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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview of the Business
The Company is primarily engaged in the design, manufacture and sale of quality electrical and electronic products for a broad range of non-residential and residential construction, industrial and utility applications. Products are either sourced complete, manufactured or assembled by subsidiaries in the United States, Canada, Switzerland, Puerto Rico, China, Mexico, the United Kingdom, Brazil, Australia Spain and Ireland. The Company also participates in joint ventures in Taiwan, Hong Kong and the Philippines, and maintains offices in Singapore, Italy, China, India, Mexico, South Korea, Chile, and countries in the Middle East. The Company employed approximately 17,700 individuals worldwide as of December 31, 2017.
The Company’s reporting segments consist of the Electrical segment and the Power segment. Results for 2017, 2016 and 2015 by segment are included under “Segment Results” within this Management’s Discussion and Analysis.
The Company's long-term strategy is to serve its customers with reliable and innovative electrical and related infrastructure solutions with desired brands, high-quality service, and delivered through a competitive cost structure; to complement organic revenue growth with acquisitions that enhance its product offerings; and to allocate capital effectively to create shareholder value.
Our strategy to complement organic revenue growth with acquisitions focuses on acquiring assets that extend our capabilities, expand our product offerings, and present opportunities to compete in core, adjacent or complementary markets. Our acquisition strategy also provides the opportunity to advance our revenue growth objectives during periods of weakness or inconsistency in our end-markets.
Our strategy to deliver products through a competitive cost structure has resulted in the restructuring and related activities we have initiated, beginning in 2014. Our restructuring and related efforts include the consolidation of manufacturing and distribution facilities, workforce actions, as well as streamlining and consolidating our back-office functions. The primary objectives of our restructuring and related activities are to optimize our manufacturing footprint, cost structure, and effectiveness and efficiency of our workforce.
Productivity improvement also continues to be a key area of focus for the Company and efforts to drive productivity work with our restructuring and related activities to minimize the impact of rising material costs and administrative cost inflation. Material costs are approximately two-thirds of our cost of goods sold therefore volatility in this area can significantly impact profitability. Our goal is to have pricing and productivity programs that offset material and other inflationary cost increases as well as pay for investments in key growth areas.
Productivity programs impact virtually all functional areas within the Company by reducing or eliminating waste and improving processes. We continue to expand our efforts surrounding global product and component sourcing and supplier cost reduction programs. Value engineering efforts, product transfers and the use of lean process improvement techniques are expected to continue to increase manufacturing efficiency. In addition, we continue to build upon the benefits of our enterprise resource planning system across all functions.
Acquisition of Aclara
On February 2, 2018 the Company acquired Aclara for approximately $1.1 billion. Aclara is a leading global supplier 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 extends the Power 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.
For additional information about the Aclara acquisition, refer to Note 2 — Business Acquisitions in the Notes to the Consolidated Financial Statements as well as the Company's current report on Form 8-K filed on December 26, 2017.
| 18 | HUBBELL INCORPORATED - Form 10-K |
Outlook
In 2018, we expect aggregate growth across our end markets of approximately two to four percent and that our new product development initiatives will drive our net sales results to modestly out-perform end-market expectations. Our end-market growth expectations include three to five percent growth in the oil and gas market, two to four percent growth in the electrical transmission and distribution, industrial, and residential markets, and one to three percent growth in the non-residential market. We expect acquisitions to contribute approximately 15% to net sales growth in 2018, including net sales growth from the acquisition of Aclara.
We expect reported earnings per diluted share for 2018 in the range of $6.10 to $6.50 and adjusted earnings per diluted share in the range of $6.95 to $7.35(1).
Finally, with our strong financial position and cash flows provided by operating activities, we expect to continue to enhance shareholder value through capital deployment. We expect free cash flow (defined as cash flows from operating activities less capital expenditures) to be equal to net income attributable to Hubbell in 2018.
(1) Effective with results of operations reported in the first quarter of 2018, "adjusted" operating measures will no longer exclude restructuring and related costs, as these costs and the related savings are expected to return to a more consistent annual run-rate in 2018, and therefore no longer affect the comparability of our underlying performance from period to period. Our expectation for full year 2018 adjusted earnings per diluted share in the range of $6.95 to $7.35 excludes Aclara acquisition-related and transaction costs. Aclara acquisition-related costs include the amortization of identified intangible assets and inventory step-up amortization expense.
Results of Operations
Our operations are classified into two reportable segments: Electrical and Power. For a complete description of the Company’s segments, see Part I, Item 1 of this Annual Report on Form 10-K. Within these segments, Hubbell serves customers in five primary end markets; non-residential construction, residential construction, industrial, energy-related markets (also referred to as oil and gas markets) and utility markets (also referred to as the electrical transmission and distribution market). In order of magnitude of net sales, the Company's served markets are non-residential construction, industrial, utility, oil and gas, and residential construction.
Growth of our five primary end markets was more consistent in 2017 as compared to recent years. Higher margin businesses, such as our harsh and hazardous business, that declined in recent years experienced a recovery, and the gas market was strong, which complemented utility capital spend and storm-related activity that drove growth in electrical transmission and distribution markets.
Non-residential and residential market demand grew as well, but that growth was restrained by the Lighting market, which experienced unit growth that was dampened by pricing headwinds. Industrial markets were mixed, with declines in heavy industrial business, but improvement in telecommunications.
With the return to more balanced growth and recovery of higher margin businesses, adjusted operating margin of our Electrical segment has stabilized year over year, declining by only 30 basis points, while absorbing our investment in IoT capabilities (through the acquisition of iDevices), restructuring-driven inefficiencies and pricing headwinds in our Lighting business as well as material cost headwinds during the year. Our Power segment grew organic revenues by six percent, benefiting from growth in transmission and distribution markets, and adjusted operating margins in the Power segment continued to be strong, expanding by 20 basis points as productivity drove improvement despite increasing material costs.
| HUBBELL INCORPORATED - Form 10-K | 19 |
SUMMARY OF CONSOLIDATED RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA)
| For the Year Ending December 31, | |||||||||||||||
| 2017 | % of Net sales | 2016 | % of Net sales | 2015 | % of Net sales | ||||||||||
| Net sales | $ | 3,668.8 | $ | 3,505.2 | $ | 3,390.4 | |||||||||
| Cost of goods sold | 2,516.9 | 68.6 | % | 2,404.5 | 68.6 | % | 2,298.6 | 67.8 | % | ||||||
| Gross profit | 1,151.9 | 31.4 | % | 1,100.7 | 31.4 | % | 1,091.8 | 32.2 | % | ||||||
| Selling & administrative expenses | 648.2 | 17.7 | % | 622.9 | 17.8 | % | 617.2 | 18.2 | % | ||||||
| Operating income | 503.7 | 13.7 | % | 477.8 | 13.6 | % | 474.6 | 14.0 | % | ||||||
| Net income attributable to Hubbell | 243.1 | 6.6 | % | 293.0 | 8.4 | % | 277.3 | 8.2 | % | ||||||
| EARNINGS PER SHARE - DILUTED | $ | 4.39 | $ | 5.24 | $ | 4.77 |
In the following discussion of results of operations, we refer to "adjusted" operating measures. We believe those adjusted measures, which exclude the impact of certain costs and gains, may provide investors with useful information regarding our underlying performance from period to period and allow investors to understand our results of operations without regard to items we do not consider a component of our core operating performance. The adjusted operating measures also provide useful information to understand the impact of the Company's restructuring and related activities and business transformation initiatives on its results of operations. Management uses these adjusted measures when assessing the performance of the business.
Our adjusted operating measures exclude, where applicable, the following items, as shown in the reconciliations to the comparable GAAP measures that follow.
Income tax expense associated with U.S. tax reform
In 2017, our consolidated results of operations include approximately $57 million of income tax expense associated with the TCJA. Our full year effective tax rate, which includes these income tax effects, was 43.6%. As provided by SAB 118 (See Note 1 — Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements), the Company has included in the current period financial statements a provisional amount with respect to the deemed repatriation provisions of the TCJA, the revaluation of U.S. deferred taxes and the U.S. and foreign tax costs associated with anticipated remittances related to certain of our outside basis differences. We have also included provisional amounts with respect to those states with current conformity to the Internal Revenue Code. During the measurement period (as defined in Note 1 — Significant Accounting Policies in the Notes to Consolidated Financial Statements), additional provisional amounts and adjustments to prior provisional amounts will be required as further guidance is issued and information is obtained, prepared and analyzed. These additional provisional amounts or adjustments to prior provisional amounts may be material. See Note 12 — Income Taxes in the Notes to Consolidated Financial Statements for additional information.
Loss on the early extinguishment of debt
Our consolidated results of operations in 2017 include a $10.1 million pre-tax loss on the early extinguishment of long-term debt from the redemption of all of our $300 million outstanding long-term unsecured, unsubordinated notes that were scheduled to mature in 2018.
Aclara transaction costs
Aclara transaction costs primarily include professional services and other fees that were incurred in the fourth quarter of 2017 associated with the acquisition of Aclara. See Note 2 — Business Acquisitions in the Notes to Consolidated Financial Statements and "Outlook" within this Management's Discussion and Analysis for additional information and further discussion of Aclara acquisition-related and transaction costs. Only a portion of the Aclara transaction costs are expected to be tax deductible.
Restructuring and related costs
Our consolidated results of operations in 2017, 2016 and 2015 include what we refer to as "Restructuring and Related Costs". Restructuring actions support our cost reduction efforts involving the consolidation of manufacturing and distribution facilities as well as workforce reductions and the sale or exit of business units we determine to be non-strategic. Restructuring costs include severance and employee benefits, asset impairments, as well as facility closure, contract termination and certain pension costs that are directly related to restructuring actions. Restructuring-related costs are costs associated with our business transformation initiatives, including the consolidation of back-office functions and streamlining our processes, and certain other costs and gains associated with restructuring actions. Restructuring-related costs in 2017 and 2016 include gains from the sale of properties associated with restructuring activities that occurred in the fourth quarter of each year.
Beginning in the fourth quarter of 2014, our restructuring and related activities increased and continued at heightened levels through 2017, primarily to align our cost structure with the needs of our business and also in response to conditions in certain of our end markets. We expect our restructuring programs and activities will continue in future years, however at a lower and more consistent run-rate of cost and savings as compared to the heightened levels we've recently experienced.
| 20 | HUBBELL INCORPORATED - Form 10-K |
Reclassification costs
In 2015, our consolidated results of operations included costs associated with the reclassification of the Company's common stock to eliminate its two-class structure (the "Reclassification" and the "Reclassification Costs"). Reclassification Costs are primarily professional fees associated with the reclassification and are recognized in Other expense, net in the Consolidated Statement of Income. Only a portion of the Reclassification Costs were tax deductible.
Additional information about the Reclassification is included in Note 15 — Capital Stock in the Notes to Consolidated Financial Statements as well as the Company's current reports on Form 8-K filed on August 24, 2015 and December 23, 2015 and the Company's registration statement on Form S-4 (File No. 333-206898), initially filed with the SEC on September 11, 2015 and declared effective on November 23, 2015.
The following table reconciles our adjusted financial measures to the directly comparable GAAP financial measure (in millions, except per share amounts):
| For the Year Ending December 31, | |||||||||||||||
| 2017 | % of Net sales | 2016 | % of Net sales | 2015 | % of Net sales | ||||||||||
| Gross profit (GAAP measure) | $ | 1,151.9 | 31.4 | % | $ | 1,100.7 | 31.4 | % | $ | 1,091.8 | 32.2 | % | |||
| Restructuring and related costs | 15.6 | 30.1 | 23.7 | ||||||||||||
| Adjusted gross profit | $ | 1,167.5 | 31.8 | % | $ | 1,130.8 | 32.3 | % | $ | 1,115.5 | 32.9 | % | |||
| S&A expenses (GAAP measure) | $ | 648.2 | 17.7 | % | $ | 622.9 | 17.8 | % | $ | 617.2 | 18.2 | % | |||
| Aclara transaction costs | 6.7 | — | — | ||||||||||||
| Restructuring and related costs | 8.1 | 4.9 | 15.2 | ||||||||||||
| Adjusted S&A expenses | $ | 633.4 | 17.3 | % | $ | 618.0 | 17.6 | % | $ | 602.0 | 17.8 | % | |||
| Operating income (GAAP measure) | $ | 503.7 | 13.7 | % | $ | 477.8 | 13.6 | % | $ | 474.6 | 14.0 | % | |||
| Aclara transaction costs | 6.7 | — | — | ||||||||||||
| Restructuring and related costs | 23.7 | 35.0 | 38.9 | ||||||||||||
| Adjusted operating income | $ | 534.1 | 14.6 | % | $ | 512.8 | 14.6 | % | $ | 513.5 | 15.1 | % | |||
| Effective tax rate (GAAP measure) | 43.6 | % | 30.8 | % | 32.6 | % | |||||||||
| Income tax expense associated with US tax reform | (12.8 | )% | — | % | — | % | |||||||||
| Aclara transaction costs | (0.2 | )% | — | % | — | % | |||||||||
| Other (1) | 0.2 | % | — | % | (0.9 | )% | |||||||||
| Adjusted effective tax rate | 30.8 | % | 30.8 | % | 31.7 | % | |||||||||
| Net income attributable to Hubbell (GAAP measure) | $ | 243.1 | $ | 293.0 | $ | 277.3 | |||||||||
| Income tax expense associated with US tax reform | 56.5 | — | — | ||||||||||||
| Aclara transaction costs, net of tax | 6.0 | — | — | ||||||||||||
| Loss on early extinguishment of debt, net of tax | 6.3 | — | — | ||||||||||||
| Restructuring and related costs, net of tax | 16.1 | 23.8 | 26.3 | ||||||||||||
| Reclassification costs, net of tax | — | — | 17.4 | ||||||||||||
| Adjusted net income attributable to Hubbell | $ | 328.0 | $ | 316.8 | $ | 321.0 | |||||||||
| Less: Earnings allocated to participating securities | (1.1 | ) | (1.0 | ) | (0.8 | ) | |||||||||
| Adj. net income available to common shareholders | $ | 326.9 | $ | 315.8 | $ | 320.2 | |||||||||
| Average number of diluted shares outstanding | 55.1 | 55.7 | 58.0 | ||||||||||||
| ADJUSTED EARNINGS PER SHARE — DILUTED | $ | 5.93 | $ | 5.66 | $ | 5.52 |
(1) In 2015, the impact to the effective tax rate of (0.9)% relates to Reclassification Costs. Only a portion of those costs were tax deductible. In 2017, the impact of 0.2% relates to the early extinguishment of debt.
| HUBBELL INCORPORATED - Form 10-K | 21 |
The following table reconciles our restructuring costs to our Restructuring and Related Costs for 2017, 2016 and 2015 (in millions):
| For the Year Ending December 31, | |||||||||
| 2017 | 2016 | 2015 | |||||||
| Cost of goods sold | |||||||||
| Restructuring costs (GAAP measure, Note 21 — Restructuring Costs) | $ | 13.7 | $ | 27.5 | $ | 15.3 | |||
| Restructuring related costs | 1.9 | 2.6 | 8.4 | ||||||
| Restructuring and related costs (non-GAAP measure) | $ | 15.6 | $ | 30.1 | $ | 23.7 | |||
| S&A expense | |||||||||
| Restructuring costs (GAAP measure, Note 21 — Restructuring Costs) | $ | 6.6 | $ | 7.5 | $ | 8.3 | |||
| Restructuring related costs | 1.5 | (2.6 | ) | 6.9 | |||||
| Restructuring and related costs (non-GAAP measure) | $ | 8.1 | $ | 4.9 | $ | 15.2 | |||
| Total | |||||||||
| Restructuring costs (GAAP measure, Note 21 — Restructuring Costs) | $ | 20.3 | $ | 35.0 | $ | 23.6 | |||
| Restructuring related costs | 3.4 | — | 15.3 | ||||||
| Restructuring and related costs (non-GAAP measure) | $ | 23.7 | $ | 35.0 | $ | 38.9 |
Of the $23.7 million of Restructuring and Related Costs incurred in 2017, $17.7 million is recorded in the Electrical segment and $6.0 million is recorded in the Power segment. Of the $35.0 million of Restructuring and Related Costs incurred in 2016, $32.1 million is recorded in the Electrical segment and $2.9 million is recorded in the Power segment. Restructuring and Related Costs in Cost of goods sold in 2016 includes a $12.5 million charge to record an estimated liability for the withdrawal from a multi-employer pension plan associated with the consolidation of two of our Lighting facilities. Restructuring related costs in S&A expense in 2017 and 2016 each include a gains on the sale of properties associated with restructuring actions of $6.2 million and $7.2 million, respectively.
2017 Compared to 2016
Net Sales
Net sales of $3.7 billion in 2017 increased five percent as compared to 2016. Acquisitions added two percentage points to net sales in 2017 and organic volume, including the impact of pricing headwinds, added three percentage points. Within our Electrical segment, organic net sales growth came primarily from products sold into the energy-related, non-residential and residential construction markets. Organic net sales within our Power segment increased by six percentage points primarily driven by growth in the electrical transmission and distribution market.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales in 2017 was 68.6% and was flat as compared to 2016. Price and material cost headwinds as well as a 30 basis point headwind from acquisitions, were offset by gains from productivity initiatives that exceeded cost inflation, greater realized savings from our restructuring and related actions and lower restructuring and related costs in 2017.
Gross Profit
The gross profit margin for 2017 was 31.4% and was flat as compared to 2016. Restructuring and Related Costs in Cost of goods sold were $14.5 million lower in 2017 as compared to 2016. Excluding Restructuring and Related Costs, the adjusted gross profit margin was 31.8% and declined by 50 basis points as compared to 2016. The decline is primarily due to price and material cost headwinds as well as a 30 basis point headwind from acquisitions, partially offset by gains from productivity initiatives that exceeded cost inflation and greater realized savings from our restructuring and related actions.
The headwind from acquisitions includes our investment in IoT capabilities in 2017 through the acquisition of iDevices.
Selling & Administrative Expenses
S&A expense in 2017 was $648.2 million and increased by $25.3 million compared to the same period of the prior year. S&A expense as a percentage of net sales declined by 10 basis points to 17.7% in 2017. Excluding Restructuring and Related Costs and Aclara transaction costs, adjusted S&A expense as a percentage of net sales declined by 30 basis points to 17.3% in 2017 primarily due to higher net sales volume and greater realized savings from our restructuring and related actions, partially offset by acquisitions, which increased the adjusted S&A expense as a percentage of net sales by approximately 10 basis points.
| 22 | HUBBELL INCORPORATED - Form 10-K |
Operating Income
Operating income increased five percent in 2017 to $503.7 million and operating margin increased by 10 basis points to 13.7%. Excluding Restructuring and Related Costs as well as Aclara transaction costs, adjusted operating income increased four percent in 2017 to $534.1 million and the adjusted operating margin of 14.6% was flat as compared to the prior year. The adjusted operating margin increased in 2017 primarily due to greater realized savings from our restructuring and related actions, productivity initiatives in excess of cost inflation as well as from incremental earnings on higher net sales volume. However, the benefit from those items was offset by price and material cost headwinds as well as a 40 basis point headwind from acquisitions, including our investment in IoT capabilities through the acquisition of iDevices.
Total Other Expense
Total other expense was $60.6 million in 2017 compared to $47.4 million in 2016. The increase was primarily due to a $10.1 million pre-tax loss on the early extinguishment of long-term debt recognized in 2017 and higher foreign exchange losses in 2017 partially offset by the write-off of an escrow receivable in 2016 associated with a prior acquisition. This escrow receivable write off had no effect on net income of the prior year as it was offset in income taxes by the release of a related liability.
Income Taxes
The effective tax rate was 43.6% in 2017 and includes the provisional impacts of the TCJA to the 2017 financial statements. As permitted by SAB 118, the financial statements include provisional amounts accounting for specific income tax effects for which a reasonable estimate could be determined and do not include amounts for income tax effects of the TCJA for which a reasonable estimate could not be determined. During the measurement period (as defined in Note 1 — Significant Accounting Policies in the Notes to Consolidated Financial Statements), additional provisional amounts and adjustments to prior provisional amounts will be required as further guidance is issued and information is obtained, prepared and analyzed. These additional provisional amounts or adjustments to prior provisional amounts may be material. See Note 12 — Income Taxes in the Notes to Consolidated Financial Statements.
On an adjusted basis, the effective tax rate was 30.8% in 2017 and was flat as compared to the prior year. The favorable impact primarily from the income tax effects of share-based awards and settlement of a tax examination in 2017 is offset by the impact of return to provision adjustments and other discrete favorable items realized in the prior year that did not repeat in the current year, including the release of a liability in 2016 caused by the expiration of certain statutes of limitations associated with an uncertain tax position from a prior acquisition. Additional information related to the Company’s effective tax rate is included in Note 12 — Income Taxes in the Notes to Consolidated Financial Statements.
Net Income Attributable to Hubbell and Earnings Per Diluted Share
Net income attributable to Hubbell was $243.1 million in 2017 and decreased 17% as compared to 2016. Adjusted net income attributable to Hubbell was $328.0 million in 2017 and increased 4% as compared to 2016. Earnings per diluted share in 2017 decreased 16% compared to 2016. Adjusted earnings per diluted share in 2017 increased 5% and reflects the increase in adjusted operating income in 2017 as well as a 0.6 million decline in the average number of diluted shares outstanding as compared to the prior year.
Segment Results
Electrical Segment
| (In millions) | 2017 | 2016 | ||||
| Net sales | $ | 2,532.8 | $ | 2,460.2 | ||
| Operating income | $ | 282.5 | $ | 267.4 | ||
| Restructuring and related costs | 17.7 | 32.1 | ||||
| Adjusted operating income | $ | 300.2 | $ | 299.5 | ||
| Operating margin | 11.2 | % | 10.9 | % | ||
| Adjusted operating margin | 11.9 | % | 12.2 | % |
Net sales in the Electrical segment were $2.5 billion, up three percent in 2017 as compared with 2016 due to two percentage points of net sales growth from higher organic volume, including the impact of pricing headwinds, and one percentage point contributed by acquisitions.
Within the segment, the aggregate net sales of our Commercial and Industrial and Construction and Energy business groups increased by six percentage points, due to four percentage points of organic growth, and two percentage points of net sales growth from acquisitions. Organic net sales growth of these businesses was driven primarily by our products serving the energy-related markets as well as the non-residential and residential construction markets. Net sales of our Lighting business group decreased one percent in 2017 as two percentage points of headwind from pricing, was only partially offset by one percentage point of volume growth. Within the Lighting business group, net sales of residential lighting products increased by three percent, while net sales of commercial and industrial lighting products declined by two percentage points, primarily due to headwinds on pricing.
Operating income in the Electrical segment for 2017 was $282.5 million and increased six percent compared to 2016. Operating margin in 2017 increased by approximately 30 basis points to 11.2%. Excluding Restructuring and Related Costs, the adjusted operating margin decreased by 30 basis points to 11.9% in 2017. The decrease in the adjusted operating margin is primarily due to price 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. The unfavorable impact of those items was partially offset by greater realized savings from our restructuring and related actions.
| HUBBELL INCORPORATED - Form 10-K | 23 |
Power Segment
| (In millions) | 2017 | 2016 | ||||
| Net sales | $ | 1,136.0 | $ | 1,045.0 | ||
| Operating income | $ | 221.2 | $ | 210.4 | ||
| Aclara transaction costs | 6.7 | — | ||||
| Restructuring and related costs | 6.0 | 2.9 | ||||
| Adjusted operating income | $ | 233.9 | $ | 213.3 | ||
| Operating margin | 19.5 | % | 20.1 | % | ||
| Adjusted operating margin | 20.6 | % | 20.4 | % |
Net sales in the Power segment were $1.1 billion, up nine percent compared to 2016, primarily due to higher organic volume and net sales from acquisitions. The increase 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.
Operating income in the Power segment increased five percent to $221.2 million in 2017. Operating margin in 2017, which includes the impact of Aclara transaction costs in the fourth quarter of 2017 and higher Restructuring and Related Costs, decreased by 60 basis points to 19.5%. The adjusted operating margin in 2017 excludes those items, and increased 20 basis points to 20.6%. The increase in the adjusted operating margin is primarily due to gains from productivity initiatives in excess of cost inflation as well as from incremental earnings on higher net sales volume, partially offset by price and material cost headwinds. 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.
2016 Compared to 2015
Net Sales
Net sales of $3.5 billion in 2016 increased three percent as compared to 2015. Acquisitions added three percentage points to net sales in 2016 and organic volume, including pricing headwinds, added one percentage point, while foreign currency translation reduced net sales by one percentage point. Within our Electrical segment, organic net sales of products sold into the non-residential and residential construction markets grew, but was mostly offset by lower organic net sales of products into the energy-related and industrial markets, which experienced continued, but moderating, weakness in 2016, primarily impacting our harsh and hazardous products. Within our Power segment, organic net sales were slightly higher, by less than one percentage point, in 2016.
Cost of Goods Sold
As a percentage of net sales, cost of goods sold increased to 68.6% for 2016 compared to 67.8% in 2015. The increase was primarily due to unfavorable business and product mix, pricing headwinds in our Electrical segment, the impact of our acquisitions, as well as foreign exchange headwinds. We also incurred $6.4 million of higher Restructuring and Related Costs within Cost of goods sold in 2016, primarily relating to the
proposed consolidation of two of our Lighting facilities. Those unfavorable impacts were partially offset by higher realized savings from our restructuring and related actions in 2016, and favorable material costs.
Gross Profit
The gross profit margin for 2016 declined to 31.4% compared to 32.2% in 2015. Restructuring and Related Costs in Cost of goods sold were $6.4 million higher in 2016 as compared to 2015. Excluding Restructuring and Related Costs, the adjusted gross profit margin was 32.3% in 2016 as compared to 32.9% in 2015. The decrease in the adjusted gross margin is primarily due to unfavorable business and product mix, pricing headwinds in our Electrical segment, the impact of our acquisitions, as well as foreign exchange headwinds. Those unfavorable impacts were partially offset by higher realized savings from our restructuring and related actions in 2016, and favorable material costs.
Selling & Administrative Expenses
S&A expense in 2016 was $622.9 million and increased one percent compared to 2015 as we added S&A costs in 2016 from our acquisitions, made investments in our business, and experienced higher pension costs. Those increases were almost completely offset by realized savings from our restructuring and related actions, $10.3 million lower Restructuring and Related Costs in S&A expense in 2016 and foreign currency translation. S&A expense as a percentage of net sales declined by 40 basis points to 17.8% in 2016. Excluding Restructuring and Related Costs, adjusted S&A expense as a percentage of net sales declined by 20 basis points to 17.6% in 2016 primarily due to realized savings from our restructuring and related actions and the favorable impact of higher volume, partially offset by higher pension costs and investments in our business in 2016.
Operating Income
Operating income increased one percent in 2016 to $477.8 million while operating margin declined by 40 basis points to 13.6%. Excluding Restructuring and Related Costs, adjusted operating income of $512.8 million was flat as compared to 2015 and the adjusted operating margin declined by 50 basis points to 14.6%. The adjusted operating margin decreased primarily due to unfavorable product and business mix, pricing headwinds in our Electrical segment, foreign exchange headwinds and cost increases that were greater than productivity gains. Those unfavorable impacts to the adjusted operating margin were partially offset by realized savings from our restructuring and related actions and lower material costs.
Total Other Expense
Total other expense was $47.4 million in 2016 compared to $56.0 million in 2015. Excluding Reclassification Costs that were incurred in 2015, adjusted total other expense was $47.4 in 2016 compared to $36.3 million in 2015 and increased largely due to a $12.4 million increase in interest expense primarily related to the $400 million debt offering we completed in March 2016.
| 24 | HUBBELL INCORPORATED - Form 10-K |
Income Taxes
The effective tax rate was 30.8% in 2016 as compared to 32.6% in 2015. The effective tax rate was higher in 2015 as compared to 2016 due to certain costs of the Reclassification that were not deductible partially offset by international reorganization actions in 2015 as well as certain discrete items in 2016. Additional information related to the Company’s effective tax rate is included in Note 12 — Income Taxes in the Notes to Consolidated Financial Statements.
Net Income attributable to Hubbell and Earnings Per Diluted Share
Net income attributable to Hubbell was $293.0 million in 2016 and increased 6% as compared to 2015. Excluding Restructuring and Related Costs and Reclassification Costs, adjusted net income attributable to Hubbell was $316.8 million in 2016 and decreased 1% as compared to 2015, which reflects flat adjusted operating earnings, higher interest expense in 2016, partially offset by the benefit of a lower effective tax rate as compared to 2015. Earnings per diluted share in 2016 increased 10% compared to 2015. Adjusted earnings per diluted share in 2016, increased 3% and reflects a lower average number of diluted shares outstanding for the year, which declined by approximately 2.3 million as compared to 2015.
Segment Results
Electrical Segment
| (In millions) | 2016 | 2015 | ||||
| Net sales | $ | 2,460.2 | $ | 2,388.3 | ||
| Operating income | $ | 267.4 | $ | 279.0 | ||
| Restructuring and related costs | 32.1 | 32.8 | ||||
| Adjusted operating income | $ | 299.5 | $ | 311.8 | ||
| Operating margin | 10.9 | % | 11.7 | % | ||
| Adjusted operating margin | 12.2 | % | 13.1 | % |
Net sales in the Electrical segment were $2.5 billion, up three percent in 2016 as compared with 2015 due to the contribution of net sales from acquisitions. Organic volume was higher, despite pricing headwinds, and was offset by the unfavorable impact of foreign currency translation. Net sales were three percentage points higher due to the contribution of acquisitions. Organic volume, including pricing headwinds, added one percentage point to net sales and foreign currency translation reduced net sales by one percentage point.
Within the segment, net sales of our Lighting business group increased four percent in 2016 due to organic net sales growth of six percent, partially offset by a two percentage point headwind on pricing. Within the Lighting business group, organic net sales of residential lighting products increased by thirteen percent, partially offset by a three percentage point headwind on pricing, and commercial and industrial lighting products increased by four percent, partially offset by a two
percentage point headwind on pricing. The aggregate net sales of our other business groups in the Electrical segment increased by three percentage points, primarily due to five percentage points of net sales growth from acquisitions partially offset by two percentage points from foreign currency translation. The aggregate organic net sales volume of those other business groups was lower, by less than one percent, as lower net sales of products in industrial and energy-related markets, primarily our harsh and hazardous products, were almost entirely offset by net sales growth in construction-related businesses.
Operating income in the Electrical segment for 2016 was $267.4 million and decreased four percent compared to 2015. Operating margin in 2016 decreased by approximately 80 basis points to 10.9%. Excluding Restructuring and Related Costs, the adjusted operating margin decreased by 90 basis points to 12.2% in 2016. The decrease in the adjusted operating margin is primarily due to unfavorable product and business mix, foreign exchange headwinds, cost increases that were mostly offset by productivity gains, and pricing headwinds in our Lighting business group. Those unfavorable impacts were partially offset by realized savings from our restructuring and related actions and lower material costs.
Power Segment
| (In millions) | 2016 | 2015 | ||||
| Net sales | $ | 1,045.0 | $ | 1,002.1 | ||
| Operating income | $ | 210.4 | $ | 195.6 | ||
| Restructuring and related costs | 2.9 | 6.1 | ||||
| Adjusted operating income | $ | 213.3 | $ | 201.7 | ||
| Operating margin | 20.1 | % | 19.5 | % | ||
| Adjusted operating margin | 20.4 | % | 20.1 | % |
Net sales in the Power segment were $1.0 billion, up four percent compared to 2015, due to the contribution of net sales from acquisitions. Organic volume and the impact of foreign currency translation were effectively flat, as organic volume increased by less than one percent and was offset by foreign currency headwinds of less than one percent.
Operating income in the Power segment increased eight percent to $210.4 million in 2016. Operating margin in 2016 increased by 60 basis points to 20.1%. Excluding Restructuring and Related Costs, the adjusted operating margin in 2016 increased 30 basis points to 20.4%. The increase in the adjusted operating margin is primarily due to favorable pricing and material costs, and productivity in excess of cost increases, including the reduction of an environmental liability in the fourth quarter of 2016, partially offset by acquisitions, which increased operating income, but reduced operating margin by approximately 40 basis points.
| HUBBELL INCORPORATED - Form 10-K | 25 |
Financial Condition, Liquidity and Capital Resources
Cash Flow
| December 31, | |||||||||
| (In millions) | 2017 | 2016 | 2015 | ||||||
| Net cash provided by (used in): | |||||||||
| Operating activities | $ | 379.0 | $ | 411.0 | $ | 339.4 | |||
| Investing activities | (245.6 | ) | (230.2 | ) | (249.6 | ) | |||
| Financing activities | (214.3 | ) | (59.4 | ) | (379.0 | ) | |||
| Effect of foreign currency exchange rate changes on cash and cash equivalents | 18.3 | (27.3 | ) | (21.2 | ) | ||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | $ | (62.6 | ) | $ | 94.1 | $ | (310.4 | ) |
Comparable periods have been recast to reflect the adoption of the new accounting pronouncement for share-based payments (ASU 2016-09) as of January 1, 2017.
The following table reconciles our cash flows from operating activities to free cash flows for 2017, 2016 and 2015 (in millions):
| December 31, | |||||||||
| (In millions) | 2017 | 2016 | 2015 | ||||||
| Net cash provided by operating activities (GAAP measure) | $ | 379.0 | $ | 411.0 | $ | 339.4 | |||
| Less: Capital expenditures | (79.7 | ) | (67.2 | ) | (77.1 | ) | |||
| Free cash flow | $ | 299.3 | $ | 343.8 | $ | 262.3 | |||
| Free cash flow as a percent of net income attributable to Hubbell (1) | 123.1 | % | 117.3 | % | 94.6 | % |
(1) Free cash flow as a percent of net income attributable to Hubbell, includes the approximately $57 million impact of the TCJA. Free cash flow as a percentage of net income attributable to Hubbell excluding the impact of the TCJA is approximately 100%.
Free cash flow is a non-GAAP measure and is defined as cash flow from operations less capital expenditures. Management believes that free cash flow provides useful information regarding Hubbell’s ability to generate cash without reliance on external financing. In addition, management uses free cash flow to evaluate the resources available for investments in the business, strategic acquisitions and further strengthening the balance sheet.
2017 Compared to 2016
Cash provided by operating activities for 2017 decreased compared to 2016 primarily due to higher uses of cash for working capital. Cash used for working capital was $29.0 million in 2017 compared to $10.1 million in 2016 primarily due to higher inventories in anticipation of increased demand, partially offset by stronger collections of accounts receivable and higher income taxes payable, due to the impact of the TCJA in 2017.
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 was $18.3 million in 2017 as compared to an unfavorable impact of $27.3 million in 2016. The favorable impact in 2017 was primarily related to the U.S. dollar weakening against the British pound, Canadian dollar and Australian dollar.
2016 Compared to 2015
Cash provided by operating activities for 2016 increased compared to 2015 primarily due to higher net income after adjusting for the non-cash impacts of depreciation and amortization, stock-based compensation and deferred income taxes and by lower uses of cash for working capital and cash spent for restructuring and related activities. Cash used for working capital was $10.1 million in 2016 compared to $32.3 million in 2015 primarily due to lower inventories partially offset by higher accounts receivable in 2016.
Cash used for investing activities of $230.2 million in 2016 decreased compared to cash used of $249.6 million in 2015. This decrease is primarily due to $9.9 million of lower capital expenditures and $9.6 million of proceeds from the sale of a real estate asset in our Lighting business. Those decreases in the use of cash for investing activities are partially offset by higher cash used for acquisitions in 2016 as compared to 2015.
| 26 | HUBBELL INCORPORATED - Form 10-K |
Cash used for financing activities of $59.4 million in 2016 decreased compared to $379.0 million of cash used in 2015. The decrease in cash used in 2016 as compared to 2015 is primarily the result of $393.4 million of net proceeds received from the $400 million public note offering the Company completed in March 2016, as well as $200.7 million of Class A Cash Consideration paid in connection with the Reclassification in 2015. Those decreases in cash used were partially offset by a $167.7 million increase in shares repurchased in 2016, as well as $97.1 million change year over year in cash flows from short term borrowings and a $8.1 million increase in dividends paid in 2016. For more information about the $400 million public note offering refer to Note 11 — Debt, in the Notes to Consolidated Financial Statements.
The unfavorable impact of foreign currency exchange rates on cash increased to $27.3 million in 2016 as compared to $21.2 million in 2015. The unfavorable impact in 2016 and 2015 was primarily related to the U.S. dollar strengthening against the British pound, Australian dollar, and Mexican peso.
Investments in the Business
Investments in our business include cash outlays for the acquisition of businesses as well as expenditures to support our restructuring and related activities and to maintain the operation of our equipment and facilities.
In December of 2017 the Company entered into a definitive agreement to acquire Aclara for $1.1 billion and the Aclara acquisition closed on February 2, 2018. Aclara will be added to the Power segment. Refer to the Executive Overview of the Business — Acquisition of Aclara, Note 2 — Business Acquisitions, and Note 11 — Debt, in the Notes to Consolidated Financial Statements for additional information.
In 2017, the Company also completed acquisitions for an aggregate purchase price of $171.5 million, net of cash received. Those acquisitions included the following:
| ◦ | In April of 2017, the Company acquired all of the issued and outstanding limited liability company interests in iDevices, LLC ("iDevices") for $59.2 million. iDevices is a developer with embedded firmware and application development expertise with custom-built Internet of Things ("IoT") Cloud infrastructure. The iDevices acquisition adds capabilities and expertise in IoT technology that is required to provide Tier 3 energy management solutions via connected hardware with a software front-end. iDevices has been added to the Electrical segment. |
| ◦ | In April of 2017, the Company acquired substantially all of the assets of Advance Engineering Corporation and related companies (collectively "AEC") for $32.5 million. AEC is a gas components manufacturer that complements the Company's existing business in the natural gas distribution vertical. AEC has been added to the Electrical segment. |
| ◦ | In November of 2017, the Company acquired all of the issued and outstanding shares of Meramec Instrument Transformer Company ("Meramec") for $69.7 million. Meramec is a manufacturer of instrument current transformers for the power generator, power transformer, and the high and medium- voltage circuit breaker markets. Meramec has been added to the Power segment. |
| ◦ | The Company also completed two acquisitions that have been added to the Power segment in the first quarter of 2017 for $10.1 million, net of cash received. |
For more information refer to Note 2 — Business Acquisitions, in the Notes to Consolidated Financial Statements.
Beginning in the fourth quarter of 2014 our restructuring and related activities increased and continued at heightened levels through 2017, primarily to align our cost structure with the needs of our business and also in response to conditions in certain of our end markets. As a result of those restructuring and related actions we have exited a total of 28 manufacturing and warehousing facilities.
In connection with our restructuring and related actions we have incurred restructuring costs, which are primarily severance and employee benefits, asset impairments, as well as facility closure, contract termination and certain pension costs that are directly related to restructuring actions. These 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 costs incurred in 2017, additional expected restructuring costs and the expected completion date (in millions):
| Costs Incurred in 2017 | Additional Expected Costs | Expected Completion Date | |||||
| 2017 Restructuring Actions | $ | 14.0 | $ | 2.9 | 2018 | ||
| 2016 and Prior Restructuring Actions(a) | 6.3 | 1.1 | 2018 | ||||
| Total | $ | 20.3 | $ | 4.0 |
(a) Additional expected costs does not include any potential future liability, in excess of amounts already recognized in 2016, 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 10 — Retirement Benefits in the Notes to Consolidated Financial Statements.
| HUBBELL INCORPORATED - Form 10-K | 27 |
In connection with our restructuring and related actions we also incur restructuring-related costs. Restructuring-related costs are costs associated with our business transformation initiatives, including the consolidation of back-office functions and streamlining our processes, and certain other costs and gains associated with restructuring actions. In both 2016 and 2017, restructuring-related costs include gains from the sale of properties associated with restructuring activities. We refer to restructuring costs (which is a GAAP measure) and restructuring-related costs on a combined basis as "Restructuring and Related Costs", which is a non-GAAP measure. Refer to Management's Discussion and Analysis - Results of Operations, for further detail of the costs associated with our restructuring and related activities and reconciliations of our non-GAAP measures.
We expect our restructuring programs and activities will continue in future years, however at a lower and more consistent run-rate of cost and savings as compared to the heightened levels we've recently experienced.
During 2017, we used cash of $79.7 million for capital expenditures, an increase of $12.5 million from 2016 as we made higher investments in facilities and equipment during 2017 to support our continuing focus on productivity.
Additional information with respect to future investments in the business can be found under “Outlook” within Management’s Discussion and Analysis.
Stock Repurchase Program
At December 31, 2016, we had total remaining share repurchase authorization of $153.6 million under the repurchase program authorized by our Board of Directors in August 2015. In 2017, the Company repurchased shares for an aggregate purchase price of $92.5 million, and the August 2015 program expired in October, 2017. 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 million of Common Stock and expires on October 20, 2020. As of December 31, 2017, the entire $400 million remains authorized for repurchases under 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.
Debt to Capital
At December 31, 2017 and 2016, Long-term debt in the Consolidated Balance Sheets was $987.1 million and $990.5 million, respectively, of long-term unsecured, unsubordinated notes, net of unamortized discount and the unamortized balance of capitalized debt issuance costs. Principal amounts of the Company's long-term unsecured, unsubordinated notes at December 31, 2017 are $300 million due in 2022, $400 million due in 2026, and $300 million due in 2027.
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 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.
The 2022 Notes, 2026 Notes and 2027 Notes are 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, 2017.
At December 31, 2017 and 2016, the Company had $68.1 million and $3.2 million, respectively, of short-term debt outstanding.
| ◦ | There was $63.0 million of commercial paper borrowings outstanding at December 31, 2017, which was used to fund the Meramec acquisition. There was no commercial paper outstanding as of December 31, 2016. |
| ◦ | Short-term debt at December 31, 2017 and 2016 also includes $5.1 million and $3.2 million, respectively of borrowings to support our international operations in China and Brazil. |
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.
| 28 | HUBBELL INCORPORATED - Form 10-K |
The following table sets forth the reconciliation of net debt at December 31, 2017 and 2016:
| December 31, | ||||||
| (In millions) | 2017 | 2016 | ||||
| Total Debt | $ | 1,055.2 | $ | 993.7 | ||
| Total Hubbell Shareholders’ Equity | 1,634.2 | 1,592.8 | ||||
| TOTAL CAPITAL | $ | 2,689.4 | $ | 2,586.5 | ||
| Debt to Total Capital | 39 | % | 38 | % | ||
| Cash and Investments | $ | 447.2 | $ | 505.2 | ||
| NET DEBT | $ | 608.0 | $ | 488.5 | ||
| Net Debt to Total Capital | 23 | % | 19 | % |
Subsequent Event - Funding for the Aclara acquisition
On February 2, 2018, the Company completed the acquisition of Aclara for an aggregate purchase price of $1.1 billion in an all-cash transaction. The following were the sources of funds to complete the transaction.
| ◦ | On January 31, 2018, the Company entered into a Term Loan Agreement (the “Term Loan Agreement”) with a syndicate of lenders. 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 to fund the acquisition. The interest rate applicable to borrowings under the Term Loan Agreement is generally either the adjusted LIBOR plus an applicable margin (determined by reference to a ratings based grid) or the alternate base rate. Borrowings under the Term Loan Agreement will 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 single 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. |
| ◦ | On February 2, 2018, the Company completed a public debt offering of $450 million of long-term unsecured, unsubordinated 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 2028 Notes are 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 2028 Notes, as modified by the supplemental indenture creating such notes, or upon a change in control triggering event as defined in such indenture. |
| ◦ | The remaining purchase price was funded though issuance of commercial paper. At February 12, 2018, the Company had total commercial paper borrowings outstanding of $263.0 million. |
Liquidity
We measure liquidity on the basis of our ability to meet short-term and long-term operational funding needs, fund additional investments, including acquisitions, and 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 2017, we invested in acquisitions and also returned capital to our shareholders through share repurchases and shareholder dividends. These activities were funded primarily with cash flows from operations, and short-term borrowings.
| ◦ | Cash used for the acquisition of businesses in 2017, net of cash acquired was $184.1 million, including the settlement of purchase price installments from prior year acquisitions. Further discussion of our acquisitions can be found in Note 2 — Business Acquisitions in the Notes to Consolidated Financial Statements. |
| ◦ | In 2017, cash settlements for share repurchases were $92.5 million. Shareholder dividends paid in 2017 were $157.6 million. |
| ◦ | In February of 2018, we increased our long-term and short-term borrowings to complete the acquisition of Aclara, and 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 from those borrowings. |
| HUBBELL INCORPORATED - Form 10-K | 29 |
We also require cash outlays to fund our operations, our capital expenditures, and an increase in working capital that would be required to accommodate a higher level of business activity for the foreseeable future, as well as our rate of cash dividends, 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, 2017, and as a result of the TCJA, we have an obligation to fund, over the next eight years, the Company's liability for the transition tax on the deemed repatriation.
Our sources of funds and available resources to meet these funding needs are as follows:
| ◦ | Cash flows from operations and existing cash resources: We are targeting free cash flow (defined as cash flows from operations less capital expenditures) equal to net income attributable to Hubbell in 2018. We also have $375.0 million of cash and cash equivalents at December 31, 2017, of which approximately 4% was held inside the United States and the remainder held internationally. As a result of the TCJA, the Company plans to repatriate a portion of its foreign earnings and has included a provisional tax amount in the accompanying financial statements with respect to the amount it intends to repatriate as of December 31, 2017. We have not included a provisional amount for the remaining $720 million of unremitted foreign earnings because we have not determined a reasonable estimate related to it. See Note 12 — Income Taxes in the Notes to Consolidated Financial Statements for further information. |
| ◦ | We have the ability to issue commercial paper for general corporate purposes and our $750 million revolving credit facility (the "2015 Credit Facility") serves as a backup to our commercial paper program. As of December 31, 2017, the 2015 Credit Facility had not been drawn against and the Company is in compliance with the single financial covenant of the 2015 Credit Facility. We maintain investment grade credit ratings from the major U.S. rating agencies. |
| ◦ | 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 million committed revolving credit facility. In connection with the acquisition, the Company terminated all commitments under the 2015 Credit Facility. Commitments under the 2018 Credit Facility may be increased 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 reference to 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. |
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. However, in the event of a significant deterioration in the results of our operations or cash flows, leading to deterioration in financial condition, our borrowing costs could 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 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. |
| ◦ | 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, 2017 and 2016, these lines totaled $53.9 million and $51.4 million, respectively, of which $21.5 million and $21.0 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 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 2016, we also completed a transaction with a third-party insurer to settle approximately $40 million of projected benefit obligations of our domestic qualified defined benefit pension plans.
| 30 | HUBBELL INCORPORATED - Form 10-K |
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, the amortization of unrecognized gains and losses of our primary domestic defined benefit plan is being recognized over the remaining life expectancy of participants, which is approximately 22 years. During 2017 and 2016, we recorded $11.4 million and $13.9 million, respectively, of pension expense related to the amortization of these unrecognized losses. We expect to record $11.0 million of expense related to unrecognized losses and prior service cost in 2018.
In 2017, 2016 and 2015, we contributed $1.7 million, $18.0 million, and $22.6 million, respectively, to our qualified foreign and domestic defined benefit pension plans. These contributions have improved the funded status of all of our 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 2018. The Company expects to contribute approximately $1.9 million to its foreign plans in 2018. The anticipated 2018 level of pension funding is not expected to have a significant impact on our overall liquidity.
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 | ||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||
| Weighted-average assumptions used to determine benefit obligations at December 31, | |||||||||
| Discount rate | 3.67 | % | 4.12 | % | 3.70 | % | 4.10 | % | |
| Rate of compensation increase | 3.24 | % | 3.55 | % | 4.00 | % | 3.93 | % | |
| Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, | |||||||||
| Discount rate | 4.12 | % | 4.71 | % | 4.10 | % | 4.60 | % | |
| Expected return on plan assets | 4.94 | % | 6.04 | % | N/A | N/A | |||
| Rate of compensation increase | 3.55 | % | 3.59 | % | 3.93 | % | 3.92 | % |
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 $7.4 million on 2018 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, 2017 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.
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, 2017, we used a discount rate of 3.80% for our U.S. pension plans compared to a discount rate of 4.30% used in 2016. For our Canadian pension plan, we used a discount rate of 3.50% in 2017, compared to the 3.85% discount rate used in 2016.
For our UK pension plan the discount rate was derived using a 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, 2017 discount rate for the UK pension plan of 2.60% as compared to a discount rate of 2.70% used in 2016.
| HUBBELL INCORPORATED - Form 10-K | 31 |
An increase of one percentage point in the discount rate would lower our 2018 pretax pension expense by approximately $1.7 million. A discount rate decline of one percentage point would increase our 2018 pretax pension expense by approximately $1.6 million.
In 2017 we changed the mortality table used to calculate the present value of our pension plan liabilities from the RP-2000 mortality table with generational projection using Scale BB-2D to the RP-2014 mortality table, with generational projection from 2006 using Scale MP-2017. That change resulted in an approximately $15 million decrease in the projected benefit obligation of our U.S. plans upon remeasurement at December 31, 2017. The RP-2014 mortality table with generational projection from 2006 using Scale MP-2017 was chosen as the best estimate based on the observed and anticipated experience of the plans after considering alternative tables.
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, 2017, the Company used a discount rate of 3.70% to determine the projected benefit obligation compared to a discount rate of 4.10% used in 2016.
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 $1.6 million in 2017 and a charge, net of tax, of approximately $0.7 million in 2016, 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 or (3) an obligation or liability, including a contingent obligation or liability, to the extent that it is not fully reflected in the financial statements.
We do not have any off-balance sheet arrangements as defined above which have or are likely to have a material effect on our financial condition, results of operations or cash flows.
Contractual Obligations
A summary of our contractual obligations and commitments at December 31, 2017 is as follows (in millions):
| Payments due by period | |||||||||||||||
| Total | 2018 | 2019-2020 | 2021-2022 | 2023 and thereafter | |||||||||||
| Debt obligations(a) | $ | 1,000.0 | $ | — | $ | — | $ | 300.0 | $ | 700.0 | |||||
| Short-term debt obligations(a) | 68.1 | 68.1 | — | — | — | ||||||||||
| Expected interest payments | 261.4 | 34.5 | 68.9 | 67.4 | 90.6 | ||||||||||
| Operating lease obligations | 77.6 | 18.0 | 26.4 | 14.4 | 18.8 | ||||||||||
| Retirement and other benefits(b) (c) | 211.2 | 8.8 | 17.1 | 17.1 | 168.2 | ||||||||||
| Purchase obligations | 256.9 | 250.9 | 6.0 | — | — | ||||||||||
| Obligations under customer incentive programs | 41.2 | 41.2 | — | — | — | ||||||||||
| Income tax payments(d) | 66.2 | 27.5 | 7.4 | 10.6 | 20.7 | ||||||||||
| TOTAL | $ | 1,982.6 | $ | 449.0 | $ | 125.8 | $ | 409.5 | $ | 998.3 |
| (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 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. |
| (c) | Amounts above reflect a $12.5 million obligation associated with the withdraw from a multi-employer plan. See Note 10 — Retirement Benefits in the Notes to Consolidated Financial Statements for further information. |
| (d) | Amount above includes the one-time transition tax under the TCJA. The Company will elect to pay this transition tax over an eight year period as permitted 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, 2017, we have $29.5 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 12 — Income Taxes in the Notes to Consolidated Financial Statements.
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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
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. The majority of our revenue is recognized at the time of shipment. Certain of our businesses account for sales discounts and allowances based on sales volumes, specific programs and customer deductions as is customary in the electrical products industry. These items primarily relate to sales volume incentives, special pricing allowances, and returned goods. This requires us to estimate at the time of sale the amounts that should not be recorded as revenue as these amounts are not expected to be collected from customers. We principally rely on historical experience, specific customer agreements, and anticipated future trends to estimate these amounts at the time of shipment.
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.
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.
Employee Benefits Costs and Funding
We sponsor domestic and foreign defined benefit pension, defined contribution and other postretirement plans. Major 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 date. Further discussion of the assumptions used in 2017 and 2016 are included above under “Pension Funding Status” and in Note 10 — 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 the 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.
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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.
We have accounted for the provisional impact of the TCJA based on the guidance outlined in SAB 118. The accounting for the income tax effects of the TCJA may include provisional amounts during the one-year measurement period from the date of enactment. Accordingly, the Company has recognized in the current period financial statements a provisional amount with respect to the deemed repatriation provisions of the TCJA, the revaluation of U.S. deferred taxes and the U.S. and foreign tax costs associated with anticipated remittances related to certain of our outside basis differences. We have also included provisional amounts with respect to those states with current conformity to the Internal Revenue Code. All of these provisional amounts may be subject to change during the measurement period. See Note 1 — Significant Accounting Policies and Note 12 — 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.
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 and customer related intangibles.
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 2017, 2016, or 2015.
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 step goodwill impairment testing process as prescribed in the guidance. The Company performed a qualitative assessment for two of its reporting units. The Company elected to bypass the qualitative assessment and proceeded directly to the quantitative analysis for its remaining reporting 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. We use internal discounted cash flow estimates to determine fair value. These cash flow estimates are derived from historical experience and future long-term business plans 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, 2017, 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 2017, 2016, or 2015.
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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 16 — Stock-Based Compensation in the Notes to Consolidated Financial Statements.
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 Aclara acquisition, adoption of updated accounting standards and any expected effects of such adoption, expectation regarding U.S. tax reform and the potential impact of the enactment of the TCJA, restructuring plans and expected associated costs and benefits, intent to repurchase shares of Common Stock, and the expected amount of such repurchases, and improvement 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:
| • | Changes in demand for our products, market conditions, product quality, or product availability adversely affecting sales levels. |
| • | 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 initiative and strategic sourcing plans. |
| • | The expected benefits and the timing of other actions in connection with our Enterprise Resource Planning ("ERP") system. |
| • | 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. |
| • | Regulatory issues, changes in tax laws including the recent enactment 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. |
| • | Anticipated future contributions and assumptions including changes in interest rates and plan assets with respect to pensions. |
| • | 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 and mergers, including the Aclara acquisition, the iDevices acquisition, the AEC acquisition and the Meramec acquisition. |
| • | The ability to effectively implement ERP systems without disrupting operational and financial processes. |
| • | Unanticipated difficulties integrating acquisitions as well as the realization of expected synergies and benefits anticipated when we first enter into a transaction. |
| • | The ability of governments to meet their financial obligations. |
| • | Political unrest in foreign countries. |
| • | Natural disasters. |
| • | Failure of information technology systems or security breaches resulting in unauthorized disclosure of confidential information. |
| • | Changes to provisional tax estimates related to the TCJA. |
| • | Future repurchases of common stock under our common stock repurchase program. |
| • | Changes in accounting principles, interpretations, or estimates. |
| • | The outcome of environmental, legal and tax contingencies or costs compared to amounts provided for such contingencies. |
| • | 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. |
| • | 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 this Company’s Annual Report on Form 10-K for the year ended December 31, 2017. |
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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.
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