Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Hubbell Incorporated (“Hubbell”, the “Company”, “registrant”, “we”, “our” or “us”, which references shall include its divisions and subsidiaries) have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements. In the opinion of management, all adjustments consisting only of normal recurring adjustments considered necessary for a fair statement of the results of the periods presented have been included. Operating results for the
three
months ended
March 31, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
.
The balance sheet at
December 31, 2016
has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Hubbell Incorporated Annual Report on Form 10-K for the year ended
December 31, 2016
.
Recent Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board ("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. The 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. This new guidance is effective for fiscal years beginning after December 15, 2017 and must be applied on a retrospective basis. The Company does not expect the adoption of this guidance will have a material impact on its financial statements.
In August 2016, the FASB issued an Accounting Standards Update (ASU 2016-15) to provide additional guidance and reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017 and early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance will have a material impact on its financial statements.
In March 2016, the FASB issued an Accounting Standards Update (ASU 2016-09) relating to the accounting for share-based payments. The new guidance requires all income tax effects of share-based awards to be recognized in the income statement when the awards vest or are settled, and allows companies an additional election in the method to estimate forfeitures of share-based payments. The new guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows and cash paid to a tax authority when shares are withheld to satisfy the employer's statutory income tax withholdings be classified as a financing activity. The Company adopted the standard on January 1, 2017. The Company elected to adopt all provisions impacting the Condensed Consolidated Statements of Cash Flows retrospectively, as such the comparable period within the Condensed Consolidated Statements of Cash Flows has been recast to reflect the adoption. The income statement provisions of the new guidance have been adopted prospectively. There is no change to the Company's accounting policy with respect to estimation of forfeitures. The adoption did not have a material impact on the Company's financial statements.
In February 2016, the FASB issued an Accounting Standards Update (ASU 2016-02) related to the accounting for leases. This guidance will require a lessee to recognize a right-to-use asset and a lease liability for both financing and operating leases, with a policy election permitting an exception to this guidance for leases whose term is twelve months or less. 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 new standard must be adopted using a modified retrospective transition at the beginning of the earliest comparative period presented. The Company is currently assessing the impact of adopting this standard on its financial statements.
HUBBELL INCORPORATED
-
Form 10-Q
7
In May 2014, the FASB issued an Accounting Standards Update (ASU 2014-09) related to new revenue recognition guidance 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. The guidance is required to be effective beginning in the first quarter of 2018 (with optional early adoption in 2017). This standard can be applied on either a retrospective or modified retrospective approach. Through the course of 2016 a number of ASU's have been issued which further refine the original guidance issued under ASU 2014-09 and are effective in conjunction with this original standard. The Company is currently reviewing contract terms and assessing the impact of adopting the standard and will provide updates on the expected impact to the Company’s financial statements in future filings, as determined.
NOTE 2
Business Acquisitions
In the first quarter of 2017, the Company completed
two
acquisitions for
$9.3 million
, net of cash received, resulting in the recognition of intangible assets of
$3.4 million
and goodwill of
$4.0 million
(See Note 5 – Goodwill and Intangible Assets, net for additional information). The
$3.4 million
of intangible assets consists primarily of customer relationships and trade names that will be amortized over a weighted average period of approximately
12 years
. These acquisitions have been added to the Power segment and
$2.4 million
of the goodwill is currently expected to be deductible for tax purposes.
These business acquisitions have been accounted for as business combinations and have resulted in the recognition of goodwill. The goodwill relates to a number of factors built into the purchase price, including the future earnings and cash flow potential of the businesses as well as the complementary strategic fit and resulting synergies they bring to the Company’s existing operations.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the dates of acquisition related to these transactions that were completed in the first quarter of 2017 (in millions):
|
|
|
|
|
Tangible assets acquired
|
$
|
3.1
|
|
Intangible assets
|
3.4
|
|
Goodwill
|
4.0
|
|
Other liabilities assumed
|
(1.2
|
)
|
TOTAL CONSIDERATION, NET OF CASH RECEIVED
|
$
|
9.3
|
|
The allocation of purchase price is based on preliminary estimates and assumptions, and is subject to revision based on final information received and other analysis that support the underlying estimates. We expect to complete our purchase accounting within the measurement period for each acquisition.
The Condensed Consolidated Financial Statements include the results of operations of the entities acquired in the first quarter of 2017 from the date of acquisition. Net sales and earnings related to these acquisitions for the
three
months ended
March 31, 2017
were not significant to the consolidated results. Pro forma information related to these acquisitions has not been included because the impact to the Company’s consolidated results of operations was not material.
Cash used for the acquisition of businesses, net of cash acquired as reported in the Consolidated Statement of Cash Flows for the
three
months ended
March 31, 2017
, is
$19.2 million
and includes payments associated with a 2016 acquisition for which the purchase price is due to be settled in installments.
In April 2017, the Company completed
two
additional acquisitions for an aggregate purchase price of approximately
$90 million
. The Company acquired substantially all of the assets of Advance Engineering Corporation and Perfect Pipe & Supply Corporation (collectively "AEC") for approximately
$30 million
. AEC is a gas components manufacturer that complements the Company's existing business in the natural gas distribution vertical. AEC joins the Company's recent acquisitions of GasBreaker and Lyall to bolster its main-to-meter mechanical solutions in this area. The Company also acquired all of the issued and outstanding limited liability company interests in iDevices, LLC ("iDevices") for approximately
$60 million
. iDevices is a developer with embedded firmware and application development expertise with custom-built Internet of Things ("IoT") Cloud infrastructure. The iDevices acquisition adds capabilities and expertise in IoT technology that is required to provide Tier 3 energy management solutions via connected hardware with a software front-end. These subsequent acquisitions are not recognized in the Condensed Consolidated Financial Statements as of
March 31, 2017
.
HUBBELL INCORPORATED
-
Form 10-Q
8
NOTE 3
Segment Information
The Company's reporting segments consist of the Electrical segment and the Power segment. The Electrical segment is comprised of businesses that sell stock and custom products including standard and special application wiring device products, rough-in electrical products, connector and grounding products, light fixtures and controls, components and assemblies for the natural gas distribution market as well as other electrical and communication equipment, some of which is designed such that it can also be used in harsh and hazardous locations primarily in the oil and gas (onshore and offshore) and mining industries. These products are primarily sold through electrical and industrial distributors, home centers, retail and hardware outlets, lighting showrooms and residential product-oriented internet sites. The Electrical segment is comprised of
three
business groups, which have been aggregated as they have similar long-term economic characteristics, customers and distribution channels, among other factors. The Power segment primarily serves the electric utility industry and is comprised of a wide variety of electrical distribution, transmission, and substation products with high voltage applications as well as telecommunication products. The following table sets forth financial information by business segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
Operating Income
|
Operating Income as a % of Net Sales
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Electrical
|
$
|
587.5
|
|
$
|
582.7
|
|
$
|
50.0
|
|
$
|
55.4
|
|
8.5
|
%
|
9.5
|
%
|
Power
|
264.8
|
|
252.1
|
|
54.1
|
|
46.5
|
|
20.4
|
%
|
18.4
|
%
|
TOTAL
|
$
|
852.3
|
|
$
|
834.8
|
|
$
|
104.1
|
|
$
|
101.9
|
|
12.2
|
%
|
12.2
|
%
|
NOTE 4
Inventories, net
Inventories, net are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Raw material
|
$
|
169.0
|
|
$
|
162.7
|
|
Work-in-process
|
109.4
|
|
102.8
|
|
Finished goods
|
330.3
|
|
327.9
|
|
|
608.7
|
|
593.4
|
|
Excess of FIFO over LIFO cost basis
|
(60.9
|
)
|
(61.0
|
)
|
TOTAL
|
$
|
547.8
|
|
$
|
532.4
|
|
HUBBELL INCORPORATED
-
Form 10-Q
9
NOTE 5
Goodwill and Intangible Assets, net
Changes in the carrying values of goodwill for the
three
months ended
March 31, 2017
, by segment, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
Electrical
|
|
Power
|
|
Total
|
|
BALANCE DECEMBER 31, 2016
|
$
|
652.0
|
|
$
|
339.0
|
|
$
|
991.0
|
|
Current year acquisitions (Note 2 – Business Acquisitions)
|
—
|
|
4.0
|
|
4.0
|
|
Foreign currency translation and prior year acquisitions
|
3.7
|
|
1.8
|
|
5.5
|
|
BALANCE MARCH 31, 2017
|
$
|
655.7
|
|
$
|
344.8
|
|
$
|
1,000.5
|
|
In the first three months of 2017, the Company completed two acquisitions that were added to the Power segment. These acquisitions have been accounted for as business combinations and have resulted in the recognition of
$4.0 million
of goodwill. See Note 2 – Business Acquisitions for additional information.
The carrying value of other intangible assets included in Intangible assets, net in the Condensed Consolidated Balance Sheet is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
December 31, 2016
|
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Definite-lived:
|
|
|
|
|
|
|
|
|
Patents, tradenames and trademarks
|
$
|
146.8
|
|
$
|
(45.6
|
)
|
$
|
143.7
|
|
$
|
(43.4
|
)
|
Customer/agent relationships and other
|
407.8
|
|
(134.8
|
)
|
405.9
|
|
(128.0
|
)
|
Total
|
$
|
554.6
|
|
$
|
(180.4
|
)
|
$
|
549.6
|
|
$
|
(171.4
|
)
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
Tradenames and other
|
53.1
|
|
—
|
|
53.3
|
|
—
|
|
TOTAL
|
$
|
607.7
|
|
$
|
(180.4
|
)
|
$
|
602.9
|
|
$
|
(171.4
|
)
|
Amortization expense associated with definite-lived intangible assets was
$8.5 million
and
$8.2 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. Future amortization expense associated with these intangible assets is expected to be
$24.4 million
for the remainder of
2017
,
$31.6 million
in
2018
,
$30.0 million
in
2019
,
$28.6 million
in
2020
,
$27.7 million
in
2021
, and
$26.5 million
in
2022
.
HUBBELL INCORPORATED
-
Form 10-Q
10
NOTE 6
Other Accrued Liabilities
Other accrued liabilities are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Customer program incentives
|
$
|
20.1
|
|
$
|
41.2
|
|
Accrued income taxes
|
22.3
|
|
8.4
|
|
Deferred revenue
|
12.3
|
|
11.8
|
|
Other
|
90.8
|
|
94.8
|
|
TOTAL
|
$
|
145.5
|
|
$
|
156.2
|
|
NOTE 7
Other Non-Current Liabilities
Other non-current liabilities are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Pensions
|
$
|
208.2
|
|
$
|
208.3
|
|
Other post-retirement benefits
|
24.0
|
|
24.0
|
|
Deferred tax liabilities
|
41.5
|
|
41.2
|
|
Other
|
65.2
|
|
68.2
|
|
TOTAL
|
$
|
338.9
|
|
$
|
341.7
|
|
HUBBELL INCORPORATED
-
Form 10-Q
11
NOTE 8
Total Equity
Total equity is comprised of the following (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Common stock, $.01 par value:
|
|
|
|
|
Common Stock-- authorized 200.0 shares; issued and outstanding 55.0 and 55.5 shares
|
$
|
0.5
|
|
$
|
0.6
|
|
Additional paid-in capital
|
—
|
|
15.4
|
|
Retained earnings
|
1,867.2
|
|
1,879.3
|
|
Accumulated other comprehensive loss:
|
|
|
|
|
Pension and post retirement benefit plan adjustment, net of tax
|
(178.8
|
)
|
(180.5
|
)
|
Cumulative translation adjustment
|
(109.3
|
)
|
(120.8
|
)
|
Unrealized gain on investment, net of tax
|
(0.8
|
)
|
(1.2
|
)
|
Cash flow hedge (loss) gain, net of tax
|
(0.1
|
)
|
—
|
|
Total Accumulated other comprehensive loss
|
(289.0
|
)
|
(302.5
|
)
|
Hubbell shareholders’ equity
|
1,578.7
|
|
1,592.8
|
|
Noncontrolling interest
|
10.1
|
|
10.4
|
|
TOTAL EQUITY
|
$
|
1,588.8
|
|
$
|
1,603.2
|
|
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. As a result of this accounting treatment, during the first three months of 2017,
$36.1 million
of purchase price of repurchased shares was allocated to retained earnings.
A summary of the changes in equity for the
three
months ended
March 31, 2017
and
2016
is provided below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
2016
|
|
Hubbell
Shareholders’
Equity
|
|
Noncontrolling
interest
|
|
Total Equity
|
|
Hubbell
Shareholders’
Equity
|
|
Noncontrolling
interest
|
|
Total Equity
|
|
EQUITY, JANUARY 1
|
$
|
1,592.8
|
|
$
|
10.4
|
|
$
|
1,603.2
|
|
$
|
1,740.6
|
|
$
|
8.4
|
|
$
|
1,749.0
|
|
Total comprehensive income
|
76.3
|
|
1.1
|
|
77.4
|
|
61.6
|
|
1.1
|
|
62.7
|
|
Stock-based compensation
|
4.2
|
|
—
|
|
4.2
|
|
4.6
|
|
—
|
|
4.6
|
|
Income tax windfall from stock-based awards, net
|
—
|
|
—
|
|
—
|
|
0.8
|
|
—
|
|
0.8
|
|
Repurchase/surrender of shares of common stock
|
(55.9
|
)
|
—
|
|
(55.9
|
)
|
(205.2
|
)
|
—
|
|
(205.2
|
)
|
Issuance of shares related to directors’ deferred compensation, net
|
0.1
|
|
—
|
|
0.1
|
|
0.1
|
|
—
|
|
0.1
|
|
Dividends to noncontrolling interest
|
—
|
|
(1.4
|
)
|
(1.4
|
)
|
—
|
|
(0.7
|
)
|
(0.7
|
)
|
Cash dividends declared
|
(38.8
|
)
|
—
|
|
(38.8
|
)
|
(35.6
|
)
|
—
|
|
(35.6
|
)
|
EQUITY, MARCH 31
|
$
|
1,578.7
|
|
$
|
10.1
|
|
$
|
1,588.8
|
|
$
|
1,566.9
|
|
$
|
8.8
|
|
$
|
1,575.7
|
|
The detailed components of total comprehensive income are presented in the Condensed Consolidated Statement of Comprehensive Income.
HUBBELL INCORPORATED
-
Form 10-Q
12
NOTE 9
Accumulated Other Comprehensive Loss
A summary of the changes in Accumulated other comprehensive loss (net of tax) for the
three
months ended
March 31, 2017
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, 2016
|
$
|
—
|
|
$
|
(1.2
|
)
|
$
|
(180.5
|
)
|
$
|
(120.8
|
)
|
$
|
(302.5
|
)
|
Other comprehensive income (loss) before reclassifications
|
(0.2
|
)
|
0.4
|
|
—
|
|
11.5
|
|
11.7
|
|
Amounts reclassified from accumulated other comprehensive loss
|
0.1
|
|
—
|
|
1.7
|
|
—
|
|
1.8
|
|
Current period other comprehensive income (loss)
|
(0.1
|
)
|
0.4
|
|
1.7
|
|
11.5
|
|
13.5
|
|
BALANCE AT MARCH 31, 2017
|
$
|
(0.1
|
)
|
$
|
(0.8
|
)
|
$
|
(178.8
|
)
|
$
|
(109.3
|
)
|
$
|
(289.0
|
)
|
A summary of the gain (loss) reclassifications out of Accumulated other comprehensive loss for the
three
months ended
March 31, 2017
and
2016
is provided below (in millions):
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other
Comprehensive Loss Components
|
Three Months Ended March 31, 2017
|
Three Months Ended March 31, 2016
|
|
Location of Gain (Loss)
Reclassified into Income
|
Cash flow hedges gain (loss):
|
|
|
|
|
|
|
Forward exchange contracts
|
$
|
—
|
|
$
|
0.1
|
|
|
Net sales
|
|
(0.1
|
)
|
1.0
|
|
|
Cost of goods sold
|
|
(0.1
|
)
|
1.1
|
|
|
Total before tax
|
|
—
|
|
(0.3
|
)
|
|
Tax (expense) benefit
|
|
$
|
(0.1
|
)
|
$
|
0.8
|
|
|
Gain (loss) net of tax
|
Amortization of defined benefit pension and post retirement benefit items:
|
|
|
|
|
|
|
Prior-service costs
|
$
|
0.2
|
|
$
|
0.2
|
|
(a)
|
|
Actuarial gains/(losses)
|
(2.8
|
)
|
(3.5
|
)
|
(a)
|
|
|
(2.6
|
)
|
(3.3
|
)
|
|
Total before tax
|
|
0.9
|
|
1.3
|
|
|
Tax benefit (expense)
|
|
$
|
(1.7
|
)
|
$
|
(2.0
|
)
|
|
(Loss) gain net of tax
|
Losses reclassified into earnings
|
$
|
(1.8
|
)
|
$
|
(1.2
|
)
|
|
(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 - Pension and Other Benefits for additional details).
|
HUBBELL INCORPORATED
-
Form 10-Q
13
NOTE 10
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. Service-based and performance-based restricted stock awards granted by the Company are considered participating securities as these awards contain a non-forfeitable right to dividends.
The following table sets forth the computation of earnings per share for the
three
months ended
March 31, 2017
and
2016
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Numerator:
|
|
|
|
|
Net income attributable to Hubbell
|
$
|
62.8
|
|
$
|
60.9
|
|
Less: Earnings allocated to participating securities
|
(0.2
|
)
|
(0.2
|
)
|
Net income available to common shareholders
|
$
|
62.6
|
|
$
|
60.7
|
|
Denominator:
|
|
|
|
|
Average number of common shares outstanding
|
55.2
|
|
56.3
|
|
Potential dilutive common shares
|
0.4
|
|
0.2
|
|
Average number of diluted shares outstanding
|
55.6
|
|
56.5
|
|
Earnings per share:
|
|
|
|
|
Basic
|
$
|
1.13
|
|
$
|
1.08
|
|
Diluted
|
$
|
1.13
|
|
$
|
1.08
|
|
The Company did not have outstanding any significant anti-dilutive securities during the
three
months ended
March 31, 2017
and
2016
.
HUBBELL INCORPORATED
-
Form 10-Q
14
NOTE 11
Pension and Other Benefits
The following table sets forth the components of net pension and other benefit costs for the
three
months ended
March 31, 2017
and
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Other Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
1.5
|
|
$
|
3.5
|
|
$
|
—
|
|
$
|
—
|
|
Interest cost
|
9.2
|
|
10.5
|
|
0.3
|
|
0.3
|
|
Expected return on plan assets
|
(8.5
|
)
|
(11.0
|
)
|
—
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
—
|
|
(0.2
|
)
|
(0.2
|
)
|
Amortization of actuarial losses
|
2.8
|
|
3.5
|
|
—
|
|
—
|
|
NET PERIODIC BENEFIT COST
|
$
|
5.0
|
|
$
|
6.5
|
|
$
|
0.1
|
|
$
|
0.1
|
|
Employer Contributions
Although not required by ERISA and the Internal Revenue Code, the Company may elect to make a voluntary contribution to its qualified domestic defined benefit pension plan in 2017. The Company anticipates making required contributions of approximately
$1.7 million
to its foreign pension plans during
2017
, of which $
0.4 million
has been contributed through
March 31, 2017
.
NOTE 12
Guarantees
The Company records a liability equal to the fair value of guarantees 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
March 31, 2017
and
December 31, 2016
, the fair value and maximum potential payment related to the Company’s guarantees were not material.
The Company offers product warranties that cover defects on most of its products. These warranties primarily apply to products that are properly installed, maintained and used for their intended purpose. The Company accrues estimated warranty costs at the time of sale. Estimated warranty expenses, recorded in cost of goods sold, are based upon historical information such as past experience, product failure rates, or the estimated number of units to be repaired or replaced. Adjustments are made to the product warranty accrual as claims are incurred, additional information becomes known or as historical experience indicates.
Changes in the accrual for product warranties during the
three
months ended
March 31, 2017
and 2016 are set forth below (in millions):
|
|
|
|
|
|
|
|
|
2017
|
2016
|
BALANCE AT JANUARY 1,
|
$
|
13.2
|
|
$
|
13.2
|
|
Provision
|
2.7
|
|
3.5
|
|
Expenditures/other
|
(1.5
|
)
|
(2.5
|
)
|
BALANCE AT MARCH 31,
|
$
|
14.4
|
|
$
|
14.2
|
|
HUBBELL INCORPORATED
-
Form 10-Q
15
NOTE 13
Fair Value Measurement
Investments
At
March 31, 2017
and
December 31, 2016
, the Company had
$57.0 million
and
$57.4 million
, respectively, of available-for-sale securities, consisting of municipal bonds classified in Level 2 of the fair value hierarchy and an investment in the redeemable preferred stock of a privately-held electrical utility substation security provider classified in Level 3 of the fair value hierarchy. The Company also had
$12.0 million
of trading securities at
March 31, 2017
and
$10.2 million
at
December 31, 2016
that are carried on the balance sheet at fair value. Unrealized gains and losses associated with available-for-sale securities are reflected in Accumulated other comprehensive loss, net of tax, while unrealized gains and losses associated with trading securities are reflected in the results of operations.
Fair value measurements
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. 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.
HUBBELL INCORPORATED
-
Form 10-Q
16
The following table shows, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at
March 31, 2017
and
December 31, 2016
(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
|
|
March 31, 2017
|
|
|
|
|
Money market funds
(a)
|
$
|
226.6
|
|
$
|
—
|
|
$
|
—
|
|
$
|
226.6
|
|
Available for sale investments
|
—
|
|
53.1
|
|
3.9
|
|
57.0
|
|
Trading securities
|
12.0
|
|
—
|
|
—
|
|
12.0
|
|
Deferred compensation plan liabilities
|
(12.0
|
)
|
—
|
|
—
|
|
(12.0
|
)
|
Derivatives:
|
|
|
|
|
Forward exchange contracts-Assets
(b)
|
—
|
|
0.4
|
|
—
|
|
0.4
|
|
Forward exchange contracts-(Liabilities)
(c)
|
—
|
|
(0.1
|
)
|
—
|
|
(0.1
|
)
|
TOTAL
|
$
|
226.6
|
|
$
|
53.4
|
|
$
|
3.9
|
|
$
|
283.9
|
|
|
|
|
|
|
|
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
|
|
December 31, 2016
|
|
|
|
|
Money market funds
(a)
|
$
|
263.5
|
|
$
|
—
|
|
$
|
—
|
|
$
|
263.5
|
|
Available for sale investments
|
—
|
|
53.6
|
|
3.8
|
|
57.4
|
|
Trading securities
|
10.2
|
|
—
|
|
—
|
|
10.2
|
|
Deferred compensation plan liabilities
|
(10.2
|
)
|
—
|
|
—
|
|
(10.2
|
)
|
Derivatives:
|
|
|
|
|
Forward exchange contracts-Assets
(b)
|
—
|
|
0.8
|
|
—
|
|
0.8
|
|
Forward exchange contracts-(Liabilities)
(c)
|
—
|
|
(0.1
|
)
|
—
|
|
(0.1
|
)
|
TOTAL
|
$
|
263.5
|
|
$
|
54.3
|
|
$
|
3.8
|
|
$
|
321.6
|
|
(a)
Money market funds are reflected in Cash and cash equivalents in the Condensed Consolidated Balance Sheet.
(b)
Forward exchange contracts-Assets are reflected in Other current assets in the Condensed Consolidated Balance Sheet.
(c)
Forward exchange contracts-(Liabilities) are reflected in Other accrued liabilities in the Condensed Consolidated Balance Sheet.
The methods and assumptions used to estimate the Level 2 and Level 3 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.
Available-for-sale municipal bonds classified in Level 2 – The fair value of available-for-sale investments in municipal bonds is based on observable market-based inputs, other than quoted prices in active markets for identical assets.
Available-for-sale redeemable preferred stock classified in Level 3 – The fair value of the available-for-sale investment in redeemable preferred stock is valued based on a discounted cash flow model, using significant unobservable inputs, including expected cash flows and the discount rate.
During the
three
months ended
March 31, 2017
there were
no
transfers of financial assets or liabilities in or out of Level 1 or Level 2 of the fair value hierarchy. There were also no transfers in or out of Level 3 during that period.
Deferred compensation plans
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 the
three
months ended
March 31, 2017
and
2016
, the Company purchased
$1.6 million
and
$0.9 million
, respectively, of trading securities related to these deferred compensation plans. As a result of participant distributions, the Company sold
$0.3 million
of these trading securities during the
three
months ended
March 31, 2017
and
$1.1 million
during the
three
months ended
March 31, 2016
. 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.
HUBBELL INCORPORATED
-
Form 10-Q
17
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 forecasted 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, liability or forecasted transaction are recognized in income. Derivative assets and derivative liabilities are not offset in the Condensed Consolidated Balance Sheet.
Forward exchange contracts
In
2017
and
2016
, the Company entered into a series of forward exchange contracts to purchase U.S. dollars in order to hedge exposure to fluctuating rates of exchange for both anticipated inventory purchases and forecasted sales by its subsidiaries that transact business in Canada. As of
March 31, 2017
, the Company had
47
individual forward exchange contracts for an aggregate notional amount of $
34.9 million
, having various expiration dates through February 2018. 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 the
three
months ended
March 31, 2017
and
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Gain/(Loss) Recognized in
Accumulated Other Comprehensive
Income (net of tax)
|
Location of Gain/(Loss)
Reclassified into Income
|
Gain/(Loss) Reclassified into
Earnings Effective Portion (net of tax)
|
Derivative Instrument
|
2017
|
|
2016
|
|
(Effective Portion)
|
2017
|
|
2016
|
|
Forward exchange contract
|
$
|
(0.2
|
)
|
$
|
(1.5
|
)
|
Net sales
|
$
|
—
|
|
$
|
—
|
|
|
|
|
Cost of goods sold
|
$
|
(0.1
|
)
|
$
|
0.8
|
|
Hedge ineffectiveness was immaterial with respect to the forward exchange cash flow hedges during the
three
months ended
March 31, 2017
and
2016
.
Long Term Debt
As of
March 31, 2017
and
December 31, 2016
, the estimated fair value of the long-term debt was
$1,021.0 million
and
$1,017.8 million
, respectively, using quoted market prices in active markets for similar liabilities (Level 2).
NOTE 14
Commitments and Contingencies
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.
HUBBELL INCORPORATED
-
Form 10-Q
18
NOTE 15
Restructuring Costs and Other
In the three months ended March 31, 2017, we incurred costs for restructuring actions initiated in 2017 as well as costs for 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 include severance and employee benefits, asset impairments, as well as facility closure, contract termination and certain pension costs that are directly related to restructuring actions. 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, which is expected to be settled over approximately
19
years.
Pre-tax restructuring costs incurred in each of our segments and the location of the costs in the Condensed Consolidated Statement of Income for the
three
months ended
March 31, 2017
and 2016 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
2016
|
2017
|
2016
|
2017
|
2016
|
|
Cost of goods sold
|
Selling & administrative expense
|
Total
|
Electrical Segment
|
$
|
3.7
|
|
$
|
1.8
|
|
$
|
1.0
|
|
$
|
3.7
|
|
$
|
4.7
|
|
$
|
5.5
|
|
Power Segment
|
0.5
|
|
—
|
|
0.3
|
|
0.3
|
|
0.8
|
|
0.3
|
|
Total Pre-Tax Restructuring Costs
|
$
|
4.2
|
|
$
|
1.8
|
|
$
|
1.3
|
|
$
|
4.0
|
|
$
|
5.5
|
|
$
|
5.8
|
|
The following table summarizes the accrued liabilities for our restructuring actions (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Accrued Restructuring Balance 1/1/17
|
|
Pre-tax Restructuring Costs
|
|
Utilization and Foreign Exchange
|
|
Ending Accrued Restructuring Balance 3/31/2017
|
|
2017 Restructuring Actions
|
|
|
|
|
Severance
|
$
|
—
|
|
$
|
2.4
|
|
$
|
(0.7
|
)
|
$
|
1.7
|
|
Asset write-downs
|
—
|
|
—
|
|
—
|
|
—
|
|
Facility closure and other costs
|
—
|
|
0.3
|
|
0.2
|
|
0.5
|
|
Total 2017 Restructuring Actions
|
$
|
—
|
|
$
|
2.7
|
|
$
|
(0.5
|
)
|
$
|
2.2
|
|
2016 and Prior Restructuring Actions
|
|
|
|
|
Severance
|
$
|
10.4
|
|
$
|
0.1
|
|
$
|
(3.2
|
)
|
$
|
7.3
|
|
Asset write-downs
|
—
|
|
—
|
|
—
|
|
—
|
|
Facility closure and other costs
(a)
|
$
|
14.1
|
|
$
|
2.7
|
|
$
|
(2.6
|
)
|
$
|
14.2
|
|
Total 2016 and Prior Restructuring Actions
|
$
|
24.5
|
|
$
|
2.8
|
|
$
|
(5.8
|
)
|
$
|
21.5
|
|
Total Restructuring Actions
|
$
|
24.5
|
|
$
|
5.5
|
|
$
|
(6.3
|
)
|
$
|
23.7
|
|
(a) Facility closure and other costs as of 1/1/17 includes a charge of approximately
$12.5 million
to accrue the estimated liability associated with the anticipated withdrawal from a multi-employer pension plan as a result of a restructuring action.
HUBBELL INCORPORATED
-
Form 10-Q
19
The actual costs incurred and total expected cost of our on-going restructuring actions are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected costs
|
|
Costs incurred during 2016
|
|
Costs incurred during first three months of 2017
|
|
Remaining costs at 3/31/2017
|
|
2017 Restructuring Actions
|
|
|
|
|
Electrical Segment
|
$
|
2.8
|
|
$
|
—
|
|
$
|
1.9
|
|
$
|
0.9
|
|
Power Segment
|
2.9
|
|
—
|
|
0.8
|
|
2.1
|
|
Total 2017 Restructuring Actions
|
$
|
5.7
|
|
$
|
—
|
|
$
|
2.7
|
|
$
|
3.0
|
|
2016 and Prior Restructuring Actions
|
|
|
|
|
Electrical Segment
(a)
|
44.4
|
|
33.9
|
|
2.8
|
|
7.7
|
|
Power Segment
|
1.5
|
|
1.1
|
|
—
|
|
0.4
|
|
Total 2016 and Prior Restructuring Actions
|
$
|
45.9
|
|
$
|
35.0
|
|
$
|
2.8
|
|
$
|
8.1
|
|
Total Restructuring Actions
|
$
|
51.6
|
|
$
|
35.0
|
|
$
|
5.5
|
|
$
|
11.1
|
|
(a) Costs incurred in 2016 relating to 2016 Restructuring Actions in the Electrical segment 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 March 31, 2017. Additional information about the estimated withdrawal liability can be found in Note 10 - Retirement Benefits in the Notes to Consolidated Financial Statements in the Hubbell Incorporated Annual Report on Form 10-K for the year ended
December 31, 2016
.