | 204.9 |
| 8.4 |
| 16.5 |
| 17.5 |
| 162.5 |
| |
Retirement and other benefits(b) | | Retirement and other benefits(b) | 178.4 | | 13.9 | | 17.2 | | 16.2 | | 131.1 | |
| Purchase obligations | 347.5 |
| 322.8 |
| 24.7 |
| — |
| — |
| Purchase obligations | 372.6 | | 356.1 | | 13.7 | | 2.7 | | 0.1 | |
| Obligations under customer incentive programs | 52.4 |
| 52.4 |
| — |
| — |
| — |
| Obligations under customer incentive programs | 40.7 | | 40.7 | | — | | — | | — | |
Income tax payments(d) | 28.4 |
| 3.4 |
| — |
| 8.1 |
| 16.9 |
| |
Income tax payments(c) | | Income tax payments(c) | 30.3 | | 4.8 | | 8.6 | | 16.9 | | — | |
| TOTAL | $ | 2,958.3 |
| $ | 527.3 |
| $ | 278.1 |
| $ | 668.7 |
| $ | 1,484.2 |
| TOTAL | $ | 2,604.1 | | $ | 652.8 | | $ | 471.2 | | $ | 133.9 | | $ | 1,346.2 | |
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(a) | Amounts exclude unamortized discount and capitalized debt issuance costs. |
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(b) | Amounts above reflect projected funding related to the Company’s non-qualified defined benefit and OPEB plans. Projected funding obligations of the Company’s qualified defined benefit pension plans are excluded from the table as there are significant factors, such as the future market value of plan assets and projected investment return rates, which could cause actual funding requirements to differ materially from projected funding. |
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(c) | Amounts above reflect a $12.5 million obligation associated with the withdrawal from a multi-employer plan. See Note 11 — Retirement Benefits in the Notes to Consolidated Financial Statements for further information. |
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(d) | Amount above includes future payments associated with the one-time transition tax under the TCJA. |
(a)Amounts exclude unamortized discount and capitalized debt issuance costs.
(b)Amounts above reflect projected funding related to the Company’s non-qualified defined benefit pension and OPEB plans as well as remaining payments under the multi-employer pension settlement agreement described in Note 15 – Commitments & Contingencies. Projected funding obligations of the Company’s qualified defined benefit pension plans are excluded from the table as there are significant factors, such as the future market value of plan assets and projected investment return rates, which could cause actual funding requirements to differ materially from projected funding.
(c)Amount above includes future payments associated with the one-time transition tax under the TCJA.
Our purchase obligations include amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity, delivery and termination liability. These obligations primarily consist of inventory purchases made in the normal course of business to meet operational requirements and commitments for equipment purchases. As of December 31, 2018,2020, we have $38.9$47.6 million of uncertain tax positions reflected in our Consolidated Balance Sheet. We are unable to make a reasonable estimate regarding the timing of settlement of these uncertain tax positions and, as a result, they have been excluded from the table. See Note 13 — Income Taxes in the Notes to Consolidated Financial Statements.
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3236 | HUBBELL INCORPORATED - Form 10-K |
Critical Accounting Estimates
Note 1 — Significant Accounting Policies in the Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of our financial statements.
Use of Estimates
We are required to make assumptions and estimates and apply judgments in the preparation of our financial statements that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors deemed relevant by management. We continually review these estimates and their underlying assumptions to ensure they are appropriate for the circumstances. Changes in estimates and assumptions used by us could have a material impact on our financial results. We believe that the following estimates are among the most critical in fully understanding and evaluating our reported financial results. These items utilize assumptions and estimates about the effect of future events that are inherently uncertain and are based on our judgment.
Revenue Recognition
The Company recognizes revenue when performance obligations identified under the terms of contracts with its customers are satisfied, which generally occurs, for products, upon the transfer of control in accordance with the contractual terms and conditions of the sale. The majority of the Company’s revenue associated with products is recognized at a point in time when the product is shipped to the customer, with a relatively small amount of transactions in the PowerUtility Solutions segment recognized upon delivery of the product at the contractually specified destination. Revenue from service contracts and post-shipment performance obligations is less thanapproximately three percent of total annual consolidated net revenue and those service contracts and post-shipment obligations are primarily within the PowerUtility Solutions segment. Revenue from service contracts and post-shipment performance obligations is recognized when or as those obligations are satisfied. The Company primarily offers assurance-type standard warranties that do not represent separate performance obligations and on occasion will separately offer and price extended warranties that are separate performance obligations for which the associated revenue is recognized over-time based on the extended warranty period. The Company records amounts billed to customers for reimbursement of shipping and handling costs within revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of goods sold. Sales taxes and other usage-based taxes are excluded from revenue.
The Company has certain arrangements that require us to estimate at the time of sale the amounts of variable consideration that should not be recorded as revenue as certain amounts are not expected to be collected from customers, as well as an estimate of the value of the product to be returned. The Company principally relies on historical experience, specific customer agreements and anticipated future trends to estimate these amounts at the time of shipment and to reduce the transaction price. These arrangements include sales discounts and allowances based on sales volumes, specific programs and special pricing allowances, and returned goods, as are customary in the electrical products industry. Customer returns have historically ranged from 1%-2% of gross sales.
Inventory Valuation
Inventories in the U.S. are primarily valued at the lower of LIFO cost or market, while non-U.S. inventories are valued at the lower of FIFO cost or market. We routinely evaluate the carrying value of our inventories to ensure they are carried at the lower of LIFO or FIFO cost or market value. Such evaluation is based on our judgment and use of estimates, including sales forecasts, gross margins for particular product groupings, planned dispositions of product lines, technological events and overall industry trends. In addition, the evaluation is based on changes in inventory management practices which may influence the timing of exiting products and method of disposing of excess inventory.
Excess inventory is generally identified by comparing future expected inventory usage to actual on-hand quantities. Inventory values are reduced for on-hand inventory in excess of pre-defined usage forecasts. Forecast usage is primarily determined by projecting historical (actual) sales and inventory usage levels forward to future periods. Changes in these estimates may necessitate future adjustments to inventory values.
Customer Credit and Collections
We maintain allowances for doubtful accounts receivable in order to reflect the potential uncollectability of receivables related to purchases of products on open credit. If the financial condition of our customers were to deteriorate, resulting in their inability to make required payments, we may be required to record additional allowances for doubtful accounts.
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HUBBELL INCORPORATED- Form 10-K | 37 |
Accrued Insurance
We retain a significant portion of the risks associated with workers’ compensation, medical, automobile and general liability insurance. We estimate self-insurance liabilities using a number of factors, including historical claims experience, demographic factors, severity factors and other actuarial assumptions. The accrued liabilities associated with these programs are based on our estimates of ultimate costs to settle known claims as well as claims incurred but not reported as of the balance sheet date. These assumptions are periodically reviewed with a third-party actuary to determine the adequacy of these self-insurance reserves. Changes in these assumptions may necessitate future adjustments to these self-insurance liabilities.
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HUBBELL INCORPORATED- Form 10-K
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Employee Benefits Costs and Funding
We sponsor domestic and foreign defined benefit pension, defined contribution and other postretirement plans. MajorSignificant assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on the pension fund assets, rate of increase in employee compensation levels and health care cost increase projections. These assumptions are determined based on Company data and appropriate market indicators, and are evaluated each year as of the plans’ measurement dates. Further discussion of the assumptions used in 20182020 and 20172019 are included above under “Pension Funding Status” and in Note 11 — Retirement Benefits in the Notes to Consolidated Financial Statements.
Taxes
We account for income taxes in accordance with the applicable accounting guidance which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. Additionally, deferred tax assets are required to be reduced by a valuation allowance if it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. The factors used to assess the likelihood of realization of deferred tax assets are the forecast of future taxable income, available tax planning strategies that could be implemented to realize the net deferred tax assets, and future reversals of deferred tax liabilities. Failure to achieve forecasted taxable income can affect the ultimate realization of net deferred tax assets.
We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. The Internal Revenue Service (“IRS”) and other tax authorities routinely review our tax returns. These audits can involve complex issues, which may require an extended period of time to resolve. The Company records uncertain tax positions when it has determined that it is more-likely-than-not that a tax position will not be sustained upon examination by taxing authorities based on the technical merits of the position. The Company uses the criteria established in the accounting guidance to determine whether an item meets the definition of more-likely-than-not. The Company’s policy is to recognize these uncertain tax positions when the more-likely-than-not threshold is met, when the statute of limitations has expired or upon settlement. In management’s opinion, adequate provision has been made for potential adjustments arising from any examinations. See Note 1 — Significant Accounting Policies and Note 13 — Income Taxes in the Notes to Consolidated Financial Statements.
Contingent Liabilities
We are subject to proceedings, lawsuits, and other claims or uncertainties related to environmental, legal, product and other matters. We routinely assess the likelihood of an adverse judgment or outcome to these matters, as well as the range of potential losses. We record a liability when it is both probable that a liability has been incurred and the amount can be reasonably estimated. A determination of the reserves required, if any, is made after careful analysis, including consultations with outside advisors, where applicable. Where no amount within a range of estimates is more likely, the minimum is accrued. The required reserves may change in the future due to new developments.
Warranty
The Company offers product warranties that cover defects on most of its products. These warranties primarily apply to products that are properly installed, maintained and used for their intended purpose. The Company accrues estimated warranty costs at the time of sale. Estimated warranty expenses, recorded in cost of goods sold, are based upon historical information such as past experience, product failure rates, or the estimated number of units to be repaired or replaced. Adjustments are made to the product warranty accrual as claims are incurred, additional information becomes known or as historical experience indicates.
Valuation of Long-Lived Assets
Our long-lived assets include land, buildings, equipment, molds and dies, software, goodwill and other intangible assets. Long-lived assets, other than land, goodwill and indefinite-lived intangibles, are depreciated over their estimated useful lives. The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the dates of acquisition. Goodwill represents purchase price in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets primarily consist of patents, tradenames, developed technology and customer related intangibles.
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| 38 | HUBBELL INCORPORATED - Form 10-K |
We review depreciable long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. If such a change in circumstances occurs, the related estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition is compared to the carrying amount. If the sum of the expected cash flows of the asset group is less than the carrying amount, an impairment charge is recorded. The impairment charge is measured as the amount by which the carrying amount exceeds the fair value of the asset. The fair value of impaired assets is determined using expected cash flow estimates, quoted market prices when available and appraisals as appropriate. We did not record any material impairment charges related to long-lived assets in 2018, 2017,2020, 2019, or 2016.2018.
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34 | HUBBELL INCORPORATED - Form 10-K
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Goodwill and indefinite-lived intangible assets are reviewed annually for impairment unless circumstances dictate the need for more frequent assessment. We perform our goodwill impairment testing as of April 1st of each year unless circumstances dictate the need for more frequent assessments. The accounting guidance provides entities an option of performing a qualitative assessment before performing a quantitative analysis. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the goodwill is not impaired, the entity would not need to proceed to the two stepquantitative goodwill impairment testing process as prescribed in the guidance. The Company performed a qualitative assessment for sixfour of its sevensix reporting units. The Company elected to bypass the qualitative assessment and proceeded directly to the quantitative analysis for its remaining reporting unit. units.
The goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future discounted cash flows, determining appropriate discount rates and other assumptions.assumptions, including assumptions about secular economic and market conditions, such as the potential continuing effects of the COVID-19 pandemic. We use internal discounted cash flow estimatesmodels to determineestimate fair value. These cash flow estimates are derived from historical experience, third-party end market data, and future long-term business plans and include assumptions of future sales growth, gross margin, operating margin, terminal growth rate, and the application of an appropriate discount rate. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. As of April 1, 2018,2020, our goodwill testing resulted in fair values for each reporting unit that substantially exceeded the reporting unit’s carrying value. We have not recorded any goodwill impairments since the initial adoption of the accounting guidance in 2002.
The identification and measurement of impairment of indefinite-lived intangible assets involves an assessment of qualitative factors to determine whether events or circumstances indicate that it is more-likely-than-not that an indefinite-lived intangible asset is impaired. If it is more-likely-than-not that the asset is impaired, the fair value of the indefinite lived intangibles will be determined using discounted cash flow estimates. If the carrying value of these assets exceeds the estimated fair value, the carrying value will be reduced to the estimated fair value. We did not record any impairments related to indefinite-lived intangible assets in 2018, 2017,2020, 2019, or 2016.2018.
Stock-Based Compensation
We determine the grant date fair value of certain stock-based compensation awards using either a lattice model or the Black-Scholes option pricing model. Both of these models require management to make certain assumptions with respect to selected model inputs. These inputs include assumptions for the expected term, stock volatility, dividend yield and risk-free interest rate. Changes in these inputs impact fair value and could impact our stock-based compensation expense in the future. In addition, we are required to estimate the expected forfeiture rate and recognize expense only for those awards expected to meet the service and performance vesting conditions. If our actual forfeiture rate is different from our estimate, adjustments to stock-based compensation expense may be required. See also Note 17 — Stock-Based Compensation in the Notes to Consolidated Financial Statements.
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HUBBELL INCORPORATED- Form 10-K | 39 |
Forward-Looking Statements
Some of the information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Form 10-K, contain “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. These include statements about our expected capital resources, liquidity, financial performance, pension funding, and results of operations and are based on our reasonable current expectations. In addition, all statements regarding the expected financial impact of the integration of Aclara,acquisitions, adoption of updated accounting standards and any expected effects of such adoption, restructuring plans and expected associated costs and benefits, intent to repurchase shares of Common Stock, and change in operating results, anticipated market conditions and productivity initiatives are forward looking. Forward-looking statements may be identified by the use of words, such as “believe”, “expect”, “anticipate”, “intend”, “depend”, “should”, “plan”, “estimated”, “predict”, “could”, “may”, “subject to”, “continues”, “growing”, “prospective”, “forecast”, “projected”, “purport”, “might”, “if”, “contemplate”, “potential”, “pending,” “target”, “goals”, “scheduled”, “will likely be”, and similar words and phrases. Discussions of strategies, plans or intentions often contain forward-looking statements. Important factors, among others, that could cause our actual results and future actions to differ materially from those described in forward-looking statements include, but are not limited to:
•The scope and duration of the novel coronavirus, or COVID-19, global pandemic and its impact on global economic systems, our employees, sites, operations, customers, and supply chain.
•Changes in demand for our products, market conditions, product quality, or product availability adversely affecting sales levels.
•Ability to effectively develop and introduce new products.
•Changes in markets or competition adversely affecting realization of price increases.
•Failure to achieve projected levels of efficiencies, cost savings and cost reduction measures, including those expected as a result of our lean initiativeinitiatives and strategic sourcing plans.
The expected benefits and the timing of other actions in connection with our Enterprise Resource Planning ("ERP") system.
The ability to effectively implement ERP systems without disrupting operational and financial processes.
Availability and costs of raw materials, purchased components, energy and freight.
Changes in expected or future levels of operating cash flow, indebtedness and capital spending.
General economic and business conditions in particular industries, markets or geographic regions, as well as inflationary trends.
•Impacts of trade tariffs, import quotas or other trade restrictions or measures taken by the U.S., U.K., and other countries.countries, including the recent and potential changes in U.S. trade policies.
•Failure to comply with import and export laws.
•Availability, costs, and quantity of raw materials, purchased components, energy and freight.
•Changes relating to impairment of our goodwill and other intangible assets.
•Inability to access capital markets or failure to maintain our credit ratings.
•Changes in expected or future levels of operating cash flow, indebtedness and capital spending.
•General economic and business conditions in particular industries, markets or geographic regions, as well as inflationary trends.
•Regulatory issues, changes in tax laws including revisions or clarifications of the TCJA, or changes in geographic profit mix affecting tax rates and availability of tax incentives.
•A major disruption in one or more of our manufacturing or distribution facilities or headquarters, including the impact of plant consolidations and relocations.
•Changes in our relationships with, or the financial condition or performance of, key distributors and other customers, agents or business partners which could adversely affect our results of operations.
•Impact of productivity improvements on lead times, quality and delivery of product.
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HUBBELL INCORPORATED- Form 10-K
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•Anticipated future contributions and assumptions including changes in interest rates and plan assets with respect to pensions.pensions and other retirement benefits, as well as pension withdrawal liabilities.
•Adjustments to product warranty accruals in response to claims incurred, historical experiences and known costs.
•Unexpected costs or charges, certain of which might be outside of our control.
•Changes in strategy, economic conditions or other conditions outside of our control affecting anticipated future global product sourcing levels.
•Ability to carry out future acquisitions and strategic investments in our core businesses as well as the acquisition related costs.
•Ability to successfully execute, manage and integrate key acquisitions, mergers, and mergers, including the Aclara acquisition.
Unanticipated difficulties integrating acquisitionsother transactions, as well as the realization offailure to realize expected synergies and benefits anticipated when we first enter into a transaction.make an acquisition.
•The ability to effectively implement Enterprise Resource Planning systems without disrupting operational and financial processes.
•The ability of governmentsgovernment customers to meet their financial obligations.
•Political unrest in foreign countries.
•The impact of Brexit and other world economic and political issues.
Natural disasters.•The impact of natural disasters or public health emergencies, such as the COVID-19 global pandemic, on our financial condition and results of operations.
•Failure of information technology systems, or security breaches, cyber threats, malware, phishing attacks, break-ins and similar events resulting in unauthorized disclosure of confidential information.
information or disruptions or damage to information technology systems that could cause interruptions to our operations or adversely affect our internal control over financial reporting.•Incurring significant and/or unexpected costs to avoid manage, defend and litigate intellectual property matters.
Future revisions to or clarifications of the TCJA.
•Future repurchases of common stock under our common stock repurchase program.
•Changes in accounting principles, interpretations, or estimates.
•Failure to comply with any laws and regulations, including those related to data privacy and information security, environmental and conflict-free minerals.
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| 40 | HUBBELL INCORPORATED - Form 10-K |
•The outcome of environmental, legal and tax contingencies or costs compared to amounts provided for such contingencies.contingencies, including contingencies or costs with respect to pension withdrawal liabilities.
•Improper conduct by any of our employees, agents or business partners that damages our reputation or subjects us to civil or criminal liability.
•Our ability to hire, retain and develop qualified personnel.
•Adverse changes in foreign currency exchange rates and the potential use of hedging instruments to hedge the exposure to fluctuating rates of foreign currency exchange on inventory purchases.
•Transitioning from LIBOR to a replacement alternative reference rate.
•Other factors described in our Securities and Exchange Commission filings, including the “Business”, “Risk Factors” and “Quantitative and Qualitative Disclosures about Market Risk” sections in thisthe Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2020.
Any such forward-looking statements are not guarantees of future performances and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements. The Company disclaims any duty to update any forward-looking statement, all of which are expressly qualified by the foregoing, other than as required by law.
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk
In the operation of our business, we have various exposures to areas of risk related to factors within and outside the control of management. Significant areas of risk and our strategies to manage the exposure are discussed below.
In 2018,2020, we manufactured and/or assembled products in the United States, Canada, Switzerland, Puerto Rico, Mexico, China, the UK, Brazil, Spain and Australia and sold products in those markets as well as through offices in Singapore, Italy, China, Mexico, and South Korea and countries in the Middle East. In 2018,2020, Hubbell also participated in joint ventures in Taiwan, Hong Kong and the Philippines. Shipments to third party customers from non-U.S. subsidiaries asAs a percentage of the Company’s total net sales, shipments from foreign operations directly to third parties were 8% in 2020, 9% in 2019 and 10% in 2018, 11% in 2017 and 10% in 2016, with the UKCanadian and CanadianUK operations representing approximately 33%approximately 34% and27%28%, respectively, of 20182020 total internationalinternational net sales. As such, our operating results could be affected by changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we sell our products. To manage this exposure, we closely monitor the working capital requirements of our international units and may enter into forward foreign exchange contracts. Further discussion of forward exchange contracts can be found in Note 14 — Financial Instruments and Fair Value Measurement in the Notes to Consolidated Financial Statements.
Product purchases representing approximately 20% of our net sales are sourced from unaffiliated suppliers located outside the United States, primarily in China and other Asian countries, Europe and Brazil. Foreign sourcing of products may result in unexpected fluctuations in product cost or increased risk of business interruption due to lack of product or component availability due to any one of the following:
•Political or economic uncertainty in the source country
•Fluctuations in the rate of exchange between the U.S. dollar and the currencies of the source countries
•Changes in U.S. laws and policies governing foreign trade
•Increased logistical complexity including supply chain interruption or delay, port of departure or entry disruption and overall time to market
•Loss of proprietary information
•Product quality issues outside the control of the Company
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36 | HUBBELL INCORPORATED - Form 10-K
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We have developed plans that address many of these risks. Such actions include careful selection of products to be outsourced and the suppliers selected; ensuring multiple sources of supply; limiting concentrations of activity by port, broker, freight forwarder, etc.; processes related to quality control; and maintaining control over operations, technologies and manufacturing deemed to provide competitive advantage. Many of our businesses have a dependency on certain basic raw materials needed to produce their products including steel, aluminum, brass, copper, bronze, zinc, nickel, plastics, phenols, elastomers and petrochemicals as well as purchased electrical and electronic components. Our financial results could be affected by the availability and changes in prices of these materials and components.
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HUBBELL INCORPORATED- Form 10-K | 41 |
Certain of these materials are sourced from a limited number of suppliers. These materials are also key source materials for many other companies in our industry and within the universe of industrial manufacturers in general. As such, in periods of rising demand for these materials, we may experience both increased costs and/or limited supply. These conditions can potentially result in our inability to acquire these key materials on a timely basis to produce our products and satisfy our incoming sales orders. Similarly, the cost of these materials can rise suddenly and result in materially higher costs of producing our products. We believe we have adequate primary and secondary sources of supply for each of our key materials and that, in periods of rising prices, we expect to recover a majority of the increased cost in the form of higher selling prices. However, recoveries typically lag the effect of cost increases due to the nature of our markets.
Our financial results are subject to interest rate fluctuations to the extent there is a difference between the amount of our interest-earning assets and the amount of interest-bearing liabilities. The principal objectives of our investment management activities are to preserve capital while earning net investment income that is commensurate with acceptable levels of interest rate, default and liquidity risk taking into account our funding needs. As part of our investment management strategy, we may use derivative financial products such as interest rate hedges and interest rate swaps.
From time to time or when required, we issue commercial paper, which exposes us to changes in interest rates. Our cash position includes amounts denominated in foreign currencies. We manage our worldwide cash requirements by considering available funds held by our subsidiaries and the cost effectiveness with which these funds can be accessed.
Our long term debt portfolio is comprised of fixed-rate senior notes and a term loan with an interest rate based on either adjusted LIBOR plus an applicable margin (determined by a ratings based grid) or the alternate base rate. As of December 31, 2018,2020, the long-term debt outstanding related to the fixed-rate senior notes and term loan was $1,450.0 million and $331.3 million, respectively.million. The senior notes are not exposed to interest rate risk as the bonds are at a fixed-rate until maturity.
We continually evaluate risk retention and insurance levels for product liability, property damage and other potential exposures to risk. We devote significant effort to maintaining and improving safety and internal control programs, which are intended to reduce our exposure to certain risks. We determine the level of insurance coverage and the likelihood of a loss and believe that the current levels of risk retention are consistent with those of comparable companies in the industries in which we operate. There can be no assurance that we will not incur losses beyond the limits of our insurance. However, our liquidity, financial position and profitability are not expected to be materially affected by the levels of risk retention that we accept.
The following table presents cost and weighted average interest rate information related to financial instruments that are sensitive to changes in interest rates, by maturity at December 31, 20182020 (dollars in millions):
| | | | 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total | Fair Value 12/31/18 |
| | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | Fair Value
12/31/20 |
| ASSETS | |
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| ASSETS | |
| Available-for-sale investments | $ | 9.2 |
| $ | 12.6 |
| $ | 3.4 |
| $ | 3.3 |
| $ | 4.6 |
| $ | 15.8 |
| $ | 48.9 |
| $ | 48.9 |
| Available-for-sale investments | $ | 9.3 | | $ | 9.7 | | $ | 13.3 | | $ | 10.3 | | $ | 4.6 | | $ | 9.2 | | $ | 56.4 | | $ | 57.7 | |
| Avg. interest rate | 4.60 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 4.60 | % | |
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| Avg. interest rate | 4.32 | % | 4.30 | % | 4.11 | % | 3.90 | % | 3.80 | % | 3.16 | % | |
| LIABILITIES | |
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| LIABILITIES | |
| Senior Notes | $ | — |
| $ | — |
| $ | — |
| $ | 300.0 |
| $ | — |
| $ | 1,150.0 |
| $ | 1,450.0 |
| $ | 1,369.3 |
| Senior Notes | $ | — | | $ | 300.0 | | $ | — | | $ | — | | $ | — | | $ | 1,150.0 | | $ | 1,450.0 | | $ | 1,569.5 | |
| Avg. interest rate | — |
| — |
| — |
| 3.63 | % | — |
| 3.36 | % | | |
| Avg. interest rate | — | | 3.63 | % | — | | — | | — | | 3.36 | % | | |
| | | |
| Term Loan | $ | 25.0 |
| $ | 34.4 |
| $ | 46.9 |
| $ | 50.0 |
| $ | 175.0 |
| $ | — |
| $ | 331.3 |
| $ | 318.8 |
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| Avg. interest rate | 3.44 | % | 3.44 | % | 3.44 | % | 3.44 | % | 3.44 | % | — |
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We use derivative financial instruments only if they are matched with a specific asset, liability, or proposed future transaction. We do not speculate or use leverage when trading a financial derivative product.
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| 42 | HUBBELL INCORPORATED- Form 10-K | 37 |
ITEM 8 Financial Statements and Supplementary Data
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| Financial Statement Schedule | |
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All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
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38 | HUBBELL INCORPORATED- Form 10-K | 43 |
Reports of Management
Report on Management’s Responsibility for Financial Statements
Our management is responsible for the preparation, integrity and fair presentation of our published financial statements. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on informed judgments made by management.
We believe it is critical to provide investors and other users of our financial statements with information that is relevant, objective, understandable and timely, so that they can make informed decisions. As a result, we have established and maintain systems and practices and internal control processes designed to provide reasonable, but not absolute, assurance that transactions are properly executed and recorded and that our policies and procedures are carried out appropriately. Management strives to recruit, train and retain high quality people to ensure that controls are designed, implemented and maintained in a high-quality, reliable manner.
Our independent registered public accounting firm audited our financial statements and the effectiveness of our internal control over financial reporting in accordance with standards established by the Public Company Accounting Oversight Board (United States). Their report appears on the next page within this Annual Report on Form 10-K.
Our Board of Directors normally meets tenat least nine times per year to provide oversight, to review corporate strategies and operations, and to assess management’s conduct of the business. The Board of Directors also schedules additional meetings on an as needed basis. The Audit Committee of our Board of Directors is composed of at least three individuals all of whom must be “independent” under current New York Stock Exchange listing standards and regulations adopted by the SEC under the federal securities laws. The Audit Committee meets regularly with our internal auditors and independent registered public accounting firm, as well as, management to review, among other matters, accounting, auditing, internal controls and financial reporting issues and practices. Both the internal auditors and independent registered public accounting firm have full, unlimited access to the Audit Committee.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate systems of internal control over financial reporting as defined by Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2020.
In February 2018,During the quarter ended December 31, 2020, the Company acquired AclaraArmorcast Products Company, Inc., Beckwith Electric Co., Inc., and AccelTex Solutions, LLC for approximately $1.1 billion.an aggregate of $236.2 million. Because the Company has not yet fully incorporated the internal controls and procedures of Aclarathe acquired entities into the Company's internal control over financial reporting, management excluded thisthese business from its assessment of the effectiveness of internal control over financial reporting as of December 31, 2018. Aclara2020. These entities accounted for 13%3% of the
Company's total assets excluding intangibles and goodwill as of December 31, 20182020 and 14%less than 1% of the Company's net sales for the year then ended.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In
making this assessment, management used the criteria set forth in Internal Control-Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management concluded that our internal control over financial reporting was effective at a reasonable assurance level as of December 31, 2018.2020.
The effectiveness of our internal control over financial reporting as of December 31, 20182020 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm as stated in their report which is included below within this Annual Report on Form 10-K.
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/s/ DAVID G. NORDGERBEN W. BAKKER | | /s/ WILLIAM R. SPERRY |
David G. NordGerben W. Bakker | | William R. Sperry |
Chairman of the Board, President and Chief Executive Officer and Director | | SeniorExecutive Vice President and Chief Financial Officer |
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| 44 | HUBBELL INCORPORATED- Form 10-K | 39 |
Report of Independent Registered Public Accounting Firm
Tothe Board of Directors and Shareholders of Hubbell Incorporated
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheetssheet of Hubbell Incorporated and its subsidiaries (the "Company") as of December 31, 20182020 and 2017,2019, and the related consolidated statements of income, of comprehensive income, of changes in shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2018,2020, including the related notes and schedule of valuation and qualifying accounts and reserves for each of the three years in the period ended December 31, 20182020 appearing under Item 15 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20182020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded Meter Readings Holding Group,Armorcast Products Company, Inc. (“Armorcast”), Beckwith Electric Co., Inc., (“Beckwith”) and AccelTex Solutions, LLC (“Aclara”AccelTex”) from its assessment of internal control over financial reporting as of December 31, 20182020 because it wasthey were acquired by the Company in a purchase business combinationcombinations during 2018.2020. We have also excluded AclaraArmorcast, Beckwith and AccelTex from our audit of internal control over financial reporting. Aclara is aArmorcast, Beckwith and AccelTex are wholly-owned subsidiarysubsidiaries whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting collectively represent 13%approximately 3% and 14%1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.2020.
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HUBBELL INCORPORATED- Form 10-K | 45 |
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment - One of the Reporting Units Subject to a Quantitative Analysis
As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1,923.3 million as of December 31, 2020. Goodwill represents purchase price in excess of fair values of the underlying net assets of acquired companies. Goodwill is subject to annual impairment testing. Management performs its goodwill impairment testing as of April 1st of each year, unless circumstances dictate the need for more frequent assessments. For three of its reporting units, management has elected to utilize the quantitative goodwill impairment testing process as permitted in the accounting guidance, by comparing the fair value of the Company's reporting units to their carrying values. If the fair value of the reporting unit exceeds its carrying value, no impairment exists. Goodwill impairment testing requires judgment by management, including the identification of reporting units, assigning assets and liabilities to reporting units and determining the fair value of each reporting unit. Management uses internal discounted cash flow models to estimate fair value. Significant judgments required by management to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions, including assumptions about secular economic and market conditions, such as the potential continuing effects of the COVID-19 pandemic. These cash flow estimates are derived from historical experience, third party end market data, and future long-term business plans and include assumptions on future sales growth, gross margin, operating margin, terminal growth rate and the application of an appropriate discount rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for one of the reporting units subject to a quantitative analysis is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to future sales growth, gross margin, operating margin and discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s quantitative goodwill impairment assessment, including controls over the determination of the fair value of the reporting unit. These procedures also included, among others, (i) testing management’s process for developing the fair value estimate; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness and accuracy of the underlying data used in the model; and (iv) evaluating the significant assumptions used by management related to future sales growth, gross margin, operating margin and discount rate. Evaluating management’s assumptions related to the future sales growth, gross margin and operating margin involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with industry and third party data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discount rate.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 15, 201911, 2021
We have served as the Company's auditor since at least 1961. We have not been able to determine the specific year we began serving as auditor of the Company.
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4046 | HUBBELL INCORPORATED - Form 10-K |
Consolidated Statement of Income
| | | | Year Ended December 31, | | Year Ended December 31, |
| (in millions, except per share amounts) | 2018 |
| 2017 |
| 2016 |
| (in millions, except per share amounts) | 2020 | 2019 | 2018 |
| Net sales | $ | 4,481.7 |
| $ | 3,668.8 |
| $ | 3,505.2 |
| Net sales | $ | 4,186.0 | | $ | 4,591.0 | | $ | 4,481.7 | |
| Cost of goods sold | 3,181.3 |
| 2,513.7 |
| 2,400.1 |
| Cost of goods sold | 2,976.7 | | 3,238.3 | | 3,181.3 | |
| Gross profit | 1,300.4 |
| 1,155.1 |
| 1,105.1 |
| Gross profit | 1,209.3 | | 1,352.7 | | 1,300.4 | |
| Selling & administrative expenses | 743.5 |
| 636.3 |
| 615.3 |
| Selling & administrative expenses | 676.3 | | 756.1 | | 743.5 | |
| Operating income | 556.9 |
| 518.8 |
| 489.8 |
| Operating income | 533.0 | | 596.6 | | 556.9 | |
| Gain on disposition of business (Note 3) | | Gain on disposition of business (Note 3) | 0 | | 21.7 | | 0 | |
| Pension charge (Note 11 & 15) | | Pension charge (Note 11 & 15) | (7.6) | | (8.5) | | 0 | |
| Interest expense | (72.4 | ) | (44.9 | ) | (43.4 | ) | Interest expense | (60.3) | | (69.4) | | (72.4) | |
| Investment income | 0.1 |
| 0.9 |
| 0.5 |
| Investment income | 0 | | 1.5 | | 0.1 | |
| Loss on extinguishment of debt | — |
| (10.1 | ) | — |
| |
| | Other expense, net | (17.6 | ) | (21.6 | ) | (16.5 | ) | Other expense, net | (11.6) | | (21.4) | | (17.6) | |
| Total other expense | (89.9 | ) | (75.7 | ) | (59.4 | ) | Total other expense | (79.5) | | (76.1) | | (89.9) | |
| Income before income taxes | 467.0 |
| 443.1 |
| 430.4 |
| Income before income taxes | 453.5 | | 520.5 | | 467.0 | |
| Provision for income taxes | 100.9 |
| 193.2 |
| 132.6 |
| Provision for income taxes | 97.5 | | 113.1 | | 100.9 | |
| Net income | 366.1 |
| 249.9 |
| 297.8 |
| Net income | 356.0 | | 407.4 | | 366.1 | |
| Less: Net income attributable to noncontrolling interest | 5.9 |
| 6.8 |
| 4.8 |
| Less: Net income attributable to noncontrolling interest | 4.8 | | 6.5 | | 5.9 | |
| NET INCOME ATTRIBUTABLE TO HUBBELL | $ | 360.2 |
| $ | 243.1 |
| $ | 293.0 |
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| NET INCOME ATTRIBUTABLE TO HUBBELL INCORPORATED | | NET INCOME ATTRIBUTABLE TO HUBBELL INCORPORATED | $ | 351.2 | | $ | 400.9 | | $ | 360.2 | |
| Earnings per share | |
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| |
| Earnings per share | | |
| Basic | $ | 6.57 |
| $ | 4.42 |
| $ | 5.26 |
| Basic | $ | 6.46 | | $ | 7.35 | | $ | 6.57 | |
| Diluted | $ | 6.54 |
| $ | 4.39 |
| $ | 5.24 |
| Diluted | $ | 6.43 | | $ | 7.31 | | $ | 6.54 | |
See notes to consolidated financial statements.
Consolidated Statement of Comprehensive Income
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2020 | 2019 | 2018 |
| Net income | $ | 356.0 | | $ | 407.4 | | $ | 366.1 | |
| Other comprehensive income (loss): | | | |
| Currency translation adjustment: | | | |
| Foreign currency translation adjustments | 12.3 | | 3.7 | | (33.9) | |
| Reclassification of currency translation gains included in net income | 0 | | (7.7) | | 0 | |
| Defined benefit pension and post-retirement plans, net of taxes of $2.9, $5.3 and $(6.3) | (8.8) | | (14.5) | | 17.8 | |
| Unrealized gain (loss) on investments, net of taxes of $(0.1), $(0.2) and $0.4 | 0.4 | | 2.6 | | (1.4) | |
| Unrealized gains (losses) on cash flow hedges, net of taxes of $0.1, $0.5 and $(0.5) | (0.2) | | (1.3) | | 1.6 | |
| Other comprehensive income (loss) | 3.7 | | (17.2) | | (15.9) | |
| Comprehensive income | 359.7 | | 390.2 | | 350.2 | |
| Less: Comprehensive income attributable to noncontrolling interest | 4.8 | | 6.5 | | 5.9 | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO HUBBELL | $ | 354.9 | | $ | 383.7 | | $ | 344.3 | |
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 |
| 2017 |
| 2016 |
|
| Net income | $ | 366.1 |
| $ | 249.9 |
| $ | 297.8 |
|
| Other comprehensive income (loss): | |
| |
| |
|
| Foreign currency translation adjustments | (33.9 | ) | 28.9 |
| (35.4 | ) |
| Defined benefit pension and post-retirement plans, net of taxes of ($6.3), ($1.0) and $18.9 | 17.8 |
| 4.0 |
| (40.3 | ) |
| Unrealized gain (loss) on investments, net of taxes of $0.4, ($0.2) and $0.1 | (1.4 | ) | 0.6 |
| (1.2 | ) |
| Unrealized gains (losses) on cash flow hedges, net of taxes of ($0.5), $0.4 and $0.5 | 1.6 |
| (0.8 | ) | (1.4 | ) |
| Other comprehensive income (loss) | (15.9 | ) | 32.7 |
| (78.3 | ) |
| Comprehensive income | 350.2 |
| 282.6 |
| 219.5 |
|
| Less: Comprehensive income attributable to noncontrolling interest | 5.9 |
| 6.8 |
| 4.8 |
|
| COMPREHENSIVE INCOME ATTRIBUTABLE TO HUBBELL | $ | 344.3 |
| $ | 275.8 |
| $ | 214.7 |
|
See notes to consolidated financial statements.
|
| | | | |
HUBBELL INCORPORATED- Form 10-K | 4147 |
Consolidated Balance Sheet
| | | | | | | | |
| At December 31, |
| (in millions, except per share amounts) | 2020 | 2019 |
| ASSETS | | |
| Current Assets | | |
| Cash and cash equivalents | $ | 259.6 | | $ | 182.0 | |
| Short-term investments | 9.3 | | 14.2 | |
| Accounts receivable (net of allowances of $12.5 and $7.7) | 634.7 | | 683.0 | |
| Inventories, net | 607.3 | | 633.0 | |
| Other current assets | 76.7 | | 62.0 | |
| Total Current Assets | 1,587.6 | | 1,574.2 | |
| Property, Plant, and Equipment, net | 519.2 | | 505.2 | |
| Other Assets | | |
| Investments | 71.1 | | 55.7 | |
| Goodwill | 1,923.3 | | 1,811.8 | |
| Other Intangible assets, net | 810.6 | | 781.5 | |
| Other long-term assets | 173.3 | | 174.6 | |
| TOTAL ASSETS | $ | 5,085.1 | | $ | 4,903.0 | |
| LIABILITIES AND EQUITY | | |
| Current Liabilities | | |
| Short-term debt and current portion of long-term debt | $ | 153.1 | | $ | 65.4 | |
| Accounts payable | 378.0 | | 347.7 | |
| Accrued salaries, wages and employee benefits | 91.5 | | 101.5 | |
| Accrued insurance | 71.6 | | 68.1 | |
| Other accrued liabilities | 254.0 | | 262.2 | |
| Total Current Liabilities | 948.2 | | 844.9 | |
| Long-term Debt | 1,436.9 | | 1,506.0 | |
| Other Non-Current Liabilities | 614.6 | | 591.6 | |
| TOTAL LIABILITIES | 2,999.7 | | 2,942.5 | |
| Commitments and Contingencies (see Note 15) | 0 | 0 |
| Hubbell Incorporated Shareholders’ Equity | | |
| Common stock, par value $0.01 | | |
Common stock - Authorized 200,000,000 shares, outstanding 54,382,659 and 54,514,172 shares | $ | 0.6 | | $ | 0.6 | |
| Additional paid-in capital | 4.9 | | 0 | |
| Retained earnings | 2,393.7 | | 2,279.4 | |
| Accumulated other comprehensive loss | (329.2) | | (332.9) | |
| Total Hubbell Incorporated Shareholders’ Equity | 2,070.0 | | 1,947.1 | |
| Noncontrolling interest | 15.4 | | 13.4 | |
| TOTAL EQUITY | 2,085.4 | | 1,960.5 | |
| TOTAL LIABILITIES AND EQUITY | $ | 5,085.1 | | $ | 4,903.0 | |
|
| | | | | | |
| | At December 31, |
| (in millions, except per share amounts) | 2018 |
| 2017 |
|
| ASSETS | |
| |
|
| Current Assets | |
| |
|
| Cash and cash equivalents | $ | 189.0 |
| $ | 375.0 |
|
| Short-term investments | 9.2 |
| 14.5 |
|
| Accounts receivable, net | 725.4 |
| 540.3 |
|
| Inventories, net | 651.0 |
| 634.7 |
|
| Other current assets | 69.1 |
| 39.6 |
|
| Total Current Assets | 1,643.7 |
| 1,604.1 |
|
| Property, Plant, and Equipment, net | 502.1 |
| 458.3 |
|
| Other Assets | |
| |
|
| Investments | 56.3 |
| 57.7 |
|
| Goodwill | 1,784.4 |
| 1,089.0 |
|
| Intangible assets, net | 819.5 |
| 460.4 |
|
| Other long-term assets | 66.1 |
| 51.1 |
|
| TOTAL ASSETS | $ | 4,872.1 |
| $ | 3,720.6 |
|
| LIABILITIES AND EQUITY | |
| |
|
| Current Liabilities | |
| |
|
| Short-term debt | $ | 56.1 |
| $ | 68.1 |
|
| Accounts payable | 393.7 |
| 326.5 |
|
| Accrued salaries, wages and employee benefits | 101.6 |
| 76.6 |
|
| Accrued insurance | 61.3 |
| 60.0 |
|
| Other accrued liabilities | 226.6 |
| 174.9 |
|
| Total Current Liabilities | 839.3 |
| 706.1 |
|
| Long-term Debt | 1,737.1 |
| 987.1 |
|
| Other Non-Current Liabilities | 496.8 |
| 379.5 |
|
| TOTAL LIABILITIES | 3,073.2 |
| 2,072.7 |
|
| Commitments and Contingencies (see Note 15) |
|
|
|
|
| Hubbell Shareholders’ Equity | |
| |
|
| Common stock, par value $.01 | |
| |
|
Common Stock - Authorized 200,000,000 shares, outstanding 54,715,188 and 54,882,154 shares | $ | 0.6 |
| $ | 0.6 |
|
| Additional paid-in capital | 1.3 |
| 11.0 |
|
| Retained earnings | 2,064.4 |
| 1,892.4 |
|
| Accumulated other comprehensive loss | (285.7 | ) | (269.8 | ) |
| Total Hubbell Shareholders’ Equity | 1,780.6 |
| 1,634.2 |
|
| Noncontrolling interest | 18.3 |
| 13.7 |
|
| TOTAL EQUITY | 1,798.9 |
| 1,647.9 |
|
| TOTAL LIABILITIES AND EQUITY | $ | 4,872.1 |
| $ | 3,720.6 |
|
See notes to consolidated financial statements.
|
| | | | |
4248 | HUBBELL INCORPORATED - Form 10-K |
Consolidated Statement of Cash Flows
| | | | Year Ended December 31, | | Year Ended December 31, |
| (in millions) | 2018 |
| 2017 |
| 2016 |
| (in millions) | 2020 | 2019 | 2018 |
| Cash Flows from Operating Activities | |
| |
| |
| Cash Flows from Operating Activities | | |
| Net income | $ | 366.1 |
| $ | 249.9 |
| $ | 297.8 |
| Net income | $ | 356.0 | | $ | 407.4 | | $ | 366.1 | |
| Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: |
|
|
|
|
|
| Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: | | |
| Depreciation and amortization | 148.4 |
| 98.2 |
| 90.9 |
| Depreciation and amortization | 157.6 | | 151.0 | | 148.4 | |
| Deferred income taxes | 49.0 |
| (14.3 | ) | 12.7 |
| Deferred income taxes | 3.3 | | 6.1 | | 49.0 | |
| Stock-based compensation | 24.2 |
| 22.3 |
| 22.3 |
| Stock-based compensation | 23.9 | | 16.4 | | 24.2 | |
| Loss on extinguishment of debt | — |
| 10.1 |
| — |
| |
| Provision for bad debt expense | | Provision for bad debt expense | 6.7 | | 1.7 | | 0 | |
| Gain on disposition of business | | Gain on disposition of business | 0 | | (21.7) | | 0 | |
| Pension charge | | Pension charge | 7.6 | | 8.5 | | 0 | |
| Gain on sale of assets | (4.0 | ) | (11.6 | ) | (5.8 | ) | Gain on sale of assets | 0.3 | | (0.4) | | (4.0) | |
| Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
| Changes in assets and liabilities, net of acquisitions: | | |
| Decrease (increase) in accounts receivable | (75.4 | ) | 3.9 |
| (42.3 | ) | Decrease (increase) in accounts receivable | 55.5 | | 44.5 | | (75.4) | |
| Decrease (increase) in inventories | 34.2 |
| (90.3 | ) | 18.4 |
| |
| Increase in current liabilities | 15.6 |
| 57.4 |
| 13.8 |
| |
| Decrease in inventories | | Decrease in inventories | 50.7 | | 12.2 | | 34.2 | |
| Increase (decrease) in accounts payable | | Increase (decrease) in accounts payable | 22.6 | | (41.2) | | 21.5 | |
| (Decrease) increase in current liabilities | | (Decrease) increase in current liabilities | (39.9) | | 5.0 | | (5.9) | |
| Changes in other assets and liabilities, net | (20.4 | ) | 50.7 |
| 8.4 |
| Changes in other assets and liabilities, net | 19.2 | | 0.9 | | (20.4) | |
| Contributions to qualified defined benefit pension plans | (27.9 | ) | (1.7 | ) | (18.0 | ) | Contributions to qualified defined benefit pension plans | (23.2) | | (10.4) | | (27.9) | |
| Other, net | 7.3 |
| 4.4 |
| 12.8 |
| Other, net | 7.7 | | 11.6 | | 7.3 | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 517.1 |
| 379.0 |
| 411.0 |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 648.0 | | 591.6 | | 517.1 | |
| Cash Flows from Investing Activities |
|
|
|
|
|
| Cash Flows from Investing Activities | | |
| Capital expenditures | (96.2 | ) | (79.7 | ) | (67.2 | ) | Capital expenditures | (88.4) | | (93.9) | | (96.2) | |
| Acquisitions, net of cash acquired | (1,118.0 | ) | (184.1 | ) | (173.4 | ) | Acquisitions, net of cash acquired | (239.6) | | (70.8) | | (1,118.0) | |
| Proceeds from disposal of business, net of cash | | Proceeds from disposal of business, net of cash | 0 | | 33.4 | | 0 | |
| Purchases of available-for-sale investments | (16.6 | ) | (20.9 | ) | (20.0 | ) | Purchases of available-for-sale investments | (35.1) | | (14.1) | | (16.6) | |
| Proceeds from sales of available-for-sale investments | 20.5 |
| 17.4 |
| 13.3 |
| Proceeds from sales of available-for-sale investments | 28.9 | | 12.5 | | 20.5 | |
| Proceeds from disposition of assets | 6.8 |
| 18.4 |
| 10.8 |
| Proceeds from disposition of assets | 4.5 | | 3.1 | | 6.8 | |
| Other, net | 2.1 |
| 3.3 |
| 6.3 |
| Other, net | 0.9 | | 0.9 | | 2.1 | |
| NET CASH USED IN INVESTING ACTIVITIES | (1,201.4 | ) | (245.6 | ) | (230.2 | ) | NET CASH USED IN INVESTING ACTIVITIES | (328.8) | | (128.9) | | (1,201.4) | |
| Cash Flows from Financing Activities |
|
|
| Cash Flows from Financing Activities | | |
| Issuance of long-term debt | 947.5 |
| 297.6 |
| 397.0 |
| Issuance of long-term debt | 225.0 | | 0 | | 947.5 | |
| Payment of long-term debt | (168.8 | ) | (300.0 | ) | — |
| Payment of long-term debt | (331.3) | | (225.0) | | (168.8) | |
| Issuance of short-term debt | 0.8 |
| 66.3 |
| 1.2 |
| Issuance of short-term debt | 125.5 | | 0.7 | | 0.8 | |
| Payment of short-term debt | (38.0 | ) | (1.7 | ) | (51.5 | ) | Payment of short-term debt | (3.6) | | (0.8) | | (38.0) | |
| Make whole payment for extinguishment of long-term debt | — |
| (9.9 | ) | — |
| |
| Debt issuance cost | (7.6 | ) | (3.0 | ) | (3.6 | ) | Debt issuance cost | 0 | | 0 | | (7.6) | |
| Payment of dividends | (172.3 | ) | (157.6 | ) | (144.0 | ) | Payment of dividends | (201.4) | | (186.6) | | (172.3) | |
| Payment of dividends to noncontrolling interest | (3.9 | ) | (3.5 | ) | (2.8 | ) | Payment of dividends to noncontrolling interest | (2.1) | | (11.3) | | (3.9) | |
| Acquisition of common shares | (40.0 | ) | (92.5 | ) | (246.8 | ) | Acquisition of common shares | (41.3) | | (35.0) | | (40.0) | |
| Other | (11.2 | ) | (10.0 | ) | (8.9 | ) | Other | (15.0) | | (13.0) | | (11.2) | |
| NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES | 506.5 |
| (214.3 | ) | (59.4 | ) | NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES | (244.2) | | (471.0) | | 506.5 | |
| Effect of foreign currency exchange rate changes on cash and cash equivalents | (8.2 | ) | 18.3 |
| (27.3 | ) | Effect of foreign currency exchange rate changes on cash and cash equivalents | 2.6 | | 1.3 | | (8.2) | |
| Increase (Decrease) in cash and cash equivalents | (186.0 | ) | (62.6 | ) | 94.1 |
| Increase (Decrease) in cash and cash equivalents | 77.6 | | (7.0) | | (186.0) | |
| Cash and cash equivalents, beginning of year | 375.0 |
| 437.6 |
| 343.5 |
| Cash and cash equivalents, beginning of year | 182.0 | | 189.0 | | 375.0 | |
| Cash and cash equivalents, end of year | $ | 189.0 |
| $ | 375.0 |
| $ | 437.6 |
| Cash and cash equivalents, end of year | $ | 259.6 | | $ | 182.0 | | $ | 189.0 | |
See notes to consolidated financial statements.
|
| | | | |
HUBBELL INCORPORATED- Form 10-K | 4349 |
Consolidated Statement of Changes in Equity
| | | | | | |
(in millions, except per share amounts) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Hubbell Shareholders' Equity | Non- controlling interest | (in millions, except per
share amounts) | Common Stock | Additional
Paid-in
Capital | Retained
Earnings | Accumulated
Other
Comprehensive
Income (Loss) | Total Hubbell
Shareholders'
Equity | Non-
controlling
interest |
BALANCE AT
DECEMBER 31, 2015 | $ | 0.6 |
| $ | 78.1 |
| $ | 1,886.1 |
| $ | (224.2 | ) | $ | 1,740.6 |
| $ | 8.4 |
| |
| Net income | | |
| 293.0 |
| |
| 293.0 |
| 4.8 |
| |
| Other comprehensive (loss) income | | |
| |
| (78.3 | ) | (78.3 | ) | |
| |
| Stock-based compensation | | 22.5 |
| |
| |
| 22.5 |
| |
| |
| Income tax windfall from stock-based awards, net | | 4.8 |
| |
| |
| 4.8 |
| |
| |
Acquisition/surrender of common shares(1) | | (90.4 | ) | (155.5 | ) | |
| (245.9 | ) | |
| |
| Cash dividends declared ($2.59 per share) | | |
| (144.3 | ) | |
| (144.3 | ) | |
| |
| Dividends to noncontrolling interest | | |
| |
| |
| |
| (2.8 | ) | |
| Director's deferred compensation | | 0.4 |
| | 0.4 |
| | |
BALANCE AT DECEMBER 31, 2016 | 0.6 |
| 15.4 |
| 1,879.3 |
| (302.5 | ) | 1,592.8 |
| 10.4 |
| |
| Net income | | |
| 243.1 |
| |
| 243.1 |
| 6.8 |
| |
| Other comprehensive (loss) income | | |
| |
| 32.7 |
| 32.7 |
| |
| |
| Stock-based compensation | | 22.3 |
| |
| |
| 22.3 |
| |
| |
Acquisition/surrender of common shares(1) | | (27.2 | ) | (72.1 | ) | |
| (99.3 | ) | |
| |
| Cash dividends declared ($2.87 per share) | | |
| (157.9 | ) | |
| (157.9 | ) | |
| |
| Dividends to noncontrolling interest | | |
| |
| |
| |
| (3.5 | ) | |
| Director's deferred compensation | | 0.5 |
| | 0.5 |
| | |
BALANCE AT DECEMBER 31, 2017 | 0.6 |
| 11.0 |
| 1,892.4 |
| (269.8 | ) | 1,634.2 |
| 13.7 |
| BALANCE AT DECEMBER 31, 2017 | $ | 0.6 | | $ | 11.0 | | $ | 1,892.4 | | $ | (269.8) | | $ | 1,634.2 | | $ | 13.7 | |
| Net income | | |
| 360.2 |
| |
| 360.2 |
| 5.9 |
| Net income | — | 360.2 | — | 360.2 | 5.9 |
| Other comprehensive (loss) income | | |
| |
| (15.9 | ) | (15.9 | ) | |
| Other comprehensive (loss) income | — | (15.9) | — |
| Stock-based compensation | | 24.2 |
| |
| |
| 24.2 |
| |
| Stock-based compensation | — | 24.2 | — | 24.2 | — |
| ASC 606 adoption to retained earnings | | 0.6 |
| | 0.6 |
| | ASC 606 adoption to retained earnings | — | 0.6 | — | 0.6 | — |
Acquisition/surrender of common shares(1) | | (34.5 | ) | (16.0 | ) | |
| (50.5 | ) | |
| Acquisition/surrender of common shares (1) | — | (34.5) | (16.0) | — | (50.5) | — |
| Cash dividends declared ($3.15 per share) | | |
| (172.8 | ) | |
| (172.8 | ) | |
| Cash dividends declared ($3.15 per share) | — | (172.8) | — | (172.8) | — |
| Dividends to noncontrolling interest | | |
| |
| |
| |
| (3.9 | ) | Dividends to noncontrolling interest | — | (3.9) |
| Aclara noncontrolling interest | | 2.6 |
| Aclara noncontrolling interest | — | 2.6 |
| Director's deferred compensation | | 0.6 |
| | 0.6 |
| | |
| Directors deferred compensation | | Directors deferred compensation | — | 0.6 | — | 0.6 | — |
BALANCE AT DECEMBER 31, 2018 | $ | 0.6 |
| $ | 1.3 |
| $ | 2,064.4 |
| $ | (285.7 | ) | $ | 1,780.6 |
| $ | 18.3 |
| BALANCE AT DECEMBER 31, 2018 | $ | 0.6 | | $ | 1.3 | | $ | 2,064.4 | | $ | (285.7) | | $ | 1,780.6 | | $ | 18.3 | |
| Net income | | Net income | — | 400.9 | — | 400.9 | 6.5 |
| Other comprehensive (loss) income | | Other comprehensive (loss) income | — | (17.2) | — |
| Stock-based compensation | | Stock-based compensation | — | 16.4 | — | 16.4 | — |
| Reclassification of stranded tax effects | | Reclassification of stranded tax effects | — | 30.0 | (30.0) | — |
Acquisition/surrender of common shares (1) | | Acquisition/surrender of common shares (1) | — | (18.3) | (28.9) | — | (47.2) | — |
| Cash dividends declared ($3.43 per share) | | Cash dividends declared ($3.43 per share) | — | (187.0) | — | (187.0) | — |
| Dividends to noncontrolling interest | | Dividends to noncontrolling interest | — | (11.4) |
| Directors deferred compensation | | Directors deferred compensation | — | 0.6 | — | 0.6 | — |
| BALANCE AT DECEMBER 31, 2019 | | BALANCE AT DECEMBER 31, 2019 | $ | 0.6 | | $ | 0 | | $ | 2,279.4 | | $ | (332.9) | | $ | 1,947.1 | | $ | 13.4 | |
| Net income | | Net income | — | 351.2 | — | 351.2 | 4.8 |
| Other comprehensive (loss) income | | Other comprehensive (loss) income | — | 3.7 | — |
| Stock-based compensation | | Stock-based compensation | — | 23.9 | — | 23.9 | — |
Acquisition/surrender of common shares (1) | | Acquisition/surrender of common shares (1) | — | (17.8) | (34.1) | — | (51.9) | — |
| Cash dividends declared ($3.71 per share) | | Cash dividends declared ($3.71 per share) | — | (201.8) | — | (201.8) | — |
| Dividends to noncontrolling interest | | Dividends to noncontrolling interest | — | (2.8) |
| Directors deferred compensation | | Directors deferred compensation | — | (1.2) | — | (1.2) | — |
| Cumulative effect from adoption of CECL accounting standard | | Cumulative effect from adoption of CECL accounting standard | — | (1.0) | — | (1.0) | — |
| BALANCE AT DECEMBER 31, 2020 | | BALANCE AT DECEMBER 31, 2020 | $ | 0.6 | | $ | 4.9 | | $ | 2,393.7 | | $ | (329.2) | | $ | 2,070.0 | | $ | 15.4 | |
See notes to consolidated financial statements.
(1) For accounting purposes, the Company treats repurchased shares as constructively retired when acquired and accordingly charges the purchase price against Common Stock par value, Additional paid-in capital, to the extent available, and Retained earnings. The change in Retained earnings of $34.1 million, $28.9 million and $16.0 million $72.1 millionin 2020, 2019 and $155.5 million in 2018, 2017 and 2016, respectively, reflects this accounting treatment.
|
| | | | |
4450 | HUBBELL INCORPORATED - Form 10-K |
Notes to Consolidated Financial Statements
NOTE 1 Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation
The Consolidated Financial Statements include all wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company participates in three2 joint ventures one of which is accounted for using the equity method, the othersthat have been consolidated in accordance with the consolidation accounting guidance. An analysis is performed to determine which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with a primarily qualitative analysis. The qualitative analysis is based on identifying the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance (the “power criterion”) and the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE (the “losses/benefit criterion”). The party that meets both these criteria is deemed to have a controlling financial interest. The party with the controlling financial interest is considered to be the primary beneficiary and as a result is required to consolidate the VIE. The Company has a 50% interest in a joint venture in Hong Kong, established as Hubbell Asia Limited (“HAL”). The principal objective of HAL is to manage the operations of its wholly-owned manufacturing company in China. Under the accounting guidance, the Company is the primary beneficiary of HAL and as a result consolidates HAL. This determination is based on the fact that HAL’s sole business purpose is to manufacture product exclusively for the Company (the power criterion) and the Company is financially responsible for ensuring HAL maintains a fixed operating margin (the losses/benefit criterion). The consolidation of HAL is not material to the Company’s consolidated financial statements.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements. Actual results could differ from the estimates that are used.
Impact of the COVID-19 Pandemic
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The pandemic began to affect the Company’s business and operations late in the first quarter of 2020 and became more pronounced during the second quarter of 2020. Through the fourth quarter of 2020, the pandemic continued to significantly affect global economic conditions and in the U.S. Federal, state, local, and foreign governments continue to react to the public health crisis with mitigation measures, creating significant uncertainties in the U.S. and global economies. The extent to which the coronavirus pandemic will continue to affect our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict and which may cause the actual results to differ from the estimates and assumptions we are required to make in the preparation of financial statements according to GAAP.
Revenue Recognition
The Company recognizes revenue when performance obligations identified under the terms of contracts with its customers are satisfied, which generally occurs, for products, upon the transfer of control in accordance with the contractual terms and conditions of the sale. The majority of the Company’s revenue associated with products is recognized at a point in time when the product is shipped to the customer, with a relatively small amount of transactions in the PowerUtility Solutions segment recognized upon delivery of the product at the contractually specified destination. Revenue from service contracts and post-shipment performance obligations is less than threeapproximately 3 percent of total annual consolidated net revenue and those service contracts and post-shipment obligations are primarily within the PowerUtility Solutions segment. Revenue from service contracts and post-shipment performance obligations is recognized when or as those obligations are satisfied. The Company primarily offers assurance-type standard warranties that do not represent separate performance obligations and on occasion will separately offer and price extended warranties that are separate performance obligations for which the associated revenue is recognized over-time based on the extended warranty period. The Company records amounts billed to customers for reimbursement of shipping and handling costs within revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of goods sold. Sales taxes and other usage-based taxes are excluded from revenue.
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HUBBELL INCORPORATED- Form 10-K | 51 |
Within the Electrical Solutions segment, certain businesses require a portion of the transaction price to be paid in advance of transfer of control. Advance payments are not considered a significant financing component as they are received less than one year before the related performance obligations are satisfied. In addition, in the PowerUtility Solutions segment, certain businesses offer annual maintenance service contracts that require payment at the beginning of the contract period. These payments are treated as a contract liability and are classified in Other accrued liabilities in the Consolidated Balance Sheet. Once control transfers to the customer and the Company meets the revenue recognition criteria, the deferred revenue is recognized in the Consolidated Statement of Income. The deferred revenue relating to the annual maintenance service contracts is recognized in the Consolidated Statement of Income on a straight line basis over the expected term of the contract.
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HUBBELL INCORPORATED- Form 10-K
| 45 |
The Company has certain arrangements that require us to estimate at the time of sale the amounts of variable consideration that should not be recorded as revenue as certain amounts are not expected to be collected from customers, as well as an estimate of the value of the product to be returned. The Company principally relies on historical experience, specific customer agreements and anticipated future trends to estimate these amounts at the time of shipment and to reduce the transaction price. These arrangements include sales discounts and allowances based on sales volumes, specific programs and special pricing allowances, and returned goods, as are customary in the electrical products industry. Customer returns have historically ranged from 1%-2% of gross sales.
Shipping and Handling Costs
The Company records shipping and handling costs as part of Cost of goods sold in the Consolidated Statement of Income.
Foreign Currency Translation
The assets and liabilities of international subsidiaries are translated to U.S. dollars at exchange rates in effect at the end of the year, and income and expense items are translated at average exchange rates in effect during the year. The effects of exchange rate fluctuations on the translated amounts of foreign currency assets and liabilities are included as translation adjustments in Accumulated other comprehensive loss within Hubbell shareholders’ equity. Gains and losses from foreign currency transactions are included in results of operations.
Cash and Cash Equivalents
The carrying value of cash equivalents approximates fair value. Cash equivalents consist of highly liquid investments with original maturities to the Company of three months or less.
Investments
Investments in debt and equity securities are classified by individual security as available-for-sale, held-to-maturity or trading securities. Our available-for-sale securities, consisting of municipal bonds, and the redeemable preferred stock of a privately held company, are carried on the balance sheet at fair value with current period adjustments to carrying value recorded in Accumulated other comprehensive loss within Hubbell shareholders’ equity, net of tax. Realized gains and losses are recorded in income in the period of sale. The Company’s trading securities are carried on the balance sheet at fair value and consist primarily of debt and equity mutual funds. Gains and losses associated with these trading securities are reflected in the results of operations. The Company did not have any investments classified as held-to-maturity as of December 31, 20182020 and 2017.2019.
Accounts Receivable and Allowances
Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The allowance for doubtful accounts is based on an estimated amount of probable credit losses in existing accounts receivable. The allowance is calculated based upon a combination of historical write-off experience, fixed percentages applied to aging categories and specific identification based upon a review of past due balances and problem accounts. Account balances are charged off against the allowance when it is determined that internal collection efforts should no longer be pursued. The Company also maintains a reserve for credit memos and cash discounts which are principally calculated based upon historical experience, specific customer agreements, as well as anticipated future trends.
Inventories
Inventories are stated at the lower of cost or market value. Approximately 66%56% of total net inventory value is determined utilizing the last-in, first-out (LIFO) method of inventory accounting. The cost of foreign inventories and certain domestic inventories is determined utilizing average cost or first-in, first-out (FIFO) methods of inventory accounting. Reserves for excess and obsolete inventory are provided based on current assessments about future demand compared to on-hand quantities.
Property, Plant, and Equipment
Property, plant, and equipment values are stated at cost less accumulated depreciation. Maintenance and repair expenditures that do not significantly increase the life of an asset are charged to expense when incurred. Property, plant, and equipment placed in service prior to January 1, 1999 are depreciated over their estimated useful lives, principally, using accelerated methods. Assets placed in service subsequent to January 1, 1999 are depreciated over their estimated useful lives, using straight-line methods. Leasehold improvements are amortized over the shorter of their economic lives or the lease term. Gains and losses arising on the disposal of property, plant and equipment are included in Operating income in the Consolidated Statement of Income.
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| 52 | HUBBELL INCORPORATED - Form 10-K |
Capitalized Computer Software Costs
Capitalized computer software costs, net of amortization, were $20.2$20.7 million and $15.7$22.5 million at December 31, 20182020 and 2017,2019, respectively. This balance is reflected in Other long-term assets in the Consolidated Balance Sheet. Capitalized computer software is for internal use and costs primarily consist of purchased materials, external services and salary costs for personnel dedicated to the projects. Software is amortized on a straight-line basis over appropriate periods, generally between three and five years. The Company recorded amortization expense of $10.2 million in 2020, $9.0 million in 2019 and $6.4 million in 2018 $5.6 million in 2017 and $5.2 million in 2016 relating to capitalized computer software.
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46 | HUBBELL INCORPORATED - Form 10-K
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Goodwill and Other Intangible Assets
Goodwill represents purchase price in excess of fair values of the underlying net assets of acquired companies. Indefinite-lived intangible assets and goodwill are subject to annual impairment testing using the specific guidance and criteria described in the accounting guidance. The Company performs its goodwill impairment testing as of April 1st of each year, unless circumstances dictate the need for more frequent assessments. The accounting guidance provides entities an option of performing a qualitative assessment (a "step-zero" test) before performing a quantitative analysis. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the goodwill is not impaired, the entity would not need to proceed to the two stepquantitative goodwill impairment testing process (quantitative analysis) as prescribed in the guidance. The Company applied the "step-zero" test to six3 of its seven6 reporting units. Based on that qualitative assessment, the Company concluded it was more-likely-than-not that the fair value of these reporting units substantially exceeded their carrying value and therefore, further quantitative analysis was not required. For the seventhother three reporting unitunits the Company has elected to utilize the two stepquantitative goodwill impairment testing process as permitted in the accounting guidance. Step 1 comparesguidance, by comparing the fair value of the Company’sCompany's reporting units to their carrying values. If the fair value of the reporting unit exceeds its carrying value, no further analysis is necessary. If the carrying value of the reporting unit exceeds its fair value, Step 2 must be completed to determine the amount of impairment.impairment exists.
Goodwill impairment testing requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. The Company usesassumptions, including assumptions about secular economic and market conditions, such as the potential continuing effects of the COVID-19 pandemic. We use internal discounted cash flow estimatesmodels to determineestimate fair value. These cash flow estimates are derived from historical experience, third party end market data, and future long-term business plans and include assumptions on future sales growth, gross margin, operating margin, terminal growth rate, and the application of an appropriate discount rate. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. The Company’sCompany believes that its estimated aggregate fair value of its reporting units areis reasonable when compared to the Company’sCompany's market capitalization on the valuation date.
As of April 1, 2018, our2020, the impairment testing resulted in implied fair valuevalues for each reporting unit that substantially exceeded the reporting unit’sunit's carrying value, including goodwill. The Company did not have any reporting units at risk of failing Step 1 of the quantitative impairment test as the excess of the implied fair value significantly exceeded the carrying value of the reporting units. Additionally, the Company did not have any reporting units with zero or negative carrying amounts. The Company has not recorded any goodwill impairments since the initial adoption of the accounting guidance in 2002.
The Company’s intangible assets consist primarily of customer relationships, tradenames, developed technology and patents. Intangible assets with definite lives are amortized over periods generally ranging from 5-30 years. The Company amortizes intangible assets with definite lives using either an accelerated method that reflects the pattern in which economic benefits of the intangible assets are consumed and results in higher amortization in the earlier years of the assets,assets' useful life, or using a straight line method.
Approximately 75%77% of the gross value of definite-lived intangible assets follow an accelerated amortization method. These definite lived intangibles are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The Company did not0t record any material impairments related to its definite lived intangible assets in 2018, 20172020, 2019 or 2016.2018. The Company also has some tradenames that are considered to be indefinite-lived intangible assets. These indefinite-lived intangible assets are not amortized and are tested for impairment annually, unless circumstances dictate the need for more frequent assessment.
The accounting guidance related to testing indefinite-lived intangible assets for impairment provides entities an option of performing a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the asset is not impaired, the entity would not need to calculate the fair value of the asset. The Company performed the qualitative assessment which resulted in no0 impairment in 2018, 20172020, 2019 and 2016.2018.
Other Long-Lived Assets
The Company reviews depreciable long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. If such a change in circumstances occurs, the related estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition is compared to the carrying amount. If the sum of the expected cash flows is less than the carrying amount, an impairment charge is recorded. The impairment charge is measured as the amount by which the carrying amount exceeds the fair value of the asset. The fair value of impaired assets is determined using expected cash flow estimates, quoted market prices when available and appraisals as appropriate. The Company did not record any material impairment charges in 2018, 20172020, 2019 or 2016.2018.
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HUBBELL INCORPORATED- Form 10-K | 53 |
Leases
We determine if an arrangement is a lease at inception. Operating leases are included as ROU assets within other long-term assets, other accrued liabilities, and other non-current liabilities in our Consolidated Balance Sheets. Finance leases are included in property, plant, and equipment, net, other accrued liabilities, and other non-current liabilities. The Company's finance leases are immaterial.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We use an implicit rate when readily determinable. For leases existing as of January 1, 2019, we have elected to use the remaining lease term as of the adoption date in determining the incremental borrowing rate. Our determination of the lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. Additionally, for our vehicle leases, we apply a portfolio approach regarding the assumed lease term.
Accrued Insurance
The Company retains a significant portion of the risks associated with workers’ compensation, medical, automobile and general liability insurance. The Company estimates self-insurance liabilities using a number of factors, including historical claims experience, demographic factors, and other actuarial assumptions. The accrued liabilities associated with these programs are based on the Company’s estimate of the ultimate costs to settle known claims as well as claims incurred but not reported as of the balance sheet date. The Company periodically reviews the assumptions with a third party actuary to determine the adequacy of these self-insurance reserves.
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HUBBELL INCORPORATED- Form 10-K
| 47 |
Accrued Warranty
The Company offers product warranties which cover defects on most of its products. These warranties primarily apply to products that are properly installed, maintained and used for their intended purpose. The Company accrues estimated warranty costs at the time of sale. Estimated warranty expenses, recorded in cost of goods sold, are based upon historical information such as past experience, product failure rates, or the estimated number of units to be repaired or replaced. Adjustments are made to the product warranty accrual as claims are incurred, additional information becomes known or as historical experience indicates. The Company assumed warranty obligations with an estimated fair value of $89.4 million in connection with the acquisition of Aclara.
Income Taxes
The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The IRS and other tax authorities routinely examine the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. The Company makes adequate provisions for best estimates of exposures on previously filed tax returns. Deferred income taxes are recognized for the tax consequence of differences between financial statement carrying amounts and the tax basis of assets and liabilities by applying the currently enacted statutory tax rates in accordance with the accounting guidance for income taxes. The effect of a change in statutory tax rates is recognized in the period that includes the enactment date. Additionally, deferred tax assets are required to be reduced by a valuation allowance if it is more-likely-than-not that somea portion or all of the deferred tax asset will not be realized. The Company uses factors to assess the likelihood of realization of deferred tax assets such as the forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets.
In addition, the accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of the tax position taken or expected to be taken in a tax return. For any amount of benefit to be recognized, it must be determined that it is more-likely-than-not that a tax position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount of benefit to be recognized is based on the Company’s assertion of the most likely outcome resulting from an examination, including resolution of any related appeals or litigation processes. Companies are required to reflect only those tax positions that are more-likely-than-not to be sustained.
We have completed the accounting for the income tax effects of the TCJA in accordance with SAB 118. The Company has included in the current period financial statements adjustments to the prior provisional estimates.
See Note 13 — Income Taxes for additional information.
Research and Development
Research and development expenditures represent costs to discover and/or apply new knowledge in developing a new product, process, or in bringing about a significant improvement to an existing product or process. Research and development expenses are recorded as a component of Cost of goods sold. Expenses for research and development were approximately 3% of Cost of goods sold in 2018, 3%each of 2020, 2019 and in 2017 and 2% in 2016.2018.
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| 54 | HUBBELL INCORPORATED - Form 10-K |
Retirement Benefits
The Company maintains various defined benefit pension plans for some of its U.S. and foreign employees. The accounting guidance for retirement benefits requires the Company to recognize the funded status of its defined benefit pension and postretirement plans as an asset or liability in the Consolidated Balance Sheet. Gains or losses, prior service costs or credits, and transition assets or obligations that have not yet been included in net periodic benefit cost as of the end of the year are recognized as components of Accumulated other comprehensive loss, net of tax, within Hubbell shareholders’ equity. The Company’s policy is to fund pension costs within the ranges prescribed by applicable regulations. In addition to providing defined benefit pension benefits, the Company provides health care and life insurance benefits for some of its active and retired employees. The Company’s policy is to fund these benefits through insurance premiums or as actual expenditures are made. See also Note 11 — Retirement Benefits.
Earnings Per Share
Restricted stock granted by the Company is considered a participating security since it contains a non-forfeitable right to dividends. As a result, the earnings per share accounting guidance requires the Company to use the two-class method for calculating earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities. Basic earnings per share is calculated as net income available to common shareholders divided by the weighted average number of shares of common stock outstanding. Earnings per diluted share is calculated as net income available to common shareholders divided by the weighted average number of shares outstanding of common stock plus the incremental shares outstanding assuming the exercise of dilutive stock options, stock appreciation rights and performance shares. See also Note 18 — Earnings Per Share.
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48 | HUBBELL INCORPORATED - Form 10-K
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Stock-Based Compensation
The Company recognizes the grant-date fair value of all stock-based awards on a straight-line basis over their respective requisite service periods (generally equal to an award’s vesting period). A stock-based award is considered vested for expense attribution purposes when the retention of the award is no longer contingent on providing subsequent service. Accordingly, the Company generally recognizes compensation cost immediately for awards granted to retirement-eligible individuals or over the period from the grant date to the date retirement eligibility is achieved, if less than the stated vesting period. The expense is recorded in Cost of goods sold and S&A expense in the Consolidated Statement of Income based on the recipients’ respective functions within the organization.
The Company records deferred tax assets for awards that will result in deductions on its tax returns, based upon the amount of compensation cost recognized and the statutory tax rate in the jurisdiction in which it will receive a deduction. See also Note 17 — Stock-Based Compensation.
Derivatives
In order to limit financial risk in the management of its assets, liabilities and debt, the Company may use derivative financial instruments such as foreign currency hedges, interest rate hedges and interest rate swaps. All derivative financial instruments are matched with an existing Company asset, liability or proposed transaction. The Company does not speculate or use leverage when trading a derivative product. Market value gains or losses on the derivative financial instrument are recognized in income when the effects of the related price changes of the underlying asset or liability are recognized in income. See Note 14 — Financial Instruments and Fair Value Measurement for more information regarding our derivative instruments.
RecentRecently Adopted Accounting Pronouncements
In February 2018,June 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued an Accounting Standards Update (ASU 2018-02) relating2016-13), "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASC 326 or "CECL"), which amends the impairment model by requiring entities to the reclassificationuse a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of certain tax effects from accumulated other comprehensive income/(loss). The new guidance allows an entity to reclassify the income tax effects of the TCJA on items within accumulated other comprehensive income/(loss) to retained earnings.financial instruments, including trade receivables. This new guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard must be adopted retrospectively to each period in which the effect of the changemay result in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company is currently assessing the impactearlier recognition of adopting this standard on its financial statements.
In response to the enactment of the TCJA, the Securities and Exchange Commission’s Office of the Chief Accountant published Staff Accounting Bulletin 118 ("SAB 118"). SAB 118 addresses the requirements to accountallowances for the impact of a change in tax law or tax rates in the period of enactment. Specifically, SAB 118 provides guidance for issuers that are not able to complete the accounting for the income tax effects of the TCJA by the time financial statements are issued for the reporting period that includes the enactment date (“enactment period financials”).
Under SAB 118, the measurement period for accounting for the TCJA begins in the period of enactment and ends when an entity has obtained, prepared and analyzed the information necessary to complete the accounting requirements under ASC 740, Income Taxes, (the “measurement period”), but in no event can the measurement period extend beyond one year from the TCJA’s enactment date. Any provisional amount or adjustment to a provisional amount included in a company’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined. The Company completed its analysis of the income tax effects of the TCJA within the measurement period and the impact of those income tax effects have been reflected in the income from continuing operations as an adjustment to tax expense in the appropriate reporting period.
In January 2017, the FASB issued an Accounting Standards Update (ASU 2017-04) “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. The Company is currently assessing the impact of adopting this standard on its financial statements.
In March 2017, the FASB issued an Accounting Standards Update (ASU 2017-07) relating to the presentation of net periodic pension costs and net periodic post-retirement benefit cost. This new guidance requires the service component of net periodic pension and post-retirement benefit costs to be reported in the same income statement line item as other employee compensation costs, and the other components to be reported outside of operating income.losses. The Company adopted the requirements of the new standard in the first quarter of 2018 and applied the guidance on a retrospective basis, as required by the standard.2020. The impact to our fiscal quarters and year-ended 2017 is shown in the table below (in millions):
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HUBBELL INCORPORATED- Form 10-K
| 49 |
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| | Three Months Ended | | Twelve Months Ended |
| (in millions) | Dec 31, 2017 | Sep 30, 2017 | Jun 30, 2017 | Mar 31, 2017 | | Dec 31, 2017 | Dec 31, 2016 |
| Cost of goods sold | $ | (0.9 | ) | $ | (0.8 | ) | $ | (0.8 | ) | $ | (0.8 | ) | | $ | (3.3 | ) | $ | (4.4 | ) |
| Selling & administrative expenses | (2.9 | ) | (3.0 | ) | (3.0 | ) | (2.9 | ) | | (11.8 | ) | (7.6 | ) |
| Total operating expenses | (3.8 | ) | (3.8 | ) | (3.8 | ) | (3.7 | ) | | (15.1 | ) | (12.0 | ) |
| Operating income | 3.8 |
| 3.8 |
| 3.8 |
| 3.7 |
| | 15.1 |
| 12.0 |
|
| Total other expense | (3.8 | ) | (3.8 | ) | (3.8 | ) | (3.7 | ) | | (15.1 | ) | (12.0 | ) |
| Net income | $ | — |
| $ | — |
| $ | — |
| $ | — |
| | $ | — |
| $ | — |
|
In February 2016, the FASB issued an Accounting Standards Update (ASU 2016-02) related to the accounting and financial statement presentation for leases. This new guidance, codified in ASC 842, will require a lessee to recognize a right-of-use asset and a lease liability for both financing and operating leases, with a policy election permitting an exception toadoption of this guidance for leases with a term of 12 months or less and that do not contain a purchase option that is reasonably certain to be exercised. For financing leases, the lessee will recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee will recognize a straight-line lease expense. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company will adopt the standard as of January 1, 2019.
Pursuant to ASU 2018-11, ASC 842 must be adopted using a modified retrospective transition at the beginning of the earliest comparative period presented. The standard, as originally issued, was to be applied retrospectively, however in July 2018 the FASB issued ASU No. 2018-11 “Leases (Topic 842): Targeted Improvements,” which provides an additional transition method that permits changes to be applied by meansrecognition of a loss allowance at an amount equal to lifetime expected credit losses for trade receivables resulted in a $1.0 million cumulative-effect adjustment recorded into retained earnings, asnet of the beginning of the fiscal year of adoption. It is our intention to apply this approach in adopting the standard.
tax.In preparing to adopt ASC 842, we have designed processes and controls to manage and account for our active leases under the new requirements. We have completed a qualitative assessment of the company’s portfolio of active leases and have compiled a central repository of related data. In addition, we have implemented a software system to address the new reporting requirements. Lease data elements, required for accounting under the new standard, are being abstracted, validated and loaded into the software solution. The Company estimates that it will recognize approximately $100 million of right-of-use assets and corresponding lease liabilities on the balance sheet upon adoption. However, the population of contracts subject to balance sheet recognition and their initial measurement remains under evaluation; final balance sheet impacts will depend on the lease portfolio at the time of adoption. The Company does not expect that adoption will have a material impact on our results of operations or liquidity.
In May 2014, the FASB issued an Accounting Standards Update (ASU 2014-09) related to new revenue recognition guidance (ASC 606) that supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Subsequently, the FASB has issued amendments to certain aspects of the guidance including the effective date.
Effective January 1, 2018, the Company adopted the requirements of ASC 606 using the modified retrospective approach. The Company applied the guidance to all contracts and recognized a cumulative effect adjustment to Retained Earnings as of January, 1, 2018 of $0.6 million. The impacts to the financial statements are primarily related to balance sheet classification, including amounts associated with the change in balance sheet classification of sales returns reserves, while the impacts on the income statement reflect the change in classification of restocking fees. The impact to our financial statements for the quarter ended December 31, 2018 was as follows (in millions):
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| | For the Twelve Months Ended December 31, 2018 |
| Income Statement | As Reported | Balances Without Adoption of ASC 606 | Effect of Adoption Higher/(Lower) |
| Net sales | $ | 4,481.7 |
| $ | 4,478.7 |
| $ | 3.0 |
|
| | | | |
| Costs and expenses | | | |
| Cost of goods sold | $ | 3,181.3 |
| $ | 3,178.3 |
| $ | 3.0 |
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50 | HUBBELL INCORPORATED - Form 10-K
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| | As of December 31, 2018 |
| Balance Sheet | As Reported | Balances Without Adoption of ASC 606 | Effect of Adoption Higher/(Lower) |
| ASSETS | | | |
| Accounts receivable, net | $ | 725.4 |
| $ | 708.7 |
| $ | 16.7 |
|
| Inventories, net | 651.0 |
| 661.8 |
| (10.8 | ) |
| Other current assets | 69.1 |
| 59.5 |
| 9.6 |
|
| Total Assets | $ | 4,872.1 |
| $ | 4,856.6 |
| $ | 15.5 |
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| | | | |
| LIABILITIES | | | |
| Other accrued liabilities | $ | 226.6 |
| $ | 211.7 |
| $ | 14.9 |
|
| Total Liabilities | $ | 3,073.2 |
| $ | 3,058.3 |
| $ | 14.9 |
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| | | | |
| EQUITY | | | |
| Retained earnings | $ | 2,064.4 |
| $ | 2,063.8 |
| $ | 0.6 |
|
| Total Equity | $ | 1,798.9 |
| $ | 1,798.3 |
| $ | 0.6 |
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In August 2018, the FASB issued an Accounting Standards Update (ASU 2018-13) "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement", which modifies the disclosure requirements for fair value measurements. ASU 2018-13 is effective in the first quarter of fiscal 2020, and early adoption is permitted, including an election to early adopt provisions that remove or modify disclosures without early adopting requirements that add disclosures. The Company has elected to early adopt the provisions of the ASU that removed or modify disclosures in 2018 and the adoption had no material impact on its financial statements.
In August 2018, the FASB issued an Accounting Standards Update (ASU 2018-14) "Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans", which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective in the first quarter of fiscal 2021, and early adoption is permitted. ASU 2018-14 was adopted by the Company in 2018 and had no material impact on its financial statements.
In August 2018, the FASB issued an Accounting Standards Update (ASU 2018-15) "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective inThe Company adopted the standard prospectively during the first quarter of 2020 with no material impact to the consolidated financial statements.
In December 2019, the FASB issued an Accounting Standards Update (ASU 2019-12) "Simplifying the Accounting for Income Taxes", which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company elected to early adopt the standard during the fourth quarter. The impact of the adoption of the standard was not material.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which provides optional expedients and early adoption is permitted.exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are effective for all entities beginning on March 12, 2020 through December 31, 2022. The Company may elect to apply the amendments prospectively through December 31, 2022. The Company has not adopted this ASU as of December 31, 2020. The Company is currently assessing the impact of adopting this standard on its financial statements.statements and the timing of adoption.
NOTE 2 Revenue
|
| | | | |
HUBBELL INCORPORATED- Form 10-K | 55 |
NOTE 2 Revenue
Approximately two-thirds of the Company's net sales are to distributors who then sell directly into the residential, non-residential, industrial, electrical transmission and distribution and oil and gasour end markets. Within the PowerUtility Solutions segment, our businesses sell to distributors, with the majority of sales to the utility end markets. Our businesses within the PowerUtility Solutions segment also sell directly into transmission and distribution utility markets.
|
| |
HUBBELL INCORPORATED- Form 10-K
| 51 |
The following table presents disaggregated revenue by business group (in millions) for the twelve months ended December 31, 2018, 2017 and 2016:group:
| | | | | | | | | | | |
| Twelve Months Ended December 31, |
| in millions | 2020 | 2019 | 2018 |
| Net sales | | | |
| Commercial and Industrial | $ | 762.1 | | $ | 902.1 | | $ | 910.8 | |
| Construction and Energy | 715.4 | | 808.7 | | 799.7 | |
| Lighting | 786.1 | | 914.9 | | 950.1 | |
| Total Electrical Solutions | $ | 2,263.6 | | $ | 2,625.7 | | $ | 2,660.6 | |
| Power Systems | 1,343.0 | | 1,283.1 | | 1,210.0 | |
| Aclara | 579.4 | | 682.2 | | 611.1 | |
| Total Utility Solutions | $ | 1,922.4 | | $ | 1,965.3 | | $ | 1,821.1 | |
| TOTAL | $ | 4,186.0 | | $ | 4,591.0 | | $ | 4,481.7 | |
|
| | | | | | | | | |
| | Twelve Months Ended December 31, |
| | 2018 | 2017 | 2016 |
| Net sales | | | |
| Hubbell Commercial and Industrial | $ | 910.8 |
| $ | 864.5 |
| $ | 846.9 |
|
| Hubbell Construction and Energy | 799.7 |
| 732.6 |
| 667.5 |
|
| Hubbell Lighting | 950.1 |
| 935.7 |
| 945.8 |
|
| Hubbell Power Systems | 1,821.1 |
| 1,136.0 |
| 1,045.0 |
|
| Total net sales | $ | 4,481.7 |
| $ | 3,668.8 |
| $ | 3,505.2 |
|
The following table presents disaggregated third-party net sales by geographic location (in millions) for the twelve months ended December 31, 2018, 2017 and 2016 (on a geographic basis, the Company defines "international" as businessesoperations based outside of the United States and its possessions):
| | | | | | | | | | | |
| Twelve Months Ended December 31, |
| in millions | 2020 | 2019 | 2018 |
| Net sales | | | |
| United States | $ | 2,049.5 | | $ | 2,358.2 | | $ | 2,365.4 | |
| International | 214.1 | | 267.5 | | 295.2 | |
| Total Electrical Solutions | $ | 2,263.6 | | $ | 2,625.7 | | $ | 2,660.6 | |
| United States | 1,810.9 | | 1,832.3 | | 1,675.2 | |
| International | 111.5 | | 133.0 | | 145.9 | |
| Total Utility Solutions | $ | 1,922.4 | | $ | 1,965.3 | | $ | 1,821.1 | |
| TOTAL | $ | 4,186.0 | | $ | 4,591.0 | | $ | 4,481.7 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2018 | | Twelve Months Ended December 31, 2017 | | Twelve Months Ended December 31, 2016 |
| | Electrical | Power | Total | | Electrical | Power | Total | | Electrical | Power | Total |
| Net sales | | | | | | | | | | | |
| United States | $ | 2,365.4 |
| $ | 1,675.2 |
| $ | 4,040.6 |
| | $ | 2,229.3 |
| $ | 1,051.6 |
| $ | 3,280.9 |
| | $ | 2,187.0 |
| $ | 960.4 |
| $ | 3,147.4 |
|
| International | 295.2 |
| 145.9 |
| 441.1 |
| | 303.5 |
| 84.4 |
| 387.9 |
| | 273.2 |
| 84.6 |
| 357.8 |
|
| Total net sales | $ | 2,660.6 |
| $ | 1,821.1 |
| $ | 4,481.7 |
| | $ | 2,532.8 |
| $ | 1,136.0 |
| $ | 3,668.8 |
| | $ | 2,460.2 |
| $ | 1,045.0 |
| $ | 3,505.2 |
|
| | | | | |
| 56 | HUBBELL INCORPORATED - Form 10-K |
Contract Balances
Our contract liabilities consist of advance payments for products as well as deferred revenue on service obligations and extended warranties. The current portion of deferred revenue is included in Other accrued liabilities and the non-current portion of deferred revenue is included in Other non-current liabilities in the Consolidated Balance Sheet.
Contract liabilities were $27.7$30.9 million as of December 31, 20182020 compared to $10.2$31.0 million as of December 31, 2017.2019. The $17.5$0.1 million increasedecrease in our contract liabilities balance was primarily due to timing of advance payments on certain orders and the acquisition of Aclara, partially offset by the recognition of $9.0$19.7 million in revenue related to amounts that were recorded in contract liabilities at January 1, 2018. The Company has an immaterial amount2020, partially offset by a $19.6 million net increase in current year deferrals primarily due to timing of contract assets relating to performance obligations satisfied prior to payment that is recorded in Other long-term assets in the Consolidated Balance Sheet.advance payments on certain orders. Impairment losses recognized on our receivables and contract assets were immaterial in the twelve months ended December 31, 2018.2020. See Note 1 – Basis of Presentation and Note 3 – Business AcquisitionsSignificant Accounting Policies in the Notes to Consolidated Financial Statements for additional information.
Unsatisfied Performance Obligations
The Company has elected the practical expedient to disclose only the value of unsatisfied performance obligations for contracts with an original expected length greater than one year. Prior to the acquisition of Aclara, the majority of Hubbell's revenues resulted from sales of inventoried products with short periods of manufacture and delivery and thus are excluded from this disclosure. As of December 31, 2018,2020, the Company had approximately $530$305 million of unsatisfied performance obligations for contracts with an original expected length of greater than one year, primarily relating to long-term contracts of the Aclara business (within the PowerUtility Solutions segment) to deliver and install meters, metering communications and grid monitoring sensor technology. The Company expects that a majority of the unsatisfied performance obligations will be completed and recognized over the next 3 years.
Practical Expedients
We apply a practical expedient to expense costs to obtain a contract as incurred when the amortization period would have been one year or less.
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| | | | |
HUBBELL INCORPORATED- Form 10-K | 5257 |
NOTE 3 Business Acquisitions
2020 Acquisitions
In the fourth quarter of 2020 we completed the following acquisitions:
The Company acquired all of the issued and outstanding shares of Armorcast Products Company, Inc. (“Armorcast”) for $136.8 million, net of cash acquired. Armorcast develops and manufactures polymer concrete and fiberglass products for the utility industry. Armorcast is reported in the Utility Solutions segment. We have recognized intangible assets of $53.8 million, primarily consisting of customer relationships and a tradename, and goodwill of $65.1 million as a result of this acquisition. The intangible assets will be amortized over a weighted average period of approximately 19 years.
The Company acquired all of the issued and outstanding shares of Beckwith Electric Co., Inc. (“Beckwith”) for $54.3 million, net of cash acquired. Beckwith is a manufacturer and installer of protection relay and distribution control units used in electronic power systems. Beckwith is reported in the Utility Solutions segment. We have recognized intangible assets of $33.2 million, primarily consisting of customer relationships, technology and a tradename, and goodwill of $12.5 million as a result of this acquisition. The intangible assets will be amortized over a weighted average period of approximately 15 years.
The Company acquired all of the issued and outstanding shares of AccelTex Solutions, LLC (“AccelTex”) for $45.1 million, net of cash acquired. AccelTex is a manufacturer of products and accessories for wireless networks. AccelTex is reported in the Electrical Solutions segment. We have recognized intangible assets of $19.4 million, primarily consisting of customer relationships and a tradename, and goodwill of $21.1 million as a result of this acquisition. The intangible assets will be amortized over a weighted average period of approximately 15 years.
In the fourth quarter of 2020 the Company also completed a $1.6 million asset acquisition, of which $0.2 million of the purchase price payment is deferred, and recognized $1.0 million of goodwill as a result.
These business acquisitions have been accounted for as business combinations and have resulted in the recognition of goodwill. The goodwill relates to a number of factors implied in the purchase price, including the future earnings and cash flow potential of the businesses as well as the complementary strategic fit and resulting synergies they bring to the Company’s existing operations.
With the exception of tradenames, we amortize intangible assets using an accelerated method that reflects the pattern in which economic benefits of the intangible assets are consumed and results in higher amortization in the earlier years of the assets' useful life. Tradenames are amortized on a straight-line basis.
All of the goodwill associated with the 2020 acquisitions is deductible for tax purposes, except the goodwill associated with the acquisition of Beckwith.
Preliminary Allocation of Consideration Transferred to Net Assets Acquired
The following table presents the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Company's 2020 acquisitions. The final determination of the fair value of certain assets and liabilities will be completed within the one year measurement period as required by the FASB ASC Topic 805, “Business Combinations.” As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the purchase accounting assessment may result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the respective date of acquisition for all transactions (in millions):
| | | | | |
| |
| Tangible assets acquired | $ | 66.5 | |
| Intangible assets | 106.4 | |
| Goodwill | 99.7 | |
| Net deferred taxes | (8.6) | |
| Other liabilities assumed | (26.4) | |
| Total Estimate of Consideration Transferred, Net of Cash Acquired | $ | 237.6 | |
The Consolidated Financial Statements include the results of operations of the acquired businesses from their respective dates of acquisition. Net sales and earnings related to these acquisitions for the year ended December 31, 2020 were not significant to the consolidated results. Pro forma information related to these acquisitions has not been included because the impact to the Company’s consolidated results of operations was not material.
Cash used for the acquisition of businesses, net of cash acquired as reported in the Consolidated Statement of Cash Flows for the year ended December 31, 2020 is $239.6 million and includes approximately $2.0 million of net working capital settlements relating to acquisitions completed in the previous year.
| | | | | |
HUBBELL INCORPORATED- Form 10-K | 58 |
2019 Acquisitions
In the fourth quarter of 2019, the Company acquired all of the issued and outstanding shares of Cantega Technologies Inc., including its wholly owned subsidiary Greenjacket Inc., and all of the issued and outstanding shares of Reliaguard Inc. (collectively “Cantega”) for $38.4 million, net of cash acquired. Cantega is a provider of innovative asset protection solutions and services for electrical utilities that complements the Company's existing power systems business. Cantega is reported in the Utility Solutions segment. We have recognized intangible assets of $20.4 million, primarily consisting of customer relationships and technology, and goodwill of $16.9 million as a result of this acquisition. The intangible assets consists will be amortized over a weighted average period of approximately 12 years.
In the fourth quarter of 2019, the Company also acquired substantially all the assets of Connector Products, Incorporated (“CPI”) for $27.9 million. CPI is a manufacturer of electrical connectors and accessories for power utilities and mass transit systems. CPI is reported in the Electrical Solutions segment. We have recognized intangible assets of $12.8 million, primarily consisting of customer relationships and a tradename, and goodwill of $11.0 million as a result of this acquisition. The intangible assets will be amortized over a weighted average period of approximately 18 years.
In 2019 the Company also completed a $5.0 million asset acquisition, and recognized $4.7 million of goodwill as a result.
These business acquisitions have been accounted for as business combinations and have resulted in the recognition of goodwill. The goodwill relates to a number of factors implied in the purchase price, including the future earnings and cash flow potential of the businesses as well as the complementary strategic fit and resulting synergies they bring to the Company’s existing operations.
All of the goodwill associated with the 2019 acquisitions is deductible for tax purposes, except the goodwill associated with the acquisition of Cantega.
Allocation of Consideration Transferred to Net Assets Acquired
The following table presents the determination of the fair value of identifiable assets acquired and liabilities assumed from the Company's 2019 acquisitions. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations.
The following table summarizes the assets acquired and liabilities assumed as of the respective date of acquisition for all transactions (in millions):
| | | | | |
| |
| Tangible assets acquired | $ | 17.9 | |
| Intangible assets | 33.2 | |
| Goodwill | 32.5 | |
| Net deferred taxes | (4.4) | |
| Other liabilities assumed | (7.9) | |
| Total Estimate of Consideration Transferred, Net of Cash Acquired | $ | 71.3 | |
The Consolidated Financial Statements include the results of operations of the acquired businesses from their respective dates of acquisition. Net sales and earnings related to these acquisitions for the year ended December 31, 2019 were not significant to the consolidated results. Pro forma information related to these acquisitions has not been included because the impact to the Company’s consolidated results of operations was not material.
Cash used for the acquisition of businesses, net of cash acquired as reported in the Consolidated Statement of Cash Flows for the year ended December 31, 2019 is $70.8 million and includes approximately $1.5 million of deferred purchase price relating to an acquisition completed in a previous year.
| | | | | |
HUBBELL INCORPORATED- Form 10-K | 59 |
2018 Acquisition
On February 2, 2018, the Company completed the acquisition of Aclara for approximately $1.1 billion. Aclara is a leading global provider of smart infrastructure solutions for electric, gas, and water utilities, with advanced metering solutions and grid monitoring sensor technology, as well as leading software enabled installation services. The acquisition was structured as a merger in which Aclara became a wholly owned indirect subsidiary of the Company. Aclara's businesses have been added to the PowerUtility Solutions segment. The acquisition extends the PowerUtility Solutions segment's capabilities into smart automation technologies, accelerates ongoing innovation efforts to address utility customer demand for data and integrated solutions, and expands the segment's reach to a broader set of utility customers.
The Company financed the acquisition and related transactions with net proceeds from borrowings under a newan unsecured term loan facility in an aggregate principal amount of $500 million, the issuance of 3.50% Senior Notes due 2028 in an aggregate principal amount of $450 million and commercial paper borrowings.
Allocation of Consideration Transferred to Net Assets Acquired
The following table presents the determination of the fair value of identifiable assets acquired and liabilities assumed from the Company's acquisition of Aclara. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations.
The following are the assets acquired and the liabilities assumed by the Company in the Aclara acquisition, reconciled to the acquisition consideration (in millions):
|
| | | |
| Accounts receivable | $ | 118.1 |
|
| Inventories | 73.5 |
|
| Other current assets | 8.5 |
|
| Property, plant and equipment | 30.9 |
|
| Intangible assets | 434.0 |
|
| Accounts payable | (51.8 | ) |
| Other accrued liabilities | (93.3 | ) |
| Deferred tax liabilities, net | (42.1 | ) |
| Other non-current liabilities | (67.7 | ) |
| Noncontrolling interest | (2.5 | ) |
| Goodwill | 708.7 |
|
| Total Estimate of Consideration Transferred, Net of Cash Acquired | $ | 1,116.3 |
|
| | | | | |
| |
| Accounts receivable | $ | 118.1 | |
| Inventories | 73.5 | |
| Other current assets | 8.5 | |
| Property, plant and equipment | 30.9 | |
| Intangible assets | 434.0 | |
| Accounts payable | (51.8) | |
| Other accrued liabilities | (93.3) | |
| Deferred tax liabilities, net | (42.1) | |
| Other non-current liabilities | (67.7) | |
| Noncontrolling interest | (2.5) | |
| Goodwill | 708.7 | |
| Total Estimate of Consideration Transferred, Net of Cash Acquired | $ | 1,116.3 | |
Cash used for the acquisition of businesses, net of cash acquired as reported in the Consolidated Statement of Cash Flows for the twelve months ended December 31, 2018 is $1,118.0 million and includes approximately $1.7 million of deferred purchase price and net working capital settlements relating to acquisitions completed in priorprevious years.
In connection with the Aclara transaction, the Company recorded goodwill of $708.7 million, which is attributable primarily to expected synergies, expanded market opportunities, and other expected benefits that the Company believes will result from combining its operations with the operations of Aclara. For tax purposes, $159.9 million of the Aclara historical goodwill is deductible. The incremental goodwill created as a result of the acquisition is not deductible for tax purposes. Goodwill has been allocated to the PowerUtility Solutions segment.
The purchase price allocation to identifiable intangible assets acquired is as follows (in millions, except useful life amounts):
| | | | | | | | | | | |
| Estimated Fair Value | | Weighted Average Estimated Useful Life |
| Patents, tradenames and trademarks | $ | 55.0 | | | 20.0 |
| Customer relationships | 194.0 | | | 18.0 |
| Developed technology | 185.0 | | | 13.0 |
| Total | $ | 434.0 | | | |
Customer relationships and developed technology intangible assets acquired are amortized using an accelerated method that reflects the pattern in which economic benefits of the intangible assets are consumed and results in higher amortization in the earlier years of the asset's useful life.
For the year ended December 31, 2018, and 2017, the Company recorded transaction costs of $12.8 million and $7.1 million, respectively, relating to the Acquisitionacquisition of Aclara. These costs were recorded in the respective financial statement line items as follows (in millions):
|
| | | | | | | |
| | Twelve Months Ended December 31, |
| | 2018 | | 2017 |
| Selling & administrative expense | $ | 9.5 |
| | $ | 6.7 |
|
| Interest expense | 3.3 |
| | 0.4 |
|
| Total Aclara Transaction Costs | $ | 12.8 |
| | $ | 7.1 |
|
| | | | | |
| Twelve Months Ended December 31, |
| 2018 |
| Selling & administrative expense | $ | 9.5 | |
| Interest expense | 3.3 | |
| Total Aclara Transaction Costs | $ | 12.8 | |
|
| | | | |
HUBBELL INCORPORATED- Form 10-K | 5360 |
Supplemental Pro-Forma Data
Aclara’s results of operations have been included in the Company's financial statements for the period subsequent to the completion of the acquisition on February 2, 2018. Aclara contributed sales of approximately $611.1 million and operating income of approximately $29.6 million, before any transaction costs described below, for the period from the completion of the acquisition through December 31, 2018.
The following unaudited supplemental pro-forma information presents consolidated results as if the acquisition had been completed on January 1, 2017. Following that approach, for the purpose of the pro-forma results presented in the tables below, certain costs incurred by the Company during 2018 have been reclassified into the pro-forma 2017 period. Those reclassifications primarily include the following, which represent the amount of increase or (decrease) to reported results to arrive at the pro forma results. Per share amounts in 2018 reflect the reduction in the U.S. federal corporate income tax rate from 35% to 21%:
|
| | | | | | | | | | | | | | | |
| (pre-tax in millions, except per share amounts) | Twelve Months Ended December 31, | | Per Diluted Share |
| | 2018 | | 2017 | | 2018 | | 2017 |
Aclara transaction costs incurred in 2018(1) | $ | 12.8 |
| | $ | (12.8 | ) | | $ | 0.19 |
| | $ | (0.16 | ) |
Intangible amortization and inventory step up(2) | 1.3 |
| | (44.3 | ) | | 0.02 |
| | (0.50 | ) |
Interest expense(3) | 3.8 |
| | (27.6 | ) | | 0.05 |
| | (0.31 | ) |
(1)Aclara transaction costs incurred in 2018 have been reclassified into the comparable pro-forma 2017 period.
(2)Aclara intangible amortization and inventory step up amortization incurred in 2018 has been reclassified into the comparable pro-forma 2017 period and increased to reflect the assumption the transaction was completed on January 1, 2017. The pro-forma 2018 period include the intangible amortization that would be incurred assuming the transaction had been completed on January 1, 2017.
(3)Interest expense incurred in 2018, reflecting amounts incurred from the date of the acquisition, has been reclassified into the pro-forma 2017 period and increased to reflect the assumption the transaction was completed on January 1, 2017. The pro-forma 2018 period includes the interest expense that would have been incurred assuming the transaction had been completed on January 1, 2017.
The pro-forma results were calculated by combining the results of the Company with the stand-alone results of Aclara for the pre-acquisition periods, as described above:
|
| | | | | | | |
(in millions, except per share amounts) | Twelve Months Ended December 31, |
| | 2018 | | 2017 |
| Net sales | $ | 4,531.2 |
| | $ | 4,180.9 |
|
| Net income attributable to Hubbell | $ | 376.4 |
| | $ | 209.8 |
|
| Earnings Per Share: | | | |
| Basic | $ | 6.86 |
| | $ | 3.82 |
|
| Diluted | $ | 6.83 |
| | $ | 3.81 |
|
The unaudited supplemental pro-forma financial information does not reflect the actual performance of Aclara in the periods presented and does not reflect the potential realization of cost savings relating to the integration of the two companies. Further, the pro-forma data should not be considered indicative of the results that would have occurred if the acquisition and related financing had been consummated on January 1, 2017, nor are they indicative of future results. Per share amounts in 2018 reflect the reduction in the U.S. federal corporate income tax rate from 35% to 21%:
| | | | | | | | | |
(in millions, except per share amounts) | | | Twelve Months Ended December 31, |
| | | | | 2018 |
HUBBELL INCORPORATED- Form 10-K
Net sales | 54 | | | | $ | 4,531.2 | |
| Net income attributable to Hubbell | | | | | $ | 376.4 | |
| Earnings Per Share: | | | | | |
| Basic | | | | | $ | 6.86 | |
| Diluted | | | | | $ | 6.83 | |
In August 2019, the Company completed the sale of Haefely Test, AG (“Haefely”) for $38.1 million. Haefely designs and manufactures high voltage test equipment and is based in Basel, Switzerland. The Haefely business was previously included within the Electrical Solutions segment. Upon disposition, the Haefely business had tangible assets of $32.3 million (primarily composed of cash, accounts receivable, inventories, and property, plant and equipment), goodwill of $3.1 million, total liabilities of $12.2 million (primarily composed of accounts payable, accrued expenses, and cash received in advance from customers) and a $7.7 million balance of cumulative currency translation adjustments recognized within Accumulated other comprehensive income. As a result of the sale of Haefely, we recognized a pre-tax gain of $21.7 million that is included in Total other expense in the Consolidated Statement of Income.
NOTE 4 Receivables and Allowances
Receivables consist of the following components at December 31, (in millions):
| | | | | | | | |
| | 2020 | 2019 |
| Trade accounts receivable | $ | 658.2 | | $ | 696.8 | |
| Non-trade receivables | 23.4 | | 29.9 | |
| Accounts receivable, gross | 681.6 | | 726.7 | |
| Allowance for credit memos, returns and cash discounts | (34.4) | | (36.0) | |
| Allowance for doubtful accounts | (12.5) | | (7.7) | |
| Total allowances | (46.9) | | (43.7) | |
| ACCOUNTS RECEIVABLE, NET | $ | 634.7 | | $ | 683.0 | |
|
| | | | | | |
| | 2018 |
| 2017 |
|
| Trade accounts receivable | $ | 739.1 |
| $ | 576.3 |
|
| Non-trade receivables | 26.2 |
| 19.1 |
|
| Accounts receivable, gross | 765.3 |
| 595.4 |
|
Allowance for credit memos, returns and cash discounts(1) | (35.1 | ) | (50.5 | ) |
| Allowance for doubtful accounts | (4.8 | ) | (4.6 | ) |
| Total allowances | (39.9 | ) | (55.1 | ) |
| ACCOUNTS RECEIVABLE, NET | $ | 725.4 |
| $ | 540.3 |
|
(1) In 2017 includes $17.6 million of reserves for returns. Effective January 1, 2018, upon adoption of ASC 606, reserves for returns have been reclassified in the Consolidated Balance Sheet to Other accrued liabilities.
NOTE 5 Inventories
|
| | | | |
HUBBELL INCORPORATED- Form 10-K | 61 |
NOTE 5 Inventories
Inventories are classified as follows at December 31, (in millions):
| | | | | | | | |
| | 2020 | 2019 |
| Raw material | $ | 219.5 | | $ | 217.4 | |
| Work-in-process | 108.3 | | 101.8 | |
| Finished goods | 366.8 | | 403.6 | |
| Subtotal | 694.6 | | 722.8 | |
| Excess of FIFO over LIFO cost basis | (87.3) | | (89.8) | |
| INVENTORIES, NET | $ | 607.3 | | $ | 633.0 | |
|
| | | | | | |
| | 2018 |
| 2017 |
|
| Raw material | $ | 220.2 |
| $ | 190.0 |
|
| Work-in-process | 110.3 |
| 115.8 |
|
| Finished goods | 402.3 |
| 390.5 |
|
| | 732.8 |
| 696.3 |
|
| Excess of FIFO over LIFO cost basis | (81.8 | ) | (61.6 | ) |
| INVENTORIES, NET | $ | 651.0 |
| $ | 634.7 |
|
|
| |
HUBBELL INCORPORATED- Form 10-K
| 55 |
NOTE 6 Goodwill and Other Intangible Assets
Changes in the carrying amounts of goodwill for the years ended December 31, 20182020 and 2017,2019, by segment, were as follows (in millions):
| | | | | | | | | | | |
| | Segment | |
| | Electrical Solutions | Utility Solutions | Total |
| BALANCE AT DECEMBER 31, 2018 | $ | 714.1 | | $ | 1,070.3 | | $ | 1,784.4 | |
Current year acquisitions(1) | 15.2 | | 14.2 | | 29.4 | |
Dispositions(1) | (3.1) | | 0 | | (3.1) | |
| Foreign currency translation | 1.5 | | (0.4) | | 1.1 | |
| BALANCE AT DECEMBER 31, 2019 | $ | 727.7 | | $ | 1,084.1 | | $ | 1,811.8 | |
Current year acquisitions(1) | 21.1 | | 78.6 | | 99.7 | |
Prior year acquisitions(1) | 0.5 | | 2.6 | | 3.1 | |
| Foreign currency translation | 3.1 | | 5.6 | | 8.7 | |
| BALANCE AT DECEMBER 31, 2020 | $ | 752.4 | | $ | 1,170.9 | | $ | 1,923.3 | |
|
| | | | | | | | | |
| | Segment | |
| | Electrical |
| Power |
| Total |
|
| BALANCE AT DECEMBER 31, 2016 | $ | 652.0 |
| $ | 339.0 |
| $ | 991.0 |
|
| Current year acquisitions | 58.7 |
| 29.8 |
| 88.5 |
|
| Foreign currency translation and prior year acquisitions | 6.9 |
| 2.6 |
| 9.5 |
|
| BALANCE AT DECEMBER 31, 2017 | $ | 717.6 |
| $ | 371.4 |
| $ | 1,089.0 |
|
| Current year acquisitions | — |
| 708.7 |
| 708.7 |
|
| Foreign currency translation and prior year acquisitions | (3.5 | ) | (9.8 | ) | (13.3 | ) |
| BALANCE AT DECEMBER 31, 2018 | $ | 714.1 |
| $ | 1,070.3 |
| $ | 1,784.4 |
|
In 2018,2020, the Company completed one acquisition (Aclara) that was added to the Power segment. The acquisition hasmultiple acquisitions. These acquisitions have been accounted for as a business combinationcombinations and hashave resulted in the recognition of $708.7$99.7 million of goodwill. See also Note 3 — Business Acquisitions.
The Company has not recorded any material goodwill impairments since the initial adoption of the related accounting guidance in 2002.
Identifiable intangible assets are recorded in Intangible assets, net in the Consolidated Balance Sheet. Identifiable intangible assets are comprised of the following (in millions):
| | | | December 31, 2018 | | December 31, 2017 | | December 31, 2020 | | December 31, 2019 |
| | Gross Amount |
| Accumulated Amortization |
| | Gross Amount |
| Accumulated Amortization |
| | Gross Amount | Accumulated
Amortization | | Gross Amount | Accumulated
Amortization |
| Definite-lived: | |
| |
| | |
| |
| Definite-lived: | | | |
| Patents, tradenames and trademarks | $ | 204.4 |
| $ | (58.6 | ) | | $ | 151.4 |
| $ | (50.1 | ) | Patents, tradenames and trademarks | $ | 213.4 | | $ | (73.8) | | | $ | 202.7 | | $ | (65.0) | |
| Customer/agent relationships and other | 833.0 |
| (212.6 | ) | | 462.0 |
| (156.7 | ) | |
| Customer relationships, developed technology and other | | Customer relationships, developed technology and other | 958.0 | | (340.6) | | | 861.0 | | (270.8) | |
| TOTAL DEFINITE-LIVED INTANGIBLES | 1,037.4 |
| (271.2 | ) | | 613.4 |
| (206.8 | ) | TOTAL DEFINITE-LIVED INTANGIBLES | 1,171.4 | | (414.4) | | | 1,063.7 | | (335.8) | |
| Indefinite-lived: | |
| |
| | |
| |
| Indefinite-lived: | | | |
| Tradenames and other | 53.3 |
| — |
| | 53.8 |
| — |
| Tradenames and other | 53.6 | | — | | | 53.6 | | — | |
| TOTAL INTANGIBLE ASSETS | $ | 1,090.7 |
| $ | (271.2 | ) | | $ | 667.2 |
| $ | (206.8 | ) | |
| TOTAL OTHER INTANGIBLE ASSETS | | TOTAL OTHER INTANGIBLE ASSETS | $ | 1,225.0 | | $ | (414.4) | | | $ | 1,117.3 | | $ | (335.8) | |
Amortization expense associated with these definite-lived intangible assets was $75.4 million, $72.0 million and $68.9 million $34.9 millionin 2020, 2019 and $32.3 million in 2018, 2017 and 2016, respectively. Amortization expense associated with these intangible assets is expected to be $71.9 million in 2019, $71.2 million in 2020, $69.5$80.4 million in 2021, $64.2$74.1 million in 2022, and $59.6$69.3 million in 2023.
2023, $64.4 million in 2024 and $59.8 million in 2025. The Company amortizes intangible assets with definite lives using either an accelerated method that reflects the pattern in which economic benefits of the intangible assets are consumed and results in higher amortization in the earlier years of the assets useful life, or using a straight line method. Approximately 77% of the gross value of definite-lived intangible assets follow an accelerated amortization method.
| | | | | |
| 62 | HUBBELL INCORPORATED - Form 10-K |
NOTE 7 Investments
| | | | | |
| |
56 | HUBBELL INCORPORATED - Form 10-K
|
NOTE 7 Investments
At December 31, 20182020 and December 31, 2017,2019, the Company held investments classified as available-for-sale and investments classified as trading securities. Investments classified as available-for-sale consisted of municipal bonds with an amortized cost basis of $49.0$56.4 million and an investment in the redeemable preferred stockas of a privately-held electrical utility substation security provider with an amortized cost basis of $5.0 million. The investment in redeemable preferred stock was classified in Level 3 of the fair value hierarchy and had a fair value of $2.3 million and $4.1 million at December 31, 2018 and 2017, respectively.2020. Investments classified as trading securities were composed primarily of debt and equity mutual funds and are stated at fair market value based on current quotes.
The following table sets forth selected data with respect to the Company’s investments at December 31, (in millions): | | | | 2018 | | 2017 | | 2020 | | 2019 |
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Carrying Value | | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Carrying Value | | Amortized
Cost | Gross Unrealized
Gains | Gross
Unrealized
Losses | Fair
Value | Carrying
Value | | Amortized
Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair
Value | Carrying
Value |
| Available-for-sale securities | $54.0 | $1.1 | $(3.9) | $51.2 | | $59.3 | $0.1 | $(1.0) | $58.4 | Available-for-sale securities | $56.4 | $1.4 | $(0.1) | $57.7 | | $50.0 | $0.8 | $(0.1) | $50.7 |
| Trading securities | 10.1 | 4.2 | — | 14.3 | 14.3 | | 8.9 | 4.9 | — | 13.8 | Trading securities | 13.1 | 9.6 | 0 | 22.7 | | 12.0 | 7.2 | 0 | 19.2 |
| TOTAL INVESTMENTS | $64.1 | $5.3 | $(3.9) | $65.5 | | $68.2 | $5.0 | $(1.0) | $72.2 | TOTAL INVESTMENTS | $69.5 | $11.0 | $(0.1) | $80.4 | | $62.0 | $8.0 | $(0.1) | $69.9 |
Contractual maturities of our investments in available-for-sale securities at December 31, 20182020 were as follows (in millions):
| | | | Amortized Cost |
| Fair Value |
| | Amortized Cost | Fair Value |
| Available-for-sale securities | |
| |
| Available-for-sale securities | |
| Due within 1 year | $ | 9.2 |
| $ | 9.2 |
| Due within 1 year | $ | 9.3 | | $ | 9.4 | |
| After 1 year but within 5 years | 28.8 |
| 26.0 |
| After 1 year but within 5 years | 37.9 | | 38.7 | |
| After 5 years but within 10 years | 13.4 |
| 13.4 |
| After 5 years but within 10 years | 4.3 | | 4.6 | |
| Due after 10 years | 2.6 |
| 2.6 |
| Due after 10 years | 4.9 | | 5.0 | |
| TOTAL | $ | 54.0 |
| $ | 51.2 |
| TOTAL | $ | 56.4 | | $ | 57.7 | |
The total unrealized gain/(loss) recognized in the year relating to available-for-sale securities, net of tax, was $(1.4) $0.4 million and $0.6$2.6 million at December 31, 20182020 and 2017,2019, respectively. These net unrealized gains/(losses) are included in Accumulated other comprehensive loss, net of tax. Net unrealized gains relating to trading securities have been reflected in the results of operations. The Company uses the specific identification method when identifying the cost basis used to calculate the gain or loss on these securities. Gains and losses for both available-for-sale and trading securities were not material in 2018, 20172020, 2019 and 2016.2018.
At December 31, 2020 and December 31, 2019, the Company had $57.7 million and $50.7 million, respectively, of available-for-sale municipal debt securities. These investments had an amortized cost of $56.4 million and $50.0 million, respectively. No allowance for credit losses related to our available-for-sale debt securities was recorded for the twelve months ended December 31, 2020. As of December 31, 2020 and December 31, 2019 the unrealized losses attributable to our available-for-sale debt securities was $0.1 million at each period end. The fair value of available-for-sale debt securities with unrealized losses was $6.1 million at December 31, 2020 and $3.6 million at December 31, 2019.
In the third quarter of 2019, the Company disposed of an available-for-sale investment in a privately-held company that was previously classified in Level 3 of the fair value hierarchy and recognized a $5.0 million pre-tax loss classified in Other expense, net in the Consolidated Statements of Income.
| | | | | |
HUBBELL INCORPORATED- Form 10-K | 63 |
NOTE 8 Property, Plant, and Equipment
Property, plant, and equipment, carried at cost, is summarized as follows at December 31, (in millions):
| | | | 2018 |
| 2017 |
| | 2020 | 2019 |
| Land | $ | 42.2 |
| $ | 40.0 |
| Land | $ | 37.2 | | $ | 37.7 | |
| Buildings and improvements | 277.3 |
| 272.2 |
| Buildings and improvements | 282.7 | | 285.3 | |
| Machinery, tools, and equipment | 863.5 |
| 806.2 |
| Machinery, tools, and equipment | 924.4 | | 896.0 | |
| Construction-in-progress | 46.2 |
| 43.4 |
| Construction-in-progress | 57.4 | | 35.3 | |
| Gross property, plant, and equipment | 1,229.2 |
| 1,161.8 |
| Gross property, plant, and equipment | 1,301.7 | | 1,254.3 | |
| Less accumulated depreciation | (727.1 | ) | (703.5 | ) | Less accumulated depreciation | (782.5) | | (749.1) | |
| PROPERTY, PLANT, AND EQUIPMENT, NET | $ | 502.1 |
| $ | 458.3 |
| PROPERTY, PLANT, AND EQUIPMENT, NET | $ | 519.2 | | $ | 505.2 | |
Depreciable lives on buildings range between 20-45years. Depreciable lives on machinery, tools, and equipment range between 3-15 years. The Company recorded depreciation expense of $71.5 million, $70.0 million and $66.1 million $57.5 millionfor 2020, 2019 and $53.4 million for 2018, 2017 and 2016, respectively.
| | | | | |
| 64 | HUBBELL INCORPORATED - Form 10-K |
NOTE 9 Other Accrued Liabilities
| | | | | |
| |
HUBBELL INCORPORATED- Form 10-K
| 57 |
NOTE 9 Other Accrued Liabilities
Other accrued liabilities consist of the following at December 31, (in millions):
| | | | | | | | |
| | 2020 | 2019 |
| Customer program incentives | $ | 40.7 | | $ | 49.0 | |
| Accrued income taxes | 4.6 | | 6.0 | |
| Contract liabilities - deferred revenue | 30.9 | | 31.0 | |
| Customer refund liability | 17.4 | | 19.0 | |
Accrued warranties(1) | 28.7 | | 24.0 | |
| Current operating lease liabilities | 32.1 | | 29.6 | |
| Other | 99.6 | | 103.6 | |
| TOTAL | $ | 254.0 | | $ | 262.2 | |
|
| | | | | | |
| | 2018 |
| 2017 |
|
| Customer program incentives | $ | 52.4 |
| $ | 41.2 |
|
| Accrued income taxes | 3.4 |
| 27.5 |
|
| Contract liabilities - deferred revenue | 27.7 |
| 10.2 |
|
| Customer refund liability | 15.3 |
| — |
|
Accrued warranties(1) | 33.5 |
| 14.0 |
|
| Other | 94.3 |
| 82.0 |
|
| TOTAL | $ | 226.6 |
| $ | 174.9 |
|
(1)Refer to Note 21 – Guarantees for additional information regarding warranties.
NOTE 10 Other Non-Current Liabilities
Other non-current liabilities consists of the following at December 31, (in millions):
| | | | | | | | |
| | 2020 | 2019 |
| Pensions | $ | 199.0 | | $ | 198.5 | |
| Other post-employment benefits | 21.2 | | 21.5 | |
| Deferred tax liabilities | 135.3 | | 126.8 | |
Accrued warranties long-term(1) | 51.8 | | 58.1 | |
| Non-current operating lease liabilities | 74.9 | | 71.7 | |
| Other | 132.4 | | 115.0 | |
| TOTAL | $ | 614.6 | | $ | 591.6 | |
|
| | | | | | |
| | 2018 |
| 2017 |
|
| Pensions | $ | 177.0 |
| $ | 213.2 |
|
| Other post-employment benefits | 23.7 |
| 24.6 |
|
| Deferred tax liabilities | 120.0 |
| 23.7 |
|
Accrued warranties long-term(1) | 59.2 |
| — |
|
| Other | 116.9 |
| 118.0 |
|
| TOTAL | $ | 496.8 |
| $ | 379.5 |
|
(1)Refer to Note 21 – Guarantees for additional information regarding warranties.
|
| | | | |
58 | HUBBELL INCORPORATED- Form 10-K | 65 |
NOTE 11 Retirement Benefits
The Company has funded and unfunded non-contributory U.S. and foreign defined benefit pension plans. Benefits under these plans are generally provided based on either years of service and final average pay or a specified dollar amount per year of service. The U.S. defined benefit pension plan has been closed to new participants since 2004, while the Canadian and UK defined benefit pension plans have been closed to new entrants since 2006 and 2007, respectively. These U.S., Canadian and UK employees are eligible instead for defined contribution plans.
The Company also has a number of health care and life insurance benefit plans covering eligible employees who reached retirement age while working for the Company. These benefits have been discontinued for substantially all future retirees. The Company anticipates future cost-sharing charges for its discontinued plans that are consistent with past practices. The Company uses a December 31 measurement date for all of its plans.
In 2020, the Company recognized a $7.6 million settlement loss relating to retirees that elected to receive lump-sum distributions from the Company's defined benefit pension plans. This charge was the result of lump-sum payments which exceeded the threshold for settlement accounting under U.S. GAAP for 2020.
In 2019, the Company approved amendments to one of its domestic qualified defined benefit pension plans, which froze service accruals for nearly all active participants within the plan effective January 1, 2020. As a result of the amendment, the Company recognized a $0.3 million curtailment charge, net of tax. Effective January 1, 2020, the amortization of unrecognized gains and losses of all of the Company's qualified defined benefit pension plans is recognized over the remaining life expectancy of participants, as nearly all participants are considered inactive as a result of plan amendments.
In the third quarter of 2018, the Company approved amendments to one1 of its foreign defined benefit pension plans, which closed the plan to future service accruals effective August 31, 2018. As a result of the amendments, in the third quarter of 2018, the Company recognized a curtailment gain of approximately $4.7 million, net of tax, in Accumulated other comprehensive income. In addition, effective August 31, 2018, the amortization of actuarial gains and losses is being recognized over the remaining life expectancy of the participants of this plan, as all participants are considered inactive as a result of the amendment.
In December 2016, the Company approved amendments to the domestic qualified defined benefit pension plan and non-qualified defined benefit plan, which froze service accruals for active participants effective February 28, 2017 and further will freeze compensation accruals effective December 31, 2020. The Company also froze all accruals in a second non-qualified defined benefit plan effective December 31, 2016.
As a result of these amendments, the Company recognized a $34.1 million curtailment gain in Accumulated other comprehensive income as of December 31, 2016 and also recognized $0.2 million of pension expense in 2016 associated with previously unrecognized prior service costs. In addition, effective January 1, 2017, the amortization of actuarial gains and losses of these plans is being recognized over the remaining life expectancy of participants, as all participants are considered inactive as a result of the amendment.
In 2018, and 2016, we completed transactions with a third-party insurersinsurer to settle approximately $28 million and $40 million, respectively, of projected benefit obligation of our domestic qualified defined benefit pension plans.
The Company's U.S. defined benefit pension plans were approximately 88%87% of the $844.3$994.2 million total pension benefit obligations at December 31, 2018.2020.
|
| | | | |
| 66 | HUBBELL INCORPORATED- Form 10-K | 59 |
The following table sets forth the reconciliation of beginning and ending balances of the benefit obligations and the plan assets for the Company’s defined benefit pension and other benefit plans at December 31, (in millions):
| | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| | 2020 | 2019 | | 2020 | 2019 |
| Change in benefit obligation | |
| |
| | |
| |
| Change in benefit obligation | | | | | |
| Benefit obligation at beginning of year | $ | 956.1 |
| $ | 917.4 |
| | $ | 27.0 |
| $ | 26.2 |
| Benefit obligation at beginning of year | $ | 938.7 | | $ | 844.3 | | | $ | 23.8 | | $ | 26.1 | |
| Acquisitions | 1.3 |
| — |
| | — |
| — |
| |
| | Service cost | 3.8 |
| 5.9 |
| | 0.1 |
| 0.1 |
| Service cost | 1.2 | | 2.2 | | | 0 | | 0.1 | |
| Interest cost | 34.3 |
| 37.2 |
| | 1.0 |
| 1.0 |
| Interest cost | 28.0 | | 34.6 | | | 0.7 | | 1.1 | |
| Plan participants’ contributions | 0.4 |
| 0.6 |
| | — |
| — |
| Plan participants’ contributions | 0 | | 0.4 | | | 0 | | 0 | |
| Amendments | 3.6 |
| 0.3 |
| | — |
| — |
| |
| | Actuarial loss/(gain) | (72.4 | ) | 29.7 |
| | (0.5 | ) | 1.4 |
| Actuarial loss/(gain) | 89.6 | | 107.0 | | | 0.2 | | (2.0) | |
| Curtailment gain | (5.7 | ) | — |
| | — |
| — |
| Curtailment gain | (0.1) | | 0 | | | 0 | | 0 | |
| Settlements | | Settlements | (24.7) | | 0 | | | 0 | | 0 | |
| Currency impact | (5.7 | ) | 9.7 |
| | — |
| — |
| Currency impact | 5.1 | | 3.6 | | | 0 | | 0 | |
| Other | (0.5 | ) | (0.4 | ) | | — |
| — |
| Other | 0 | | 0.1 | | | 0 | | 0 | |
| Benefits paid | (70.9 | ) | (44.3 | ) | | (1.5 | ) | (1.7 | ) | Benefits paid | (43.6) | | (53.5) | | | (1.5) | | (1.5) | |
| Benefit obligation at end of year | $ | 844.3 |
| $ | 956.1 |
| | $ | 26.1 |
| $ | 27.0 |
| Benefit obligation at end of year | $ | 994.2 | | $ | 938.7 | | | $ | 23.2 | | $ | 23.8 | |
| Change in plan assets | | | | | | Change in plan assets | | | | |
| Fair value of plan assets at beginning of year | $ | 738.8 |
| $ | 705.1 |
| | $ | — |
| $ | — |
| Fair value of plan assets at beginning of year | $ | 743.4 | | $ | 670.1 | | | $ | 0 | | $ | 0 | |
| Acquisitions | 1.2 |
| — |
| | — |
| — |
| |
| | Actual return on plan assets | (27.5 | ) | 58.6 |
| | — |
| — |
| Actual return on plan assets | 94.9 | | 106.2 | | | 0 | | 0 | |
| Employer contributions | 34.0 |
| 9.8 |
| | 1.5 |
| 1.7 |
| Employer contributions | 29.5 | | 16.4 | | | 1.5 | | 1.5 | |
| Plan participants’ contributions | 0.4 |
| 0.6 |
| | — |
| — |
| Plan participants’ contributions | 0 | | 0.4 | | | 0 | | 0 | |
| Settlements | | Settlements | (24.7) | | 0 | | | 0 | | 0 | |
| Currency impact | (5.9 | ) | 9.0 |
| | — |
| — |
| Currency impact | 5.6 | | 3.8 | | | 0 | | 0 | |
| Benefits paid | (70.9 | ) | (44.3 | ) | | (1.5 | ) | (1.7 | ) | Benefits paid | (43.6) | | (53.5) | | | (1.5) | | (1.5) | |
| Fair value of plan assets at end of year | $ | 670.1 |
| $ | 738.8 |
| | $ | — |
| $ | — |
| Fair value of plan assets at end of year | $ | 805.1 | | $ | 743.4 | | | $ | 0 | | $ | 0 | |
| FUNDED STATUS | $ | (174.2 | ) | $ | (217.3 | ) | | $ | (26.1 | ) | $ | (27.0 | ) | FUNDED STATUS | $ | (189.1) | | $ | (195.3) | | | $ | (23.2) | | $ | (23.8) | |
| Amounts recognized in the consolidated balance sheet consist of: | | | | | | Amounts recognized in the consolidated balance sheet consist of: | | | | |
| Prepaid pensions (included in Other long-term assets) | $ | 8.0 |
| $ | 1.5 |
| | $ | — |
| $ | — |
| Prepaid pensions (included in Other long-term assets) | $ | 16.4 | | $ | 8.6 | | | $ | 0 | | $ | 0 | |
| Accrued benefit liability (short-term and long-term) | (182.2 | ) | (218.8 | ) | | (26.1 | ) | (27.0 | ) | Accrued benefit liability (short-term and long-term) | (205.5) | | (203.9) | | | (23.2) | | (23.8) | |
| NET AMOUNT RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET | $ | (174.2 | ) | $ | (217.3 | ) | | $ | (26.1 | ) | $ | (27.0 | ) | NET AMOUNT RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET | $ | (189.1) | | $ | (195.3) | | | $ | (23.2) | | $ | (23.8) | |
| Amounts recognized in Accumulated other comprehensive loss (income) consist of: | | | | | | Amounts recognized in Accumulated other comprehensive loss (income) consist of: | | | | |
| Net actuarial loss | $ | 240.8 |
| $ | 270.1 |
| | $ | 2.4 |
| $ | 3.0 |
| Net actuarial loss | $ | 275.4 | | $ | 263.4 | | | $ | 0.6 | | $ | 0.3 | |
| Prior service cost (credit) | 4.1 |
| 0.6 |
| | (1.3 | ) | (2.3 | ) | Prior service cost (credit) | 3.5 | | 3.6 | | | 0 | | (0.4) | |
| NET AMOUNT RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE LOSS | $ | 244.9 |
| $ | 270.7 |
| | $ | 1.1 |
| $ | 0.7 |
| NET AMOUNT RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE LOSS | $ | 278.9 | | $ | 267.0 | | | $ | 0.6 | | $ | (0.1) | |
The accumulated benefit obligation for all defined benefit pension plans was $835.6$993.9 million and $924.6$933.5 million at December 31, 20182020 and 2017,2019, respectively. Information with respect to plans with accumulated benefit obligations in excess of plan assets is as follows, (in millions):
| | | | 2018 |
| 2017 |
| | 2020 | 2019 |
| Projected benefit obligation | $ | 744.0 |
| $ | 842.7 |
| Projected benefit obligation | $ | 865.1 | | $ | 823.8 | |
| Accumulated benefit obligation | $ | 735.4 |
| $ | 826.5 |
| Accumulated benefit obligation | $ | 865.1 | | $ | 819.0 | |
| Fair value of plan assets | $ | 561.7 |
| $ | 626.3 |
| Fair value of plan assets | $ | 659.5 | | $ | 620.0 | |
|
| | | | |
60 | HUBBELL INCORPORATED- Form 10-K | 67 |
The following table sets forth the components of pension and other benefit costs for the years ended December 31, (in millions):
| | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
| | 2020 | 2019 | 2018 | | 2020 | 2019 | 2018 |
| Components of net periodic benefit cost: | |
| |
| |
| | |
| |
| |
| Components of net periodic benefit cost: | | | | | |
| Service cost | $ | 3.8 |
| $ | 5.9 |
| $ | 12.9 |
| | $ | 0.1 |
| $ | 0.1 |
| $ | — |
| Service cost | $ | 1.2 | | $ | 2.2 | | $ | 3.8 | | | $ | 0 | | $ | 0.1 | | $ | 0.1 | |
| Interest cost | 34.3 |
| 37.2 |
| 41.9 |
| | 1.0 |
| 1.0 |
| 1.2 |
| Interest cost | 28.0 | | 34.6 | | 34.3 | | | 0.7 | | 1.1 | | 1.0 | |
| Expected return on plan assets | (33.5 | ) | (34.1 | ) | (44.3 | ) | | — |
| — |
| — |
| Expected return on plan assets | (33.9) | | (30.7) | | (33.5) | | | 0 | | 0 | | 0 | |
| Amortization of prior service cost (credit) | 0.1 |
| 0.1 |
| 0.1 |
| | (0.8 | ) | (1.0 | ) | (1.0 | ) | Amortization of prior service cost (credit) | 0.2 | | 0.2 | | 0.1 | | | (0.4) | | (0.9) | | (0.8) | |
| Amortization of actuarial losses (gains) | 10.5 |
| 11.4 |
| 13.9 |
| | — |
| — |
| — |
| Amortization of actuarial losses (gains) | 9.8 | | 9.6 | | 10.5 | | | (0.1) | | 0.1 | | 0 | |
| Curtailment and settlement losses | — |
| 0.4 |
| 0.2 |
| | — |
| — |
| — |
| Curtailment and settlement losses | 7.5 | | 0.3 | | 0 | | | 0 | | 0 | | 0 | |
| Net periodic benefit cost | $ | 15.2 |
| $ | 20.9 |
| $ | 24.7 |
| | $ | 0.3 |
| $ | 0.1 |
| $ | 0.2 |
| Net periodic benefit cost | $ | 12.8 | | $ | 16.2 | | $ | 15.2 | | | $ | 0.2 | | $ | 0.4 | | $ | 0.3 | |
| Changes recognized in other comprehensive loss (income), before tax: | | | | | | Changes recognized in other comprehensive loss (income), before tax: | | | | |
| Current year net actuarial loss (gain) | $ | (15.8 | ) | $ | 4.2 |
| $ | 72.0 |
| | $ | (0.4 | ) | $ | 1.4 |
| $ | 0.2 |
| Current year net actuarial loss (gain) | $ | 28.6 | | $ | 31.5 | | $ | (15.8) | | | $ | 0.1 | | $ | (2.0) | | $ | (0.4) | |
| Current year prior service credit | 2.0 |
| 0.3 |
| — |
| | — |
| — |
| — |
| Current year prior service credit | 0 | | 0 | | 2.0 | | | 0 | | 0 | | 0 | |
| Amortization of prior service (cost) credit | (0.1 | ) | (0.1 | ) | (0.1 | ) | | 1.0 |
| 1.0 |
| 1.0 |
| Amortization of prior service (cost) credit | (0.2) | | (0.2) | | (0.1) | | | 0.4 | | 0.9 | | 1.0 | |
| Amortization of net actuarial (losses) gains | (10.5 | ) | (11.4 | ) | (13.9 | ) | | (0.2 | ) | — |
| — |
| Amortization of net actuarial (losses) gains | (9.8) | | (9.6) | | (10.5) | | | 0.1 | | (0.1) | | (0.2) | |
| Currency impact | (1.3 | ) | 3.5 |
| (4.0 | ) | | — |
| — |
| — |
| Currency impact | 0.1 | | 0.7 | | (1.3) | | | 0 | | 0 | | 0 | |
| Other adjustments | — |
| (0.4 | ) | (0.2 | ) | | — |
| — |
| — |
| |
| Settlement adjustment | | Settlement adjustment | (7.6) | | 0 | | 0 | | | 0 | | 0 | | 0 | |
| Curtailment adjustments | | Curtailment adjustments | 0.1 | | (0.3) | | 0 | | | 0 | | 0 | | 0 | |
| Total recognized in other comprehensive loss | (25.7 | ) | (3.9 | ) | 53.8 |
| | 0.4 |
| 2.4 |
| 1.2 |
| Total recognized in other comprehensive loss | 11.2 | | 22.1 | | (25.7) | | | 0.6 | | (1.2) | | 0.4 | |
| TOTAL RECOGNIZED IN NET PERIODIC PENSION COST AND OTHER COMPREHENSIVE LOSS | $ | (10.5 | ) | $ | 17.0 |
| $ | 78.5 |
| | $ | 0.7 |
| $ | 2.5 |
| $ | 1.4 |
| TOTAL RECOGNIZED IN NET PERIODIC PENSION COST AND OTHER COMPREHENSIVE LOSS | $ | 24.0 | | $ | 38.3 | | $ | (10.5) | | | $ | 0.8 | | $ | (0.8) | | $ | 0.7 | |
|
The Company also maintains five5 primary defined contribution pension plans. The total cost of the Company's defined contribution plans was $23.1 million in 2020, $23.4 million in 2019 and $22.5 million in 2018, $19.8 million in 2017 and $15.6 million in 2016, excluding the employer match for the 401(k) plan. This cost is not included in the above net periodic benefit cost for the defined benefit pension plans.
TheIn 2018, 2019 and 2020 the Company participated in two1 multi-employer defined benefit pension plans under the terms of collective-bargaining agreements that cover its union represented employees at December 31, 2016. In 2017, the Company withdrew from one of these plans.plan. The Company’s total contributions to plans it participatedwhile participating in werethis plan was $0.2 million in 2018, $0.4 million in 2017, and $0.5 million in 2016. These contributions represent more than five percent of the total contributions made to oneeach of these plans in 2018, 2017 and 2016.years.
The risks of participating in multi-employer plans are different from single-employer plans in that assets contributed are pooled and may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may have to be assumed by the remaining participant employers. If we choose to stop participating in a multi-employer plan we may be required to pay those plans a withdrawal liability based on the unfunded status of the plan.
In the fourth quarter of 2016, the Company recorded a charge of $12.5 million in Cost of goods sold representing the estimated withdrawal liability from onea multi-employer plan from which it subsequently withdrew in 2017. In March 2019, the remaining employer in that multi-employer pension plan filed for protection under Chapter 11 of the multi-employer plans. Depending on actionsUnited States Bankruptcy Code and was proceeding towards liquidation as of third parties, including bankruptcy or withdrawals fromJune 2019. It was therefore deemed probable that the multi-employer plan,Company would be subject to mass withdrawal liability under the terms customary to multi-employer plans, it is possible thatplans. Further, the Company could intrustees of the future be subject to certain additional liabilities associated with its participation and withdraw frompension fund announced the termination of the multi-employer pension plan whichand declared the amounts attributed to the other employer uncollectible. In December 2019, the Company estimates could be up toentered into a settlement agreement with the multi-employer pension plan. As a result, the Company recognized an additional $23$8.5 million asnet charge in 2019 to settle the mass withdrawal obligation and made scheduled payments of $10.0 million in 2019, $6.0 million in 2020, and is obligated to fund an additional $5.0 million payable before December 31, 2018.2021, according to the terms of that settlement agreement.
|
| | | | |
| 68 | HUBBELL INCORPORATED- Form 10-K | 61 |
The following assumptions were used to determine the projected benefit obligations at the measurement date and the net periodic benefit cost for the year:
| | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| | 2018 |
| 2017 |
| 2016 |
| | 2018 |
| 2017 |
| 2016 |
| | 2020 | 2019 | 2018 | | 2020 | 2019 | 2018 |
| Weighted-average assumptions used to determine benefit obligations at December 31, | |
| |
| |
| | | |
| |
| Weighted-average assumptions used to determine benefit obligations at December 31, | | | | | |
| Discount rate | 4.24 | % | 3.67 | % | 4.12 | % | | 4.40 | % | 3.70 | % | 4.10 | % | Discount rate | 2.47 | % | 3.17 | % | 4.24 | % | | 2.50 | % | 3.30 | % | 4.40 | % |
| Rate of compensation increase | 3.25 | % | 3.24 | % | 3.55 | % | | 4.05 | % | 4.00 | % | 3.93 | % | Rate of compensation increase | 0.24 | % | 2.94 | % | 3.25 | % | | 3.99 | % | 4.00 | % | 4.05 | % |
| Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, | | | | | | Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, | | | | |
| Discount rate | 3.67 | % | 4.12 | % | 4.71 | % | | 3.70 | % | 4.10 | % | 4.60 | % | Discount rate | 3.17 | % | 4.24 | % | 3.67 | % | | 3.30 | % | 4.40 | % | 3.70 | % |
| Expected return on plan assets | 4.68 | % | 4.94 | % | 6.04 | % | | N/A |
| N/A |
| N/A |
| Expected return on plan assets | 4.69 | % | 4.75 | % | 4.68 | % | | N/A | N/A |
| Rate of compensation increase | 3.25 | % | 3.55 | % | 3.59 | % | | 4.00 | % | 3.93 | % | 3.92 | % | Rate of compensation increase | 2.94 | % | 3.25 | % | 3.24 | % | | 4.00 | % | 4.05 | % | 4.00 | % |
At the end of each year, the Company determines the appropriate expected return on assets for each plan based upon its strategic asset allocation (see discussion below). In making this determination, the Company utilizes expected returns for each asset class based upon current market conditions and expected risk premiums for each asset class.
The Company also determines the discount rate to be used to calculate the present value of pension plan liabilities at the end of each year. The discount rate for the Company’s U.S. and Canadian pension plans is determined by matching the expected cash flows associated with its benefit obligations to the expected cash flows of a hypothetical portfolio of high quality, fixed income debt instruments with maturities that closely match the expected funding period of its pension liabilities. As of December 31, 2018,2020, the Company used a discount rate of 4.40%2.60% for its U.S. pension plans compared to a discount rate of 3.80%3.30% used in 2017.2019. For its Canadian pension plan, the Company used a discount rate of 3.60%2.55% as of December 31, 20182020 compared to the 3.50%a 3.00% discount rate used in 2017.2019.
For its UK pension plan the discount rate was derived using a full yield curve fitted to the yields on AA bonds in the Barclays Capital Sterling Aggregate Corporate Index and uses sample plan cash flow data as a proxy to plan specific liability cash flows. The derived discount rate is the single discount rate equivalent to discounting these liability cash flows at the term-dependent spot rate of AA corporate bonds. This methodology resulted in a December 31, 20182020 discount rate for the UK pension plan of 2.90%1.40% as compared to a discount rate of 2.60%2.10% used in 2017.2019.
In 20182019 we changed the mortality table used to calculate the present value of our pension plan liabilities from the RP-2014 mortality table, with generational projection from 2006 using Scale MP-2017MP-2018 to the RP-2014Pri-2012 mortality table, with generational projection from 20062012 using Scale MP-2018. That changeMP-2019. In 2020 we continued to use the Pri-2012 mortality table and adopted the MP-2020 projection scale. The Pri-2012 mortality table with adjustment for collar as appropriate and generational projection from 2012 using Scale MP-2020 was chosen as the best estimate based on the observed and anticipated experience of the plans after considering alternative tables. These changes did not have a material impact to the projected benefit obligation of our U.S. plans upon remeasurement at December 31, 2018. The RP-2014 mortality table with generational projection from 2006 using Scale MP-2018 was chosen as the best estimate based on the observed2019 and anticipated experience of the plans after considering alternative tables.December 31, 2020.
The rate of compensation increase assumption reflects the Company’s actual experience and best estimate of future increases.
|
| |
62 | HUBBELL INCORPORATED - Form 10-K
|
The assumed health care cost trend rates used to determine the projected postretirement benefit obligation are as follows:
| | | | | | | | | | | |
| | Other Benefits |
| | 2020 | 2019 | 2018 |
| Assumed health care cost trend rates at December 31, | | | |
| Health care cost trend assumed for next year | 6.4 | % | 6.6 | % | 6.8 | % |
| Rate to which the cost trend is assumed to decline | 5.0 | % | 5.0 | % | 5.0 | % |
| Year that the rate reaches the ultimate trend rate | 2028 | 2028 | 2028 |
|
| | | | | | |
| | Other Benefits |
| | 2018 |
| 2017 |
| 2016 |
|
| Assumed health care cost trend rates at December 31, | |
| |
| |
|
| Health care cost trend assumed for next year | 6.8 | % | 7.0 | % | 7.2 | % |
| Rate to which the cost trend is assumed to decline | 5.0 | % | 5.0 | % | 5.0 | % |
| Year that the rate reaches the ultimate trend rate | 2028 |
| 2028 |
| 2028 |
|
| | | | | |
HUBBELL INCORPORATED- Form 10-K | 69 |
Plan Assets
The Company’s combined targeted 20192021 weighted average asset allocation for domestic and foreign pension plans and the actual weighted average asset allocation for domestic and foreign pension plans at December 31, 20182020and20172019 by asset category are as follows:
| | | | Percentage of Plan Assets | | Percentage of Plan Assets |
| | Target | Actual | | Target | Actual |
| Asset Category | 2019 |
| 2018 |
| 2017 |
| Asset Category | 2021 | 2020 | 2019 |
| Equity securities | 22 | % | 19 | % | 18 | % | Equity securities | 25 | % | 24 | % | 25 | % |
| Debt securities & Cash | 64 | % | 67 | % | 65 | % | Debt securities & Cash | 73 | % | 74 | % | 73 | % |
| Alternative Investments | 14 | % | 14 | % | 17 | % | Alternative Investments | 2 | % | 2 | % | 2 | % |
| TOTAL | 100 | % | 100 | % | 100 | % | TOTAL | 100 | % | 100 | % | 100 | % |
At the end of each year, the Company estimates the expected long-term rate of return on pension plan assets based on the strategic asset allocation for its plans. In making this determination, the Company utilizes expected rates of return for each asset class based upon current market conditions and expected risk premiums for each asset class. The Company has written investment policies and asset allocation guidelines for its domestic and foreign pension plans. In establishing these policies, the Company has considered that its various pension plans are a major retirement vehicle for most plan participants and has acted to discharge its fiduciary responsibilities with regard to the plans solely in the interest of such participants and their beneficiaries. The goal underlying the establishment of the investment policies is to provide that pension assets shall be invested in a prudent manner and so that, together with the expected contributions to the plans, the funds will be sufficient to meet the obligations of the plans as they become due.
To achieve this result, the Company conducts a periodic strategic asset allocation study to form a basis for the allocation of pension assets between various asset categories. Specific policy
benchmark percentages are assigned to each asset category with minimum and maximum ranges established for each. The assets are then tactically managed within these ranges. Equity securities include investments in large-cap, mid-cap and small-cap companies located inside and outside the United States. Fixed income securities include corporate bonds of companies from diversified industries, mortgage-backed securities and US Treasuries. Derivative investments include futures contracts used by the plan to adjust the level of its investments within an asset allocation category. The actual and target percentages reported in the preceding table reflect the economic exposure to each asset category, including the impact of derivative positions. All futures contracts are 100% supported by cash or cash equivalent investments. At no time may derivatives be utilized to leverage the asset portfolio. At December 31, 20182020 and 2017,2019, there were no0 holdings of Company stock in pension plan assets.
The Company’s other post-employment benefits are unfunded; therefore, no asset information is reported.
|
| | | | |
| 70 | HUBBELL INCORPORATED- Form 10-K | 63 |
The fair value of the Company’s pension plan assets at December 31, 20182020 and 2017,2019, by asset category are as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | | Quoted Prices in Active Markets for Identical Assets | Quoted Prices in Active Market for Similar Asset | Significant Unobservable Inputs | Investments Priced Using Net Asset Value |
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | |
| Cash and cash equivalents | $ | 47.0 |
| $ | 47.0 |
| $ | — |
| $ | — |
| $ | — |
|
| Equity securities: | |
|
|
|
|
|
| |
U.S. Large-cap (a) | 8.2 |
| 8.2 |
| — |
| — |
| — |
|
U.S. Mid-cap and Small-cap Growth (b) | 3.1 |
| 3.1 |
| — |
| — |
| — |
|
| International Large-cap | 8.6 |
| 8.6 |
| — |
| — |
| — |
|
Emerging Markets (c) | 13.3 |
| 8.1 |
| 5.2 |
| — |
| — |
|
Common Pooled Equity Funds (d) | 12.7 |
| — |
| 12.7 |
| — |
| — |
|
| Fixed Income Securities: | |
|
|
|
|
|
|
| |
| U.S. Treasuries | 378.0 |
| — |
| 378.0 |
| — |
| — |
|
Corporate Bonds (e) | 0.3 |
| 0.3 |
| — |
| — |
| — |
|
| Asset Backed Securities and Other | 22.8 |
| — |
| 22.8 |
| — |
| — |
|
Common Pooled Fixed Income Funds (f) | 61.8 |
| — |
| 57.6 |
| — |
| 4.2 |
|
| Derivatives: | |
|
|
|
|
|
|
| |
Assets (g) | 8.2 |
| 8.0 |
| 0.2 |
| — |
| — |
|
(Liabilities) (g) | (7.9 | ) | (6.9 | ) | (1.0 | ) | — |
| — |
|
Alternative Investment Funds (h) | 96.8 |
| 11.6 |
| 3.3 |
| — |
| 81.9 |
|
Common Pooled Funds (i) | 17.7 |
| 0.9 |
| 16.8 |
| — |
| — |
|
| BALANCE AT DECEMBER 31, 2018 | $ | 670.6 |
| $ | 88.9 |
| $ | 495.6 |
| $ | — |
| $ | 86.1 |
|
| | | | | | | | | | | | | | | | | |
| | Quoted Prices in Active
Markets for Identical Assets | Quoted Prices in Active
Market for Similar Asset | Significant
Unobservable Inputs | Investments Priced
Using Net Asset Value |
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | |
| Cash and cash equivalents | $ | 26.6 | | $ | 26.6 | | $ | 0 | | $ | 0 | | $ | 0 | |
| Equity securities: | | | | | |
| | | | | |
| | | | | |
| Equity Mutual Funds | 29.8 | | 29.8 | | 0 | | 0 | | 0 | |
Common Pooled Equity Funds (a) | 153.9 | | 0 | | 153.9 | | 0 | | 0 | |
| | | | | |
| Fixed Income Securities: | | | | | |
| U.S. Treasuries | 52.0 | | 0 | | 52.0 | | 0 | | 0 | |
| State and Local Municipal Bonds | 9.3 | | 0 | | 9.3 | | 0 | | 0 | |
| Sovereign Debt | 9.3 | | 0 | | 9.3 | | 0 | | 0 | |
Corporate Bonds (b) | 145.1 | | 0 | | 145.1 | | 0 | | 0 | |
| Fixed Income Mutual Funds | 59.9 | | 59.9 | | 0 | | 0 | | 0 | |
Common Pooled Fixed Income Funds (c) | 279.4 | | 0 | | 279.4 | | 0 | | 0 | |
| | | | | |
| | | | | |
| | | | | |
Alternative Investment Funds (d) | 14.3 | | 0 | | 0 | | 0 | | 14.3 | |
Common Pooled Funds (e) | 25.5 | | 0.5 | | 25.0 | | 0 | | 0 | |
| BALANCE AT DECEMBER 31, 2020 | $ | 805.1 | | $ | 116.8 | | $ | 674.0 | | $ | 0 | | $ | 14.3 | |
|
| | | | | | | | | | | | | | | |
| | | Quoted Prices in Active Markets for Identical Assets | Quoted Prices in Active Market for Similar Asset | Significant Unobservable Inputs | Investments Priced Using Net Asset Value |
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | |
| Cash and cash equivalents | $ | 47.9 |
| $ | 47.9 |
| $ | — |
| $ | — |
| $ | — |
|
| Equity securities: | |
| |
| | |
| |
U.S. Large-cap (a) | 15.6 |
| 15.6 |
| — |
| — |
| — |
|
U.S. Mid-cap and Small-cap Growth (b) | 3.1 |
| 3.1 |
| — |
| — |
| — |
|
| International Large-cap | 30.9 |
| 30.9 |
| — |
| — |
| — |
|
Emerging Markets (c) | 8.6 |
| 8.6 |
| — |
| — |
| — |
|
| Fixed Income Securities: | |
| | |
| |
| |
| U.S. Treasuries | 402.2 |
| — |
| 402.2 |
| — |
| — |
|
Corporate Bonds (e) | 10.6 |
| 0.3 |
| 10.3 |
| — |
| — |
|
| Asset Backed Securities and Other | 75.6 |
| — |
| 75.6 |
| — |
| — |
|
| Derivatives: | |
| | |
| |
| |
Assets (g) | 4.6 |
| 1.5 |
| 3.1 |
| — |
| — |
|
(Liabilities) (g) | (1.3 | ) | 0.1 |
| (1.4 | ) | — |
| — |
|
Alternative Investment Funds (h) | 123.0 |
| 50.6 |
| — |
| — |
| 72.4 |
|
Common Pooled Funds (i) | 18.0 |
| 0.8 |
| 17.2 |
| — |
| — |
|
| BALANCE AT DECEMBER 31, 2017 | $ | 738.8 |
| $ | 159.4 |
| $ | 507.0 |
| $ | — |
| $ | 72.4 |
|
| |
(a) | Includes an actively managed portfolio of large-cap U.S. stocks. |
| |
(b) | Includes an investment in a small cap open ended mutual fund. |
| |
(c) | Includes open ended emerging markets mutual funds. |
| |
(d) | Investments in Common Pooled Equity Funds, including funds and fund products investing in various equity securities |
| |
(e) | Includes primarily investment grade bonds from diverse industries |
| |
(f) | Investments in Common Pooled Fixed Income Funds, including funds and fund products investing in various fixed income investments |
| |
(g) | Includes primarily U.S. and foreign equity futures as well as foreign fixed income futures and positions in U.S. Treasury futures to adjust the duration of the portfolio. |
| |
(h) | Includes investments in hedge funds, including fund of funds products and open end mutual funds |
| |
(i) | Investments in Common Pooled Funds, consisting of equities and fixed income securities |
| | | | | | | | | | | | | | | | | |
| | Quoted Prices in Active
Markets for Identical Assets | Quoted Prices in Active
Market for Similar Asset | Significant
Unobservable Inputs | Investments Priced
Using Net Asset Value |
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | |
| Cash and cash equivalents | $ | 16.6 | | $ | 16.6 | | $ | 0 | | $ | 0 | | $ | 0 | |
| Equity securities: | | | | | |
| Equity Mutual Funds | 31.6 | | 31.6 | | 0 | | 0 | | 0 | |
| | | | | |
| | | | | |
| | | | | |
Common Pooled Equity Funds (a) | 144.0 | | 0 | | 144.0 | | 0 | | 0 | |
| Fixed Income Securities: | | | | | |
| U.S. Treasuries | 64.5 | | 0 | | 64.5 | | 0 | | 0 | |
| State and Local Municipal Bonds | 9.4 | | 0 | | 9.4 | | 0 | | 0 | |
| Sovereign Debt | 7.6 | | 0 | | 7.6 | | 0 | | 0 | |
Corporate Bonds (b) | 122.9 | | 0.1 | | 122.8 | | 0 | | 0 | |
| Fixed Income Mutual Funds | 54.2 | | 54.2 | | 0 | | 0 | | 0 | |
Common Pooled Fixed Income Funds (c) | 252.3 | | 0 | | 252.3 | | 0 | | 0 | |
| | | | | |
| | | | | |
| | | | | |
Alternative Investment Funds (d) | 18.1 | | 0 | | 0.9 | | 0 | | 17.2 | |
Common Pooled Funds (e) | 22.2 | | 0.5 | | 21.7 | | 0 | | 0 | |
| BALANCE AT DECEMBER 31, 2019 | $ | 743.4 | | $ | 103.0 | | $ | 623.2 | | $ | 0 | | $ | 17.2 | |
(a)Investments in Common Pooled Equity Funds, including funds and fund products investing in various equity securities.
(b)Includes primarily investment grade bonds from diverse industries
|
| |
64 | HUBBELL INCORPORATED - Form 10-K
|
(c)Investments in Common Pooled Fixed Income Funds, including funds and fund products investing in various fixed income investments(d)Includes investments in hedge funds, including fund of funds products and open end mutual funds
(e)Investments in Common Pooled Funds, consisting of equities and fixed income securities
Investments Priced Usingpriced using Net Asset Value ("NAV") within Alternative Investment Funds in the preceding tables consist of fund of fund products. These products invest in a number of investment funds managed by a diversified group of third-party investment managers who employ a variety of alternative investment strategies, including relative value, security selection, distressed value, global macro, specialized credit and directional strategies. The objective of these funds is to achieve the desired capital appreciation with lower volatility than either traditional equity or fixed income securities.
| | | | | |
HUBBELL INCORPORATED- Form 10-K | 71 |
Contributions
The Company made $27.9approximately $23.2 million of contributions to its qualified defined benefit pension plans in 2018,2020, including $20.0$15.0 million of U.S. voluntary contributions to its U.S. qualified plans that were not required under the Pension Protection Act of 2006. The Company expects to contribute2006 and approximately $0.5$8.0 million of contributions to its foreign plansU.K. qualified plans. Further, as stated earlier within this Note 11, the Company entered into a settlement agreement with a multi-employer pension plan in 2019.December of 2019 and, pursuant to that agreement, made a $10.0 million cash payment in 2019, $6.0 million cash payment in 2020, and is obligated to fund an additional $5.0 million payable before December 31, 2021, according to the terms of that settlement agreement.
Estimated Future Benefit Payments
The following domestic and foreign benefit payments, which reflect future service, as appropriate, are expected to be paid as follows, (in millions):
| | | | | | | | |
| Pension Benefits | Other Benefits |
| 2021 | $ | 52.1 | | $ | 2.0 | |
| 2022 | $ | 53.1 | | $ | 1.9 | |
| 2023 | $ | 53.5 | | $ | 1.8 | |
| 2024 | $ | 53.7 | | $ | 1.7 | |
| 2025 | $ | 53.9 | | $ | 1.6 | |
| 2025-2028 | $ | 262.9 | | $ | 6.9 | |
|
| | | | | | |
| | Pension Benefits |
| Other Benefits |
|
| 2019 | $ | 50.3 |
| $ | 2.4 |
|
| 2020 | $ | 50.5 |
| $ | 2.3 |
|
| 2021 | $ | 51.8 |
| $ | 2.3 |
|
| 2022 | $ | 53.6 |
| $ | 2.1 |
|
| 2023 | $ | 54.0 |
| $ | 2.0 |
|
| 2024-2028 | $ | 268.9 |
| $ | 8.7 |
|
NOTE 12 Debt
The following table sets forth the Company’s long-term debt at December 31, (in millions):
| | | | | | | | | | | |
| | Maturity | 2020 | 2019 |
| Senior notes at 3.625% | 2022 | $ | 299.2 | | $ | 298.8 | |
| Senior notes at 3.35% | 2026 | 396.5 | | 395.7 | |
| Senior notes at 3.15% | 2027 | 296.4 | | 295.9 | |
| Senior notes at 3.50% | 2028 | 444.8 | | 444.0 | |
| Term loan, net of current portion of $0 million and $34.4 million, respectively | 2023 | 0 | | 71.6 | |
| 2018 Credit Facility | 2023 | 0 | | 0 | |
TOTAL LONG-TERM DEBT(a) | | $ | 1,436.9 | | $ | 1,506.0 | |
|
| | | | | | | |
| | Maturity | 2018 | 2017 |
| Senior notes at 3.625% | 2022 | 298.3 |
| 297.9 |
|
| Senior notes at 3.35% | 2026 | 395.1 |
| 394.4 |
|
| Senior notes at 3.15% | 2027 | 295.4 |
| 294.8 |
|
| Senior notes at 3.50% | 2028 | 443.3 |
| — |
|
| Term loan, net of current portion of $25 million | 2023 | 305.0 |
| — |
|
TOTAL LONG-TERM DEBT(a) | | $ | 1,737.1 |
| $ | 987.1 |
|
(a)Long-term debt is presented net of debt issuance costs and unamortized discounts.
The Company has a five-year revolving credit agreement (the "2018 Credit Facility") with a syndicate of lenders that provides a $750 million committed revolving credit facility. Commitments under the 2018 Credit Facility may be increased (subject to certain conditions) to an aggregate amount not to exceed $1.25 billion. The interest rate applicable to borrowings under the 2018 Credit Facility is generally either the adjusted LIBOR plus an applicable margin (determined by a ratings-based grid) or the alternate base rate. The single financial covenant in the 2018 Credit Facility requires that total debt not exceed 65% of total capitalization as of the last day of each fiscal quarter of the Company. The Company has been in compliance of this covenant at all required testing dates. The 2018 Credit Facility expires in February 2023.
In March 2020, the Company borrowed $100.0 million and in April 2020, the Company borrowed an additional $125.0 million under the 2018 Credit Facility. In the second quarter of 2020, the Company repaid $100.0 million of such borrowings. In July 2020, the Company repaid the remaining $125.0 million of outstanding borrowings, using a combination of cash on hand and proceeds from commercial paper. There were 0 borrowings outstanding under the 2018 Credit Facility at December 31, 2020. The Company had $750.0 million of borrowing capacity under the 2018 Credit Facility at December 31, 2020. There were also 0 borrowings outstanding at December 31, 2019.
| | | | | |
| 72 | HUBBELL INCORPORATED - Form 10-K |
In February 2018, the Company completed a public offering of $450 million of senior, unsecured, notes maturing in February 2028 and bearing interest at a fixed rate of 3.50% (the "2028 Notes"). Net proceeds from the issuance of the 2028 Notes were $442.6 million after deducting the discount on such notes and offering expenses paid by the Company. The 2028 Notes are callable at any time at specified prices and are only subject to accelerated payment prior to maturity upon customary events of a default under the indenture governing the 2028 Notes, as modified by the supplemental indenture creating such notes, or upon a change in control triggering event as defined in such indenture.
In January 2018, the Company entered into athe Term Loan Agreement (the "Term Loan Agreement") with a syndicate of lenders.Agreement. The Term Loan Agreement provided the Company, with the ability to borrow, in a single borrowing on the Aclara acquisition date, up to $500 million on an unsecured basis to partially finance the Aclara acquisition (the "Term Loan"). On February 2, 2018, the Company borrowed $500 million under the Term Loan Agreement. The interest rate applicable to borrowings under the Term Loan Agreement is generally either adjusted LIBOR plus an applicable margin (determined by a ratings based grid) or the alternate base rate. The principal amount of borrowings under the Term Loan Agreement amortizeamortized in equal quarterly installments of 5% per year in year one, 5% per year in year two, 7.5% per year in year three, 10% per year in year four, 10% per year in year five, and any remaining borrowings under the Term Loan Agreement arewere due and payable in full in February 2023. The Company may also make principal payments in excess of the amortization schedule at its discretion. In the second half of 2018 the Company made discretionary payments of $150.0 million against the outstanding principal amount of the Term Loan. The sole financial covenant in the Term Loan Agreement requires that total debt not exceed 65% of total capitalization as of the last day of each fiscal quarter of the Company. The Company was in compliance with this covenant as of December 31, 2018.
Proceeds of the 2028 Notes and Term Loan were used to fund the Aclara acquisition.
|
| |
HUBBELL INCORPORATED- Form 10-K
| 65 |
In January 2018,December 2019, the Company entered into a new five-year revolving credit agreement (the "2018 Credit Facility") with a syndicatemade discretionary payments of lenders that provides a $750$200 million committed revolving credit facility. In connection withagainst the acquisitionoutstanding principal amount of Aclara,the Term Loan. During the third quarter of 2020, the Company terminated all commitments underrepaid in full the Company's previous 2015 credit facility. Commitments underremaining principal balance of the 2018 Credit Facility may be increased to an aggregate amount not to exceed $1.250 billion.Term Loan of $90.6 million as well as $0.1 million of accrued interest. The prepayment resulted in a $0.2 million loss on extinguishment of debt (recorded within interest rate applicable to borrowings under the 2018 Credit Facility is generally either adjusted LIBOR plus an applicable margin (determined by a ratings based grid) or the alternate base rate. The 2018 Credit Facility expires in February 2023. The sole financial covenantexpense in the 2018 Credit Facility requires that totalConsolidated Statement of Income) primarily related to the write-off of capitalized debt not exceed 65% of total capitalization as of the last day of each fiscal quarter of the Company. The Company was in compliance with this covenant as of December 31, 2018. As of December 31, 2018, the Company has not drawn against the 2018 Credit Facility.issuance costs.
In August 2017, the Company completed a public debt offering of $300 million of long-term unsecured, unsubordinated notes maturing in August 2027 and bearing interest at a fixed rate of 3.15% (the "2027 Notes"). Net proceeds from the issuance were $294.6 million after deducting the discount on the notes and offering expenses paid by the Company.
In September 2017, the Company applied the net proceeds from the 2027 Notes to redeem all of its $300 million outstanding long-term, unsecured, unsubordinated notes maturing in 2018 and bearing interest at a fixed rate of 5.95% (the "2018 Notes"). In connection with this redemption, the Company recognized a loss on the early extinguishment of the 2018 Notes of $10.1 million on a before-tax basis.
In March 2016, the Company completed a public debt offering of $400 million of long-term unsecured, unsubordinated notes maturing in March 2026 and bearing interest at a fixed rate of 3.35% (the "2026 Notes"). Net proceeds from the issuance were $393.4 million after deducting the discount on the notes and offering expenses paid by the Company.
In November 2010, the Company completed a public debt offering for $300 million of long-term unsecured, unsubordinated notes maturing in November 2022 (“2022 Notes”) and bearing interest at a fixed rate of 3.625%. Prior to the issuance of the 2022 Notes, the Company entered into a forward interest rate lock which resulted in a $1.6 million loss. This amount was recorded in Accumulated other comprehensive loss, net of tax, and is being amortized over the life of the 2022 Notes.
The 2022 Notes, 2026 Notes, 2027 Notes and 2028 Notes, are all fixed rate indebtedness, are callable at any time with a make whole premium and are only subject to accelerated payment prior to maturity in the event of a default (including as a result of the Company's failure to meet certain non-financial covenants) under the indenture governing the notes, as modified by the supplemental indentures creating such notes, or upon a change in control triggering event as defined in such indenture. The Company was in compliance with all non-financial covenants as of December 31, 2018.2020.
At December 31, 20182020 and 2017,2019, the Company had $56.1$153.1 million and $68.1$65.4 million, respectively, of short-term debt outstanding composed of;of:
◦$150.0 million and $26.0 million of commercial paper borrowings outstanding at December 31, 2020 and 2019, respectively.
◦$34.4 million at December 31, 2019, of long-term debt classified as short-term within current liabilities in the Consolidated Balance Sheets, reflecting maturities within the next twelve months relating to our borrowing under the now fully repaid Term Loan Agreement.
◦$3.1 million at December 31, 2020 and $5.0 million at December 31, 2019, respectively, of borrowings to support our international operations in China.
| | | | | |
◦HUBBELL INCORPORATED- Form 10-K | $26.0 million and $63.0 million of commercial paper borrowings outstanding at December 31, 2018 and 2017 respectively.73 |
| |
◦ | Long-term debt classified as short-term within current liabilities in the Consolidated Balance Sheets, reflecting maturities within the next 12 months related to borrowings under the Term Loan, at December 31, 2018. |
| |
◦ | $5.1 million of other borrowings to support our international operations in China at December 31, 2018 and 2017 respectively. |
Other information related to short-term debt at December 31, is summarized below:
| | | | | | | | |
| | 2020 | 2019 |
| Weighted average interest rate on short-term debt: | | |
| At year end | 0.32 | % | 2.59 | % |
|
| | | | |
| | 2018 | 2017 |
| Interest rate on short-term debt: | |
| |
|
| At year end | 3.21 | % | 1.95 | % |
| Paid during the year (weighted average) | 2.43 | % | 2.24 | % |
The Company also maintains other lines of credit that are primarily used to support the issuance of letters of credit. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions. At December 31, 20182020 and 20172019 these lines totaled $54.8$32.1 million and $53.9$23.0 million, respectively, of which $20.3$19.3 million and $21.5$15.7 million was utilized to support letters of credit and the remaining amount was unused. The annual commitment fees associated with these lines of credit are not material.
Interest and fees paid related to total indebtedness was $54.4 million, $62.8 million and $59.5 million $47.9 millionin 2020, 2019 and $37.1 million in 2018, 2017 and 2016, respectively. The $47.9 million paid in 2017 includes $9.9 million related to the make whole payment for the extinguishment of the 2018 Notes.
NOTE 13 Income Taxes
| | | | | |
| |
66 | HUBBELL INCORPORATED - Form 10-K
|
NOTE 13 Income Taxes
The following table sets forth selected data with respect to the Company’s income tax provisions for the years ended December 31, (in millions):
| | | | 2018 |
| 2017 |
| 2016 |
| | 2020 | 2019 | 2018 |
| Income before income taxes: | | | Income before income taxes: | | |
| United States | $ | 360.8 |
| $ | 354.7 |
| $ | 349.5 |
| United States | $ | 372.0 | | $ | 406.7 | | $ | 360.8 | |
| International | 106.2 |
| 88.4 |
| 80.9 |
| International | 81.5 | | 113.8 | | 106.2 | |
| TOTAL INCOME BEFORE INCOME TAXES | $ | 467.0 |
| $ | 443.1 |
| $ | 430.4 |
| TOTAL INCOME BEFORE INCOME TAXES | $ | 453.5 | | $ | 520.5 | | $ | 467.0 | |
| Provision for income taxes — current: | | | |
| Provision for income taxes — current: | | | |
| Federal | $ | 12.3 |
| $ | 164.1 |
| $ | 85.5 |
| Federal | $ | 60.7 | | $ | 65.0 | | $ | 12.3 | |
| State | 21.8 |
| 15.3 |
| 17.4 |
| State | 16.1 | | 16.6 | | 21.8 | |
| International | 17.8 |
| 28.1 |
| 17.0 |
| International | 17.4 | | 25.4 | | 17.8 | |
| Total provision — current | 51.9 |
| 207.5 |
| 119.9 |
| Total provision — current | 94.2 | | 107.0 | | 51.9 | |
| Provision for income taxes — deferred: | |
| |
| |
| Provision for income taxes — deferred: | | |
| Federal | 35.0 |
| (10.4 | ) | 13.5 |
| Federal | 2.4 | | 8.6 | | 35.0 | |
| State | 9.4 |
| (0.9 | ) | 1.3 |
| State | 1.0 | | 0.5 | | 9.4 | |
| International | 4.6 |
| (3.0 | ) | (2.1 | ) | International | (0.1) | | (3.0) | | 4.6 | |
| Total provision — deferred | 49.0 |
| (14.3 | ) | 12.7 |
| Total provision — deferred | 3.3 | | 6.1 | | 49.0 | |
| TOTAL PROVISION FOR INCOME TAXES | $ | 100.9 |
| $ | 193.2 |
| $ | 132.6 |
| TOTAL PROVISION FOR INCOME TAXES | $ | 97.5 | | $ | 113.1 | | $ | 100.9 | |
OnAs a result of the enactment of TCJA on December 22, 2017, the TCJA was enacted into law, reducing the Federal corporate income tax rate from 35% to 21%. As permitted by SAB 118, the Company recognized a provisional estimate of $56.5 million in the fourth quarter of 2017 to account for specific income tax effects of the TCJA for which a reasonable estimate could be determined. During the SAB 118 measurement period2018, the Company completed its analysis of the specific income tax effects of TCJA and recognized a net tax benefit of approximately $6 million from adjustments to the prior provisional estimates and to record amounts related to items for which a prior provisional estimate had not been made. The measurement period adjustments include adjustments to
the one-time transition tax, the revaluation of U.S. deferred taxes, and any related state income tax impacts. We also recorded an adjustment to the U.S. and foreign tax costs associated with actual and estimated future remittances related to certain of our outside basis differences. These adjustments are included as a component of income tax expense from continuing operations.
|
| | | | |
| 74 | HUBBELL INCORPORATED- Form 10-K | 67 |
Deferred tax assets and liabilities result from differences in the basis of assets and liabilities for tax and financial statement purposes. The components of the deferred tax assets/(liabilities) at December 31, were as follows (in millions):
| | | | 2018 |
| 2017 |
| | 2020 | 2019 |
| Deferred tax assets: | | | Deferred tax assets: | | |
| Inventories | $ | 6.2 |
| $ | 5.2 |
| Inventories | $ | 9.6 | | $ | 10.1 | |
| Lease Liabilities | | Lease Liabilities | 26.0 | | 24.8 | |
| Income tax credits | 24.5 |
| 21.0 |
| Income tax credits | 27.8 | | 26.9 | |
| Accrued liabilities | 35.9 |
| 17.2 |
| Accrued liabilities | 42.6 | | 37.8 | |
| Pension | 49.6 |
| 55.8 |
| Pension | 49.6 | | 53.4 | |
| Post retirement and post employment benefits | 6.6 |
| 6.5 |
| Post retirement and post employment benefits | 6.0 | | 6.0 | |
| Stock-based compensation | 13.1 |
| 13.4 |
| Stock-based compensation | 7.4 | | 9.7 | |
| Net operating loss carryforwards | 22.2 |
| 19.0 |
| |
| Loss Carryforwards | | Loss Carryforwards | 20.5 | | 21.3 | |
| Miscellaneous other | 8.8 |
| 10.7 |
| Miscellaneous other | 16.4 | | 11.9 | |
| Gross deferred tax assets | 166.9 |
| 148.8 |
| Gross deferred tax assets | 205.9 | | 201.9 | |
| Valuation allowance | (21.8 | ) | (19.4 | ) | Valuation allowance | (34.2) | | (29.0) | |
| Total deferred tax assets, net of valuation allowance | 145.1 |
| 129.4 |
| Total deferred tax assets, net of valuation allowance | 171.7 | | 172.9 | |
| Deferred tax liabilities: | |
| |
| Deferred tax liabilities: | | |
| Liability on undistributed foreign earnings | (10.9 | ) | — |
| Liability on undistributed foreign earnings | (9.6) | | (8.6) | |
| Goodwill and Intangibles | (206.4 | ) | (116.5 | ) | Goodwill and Intangibles | (218.3) | | (212.3) | |
| Right-of-use assets | | Right-of-use assets | (25.1) | | (24.2) | |
| Property, plant, and equipment | (41.4 | ) | (30.3 | ) | Property, plant, and equipment | (48.9) | | (48.4) | |
| Total deferred tax liabilities | (258.7 | ) | (146.8 | ) | Total deferred tax liabilities | (301.9) | | (293.5) | |
| TOTAL NET DEFERRED TAX LIABILITY | $ | (113.6 | ) | $ | (17.4 | ) | TOTAL NET DEFERRED TAX LIABILITY | $ | (130.2) | | $ | (120.6) | |
| Deferred taxes are reflected in the Consolidated Balance Sheet as follows: | |
| |
| Deferred taxes are reflected in the Consolidated Balance Sheet as follows: | | |
| Non-current tax assets (included in Other long-term assets) | 6.4 |
| 6.3 |
| Non-current tax assets (included in Other long-term assets) | 5.1 | | 6.2 | |
| Non-current tax liabilities (included in Other Non-Current Liabilities) | (120.0 | ) | (23.7 | ) | Non-current tax liabilities (included in Other Non-Current Liabilities) | (135.3) | | (126.8) | |
| TOTAL NET DEFERRED TAX LIABILITY | $ | (113.6 | ) | $ | (17.4 | ) | TOTAL NET DEFERRED TAX LIABILITY | $ | (130.2) | | $ | (120.6) | |
As of December 31, 2018,2020, the Company had a total of $24.5$27.8 million of Federal, StateU.S. federal, state (net of Federalfederal benefit) and foreign tax credit carryforwards, available to offset future income taxes. As of December 31, 2018, $14.12020, $15.7 million of the tax credits may be carried forward indefinitely while the remaining $10.4$12.1 million will begin to expire at various times in 20192021 through 2036. As of December 31, 2018,2020, the Company had recorded tax benefits totaling $22.2$19.9 million for Federal, StateU.S. federal, state and foreign net operating loss carryforwards (“NOLs”). As of December 31, 2018, $7.92020, $7.8 million of NOLs may be carried forward indefinitely while the remaining $14.3$12.1 million will begin to expire at various times in 20202021 through 2029.2038. The tax benefit related to a portion of these NOLs has been adjusted to reflect an “ownership change” pursuant to Internal Revenue Code Section 382, which imposes an annual limitation on the utilization of pre-acquisition operating losses. The Company has recorded a net valuation allowance of $21.8$34.2 million for theon certain deferred tax assets including a portion of the foreign tax and state tax credit carryforwards, capital loss carryforwards and foreign NOLs that the Company anticipates will expire prior to utilization.
During 2018 and 2019, the Company repatriated certain of its foreign earnings. As of December 31, 2018,2020, the Company also anticipates repatriating certain of its foreign earnings in the future. The accompanying financial statements reflect the expected income tax expense associated with actual and anticipated remittances related to certain of our outside basis differences. The Company has not provided for the income tax effects of distributing the remaining approximately $220$360 million of undistributed foreign earnings as those amounts are either permanently reinvested or intended to be reinvested in our international operations. It is not practicable to estimate the tax cost associated with a remittance of such earnings.
Cash payments of income taxes were $96.2 million, $91.9 million and $106.3 million $130.8 millionin 2020, 2019, and $117.4 million in 2018, 2017, and 2016, respectively.
| | | | | |
HUBBELL INCORPORATED- Form 10-K | 75 |
The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The IRS and other tax authorities routinely audit the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. The Company is not currently under FederalU.S. federal examination for any open tax year. With few exceptions, the Company is no longer subject to state, local, or non-U.S. income tax examinations by tax authorities for years prior to 2013.2016.
The following tax years, by major jurisdiction, are still subject to examination by taxing authorities:
|
| | | | |
| Jurisdiction | Open Years |
| United States | 2015-20182017-2020 |
| UK | 2017-20182019-2020 |
| Puerto Rico | 2014-20182016-2020 |
| Canada | 2013-20182016-2020 |
|
| |
68 | HUBBELL INCORPORATED - Form 10-K
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
| | | | 2018 |
| 2017 |
| 2016 |
| | 2020 | 2019 | 2018 |
| Unrecognized tax benefits at beginning of year | $ | 29.5 |
| $ | 20.2 |
| $ | 20.3 |
| Unrecognized tax benefits at beginning of year | $ | 41.9 | | $ | 38.9 | | $ | 29.5 | |
| Additions based on tax positions relating to the current year | 3.8 |
| 13.6 |
| 2.8 |
| Additions based on tax positions relating to the current year | 7.4 | | 7.0 | | 3.8 | |
| Reductions based on expiration of statute of limitations | (1.7 | ) | (1.4 | ) | (5.7 | ) | Reductions based on expiration of statute of limitations | (6.2) | | (5.2) | | (1.7) | |
| Additions to tax positions relating to previous years | 7.4 |
| 1.0 |
| 2.9 |
| Additions to tax positions relating to previous years | 4.5 | | 1.6 | | 7.4 | |
| Settlements | (0.1 | ) | (3.9 | ) | (0.1 | ) | Settlements | 0 | | (0.4) | | (0.1) | |
| TOTAL UNRECOGNIZED TAX BENEFITS | $ | 38.9 |
| $ | 29.5 |
| $ | 20.2 |
| TOTAL UNRECOGNIZED TAX BENEFITS | $ | 47.6 | | $ | 41.9 | | $ | 38.9 | |
Included in the balance at December 31, 20182020 are approximately $30.7$38.6 million of tax positions which, if in the future are determined to be recognizable, would affect the annual effective income tax rate. Additionally, there are $4.9 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the applicable taxing authority to an earlier period. It is reasonably possible that in the next twelve months, because of changes in facts and circumstances, the unrecognized tax benefits may increase or decrease.
The Company estimates a possible decrease of approximately $5.5$13 million to $6.5$15 million within the next twelve months due to the expiration of the statute of limitations and the completion of certain tax audits.audit resolutions.
The Company’s policy is to record interest and penalties associated with the underpayment of income taxes within Provision for income taxes in the Consolidated Statement of Income. The Company recognized expense, before federal tax impact, related to interest and penalties of approximately $0.2 million in 2020, $0.1 million in 2019 and $1.8 million in 2018, $0.5 million in 2017 and $0.7 million 2016.2018. The Company had $7.0$7.3 million and $5.2$7.1 million accrued for the payment of interest and penalties as of December 31, 20182020 and December 31, 2017,2019, respectively.
The consolidated effective income tax rate varied from the United States federal statutory income tax rate for the years ended December 31, as follows:
| | | | 2018 |
| 2017 |
| 2016 |
| | 2020 | 2019 | 2018 |
| Federal statutory income tax rate | 21.0 | % | 35.0 | % | 35.0 | % | Federal statutory income tax rate | 21.0 | % | 21.0 | % | 21.0 | % |
| State income taxes, net of federal benefit | 4.5 |
| 1.2 |
| 2.4 |
| State income taxes, net of federal benefit | 3.0 | | 2.8 | | 4.5 | |
| Foreign income taxes | (1.1 | ) | (3.1 | ) | (3.4 | ) | Foreign income taxes | (0.1) | | (0.7) | | (1.1) | |
| Federal R&D Credit | | Federal R&D Credit | (1.5) | | (1.2) | | (1.0) | |
| TCJA and related | (1.3 | ) | 12.8 |
| — |
| TCJA and related | 0 | | 0 | | (1.3) | |
| Other, net | (1.5 | ) | (2.3 | ) | (3.2 | ) | Other, net | (0.9) | | (0.2) | | (0.5) | |
| CONSOLIDATED EFFECTIVE INCOME TAX RATE | 21.6 | % | 43.6 | % | 30.8 | % | CONSOLIDATED EFFECTIVE INCOME TAX RATE | 21.5 | % | 21.7 | % | 21.6 | % |
The foreign income tax benefit shown is primarily due to lower statutory rates in foreign jurisdictions compared to the Federal statutory income tax rate. The TCJA and related benefit in 2018 is primarily related to net favorable adjustments to the priorTCJA provisional amountsestimate recorded in 2017 as permitted under SAB 118.
2017.
|
| | | | |
| 76 | HUBBELL INCORPORATED- Form 10-K | 69 |
NOTE 14 Financial Instruments and Fair Value Measurement
Financial Instruments
Concentrations of Credit Risk: Financial instruments which potentially subject the Company to significant concentrations of credit risk consist of trade receivables, cash equivalents and investments. The Company grants credit terms in the normal course of business to its customers. Due to the diversity of its product lines, the Company has an extensive customer base including electrical distributors and wholesalers, electric utilities, equipment manufacturers, electrical contractors, telecommunication companies and retail and hardware outlets. NoWe are not dependent on a single customer, accounted for more than 10% of total sales in any year during the three years ended December 31, 2018. However,however, the Company’s top ten customers account for approximately 38% 42% of its net sales. As part of its ongoing procedures, the Company monitors the credit worthiness of its customers. Bad debt write-offs have historically been minimal. The Company places its cash and cash equivalents with financial institutions and limits the amount of exposure in any one institution.
At December 31, 2020 our accounts receivable balance was $634.7 million, net of allowances of $12.5 million. While we have not experienced any significant collection issues to date, during the twelve months ended December 31, 2020 we increased our credit loss allowances by approximately $4.8 million. The cumulative effect of the adoption of ASC 326 resulted in a $1.3 million increase to the opening balance. The remainder of the increase is primarily the result of our estimate of expected credit losses resulting from the deterioration of general economic conditions, including the volatility in oil prices and potential impacts of the COVID-19 pandemic, which we anticipate could have a negative impact on certain of our customers' ability to satisfy their obligations to the Company.
Fair Value: The carrying amounts reported in the Consolidated Balance Sheet for cash and cash equivalents, short-term investments, receivables, bank borrowings, accounts payable and accruals approximate their fair values given the immediate or short-term nature of these items. See also Note 7 — Investments.
Fair value measurements
At December 31, 20182020 and 20172019 the Company had $65.5$80.4 million and $72.2$69.9 million respectively, of investments carried on the balance sheet at fair value. Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The FASB fair value measurement guidance established a fair value hierarchy that prioritizes the inputs used to measure fair value. Refer to Note 7 — Investments for more information about these investments.
The three broad levels of the fair value hierarchy are as follows:
| |
Level 1 -
| Quoted prices (unadjusted) in active markets for identical assets or liabilities |
| |
Level 2 -
| Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly |
| |
Level 3 -
| Unobservable inputs for which little or no market data exists, therefore requiring a company to develop its own assumptions |
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 - Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly
Level 3 - Unobservable inputs for which little or no market data exists, therefore requiring a company to develop its own assumptions
|
| |
70 | HUBBELL INCORPORATED - Form 10-K
|
The following tables show, by level within the fair value hierarchy, the Company’s financial assets and liabilities that are accounted for at fair value on a recurring basis at December 31, 20182020 and 20172019 (in millions):
| | | Asset (Liability) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Quoted Prices in Active Markets for Similar Assets (Level 2) | Unobservable inputs for which little or no market data exists (Level 3) | Total | Asset (Liability) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Quoted Prices in Active Markets for Similar Assets (Level 2) | Unobservable inputs for which little or no market data exists (Level 3) | Total |
Money market funds (a) | $ | 15.1 |
| $ | — |
| $ | — |
| $ | 15.1 |
| Money market funds (a) | $ | 26.6 | | $ | 0 | | $ | 0 | | $ | 26.6 | |
Time Deposits (a) | — |
| 20.9 |
| — |
| 20.9 |
| |
| | Available for sale investments | — |
| 48.9 |
| 2.3 |
| 51.2 |
| Available for sale investments | 0 | | 57.7 | | 0 | | 57.7 | |
| Trading securities | 14.3 |
| — |
| — |
| 14.3 |
| Trading securities | 22.7 | | 0 | | 0 | | 22.7 | |
| Deferred compensation plan liabilities | (14.3 | ) | — |
| — |
| (14.3 | ) | Deferred compensation plan liabilities | (22.7) | | 0 | | 0 | | (22.7) | |
| Derivatives: | | Derivatives: | |
Forward exchange contracts-Assets (b) | — |
| 1.6 |
| — |
| 1.6 |
| |
Forward exchange contracts-(Liabilities) (c) | — |
| — |
| — |
| — |
| |
| BALANCE AT DECEMBER 31, 2018 | $ | 15.1 |
| $ | 71.4 |
| $ | 2.3 |
| $ | 88.8 |
| |
| Forward exchange contracts-(Liabilities) (b) | | Forward exchange contracts-(Liabilities) (b) | 0 | | (0.8) | | 0 | | (0.8) | |
| BALANCE AT DECEMBER 31, 2020 | | BALANCE AT DECEMBER 31, 2020 | $ | 26.6 | | $ | 56.9 | | $ | 0 | | $ | 83.5 | |
|
| | | | | | | | | | | | |
| Asset (Liability) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Quoted Prices in Active Markets for Similar Assets (Level 2) | Unobservable inputs for which little or no market data exists (Level 3) | Total |
Money market funds (a) | $ | 126.9 |
| $ | — |
| $ | — |
| $ | 126.9 |
|
| Available-for-sale investments | — |
| 54.3 |
| 4.1 |
| 58.4 |
|
| Trading securities | 13.8 |
| — |
| — |
| 13.8 |
|
| Deferred compensation plan liabilities | (13.8 | ) | — |
| — |
| (13.8 | ) |
| Derivatives: | | | | |
Forward exchange contracts-Assets (b) | — |
| 0.2 |
| — |
| 0.2 |
|
Forward exchange contracts-(Liabilities) (c) | — |
| (0.7 | ) | — |
| (0.7 | ) |
| BALANCE AT DECEMBER 31, 2017 | $ | 126.9 |
| $ | 53.8 |
| $ | 4.1 |
| $ | 184.8 |
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(a)HUBBELL INCORPORATED- Form 10-K | Money market funds and time deposits are included in Cash and cash equivalents in the Consolidated Balance Sheet.77 |
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(b) | Forward exchange contracts-Assets are reflected in Other current assets in the Consolidated Balance Sheet. |
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(c) | Forward exchange contracts-(Liabilities) are reflected in Other accrued liabilities in the Consolidated Balance Sheet. |
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| Asset (Liability) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Quoted Prices in Active Markets for Similar Assets (Level 2) | Unobservable inputs for which little or no market data exists (Level 3) | Total |
Money market funds (a) | $ | 27.5 | | $ | 0 | | $ | 0 | | $ | 27.5 | |
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| Available-for-sale investments | 0 | | 50.7 | | 0 | | 50.7 | |
| Trading securities | 19.2 | | 0 | | 0 | | 19.2 | |
| Deferred compensation plan liabilities | (19.2) | | 0 | | 0 | | (19.2) | |
| Derivatives: | | | | |
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Forward exchange contracts-(Liabilities) (b) | 0 | | (0.3) | | 0 | | (0.3) | |
| BALANCE AT DECEMBER 31, 2019 | $ | 27.5 | | $ | 50.4 | | $ | 0 | | $ | 77.9 | |
(a)Money market funds and time deposits are included in Cash and cash equivalents in the Consolidated Balance Sheet.
(b)Forward exchange contracts-(Liabilities) are reflected in Other accrued liabilities in the Consolidated Balance Sheet.
The methods and assumptions used to estimate the Level 2 fair values were as follows:
Forward exchange contracts – The fair value of forward exchange contracts were based on quoted forward foreign exchange prices at the reporting date.
MunicipalAvailable-for-sale municipal bonds classified in Level 2 – The fair value of available-for-sale investments in municipal bonds is based on observable market-based inputs, other than quoted prices in active markets for identical assets.
Available-for-sale redeemable preferred stock classified in Level 3 – The fair value of the available-for-sale investment in redeemable preferred stock is valued based on a discounted cash flow model, using significant unobservable inputs, including assumptions regarding expected cash flows and discount rates.
As of December 31, 2018 and 2017, the Company had one financial asset that was classified in Level 3 of the fair value hierarchy.
Deferred compensation plan
The Company offers certain employees the opportunity to participate in non-qualified deferred compensation plans. A participant’s deferrals are invested in a variety of participant-directed debt and equity mutual funds that are classified as trading securities. During 20182020 and 2017,2019, the Company purchased $2.7$3.0 million and $2.1$3.2 million, respectively, of trading securities related to these deferred compensation plans. As a result of participant distributions, the Company sold $1.5$2.0 million and $0.3$1.3 million of these trading securities in 20182020 and 20172019 respectively. The unrealized gains and losses associated with these trading securities are directly offset by the changes in the fair value of the underlying deferred compensation plan obligation.
Derivatives
In order to limit financial risk in the management of its assets, liabilities and debt, the Company may use derivative financial instruments such as foreign currency hedges, commodity hedges, interest rate hedges and interest rate swaps. All derivative financial instruments are matched with an existing Company asset, liability or proposed transaction. Market value gains or losses on the derivative financial instrument are recognized in income when the effects of the related price changes of the underlying asset or liability are recognized in income.
