filings.toolsItem 8. Financial Statements and Supplementary Data
189K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
| 38 | HUBBELL INCORPORATED - Form 10-K |
Reports of Management
Report on Management’s Responsibility for Financial Statements
Our management is responsible for the preparation, integrity and fair presentation of our published financial statements. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on informed judgments made by management.
We believe it is critical to provide investors and other users of our financial statements with information that is relevant, objective, understandable and timely, so that they can make informed decisions. As a result, we have established and maintain systems and practices and internal control processes designed to provide reasonable, but not absolute, assurance that transactions are properly executed and recorded and that our policies and procedures are carried out appropriately. Management strives to recruit, train and retain high quality people to ensure that controls are designed, implemented and maintained in a high-quality, reliable manner.
Our independent registered public accounting firm audited our financial statements and the effectiveness of our internal control over financial reporting in accordance with standards established by the Public Company Accounting Oversight Board (United States). Their report appears on the next page within this Annual Report on Form 10-K.
Our Board of Directors normally meets ten times per year to provide oversight, to review corporate strategies and operations, and to assess management’s conduct of the business. The Audit Committee of our Board of Directors is composed of at least three individuals all of whom must be “independent” under current New York Stock Exchange listing standards and regulations adopted by the SEC under the federal securities laws. The Audit Committee meets regularly with our internal auditors and independent registered public accounting firm, as well as, management to review, among other matters, accounting, auditing, internal controls and financial reporting issues and practices. Both the internal auditors and independent registered public accounting firm have full, unlimited access to the Audit Committee.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate systems of internal control over financial reporting as defined by Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
In February 2018, the Company acquired Aclara for approximately $1.1 billion. Because the Company has not yet fully incorporated the internal controls and procedures of Aclara into the Company's internal control over financial reporting, management excluded this business from its assessment of the effectiveness of internal control over financial reporting as of December 31, 2018. Aclara accounted for 13% of the
Company's total assets excluding intangibles and goodwill as of December 31, 2018 and 14% of the Company's net sales for the year then ended.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In
making this assessment, management used the criteria set forth in Internal Control-Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management concluded that our internal control over financial reporting was effective at a reasonable assurance level as of December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm as stated in their report which is included below within this Annual Report on Form 10-K.
| /s/ DAVID G. NORD | /s/ WILLIAM R. SPERRY | |
| David G. Nord | William R. Sperry | |
| Chairman of the Board, President and Chief Executive Officer | Senior Vice President and Chief Financial Officer |
| HUBBELL INCORPORATED - Form 10-K | 39 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Hubbell Incorporated
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hubbell Incorporated and its subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and schedule of valuation and qualifying accounts and reserves for each of the three years in the period ended December 31, 2018 appearing under Item 15 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded Meter Readings Holding Group, LLC (“Aclara”) from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. We have also excluded Aclara from our audit of internal control over financial reporting. Aclara is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 13% and 14%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 15, 2019
We have served as the Company's auditor since at least 1961. We have not been able to determine the specific year we began serving as auditor of the Company.
| 40 | HUBBELL INCORPORATED - Form 10-K |
Consolidated Statement of Income
| Year Ended December 31, | |||||||||
| (in millions, except per share amounts) | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 4,481.7 | $ | 3,668.8 | $ | 3,505.2 | |||
| Cost of goods sold | 3,181.3 | 2,513.7 | 2,400.1 | ||||||
| Gross profit | 1,300.4 | 1,155.1 | 1,105.1 | ||||||
| Selling & administrative expenses | 743.5 | 636.3 | 615.3 | ||||||
| Operating income | 556.9 | 518.8 | 489.8 | ||||||
| Interest expense | (72.4 | ) | (44.9 | ) | (43.4 | ) | |||
| Investment income | 0.1 | 0.9 | 0.5 | ||||||
| Loss on extinguishment of debt | — | (10.1 | ) | — | |||||
| Other expense, net | (17.6 | ) | (21.6 | ) | (16.5 | ) | |||
| Total other expense | (89.9 | ) | (75.7 | ) | (59.4 | ) | |||
| Income before income taxes | 467.0 | 443.1 | 430.4 | ||||||
| Provision for income taxes | 100.9 | 193.2 | 132.6 | ||||||
| Net income | 366.1 | 249.9 | 297.8 | ||||||
| Less: Net income attributable to noncontrolling interest | 5.9 | 6.8 | 4.8 | ||||||
| NET INCOME ATTRIBUTABLE TO HUBBELL | $ | 360.2 | $ | 243.1 | $ | 293.0 | |||
| Earnings per share | |||||||||
| Basic | $ | 6.57 | $ | 4.42 | $ | 5.26 | |||
| Diluted | $ | 6.54 | $ | 4.39 | $ | 5.24 |
See notes to consolidated financial statements.
Consolidated Statement of Comprehensive Income
| Year Ended December 31, | |||||||||
| (in millions) | 2018 | 2017 | 2016 | ||||||
| Net income | $ | 366.1 | $ | 249.9 | $ | 297.8 | |||
| Other comprehensive income (loss): | |||||||||
| Foreign currency translation adjustments | (33.9 | ) | 28.9 | (35.4 | ) | ||||
| Defined benefit pension and post-retirement plans, net of taxes of ($6.3), ($1.0) and $18.9 | 17.8 | 4.0 | (40.3 | ) | |||||
| Unrealized gain (loss) on investments, net of taxes of $0.4, ($0.2) and $0.1 | (1.4 | ) | 0.6 | (1.2 | ) | ||||
| Unrealized gains (losses) on cash flow hedges, net of taxes of ($0.5), $0.4 and $0.5 | 1.6 | (0.8 | ) | (1.4 | ) | ||||
| Other comprehensive income (loss) | (15.9 | ) | 32.7 | (78.3 | ) | ||||
| Comprehensive income | 350.2 | 282.6 | 219.5 | ||||||
| Less: Comprehensive income attributable to noncontrolling interest | 5.9 | 6.8 | 4.8 | ||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO HUBBELL | $ | 344.3 | $ | 275.8 | $ | 214.7 |
See notes to consolidated financial statements.
| HUBBELL INCORPORATED - Form 10-K | 41 |
Consolidated Balance Sheet
| At December 31, | ||||||
| (in millions, except per share amounts) | 2018 | 2017 | ||||
| ASSETS | ||||||
| Current Assets | ||||||
| Cash and cash equivalents | $ | 189.0 | $ | 375.0 | ||
| Short-term investments | 9.2 | 14.5 | ||||
| Accounts receivable, net | 725.4 | 540.3 | ||||
| Inventories, net | 651.0 | 634.7 | ||||
| Other current assets | 69.1 | 39.6 | ||||
| Total Current Assets | 1,643.7 | 1,604.1 | ||||
| Property, Plant, and Equipment, net | 502.1 | 458.3 | ||||
| Other Assets | ||||||
| Investments | 56.3 | 57.7 | ||||
| Goodwill | 1,784.4 | 1,089.0 | ||||
| Intangible assets, net | 819.5 | 460.4 | ||||
| Other long-term assets | 66.1 | 51.1 | ||||
| TOTAL ASSETS | $ | 4,872.1 | $ | 3,720.6 | ||
| LIABILITIES AND EQUITY | ||||||
| Current Liabilities | ||||||
| Short-term debt | $ | 56.1 | $ | 68.1 | ||
| Accounts payable | 393.7 | 326.5 | ||||
| Accrued salaries, wages and employee benefits | 101.6 | 76.6 | ||||
| Accrued insurance | 61.3 | 60.0 | ||||
| Other accrued liabilities | 226.6 | 174.9 | ||||
| Total Current Liabilities | 839.3 | 706.1 | ||||
| Long-term Debt | 1,737.1 | 987.1 | ||||
| Other Non-Current Liabilities | 496.8 | 379.5 | ||||
| TOTAL LIABILITIES | 3,073.2 | 2,072.7 | ||||
| Commitments and Contingencies (see Note 15) | ||||||
| Hubbell Shareholders’ Equity | ||||||
| Common stock, par value $.01 | ||||||
| Common Stock - Authorized 200,000,000 shares, outstanding 54,715,188 and 54,882,154 shares | $ | 0.6 | $ | 0.6 | ||
| Additional paid-in capital | 1.3 | 11.0 | ||||
| Retained earnings | 2,064.4 | 1,892.4 | ||||
| Accumulated other comprehensive loss | (285.7 | ) | (269.8 | ) | ||
| Total Hubbell Shareholders’ Equity | 1,780.6 | 1,634.2 | ||||
| Noncontrolling interest | 18.3 | 13.7 | ||||
| TOTAL EQUITY | 1,798.9 | 1,647.9 | ||||
| TOTAL LIABILITIES AND EQUITY | $ | 4,872.1 | $ | 3,720.6 |
See notes to consolidated financial statements.
| 42 | HUBBELL INCORPORATED - Form 10-K |
Consolidated Statement of Cash Flows
| Year Ended December 31, | |||||||||
| (in millions) | 2018 | 2017 | 2016 | ||||||
| Cash Flows from Operating Activities | |||||||||
| Net income | $ | 366.1 | $ | 249.9 | $ | 297.8 | |||
| Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: | |||||||||
| Depreciation and amortization | 148.4 | 98.2 | 90.9 | ||||||
| Deferred income taxes | 49.0 | (14.3 | ) | 12.7 | |||||
| Stock-based compensation | 24.2 | 22.3 | 22.3 | ||||||
| Loss on extinguishment of debt | — | 10.1 | — | ||||||
| Gain on sale of assets | (4.0 | ) | (11.6 | ) | (5.8 | ) | |||
| Changes in assets and liabilities, net of acquisitions: | |||||||||
| Decrease (increase) in accounts receivable | (75.4 | ) | 3.9 | (42.3 | ) | ||||
| Decrease (increase) in inventories | 34.2 | (90.3 | ) | 18.4 | |||||
| Increase in current liabilities | 15.6 | 57.4 | 13.8 | ||||||
| Changes in other assets and liabilities, net | (20.4 | ) | 50.7 | 8.4 | |||||
| Contributions to qualified defined benefit pension plans | (27.9 | ) | (1.7 | ) | (18.0 | ) | |||
| Other, net | 7.3 | 4.4 | 12.8 | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 517.1 | 379.0 | 411.0 | ||||||
| Cash Flows from Investing Activities | |||||||||
| Capital expenditures | (96.2 | ) | (79.7 | ) | (67.2 | ) | |||
| Acquisitions, net of cash acquired | (1,118.0 | ) | (184.1 | ) | (173.4 | ) | |||
| Purchases of available-for-sale investments | (16.6 | ) | (20.9 | ) | (20.0 | ) | |||
| Proceeds from sales of available-for-sale investments | 20.5 | 17.4 | 13.3 | ||||||
| Proceeds from disposition of assets | 6.8 | 18.4 | 10.8 | ||||||
| Other, net | 2.1 | 3.3 | 6.3 | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | (1,201.4 | ) | (245.6 | ) | (230.2 | ) | |||
| Cash Flows from Financing Activities | |||||||||
| Issuance of long-term debt | 947.5 | 297.6 | 397.0 | ||||||
| Payment of long-term debt | (168.8 | ) | (300.0 | ) | — | ||||
| Issuance of short-term debt | 0.8 | 66.3 | 1.2 | ||||||
| Payment of short-term debt | (38.0 | ) | (1.7 | ) | (51.5 | ) | |||
| Make whole payment for extinguishment of long-term debt | — | (9.9 | ) | — | |||||
| Debt issuance cost | (7.6 | ) | (3.0 | ) | (3.6 | ) | |||
| Payment of dividends | (172.3 | ) | (157.6 | ) | (144.0 | ) | |||
| Payment of dividends to noncontrolling interest | (3.9 | ) | (3.5 | ) | (2.8 | ) | |||
| Acquisition of common shares | (40.0 | ) | (92.5 | ) | (246.8 | ) | |||
| Other | (11.2 | ) | (10.0 | ) | (8.9 | ) | |||
| NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES | 506.5 | (214.3 | ) | (59.4 | ) | ||||
| Effect of foreign currency exchange rate changes on cash and cash equivalents | (8.2 | ) | 18.3 | (27.3 | ) | ||||
| Increase (Decrease) in cash and cash equivalents | (186.0 | ) | (62.6 | ) | 94.1 | ||||
| Cash and cash equivalents, beginning of year | 375.0 | 437.6 | 343.5 | ||||||
| Cash and cash equivalents, end of year | $ | 189.0 | $ | 375.0 | $ | 437.6 |
See notes to consolidated financial statements.
| HUBBELL INCORPORATED - Form 10-K | 43 |
Consolidated Statement of Changes in Equity
| (in millions, except per share amounts) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Hubbell Shareholders' Equity | Non- controlling interest | ||||||||||||
| BALANCE AT DECEMBER 31, 2015 | $ | 0.6 | $ | 78.1 | $ | 1,886.1 | $ | (224.2 | ) | $ | 1,740.6 | $ | 8.4 | |||||
| Net income | 293.0 | 293.0 | 4.8 | |||||||||||||||
| Other comprehensive (loss) income | (78.3 | ) | (78.3 | ) | ||||||||||||||
| Stock-based compensation | 22.5 | 22.5 | ||||||||||||||||
| Income tax windfall from stock-based awards, net | 4.8 | 4.8 | ||||||||||||||||
| Acquisition/surrender of common shares(1) | (90.4 | ) | (155.5 | ) | (245.9 | ) | ||||||||||||
| Cash dividends declared ($2.59 per share) | (144.3 | ) | (144.3 | ) | ||||||||||||||
| Dividends to noncontrolling interest | (2.8 | ) | ||||||||||||||||
| Director's deferred compensation | 0.4 | 0.4 | ||||||||||||||||
| BALANCE AT DECEMBER 31, 2016 | 0.6 | 15.4 | 1,879.3 | (302.5 | ) | 1,592.8 | 10.4 | |||||||||||
| Net income | 243.1 | 243.1 | 6.8 | |||||||||||||||
| Other comprehensive (loss) income | 32.7 | 32.7 | ||||||||||||||||
| Stock-based compensation | 22.3 | 22.3 | ||||||||||||||||
| Acquisition/surrender of common shares(1) | (27.2 | ) | (72.1 | ) | (99.3 | ) | ||||||||||||
| Cash dividends declared ($2.87 per share) | (157.9 | ) | (157.9 | ) | ||||||||||||||
| Dividends to noncontrolling interest | (3.5 | ) | ||||||||||||||||
| Director's deferred compensation | 0.5 | 0.5 | ||||||||||||||||
| BALANCE AT DECEMBER 31, 2017 | 0.6 | 11.0 | 1,892.4 | (269.8 | ) | 1,634.2 | 13.7 | |||||||||||
| Net income | 360.2 | 360.2 | 5.9 | |||||||||||||||
| Other comprehensive (loss) income | (15.9 | ) | (15.9 | ) | ||||||||||||||
| Stock-based compensation | 24.2 | 24.2 | ||||||||||||||||
| ASC 606 adoption to retained earnings | 0.6 | 0.6 | ||||||||||||||||
| Acquisition/surrender of common shares(1) | (34.5 | ) | (16.0 | ) | (50.5 | ) | ||||||||||||
| Cash dividends declared ($3.15 per share) | (172.8 | ) | (172.8 | ) | ||||||||||||||
| Dividends to noncontrolling interest | (3.9 | ) | ||||||||||||||||
| Aclara noncontrolling interest | 2.6 | |||||||||||||||||
| Director's deferred compensation | 0.6 | 0.6 | ||||||||||||||||
| BALANCE AT DECEMBER 31, 2018 | $ | 0.6 | $ | 1.3 | $ | 2,064.4 | $ | (285.7 | ) | $ | 1,780.6 | $ | 18.3 |
See notes to consolidated financial statements.
(1) For accounting purposes, the Company treats repurchased shares as constructively retired when acquired and accordingly charges the purchase price against Common Stock par value, Additional paid-in capital, to the extent available, and Retained earnings. The change in Retained earnings of $16.0 million, $72.1 million and $155.5 million in 2018, 2017 and 2016, respectively, reflects this accounting treatment.
| 44 | HUBBELL INCORPORATED - Form 10-K |
Notes to Consolidated Financial Statements
NOTE 1 Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation
The Consolidated Financial Statements include all wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company participates in three joint ventures, one of which is accounted for using the equity method, the others have been consolidated in accordance with the consolidation accounting guidance. An analysis is performed to determine which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with a primarily qualitative analysis. The qualitative analysis is based on identifying the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance (the “power criterion”) and the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE (the “losses/benefit criterion”). The party that meets both these criteria is deemed to have a controlling financial interest. The party with the controlling financial interest is considered to be the primary beneficiary and as a result is required to consolidate the VIE. The Company has a 50% interest in a joint venture in Hong Kong, established as Hubbell Asia Limited (“HAL”). The principal objective of HAL is to manage the operations of its wholly-owned manufacturing company in China. Under the accounting guidance, the Company is the primary beneficiary of HAL and as a result consolidates HAL. This determination is based on the fact that HAL’s sole business purpose is to manufacture product exclusively for the Company (the power criterion) and the Company is financially responsible for ensuring HAL maintains a fixed operating margin (the losses/benefit criterion). The consolidation of HAL is not material to the Company’s consolidated financial statements.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements. Actual results could differ from the estimates that are used.
Revenue Recognition
The Company recognizes revenue when performance obligations identified under the terms of contracts with its customers are satisfied, which generally occurs, for products, upon the transfer of control in accordance with the contractual terms and conditions of the sale. The majority of the Company’s revenue associated with products is recognized at a point in time when the product is shipped to the customer, with a relatively small amount of transactions in the Power segment recognized upon delivery of the product at the contractually specified destination. Revenue from service contracts and post-shipment performance obligations is less than three percent of total annual consolidated net revenue and those service contracts and post-shipment obligations are primarily within the Power segment. Revenue from service contracts and post-shipment performance obligations is recognized when or as those obligations are satisfied. The Company primarily offers assurance-type standard warranties that do not represent separate performance obligations and on occasion will separately offer and price extended warranties that are separate performance obligations for which the associated revenue is recognized over-time based on the extended warranty period. The Company records amounts billed to customers for reimbursement of shipping and handling costs within revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of goods sold. Sales taxes and other usage-based taxes are excluded from revenue.
Within the Electrical segment, certain businesses require a portion of the transaction price to be paid in advance of transfer of control. Advance payments are not considered a significant financing component as they are received less than one year before the related performance obligations are satisfied. In addition, in the Power segment, certain businesses offer annual maintenance service contracts that require payment at the beginning of the contract period. These payments are treated as a contract liability and are classified in Other accrued liabilities in the Consolidated Balance Sheet. Once control transfers to the customer and the Company meets the revenue recognition criteria, the deferred revenue is recognized in the Consolidated Statement of Income. The deferred revenue relating to the annual maintenance service contracts is recognized in the Consolidated Statement of Income on a straight line basis over the expected term of the contract.
| HUBBELL INCORPORATED - Form 10-K | 45 |
The Company has certain arrangements that require us to estimate at the time of sale the amounts of variable consideration that should not be recorded as revenue as certain amounts are not expected to be collected from customers, as well as an estimate of the value of the product to be returned. The Company principally relies on historical experience, specific customer agreements and anticipated future trends to estimate these amounts at the time of shipment and to reduce the transaction price. These arrangements include sales discounts and allowances based on sales volumes, specific programs and special pricing allowances, and returned goods, as are customary in the electrical products industry. Customer returns have historically ranged from 1%-2% of gross sales.
Shipping and Handling Costs
The Company records shipping and handling costs as part of Cost of goods sold in the Consolidated Statement of Income.
Foreign Currency Translation
The assets and liabilities of international subsidiaries are translated to U.S. dollars at exchange rates in effect at the end of the year, and income and expense items are translated at average exchange rates in effect during the year. The effects of exchange rate fluctuations on the translated amounts of foreign currency assets and liabilities are included as translation adjustments in Accumulated other comprehensive loss within Hubbell shareholders’ equity. Gains and losses from foreign currency transactions are included in results of operations.
Cash and Cash Equivalents
The carrying value of cash equivalents approximates fair value. Cash equivalents consist of highly liquid investments with original maturities to the Company of three months or less.
Investments
Investments in debt and equity securities are classified by individual security as available-for-sale, held-to-maturity or trading securities. Our available-for-sale securities, consisting of municipal bonds and the redeemable preferred stock of a privately held company, are carried on the balance sheet at fair value with current period adjustments to carrying value recorded in Accumulated other comprehensive loss within Hubbell shareholders’ equity, net of tax. Realized gains and losses are recorded in income in the period of sale. The Company’s trading securities are carried on the balance sheet at fair value and consist primarily of debt and equity mutual funds. Gains and losses associated with these trading securities are reflected in the results of operations. The Company did not have any investments classified as held-to-maturity as of December 31, 2018 and 2017.
Accounts Receivable and Allowances
Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The allowance for doubtful accounts is based on an estimated amount of probable credit losses in existing accounts receivable. The allowance is calculated based upon a combination of historical write-off experience, fixed percentages applied to aging categories and specific identification based upon a review of past due balances and problem accounts. Account balances are charged off against the allowance when it is determined that internal collection efforts should no longer be pursued. The Company also maintains a reserve for credit memos and cash discounts which are principally calculated based upon historical experience, specific customer agreements, as well as anticipated future trends.
Inventories
Inventories are stated at the lower of cost or market value. Approximately 66% of total net inventory value is determined utilizing the last-in, first-out (LIFO) method of inventory accounting. The cost of foreign inventories and certain domestic inventories is determined utilizing average cost or first-in, first-out (FIFO) methods of inventory accounting. Reserves for excess and obsolete inventory are provided based on current assessments about future demand compared to on-hand quantities.
Property, Plant, and Equipment
Property, plant, and equipment values are stated at cost less accumulated depreciation. Maintenance and repair expenditures that do not significantly increase the life of an asset are charged to expense when incurred. Property, plant, and equipment placed in service prior to January 1, 1999 are depreciated over their estimated useful lives, principally, using accelerated methods. Assets placed in service subsequent to January 1, 1999 are depreciated over their estimated useful lives, using straight-line methods. Leasehold improvements are amortized over the shorter of their economic lives or the lease term. Gains and losses arising on the disposal of property, plant and equipment are included in Operating income in the Consolidated Statement of Income.
Capitalized Computer Software Costs
Capitalized computer software costs, net of amortization, were $20.2 million and $15.7 million at December 31, 2018 and 2017, respectively. This balance is reflected in Other long-term assets in the Consolidated Balance Sheet. Capitalized computer software is for internal use and costs primarily consist of purchased materials, external services and salary costs for personnel dedicated to the projects. Software is amortized on a straight-line basis over appropriate periods, generally between three and five years. The Company recorded amortization expense of $6.4 million in 2018, $5.6 million in 2017 and $5.2 million in 2016 relating to capitalized computer software.
| 46 | HUBBELL INCORPORATED - Form 10-K |
Goodwill and Other Intangible Assets
Goodwill represents purchase price in excess of fair values of the underlying net assets of acquired companies. Indefinite-lived intangible assets and goodwill are subject to annual impairment testing using the specific guidance and criteria described in the accounting guidance. The Company performs its goodwill impairment testing as of April 1st of each year, unless circumstances dictate the need for more frequent assessments. The accounting guidance provides entities an option of performing a qualitative assessment (a "step-zero" test) before performing a quantitative analysis. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the goodwill is not impaired, the entity would not need to proceed to the two step goodwill impairment testing process (quantitative analysis) as prescribed in the guidance. The Company applied the "step-zero" test to six of its seven reporting units. Based on that qualitative assessment, the Company concluded it was more-likely-than-not that the fair value of these reporting units substantially exceeded their carrying value and therefore, further quantitative analysis was not required. For the seventh reporting unit the Company has elected to utilize the two step goodwill impairment testing process as permitted in the accounting guidance. Step 1 compares the fair value of the Company’s reporting units to their carrying values. If the fair value of the reporting unit exceeds its carrying value, no further analysis is necessary. If the carrying value of the reporting unit exceeds its fair value, Step 2 must be completed to determine the amount of impairment.
Goodwill impairment testing requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. The Company uses 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. The Company’s estimated aggregate fair value of its reporting units are reasonable when compared to the Company’s market capitalization on the valuation date.
As of April 1, 2018, our impairment testing resulted in implied fair value for each reporting unit that exceeded the reporting unit’s carrying value, including goodwill. The Company did not have any reporting units at risk of failing Step 1 of the impairment test as the excess of the implied fair value significantly exceeded the carrying value of the reporting units. Additionally, the Company did not have any reporting units with zero or negative carrying amounts. The Company has not recorded any goodwill impairments since the initial adoption of the accounting guidance in 2002.
The Company’s intangible assets consist primarily of customer relationships, tradenames and patents. Intangible assets with definite lives are amortized over periods generally ranging from 5-30 years. The Company amortizes intangible assets with definite lives using either an accelerated method that reflects the pattern in which economic benefits of the intangible assets are consumed and results in higher amortization in the earlier years of the assets, useful life, or using a straight line method.
Approximately 75% of the gross value of definite-lived intangible assets follow an accelerated amortization method. These definite lived intangibles are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The Company did not record any material impairments related to its definite lived intangible assets in 2018, 2017 or 2016. The Company also has some tradenames that are considered to be indefinite-lived intangible assets. These indefinite-lived intangible assets are not amortized and are tested for impairment annually, unless circumstances dictate the need for more frequent assessment.
The accounting guidance related to testing indefinite-lived intangible assets for impairment provides entities an option of performing a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the asset is not impaired, the entity would not need to calculate the fair value of the asset. The Company performed the qualitative assessment which resulted in no impairment in 2018, 2017 and 2016.
Other Long-Lived Assets
The Company reviews depreciable long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. If such a change in circumstances occurs, the related estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition is compared to the carrying amount. If the sum of the expected cash flows is less than the carrying amount, an impairment charge is recorded. The impairment charge is measured as the amount by which the carrying amount exceeds the fair value of the asset. The fair value of impaired assets is determined using expected cash flow estimates, quoted market prices when available and appraisals as appropriate. The Company did not record any material impairment charges in 2018, 2017 or 2016.
Accrued Insurance
The Company retains a significant portion of the risks associated with workers’ compensation, medical, automobile and general liability insurance. The Company estimates self-insurance liabilities using a number of factors, including historical claims experience, demographic factors, and other actuarial assumptions. The accrued liabilities associated with these programs are based on the Company’s estimate of the ultimate costs to settle known claims as well as claims incurred but not reported as of the balance sheet date. The Company periodically reviews the assumptions with a third party actuary to determine the adequacy of these self-insurance reserves.
| HUBBELL INCORPORATED - Form 10-K | 47 |
Accrued Warranty
The Company offers product warranties which cover defects on most of its products. These warranties primarily apply to products that are properly installed, maintained and used for their intended purpose. The Company accrues estimated warranty costs at the time of sale. Estimated warranty expenses, recorded in cost of goods sold, are based upon historical information such as past experience, product failure rates, or the estimated number of units to be repaired or replaced. Adjustments are made to the product warranty accrual as claims are incurred, additional information becomes known or as historical experience indicates. The Company assumed warranty obligations with an estimated fair value of $89.4 million in connection with the acquisition of Aclara.
Income Taxes
The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The IRS and other tax authorities routinely examine the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. The Company makes adequate provisions for best estimates of exposures on previously filed tax returns. Deferred income taxes are recognized for the tax consequence of differences between financial statement carrying amounts and the tax basis of assets and liabilities by applying the currently enacted statutory tax rates in accordance with the accounting guidance for income taxes. The effect of a change in statutory tax rates is recognized in the period that includes the enactment date. Additionally, deferred tax assets are required to be reduced by a valuation allowance if it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized. The Company uses factors to assess the likelihood of realization of deferred tax assets such as the forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets.
In addition, the accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of the tax position taken or expected to be taken in a tax return. For any amount of benefit to be recognized, it must be determined that it is more-likely-than-not that a tax position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount of benefit to be recognized is based on the Company’s assertion of the most likely outcome resulting from an examination, including resolution of any related appeals or litigation processes. Companies are required to reflect only those tax positions that are more-likely-than-not to be sustained.
We have completed the accounting for the income tax effects of the TCJA in accordance with SAB 118. The Company has included in the current period financial statements adjustments to the prior provisional estimates.
See Note 13 — Income Taxes for additional information.
Research and Development
Research and development expenditures represent costs to discover and/or apply new knowledge in developing a new product, process, or in bringing about a significant improvement to an existing product or process. Research and development expenses are recorded as a component of Cost of goods sold. Expenses for research and development were approximately 3% of Cost of goods sold in 2018, 3% in 2017 and 2% in 2016.
Retirement Benefits
The Company maintains various defined benefit pension plans for some of its U.S. and foreign employees. The accounting guidance for retirement benefits requires the Company to recognize the funded status of its defined benefit pension and postretirement plans as an asset or liability in the Consolidated Balance Sheet. Gains or losses, prior service costs or credits, and transition assets or obligations that have not yet been included in net periodic benefit cost as of the end of the year are recognized as components of Accumulated other comprehensive loss, net of tax, within Hubbell shareholders’ equity. The Company’s policy is to fund pension costs within the ranges prescribed by applicable regulations. In addition to providing defined benefit pension benefits, the Company provides health care and life insurance benefits for some of its active and retired employees. The Company’s policy is to fund these benefits through insurance premiums or as actual expenditures are made. See also Note 11 — Retirement Benefits.
Earnings Per Share
Restricted stock granted by the Company is considered a participating security since it contains a non-forfeitable right to dividends. As a result, the earnings per share accounting guidance requires the Company to use the two-class method for calculating earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities. Basic earnings per share is calculated as net income available to common shareholders divided by the weighted average number of shares of common stock outstanding. Earnings per diluted share is calculated as net income available to common shareholders divided by the weighted average number of shares outstanding of common stock plus the incremental shares outstanding assuming the exercise of dilutive stock options, stock appreciation rights and performance shares. See also Note 18 — Earnings Per Share.
| 48 | HUBBELL INCORPORATED - Form 10-K |
Stock-Based Compensation
The Company recognizes the grant-date fair value of all stock-based awards on a straight-line basis over their respective requisite service periods (generally equal to an award’s vesting period). A stock-based award is considered vested for expense attribution purposes when the retention of the award is no longer contingent on providing subsequent service. Accordingly, the Company generally recognizes compensation cost immediately for awards granted to retirement-eligible individuals or over the period from the grant date to the date retirement eligibility is achieved, if less than the stated vesting period. The expense is recorded in Cost of goods sold and S&A expense in the Consolidated Statement of Income based on the recipients’ respective functions within the organization.
The Company records deferred tax assets for awards that will result in deductions on its tax returns, based upon the amount of compensation cost recognized and the statutory tax rate in the jurisdiction in which it will receive a deduction. See also Note 17 — Stock-Based Compensation.
Derivatives
In order to limit financial risk in the management of its assets, liabilities and debt, the Company may use derivative financial instruments such as foreign currency hedges, interest rate hedges and interest rate swaps. All derivative financial instruments are matched with an existing Company asset, liability or proposed transaction. The Company does not speculate or use leverage when trading a derivative product. Market value gains or losses on the derivative financial instrument are recognized in income when the effects of the related price changes of the underlying asset or liability are recognized in income. See Note 14 — Financial Instruments and Fair Value Measurement for more information regarding our derivative instruments.
Recent Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (ASU 2018-02) relating to the reclassification of certain tax effects from accumulated other comprehensive income/(loss). The new guidance allows an entity to reclassify the income tax effects of the TCJA on items within accumulated other comprehensive income/(loss) to retained earnings. This new guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard must be adopted retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company is currently assessing the impact of adopting this standard on its financial statements.
In response to the enactment of the TCJA, the Securities and Exchange Commission’s Office of the Chief Accountant published Staff Accounting Bulletin 118 ("SAB 118"). SAB 118 addresses the requirements to account for the impact of a change in tax law or tax rates in the period of enactment. Specifically, SAB 118 provides guidance for issuers that are not able to complete the accounting for the income tax effects of the TCJA by the time financial statements are issued for the reporting period that includes the enactment date (“enactment period financials”).
Under SAB 118, the measurement period for accounting for the TCJA begins in the period of enactment and ends when an entity has obtained, prepared and analyzed the information necessary to complete the accounting requirements under ASC 740, Income Taxes, (the “measurement period”), but in no event can the measurement period extend beyond one year from the TCJA’s enactment date. Any provisional amount or adjustment to a provisional amount included in a company’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined. The Company completed its analysis of the income tax effects of the TCJA within the measurement period and the impact of those income tax effects have been reflected in the income from continuing operations as an adjustment to tax expense in the appropriate reporting period.
In January 2017, the FASB issued an Accounting Standards Update (ASU 2017-04) “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. The Company is currently assessing the impact of adopting this standard on its financial statements.
In March 2017, the FASB issued an Accounting Standards Update (ASU 2017-07) relating to the presentation of net periodic pension costs and net periodic post-retirement benefit cost. This new guidance requires the service component of net periodic pension and post-retirement benefit costs to be reported in the same income statement line item as other employee compensation costs, and the other components to be reported outside of operating income. The Company adopted the requirements of the new standard in the first quarter of 2018 and applied the guidance on a retrospective basis, as required by the standard. The impact to our fiscal quarters and year-ended 2017 is shown in the table below (in millions):
| HUBBELL INCORPORATED - Form 10-K | 49 |
| Three Months Ended | Twelve Months Ended | ||||||||||||||||||
| (in millions) | Dec 31, 2017 | Sep 30, 2017 | Jun 30, 2017 | Mar 31, 2017 | Dec 31, 2017 | Dec 31, 2016 | |||||||||||||
| Cost of goods sold | $ | (0.9 | ) | $ | (0.8 | ) | $ | (0.8 | ) | $ | (0.8 | ) | $ | (3.3 | ) | $ | (4.4 | ) | |
| Selling & administrative expenses | (2.9 | ) | (3.0 | ) | (3.0 | ) | (2.9 | ) | (11.8 | ) | (7.6 | ) | |||||||
| Total operating expenses | (3.8 | ) | (3.8 | ) | (3.8 | ) | (3.7 | ) | (15.1 | ) | (12.0 | ) | |||||||
| Operating income | 3.8 | 3.8 | 3.8 | 3.7 | 15.1 | 12.0 | |||||||||||||
| Total other expense | (3.8 | ) | (3.8 | ) | (3.8 | ) | (3.7 | ) | (15.1 | ) | (12.0 | ) | |||||||
| Net income | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
In February 2016, the FASB issued an Accounting Standards Update (ASU 2016-02) related to the accounting and financial statement presentation for leases. This new guidance, codified in ASC 842, will require a lessee to recognize a right-of-use asset and a lease liability for both financing and operating leases, with a policy election permitting an exception to this guidance for leases with a term of 12 months or less and that do not contain a purchase option that is reasonably certain to be exercised. For financing leases, the lessee will recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee will recognize a straight-line lease expense. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company will adopt the standard as of January 1, 2019.
Pursuant to ASU 2018-11, ASC 842 must be adopted using a modified retrospective transition at the beginning of the earliest comparative period presented. The standard, as originally issued, was to be applied retrospectively, however in July 2018 the FASB issued ASU No. 2018-11 “Leases (Topic 842): Targeted Improvements,” which provides an additional transition method that permits changes to be applied by means of a cumulative-effect adjustment recorded in retained earnings as of the beginning of the fiscal year of adoption. It is our intention to apply this approach in adopting the standard.
In preparing to adopt ASC 842, we have designed processes and controls to manage and account for our active leases under the new requirements. We have completed a qualitative assessment of the company’s portfolio of active leases and have compiled a central repository of related data. In addition, we have implemented a software system to address the new reporting requirements. Lease data elements, required for accounting under the new standard, are being abstracted, validated and loaded into the software solution. The Company estimates that it will recognize approximately $100 million of right-of-use assets and corresponding lease liabilities on the balance sheet upon adoption. However, the population of contracts subject to balance sheet recognition and their initial measurement remains under evaluation; final balance sheet impacts will depend on the lease portfolio at the time of adoption. The Company does not expect that adoption will have a material impact on our results of operations or liquidity.
In May 2014, the FASB issued an Accounting Standards Update (ASU 2014-09) related to new revenue recognition guidance (ASC 606) that supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Subsequently, the FASB has issued amendments to certain aspects of the guidance including the effective date.
Effective January 1, 2018, the Company adopted the requirements of ASC 606 using the modified retrospective approach. The Company applied the guidance to all contracts and recognized a cumulative effect adjustment to Retained Earnings as of January, 1, 2018 of $0.6 million. The impacts to the financial statements are primarily related to balance sheet classification, including amounts associated with the change in balance sheet classification of sales returns reserves, while the impacts on the income statement reflect the change in classification of restocking fees. The impact to our financial statements for the quarter ended December 31, 2018 was as follows (in millions):
| For the Twelve Months Ended December 31, 2018 | |||||||||
| Income Statement | As Reported | Balances Without Adoption of ASC 606 | Effect of Adoption Higher/(Lower) | ||||||
| Net sales | $ | 4,481.7 | $ | 4,478.7 | $ | 3.0 | |||
| Costs and expenses | |||||||||
| Cost of goods sold | $ | 3,181.3 | $ | 3,178.3 | $ | 3.0 |
| 50 | HUBBELL INCORPORATED - Form 10-K |
| As of December 31, 2018 | |||||||||
| Balance Sheet | As Reported | Balances Without Adoption of ASC 606 | Effect of Adoption Higher/(Lower) | ||||||
| ASSETS | |||||||||
| Accounts receivable, net | $ | 725.4 | $ | 708.7 | $ | 16.7 | |||
| Inventories, net | 651.0 | 661.8 | (10.8 | ) | |||||
| Other current assets | 69.1 | 59.5 | 9.6 | ||||||
| Total Assets | $ | 4,872.1 | $ | 4,856.6 | $ | 15.5 | |||
| LIABILITIES | |||||||||
| Other accrued liabilities | $ | 226.6 | $ | 211.7 | $ | 14.9 | |||
| Total Liabilities | $ | 3,073.2 | $ | 3,058.3 | $ | 14.9 | |||
| EQUITY | |||||||||
| Retained earnings | $ | 2,064.4 | $ | 2,063.8 | $ | 0.6 | |||
| Total Equity | $ | 1,798.9 | $ | 1,798.3 | $ | 0.6 |
In August 2018, the FASB issued an Accounting Standards Update (ASU 2018-13) "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement", which modifies the disclosure requirements for fair value measurements. ASU 2018-13 is effective in the first quarter of fiscal 2020, and early adoption is permitted, including an election to early adopt provisions that remove or modify disclosures without early adopting requirements that add disclosures. The Company has elected to early adopt the provisions of the ASU that removed or modify disclosures in 2018 and the adoption had no material impact on its financial statements.
In August 2018, the FASB issued an Accounting Standards Update (ASU 2018-14) "Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans", which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective in the first quarter of fiscal 2021, and early adoption is permitted. ASU 2018-14 was adopted by the Company in 2018 and had no material impact on its financial statements.
In August 2018, the FASB issued an Accounting Standards Update (ASU 2018-15) "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective in the first quarter of fiscal 2020, and early adoption is permitted. The Company is currently assessing the impact of adopting this standard on its financial statements.
NOTE 2 Revenue
Approximately two-thirds of the Company's net sales are to distributors who then sell directly into the residential, non-residential, industrial, electrical transmission and distribution and oil and gas end markets. Within the Power segment, our businesses sell to distributors, with the majority of sales to the utility end markets. Our businesses within the Power segment also sell directly into transmission and distribution utility markets.
| HUBBELL INCORPORATED - Form 10-K | 51 |
The following table presents disaggregated revenue by business group (in millions) for the twelve months ended December 31, 2018, 2017 and 2016:
| Twelve Months Ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Net sales | |||||||||
| Hubbell Commercial and Industrial | $ | 910.8 | $ | 864.5 | $ | 846.9 | |||
| Hubbell Construction and Energy | 799.7 | 732.6 | 667.5 | ||||||
| Hubbell Lighting | 950.1 | 935.7 | 945.8 | ||||||
| Hubbell Power Systems | 1,821.1 | 1,136.0 | 1,045.0 | ||||||
| Total net sales | $ | 4,481.7 | $ | 3,668.8 | $ | 3,505.2 |
The following table presents disaggregated third-party net sales by geographic location (in millions) for the twelve months ended December 31, 2018, 2017 and 2016 (on a geographic basis, the Company defines "international" as businesses based outside of the United States and its possessions):
| Twelve Months Ended December 31, 2018 | Twelve Months Ended December 31, 2017 | Twelve Months Ended December 31, 2016 | |||||||||||||||||||||||||||
| Electrical | Power | Total | Electrical | Power | Total | Electrical | Power | Total | |||||||||||||||||||||
| Net sales | |||||||||||||||||||||||||||||
| United States | $ | 2,365.4 | $ | 1,675.2 | $ | 4,040.6 | $ | 2,229.3 | $ | 1,051.6 | $ | 3,280.9 | $ | 2,187.0 | $ | 960.4 | $ | 3,147.4 | |||||||||||
| International | 295.2 | 145.9 | 441.1 | 303.5 | 84.4 | 387.9 | 273.2 | 84.6 | 357.8 | ||||||||||||||||||||
| Total net sales | $ | 2,660.6 | $ | 1,821.1 | $ | 4,481.7 | $ | 2,532.8 | $ | 1,136.0 | $ | 3,668.8 | $ | 2,460.2 | $ | 1,045.0 | $ | 3,505.2 |
Contract Balances
Our contract liabilities consist of advance payments for products as well as deferred revenue on service obligations and extended warranties. The current portion of deferred revenue is included in Other accrued liabilities and the non-current portion of deferred revenue is included in Other non-current liabilities in the Consolidated Balance Sheet.
Contract liabilities were $27.7 million as of December 31, 2018 compared to $10.2 million as of December 31, 2017. The $17.5 million increase in our contract liabilities balance was primarily due to timing of advance payments on certain orders and the acquisition of Aclara, partially offset by the recognition of $9.0 million in revenue related to amounts that were recorded in contract liabilities at January 1, 2018. The Company has an immaterial amount of contract assets relating to performance obligations satisfied prior to payment that is recorded in Other long-term assets in the Consolidated Balance Sheet. Impairment losses recognized on our receivables and contract assets were immaterial in the twelve months ended December 31, 2018. See Note 1 – Basis of Presentation and Note 3 – Business Acquisitions in the Notes to Consolidated Financial Statements for additional information.
Unsatisfied Performance Obligations
The Company has elected the practical expedient to disclose only the value of unsatisfied performance obligations for contracts with an original expected length greater than one year. Prior to the acquisition of Aclara, the majority of Hubbell's revenues resulted from sales of inventoried products with short periods of manufacture and delivery and thus are excluded from this disclosure. As of December 31, 2018, the Company had approximately $530 million of unsatisfied performance obligations for contracts with an original expected length of greater than one year, primarily relating to long-term contracts of the Aclara business (within the Power segment) to deliver and install meters and grid monitoring sensor technology. The Company expects that a majority of the unsatisfied performance obligations will be completed and recognized over the next 3 years.
Practical Expedients
We apply a practical expedient to expense costs to obtain a contract as incurred when the amortization period would have been one year or less.
| HUBBELL INCORPORATED - Form 10-K | 52 |
NOTE 3 Business Acquisitions
On February 2, 2018, the Company completed the acquisition of Aclara for approximately $1.1 billion. Aclara is a leading global provider of smart infrastructure solutions for electric, gas, and water utilities, with advanced metering solutions and grid monitoring sensor technology, as well as leading software enabled installation services. The acquisition was structured as a merger in which Aclara became a wholly owned indirect subsidiary of the Company. Aclara's businesses have been added to the Power segment. 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.
The Company financed the acquisition and related transactions with net proceeds from borrowings under a new unsecured term loan facility in an aggregate principal amount of $500 million, the issuance of 3.50% Senior Notes due 2028 in an aggregate principal amount of $450 million and commercial paper borrowings.
Allocation of Consideration Transferred to Net Assets Acquired
The following table presents the determination of the fair value of identifiable assets acquired and liabilities assumed from the Company's acquisition of Aclara. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations.
The following are the assets acquired and the liabilities assumed by the Company in the Aclara acquisition, reconciled to the acquisition consideration (in millions):
| Accounts receivable | $ | 118.1 | |
| Inventories | 73.5 | ||
| Other current assets | 8.5 | ||
| Property, plant and equipment | 30.9 | ||
| Intangible assets | 434.0 | ||
| Accounts payable | (51.8 | ) | |
| Other accrued liabilities | (93.3 | ) | |
| Deferred tax liabilities, net | (42.1 | ) | |
| Other non-current liabilities | (67.7 | ) | |
| Noncontrolling interest | (2.5 | ) | |
| Goodwill | 708.7 | ||
| Total Estimate of Consideration Transferred, Net of Cash Acquired | $ | 1,116.3 |
Cash used for the acquisition of businesses, net of cash acquired as reported in the Consolidated Statement of Cash Flows for the twelve months ended December 31, 2018 is $1,118.0 million and includes approximately $1.7 million of deferred purchase price and net working capital settlements relating to acquisitions completed in prior years.
In connection with the Aclara transaction, the Company recorded goodwill of $708.7 million, which is attributable primarily to expected synergies, expanded market opportunities, and other expected benefits that the Company believes will result from combining its operations with the operations of Aclara. For tax purposes, $159.9 million of the Aclara historical goodwill is deductible. The incremental goodwill created as a result of the acquisition is not deductible for tax purposes. Goodwill has been allocated to the Power segment.
The purchase price allocation to identifiable intangible assets acquired is as follows (in millions, except useful life amounts):
| Estimated Fair Value | Weighted Average Estimated Useful Life | ||||
| Patents, tradenames and trademarks | $ | 55.0 | 20.0 | ||
| Customer relationships | 194.0 | 18.0 | |||
| Developed technology | 185.0 | 13.0 | |||
| Total | $ | 434.0 |
Customer relationships and developed technology intangible assets acquired are amortized using an accelerated method that reflects the pattern in which economic benefits of the intangible assets are consumed and results in higher amortization in the earlier years of the asset's useful life.
For the year ended December 31, 2018 and 2017, the Company recorded transaction costs of $12.8 million and $7.1 million, respectively, relating to the Acquisition of Aclara. These costs were recorded in the respective financial statement line items as follows (in millions):
| Twelve Months Ended December 31, | |||||||
| 2018 | 2017 | ||||||
| Selling & administrative expense | $ | 9.5 | $ | 6.7 | |||
| Interest expense | 3.3 | 0.4 | |||||
| Total Aclara Transaction Costs | $ | 12.8 | $ | 7.1 |
| HUBBELL INCORPORATED - Form 10-K | 53 |
Supplemental Pro-Forma Data
Aclara’s results of operations have been included in the Company's financial statements for the period subsequent to the completion of the acquisition on February 2, 2018. Aclara contributed sales of approximately $611.1 million and operating income of approximately $29.6 million, before any transaction costs described below, for the period from the completion of the acquisition through December 31, 2018.
The following unaudited supplemental pro-forma information presents consolidated results as if the acquisition had been completed on January 1, 2017. Following that approach, for the purpose of the pro-forma results presented in the tables below, certain costs incurred by the Company during 2018 have been reclassified into the pro-forma 2017 period. Those reclassifications primarily include the following, which represent the amount of increase or (decrease) to reported results to arrive at the pro forma results. Per share amounts in 2018 reflect the reduction in the U.S. federal corporate income tax rate from 35% to 21%:
| (pre-tax in millions, except per share amounts) | Twelve Months Ended December 31, | Per Diluted Share | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Aclara transaction costs incurred in 2018(1) | $ | 12.8 | $ | (12.8 | ) | $ | 0.19 | $ | (0.16 | ) | |||||
| Intangible amortization and inventory step up(2) | 1.3 | (44.3 | ) | 0.02 | (0.50 | ) | |||||||||
| Interest expense(3) | 3.8 | (27.6 | ) | 0.05 | (0.31 | ) |
(1) Aclara transaction costs incurred in 2018 have been reclassified into the comparable pro-forma 2017 period.
(2) Aclara intangible amortization and inventory step up amortization incurred in 2018 has been reclassified into the comparable pro-forma 2017 period and increased to reflect the assumption the transaction was completed on January 1, 2017. The pro-forma 2018 period include the intangible amortization that would be incurred assuming the transaction had been completed on January 1, 2017.
(3) Interest expense incurred in 2018, reflecting amounts incurred from the date of the acquisition, has been reclassified into the pro-forma 2017 period and increased to reflect the assumption the transaction was completed on January 1, 2017. The pro-forma 2018 period includes the interest expense that would have been incurred assuming the transaction had been completed on January 1, 2017.
The pro-forma results were calculated by combining the results of the Company with the stand-alone results of Aclara for the pre-acquisition periods, as described above:
| (in millions, except per share amounts) | Twelve Months Ended December 31, | ||||||
| 2018 | 2017 | ||||||
| Net sales | $ | 4,531.2 | $ | 4,180.9 | |||
| Net income attributable to Hubbell | $ | 376.4 | $ | 209.8 | |||
| Earnings Per Share: | |||||||
| Basic | $ | 6.86 | $ | 3.82 | |||
| Diluted | $ | 6.83 | $ | 3.81 |
The unaudited supplemental pro-forma financial information does not reflect the actual performance of Aclara in the periods presented and does not reflect the potential realization of cost savings relating to the integration of the two companies. Further, the pro-forma data should not be considered indicative of the results that would have occurred if the acquisition and related financing had been consummated on January 1, 2017, nor are they indicative of future results.
| HUBBELL INCORPORATED - Form 10-K | 54 |
NOTE 4 Receivables and Allowances
Receivables consist of the following components at December 31, (in millions):
| 2018 | 2017 | |||||
| Trade accounts receivable | $ | 739.1 | $ | 576.3 | ||
| Non-trade receivables | 26.2 | 19.1 | ||||
| Accounts receivable, gross | 765.3 | 595.4 | ||||
| Allowance for credit memos, returns and cash discounts(1) | (35.1 | ) | (50.5 | ) | ||
| Allowance for doubtful accounts | (4.8 | ) | (4.6 | ) | ||
| Total allowances | (39.9 | ) | (55.1 | ) | ||
| ACCOUNTS RECEIVABLE, NET | $ | 725.4 | $ | 540.3 |
(1) In 2017 includes $17.6 million of reserves for returns. Effective January 1, 2018, upon adoption of ASC 606, reserves for returns have been reclassified in the Consolidated Balance Sheet to Other accrued liabilities.
NOTE 5 Inventories
Inventories are classified as follows at December 31, (in millions):
| 2018 | 2017 | |||||
| Raw material | $ | 220.2 | $ | 190.0 | ||
| Work-in-process | 110.3 | 115.8 | ||||
| Finished goods | 402.3 | 390.5 | ||||
| 732.8 | 696.3 | |||||
| Excess of FIFO over LIFO cost basis | (81.8 | ) | (61.6 | ) | ||
| INVENTORIES, NET | $ | 651.0 | $ | 634.7 |
| HUBBELL INCORPORATED - Form 10-K | 55 |
NOTE 6 Goodwill and Other Intangible Assets
Changes in the carrying amounts of goodwill for the years ended December 31, 2018 and 2017, by segment, were as follows (in millions):
| Segment | |||||||||
| Electrical | Power | Total | |||||||
| BALANCE AT DECEMBER 31, 2016 | $ | 652.0 | $ | 339.0 | $ | 991.0 | |||
| Current year acquisitions | 58.7 | 29.8 | 88.5 | ||||||
| Foreign currency translation and prior year acquisitions | 6.9 | 2.6 | 9.5 | ||||||
| BALANCE AT DECEMBER 31, 2017 | $ | 717.6 | $ | 371.4 | $ | 1,089.0 | |||
| Current year acquisitions | — | 708.7 | 708.7 | ||||||
| Foreign currency translation and prior year acquisitions | (3.5 | ) | (9.8 | ) | (13.3 | ) | |||
| BALANCE AT DECEMBER 31, 2018 | $ | 714.1 | $ | 1,070.3 | $ | 1,784.4 |
In 2018, the Company completed one acquisition (Aclara) that was added to the Power segment. The acquisition has been accounted for as a business combination and has resulted in the recognition of $708.7 million of goodwill. See also Note 3 — Business Acquisitions.
The Company has not recorded any material goodwill impairments since the initial adoption of the accounting guidance in 2002.
Identifiable intangible assets are recorded in Intangible assets, net in the Consolidated Balance Sheet. Identifiable intangible assets are comprised of the following (in millions):
| December 31, 2018 | December 31, 2017 | ||||||||||||
| Gross Amount | Accumulated Amortization | Gross Amount | Accumulated Amortization | ||||||||||
| Definite-lived: | |||||||||||||
| Patents, tradenames and trademarks | $ | 204.4 | $ | (58.6 | ) | $ | 151.4 | $ | (50.1 | ) | |||
| Customer/agent relationships and other | 833.0 | (212.6 | ) | 462.0 | (156.7 | ) | |||||||
| TOTAL DEFINITE-LIVED INTANGIBLES | 1,037.4 | (271.2 | ) | 613.4 | (206.8 | ) | |||||||
| Indefinite-lived: | |||||||||||||
| Tradenames and other | 53.3 | — | 53.8 | — | |||||||||
| TOTAL INTANGIBLE ASSETS | $ | 1,090.7 | $ | (271.2 | ) | $ | 667.2 | $ | (206.8 | ) |
Amortization expense associated with these definite-lived intangible assets was $68.9 million, $34.9 million and $32.3 million in 2018, 2017 and 2016, respectively. Amortization expense associated with these intangible assets is expected to be $71.9 million in 2019, $71.2 million in 2020, $69.5 million in 2021, $64.2 million in 2022 and $59.6 million in 2023.
| 56 | HUBBELL INCORPORATED - Form 10-K |
NOTE 7 Investments
At December 31, 2018 and December 31, 2017, the Company held investments classified as available-for-sale and investments classified as trading securities. Investments classified as available-for-sale consisted of municipal bonds with an amortized cost basis of $49.0 million and an investment in the redeemable preferred stock of a privately-held electrical utility substation security provider with an amortized cost basis of $5.0 million. The investment in redeemable preferred stock was classified in Level 3 of the fair value hierarchy and had a fair value of $2.3 million and $4.1 million at December 31, 2018 and 2017, respectively. Investments classified as trading securities were composed primarily of debt and equity mutual funds and are stated at fair market value based on current quotes.
The following table sets forth selected data with respect to the Company’s investments at December 31, (in millions):
| 2018 | 2017 | ||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Carrying Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Carrying Value | ||
| Available-for-sale securities | $54.0 | $1.1 | $(3.9) | $51.2 | $51.2 | $59.3 | $0.1 | $(1.0) | $58.4 | $58.4 | |
| Trading securities | 10.1 | 4.2 | — | 14.3 | 14.3 | 8.9 | 4.9 | — | 13.8 | 13.8 | |
| TOTAL INVESTMENTS | $64.1 | $5.3 | $(3.9) | $65.5 | $65.5 | $68.2 | $5.0 | $(1.0) | $72.2 | $72.2 |
Contractual maturities of our investments in available-for-sale securities at December 31, 2018 were as follows (in millions):
| Amortized Cost | Fair Value | |||||
| Available-for-sale securities | ||||||
| Due within 1 year | $ | 9.2 | $ | 9.2 | ||
| After 1 year but within 5 years | 28.8 | 26.0 | ||||
| After 5 years but within 10 years | 13.4 | 13.4 | ||||
| Due after 10 years | 2.6 | 2.6 | ||||
| TOTAL | $ | 54.0 | $ | 51.2 |
The total unrealized gain/(loss) recognized in the year relating to available-for-sale securities, net of tax, was $(1.4) million and $0.6 million at December 31, 2018 and 2017, respectively. These net unrealized gains/(losses) are included in Accumulated other comprehensive loss, net of tax. Net unrealized gains relating to trading securities have been reflected in the results of operations. The Company uses the specific identification method when identifying the cost basis used to calculate the gain or loss on these securities. Gains and losses for both available-for-sale and trading securities were not material in 2018, 2017 and 2016.
NOTE 8 Property, Plant, and Equipment
Property, plant, and equipment, carried at cost, is summarized as follows at December 31, (in millions):
| 2018 | 2017 | |||||
| Land | $ | 42.2 | $ | 40.0 | ||
| Buildings and improvements | 277.3 | 272.2 | ||||
| Machinery, tools, and equipment | 863.5 | 806.2 | ||||
| Construction-in-progress | 46.2 | 43.4 | ||||
| Gross property, plant, and equipment | 1,229.2 | 1,161.8 | ||||
| Less accumulated depreciation | (727.1 | ) | (703.5 | ) | ||
| PROPERTY, PLANT, AND EQUIPMENT, NET | $ | 502.1 | $ | 458.3 |
Depreciable lives on buildings range between 20-45 years. Depreciable lives on machinery, tools, and equipment range between 3-15 years. The Company recorded depreciation expense of $66.1 million, $57.5 million and $53.4 million for 2018, 2017 and 2016, respectively.
| HUBBELL INCORPORATED - Form 10-K | 57 |
NOTE 9 Other Accrued Liabilities
Other accrued liabilities consist of the following at December 31, (in millions):
| 2018 | 2017 | |||||
| Customer program incentives | $ | 52.4 | $ | 41.2 | ||
| Accrued income taxes | 3.4 | 27.5 | ||||
| Contract liabilities - deferred revenue | 27.7 | 10.2 | ||||
| Customer refund liability | 15.3 | — | ||||
| Accrued warranties(1) | 33.5 | 14.0 | ||||
| Other | 94.3 | 82.0 | ||||
| TOTAL | $ | 226.6 | $ | 174.9 |
(1) Refer to Note 21 – Guarantees for additional information regarding warranties.
NOTE 10 Other Non-Current Liabilities
Other non-current liabilities consists of the following at December 31, (in millions):
| 2018 | 2017 | |||||
| Pensions | $ | 177.0 | $ | 213.2 | ||
| Other post-employment benefits | 23.7 | 24.6 | ||||
| Deferred tax liabilities | 120.0 | 23.7 | ||||
| Accrued warranties long-term(1) | 59.2 | — | ||||
| Other | 116.9 | 118.0 | ||||
| TOTAL | $ | 496.8 | $ | 379.5 |
(1) Refer to Note 21 – Guarantees for additional information regarding warranties.
| 58 | HUBBELL INCORPORATED - Form 10-K |
NOTE 11 Retirement Benefits
The Company has funded and unfunded non-contributory U.S. and foreign defined benefit pension plans. Benefits under these plans are generally provided based on either years of service and final average pay or a specified dollar amount per year of service. The U.S. defined benefit pension plan has been closed to new participants since 2004, while the Canadian and UK defined benefit pension plans have been closed to new entrants since 2006 and 2007, respectively. These U.S., Canadian and UK employees are eligible instead for defined contribution plans.
The Company also has a number of health care and life insurance benefit plans covering eligible employees who reached retirement age while working for the Company. These benefits have been discontinued for substantially all future retirees. The Company anticipates future cost-sharing charges for its discontinued plans that are consistent with past practices. The Company uses a December 31 measurement date for all of its plans.
In the third quarter of 2018, the Company approved amendments to one of its foreign defined benefit pension plans, which closed the plan to future service accruals effective August 31, 2018. As a result of the amendments, in the third quarter of 2018, the Company recognized a curtailment gain of approximately $4.7 million, net of tax, in Accumulated other comprehensive income. In addition, effective August 31, 2018, the amortization of actuarial gains and losses is being recognized over the remaining life expectancy of the participants of this plan, as all participants are considered inactive as a result of the amendment.
In December 2016, the Company approved amendments to the domestic qualified defined benefit pension plan and non-qualified defined benefit plan, which froze service accruals for active participants effective February 28, 2017 and further will freeze compensation accruals effective December 31, 2020. The Company also froze all accruals in a second non-qualified defined benefit plan effective December 31, 2016.
As a result of these amendments, the Company recognized a $34.1 million curtailment gain in Accumulated other comprehensive income as of December 31, 2016 and also recognized $0.2 million of pension expense in 2016 associated with previously unrecognized prior service costs. In addition, effective January 1, 2017, the amortization of actuarial gains and losses of these plans is being recognized over the remaining life expectancy of participants, as all participants are considered inactive as a result of the amendment.
In 2018 and 2016, we completed transactions with third-party insurers to settle approximately $28 million and $40 million, respectively, of projected benefit obligation of our domestic qualified defined benefit pension plans.
The Company's U.S. defined benefit pension plans were approximately 88% of the $844.3 million total pension benefit obligations at December 31, 2018.
| HUBBELL INCORPORATED - Form 10-K | 59 |
The following table sets forth the reconciliation of beginning and ending balances of the benefit obligations and the plan assets for the Company’s defined benefit pension and other benefit plans at December 31, (in millions):
| Pension Benefits | Other Benefits | ||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||
| Change in benefit obligation | |||||||||||||
| Benefit obligation at beginning of year | $ | 956.1 | $ | 917.4 | $ | 27.0 | $ | 26.2 | |||||
| Acquisitions | 1.3 | — | — | — | |||||||||
| Service cost | 3.8 | 5.9 | 0.1 | 0.1 | |||||||||
| Interest cost | 34.3 | 37.2 | 1.0 | 1.0 | |||||||||
| Plan participants’ contributions | 0.4 | 0.6 | — | — | |||||||||
| Amendments | 3.6 | 0.3 | — | — | |||||||||
| Actuarial loss/(gain) | (72.4 | ) | 29.7 | (0.5 | ) | 1.4 | |||||||
| Curtailment gain | (5.7 | ) | — | — | — | ||||||||
| Currency impact | (5.7 | ) | 9.7 | — | — | ||||||||
| Other | (0.5 | ) | (0.4 | ) | — | — | |||||||
| Benefits paid | (70.9 | ) | (44.3 | ) | (1.5 | ) | (1.7 | ) | |||||
| Benefit obligation at end of year | $ | 844.3 | $ | 956.1 | $ | 26.1 | $ | 27.0 | |||||
| Change in plan assets | |||||||||||||
| Fair value of plan assets at beginning of year | $ | 738.8 | $ | 705.1 | $ | — | $ | — | |||||
| Acquisitions | 1.2 | — | — | — | |||||||||
| Actual return on plan assets | (27.5 | ) | 58.6 | — | — | ||||||||
| Employer contributions | 34.0 | 9.8 | 1.5 | 1.7 | |||||||||
| Plan participants’ contributions | 0.4 | 0.6 | — | — | |||||||||
| Currency impact | (5.9 | ) | 9.0 | — | — | ||||||||
| Benefits paid | (70.9 | ) | (44.3 | ) | (1.5 | ) | (1.7 | ) | |||||
| Fair value of plan assets at end of year | $ | 670.1 | $ | 738.8 | $ | — | $ | — | |||||
| FUNDED STATUS | $ | (174.2 | ) | $ | (217.3 | ) | $ | (26.1 | ) | $ | (27.0 | ) | |
| Amounts recognized in the consolidated balance sheet consist of: | |||||||||||||
| Prepaid pensions (included in Other long-term assets) | $ | 8.0 | $ | 1.5 | $ | — | $ | — | |||||
| Accrued benefit liability (short-term and long-term) | (182.2 | ) | (218.8 | ) | (26.1 | ) | (27.0 | ) | |||||
| NET AMOUNT RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET | $ | (174.2 | ) | $ | (217.3 | ) | $ | (26.1 | ) | $ | (27.0 | ) | |
| Amounts recognized in Accumulated other comprehensive loss (income) consist of: | |||||||||||||
| Net actuarial loss | $ | 240.8 | $ | 270.1 | $ | 2.4 | $ | 3.0 | |||||
| Prior service cost (credit) | 4.1 | 0.6 | (1.3 | ) | (2.3 | ) | |||||||
| NET AMOUNT RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE LOSS | $ | 244.9 | $ | 270.7 | $ | 1.1 | $ | 0.7 |
The accumulated benefit obligation for all defined benefit pension plans was $835.6 million and $924.6 million at December 31, 2018 and 2017, respectively. Information with respect to plans with accumulated benefit obligations in excess of plan assets is as follows, (in millions):
| 2018 | 2017 | |||||
| Projected benefit obligation | $ | 744.0 | $ | 842.7 | ||
| Accumulated benefit obligation | $ | 735.4 | $ | 826.5 | ||
| Fair value of plan assets | $ | 561.7 | $ | 626.3 |
| 60 | HUBBELL INCORPORATED - Form 10-K |
The following table sets forth the components of pension and other benefit costs for the years ended December 31, (in millions):
| Pension Benefits | Other Benefits | ||||||||||||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||
| Components of net periodic benefit cost: | |||||||||||||||||||
| Service cost | $ | 3.8 | $ | 5.9 | $ | 12.9 | $ | 0.1 | $ | 0.1 | $ | — | |||||||
| Interest cost | 34.3 | 37.2 | 41.9 | 1.0 | 1.0 | 1.2 | |||||||||||||
| Expected return on plan assets | (33.5 | ) | (34.1 | ) | (44.3 | ) | — | — | — | ||||||||||
| Amortization of prior service cost (credit) | 0.1 | 0.1 | 0.1 | (0.8 | ) | (1.0 | ) | (1.0 | ) | ||||||||||
| Amortization of actuarial losses (gains) | 10.5 | 11.4 | 13.9 | — | — | — | |||||||||||||
| Curtailment and settlement losses | — | 0.4 | 0.2 | — | — | — | |||||||||||||
| Net periodic benefit cost | $ | 15.2 | $ | 20.9 | $ | 24.7 | $ | 0.3 | $ | 0.1 | $ | 0.2 | |||||||
| Changes recognized in other comprehensive loss (income), before tax: | |||||||||||||||||||
| Current year net actuarial loss (gain) | $ | (15.8 | ) | $ | 4.2 | $ | 72.0 | $ | (0.4 | ) | $ | 1.4 | $ | 0.2 | |||||
| Current year prior service credit | 2.0 | 0.3 | — | — | — | — | |||||||||||||
| Amortization of prior service (cost) credit | (0.1 | ) | (0.1 | ) | (0.1 | ) | 1.0 | 1.0 | 1.0 | ||||||||||
| Amortization of net actuarial (losses) gains | (10.5 | ) | (11.4 | ) | (13.9 | ) | (0.2 | ) | — | — | |||||||||
| Currency impact | (1.3 | ) | 3.5 | (4.0 | ) | — | — | — | |||||||||||
| Other adjustments | — | (0.4 | ) | (0.2 | ) | — | — | — | |||||||||||
| Total recognized in other comprehensive loss | (25.7 | ) | (3.9 | ) | 53.8 | 0.4 | 2.4 | 1.2 | |||||||||||
| TOTAL RECOGNIZED IN NET PERIODIC PENSION COST AND OTHER COMPREHENSIVE LOSS | $ | (10.5 | ) | $ | 17.0 | $ | 78.5 | $ | 0.7 | $ | 2.5 | $ | 1.4 |
The Company also maintains five primary defined contribution pension plans. The total cost of the Company's defined contribution plans was $22.5 million in 2018, $19.8 million in 2017 and $15.6 million in 2016, excluding the employer match for the 401(k) plan. This cost is not included in the above net periodic benefit cost for the defined benefit pension plans.
The Company participated in two multi-employer defined benefit pension plans under the terms of collective-bargaining agreements that cover its union represented employees at December 31, 2016. In 2017, the Company withdrew from one of these plans. The Company’s total contributions to plans it participated in were $0.2 million in 2018, $0.4 million in 2017, and $0.5 million in 2016. These contributions represent more than five percent of the total contributions made to one of these plans in 2018, 2017 and 2016.
The risks of participating in multi-employer plans are different from single-employer plans in that assets contributed are pooled and may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may have to be assumed by the remaining participant employers. If we choose to stop participating in a multi-employer plan we may be required to pay those plans a withdrawal liability based on the unfunded status of the plan.
In the fourth quarter of 2016, the Company recorded a charge of $12.5 million in Cost of goods sold representing the estimated withdrawal liability from one of the multi-employer plans. Depending on actions of third parties, including bankruptcy or withdrawals from the multi-employer plan, under terms customary to multi-employer plans, it is possible that the Company could in the future be subject to certain additional liabilities associated with its participation and withdraw from the multi-employer pension plan, which the Company estimates could be up to an additional $23 million as of December 31, 2018.
| HUBBELL INCORPORATED - Form 10-K | 61 |
Assumptions
The following assumptions were used to determine the projected benefit obligations at the measurement date and the net periodic benefit cost for the year:
| Pension Benefits | Other Benefits | ||||||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||
| Weighted-average assumptions used to determine benefit obligations at December 31, | |||||||||||||
| Discount rate | 4.24 | % | 3.67 | % | 4.12 | % | 4.40 | % | 3.70 | % | 4.10 | % | |
| Rate of compensation increase | 3.25 | % | 3.24 | % | 3.55 | % | 4.05 | % | 4.00 | % | 3.93 | % | |
| Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, | |||||||||||||
| Discount rate | 3.67 | % | 4.12 | % | 4.71 | % | 3.70 | % | 4.10 | % | 4.60 | % | |
| Expected return on plan assets | 4.68 | % | 4.94 | % | 6.04 | % | N/A | N/A | N/A | ||||
| Rate of compensation increase | 3.25 | % | 3.55 | % | 3.59 | % | 4.00 | % | 3.93 | % | 3.92 | % |
At the end of each year, the Company determines the appropriate expected return on assets for each plan based upon its strategic asset allocation (see discussion below). In making this determination, the Company utilizes expected returns for each asset class based upon current market conditions and expected risk premiums for each asset class.
The Company also determines the discount rate to be used to calculate the present value of pension plan liabilities at the end of each year. The discount rate for the Company’s U.S. and Canadian pension plans is determined by matching the expected cash flows associated with its benefit obligations to the expected cash flows of a hypothetical portfolio of high quality, fixed income debt instruments with maturities that closely match the expected funding period of its pension liabilities. As of December 31, 2018, the Company used a discount rate of 4.40% for its U.S. pension plans compared to a discount rate of 3.80% used in 2017. For its Canadian pension plan, the Company used a discount rate of 3.60% as of December 31, 2018 compared to the 3.50% discount rate used in 2017.
For its 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 rate of AA corporate bonds. This methodology resulted in a December 31, 2018 discount rate for the UK pension plan of 2.90% as compared to a discount rate of 2.60% used in 2017.
In 2018 we changed the mortality table used to calculate the present value of our pension plan liabilities from the RP-2014 mortality table, with generational projection from 2006 using Scale MP-2017 to the RP-2014 mortality table, with generational projection from 2006 using Scale MP-2018. That change did not have a material impact to the projected benefit obligation of our U.S. plans upon remeasurement at December 31, 2018. The RP-2014 mortality table with generational projection from 2006 using Scale MP-2018 was chosen as the best estimate based on the observed and anticipated experience of the plans after considering alternative tables.
The rate of compensation increase assumption reflects the Company’s actual experience and best estimate of future increases.
| 62 | HUBBELL INCORPORATED - Form 10-K |
The assumed health care cost trend rates used to determine the projected postretirement benefit obligation are as follows:
| Other Benefits | ||||||
| 2018 | 2017 | 2016 | ||||
| Assumed health care cost trend rates at December 31, | ||||||
| Health care cost trend assumed for next year | 6.8 | % | 7.0 | % | 7.2 | % |
| Rate to which the cost trend is assumed to decline | 5.0 | % | 5.0 | % | 5.0 | % |
| Year that the rate reaches the ultimate trend rate | 2028 | 2028 | 2028 |
Plan Assets
The Company’s combined targeted 2019 weighted average asset allocation for domestic and foreign pension plans and the actual weighted average asset allocation for domestic and foreign pension plans at December 31, 2018 and 2017 by asset category are as follows:
| Percentage of Plan Assets | ||||||
| Target | Actual | |||||
| Asset Category | 2019 | 2018 | 2017 | |||
| Equity securities | 22 | % | 19 | % | 18 | % |
| Debt securities & Cash | 64 | % | 67 | % | 65 | % |
| Alternative Investments | 14 | % | 14 | % | 17 | % |
| TOTAL | 100 | % | 100 | % | 100 | % |
At the end of each year, the Company estimates the expected long-term rate of return on pension plan assets based on the strategic asset allocation for its plans. In making this determination, the Company utilizes expected rates of return for each asset class based upon current market conditions and expected risk premiums for each asset class. The Company has written investment policies and asset allocation guidelines for its domestic and foreign pension plans. In establishing these policies, the Company has considered that its various pension plans are a major retirement vehicle for most plan participants and has acted to discharge its fiduciary responsibilities with regard to the plans solely in the interest of such participants and their beneficiaries. The goal underlying the establishment of the investment policies is to provide that pension assets shall be invested in a prudent manner and so that, together with the expected contributions to the plans, the funds will be sufficient to meet the obligations of the plans as they become due. To achieve this result, the Company conducts a periodic strategic asset allocation study to form a basis for the allocation of pension assets between various asset categories. Specific policy
benchmark percentages are assigned to each asset category with minimum and maximum ranges established for each. The assets are then tactically managed within these ranges. Equity securities include investments in large-cap, mid-cap and small-cap companies located inside and outside the United States. Fixed income securities include corporate bonds of companies from diversified industries, mortgage-backed securities and US Treasuries. Derivative investments include futures contracts used by the plan to adjust the level of its investments within an asset allocation category. The actual and target percentages reported in the preceding table reflect the economic exposure to each asset category, including the impact of derivative positions. All futures contracts are 100% supported by cash or cash equivalent investments. At no time may derivatives be utilized to leverage the asset portfolio. At December 31, 2018 and 2017, there were no holdings of Company stock in pension plan assets.
The Company’s other post-employment benefits are unfunded; therefore, no asset information is reported.
| HUBBELL INCORPORATED - Form 10-K | 63 |
The fair value of the Company’s pension plan assets at December 31, 2018 and 2017, by asset category are as follows (in millions):
| Quoted Prices in Active Markets for Identical Assets | Quoted Prices in Active Market for Similar Asset | Significant Unobservable Inputs | Investments Priced Using Net Asset Value | ||||||||||||
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||
| Cash and cash equivalents | $ | 47.0 | $ | 47.0 | $ | — | $ | — | $ | — | |||||
| Equity securities: | |||||||||||||||
| U.S. Large-cap (a) | 8.2 | 8.2 | — | — | — | ||||||||||
| U.S. Mid-cap and Small-cap Growth (b) | 3.1 | 3.1 | — | — | — | ||||||||||
| International Large-cap | 8.6 | 8.6 | — | — | — | ||||||||||
| Emerging Markets (c) | 13.3 | 8.1 | 5.2 | — | — | ||||||||||
| Common Pooled Equity Funds (d) | 12.7 | — | 12.7 | — | — | ||||||||||
| Fixed Income Securities: | |||||||||||||||
| U.S. Treasuries | 378.0 | — | 378.0 | — | — | ||||||||||
| Corporate Bonds (e) | 0.3 | 0.3 | — | — | — | ||||||||||
| Asset Backed Securities and Other | 22.8 | — | 22.8 | — | — | ||||||||||
| Common Pooled Fixed Income Funds (f) | 61.8 | — | 57.6 | — | 4.2 | ||||||||||
| Derivatives: | |||||||||||||||
| Assets (g) | 8.2 | 8.0 | 0.2 | — | — | ||||||||||
| (Liabilities) (g) | (7.9 | ) | (6.9 | ) | (1.0 | ) | — | — | |||||||
| Alternative Investment Funds (h) | 96.8 | 11.6 | 3.3 | — | 81.9 | ||||||||||
| Common Pooled Funds (i) | 17.7 | 0.9 | 16.8 | — | — | ||||||||||
| BALANCE AT DECEMBER 31, 2018 | $ | 670.6 | $ | 88.9 | $ | 495.6 | $ | — | $ | 86.1 |
| Quoted Prices in Active Markets for Identical Assets | Quoted Prices in Active Market for Similar Asset | Significant Unobservable Inputs | Investments Priced Using Net Asset Value | ||||||||||||
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||
| Cash and cash equivalents | $ | 47.9 | $ | 47.9 | $ | — | $ | — | $ | — | |||||
| Equity securities: | |||||||||||||||
| U.S. Large-cap (a) | 15.6 | 15.6 | — | — | — | ||||||||||
| U.S. Mid-cap and Small-cap Growth (b) | 3.1 | 3.1 | — | — | — | ||||||||||
| International Large-cap | 30.9 | 30.9 | — | — | — | ||||||||||
| Emerging Markets (c) | 8.6 | 8.6 | — | — | — | ||||||||||
| Fixed Income Securities: | |||||||||||||||
| U.S. Treasuries | 402.2 | — | 402.2 | — | — | ||||||||||
| Corporate Bonds (e) | 10.6 | 0.3 | 10.3 | — | — | ||||||||||
| Asset Backed Securities and Other | 75.6 | — | 75.6 | — | — | ||||||||||
| Derivatives: | |||||||||||||||
| Assets (g) | 4.6 | 1.5 | 3.1 | — | — | ||||||||||
| (Liabilities) (g) | (1.3 | ) | 0.1 | (1.4 | ) | — | — | ||||||||
| Alternative Investment Funds (h) | 123.0 | 50.6 | — | — | 72.4 | ||||||||||
| Common Pooled Funds (i) | 18.0 | 0.8 | 17.2 | — | — | ||||||||||
| BALANCE AT DECEMBER 31, 2017 | $ | 738.8 | $ | 159.4 | $ | 507.0 | $ | — | $ | 72.4 |
| (a) | Includes an actively managed portfolio of large-cap U.S. stocks. |
| (b) | Includes an investment in a small cap open ended mutual fund. |
| (c) | Includes open ended emerging markets mutual funds. |
| (d) | Investments in Common Pooled Equity Funds, including funds and fund products investing in various equity securities |
| (e) | Includes primarily investment grade bonds from diverse industries |
| (f) | Investments in Common Pooled Fixed Income Funds, including funds and fund products investing in various fixed income investments |
| (g) | Includes primarily U.S. and foreign equity futures as well as foreign fixed income futures and positions in U.S. Treasury futures to adjust the duration of the portfolio. |
| (h) | Includes investments in hedge funds, including fund of funds products and open end mutual funds |
| (i) | Investments in Common Pooled Funds, consisting of equities and fixed income securities |
| 64 | HUBBELL INCORPORATED - Form 10-K |
Investments Priced Using Net Asset Value ("NAV") within Alternative Investment Funds in the preceding tables consist of fund of fund products. These products invest in a number of investment funds managed by a diversified group of third-party investment managers who employ a variety of alternative investment strategies, including relative value, security selection, distressed value, global macro, specialized credit and directional strategies. The objective of these funds is to achieve the desired capital appreciation with lower volatility than either traditional equity or fixed income securities.
Contributions
The Company made $27.9 million of contributions to its qualified defined benefit pension plans in 2018, including $20.0 million of U.S. voluntary contributions that were not required under the Pension Protection Act of 2006. The Company expects to contribute approximately $0.5 million to its foreign plans in 2019.
Estimated Future Benefit Payments
The following domestic and foreign benefit payments, which reflect future service, as appropriate, are expected to be paid as follows, (in millions):
| Pension Benefits | Other Benefits | |||||
| 2019 | $ | 50.3 | $ | 2.4 | ||
| 2020 | $ | 50.5 | $ | 2.3 | ||
| 2021 | $ | 51.8 | $ | 2.3 | ||
| 2022 | $ | 53.6 | $ | 2.1 | ||
| 2023 | $ | 54.0 | $ | 2.0 | ||
| 2024-2028 | $ | 268.9 | $ | 8.7 |
NOTE 12 Debt
The following table sets forth the Company’s long-term debt at December 31, (in millions):
| Maturity | 2018 | 2017 | |||||
| Senior notes at 3.625% | 2022 | 298.3 | 297.9 | ||||
| Senior notes at 3.35% | 2026 | 395.1 | 394.4 | ||||
| Senior notes at 3.15% | 2027 | 295.4 | 294.8 | ||||
| Senior notes at 3.50% | 2028 | 443.3 | — | ||||
| Term loan, net of current portion of $25 million | 2023 | 305.0 | — | ||||
| TOTAL LONG-TERM DEBT(a) | $ | 1,737.1 | $ | 987.1 |
(a) Long-term debt is presented net of debt issuance costs and unamortized discounts.
In February 2018, the Company completed a public offering of $450 million of senior, unsecured, notes maturing in February 2028 and bearing interest at a fixed rate of 3.50% (the "2028 Notes"). Net proceeds from the issuance of the 2028 Notes were $442.6 million after deducting the discount on such notes and offering expenses paid by the Company. The 2028 Notes are callable at any time at specified prices and are only subject to accelerated payment prior to maturity upon customary events of a default under the indenture governing the 2028 Notes, as modified by the supplemental indenture creating such notes, or upon a change in control triggering event as defined in such indenture.
In January 2018, the Company entered into 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. The interest rate applicable to borrowings under the Term Loan Agreement is generally either adjusted LIBOR plus an applicable margin (determined by a ratings based grid) or the alternate base rate. The principal amount of borrowings under the Term Loan Agreement amortize in equal quarterly installments of 5% per year in year one, 5% per year in year two, 7.5% per year in year three, 10% per year in year four, 10% per year in year five, and any remaining borrowings under the Term Loan Agreement are due and payable in full in February 2023. The Company may also make principal payments in excess of the amortization schedule at its discretion. In the second half of 2018 the Company made discretionary payments of $150.0 million against the outstanding principal amount of the Term Loan. The sole financial covenant in the Term Loan Agreement requires that total debt not exceed 65% of total capitalization as of the last day of each fiscal quarter of the Company. The Company was in compliance with this covenant as of December 31, 2018.
Proceeds of the 2028 Notes and Term Loan were used to fund the Aclara acquisition.
| HUBBELL INCORPORATED - Form 10-K | 65 |
In January 2018, the Company entered into a new 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 of Aclara, the Company terminated all commitments under the Company's previous 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 adjusted LIBOR plus an applicable margin (determined by a ratings based grid) or the alternate base rate. The 2018 Credit Facility expires in February 2023. The sole financial covenant in the 2018 Credit Facility requires that total debt not exceed 65% of total capitalization as of the last day of each fiscal quarter of the Company. The Company was in compliance with this covenant as of December 31, 2018. As of December 31, 2018, the Company has not drawn against the 2018 Credit Facility.
In August 2017, the Company completed a public debt offering of $300 million of long-term unsecured, unsubordinated notes maturing in August 2027 and bearing interest at a fixed rate of 3.15% (the "2027 Notes"). Net proceeds from the issuance were $294.6 million after deducting the discount on the notes and offering expenses paid by the Company.
In September 2017, the Company applied the net proceeds from the 2027 Notes to redeem all of its $300 million outstanding long-term, unsecured, unsubordinated notes maturing in 2018 and bearing interest at a fixed rate of 5.95% (the "2018 Notes"). In connection with this redemption, the Company recognized a loss on the early extinguishment of the 2018 Notes of $10.1 million on a before-tax basis.
In March 2016, the Company completed a public debt offering of $400 million of long-term unsecured, unsubordinated notes maturing in March 2026 and bearing interest at a fixed rate of 3.35% (the "2026 Notes"). Net proceeds from the issuance were $393.4 million after deducting the discount on the notes and offering expenses paid by the Company.
In November 2010, the Company completed a public debt offering for $300 million of long-term unsecured, unsubordinated notes maturing in November 2022 (“2022 Notes”) and bearing interest at a fixed rate of 3.625%. Prior to the issuance of the 2022 Notes, the Company entered into a forward interest rate lock which resulted in a $1.6 million loss. This amount was recorded in Accumulated other comprehensive loss, net of tax, and is being amortized over the life of the 2022 Notes.
The 2022 Notes, 2026 Notes 2027 Notes and 2028 Notes, are all fixed rate indebtedness, are callable at any time with a make whole premium and are only subject to accelerated payment prior to maturity in the event of a default (including as a result of the Company's failure to meet certain non-financial covenants) under the indenture governing the notes, as modified by the supplemental indentures creating such notes, or upon a change in control triggering event as defined in such indenture. The Company was in compliance with all non-financial covenants as of December 31, 2018.
At December 31, 2018 and 2017, the Company had $56.1 million and $68.1 million, respectively, of short-term debt outstanding composed of;
| ◦ | $26.0 million and $63.0 million of commercial paper borrowings outstanding at December 31, 2018 and 2017 respectively. |
| ◦ | Long-term debt classified as short-term within current liabilities in the Consolidated Balance Sheets, reflecting maturities within the next 12 months related to borrowings under the Term Loan, at December 31, 2018. |
| ◦ | $5.1 million of other borrowings to support our international operations in China at December 31, 2018 and 2017 respectively. |
Other information related to short-term debt at December 31, is summarized below:
| 2018 | 2017 | |||
| Interest rate on short-term debt: | ||||
| At year end | 3.21 | % | 1.95 | % |
| Paid during the year (weighted average) | 2.43 | % | 2.24 | % |
The Company also maintains other lines of credit that are primarily used to support the issuance of letters of credit. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions. At December 31, 2018 and 2017 these lines totaled $54.8 million and $53.9 million, respectively, of which $20.3 million and $21.5 million was utilized to support letters of credit and the remaining amount was unused. The annual commitment fees associated with these lines of credit are not material.
Interest and fees paid related to total indebtedness was $59.5 million, $47.9 million and $37.1 million in 2018, 2017 and 2016, respectively. The $47.9 million paid in 2017 includes $9.9 million related to the make whole payment for the extinguishment of the 2018 Notes.
| 66 | HUBBELL INCORPORATED - Form 10-K |
NOTE 13 Income Taxes
The following table sets forth selected data with respect to the Company’s income tax provisions for the years ended December 31, (in millions):
| 2018 | 2017 | 2016 | |||||||
| Income before income taxes: | |||||||||
| United States | $ | 360.8 | $ | 354.7 | $ | 349.5 | |||
| International | 106.2 | 88.4 | 80.9 | ||||||
| TOTAL INCOME BEFORE INCOME TAXES | $ | 467.0 | $ | 443.1 | $ | 430.4 | |||
| Provision for income taxes — current: | |||||||||
| Federal | $ | 12.3 | $ | 164.1 | $ | 85.5 | |||
| State | 21.8 | 15.3 | 17.4 | ||||||
| International | 17.8 | 28.1 | 17.0 | ||||||
| Total provision — current | 51.9 | 207.5 | 119.9 | ||||||
| Provision for income taxes — deferred: | |||||||||
| Federal | 35.0 | (10.4 | ) | 13.5 | |||||
| State | 9.4 | (0.9 | ) | 1.3 | |||||
| International | 4.6 | (3.0 | ) | (2.1 | ) | ||||
| Total provision — deferred | 49.0 | (14.3 | ) | 12.7 | |||||
| TOTAL PROVISION FOR INCOME TAXES | $ | 100.9 | $ | 193.2 | $ | 132.6 |
On December 22, 2017, the TCJA was enacted into law, reducing the Federal corporate income tax rate from 35% to 21%. As permitted by SAB 118, the Company recognized a provisional estimate of $56.5 million in the fourth quarter of 2017 to account for specific income tax effects of the TCJA for which a reasonable estimate could be determined. During the SAB 118 measurement period the Company completed its analysis of the specific income tax effects of TCJA and recognized a net tax benefit of approximately $6 million from adjustments to the prior provisional estimates and to record amounts related to items for which a prior provisional estimate had not been made. The measurement period adjustments include adjustments to
the one-time transition tax, the revaluation of U.S. deferred taxes, and any related state income tax impacts. We also recorded an adjustment to the U.S. and foreign tax costs associated with actual and estimated future remittances related to certain of our outside basis differences. These adjustments are included as a component of income tax expense from continuing operations.
| HUBBELL INCORPORATED - Form 10-K | 67 |
Deferred tax assets and liabilities result from differences in the basis of assets and liabilities for tax and financial statement purposes. The components of the deferred tax assets/(liabilities) at December 31, were as follows (in millions):
| 2018 | 2017 | |||||
| Deferred tax assets: | ||||||
| Inventories | $ | 6.2 | $ | 5.2 | ||
| Income tax credits | 24.5 | 21.0 | ||||
| Accrued liabilities | 35.9 | 17.2 | ||||
| Pension | 49.6 | 55.8 | ||||
| Post retirement and post employment benefits | 6.6 | 6.5 | ||||
| Stock-based compensation | 13.1 | 13.4 | ||||
| Net operating loss carryforwards | 22.2 | 19.0 | ||||
| Miscellaneous other | 8.8 | 10.7 | ||||
| Gross deferred tax assets | 166.9 | 148.8 | ||||
| Valuation allowance | (21.8 | ) | (19.4 | ) | ||
| Total deferred tax assets, net of valuation allowance | 145.1 | 129.4 | ||||
| Deferred tax liabilities: | ||||||
| Liability on undistributed foreign earnings | (10.9 | ) | — | |||
| Goodwill and Intangibles | (206.4 | ) | (116.5 | ) | ||
| Property, plant, and equipment | (41.4 | ) | (30.3 | ) | ||
| Total deferred tax liabilities | (258.7 | ) | (146.8 | ) | ||
| TOTAL NET DEFERRED TAX LIABILITY | $ | (113.6 | ) | $ | (17.4 | ) |
| Deferred taxes are reflected in the Consolidated Balance Sheet as follows: | ||||||
| Non-current tax assets (included in Other long-term assets) | 6.4 | 6.3 | ||||
| Non-current tax liabilities (included in Other Non-Current Liabilities) | (120.0 | ) | (23.7 | ) | ||
| TOTAL NET DEFERRED TAX LIABILITY | $ | (113.6 | ) | $ | (17.4 | ) |
As of December 31, 2018, the Company had a total of $24.5 million of Federal, State (net of Federal benefit) and foreign tax credit carryforwards, available to offset future income taxes. As of December 31, 2018, $14.1 million of the tax credits may be carried forward indefinitely while the remaining $10.4 million will begin to expire at various times in 2019 through 2036. As of December 31, 2018, the Company had recorded tax benefits totaling $22.2 million for Federal, State and foreign net operating loss carryforwards (“NOLs”). As of December 31, 2018, $7.9 million of NOLs may be carried forward indefinitely while the remaining $14.3 million will begin to expire at various times in 2020 through 2029. The tax benefit related to a portion of these NOLs has been adjusted to reflect an “ownership change” pursuant to Internal Revenue Code Section 382, which imposes an annual limitation on the utilization of pre-acquisition operating losses. The Company has recorded a net valuation allowance of $21.8 million for the portion of the foreign tax and state tax credit carryforwards, capital loss carryforwards and foreign NOLs that the Company anticipates will expire prior to utilization.
During 2018, the Company repatriated certain of its foreign earnings. As of December 31, 2018, the Company also anticipates repatriating certain of its foreign earnings in the future. The accompanying financial statements reflect the expected income tax expense associated with actual and anticipated remittances related to certain of our outside basis differences. The Company has not provided for the income tax effects of distributing the remaining approximately $220 million of undistributed foreign earnings as those amounts are either permanently reinvested or intended to be reinvested in our international operations. It is not practicable to estimate the tax cost associated with a remittance of such earnings.
Cash payments of income taxes were $106.3 million, $130.8 million and $117.4 million in 2018, 2017, and 2016, respectively.
The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The IRS and other tax authorities routinely audit the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. The Company is not currently under Federal examination for any open tax year. With few exceptions, the Company is no longer subject to state, local, or non-U.S. income tax examinations by tax authorities for years prior to 2013.
The following tax years, by major jurisdiction, are still subject to examination by taxing authorities:
| Jurisdiction | Open Years |
| United States | 2015-2018 |
| UK | 2017-2018 |
| Puerto Rico | 2014-2018 |
| Canada | 2013-2018 |
| 68 | HUBBELL INCORPORATED - Form 10-K |
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
| 2018 | 2017 | 2016 | |||||||
| Unrecognized tax benefits at beginning of year | $ | 29.5 | $ | 20.2 | $ | 20.3 | |||
| Additions based on tax positions relating to the current year | 3.8 | 13.6 | 2.8 | ||||||
| Reductions based on expiration of statute of limitations | (1.7 | ) | (1.4 | ) | (5.7 | ) | |||
| Additions to tax positions relating to previous years | 7.4 | 1.0 | 2.9 | ||||||
| Settlements | (0.1 | ) | (3.9 | ) | (0.1 | ) | |||
| TOTAL UNRECOGNIZED TAX BENEFITS | $ | 38.9 | $ | 29.5 | $ | 20.2 |
Included in the balance at December 31, 2018 are approximately $30.7 million of tax positions which, if in the future are determined to be recognizable, would affect the annual effective income tax rate. Additionally, there are $4.9 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the applicable taxing authority to an earlier period. It is reasonably possible that in the next twelve months, because of changes in facts and circumstances, the unrecognized tax benefits may increase or decrease.
The Company estimates a possible decrease of approximately $5.5 million to $6.5 million within the next twelve months due to the expiration of the statute of limitations and the completion of certain tax audits.
The Company’s policy is to record interest and penalties associated with the underpayment of income taxes within Provision for income taxes in the Consolidated Statement of Income. The Company recognized expense, before federal tax impact, related to interest and penalties of approximately $1.8 million in 2018, $0.5 million in 2017 and $0.7 million 2016. The Company had $7.0 million and $5.2 million accrued for the payment of interest and penalties as of December 31, 2018 and December 31, 2017, respectively.
The consolidated effective income tax rate varied from the United States federal statutory income tax rate for the years ended December 31, as follows:
| 2018 | 2017 | 2016 | ||||
| Federal statutory income tax rate | 21.0 | % | 35.0 | % | 35.0 | % |
| State income taxes, net of federal benefit | 4.5 | 1.2 | 2.4 | |||
| Foreign income taxes | (1.1 | ) | (3.1 | ) | (3.4 | ) |
| TCJA and related | (1.3 | ) | 12.8 | — | ||
| Other, net | (1.5 | ) | (2.3 | ) | (3.2 | ) |
| CONSOLIDATED EFFECTIVE INCOME TAX RATE | 21.6 | % | 43.6 | % | 30.8 | % |
The foreign income tax benefit shown is primarily due to lower statutory rates in foreign jurisdictions compared to the Federal statutory income tax rate. The TCJA and related benefit is primarily related to net favorable adjustments to the prior provisional amounts recorded in 2017 as permitted under SAB 118.
| HUBBELL INCORPORATED - Form 10-K | 69 |
NOTE 14 Financial Instruments and Fair Value Measurement
Financial Instruments
Concentrations of Credit Risk: Financial instruments which potentially subject the Company to significant concentrations of credit risk consist of trade receivables, cash equivalents and investments. The Company grants credit terms in the normal course of business to its customers. Due to the diversity of its product lines, the Company has an extensive customer base including electrical distributors and wholesalers, electric utilities, equipment manufacturers, electrical contractors, telecommunication companies and retail and hardware outlets. No single customer accounted for more than 10% of total sales in any year during the three years ended December 31, 2018. However, the Company’s top ten customers account for approximately 38% of its net sales. As part of its ongoing procedures, the Company monitors the credit worthiness of its customers. Bad debt write-offs have historically been minimal. The Company places its cash and cash equivalents with financial institutions and limits the amount of exposure in any one institution.
Fair Value: The carrying amounts reported in the Consolidated Balance Sheet for cash and cash equivalents, short-term investments, receivables, bank borrowings, accounts payable and accruals approximate their fair values given the immediate or short-term nature of these items. See also Note 7 — Investments.
Fair value measurements
At December 31, 2018 and 2017 the Company had $65.5 million and $72.2 million respectively, of investments carried on the balance sheet at fair value. Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The FASB fair value measurement guidance established a fair value hierarchy that prioritizes the inputs used to measure fair value. Refer to Note 7 — Investments for more information about these investments.
The three broad levels of the fair value hierarchy are as follows:
| Level 1 - | Quoted prices (unadjusted) in active markets for identical assets or liabilities |
| Level 2 - | Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly |
| Level 3 - | Unobservable inputs for which little or no market data exists, therefore requiring a company to develop its own assumptions |
| 70 | HUBBELL INCORPORATED - Form 10-K |
The following tables show, by level within the fair value hierarchy, the Company’s financial assets and liabilities that are accounted for at fair value on a recurring basis at December 31, 2018 and 2017 (in millions):
| Asset (Liability) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Quoted Prices in Active Markets for Similar Assets (Level 2) | Unobservable inputs for which little or no market data exists (Level 3) | Total | ||||||||
| Money market funds (a) | $ | 15.1 | $ | — | $ | — | $ | 15.1 | ||||
| Time Deposits (a) | — | 20.9 | — | 20.9 | ||||||||
| Available for sale investments | — | 48.9 | 2.3 | 51.2 | ||||||||
| Trading securities | 14.3 | — | — | 14.3 | ||||||||
| Deferred compensation plan liabilities | (14.3 | ) | — | — | (14.3 | ) | ||||||
| Derivatives: | ||||||||||||
| Forward exchange contracts-Assets (b) | — | 1.6 | — | 1.6 | ||||||||
| Forward exchange contracts-(Liabilities) (c) | — | — | — | — | ||||||||
| BALANCE AT DECEMBER 31, 2018 | $ | 15.1 | $ | 71.4 | $ | 2.3 | $ | 88.8 |
| Asset (Liability) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Quoted Prices in Active Markets for Similar Assets (Level 2) | Unobservable inputs for which little or no market data exists (Level 3) | Total | ||||||||
| Money market funds (a) | $ | 126.9 | $ | — | $ | — | $ | 126.9 | ||||
| Available-for-sale investments | — | 54.3 | 4.1 | 58.4 | ||||||||
| Trading securities | 13.8 | — | — | 13.8 | ||||||||
| Deferred compensation plan liabilities | (13.8 | ) | — | — | (13.8 | ) | ||||||
| Derivatives: | ||||||||||||
| Forward exchange contracts-Assets (b) | — | 0.2 | — | 0.2 | ||||||||
| Forward exchange contracts-(Liabilities) (c) | — | (0.7 | ) | — | (0.7 | ) | ||||||
| BALANCE AT DECEMBER 31, 2017 | $ | 126.9 | $ | 53.8 | $ | 4.1 | $ | 184.8 |
| (a) | Money market funds and time deposits are included in Cash and cash equivalents in the Consolidated Balance Sheet. |
| (b) | Forward exchange contracts-Assets are reflected in Other current assets in the Consolidated Balance Sheet. |
| (c) | Forward exchange contracts-(Liabilities) are reflected in Other accrued liabilities in the Consolidated Balance Sheet. |
The methods and assumptions used to estimate the Level 2 fair values were as follows:
Forward exchange contracts – The fair value of forward exchange contracts were based on quoted forward foreign exchange prices at the reporting date.
Municipal bonds – The fair value of available-for-sale investments in municipal bonds is based on observable market-based inputs, other than quoted prices in active markets for identical assets.
Available-for-sale redeemable preferred stock classified in Level 3 – The fair value of the available-for-sale investment in redeemable preferred stock is valued based on a discounted cash flow model, using significant unobservable inputs, including assumptions regarding expected cash flows and discount rates.
As of December 31, 2018 and 2017, the Company had one financial asset that was classified in Level 3 of the fair value hierarchy.
Deferred compensation plan
The Company offers certain employees the opportunity to participate in non-qualified deferred compensation plans. A participant’s deferrals are invested in a variety of participant-directed debt and equity mutual funds that are classified as trading securities. During 2018 and 2017, the Company purchased $2.7 million and $2.1 million, respectively, of trading securities related to these deferred compensation plans. As a result of participant distributions, the Company sold $1.5 million and $0.3 million of these trading securities in 2018 and 2017 respectively. The unrealized gains and losses associated with these trading securities are directly offset by the changes in the fair value of the underlying deferred compensation plan obligation.
Derivatives
In order to limit financial risk in the management of its assets, liabilities and debt, the Company may use derivative financial instruments such as foreign currency hedges, commodity hedges, interest rate hedges and interest rate swaps. All derivative financial instruments are matched with an existing Company asset, liability or proposed transaction. Market value gains or losses on the derivative financial instrument are recognized in income when the effects of the related price changes of the underlying asset or liability are recognized in income.
| HUBBELL INCORPORATED - Form 10-K | 71 |
Forward exchange contracts
In 2018 and 2017, the Company entered into a series of forward exchange contracts to purchase U.S. dollars in order to hedge its exposure to fluctuating rates of exchange on anticipated inventory purchases and forecasted sales by its subsidiaries who transact business in Canadian dollars. As of December 31, 2018, the Company had 36 individual forward exchange contracts for notional amounts which range from $0.5 million to $1.5 million each, which have various expiration dates through December 2019. These contracts have been designated as cash flow hedges in accordance with the accounting guidance for derivatives.
The following table summarizes the results of cash flow hedging relationships for years ended December 31, (in millions):
| Derivative Gain/(Loss) Recognized in Accumulated Other Comprehensive Loss, net of tax | Location of Gain/(Loss) when reclassified | Gain/(Loss) Reclassified into Earnings (Effective Portion), net of tax | |||||||||||
| Derivative Instrument | 2018 | 2017 | (Effective Portion) | 2018 | 2017 | ||||||||
| Forward exchange contract | $ | 1.9 | $ | (1.7 | ) | Net sales | $ | 0.1 | $ | (0.3 | ) | ||
| Cost of goods sold | $ | 0.2 | $ | (0.6 | ) |
There was no material hedge ineffectiveness with respect to the forward exchange cash flow hedges during 2018, 2017 and 2016.
Long-term Debt
The total carrying value of long-term debt including the $25.0 million current portion of the Term Loan as of December 31, 2018 was $1,762.1 million, net of unamortized discount and debt issuance costs. As of December 31, 2017 the total carrying value of long-term debt was $987.1 million, net of unamortized discount and debt issuance costs. As of December 31, 2018 and 2017, the estimated fair value of the long-term debt was $1,688.1 million and $1,013.2 million, respectively, based on quoted market prices. The Company’s long-term debt falls within level 2 of the fair value hierarchy.
| 72 | HUBBELL INCORPORATED - Form 10-K |
NOTE 15 Commitments and Contingencies
Legal and Environmental
The Company is subject to various legal proceedings arising in the normal course of its business. These proceedings include claims for damages arising out of use of the Company’s products, intellectual property, workers’ compensation and environmental matters. The Company is self-insured up to specified limits for certain types of claims, including product liability and workers’ compensation, and is fully self-insured for certain other types of claims, including environmental and intellectual property matters. The Company recognizes a liability for any contingency that in management’s judgment is probable of occurrence and can be reasonably estimated. We continually reassess the likelihood of adverse judgments and outcomes in these matters, as well as estimated ranges of possible losses based upon an analysis of each matter which includes consideration of outside legal counsel and, if applicable, other experts.
As previously reported, in the fourth quarter of 2016, the Company recorded a charge of $12.5 million in Cost of goods sold representing the estimated withdrawal liability from one of the multi-employer pension plans in which it participated. Depending on actions of third parties, including bankruptcy or withdrawals from the multi-employer plan, under terms customary to multi-employer plans, it is possible that the Company could in the future be subject to certain additional liabilities associated with its participation and withdraw from the multi-employer pension plan, which the Company estimated could be up to an additional $23 million as of December 31, 2018. In connection therewith, on October 4, 2018, the trustees of the plan demanded an additional payment of $23.3 million. The Company disputes the trustees' demand and on October 4, 2018, and the Company commenced an arbitration proceeding with respect thereto. The Company intends to prosecute the arbitration vigorously.
The Company is subject to environmental laws and regulations which may require that it investigate and remediate the effects of potential contamination associated with past and present operations as well as those acquired through business combinations. Environmental liabilities are recorded when remedial efforts are probable and the costs can be reasonably estimated. The Company continues to monitor these environmental matters and revalues its liabilities as necessary. Total environmental liabilities were $8.5 million and $4.9 million as of December 31, 2018 and 2017, respectively.
The Company accounts for conditional asset retirement and environmental obligations in accordance with the applicable accounting guidance. The accounting guidance defines “conditional asset retirement obligation” as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Asset retirement obligations were not material as of December 31, 2018 and 2017.
Leases
Total rental expense under operating leases was $44.8 million in 2018, $30.5 million in 2017 and $28.8 million in 2016. The minimum annual rentals on non-cancelable, long-term, operating leases in effect at December 31, 2018 are expected to approximate $23.5 million in 2019, $21.0 million in 2020, $16.5 million in 2021, $13.2 million in 2022, $10.5 million in 2023 and $26.5 million thereafter. The Company’s leases primarily consist of operating leases for buildings, vehicles or equipment. The terms for building leases typically range from month-to-month up to 10 years, with various renewal periods depending on the terms.
| HUBBELL INCORPORATED - Form 10-K | 73 |
NOTE 16 Capital Stock
Activity in the Company’s common shares outstanding is set forth below for the three years ended December 31, 2018 (in thousands):
| Common Stock | ||
| OUTSTANDING AT DECEMBER 31, 2015 | 57,837 | |
| Exercise of stock options/stock appreciation rights | 78 | |
| Director compensation arrangements, net | 6 | |
| Restricted/performance shares activity, net of forfeitures | 98 | |
| Acquisition/surrender of shares | (2,487 | ) |
| OUTSTANDING AT DECEMBER 31, 2016 | 55,532 | |
| Exercise of stock appreciation rights | 53 | |
| Director compensation arrangements, net | 10 | |
| Restricted/performance shares activity, net of forfeitures | 89 | |
| Acquisition/surrender of shares | (802 | ) |
| OUTSTANDING AT DECEMBER 31, 2017 | 54,882 | |
| Exercise of stock appreciation rights | 66 | |
| Director compensation arrangements, net | 11 | |
| Restricted/performance shares activity, net of forfeitures | 165 | |
| Acquisition/surrender of shares | (409 | ) |
| OUTSTANDING AT DECEMBER 31, 2018 | 54,715 |
For accounting purposes, the Company treats repurchased shares as constructively retired when acquired and accordingly charges the purchase price against Common Stock par value, Additional paid-in capital and Retained earnings to the extent required. Shares may be repurchased through the Company’s stock repurchase program, acquired by the Company from employees or surrendered to the Company by employees in settlement of their minimum tax liability on vesting of restricted shares and performance shares under the Hubbell Incorporated 2005 Incentive Award Plan as amended and restated, (the “Award Plan”).
Shares of the Company’s common stock were reserved at December 31, 2018 as follows (in thousands):
| Common Stock | ||
| Future grant of stock-based compensation | 2,170 | |
| Shares reserved under other equity compensation plans | 156 | |
| TOTAL | 2,326 |
| 74 | HUBBELL INCORPORATED - Form 10-K |
NOTE 17 Stock-Based Compensation
As of December 31, 2018, the Company had various stock-based awards outstanding which were issued to executives and other key employees. The Company recognizes the grant-date fair value of all stock-based awards to employees over their respective requisite service periods (generally equal to an award’s vesting period), net of estimated forfeitures. A stock-based award is considered vested for expense attribution purposes when the employee’s retention of the award is no longer contingent on providing subsequent service. For those awards that vest immediately upon retirement eligibility, the Company recognizes compensation cost immediately for retirement-eligible individuals or over the period from the grant date to the date retirement eligibility is achieved, if less than the stated vesting period.
The Company’s long-term incentive program for awarding stock-based compensation includes a combination of restricted stock, stock appreciation rights (“SARs”), and performance shares of the Company’s Common Stock pursuant to the Award Plan. Under the Award Plan, the Company may authorize up to 9.7 million shares of Common Stock to settle awards of restricted stock, performance shares, or SARs. The Company issues new shares to settle stock-based awards. In 2018, the Company's grant of stock-based awards included restricted stock, SARs and performance shares.
Stock-based compensation expense recognized by the Company was $24.2 million in 2018 and $22.3 million in 2017 and 2016. The total income tax benefit recognized was $5.3 million in 2018, $5.4 million in 2017, and $8.2 million in 2016. The net tax windfall recorded as a result of exercise or vesting (depending on the type of award) was $2.4 million, $2.5 million, and $3.7 million in 2018, 2017' and 2016, respectively. As of December 31, 2018, there was $33.1 million, pretax, of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized through 2021.
Stock-based compensation expense is recorded in S&A expense as well as Cost of goods sold. Of the total 2018 expense, $23.4 million was recorded to S&A expense and $0.8 million was recorded to Cost of goods sold. In 2017 and 2016, $21.1 million and $21.6 million, respectively, was recorded to S&A expense and $1.2 million and $0.7 million, respectively, was recorded to Cost of goods sold. Stock-based compensation costs capitalized to inventory was $0.2 million in 2018, $0.3 million in 2017 and $0.2 million in 2016.
Each of the compensation arrangements is discussed below.
Restricted Stock
The Company issues various types of restricted stock awards all of which are considered outstanding at the time of grant, as the award holders are entitled to dividends and voting rights. Unvested restricted stock awards are considered participating securities when computing earnings per share. Restricted stock grants are not transferable and are subject to forfeiture in the event of the recipient’s termination of employment prior to vesting.
Restricted Stock Issued to Employees - Service Condition
Restricted stock awards that vest based upon a service condition are expensed on a straight-line basis over the requisite service period. These awards generally vest in three equal installments on each of the first three anniversaries of the grant date, however in December of 2018 the company granted a certain number of these awards that vest on the third year anniversary of the grant date. The fair value of these awards is measured by the average of the high and low trading prices of the Company’s common stock on the most recent trading day immediately preceding the grant date (“measurement date”).
Restricted Stock Issued to Employees - Market Condition
The Company granted certain restricted stock awards that vest subject to the achievement of a market-based condition (referred to a performance based restricted stock, or PBRS). These awards were granted to certain employees in 2015, 2016 and 2017. No PBRS awards were granted in 2018. PBRS awards are expensed on a straight-line basis over the requisite service period which starts on the date of the grant and ends upon the completion of the performance period. Expense is recognized irrespective of the market condition being achieved.
PBRS awards will be earned if the Company’s relative TSR performance over a three year period is equal to or exceeds the 20th percentile as compared to the TSR of other companies in the S&P Capital Goods 900 Index, and service through the requisite service period or the retirement-eligibility date. If this market-based condition is achieved, the awards will vest at 100% of the number of awards granted. If the market-based condition is not achieved the awards will not vest. The fair value of these awards was determined based upon a lattice model.
The three year performance period for awards granted in 2015 ended on December 31, 2018.The performance condition was met and 25,167 shares vested and were approved by the Compensation Committee in February 2019. The fair value of the shares at vesting was approximately $2.9 million.
| HUBBELL INCORPORATED - Form 10-K | 75 |
The following table summarizes the assumptions used in estimating the fair value of these awards:
| Grant Date | Stock Price on Measurement Date | Expected Volatility | Risk Free Interest Rate | Expected Term | Weighted Avg. Grant Date Fair Value | ||||||
| 2017 | $ | 127.51 | 24.7 | % | 1.9 | % | 3 Years | $ | 119.88 | ||
| 2016 | $ | 113.69 | 25.6 | % | 1.4 | % | 3 Years | $ | 104.93 |
Restricted Stock Issued to Non-employee Directors
In 2018, 2017 and 2016, each non-employee director received a restricted stock grant. These grants are made on the date of the annual meeting of shareholders and vest at the following year’s annual meeting of shareholders, or upon certain other events. The grant is subject to forfeiture if the director’s service terminates prior to the date of the next regularly scheduled annual meeting of shareholders. During 2018, 2017 and 2016, the Company granted 9,376 shares, 8,480 shares, and 9,128 shares, respectively, to non-employee directors.
Activity related to both employee and non-employee restricted stock for the year ended December 31, 2018 is as follows (in thousands, except per share amounts):
| Shares | Weighted Average Grant Date Fair Value/Share | ||||
| RESTRICTED STOCK AT DECEMBER 31, 2017 | 239 | $ | 108.51 | ||
| Shares granted | 134 | 108.74 | |||
| Shares vested | (80 | ) | 107.59 | ||
| Shares forfeited | (9 | ) | 122.62 | ||
| RESTRICTED STOCK AT DECEMBER 31, 2018 | 284 | $ | 108.40 |
The weighted average fair value per share of restricted stock granted in 2018, 2017 and 2016 was $108.74, $123.39 and $109.95, respectively. The total fair value of restricted stock vested in 2018, 2017 and 2016 was $8.6 million, $6.6 million and $6.4 million, respectively.
Stock Appreciation Rights
SARs grant the holder the right to receive, once vested, the value in shares of the Company's Common Stock equal to the positive difference between the grant price, as determined using the mean of the high and low trading prices of the Company’s Common Stock on the measurement date, and the fair market value of the Company’s Common Stock on the date of exercise. This amount is payable in shares of the Company’s Common Stock. SARs vest and become exercisable in three equal installments during the first three years following the grant date and expire ten years from the grant date.
Activity related to SARs for the year ended December 31, 2018 is as follows (in thousands, except per share amounts):
| Number of Rights | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||
| OUTSTANDING AT DECEMBER 31, 2017 | 2,042 | $ | 103.59 | ||||||
| Granted | 369 | 107.23 | |||||||
| Exercised | (279 | ) | 81.21 | ||||||
| Forfeited | (21 | ) | 121.33 | ||||||
| Canceled | — | — | |||||||
| OUTSTANDING AT DECEMBER 31, 2018 | 2,111 | $ | 107.01 | 7.3 Years | $ | 6,685 | |||
| EXERCISABLE AT DECEMBER 31, 2018 | 1,342 | $ | 102.19 | 6.2 Years | $ | 6,685 |
The aggregated intrinsic value of SARs exercised during 2018, 2017 and 2016 was $14.1 million, $10.1 million and $13.8 million, respectively.
The fair value of each SAR award was measured using the Black-Scholes option pricing model.
| 76 | HUBBELL INCORPORATED - Form 10-K |
The following table summarizes the weighted-average assumptions used in estimating the fair value of the SARs granted during the years 2018, 2017 and 2016:
| Grant Date | Expected Dividend Yield | Expected Volatility | Risk Free Interest Rate | Expected Term | Weighted Avg. Grant Date Fair Value of 1 SAR | |||||
| 2018 | 2.9 | % | 21.7 | % | 2.8 | % | 5.5 Years | $ | 18.23 | |
| 2017 | 2.6 | % | 18.0 | % | 2.2 | % | 5.5 Years | $ | 17.45 | |
| 2016 | 2.6 | % | 22.3 | % | 1.9 | % | 5.5 Years | $ | 18.76 |
The expected dividend yield was calculated by dividing the Company’s expected annual dividend by the average stock price for the past three months. Expected volatilities are based on historical volatilities of the Company’s stock for a period consistent with the expected term. The expected term of SARs granted was based upon historical exercise behavior of stock options and SARs. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the award.
Performance Shares
Performance shares represent the right to receive a share of the Company’s Common Stock subject to the achievement of certain market or performance conditions established by the Company’s Compensation Committee and measured over a three year period. Partial vesting in these awards may occur after separation from the Company for retirement eligible employees. Shares are not vested until approved by the Company’s Compensation Committee.
Performance Shares - Performance and Market Conditions
In December 2018, the Company granted 60,008 shares that will vest subject to a performance condition and service requirement. The number of shares vested is then modified by a market condition as described below.
Thirty-four percent of shares granted will vest based on Hubbell’s compounded annual growth rate of net sales as compared to that of the companies that comprise the S&P Capital Goods 900 index. Thirty-three percent of shares granted will vest based on achieved operating margin performance as compared to internal targets, and thirty-three percent of shares granted will vest based on achieved trade working capital as a percent of net sales as compared to internal targets. Each of these performance conditions is measured over the same three-year performance period. The cumulative result of these performance conditions can result in a number of shares earned in the range of 0% - 200% of the target number of shares granted. That cumulative performance achieved is then further modified based on the Company' three year TSR relative to the companies that constitute the S&P Capital Goods 900 index, to potentially increase or reduce the shared earned by 20%.
The fair value of the award was determined based upon a lattice model. The Company expenses these awards on a straight-line basis over the requisite service period and including an assessment of the performance achieved to date. The weighted average fair value per share was $98.80 for the awards granted in 2018.
| Grant Date | Shares Outstanding at 12/31/2018 | Fair Value | Performance Period | Payout Range | ||||
| 2018 | 60,008 | $ | 98.80 | Jan 2019-Dec 2021 | 0-200% +/- 20% |
Performance Shares - Market Condition
In December 2017 and 2016, the Company granted 24,675 and 29,012, respectively, of performance shares that will vest subject to a market condition and service through the performance period. The market condition associated with the awards is the Company's TSR compared to the TSR generated by the companies of a reference index over a three year performance period. Performance at target will result in vesting and a number of shared earned equal to 100% of shares granted. Performance below or above target can result in a number of shares earned in the range of 0%-200% of shares granted. Expense is recognized irrespective of the market condition being achieved.
In February 2019, the vesting condition was not met therefore, no shares were earned related to the December 2015 performance award grant. The performance period associated with this award was from January 1, 2016 through December 31, 2018 and was based upon the Company’s TSR compared to the TSR generated by the other companies that comprise the S&P Capital Goods 900 Index.
The fair value of the performance share awards with a market condition for the fiscal years 2017 and 2016 was determined based upon a lattice model.
| HUBBELL INCORPORATED - Form 10-K | 77 |
The following table summarizes the related assumptions used to determine the fair values of the performance share awards with a market condition granted during the years 2017 and 2016:
| Grant Date | Stock Price on Measurement Date | Dividend Yield | Expected Volatility | Risk Free Interest Rate | Expected Term | Weighted Avg. Grant Date Fair Value | |||||||
| 2017 | $ | 127.51 | 2.4 | % | 24.7 | % | 1.9 | % | 3 Years | $ | 142.89 | ||
| 2016 | $ | 113.69 | 2.5 | % | 25.6 | % | 1.4 | % | 3 Years | $ | 126.65 |
Expected volatilities are based on historical volatilities of the Company’s stock over a three year period. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the expected term of the award.
Performance Shares - Performance Condition
In December 2017 and 2016 the Company granted 24,675 and 29,012, respectively, of performance shares that are subject to a performance condition and service requirement during the three year performance period. The performance condition associated with the awards is based on the Company's relative sales growth compared to the relative sales growth of the companies of a reference index, further adjusted by the Company achieving a target net income margin, each measured over the same three year performance period. Performance at target will result in vesting and a number of shares earned equal to 100% of shares granted. Performance below or above target can result in a number of shares earned in the range of 0%-250% of shares granted.
In April 2018, the Company paid out 32,425 shares related to the December 2014 performance award grant. The performance period associated with this award was from January 1, 2015 through December 31, 2017 and was based upon the Company’s net sales growth compared to the net sales growth by the other companies that comprise the S&P Capital Goods 900 Index. The number of shares vested in April 2018 was based upon achieving 137% of the market-based criteria and the fair value of the awards at vesting was $4.0 million.
The fair value of the award is measured based upon the average of the high and low trading prices of the Company's common stock on the measurement date reduced by the present value of dividends expected to be paid during the requisite service period. The Company expenses these awards on a straight-line basis over the requisite service period, including an assessment of the performance achieved to date.
The following table summarizes the attributes of the performance shares outstanding at December 31, 2018:
| Grant Date | Shares Outstanding at 12/31/2018 | Fair Value | Performance Period | Payout Range | |||
| 2017 | 23,138 | 118.55 | Jan 2018-Dec 2020 | 0-250% | |||
| 2016 | 26,996 | 105.48 | Jan 2017-Dec 2019 | 0-250% | |||
| 2015 | 29,818 | 97.48 | Jan 2016-Dec 2018 | 0-250% |
| 78 | HUBBELL INCORPORATED - Form 10-K |
NOTE 18 Earnings Per Share
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and participating securities. Restricted stock granted by the Company is considered a participating security since it contains a non-forfeitable right to dividends.
The following table sets forth the computation of earnings per share for the three years ended December 31 (in millions, except per share amounts):
| 2018 | 2017 | 2016 | |||||||
| Numerator: | |||||||||
| Net income attributable to Hubbell | $ | 360.2 | $ | 243.1 | $ | 293.0 | |||
| Less: Earnings allocated to participating securities | (1.3 | ) | (0.8 | ) | (0.9 | ) | |||
| Net income available to common shareholders | $ | 358.9 | $ | 242.3 | $ | 292.1 | |||
| Denominator: | |||||||||
| Average number of common shares outstanding | 54.6 | 54.8 | 55.5 | ||||||
| Potential dilutive shares | 0.3 | 0.3 | 0.2 | ||||||
| Average number of diluted shares outstanding | 54.9 | 55.1 | 55.7 | ||||||
| Earnings per share: | |||||||||
| Basic | $ | 6.57 | $ | 4.42 | $ | 5.26 | |||
| Diluted | $ | 6.54 | $ | 4.39 | $ | 5.24 |
The Company did not have any significant anti-dilutive securities in 2018, 2017 or 2016.
| HUBBELL INCORPORATED - Form 10-K | 79 |
NOTE 19 Accumulated Other Comprehensive Loss
A summary of the changes in Accumulated other comprehensive loss (net of tax) for the three years ended December 31, 2018 is provided below (in millions):
| (Debit) credit | Cash Flow Hedge (Loss) Gain | Unrealized Gain (Loss) on Available-for-Sale Securities | Pension and Post Retirement Benefit Plan Adjustment | Cumulative Translation Adjustment | Total | ||||||||||
| BALANCE AT DECEMBER 31, 2015 | $ | 1.4 | $ | — | $ | (140.2 | ) | $ | (85.4 | ) | $ | (224.2 | ) | ||
| Other comprehensive income (loss) before Reclassifications | (1.4 | ) | (1.2 | ) | (48.5 | ) | (35.4 | ) | (86.5 | ) | |||||
| Amounts reclassified from accumulated other comprehensive loss | — | — | 8.2 | — | 8.2 | ||||||||||
| Current period other comprehensive income (loss) | (1.4 | ) | (1.2 | ) | (40.3 | ) | (35.4 | ) | (78.3 | ) | |||||
| BALANCE AT DECEMBER 31, 2016 | $ | — | $ | (1.2 | ) | $ | (180.5 | ) | $ | (120.8 | ) | $ | (302.5 | ) | |
| Other comprehensive income (loss) before Reclassifications | (1.7 | ) | 0.6 | (3.4 | ) | 28.9 | 24.4 | ||||||||
| Amounts reclassified from accumulated other comprehensive loss | 0.9 | — | 7.4 | - | 8.3 | ||||||||||
| Current period other comprehensive income (loss) | (0.8 | ) | 0.6 | 4.0 | 28.9 | 32.7 | |||||||||
| BALANCE AT DECEMBER 31, 2017 | $ | (0.8 | ) | $ | (0.6 | ) | $ | (176.5 | ) | $ | (91.9 | ) | $ | (269.8 | ) |
| Other comprehensive income (loss) before Reclassifications | 1.9 | (1.4 | ) | 10.4 | (33.9 | ) | (23.0 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive loss | (0.3 | ) | — | 7.4 | — | 7.1 | |||||||||
| Current period other comprehensive income (loss) | 1.6 | (1.4 | ) | 17.8 | (33.9 | ) | (15.9 | ) | |||||||
| BALANCE AT DECEMBER 31, 2018 | $ | 0.8 | $ | (2.0 | ) | $ | (158.7 | ) | $ | (125.8 | ) | $ | (285.7 | ) |
A summary of the gain (loss) reclassifications out of Accumulated other comprehensive loss for the two years ended December 31 is provided below (in millions):
| Details about Accumulated Other Comprehensive Loss Components | 2018 | 2017 | Location of Gain (Loss) Reclassified into Income | ||||||
| Cash flow hedges gain (loss): | |||||||||
| Forward exchange contracts | $ | 0.1 | $ | (0.4 | ) | Net Sales | |||
| 0.3 | (0.9 | ) | Cost of goods sold | ||||||
| 0.4 | (1.3 | ) | Total before tax | ||||||
| (0.1 | ) | 0.4 | Tax (expense) benefit | ||||||
| $ | 0.3 | $ | (0.9 | ) | Gain (loss) net of tax | ||||
| Amortization of defined benefit pension and post retirement benefit items: | |||||||||
| Prior-service costs | $ | 0.9 | (a) | $ | 0.9 | (a) | |||
| Actuarial gains/(losses) | (10.7 | ) | (a) | (11.4 | ) | (a) | |||
| Settlement and curtailment losses | — | (a) | (0.4 | ) | (a) | ||||
| (9.8 | ) | (10.9 | ) | Total before tax | |||||
| 2.4 | 3.5 | Tax benefit (expense) | |||||||
| $ | (7.4 | ) | $ | (7.4 | ) | (Loss) gain net of tax | |||
| Losses reclassified into earnings | $ | (7.1 | ) | $ | (8.3 | ) | (Loss) gain net of tax |
| (a) | These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 11 — Retirement Benefits for additional details). |
| 80 | HUBBELL INCORPORATED - Form 10-K |
NOTE 20 Industry Segments and Geographic Area Information
Nature of Operations
Hubbell designs, manufactures and sells 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 UK, Brazil, Australia, Spain and Ireland. Hubbell 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. Each of the above references to manufacturing locations, joint venture participation, and office locations relate to the three year period ending December 31, 2018.
The Company’s reporting segments consist of the Electrical segment and the Power segment, as described below.
The Electrical segment comprises businesses that sell stock and custom products including standard and special application wiring device products, rough-in electrical products, connector and grounding products, lighting fixtures and controls, components and assemblies for the natural gas distribution market and other electrical equipment. The products are typically used in and around industrial, commercial and institutional facilities by electrical contractors, maintenance personnel, electricians, utilities, and telecommunications companies. In addition, certain businesses design and manufacture a variety of high voltage test and measurement equipment, industrial controls and communication systems used in the non-residential and industrial markets. Many of these products are designed such that they can also be used in harsh and hazardous locations where a potential for fire and explosion exists due to the presence of flammable gasses and vapors. Harsh and hazardous products are primarily used in the oil and gas (onshore and offshore) and mining industries. There are also a variety of lighting fixtures, wiring devices and electrical products that have residential and utility applications, including residential products with Internet-of-Things ("IoT") enabled technologies. These products are primarily sold through electrical and industrial distributors, home centers, retail and hardware outlets, lighting showrooms and residential product oriented internet sites. Special application products are primarily sold through wholesale distributors to contractors, industrial customers and OEMs. High voltage products are also sold direct to customers through our sales engineers. The Electrical segment comprises three business groups, which have been aggregated as they have similar economic characteristics, customers and distribution channels, among other factors.
The Power segment consists of operations that design and manufacture various distribution, transmission, substation and telecommunications products primarily used by the electrical utility industry. In addition, certain of these products are used in the civil construction, water utility, and transportation industries. Products are sold to distributors and directly to users such as utilities, telecommunication companies, pipeline and mining operations, industrial firms, construction and engineering firms. The 2018 acquisition of Aclara expanded offerings, to include advanced metering infrastructure, meter and edge devices, software and infrastructure services, which are primarily sold to the electrical, water, and gas utility industries.
Financial Information
Financial information by industry segment, product class and geographic area for each of the three years ended December 31, 2018, 2017 and 2016 is summarized below (in millions). When reading the data the following items should be noted:
| • | Net sales comprise sales to unaffiliated customers — inter-segment and inter-area sales are not significant. |
| • | Segment operating income consists of net sales less operating expenses, including total corporate expenses, which are generally allocated to each segment on the basis of the segment’s percentage of consolidated net sales. Interest expense and investment income and other expense, net have not been allocated to segments as these items are centrally managed by the Company. |
| • | General corporate assets not allocated to segments are principally cash, prepaid pensions, investments and deferred taxes. These assets have not been allocated as they are centrally managed by the Company. |
| HUBBELL INCORPORATED - Form 10-K | 81 |
INDUSTRY SEGMENT DATA
| 2018 | 2017 | 2016 | |||||||
| Net Sales: | |||||||||
| Electrical | $ | 2,660.6 | $ | 2,532.8 | $ | 2,460.2 | |||
| Power | 1,821.1 | 1,136.0 | 1,045.0 | ||||||
| TOTAL NET SALES | $ | 4,481.7 | $ | 3,668.8 | $ | 3,505.2 | |||
| Operating Income: | |||||||||
| Electrical | $ | 320.8 | $ | 294.0 | $ | 276.4 | |||
| Power | 236.1 | 224.8 | 213.4 | ||||||
| Operating Income | $ | 556.9 | $ | 518.8 | $ | 489.8 | |||
| Interest expense | (72.4 | ) | (44.9 | ) | (43.4 | ) | |||
| Loss on extinguishment of debt | — | (10.1 | ) | — | |||||
| Investment income and other expense, net | (17.5 | ) | (20.7 | ) | (16.0 | ) | |||
| INCOME BEFORE INCOME TAXES | $ | 467.0 | $ | 443.1 | $ | 430.4 | |||
| Assets: | |||||||||
| Electrical | $ | 2,228.5 | $ | 2,344.7 | $ | 2,246.0 | |||
| Power | 2,395.8 | 1,102.2 | 911.5 | ||||||
| General Corporate | 247.8 | 273.7 | 367.5 | ||||||
| TOTAL ASSETS | $ | 4,872.1 | $ | 3,720.6 | $ | 3,525.0 | |||
| Capital Expenditures: | |||||||||
| Electrical | $ | 53.0 | $ | 48.0 | $ | 43.4 | |||
| Power | 36.8 | 29.0 | 22.7 | ||||||
| General Corporate | 6.4 | 2.7 | 1.1 | ||||||
| TOTAL CAPITAL EXPENDITURES | $ | 96.2 | $ | 79.7 | $ | 67.2 | |||
| Depreciation and Amortization: | |||||||||
| Electrical | $ | 61.4 | $ | 64.7 | $ | 60.2 | |||
| Power | 87.0 | 33.5 | 30.7 | ||||||
| TOTAL DEPRECIATION AND AMORTIZATION | $ | 148.4 | $ | 98.2 | $ | 90.9 |
GEOGRAPHIC AREA DATA
| 2018 | 2017 | 2016 | |||||||
| Net Sales: | |||||||||
| United States | $ | 4,040.6 | $ | 3,280.9 | $ | 3,147.4 | |||
| International | 441.1 | 387.9 | 357.8 | ||||||
| TOTAL NET SALES | $ | 4,481.7 | $ | 3,668.8 | $ | 3,505.2 | |||
| Operating Income: | |||||||||
| United States | $ | 478.0 | $ | 435.8 | $ | 431.1 | |||
| International | 78.9 | 83.0 | 58.7 | ||||||
| TOTAL OPERATING INCOME | $ | 556.9 | $ | 518.8 | $ | 489.8 | |||
| Long-lived Assets: | |||||||||
| United States | $ | 2,972.4 | $ | 1,877.4 | $ | 1,762.9 | |||
| International | 245.0 | 232.8 | 200.1 | ||||||
| TOTAL LONG-LIVED ASSETS | $ | 3,217.4 | $ | 2,110.2 | $ | 1,963.0 |
On a geographic basis, the Company defines “international” as operations based outside of the United States and its possessions. As a percentage of total net sales, shipments from foreign operations directly to third parties were 10% in 2018, 11% in 2017 and 10% in 2016, with the UK and Canadian operations representing approximately 33%, and 27% respectively, of 2018 total international net sales.
Long-lived assets, excluding deferred tax assets, of international subsidiaries were 8% of the consolidated total in 2018, 11% in 2017 and 10% in 2016, with the UK, Mexico and Canada operations representing approximately 33%, 18%, and 13%, respectively, of the 2018 international total. Export sales from United States operations were $261.9 million in 2018, $217.2 million in 2017 and $213.8 million in 2016.
| 82 | HUBBELL INCORPORATED - Form 10-K |
NOTE 21 Guarantees
The Company records a liability equal to the fair value of guarantees in the Consolidated Balance Sheet in accordance with the accounting guidance for guarantees. When it is probable that a liability has been incurred and the amount can be reasonably estimated, the Company accrues for costs associated with guarantees. The most likely costs to be incurred are accrued based on an evaluation of currently available facts and, where no amount within a range of estimates is more likely, the minimum is accrued.
As of December 31, 2018, the fair value and maximum potential payment related to the Company’s guarantees were not material.
The Company offers product warranties which cover defects on most of its products. These warranties primarily apply to products that are properly installed, maintained and used for their intended purpose. The Company accrues estimated warranty costs at the time of sale. Estimated warranty expenses, recorded in cost of goods sold, are based upon historical information such as past experience, product failure rates, or the estimated number of units to be repaired or replaced. Adjustments are made to the product warranty accrual as claims are incurred, additional information becomes known or as historical experience indicates.
Changes in the accrual for product warranties in 2018 are set forth below (in millions):
| BALANCE AT DECEMBER 31, 2016 | $ | 13.8 | |
| Provision | 10.0 | ||
| Expenditures/other | (9.8 | ) | |
| BALANCE AT DECEMBER 31, 2017 | $ | 14.0 | |
| Provision | 12.0 | ||
| Expenditures/other | (22.7 | ) | |
| Acquisitions(a) | 89.4 | ||
| BALANCE AT DECEMBER 31, 2018(b) | $ | 92.7 |
(a) Relates to the Aclara acquisition. Refer to Note 3 – Business Acquisitions for additional information.
(b) Refer to Note 9 – Other Accrued Liabilities and Note 10 – Other Non-Current Liabilities for a breakout of short-term and long-term warranties.
| HUBBELL INCORPORATED - Form 10-K | 83 |
NOTE 22 Restructuring Costs
During 2018, we incurred costs for restructuring actions initiated in 2018 as well as costs involving restructuring actions initiated in the prior year. Our restructuring actions are associated with cost reduction efforts that include 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 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 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, and a $12.5 million charge in the fourth quarter of 2016 to recognize the estimated liability associated with the withdrawal from a multi-employer pension plan. That withdrawal liability may be settled either in periodic payments over approximately 19 years, or in a lump sum, subject to negotiation.
Pre-tax restructuring costs incurred in each of our segments and the location of the costs in the Consolidated Statement of Income for the years ended December 31, 2018, 2017 and 2016 are as follows (in millions):
| Twelve Months Ended December 31, 2018 | Twelve Months Ended December 31, 2017 | Twelve Months Ended December 31, 2016 | |||||||||||||||||||||||||||
| Electrical | Power | Total | Electrical | Power | Total | Electrical | Power | Total | |||||||||||||||||||||
| Restructuring costs | |||||||||||||||||||||||||||||
| Cost of goods sold | $ | 4.9 | $ | 3.3 | $ | 8.2 | $ | 11.5 | $ | 2.2 | $ | 13.7 | $ | 27.3 | $ | 0.2 | $ | 27.5 | |||||||||||
| S&A expense | 3.4 | 0.4 | 3.8 | 5.4 | 1.2 | 6.6 | 6.6 | 0.9 | 7.5 | ||||||||||||||||||||
| Total restructuring costs | $ | 8.3 | $ | 3.7 | $ | 12.0 | $ | 16.9 | $ | 3.4 | $ | 20.3 | $ | 33.9 | $ | 1.1 | $ | 35.0 |
The following table summarizes the accrued liabilities for our restructuring actions (in millions):
| Beginning Accrued Restructuring Balance 1/1/18 | Pre-tax Restructuring Costs | Utilization and Foreign Exchange | Ending Accrued Restructuring Balance 12/31/2018 | |||||||||
| 2018 Restructuring Actions | ||||||||||||
| Severance | $ | — | $ | 8.8 | $ | (2.0 | ) | $ | 6.8 | |||
| Asset write-downs | — | 0.4 | (0.4 | ) | — | |||||||
| Facility closure and other costs | — | 3.5 | (3.4 | ) | 0.1 | |||||||
| Total 2018 Restructuring Actions | $ | — | $ | 12.7 | $ | (5.8 | ) | $ | 6.9 | |||
| 2017 and Prior Restructuring Actions | ||||||||||||
| Severance | $ | 5.4 | $ | (2.3 | ) | $ | (2.2 | ) | $ | 0.9 | ||
| Asset write-downs | — | — | — | — | ||||||||
| Facility closure and other costs (a) | 15.5 | 1.6 | (3.9 | ) | 13.2 | |||||||
| Total 2017 and Prior Restructuring Actions | $ | 20.9 | $ | (0.7 | ) | $ | (6.1 | ) | $ | 14.1 | ||
| Total Restructuring Actions | $ | 20.9 | $ | 12.0 | $ | (11.9 | ) | $ | 21.0 |
(a) The beginning and ending accrual for Facility closure and other costs includes the remaining balance of accrued liability associated with the withdrawal from a multi-employer pension plan as a result of a restructuring action in 2016.
| 84 | HUBBELL INCORPORATED - Form 10-K |
The actual and expected costs for our restructuring actions are as follows (in millions):
| Expected Costs | Costs incurred in 2016 | Costs incurred in 2017 | Costs incurred in 2018 | Remaining costs at 12/31/18 | |||||||||||
| 2018 Restructuring Actions | |||||||||||||||
| Electrical Segment | $ | 14.6 | $ | — | $ | — | $ | 8.6 | $ | 6.0 | |||||
| Power Segment | 5.9 | — | — | 4.1 | 1.8 | ||||||||||
| Total 2018 Restructuring Actions | $ | 20.5 | $ | — | $ | — | $ | 12.7 | $ | 7.8 | |||||
| 2017 Restructuring Actions | |||||||||||||||
| Electrical Segment | $ | 10.3 | $ | — | $ | 10.6 | $ | (0.3 | ) | $ | — | ||||
| Power Segment | 3.1 | — | 3.4 | (0.4 | ) | 0.1 | |||||||||
| Total 2017 Restructuring Actions | $ | 13.4 | $ | — | $ | 14.0 | $ | (0.7 | ) | $ | 0.1 | ||||
| 2016 Restructuring Actions | |||||||||||||||
| Electrical Segment | $ | 40.2 | $ | 33.9 | $ | 6.3 | $ | — | $ | — | |||||
| Power Segment | 1.1 | 1.1 | — | — | — | ||||||||||
| Total 2016 and Prior Restructuring Actions(a) | $ | 41.3 | $ | 35.0 | $ | 6.3 | $ | — | $ | — | |||||
| Total Restructuring Actions | $ | 75.2 | $ | 35.0 | $ | 20.3 | $ | 12.0 | $ | 7.9 |
(a) Costs incurred in 2016 relating to 2016 Restructuring Actions in the Electrical segment in the preceding table include the $12.5 million previously mentioned charge representing the estimated withdrawal liability from a multi-employer pension plan. Any potential future liability in excess of the amount already recognized in 2016 is not included in the remaining costs at December 31, 2018. Additional information about the estimated withdrawal liability is included in Note 11 — Retirement Benefits in the Notes to Consolidated Financial Statements.
| HUBBELL INCORPORATED - Form 10-K | 85 |
NOTE 23 Quarterly Financial Data (Unaudited)
The table below sets forth summarized quarterly financial data for the years ended December 31, 2018 and 2017 (in millions, except per share amounts):
| Reported First Quarter | Reported Second Quarter | Reported Third Quarter | Fourth Quarter | |||||||||
| 2018 | ||||||||||||
| Net sales | $ | 991.2 | $ | 1,166.7 | $ | 1,179.7 | $ | 1,144.1 | ||||
| Cost of goods sold | $ | 708.3 | $ | 818.8 | $ | 830.7 | $ | 823.5 | ||||
| Gross profit | $ | 282.9 | $ | 347.9 | $ | 349.0 | $ | 320.6 | ||||
| Selling & administrative expenses | $ | 183.3 | $ | 191.0 | $ | 185.2 | $ | 184.0 | ||||
| Net income | $ | 59.8 | $ | 102.4 | $ | 114.7 | $ | 89.2 | ||||
| Net Income attributable to Hubbell | $ | 58.3 | $ | 100.3 | $ | 113.6 | $ | 88.0 | ||||
| Earnings per share — Basic | $ | 1.06 | $ | 1.83 | $ | 2.07 | $ | 1.61 | ||||
| Earnings per share — Diluted | $ | 1.05 | $ | 1.82 | $ | 2.06 | $ | 1.60 | ||||
| Reported First Quarter | Reported Second Quarter | Reported Third Quarter | Fourth Quarter | |||||||||
| 2017 | ||||||||||||
| Net sales | $ | 852.3 | $ | 948.3 | $ | 950.5 | $ | 917.7 | ||||
| Cost of goods sold (2) | $ | 589.7 | $ | 652.8 | $ | 642.9 | $ | 628.3 | ||||
| Gross profit | $ | 262.6 | $ | 295.5 | $ | 307.6 | $ | 289.4 | ||||
| Selling & administrative expenses (2) | $ | 154.8 | $ | 161.1 | $ | 157.5 | $ | 162.9 | ||||
| Net income (1) | $ | 63.9 | $ | 80.8 | $ | 82.8 | $ | 22.4 | ||||
| Net Income attributable to Hubbell (1) | $ | 62.8 | $ | 79.1 | $ | 80.8 | $ | 20.4 | ||||
| Earnings per share — Basic | $ | 1.13 | $ | 1.44 | $ | 1.47 | $ | 0.37 | ||||
| Earnings per share — Diluted | $ | 1.13 | $ | 1.43 | $ | 1.47 | $ | 0.37 | ||||
| (1) Net income in the fourth quarter of 2017 includes approximately $57 million, or $1.02 per share, impact associated with the TCJA. | ||||||||||||
| (2) Historical amounts have been adjusted to reflect the retrospective effects from the January 1, 2018 adoption of Accounting Standards Update (ASU) No. 2017-07, Compensation Retirement Benefits (Topic): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. |
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