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 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 United States of America (“U.S.”) GAAP for audited 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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020. In the first quarter of 2020 our former Power segment was re-named Hubbell Utility Solutions ("Utility Solutions") to reflect the depth and breadth of our industry-leading offering for electric, water, gas and telecom utilities ranging from a wide variety of critical infrastructure components to full-scale smart grid solutions.
In August 2019, the Company completed the sale of Haefely Test, AG (“Haefely”) for $38.1 million. Haefely designs and manufactures high voltage test equipment and is based in Basel, Switzerland. The Haefely business was previously included within the Electrical segment. As a result of the sale of Haefely, we recognized a pre-tax gain of $21.7 million that is included in Total other expense in the Condensed Consolidated Statements of Income.
The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP 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, 2019.
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19) and began to affect the Company’s business and operations late in the first quarter of 2020 and became more pronounced during the second quarter of 2020. Through the third quarter of 2020, the pandemic continues to significantly impact global economic conditions and in the U.S. as federal, state, local, and foreign governments react to the public health crisis with mitigation measures, creating significant uncertainties in the U.S. and global economies. The extent to which the coronavirus pandemic will continue to affect our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict and which may cause the actual results to differ from the estimates and assumptions we are required to make in the preparation of financial statements according to GAAP.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update (ASU 2016-13), "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASC 326 or "CECL"), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The Company adopted the requirements of the new standard in the first quarter of 2020. The adoption of this guidance and recognition of a loss allowance at an amount equal to lifetime expected credit losses for trade receivables resulted in a $1.0 million cumulative-effect adjustment to retained earnings, net of tax.
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. The Company adopted the standard prospectively during the first quarter of 2020 with no material impact to the consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued an Accounting Standards Update (ASU 2019-12) "Simplifying the Accounting for Income Taxes", which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently assessing the impact of adopting this standard on its financial statements and the timing of adoption.
HUBBELL INCORPORATED-Form 10-Q 7
In March 2020, FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are effective for all entities beginning on March 12, 2020 through December 31, 2022. The Company may elect to apply the amendments prospectively through December 31, 2022. The Company has not adopted this ASU as of September 30, 2020. The Company is currently assessing the impact of adopting this standard on its financial statements and the timing of adoption.
NOTE 2 Revenue
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 primarily in the Utility Solutions segment recognized upon delivery of the product at the destination. Revenue from service contracts and post-shipment performance obligations are approximately three percent of total annual consolidated net revenue and those service contracts and post-shipment obligations are primarily within the Utility Solutions segment. Revenue from service contracts and post-shipment performance obligations is recognized when or as those obligations are satisfied. The Company primarily offers assurance-type standard warranties that do not represent separate performance obligations and on occasion will separately offer and price extended warranties that are separate performance obligations for which the associated revenue is recognized over-time based on the extended warranty period. The Company records amounts billed to customers for reimbursement of shipping and handling costs within revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of goods sold. Sales taxes and other usage-based taxes are excluded from revenue.
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 Utility Solutions segment, certain businesses offer annual maintenance service contracts that require payment at the beginning of the contract period. These payments are treated as a contract liability and are classified in Other accrued liabilities in the Condensed Consolidated Balance Sheets. Once control transfers to the customer and the Company meets the revenue recognition criteria, the deferred revenue is recognized in the Condensed Consolidated Statements of Income. The deferred revenue relating to the annual maintenance service contracts is recognized in the Condensed Consolidated Statements of Income on a straight-line basis over the expected term of the contract.
The following table presents disaggregated revenue by business group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
in millions
|
2020
|
2019
|
2020
|
2019
|
|
Net sales
|
|
|
|
|
|
Commercial and Industrial
|
$
|
194.8
|
|
$
|
237.0
|
|
$
|
575.5
|
|
$
|
692.6
|
|
|
Construction and Energy
|
181.9
|
|
213.0
|
|
533.0
|
|
608.7
|
|
|
Lighting
|
214.5
|
|
239.3
|
|
595.9
|
|
706.4
|
|
|
Total Electrical
|
$
|
591.2
|
|
$
|
689.3
|
|
$
|
1,704.4
|
|
$
|
2,007.7
|
|
|
Power Systems
|
369.7
|
|
339.5
|
|
1,008.9
|
|
965.5
|
|
|
Aclara
|
147.7
|
|
175.2
|
|
434.8
|
|
514.5
|
|
|
Total Utility Solutions
|
$
|
517.4
|
|
$
|
514.7
|
|
$
|
1,443.7
|
|
$
|
1,480.0
|
|
|
TOTAL
|
$
|
1,108.6
|
|
$
|
1,204.0
|
|
$
|
3,148.1
|
|
$
|
3,487.7
|
|
|
HUBBELL INCORPORATED-Form 10-Q 8
The following table presents disaggregated revenue by geographic location (on a geographic basis, the Company defines "international" as operations based outside of the United States and its possessions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
in millions
|
2020
|
2019
|
2020
|
2019
|
Net sales
|
|
|
|
|
United States
|
$
|
535.9
|
|
$
|
618.2
|
|
$
|
1,547.5
|
|
$
|
1,804.3
|
|
International
|
55.3
|
|
71.1
|
|
156.9
|
|
203.4
|
|
Total Electrical
|
$
|
591.2
|
|
$
|
689.3
|
|
$
|
1,704.4
|
|
$
|
2,007.7
|
|
United States
|
484.7
|
|
477.7
|
|
1,359.0
|
|
1,386.7
|
|
International
|
32.7
|
|
37.0
|
|
84.7
|
|
93.3
|
|
Total Utility Solutions
|
$
|
517.4
|
|
$
|
514.7
|
|
$
|
1,443.7
|
|
$
|
1,480.0
|
|
TOTAL
|
$
|
1,108.6
|
|
$
|
1,204.0
|
|
$
|
3,148.1
|
|
$
|
3,487.7
|
|
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 Condensed Consolidated Balance Sheets.
Contract liabilities were $35.7 million as of September 30, 2020 compared to $31.0 million as of December 31, 2019. The $4.7 million increase in our contract liabilities balance was primarily due to a $15.4 million net increase in current year deferrals primarily due to timing of advance payments on certain orders, partially offset by the recognition of $10.7 million in revenue related to amounts that were recorded in contract liabilities at January 1, 2020. 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 Condensed Consolidated Balance Sheets. Impairment losses recognized on our receivables and contract assets were immaterial for the three and nine months ended September 30, 2020.
Unsatisfied Performance Obligations
As of September 30, 2020, the Company had approximately $305 million of unsatisfied performance obligations for contracts with an original expected length of greater than one year, primarily relating to long-term contracts of the Utility Solutions segment to deliver and install meters, metering communications and grid monitoring sensor technology. The Company expects that a majority of the unsatisfied performance obligations will be completed and recognized over the next three years.
HUBBELL INCORPORATED-Form 10-Q 9
NOTE 3 Segment Information
The Company's reporting segments consist of the Electrical segment and the Utility Solutions segment. In the first quarter of 2020 our former Power segment was re-named Utility Solutions to reflect the depth and breadth of our industry-leading offering for electric, water, gas and telecom utilities ranging from a wide variety of critical infrastructure components to full-scale smart grid solutions.
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 of our businesses design and manufacture 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. The Electrical segment is comprised of three business groups, which have been aggregated as they have similar economic characteristics, customers and distribution channels, among other factors.
The Utility Solutions segment consists of businesses that design and manufacture various distribution, transmission, substation and telecommunications products primarily used by the electric, water, gas, and telecommunication utility industries. These offerings include advanced metering infrastructure, meter and edge devices, software and infrastructure services, which are primarily sold to the electric, water, and gas utility industries. 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, industrial firms, construction and engineering firms.
The following table sets forth financial information by business segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Operating Income
|
|
Operating Income as a % of Net Sales
|
|
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
Three Months Ended September 30,
|
|
|
|
|
|
|
Electrical
|
$
|
591.2
|
|
$
|
689.3
|
|
$
|
70.6
|
|
$
|
90.2
|
|
11.9
|
%
|
13.1
|
%
|
Utility Solutions
|
517.4
|
|
514.7
|
|
92.3
|
|
82.7
|
|
17.8
|
%
|
16.1
|
%
|
TOTAL
|
$
|
1,108.6
|
|
$
|
1,204.0
|
|
$
|
162.9
|
|
$
|
172.9
|
|
14.7
|
%
|
14.4
|
%
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
Electrical
|
$
|
1,704.4
|
|
$
|
2,007.7
|
|
$
|
185.7
|
|
$
|
246.8
|
|
10.9
|
%
|
12.3
|
%
|
Utility Solutions
|
1,443.7
|
|
1,480.0
|
|
227.5
|
|
213.9
|
|
15.8
|
%
|
14.5
|
%
|
TOTAL
|
$
|
3,148.1
|
|
$
|
3,487.7
|
|
$
|
413.2
|
|
$
|
460.7
|
|
13.1
|
%
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HUBBELL INCORPORATED-Form 10-Q 10
NOTE 4 Inventories, net
Inventories, net consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
December 31, 2019
|
Raw material
|
$
|
219.8
|
|
$
|
217.4
|
|
Work-in-process
|
110.4
|
|
101.8
|
|
Finished goods
|
344.7
|
|
403.6
|
|
Subtotal
|
674.9
|
|
722.8
|
|
Excess of FIFO over LIFO cost basis
|
(90.0)
|
|
(89.8)
|
|
TOTAL
|
$
|
584.9
|
|
$
|
633.0
|
|
HUBBELL INCORPORATED-Form 10-Q 11
NOTE 5 Goodwill and Other Intangible Assets, net
Changes in the carrying values of goodwill for the nine months ended September 30, 2020, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
Electrical
|
Utility Solutions
|
Total
|
BALANCE DECEMBER 31, 2019
|
$
|
727.7
|
|
$
|
1,084.1
|
|
$
|
1,811.8
|
|
|
|
|
|
Prior year acquisitions
|
0.2
|
|
2.7
|
|
2.9
|
|
Foreign currency translation
|
(1.0)
|
|
(0.3)
|
|
(1.3)
|
|
BALANCE SEPTEMBER 30, 2020
|
$
|
726.9
|
|
$
|
1,086.5
|
|
$
|
1,813.4
|
|
During the nine months ended September 30, 2020, we recognized a net increase to the consideration paid primarily related to our acquisition of all of the issued and outstanding shares of Cantega Technologies Inc., including its wholly owned subsidiary Greenjacket Inc., and all of the issued and outstanding shares of Reliaguard Inc. (collectively "Cantega") as a result of the customary net working capital provisions in the acquisition agreement. The increase in net consideration paid of $2.0 million resulted in a corresponding increase to goodwill. The goodwill is not deductible for tax purposes.
The carrying value of other intangible assets included in Other intangible assets, net in the Condensed Consolidated Balance Sheets is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Gross Amount
|
Accumulated
Amortization
|
Gross Amount
|
Accumulated
Amortization
|
Definite-lived:
|
|
|
|
|
Patents, tradenames and trademarks
|
$
|
201.6
|
|
$
|
(71.2)
|
|
$
|
202.7
|
|
$
|
(65.0)
|
|
Customer relationships, developed technology and other
|
858.4
|
|
(318.0)
|
|
861.0
|
|
(270.8)
|
|
Total
|
$
|
1,060.0
|
|
$
|
(389.2)
|
|
$
|
1,063.7
|
|
$
|
(335.8)
|
|
Indefinite-lived:
|
|
|
|
|
Tradenames and other
|
53.2
|
|
—
|
|
53.6
|
|
—
|
|
TOTAL
|
$
|
1,113.2
|
|
$
|
(389.2)
|
|
$
|
1,117.3
|
|
$
|
(335.8)
|
|
Amortization expense associated with definite-lived intangible assets was $18.5 million and $17.1 million during the three months ended September 30, 2020 and 2019, respectively, and $56.2 million and $53.4 million during the nine months ended September 30, 2020 and 2019, respectively. Future amortization expense associated with these intangible assets is estimated to be $18.0 million for the remainder of 2020, $72.3 million in 2021, $67.2 million in 2022, $62.3 million in 2023, $57.0 million in 2024, and $52.4 million in 2025. The Company amortizes intangible assets with definite lives using either an accelerated method that reflects the pattern in which economic benefits of the intangible assets are consumed and results in higher amortization in the earlier years of the assets useful life, or using a straight line method. Approximately 75% of the gross value of definite-lived intangible assets follow an accelerated amortization method.
In October 2020, the Company completed the acquisition of AccelTex Solutions, LLC ("AccelTex") for approximately $45 million. AccelTex engineers and manufactures wireless network products and accessories and the acquisition extends our reach into 5G and datacom. AccelTex will be added to the Electrical segment. This acquisition is not recognized in the Condensed Consolidated Financial Statements as of September 30, 2020.
HUBBELL INCORPORATED-Form 10-Q 12
NOTE 6 Other Accrued Liabilities
Other accrued liabilities consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
December 31, 2019
|
Customer program incentives
|
$
|
35.3
|
|
$
|
49.0
|
|
Accrued income taxes
|
7.5
|
|
6.0
|
|
Contract liabilities - deferred revenue
|
35.7
|
|
31.0
|
|
Customer refund liability
|
19.7
|
|
19.0
|
|
Accrued warranties(1)
|
22.0
|
|
24.0
|
|
Current operating lease liabilities
|
28.5
|
|
29.6
|
|
Other
|
83.5
|
|
103.6
|
|
TOTAL
|
$
|
232.2
|
|
$
|
262.2
|
|
(1) Refer to Note 21 - Guarantees, in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information regarding warranties.
NOTE 7 Other Non-Current Liabilities
Other non-current liabilities consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
December 31, 2019
|
Pensions
|
$
|
218.6
|
|
$
|
198.5
|
|
Other post-retirement benefits
|
21.5
|
|
21.5
|
|
Deferred tax liabilities
|
116.5
|
|
126.8
|
|
Accrued warranties long-term(1)
|
59.9
|
|
58.1
|
|
Non-current operating lease liabilities
|
67.1
|
|
71.7
|
|
Other
|
133.5
|
|
115.0
|
|
TOTAL
|
$
|
617.1
|
|
$
|
591.6
|
|
(1) Refer to Note 21 - Guarantees, in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information regarding warranties.
HUBBELL INCORPORATED-Form 10-Q 13
NOTE 8 Total Equity
A summary of changes in total equity for the three and nine months ended September 30, 2020 and the three and nine months ended September 30, 2019 is provided below (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, 2019
|
$
|
0.6
|
|
$
|
—
|
|
$
|
2,279.4
|
|
$
|
(332.9)
|
|
$
|
1,947.1
|
|
$
|
13.4
|
|
Net income
|
—
|
|
—
|
|
163.2
|
|
—
|
|
163.2
|
|
1.6
|
|
Other comprehensive (loss) income
|
—
|
|
—
|
|
—
|
|
(19.0)
|
|
(19.0)
|
|
—
|
|
Stock-based compensation
|
—
|
|
15.9
|
|
—
|
|
—
|
|
15.9
|
|
—
|
|
|
|
|
|
|
|
|
Acquisition/surrender of common shares(1)
|
—
|
|
(12.0)
|
|
(34.1)
|
|
—
|
|
(46.1)
|
|
—
|
|
Cash dividends declared ($0.91 per share)
|
—
|
|
—
|
|
(99.1)
|
|
—
|
|
(99.1)
|
|
—
|
|
Dividends to noncontrolling interest
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1.4)
|
|
|
|
|
|
|
|
|
Directors deferred compensation
|
—
|
|
(1.1)
|
|
—
|
|
—
|
|
(1.1)
|
|
—
|
|
Cumulative effect from adoption of CECL accounting standard (Note1)
|
—
|
|
—
|
|
(1.0)
|
|
—
|
|
(1.0)
|
|
—
|
|
BALANCE AT JUNE 30, 2020
|
$
|
0.6
|
|
$
|
2.8
|
|
$
|
2,308.4
|
|
$
|
(351.9)
|
|
$
|
1,959.9
|
|
$
|
13.6
|
|
Net income
|
—
|
|
—
|
|
107.1
|
|
—
|
|
107.1
|
|
1.5
|
|
Other comprehensive (loss) income
|
—
|
|
—
|
|
—
|
|
(4.4)
|
|
(4.4)
|
|
—
|
|
Stock-based compensation
|
—
|
|
4.1
|
|
—
|
|
—
|
|
4.1
|
|
—
|
|
Acquisition/surrender of common shares(1)
|
—
|
|
(0.6)
|
|
—
|
|
—
|
|
(0.6)
|
|
—
|
|
Cash dividends declared ($0.91 per share)
|
—
|
|
—
|
|
(49.5)
|
|
—
|
|
(49.5)
|
|
—
|
|
Dividends to noncontrolling interest
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(0.9)
|
|
Directors deferred compensation
|
—
|
|
0.2
|
|
—
|
|
—
|
|
0.2
|
|
—
|
|
|
|
|
|
|
|
|
BALANCE AT SEPTEMBER 30, 2020
|
$
|
0.6
|
|
$
|
6.5
|
|
$
|
2,366.0
|
|
$
|
(356.3)
|
|
$
|
2,016.8
|
|
$
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HUBBELL INCORPORATED-Form 10-Q 14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total Hubbell
Shareholders'
Equity
|
Non-
controlling
interest
|
BALANCE AT DECEMBER 31, 2018
|
$
|
0.6
|
|
$
|
1.3
|
|
$
|
2,064.4
|
|
$
|
(285.7)
|
|
$
|
1,780.6
|
|
$
|
18.3
|
|
Net income
|
—
|
|
—
|
|
168.3
|
|
—
|
|
168.3
|
|
3.4
|
|
Other comprehensive (loss) income
|
—
|
|
—
|
|
—
|
|
6.0
|
|
6.0
|
|
—
|
|
Stock-based compensation
|
—
|
|
8.3
|
|
—
|
|
—
|
|
8.3
|
|
—
|
|
Reclassification of stranded tax effects
|
—
|
|
—
|
|
30.0
|
|
(30.0)
|
|
—
|
|
—
|
|
Acquisition/surrender of common shares(1)
|
—
|
|
(8.8)
|
|
(27.2)
|
|
—
|
|
(36.0)
|
|
—
|
|
Cash dividends declared ($0.84 per share)
|
—
|
|
—
|
|
(91.7)
|
|
—
|
|
(91.7)
|
|
—
|
|
Dividends to noncontrolling interest
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2.6)
|
|
|
|
|
|
|
|
|
Directors deferred compensation
|
—
|
|
0.4
|
|
—
|
|
—
|
|
0.4
|
|
—
|
|
BALANCE AT JUNE 30, 2019
|
$
|
0.6
|
|
$
|
1.2
|
|
$
|
2,143.8
|
|
$
|
(309.7)
|
|
$
|
1,835.9
|
|
$
|
19.1
|
|
Net income
|
—
|
|
—
|
|
130.7
|
|
—
|
|
130.7
|
|
1.9
|
|
Other comprehensive (loss) income
|
—
|
|
—
|
|
—
|
|
(16.0)
|
|
(16.0)
|
|
—
|
|
Stock-based compensation
|
—
|
|
5.2
|
|
—
|
|
—
|
|
5.2
|
|
—
|
|
Acquisition/surrender of common shares(1)
|
—
|
|
(5.8)
|
|
(1.4)
|
|
—
|
|
(7.2)
|
|
—
|
|
Cash dividends declared ($0.84 per share)
|
—
|
|
—
|
|
(45.6)
|
|
—
|
|
(45.6)
|
|
—
|
|
Dividends to noncontrolling interest
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(8.5)
|
|
Directors deferred compensation
|
—
|
|
0.1
|
|
—
|
|
—
|
|
0.1
|
|
—
|
|
BALANCE AT SEPTEMBER 30, 2019
|
$
|
0.6
|
|
$
|
0.7
|
|
$
|
2,227.5
|
|
$
|
(325.7)
|
|
$
|
1,903.1
|
|
$
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) For accounting purposes, the Company treats repurchased shares as constructively retired when acquired and accordingly charges the purchase price against common stock par value, Additional paid-in capital, to the extent available, and Retained earnings. The change in Retained earnings of $34.1 million and $28.6 million in the first nine months of 2020 and 2019, respectively, reflects this accounting treatment.
The detailed components of total comprehensive income are presented in the Condensed Consolidated Statements of Comprehensive Income.
HUBBELL INCORPORATED-Form 10-Q 15
NOTE 9 Accumulated Other Comprehensive Loss
A summary of the changes in Accumulated other comprehensive loss (net of tax) for the nine months ended September 30, 2020 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, 2019
|
$
|
(0.5)
|
|
$
|
0.6
|
|
$
|
(203.2)
|
|
$
|
(129.8)
|
|
$
|
(332.9)
|
|
Other comprehensive income (loss) before reclassifications
|
1.2
|
|
0.5
|
|
(22.3)
|
|
(12.2)
|
|
(32.8)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(0.7)
|
|
—
|
|
10.1
|
|
—
|
|
9.4
|
|
Current period other comprehensive income (loss)
|
0.5
|
|
0.5
|
|
(12.2)
|
|
(12.2)
|
|
(23.4)
|
|
BALANCE AT SEPTEMBER 30, 2020
|
$
|
—
|
|
$
|
1.1
|
|
$
|
(215.4)
|
|
$
|
(142.0)
|
|
$
|
(356.3)
|
|
A summary of the gain (loss) reclassifications out of Accumulated other comprehensive loss for the three and nine months ended September 30, 2020 and 2019 is provided below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
Details about Accumulated Other
Comprehensive Loss Components
|
2020
|
2019
|
|
2020
|
2019
|
Location of Gain (Loss) Reclassified into Income
|
Cash flow hedges gain (loss):
|
|
|
|
|
|
|
Forward exchange contracts
|
$
|
—
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
$
|
0.4
|
|
Net sales
|
|
0.2
|
|
—
|
|
|
0.7
|
|
0.5
|
|
Cost of goods sold
|
|
0.2
|
|
0.1
|
|
|
1.0
|
|
0.9
|
|
Total before tax
|
|
(0.1)
|
|
—
|
|
|
(0.3)
|
|
(0.2)
|
|
Tax benefit (expense)
|
|
$
|
0.1
|
|
$
|
0.1
|
|
|
$
|
0.7
|
|
$
|
0.7
|
|
Gain (loss) net of tax
|
Defined benefit pension and post-retirement benefit items:
|
|
|
|
|
|
|
Prior-service costs (a)
|
$
|
0.1
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
$
|
0.5
|
|
|
Actuarial gains/(losses) (a)
|
(2.4)
|
|
(2.4)
|
|
|
(7.1)
|
|
(7.3)
|
|
|
Settlement and curtailment losses (a)
|
(6.6)
|
|
(0.3)
|
|
|
(6.6)
|
|
(0.3)
|
|
|
|
(8.9)
|
|
(2.6)
|
|
|
(13.5)
|
|
(7.1)
|
|
Total before tax
|
|
2.3
|
|
0.7
|
|
|
3.4
|
|
1.8
|
|
Tax benefit (expense)
|
|
$
|
(6.6)
|
|
$
|
(1.9)
|
|
|
$
|
(10.1)
|
|
$
|
(5.3)
|
|
Gain (loss) net of tax
|
|
|
|
|
|
|
|
Reclassification of gains (losses) on available-for-sale securities:
|
$
|
—
|
|
$
|
(1.8)
|
|
|
$
|
—
|
|
$
|
(1.8)
|
|
Other expense, net
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Tax benefit (expense)
|
|
$
|
—
|
|
$
|
(1.8)
|
|
|
$
|
—
|
|
$
|
(1.8)
|
|
|
|
|
|
|
|
|
|
Reclassification of currency translation gain:
|
$
|
—
|
|
$
|
7.7
|
|
|
$
|
—
|
|
$
|
7.7
|
|
Gain on disposition of business (Note 1)
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Tax benefit (expense)
|
|
$
|
—
|
|
$
|
7.7
|
|
|
$
|
—
|
|
$
|
7.7
|
|
|
|
|
|
|
|
|
|
Gains (losses) reclassified into earnings
|
$
|
(6.5)
|
|
$
|
4.1
|
|
|
$
|
(9.4)
|
|
$
|
1.3
|
|
|
(a) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 11 - Pension and Other Benefits in the Notes to Condensed Consolidated Financial Statements for additional details).
HUBBELL INCORPORATED-Form 10-Q 16
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 and nine months ended September 30, 2020 and 2019 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
Numerator:
|
|
|
|
|
Net income attributable to Hubbell Incorporated
|
$
|
107.1
|
|
$
|
130.7
|
|
$
|
270.3
|
|
$
|
299.0
|
|
Less: Earnings allocated to participating securities
|
(0.4)
|
|
(0.5)
|
|
(1.0)
|
|
(1.2)
|
|
Net income available to common shareholders
|
$
|
106.7
|
|
$
|
130.2
|
|
$
|
269.3
|
|
$
|
297.8
|
|
Denominator:
|
|
|
|
|
Average number of common shares outstanding
|
54.2
|
|
54.3
|
|
54.1
|
|
54.4
|
|
Potential dilutive common shares
|
0.3
|
|
0.3
|
|
0.3
|
|
0.3
|
|
Average number of diluted shares outstanding
|
54.5
|
|
54.6
|
|
54.4
|
|
54.7
|
|
Earnings per share:
|
|
|
|
|
Basic
|
$
|
1.97
|
|
$
|
2.40
|
|
$
|
4.97
|
|
$
|
5.48
|
|
Diluted
|
$
|
1.96
|
|
$
|
2.38
|
|
$
|
4.95
|
|
$
|
5.45
|
|
The Company did not have outstanding any significant anti-dilutive securities during the three and nine months ended September 30, 2020 and 2019.
HUBBELL INCORPORATED-Form 10-Q 17
NOTE 11 Pension and Other Benefits
The following table sets forth the components of net pension and other benefit costs for the three and nine months ended September 30, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
2020
|
2019
|
2020
|
2019
|
Three Months Ended September 30,
|
|
|
|
|
Service cost
|
$
|
0.3
|
|
$
|
0.5
|
|
$
|
—
|
|
$
|
0.1
|
|
Interest cost
|
7.2
|
|
8.7
|
|
0.2
|
|
0.2
|
|
Expected return on plan assets
|
(8.5)
|
|
(7.7)
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
0.2
|
|
(0.1)
|
|
(0.3)
|
|
Amortization of actuarial losses
|
2.4
|
|
2.3
|
|
—
|
|
0.1
|
|
Settlement and curtailment losses
|
6.6
|
|
0.3
|
|
—
|
|
—
|
|
NET PERIODIC BENEFIT COST
|
$
|
8.0
|
|
$
|
4.3
|
|
$
|
0.1
|
|
$
|
0.1
|
|
Nine Months Ended September 30,
|
|
|
|
|
Service cost
|
$
|
0.8
|
|
$
|
1.6
|
|
$
|
—
|
|
$
|
0.1
|
|
Interest cost
|
21.6
|
|
26.0
|
|
0.6
|
|
0.8
|
|
Expected return on plan assets
|
(25.4)
|
|
(23.0)
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
0.1
|
|
0.2
|
|
(0.3)
|
|
(0.7)
|
|
Amortization of actuarial losses
|
7.1
|
|
7.2
|
|
—
|
|
0.1
|
|
Settlement and curtailment losses
|
6.6
|
|
0.3
|
|
—
|
|
—
|
|
NET PERIODIC BENEFIT COST
|
$
|
10.8
|
|
$
|
12.3
|
|
$
|
0.3
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter of 2020, the Company recorded $6.6 million of settlement losses relating to retirees that elected to receive lump-sum distributions from the Company's defined benefit pension plans. This charge was the result of lump-sum payments which exceeded the threshold for settlement accounting under U.S. GAAP for the year.
Employer Contributions
The Company anticipates making required contributions of approximately $4.3 million to its foreign pension plans during 2020, of which $2.8 million has been contributed through September 30, 2020. Although not required by ERISA and the Internal Revenue Code, the Company may elect to make an additional voluntary contribution to its qualified domestic defined benefit pension plan in 2020. Additionally, we anticipate making cash payments of $6.0 million and $5.0 million due in 2020 and 2021, respectively, related to the previously disclosed settlement agreement with a multi-employer pension plan.
HUBBELL INCORPORATED-Form 10-Q 18
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 September 30, 2020 and December 31, 2019, 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 nine months ended September 30, 2020 and 2019 are set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
BALANCE AT JANUARY 1, (a)
|
$
|
82.1
|
|
$
|
92.7
|
|
Provision
|
10.0
|
|
13.0
|
|
Expenditures/payments/other
|
(10.2)
|
|
(23.2)
|
|
BALANCE AT SEPTEMBER 30, (a)
|
$
|
81.9
|
|
$
|
82.5
|
|
(a) Refer to Note 6 – Other Accrued Liabilities and Note 7 – Other Non-Current Liabilities for a breakout of short-term and long-term warranties.
HUBBELL INCORPORATED-Form 10-Q 19
NOTE 13 Fair Value Measurement
Financial Instruments
Financial instruments which potentially subject the Company to significant concentrations of credit loss 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. As part of its ongoing procedures, the Company monitors the credit worthiness of its customers. Bad debt write-offs have historically been minimal. The Company places its cash and cash equivalents with financial institutions and limits the amount of exposure in any one institution.
At September 30, 2020 our accounts receivable balance was $711.4 million, net of allowances of $14.7 million. While we have not experienced any significant collection issues to date, during the nine months ended September 30, 2020 our allowances increased approximately $7.0 million. The cumulative effect of the adoption of ASC 326 resulted in a $1.3 million increase to the opening balance. The remainder of the increase is primarily the result of our estimate of expected credit losses resulting from the deterioration of general economic conditions, including the volatility in oil prices and potential impacts of the COVID-19 pandemic, which we anticipate could have a negative impact on certain of our customers' ability to satisfy their obligations to the Company.
Investments
At September 30, 2020 and December 31, 2019, the Company had $48.7 million and $50.7 million, respectively, of available-for-sale municipal debt securities. These investments had an amortized cost of $47.4 million and $50.1 million, respectively. No allowance for credit losses related to our available-for-sale debt securities was recorded for the nine months ended September 30, 2020. As of September 30, 2020 and December 31, 2019 the unrealized losses attributable to our available-for-sale debt securities was $0.1 million at each period end. The fair value of available-for-sale debt securities with unrealized losses was $3.8 million at September 30, 2020 and $3.6 million at December 31, 2019.
In the third quarter of 2019, the Company disposed of an available-for-sale investment in a privately-held company that was previously classified in Level 3 of the fair value hierarchy and recognized a $5.0 million pre-tax loss classified in Other expense, net in the Condensed Consolidated Statements of Income.
The Company also had trading securities of $20.7 million at September 30, 2020 and $19.2 million at December 31, 2019 that are carried on the balance sheet at fair value. Unrealized gains and losses associated with available-for-sale debt 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 20
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 September 30, 2020 and December 31, 2019 (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
|
September 30, 2020
|
|
|
|
|
Money market funds(a)
|
$
|
68.6
|
|
$
|
—
|
|
$
|
—
|
|
$
|
68.6
|
|
|
|
|
|
|
Available for sale investments
|
—
|
|
48.7
|
|
—
|
|
48.7
|
|
Trading securities
|
20.7
|
|
—
|
|
—
|
|
20.7
|
|
Deferred compensation plan liabilities
|
(20.7)
|
|
—
|
|
—
|
|
(20.7)
|
|
Derivatives:
|
|
|
|
|
Forward exchange contracts-Assets(b)
|
—
|
|
0.2
|
|
—
|
|
0.2
|
|
Forward exchange contracts-(Liabilities)(c)
|
—
|
|
(0.1)
|
|
—
|
|
(0.1)
|
|
TOTAL
|
$
|
68.6
|
|
$
|
48.8
|
|
$
|
—
|
|
$
|
117.4
|
|
|
|
|
|
|
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
|
December 31, 2019
|
|
|
|
|
Money market funds(a)
|
$
|
27.5
|
|
$
|
—
|
|
$
|
—
|
|
$
|
27.5
|
|
|
|
|
|
|
Available for sale investments
|
—
|
|
50.7
|
|
—
|
|
50.7
|
|
Trading securities
|
19.2
|
|
—
|
|
—
|
|
19.2
|
|
Deferred compensation plan liabilities
|
(19.2)
|
|
—
|
|
—
|
|
(19.2)
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts-(Liabilities)(c)
|
—
|
|
(0.3)
|
|
—
|
|
(0.3)
|
|
TOTAL
|
$
|
27.5
|
|
$
|
50.4
|
|
$
|
—
|
|
$
|
77.9
|
|
(a) Money market funds are reflected in Cash and cash equivalents in the Condensed Consolidated Balance Sheets.
(b) Forward exchange contracts-Assets are reflected in Other current assets in the Condensed Consolidated Balance Sheets.
(c) Forward exchange contracts-(Liabilities) are reflected in Other accrued liabilities in the Condensed Consolidated Balance Sheets.
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 was 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.
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. The Company purchased $2.7 million and $3.1 million of trading securities related to these deferred compensation plans during the nine months ended September 30, 2020 and 2019. As a result of participant distributions, the Company sold $2.0 million of these trading securities during the nine months ended September 30, 2020 and $1.0 million during the nine months ended September 30, 2019. 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 21
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 Sheets.
In 2020 and 2019, 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 September 30, 2020, the Company had 20 individual forward exchange contracts for an aggregate notional amount of $21.8 million, having various expiration dates through September 2021. 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 September 30, 2020 and 2019 (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
|
2020
|
2019
|
(Effective Portion)
|
2020
|
2019
|
Forward exchange contract
|
$
|
(0.3)
|
|
$
|
0.2
|
|
Net sales
|
$
|
—
|
|
$
|
0.1
|
|
|
|
|
Cost of goods sold
|
$
|
0.1
|
|
$
|
—
|
|
The following table summarizes the results of cash flow hedging relationships for the nine months ended September 30, 2020 and 2019 (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
|
2020
|
2019
|
(Effective Portion)
|
2020
|
2019
|
Forward exchange contract
|
$
|
1.2
|
|
$
|
(0.5)
|
|
Net sales
|
$
|
0.2
|
|
$
|
0.3
|
|
|
|
|
Cost of goods sold
|
$
|
0.5
|
|
$
|
0.4
|
|
Long Term Debt
As of September 30, 2020 and December 31, 2019, the carrying value of long-term debt, net of unamortized discount and debt issuance costs, was $1,436.3 million and $1,540.4 million, respectively. The carrying value at December 31, 2019 includes $34.4 million current portion of the Term Loan. The estimated fair value of the long-term debt as of September 30, 2020 and December 31, 2019 was $1,553.5 million and $1,592.2 million, respectively, using quoted market prices in active markets for similar liabilities (Level 2).
HUBBELL INCORPORATED-Form 10-Q 22
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 advice 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 its estimated withdrawal liability from one of the multi-employer pension plans in which it participated.
In March 2019, the remaining employer in that multi-employer pension plan filed for protection under Chapter 11 of the United States Bankruptcy Code and was proceeding towards liquidation as of June 2019. As a result, the Company concluded, as of June 30, 2019, it was probable under terms customary of multi-employer plans, that the Company was subject to an estimated $22.9 million mass withdrawal liability, as a result of the other employer's withdrawal from the pension plan and anticipated liquidation. Accordingly, the Company recognized a $22.9 million charge in the second quarter of 2019.
In December 2019, the Company subsequently entered into a settlement agreement with the multi-employer plan, whereby the parties agreed to settle all of Hubbell's obligations to the multi-employer plan for $21.0 million payable in three installments; $10.0 million paid by December 31, 2019, $6.0 million payable before December 31, 2020, and $5.0 million payable before December 31, 2021. Accordingly, in the fourth quarter of 2019, the Company recognized a reduction of the second quarter 2019 charge to reflect the terms of that settlement, such that the effect to the full year of 2019 was a $8.5 million net charge.
HUBBELL INCORPORATED-Form 10-Q 23
NOTE 15 Restructuring Costs and Other
In the three and nine months ended September 30, 2020, we incurred costs for restructuring actions initiated in 2020 as well as costs for restructuring actions initiated in the prior years. 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 businesses we determine to be non-strategic. Restructuring costs include severance and employee benefits, asset impairments, accelerated depreciation, as well as facility closure, contract termination and certain pension costs that are directly related to restructuring actions. 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.
Pre-tax restructuring costs incurred in each of our reporting segments and the location of the costs in the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
|
Cost of goods sold
|
|
Selling & administrative expense
|
|
Total
|
|
Electrical
|
$
|
1.9
|
|
$
|
2.7
|
|
$
|
0.1
|
|
$
|
1.4
|
|
$
|
2.0
|
|
$
|
4.1
|
|
Utility Solutions
|
1.3
|
|
1.3
|
|
—
|
|
(0.2)
|
|
1.3
|
|
1.1
|
|
Total Pre-Tax Restructuring Costs
|
$
|
3.2
|
|
$
|
4.0
|
|
$
|
0.1
|
|
$
|
1.2
|
|
$
|
3.3
|
|
$
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
|
Cost of goods sold
|
|
Selling & administrative expense
|
|
Total
|
|
Electrical
|
$
|
5.3
|
|
$
|
8.4
|
|
$
|
2.1
|
|
$
|
3.0
|
|
$
|
7.4
|
|
$
|
11.4
|
|
Utility Solutions
|
4.9
|
|
2.9
|
|
0.2
|
|
1.3
|
|
5.1
|
|
4.2
|
|
Total Pre-Tax Restructuring Costs
|
$
|
10.2
|
|
$
|
11.3
|
|
$
|
2.3
|
|
$
|
4.3
|
|
$
|
12.5
|
|
$
|
15.6
|
|
The following table summarizes the accrued liabilities for our restructuring actions (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Accrued Restructuring Balance 1/1/20
|
Pre-tax Restructuring Costs
|
Utilization and Foreign Exchange
|
Ending Accrued Restructuring Balance 9/30/2020
|
2020 Restructuring Actions
|
|
|
|
|
Severance
|
$
|
—
|
|
$
|
6.2
|
|
$
|
(3.6)
|
|
$
|
2.6
|
|
Asset write-downs
|
—
|
|
0.2
|
|
(0.2)
|
|
—
|
|
Facility closure and other costs
|
—
|
|
1.8
|
|
(1.8)
|
|
—
|
|
Total 2020 Restructuring Actions
|
$
|
—
|
|
$
|
8.2
|
|
$
|
(5.5)
|
|
$
|
2.6
|
|
2019 and Prior Restructuring Actions
|
|
|
|
|
Severance
|
$
|
11.3
|
|
$
|
(1.3)
|
|
$
|
(6.5)
|
|
$
|
3.5
|
|
Asset write-downs
|
—
|
|
0.3
|
|
(0.3)
|
|
—
|
|
Facility closure and other costs
|
6.1
|
|
5.3
|
|
(4.7)
|
|
6.7
|
|
Total 2019 and Prior Restructuring Actions
|
$
|
17.4
|
|
$
|
4.3
|
|
$
|
(11.5)
|
|
$
|
10.2
|
|
Total Restructuring Actions
|
$
|
17.4
|
|
$
|
12.5
|
|
$
|
(17.0)
|
|
$
|
12.8
|
|
HUBBELL INCORPORATED-Form 10-Q 24
The actual costs incurred and total expected cost in each of our reporting segments of our on-going restructuring actions are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected costs
|
Costs incurred during 2019
|
Costs incurred in the first nine months of 2020
|
Remaining costs at 9/30/2020
|
2020 Restructuring Actions
|
|
|
|
|
Electrical
|
$
|
14.8
|
|
$
|
—
|
|
$
|
7.5
|
|
$
|
7.3
|
|
Utility Solutions
|
0.7
|
|
—
|
|
0.7
|
|
—
|
|
Total 2020 Restructuring Actions
|
$
|
15.5
|
|
$
|
—
|
|
$
|
8.2
|
|
$
|
7.3
|
|
2019 and Prior Restructuring Actions
|
|
|
|
|
Electrical
|
$
|
20.7
|
|
$
|
20.5
|
|
$
|
(0.1)
|
|
$
|
0.3
|
|
Utility Solutions
|
19.8
|
|
11.5
|
|
4.4
|
|
3.9
|
|
Total 2019 and Prior Restructuring Actions
|
$
|
40.5
|
|
$
|
32.0
|
|
$
|
4.3
|
|
$
|
4.2
|
|
Total Restructuring Actions
|
$
|
56.0
|
|
$
|
32.0
|
|
$
|
12.5
|
|
$
|
11.5
|
|
HUBBELL INCORPORATED-Form 10-Q 25
NOTE 16 Long-Term Debt and Financing Arrangements
Long-term debt consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
September 30, 2020
|
December 31, 2019
|
Senior notes at 3.625%
|
2022
|
$
|
299.1
|
|
$
|
298.8
|
|
Senior notes at 3.35%
|
2026
|
396.3
|
|
395.7
|
|
Senior notes at 3.15%
|
2027
|
296.3
|
|
295.9
|
|
Senior notes at 3.50%
|
2028
|
444.6
|
|
444.0
|
|
Term loan, net of current portion of $0.0 and $34.4, respectively
|
2023
|
—
|
|
71.6
|
|
2018 Credit Facility
|
2023
|
—
|
|
—
|
|
TOTAL LONG-TERM DEBT(a)
|
|
$
|
1,436.3
|
|
$
|
1,506.0
|
|
(a)Long-term debt is presented net of debt issuance costs and unamortized discounts.
The Company has a five-year revolving credit agreement (the "2018 Credit Facility") with a syndicate of lenders that provides a $750 million committed revolving credit facility. Commitments under the 2018 Credit Facility may be increased (subject to certain conditions) to an aggregate amount not to exceed $1.25 billion. The interest rate applicable to borrowings under the 2018 Credit Facility is generally either the adjusted LIBOR plus an applicable margin (determined by a ratings-based grid) or the alternate base rate. The single financial covenant in the 2018 Credit Facility requires that total debt not exceed 65% of total capitalization as of the last day of each fiscal quarter of the Company. The 2018 Credit Facility expires in February 2023.
In March 2020, the Company borrowed $100.0 million and in April 2020, the Company borrowed an additional $125.0 million under the 2018 Credit Facility. In the second quarter of 2020, the Company repaid $100.0 million of such borrowings. In July 2020, the Company repaid the remaining $125.0 million of outstanding borrowings, using a combination of cash on hand and proceeds from commercial paper. There were no borrowings outstanding under the 2018 Credit Facility at September 30, 2020. The Company had $750.0 million of borrowing capacity under the 2018 Credit Facility at September 30, 2020.
During the third quarter of 2020, the Company repaid in full the principal outstanding of the Term Loan. The Company paid $90.7 million in cash, composed of $90.6 million of principal and $0.1 million of accrued interest, also resulting in a $0.2 million loss on extinguishment of debt (recorded within interest expense, net in the Condensed Consolidated Statement of Income) primarily related to the write-off of capitalized debt issuance costs.
The Company had $21.9 million short-term debt outstanding at September 30, 2020, which consisted primarily of commercial paper. At December 31, 2019, the Company had $65.4 million of short-term debt outstanding.
HUBBELL INCORPORATED-Form 10-Q 26
NOTE 17 Stock-Based Compensation
As of September 30, 2020, 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 Hubbell Incorporated 2005 Incentive Award Plan as amended and restated (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. During the three months ended March 31, 2020, the Company's grant of stock-based awards included restricted stock, SARs and performance shares. There were no material awards granted during the three months ended June 30, 2020 or September 30, 2020.
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 2018, July 2019 and February 2020 the Company granted a certain number of these awards that generally 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”).
In February 2020, the Company granted 80,876 restricted stock awards with a fair value per share of $149.49. There were no material awards granted during the three months ended June 30, 2020 or September 30, 2020.
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.
In February 2020, the Company granted 250,080 SAR awards. The fair value of each SAR award was measured using the Black-Scholes option pricing model. There were no material awards granted during the three months ended June 30, 2020 or September 30, 2020.
The following table summarizes the weighted-average assumptions used in estimating the fair value of the SARs granted during the first three months of 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
Expected Dividend Yield
|
Expected Volatility
|
Risk Free Interest Rate
|
Expected Term
|
Weighted Avg. Grant Date Fair Value of 1 SAR
|
February 2020
|
2.5%
|
23.2%
|
1.5%
|
5.5 years
|
$25.28
|
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.
HUBBELL INCORPORATED-Form 10-Q 27
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 February 2020, the Company granted 63,868 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. There were no material awards granted during the three months ended June 30, 2020 or September 30, 2020.
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 profit 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's three-year TSR relative to the companies that constitute the S&P Capital Goods 900 index, to potentially increase or reduce the shares earned by 50%.
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 $143.45 for the awards granted in the first quarter of 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
Fair Value
|
Performance Period
|
|
Payout Range
|
|
February 2020
|
$143.45
|
Jan 2020-Dec 2022
|
|
0-200% +/- 50%
|
|
HUBBELL INCORPORATED-Form 10-Q 28